2016 Business Issues - California Chamber of Commerce

Transcription

Agenda for
California Prosperity
2 0 1 6 B U S I N E S S I S S U E S A N D L E G I S L AT I V E G U I D E
What is Wells Fargo doing to help
California small businesses?
“We’ve loaned more money to small businesses in
California than any other bank for more than a decade.* And we’re working to help even more.”
— Don A. Fracchia
Head of Pacific Midwest Business Banking
Wells Fargo
California State Capitol, Sacramento
With experienced business bankers and a broad range of financial services, we’re helping California small business
owners get the credit they need to manage their cash flow. We support small businesses because we know that their
success builds strong local economies and creates jobs. This commitment has made us the #1 small business lender
in the Golden State and in the nation for the 13th consecutive year.* To learn how we can work with you to help your
business succeed financially, talk to a banker at your local Wells Fargo store or call 1-800-359-3557.
Visit wellsfargoworks.com for additional tools and resources to help you succeed financially.
*Community Reinvestment Act government data, 2002 – 2014
All credit decisions subject to credit approval. For SBA loan products,
SBA eligibility is also required.
© 2015 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. ECG-1845601
Agenda for
2015 –16 Legislative Session
114th Congress
Second Session
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Dear Reader:
In this election year, California continues to be a land of contradictions. Some industries and regions have
regained the jobs lost during the recession; others remain stagnant. Some residents live comfortably while
others struggle. Nearly one in four Californians lives in poverty.
Developing solutions for such a diverse economy and people is complex, but doable. In that spirit, the
California Chamber of Commerce presents in this booklet our Agenda for California Prosperity.
We want to be sure we are preparing a quality workforce that enjoys affordable health care and housing, and
an improved transportation system. Not adding to employer costs is an important policy principle so that
California employers can keep pace with the competition in other states and around the world.
Please join us in keeping our jobs agenda in front of your elected representatives, state and local. To stay
up-to-date on the issues, be sure to keep the CalChamber Alert app on your mobile device. Download it at
calchamber.com/mobile.
When communicating your concerns to lawmakers and regulators, remember our grassroots website,
calchambervotes.com, offers easy-to-use sample letters.
Your involvement is critical as we continue our work to keep California the land of opportunity for all.
Michael W. Murphy
Chair, Board of Directors
®
Allan Zaremberg
President and Chief Executive Officer
2016 California Business Issues
3
Staying True To
Making A Difference.
There are a great many ways and words to recognize outstanding achievement
and exceptional accomplishment. Enterprise proudly salutes all those with drive to
make a difference ... in the workplace, in the community and in lives of others.
PROUD SUPPORTER OF
CALIFORNIA CHAMBER OF COMMERCE.
Enterprise Rent-A-Car is a socially responsible corporation.
For more information please visit enterprise.com.
©2010 Enterprise Rent-A-Car. B02119 10/10 JM
Size: 7.5 x 10”
B&W
Non-bleed
Agenda for California Prosperity
Overview........................................................................................................................................................................................ 9
2016 Highlighted Issues
State Issues
California Environmental Quality Act........................................................................................................................................ 13
Climate Change.......................................................................................................................................................................... 21
Education................................................................................................................................................................................... 26
Energy........................................................................................................................................................................................ 35
Environmental Regulation.......................................................................................................................................................... 40
Health Care................................................................................................................................................................................ 44
Information Security.................................................................................................................................................................. 52
Internet/Communications Technology....................................................................................................................................... 56
Labor and Employment: Classifying Employees......................................................................................................................... 60
Labor and Employment: Predictable Scheduling......................................................................................................................... 65
Labor and Employment: Protected Employee Classifications...................................................................................................... 68
Labor and Employment: Protected Leaves of Absence................................................................................................................ 70
Legal Reform.............................................................................................................................................................................. 74
Proposition 65............................................................................................................................................................................ 80
Retirement Savings..................................................................................................................................................................... 89
Transportation............................................................................................................................................................................ 91
Unemployment Insurance.......................................................................................................................................................... 96
Wage Theft................................................................................................................................................................................. 99
Water........................................................................................................................................................................................ 102
Workers’ Compensation........................................................................................................................................................... 111
Workplace Safety...................................................................................................................................................................... 116
Federal Issues
Immigration............................................................................................................................................................................. 124
International Trade................................................................................................................................................................... 126
2016 Issue Summaries
Americans with Disabilities Act
Implementing ADA.................................................................................................................................................................. 137
Education
Litigation Update..................................................................................................................................................................... 139
Environmental Regulation
Safer Consumer Products Regulation........................................................................................................................................ 141
Endangered Species.................................................................................................................................................................. 144
Mineral Resources Extraction................................................................................................................................................... 146
Food Labels
Food Labeling........................................................................................................................................................................... 150
Health Care
A New Tax on Health Care?..................................................................................................................................................... 152
Labor and Employment
Employment Litigation on the Rise.......................................................................................................................................... 154
International Trade
Transatlantic Trade and Investment Partnership........................................................................................................................ 157
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Trans-Pacific Partnership Agreement......................................................................................................................................... 159
World Trade Organization........................................................................................................................................................ 161
Legal Reform and Protection
Contingency Fee Arrangements for Public Entities................................................................................................................... 164
Taxation
Proposition 13 Protections Under Attack.................................................................................................................................. 166
Expansion of Sales Tax Base to Services..................................................................................................................................... 169
Tourism
Tourism.................................................................................................................................................................................... 171
Transportation
High-Speed Rail in California ................................................................................................................................................. 173
Water
Desalination............................................................................................................................................................................. 176
Campaign for California Jobs
CalChamber Job Killer Tag Identifies Worst Proposals.............................................................................................................. 180
Job Creator Bills Help California Economy Grow.................................................................................................................... 181
About CalChamber
Policy/Executive Team.............................................................................................................................................................. 185
Policy Issues and Staff Index..................................................................................................................................................... 191
CalChamber Committees ........................................................................................................................................................ 192
Membership Profile.................................................................................................................................................................. 194
Candidate Recruitment/Development
Bipartisan Approach to Electing Pro-Jobs Candidates Fosters Environment Conducive to Problem Solving............................. 197
Legislative Guide
Contacting Your Legislators: Protocol....................................................................................................................................... 200
The Legislative Process............................................................................................................................................................. 202
How to Write an Effective Lobbying Letter.............................................................................................................................. 203
Guide to Reading a Bill............................................................................................................................................................ 204
California Government Glossary.............................................................................................................................................. 205
California State Government — The Executive Branch............................................................................................................ 206
Media Guide
Tips on Talking with the Media................................................................................................................................................ 209
Pictorial Rosters of Elected Officials
The pictorial rosters of state elected officials and the California congressional delegation are available as
downloadable PDF files at www.calchamber.com.
Issue Updates
Updates on issues are available via the CalChamber Alert app. More information at www.calchamber.com/mobile.
To Order Additional Business Issue Guides
Additional copies of this Guide are available for $20 each. Mail checks to California Chamber of Commerce,
P.O. Box 1736, Sacramento, CA 95812-1736, Attn: Business Issues. Download a free electronic copy at
www.calchamber.com/businessissues.
Cover photo of Delta waterway provided by California Department of Water Resources.
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®
Agenda for
2016 Highlighted Issues
SPECIAL THANKS TO OUR
INTERNATIONAL
®
CORNERSTONE MEMBERS
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®
OVERVIEW
More Certainty Can Help Job Creators, Struggling Californians
California is a single state, but many economies. The recovery
of the entire state obscures the struggles of many regions and
industries. We have wealthy coastal enclaves and poor inland
communities; a booming high technology sector and low-wage
service businesses. Nearly a quarter of Californians live in poverty.
We can agree on some of the long-term solutions, especially
increasing educational opportunities for children in at-risk families. More immediate, however, is developing entry-level jobs
for adults living in and on the edge of poverty, and higher-wage
employment to open the doors to and through the middle class.
California is blessed with a strong and diverse economy.
Since the recession, we’ve created new businesses faster than
the rest of the nation. Our per capita personal income is 14%
higher than the state’s pre-recession peak.
But success has a price. In coastal California the cost of
housing has skyrocketed, commutes are longer and in heavier
traffic, and competition for a skilled workforce is more intense.
Gentrification is driving poorer residents to outlying areas with
fewer supporting services.
But other regions can only wish they had these problems.
Many communities in the Central Valley would likely accept
higher housing prices if the tradeoff was an economy with more
robust employment and higher-paying jobs.
California is a magnet for investor capital, with a highly
talented workforce for certain industries. In these areas,
start-ups will blossom and eventually may create a successful,
ongoing business. But the set of issues for mature industries can
be quite different: How can they control costs? Can employees
afford to live near the workplace? Can the firm afford its own
rent, energy and employment overhead costs?
Job Recovery by Sector from 2007 Peak
Health Care
Education
Leisure/Hospitality
Professional Services
All Industries
Information
Retail
Finance
Manufacturing
Construction
-20%
-10%
0%
10%
Source: California Foundation for Commerce and Education
®
20%
California’s wide diversity of businesses and industries
spawns a broad spectrum of concerns about the business
climate. One industry’s core concern may be of only passing
interest to another. But for the diversity of concerns, the
common thread is cost. If a company is labor intensive, it is
concerned about California’s complex labor laws that lead to
excessive litigation. A housing developer is concerned about the
delays—and subsequent costs—due to abuse of the California
Environmental Quality Act process. Energy-intensive manufacturers are concerned about the competitive costs of energy.
In that spirit, this year’s Business Issues and Legislative Guide
addresses the foundational issues that provide job-creating
solutions for earners throughout the California economic
spectrum—but especially for those struggling to break out of
the cycle of poverty. These solutions, if adopted, would allow
employers to invest resources now spent on unnecessary business
costs instead on growing new job markets and reinvesting in their
communities.
Of course, California cannot neglect the successful California businesses that are driving some of the best local economies
in the United States. Whether it is technology, international
trade, tourism or entertainment, to name just a few areas where
the state excels, California must continue to be competitive and
educate the talent it needs to remain a national leader.
Since the depths of the recession, the state as a whole has
managed a recovery. The unemployment rate has dropped by
more than 6 percentage points to just under 6%. After six years
of recovery, California has gained back all the jobs lost during
the recession, and then some. We’ve outpaced the nation in job
creation over the last couple years.
But the recovery has been far
from even. The distribution of
the California economy is vastly
different than it was before the
downturn that began the summer
of 2007.
Goods-producing industries
in particular have suffered. While
all industrial sectors have seen
some job recovery, construction
and manufacturing have lagged,
regaining only 82% and 86% of
their previous job levels, respectively.
Financial services also have sustained
unrecovered job losses.
Keep in mind that in 2007
an artificial real estate bubble
30%
40%
pushed construction and consumer
spending beyond sustainable levels,
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OVERVIEW
Job Recovery by Region from 2007 Peak
Inland
Coastal
Statewide
0%
1%
2%
3%
4%
5%
Source: California Foundation for Commerce and Education
resulting in an artificial peak in employment in some sectors.
The state’s economy continues to be driven by information
technology, life sciences and tourism, which tend to be focused
in and around the larger metropolitan areas along the coast.
The bulk of this gain has been in San Francisco, San Diego
and Los Angeles.
Geographically, California’s economic divide has worsened.
While coastal and metro California has gained more than 4%
more jobs since before the recession, job growth in inland and
rural California has lagged.
Wage growth has been slow. Median hourly wages have
grown by only 11% since 2007, a slightly lower growth rate
than the nation as a whole. The poverty rate is persistently
high—pegged at 23.7% by the Census Bureau and 22% by the
Public Policy Institute of California. These measures consider
California’s high cost of living, driven largely by high housing
costs, as a key element in measuring poverty. Although
traditional measures of poverty show the highest rates in the
inland and rural counties, newer measures that consider the
local cost of living show even coastal counties—especially Los
Angeles, Orange and San Diego counties—with shockingly
high poverty rates.
Housing remains a significant challenge for California.
Home prices have continued to rise much faster than income,
creating a large affordability hurdle for many homebuyers.
According to the California Association of Realtors, the median
single-family home price in California rose 5.6% year over year
to $480,630 in October.
These findings demonstrate the need for job creation
throughout the economic ladder and throughout the state. To
sustain the recovery already enjoyed by some industries and
regions, and improve access to economic opportunity for all
Californians, policymakers should aim to increase certainty and
reduce competitive disadvantages for job creators and investors.
1. Keep taxes on new investment and business
operations low, fair, stable and predictable.
California has the highest personal income and sales tax rates
in the nation, and the highest corporate tax rate among western
states. While tax rate reduction would improve our competitive
position, policymakers should above all resist making the tax
climate worse.
• Oppose punitive taxation that thwarts economic
development and stability of investments, such as:
• Discriminatory or punitive taxation of targeted
industries or groups, including consumer products, services
industries or high-income workers or investors.
• Undermining or limiting tax incentives or equitable
treatment for businesses, such as incentives regarding
research and development or net operating losses.
• Imposing a split roll property tax that increases rates or
assessments of commercial and industrial property, including
parcel taxes that differentiate among types of property
ownership.
• Increase manufacturing jobs — California took an
important first step to provide competitive treatment for
California’s remaining manufacturing industry by exempting
manufacturing and research and development (R&D)
equipment investments from the state portion of the sales tax.
We should take the next step to exempt these job-creating
investments from local and regional sales taxes.
• Revive local economic development tools — Local
economic development suffered a one-two punch with the
elimination of both enterprise zones and redevelopment
agencies. Although criticized for waste, abuse and inefficiencies,
these tools nonetheless provided cities the ability to incentivize
economic development in disadvantaged or rundown
neighborhoods. Enterprise zones have been replaced by a
temporary, narrower incentive, but cities utterly lack the tools to
redevelop blighted or urbanized neighborhoods. Policymakers
should revive the tax increment tool, with better monitoring
and accountability.
• Defend the two-thirds legislative vote for tax
increases — No matter the partisan split in the Legislature,
the two-thirds vote requirement for increasing taxes remains
the surest check on overspending and growth of government.
Hold the Legislature accountable to abide by voter-approved
Proposition 26, which narrowed the definition of “fees” and
requires two-thirds legislative vote or local approval of fees not
connected to a legitimate regulatory program.
2. Reduce the regulatory and litigation costs of
operating a business—especially when hiring and
keeping employees.
Regulating the workplace is not free. The cost of adding new
mandates, benefits or wage requirements, reducing flexibility
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®
OVERVIEW
in the workplace, or reducing the litigation bar is paid in less
hiring, reduced hours of work or tightening the elements of
employee compensation. Hardest hit: workers with the least
skills or experience.
• Adopt flexible work schedules — Provide flexibility to
employees and employers by returning to a 40-hour weekly
overtime rule, bringing the state back in line with the rest of the
nation.
• Protect workers’ compensation insurance reforms and
pursue further opportunities to reduce costs and improve
benefits — California’s workers’ compensation system is the
most costly in the country and continues to be a cost burden
on employers. Recent reforms increased benefit levels for
injured workers, and offset the cost of these benefit hikes
with some system reforms. The Legislature should achieve
additional savings to reduce the overall cost of the system while
maintaining appropriate benefits to injured workers.
• Clarify employee classification rules — Provide objective
tests for employers to determine whether an employee is exempt
or nonexempt, and whether a job is being performed by an
employee or an independent contractor, which will help separate
law-abiding employers from those operating in the underground
economy.
• Reduce excessive employment litigation — Reform
strict liability labor laws that provide employee-only attorney
fees and encourage class action litigation. Reform the Private
Attorneys General Act (Labor Code) that is used to pursue
private litigation over trivial statutory violations.
• Protect employers who rely in good faith on state
agencies — Employers who actively seek out and rely upon
information from government agencies on significant topics
such as labor, tax, or insurance issues should have certainty
that such information will be consistent and binding on all
state agencies and that employers will not subsequently be held
liable for punitive damages, interest and attorney fees if a court
determines the agency’s interpretation was wrong.
• Advocate cost-effective implementation of federal
health care reform — Support implementation of federal
health care reform policies that expand access to high-quality
health care for employees most cost-effectively while opposing
expansion of health care policies that make health care coverage
unaffordable.
3. Reduce the cost and improve the certainty and
stability of investing in new or expanded plants,
equipment and technology.
Businesses that create high-value jobs, such as manufacturers,
R&D, information and finance, often have a choice of where to
locate—nationwide and worldwide. These employers calculate
the permitting and regulatory compliance costs and timeliness
of decisions when deciding where to make new, job-creating
investments.
®
• Reform and update the California Environmental
Quality Act (CEQA) — Small but significant changes in streamlining this notoriously difficult permitting regime were made last
year, but apply primarily to infill development projects. Further
changes are needed to alleviate unnecessary expenses, delays,
uncertainty and litigation traps associated with CEQA.
• Minimize compliance costs of climate change law
— Ensure that any of the regulatory mechanisms to reduce
greenhouse gas emissions, such as cap-and-trade and low-carbon
fuels, are implemented at least cost to the economy, without
raising taxes and growing government. Any extension of the
current mandate beyond 2020 should center on a cost-effective,
revenue-neutral market mechanism that is responsive to
regulatory activity in other states and nations.
• Litigation reform — Continue to oppose efforts to
constrain employers from using arbitration or other alternative
dispute resolution; advocate appropriate limits on punitive
damages; support proposals that curb frivolous lawsuits; require
transparency of “bounty hunter” agreements between local
governments and private civil attorneys, and clarify/ streamline
targeted procedural and substantive laws to ease compliance and
expedite resolution of disputes.
• Improve the safer consumer product program to make
it workable and predictable for employers — Also known
as “Green Chemistry,” this regulatory program is intended to
encourage the development and sale of safer consumer products
in California. The Department of Toxic Substances Control
should issue guidance that provides impacted businesses with
certainty and predictability as they develop alternatives to limit
exposure to certain chemicals in targeted consumer products.
• Improve the Proposition 65 litigation climate and
reduce unnecessary warnings — Proposition 65 requires
certain businesses to provide warnings before exposing
consumers to chemicals known to cause cancer or reproductive
toxicity. Support litigation reforms to discourage meritless
lawsuits intended solely for personal financial gain that bear no
relationship to public health, and advocate against regulatory
proposals that would increase the number of warnings in a state
that is already notorious for over-warning.
• Improve policy analysis of new laws and regulations
— Aggressively enforce new rules requiring development of
economic impact analysis of major new regulations. Institute
retrospective reviews of certain current regulations for their
economic impacts. Establish a comprehensive and dynamic
economic impact analysis in the Legislature and the Executive
Branch that analyzes policies before they are passed or adopted.
• Aggressively pursue economic development opportunities — The administration should follow up on the
reorganization of the Governor’s Office of Business and Economic
Development (GO-Biz) by instituting high-level interagency
strike teams that will cut red tape and streamline permitting for
potential business locations to and expansions in California.
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OVERVIEW
4. Invest in public and private works that are the
backbone for economic growth.
Job creation lags without the public and private infrastructure to
move goods and people, electrons and data, water and waste. All
these works not only enhance the economy; they improve our
quality of life and bind together our diverse state.
• Expand the state’s energy infrastructure to improve
energy reliability and affordability — Ease barriers to
building new, cost-effective electrical generation facilities and
transmission lines, fuel terminals, and natural gas and petroleum
pipelines. Ensure new environmental protection policies do not
threaten energy reliability or affordability. Continue to oppose
targeted tax increases on energy sources and bills to subsidize
uneconomic technologies.
• Continue improvement of State Water Project —
California is in the midst of a severe and extended drought.
Aggressively implement state policies to improve and finance
water conveyance facilities and environmental improvements
in the Delta, along with developing additional water
storage elsewhere in the state and deploying water efficiency
technologies. Continue to oppose state-imposed targeted tax
increases on water bills that do not benefit all water users.
• Maintain, expand and improve the transportation
network — Implement policies, including increased financing,
that continuously improve our transportation infrastructure,
including highways, streets and transit systems. Also focus
transportation infrastructure investment and environmental
permit streamlining in the critical port zones and freight
corridors to ensure goods move quickly to markets and
minimize congestion.
• Expand the use of public-private partnerships for
infrastructure projects — Provide additional and broader
authority for public entities to partner with private entities to
finance, design, build and maintain infrastructure projects.
• Increase free trade — Support free trade worldwide, fair
and equitable market access for California products abroad,
and elimination of disincentives that impede the international
competitiveness of California business.
prosperous livelihood—too few young Californians are getting
that ticket punched.
• Promote the development of a robust accountability
system — Support the development of new, robust
accountability measures that are compatible with the Local
Control Funding Formula (LCFF), ensure the LCFF funds
are being spent to improve performance of low-income and
English-learning students, hold schools accountable for
attaining a minimum of grade-level proficiency for all students,
and improve assessment systems.
• Support post-high school options — Make certain
that high school graduates who do not pursue postsecondary
education obtain essential learning and skills during high
school, including career technical education, to ensure they are
adequately prepared for the world of work.
• Improve fiscal transparency and effectiveness —
Improve spending disclosure and hold schools and districts
accountable for their use of taxpayer funds.
• Maintain a long-term financial and policy commitment
to higher education — California’s university and college
systems are the envy of the world and a clear competitive
advantage for the state. Investments in these institutions should
be at the top of the state’s public policy and financial priorities.
• Advocate federal immigration reform — Support efforts
to comprehensively reform U.S. immigration policy to meet
labor demands, verify worker status, and provide greater border
security.
Staff Contact
Loren Kaye
5. Ensure the availability of high-quality skilled
employees.
Business leaders consistently report that California’s skilled
workforce remains a strong competitive advantage. That status,
however, is threatened by the state’s disinvestment in higher
education and the failure of many schools to produce capable
graduates proficient for college or work. More generally,
education is the ticket to economic opportunity and a
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Foundation President
[email protected]
California Foundation for Commerce and Education
1215 K Street, Suite 1400
Sacramento, CA 95814
(916) 930-1214
January 2016
®
CALIFORNIA ENVIRONMENTAL QUALITY ACT
Well-Intended Greenhouse Gas Reduction Policies
Are Further Complicating CEQA Process
Background
The California Environmental Quality Act (CEQA), passed
in 1970, is an extraordinarily complex and all-encompassing
environmental law. CEQA and its multitude of substantive and
procedural requirements are implicated for nearly every type of
land use project in the State of California, including, but not
limited to, housing and mixed-use developments, transit and
transportation infrastructure, hazardous waste facilities, mining
operations, renewable energy and school facilities, as well as
quasi-legislative approvals such as zoning amendments, general
plan updates and regional transportation plans.
Unlike its federal counterpart—the National Environmental
Protection Act (NEPA)—CEQA contains a substantive mandate
that prevents public agencies from approving projects with
potentially significant environmental impacts if there are feasible
mitigation measures that would eliminate or substantially
reduce those impacts. In addition to its substantive mandate,
CEQA contains comprehensive procedural requirements.
The cornerstone of CEQA’s procedural requirements is
public participation. CEQA provides the public with ample
opportunity to review and comment on the environmental
document beginning from its draft stage, all the way through
the day on which the final environmental document is certified.
Notwithstanding its benefits, CEQA in recent years has
imposed significant challenges on both taxpayer-funded infrastructure projects and private development of all types. This is
particularly the case in the context of greenhouse gas emissions.
Specifically, due to the lack of clear legal and regulatory guidance on the issue, one of the most complicated issues for project
proponents—both public and private—is how to properly
analyze and mitigate for a proposed project’s greenhouse gas
emissions impacts under CEQA. Indeed, nothing in the law
or in regulation establishes concrete guidance regarding how
CEQA documents should properly analyze greenhouse gas emissions impacts. Due to this uncertainty, greenhouse gas emissions
analyses are emerging as one of the primary bases upon which
CEQA petitioners are challenging projects, even those that are
critical to meet California’s greenhouse gas reduction mandates.
In light of the California Legislature’s continued focus on
greenhouse gas reduction policies and the impact those policies
have had historically and will continue to have on the CEQA
process, this article focuses solely on these policies and the
extraordinary challenges they impose on the CEQA process, and
ultimately on the state’s ability to meet critical infrastructure
and housing needs. Specifically, this article provides 1) an
explanation regarding the application of California’s climate
change policies to the CEQA process; 2) a summary of two
recent cases involving challenges to the greenhouse gas emissions
analyses contained in environmental impact reports (EIRs) for a
®
master planned development and a regional transportation plan;
and 3) a discussion of why the current statutory, regulatory and
legal frameworks governing greenhouse gas emissions analyses
in CEQA documents fail to provide any certainty for public and
private development and could hinder the state’s ability to meet
its greenhouse gas reduction mandates.
Applying California’s Climate Change Policies to the
CEQA Process
California has proposed to combat climate change through an
array of mechanisms, including executive orders, legislation,
regulations and plans. This section discusses each climate change
policy in chronological order and, where relevant, discusses
the policy’s relation to the CEQA process. For a more detailed
discussion regarding the history and current state of California’s
greenhouse gas reduction policies, see the Climate Change article.
Executive Order S-03-05
In 2005, then-Governor Arnold Schwarzenegger issued
Executive Order S-03-05, which was the first significant state
action California has taken to combat global climate change.
EO S-03-05 established greenhouse gas reduction targets for
California. Specifically, it required the reduction of greenhouse
gas emissions to 2000 levels by 2010, to 1990 levels by 2020,
and to 80% below 1990 levels by 2050. EO S-03-05 is particularly relevant in the context of CEQA because, shortly after
Governor Schwarzenegger issued the executive order, the Cleveland National Forest Foundation and others sued the San Diego
Association of Governments (SANDAG), challenging the EIR
for SANDAG’s 2050 Regional Transportation Plan/Sustainable
Communities Strategy. The lawsuit asserted that the EIR failed
to carry out its role as an informational document because it did
not analyze the inconsistency between the state’s greenhouse gas
reduction targets reflected in EO S-03-05 and the transportation plan’s greenhouse gas emissions impacts after 2020.
Importantly, the post-2020 greenhouse gas reduction targets
at issue in the case are ones that at the time had not and indeed
still have not yet been codified in statute. While some of the
targets in EO S-02-05 were authorized by subsequent legislation (see AB 32 discussion below), some of the greenhouse gas
reduction targets in EO S-02-05 and a more recent executive
order have been adopted solely by gubernatorial decree and
without legislative authorization. It should be noted that executive orders historically are intended to outline policy views,
but do not carry the full force and effect of the law when they
implement policy directives that are not otherwise authorized by
law. Accordingly, one of the primary questions in the context of
CEQA and greenhouse gas emissions reduction policies is what
legal import those nonlegislatively authorized executive order
targets have on the CEQA process. The SANDAG lawsuit,
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which presents this very question in a case pending before the
California Supreme Court, is discussed in further detail below.
Global Warming Solutions Act of 2006 (AB 32)
In response to EO S-03-05, the California Legislature in
2006 passed and the Governor signed AB 32, also known as the
Global Warming Solutions Act of 2006. More specifically, AB
32 requires that greenhouse gas emissions be reduced to 1990
levels by 2020 but, unlike EO S-03-05, AB 32 did not specify
reduction targets beyond that time. The law designates the
California Air Resources Board (ARB) as the state agency tasked
with regulating greenhouse gas emissions, and calls for the ARB
to coordinate with other state agencies to implement the state’s
reduction target.
Under AB 32, the ARB was required to determine as
accurately as possible the statewide level of greenhouse gas
emissions in 1990 and to approve on that basis a statewide
emissions limit to be achieved by 2020. The ARB was required
to prepare and approve by January 1, 2009, a “scoping plan” for
achieving “maximum technologically feasible and cost-effective”
reductions in greenhouse gas emissions by 2020.
SB 97 and the Implementing CEQA Regulations
By enacting SB 97 (Dutton; R-Rancho Cucamonga) in 2007,
the California Legislature for the first time expressly recognized
that CEQA documents must analyze greenhouse gas emissions.
SB 97 required the Office of Planning and Research (OPR) to
develop, and the Natural Resources Agency to adopt, amendments to the CEQA Guidelines addressing the analysis and
mitigation of greenhouse gas emissions. Those CEQA Guidelines
amendments clarified several points, including the following:
• Lead agencies must analyze the greenhouse gas emissions
of proposed projects, and must reach a conclusion regarding the
significance of those emissions (See CEQA Guidelines, Section
15064.4).
• When a project’s greenhouse gas emissions may be
significant, lead agencies must consider a range of potential
mitigation measures to reduce those emissions (See CEQA
Guidelines, Section 15126.4(c)).
• Lead agencies must analyze potentially significant impacts
associated with placing projects in hazardous locations,
including locations potentially affected by climate change. (See
CEQA Guidelines, Section 15126.2(a)).
• Lead agencies may significantly streamline the analysis of
greenhouse gases on a project level by using a programmatic
greenhouse gas emissions reduction plan meeting certain
criteria. (See CEQA Guidelines, Section 15183.5(b)).
• CEQA mandates analysis of a proposed project’s potential
energy use (including transportation-related energy), sources of
energy supply, and ways to reduce energy demand, including
through the use of efficient transportation alternatives. (See
CEQA Guidelines, Appendix F).
The amendments to the CEQA Guidelines implementing
SB 97 became effective on March 18, 2010.
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2008 Scoping Plan and “Business as Usual” Projection
In its 2008 Scoping Plan, ARB explained that “[r]educing
greenhouse gas emissions to 1990 levels means cutting
approximately 30 percent from business-as-usual emissions
levels projected for 2020, or about 15 percent from today’s
levels.” The Scoping Plan then sets out a “comprehensive array
of emissions reduction approaches and tools” to meet the goal,
including expanding energy efficiency programs, achieving a
statewide renewable energy mix of 33%, developing without
regional partners a cap-and-trade program for greenhouse gases,
establishing targets and policies for emissions in transportation
and implementing existing clean transportation programs, and
creating targeted fees on certain activities affecting emissions.
The Scoping Plan’s “business as usual” model is important to
understand for purposes of CEQA because many environmental
documents have and continue to rely on the model as a basis
for determining whether a proposed project’s greenhouse gas
emissions would cause a significant impact on the environment.
ARB had previously identified a year 2020 annual emissions
limit, equal to its estimate of statewide 1990 emissions, of 427
million metric tons of carbon dioxide equivalent (MMTCO2E).
In the Scoping Plan, ARB estimated emissions by economic
sector in the period 2002 to 2004, finding that they totaled
469 MMTCO2E annually. Those annual emissions were then
projected forward to the year 2020, employing population and
economic growth estimates, yielding a business-as-usual figure
of 596 MMTCO2E. The target of 427 MMTCO2E is about
29% below the 2020 forecast of 596 MMTCO2E, giving ARB
the approximately 30% reduction figure.
The Scoping Plan’s 2020 forecast is referred to as a
“business-as-usual” projection because it assumes no conservation or regulatory efforts beyond what was in place when the
forecast was made. According to the Scoping Plan, the model
“represent[s] the emissions that would be expected to occur in
the absence of any GHG reductions actions.” For example, the
emissions forecast for electricity generation assumes “all growth
in electricity demand by 2020 will be met by in-state natural
gas-fired power plants” and the estimate for on-road vehicle
emissions “assumes no change in vehicle fleet mix over time.”
The “business as usual” projection is particularly relevant
in the context of CEQA because, shortly after the Scoping
Plan was adopted, the Center for Biological Diversity sued the
California Department of Fish and Wildlife for its approval of
a large land development in northwest Los Angeles County,
arguing that the EIR prepared for the project unlawfully relied
on the business as usual projection to evaluate the significance
of the project’s greenhouse gas emission impacts. This case,
which recently was decided by the California Supreme Court, is
discussed in further detail below.
California Sustainable Communities and Climate Protection
Act of 2008 (SB 375)
In an attempt to achieve the state’s ambitious greenhouse gas
reduction policies through land use and transportation planning
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policies, the California Legislature passed and the Governor
enacted SB 375, also known as the California Sustainable
Communities and Climate Protection Act of 2008. In enacting SB 375, the Legislature found automobiles and light trucks
are responsible for 30% of the state’s greenhouse gas emissions.
Accordingly, SB 375 directed the ARB to develop regional greenhouse gas emission reduction targets for automobiles and light
trucks for 2020 and 2035. In 2010, the ARB established these
targets for 2020 and 2035 for each region covered by one of the
state’s metropolitan planning organizations (MPOs). The ARB
must update these targets every eight years until 2050, and may
update the targets every four years based on changing factors.
Based on the ARB’s reduction targets, each California MPO
must prepare a “sustainable communities strategy” (SCS) as an
integral part of its regional transportation plan (RTP). The SCS
contains land use, housing and transportation strategies that,
if implemented, would allow the region to meet its greenhouse
gas emission reduction targets. Once adopted by the MPO,
the RTP/SCS guides the transportation policies and investments for the region. The ARB must review the adopted SCS to
confirm and accept the MPO’s determination that the SCS, if
implemented, would meet the regional greenhouse gas targets.
If the combination of measures in the SCS would not meet the
regional targets, the MPO must prepare a separate “alternative
planning strategy” (APS) to meet the targets. The APS is not a
part of the RTP.
SB 375 also establishes incentives to encourage local
governments and developers to implement the SCS or the APS.
Specifically, developers can get relief from certain environmental
review requirements under CEQA if their new residential and
mixed-use projects are consistent with a region’s SCS (or APS)
that meets the targets. Such projects are called “transit priority projects,” but satisfying the plethora of requirements to be
deemed a transit priority project can be difficult.
SB 375 is particularly relevant in the context of CEQA
because, shortly after the enactment of SB 375, the Cleveland National Forest Foundation and others sued SANDAG,
contending that the EIR for SANDAG’s 2050 RTP/SCS
prepared pursuant to SB 375 failed to carry out its role as an
informational document because it did not analyze the inconsistency between the state’s policy goals reflected in EO S-03-05
and the transportation plan’s greenhouse gas emissions impacts
after 2020. This case, which is pending before the California
Supreme Court, is discussed in further detail below.
Executive Order B-30-15
In April 2015, Governor Edmund G. Brown Jr. issued
Executive Order B-30-15, which established a California greenhouse gas reduction target of 40% below 1990 levels by 2030.
In response to EO B-30-15, the ARB is in the process of updating its Scoping Plan to meet these targets. A draft is anticipated
to be released in the spring of 2016.
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SB 32
In 2015, Senator Fran Pavley (D-Agoura Hills) introduced
SB 32, which would have codified EO B-30-15 in statute
by requiring the ARB to approve greenhouse gas emissions
limits equivalent to 40% below 1990 levels by 2030. But SB
32 proposed to go well beyond EO B-30-15 by proposing
to also require the ARB to approve greenhouse gas emissions
limits equivalent to 80% below the 1990 level by 2050, the
goal that had been set forth in EO S-03-05. SB 32 also would
have prevented the ARB from updating its Scoping Plan unless
the ARB had 1) conducted an evaluation with input from an
independent advisory committee; and 2) submitted the Scoping
Plan update to the Joint Legislative Budget Committee and
appropriate policy committees, and submitted the final version
at least 60 days before adoption.
From a CEQA perspective, SB 32 would have expanded
opportunities for litigation under CEQA and would have
created an impossible threshold for development projects to
satisfy. Specifically, once SB 32 was enacted, every new project
in California—both public and private—would have had to
undergo an environmental review process to demonstrate that
the project will meet or mitigate to an 80% reduction target.
Given the speculative nature of the analysis required
to satisfy such a vigorous standard, lead agencies would be
left to guess as to the acceptable level of emissions and to
feasible mitigation strategies. It is this guessing that is most
problematic because it opens the door wide to endless CEQA
challenges. Thus, high-density affordable housing, mixed-use
infill, renewable energy, schools, universities, transit, public
infrastructure projects and all other projects requiring a CEQA
analysis would all be vulnerable.
The concerns regarding SB 32’s impact on the CEQA
process are based on recent challenges to EIRs regarding
greenhouse gas emissions analyses. Specifically, the SANDAG
case involved a challenge to SANDAG’s RTP/SCS for failure to
meet the greenhouse gas reduction targets in a nonlegislatively
codified executive order. Clearly, a more ambitious statute like SB
32 would create an even higher legal bar to meet under CEQA.
SB 32 is a two-year bill, and discussions will continue into
2016. It should be noted that during the last week of the 2015
legislative session, Senator Pavley amended the bill to eliminate
the reduction target of 80% below the 1990 level by 2050.
Significant CEQA Cases Challenging Greenhouse Gas
Analyses
With the above framework in mind, two recent cases demonstrate the challenges that lead agencies and developers face in
properly analyzing and mitigating for greenhouse gas emissions
under CEQA. The first case, Center for Biological Diversity v.
California Department of Fish and Wildlife, was decided recently
by the California Supreme Court. The second case, Cleveland
National Forest Foundation v. San Diego Association of Governments, is pending before the California Supreme Court.
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Center for Biological Diversity v. California Department of Fish
and Wildlife
Project Background: On November 30, 2015, the California
Supreme Court issued its opinion in the long-awaited case involving the California Department of Fish and Wildlife (DFW) and
the U.S. Army Corps of Engineers joint environmental impact
statement and EIR for a proposed master-planned development
called Newhall Ranch. Newhall Ranch would consist of up to
20,885 dwelling units housing nearly 58,000 residents as well as
commercial and business uses, schools, golf courses, parks and
other community facilities. The project would be developed over
about 20 years on almost 12,000 acres along the Santa Clara
River west of the City of Santa Clarita. Importantly, Newhall
Ranch is included in the Los Angeles region’s approved (and not
litigated) plan to achieve the regional greenhouse gas reduction
goals established by SB 375.
EIR’s Greenhouse Gas Significance Determination:
DFW issued the draft EIR in April 2009 and a final EIR in
June 2010. In December 2010, DFW certified the EIR, made
the findings required by CEQA, and approved the project. Of
relevance here, DFW found that Newhall Ranch’s greenhouse
gas emissions would have a less than significant impact on
global climate change, taking into account the applicant’s design
commitments and existing regulatory standards.
Specifically, in analyzing the project’s potential greenhouse
gas emissions impacts, the EIR relied on the AB 32 Scoping
Plan to set a threshold of significance, or the level at which the
impact would be deemed “significant” under CEQA and thus
require feasible mitigation. As noted above, the Scoping Plan
determined that meeting the target of 1990 levels by 2020
would require a 29% reduction in statewide emissions from
a business as usual approach—an approach that assumes no
conservation or regulatory efforts beyond what was in place
when the forecast was made. The Newhall Ranch project was
designed so that it would reduce greenhouse gas emissions by
31% over a business as usual approach, 2% beyond that which
the Scoping Plan sets out. Based on this determination, the EIR
concluded that the project’s greenhouse gas emissions would
result in a less than significant impact.
Lawsuit and Procedural History: The Center for Biological
Diversity and other groups sued, making several claims that
the EIR was flawed. The Los Angeles Superior Court ruled in
October 2012 that DFW violated CEQA by comparing the
project’s expected emissions to a hypothetical business as usual
scenario rather than to a baseline of emissions in the existing
physical environment.
In March 2014, the Court of Appeal reversed the trial court,
holding that the EIR’s analysis of greenhouse gas emissions
complied with CEQA. Specifically, the appeals court found that
consistency with AB 32’s scoping plan is a proper threshold of
significance under CEQA from which to evaluate a project’s
greenhouse gas emissions.
On July 9, 2014, the California Supreme Court granted a
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petition for review of the Court of Appeal decision. While the
state high court agreed to address three issues in the case, the
court provided the following statement of issue for the case with
respect to the EIR’s greenhouse gas emissions analysis: “May
an agency deviate from the Act’s existing conditions baseline
and instead determine the significance of a project’s greenhouse
gas emissions by reference to a hypothetical higher ‘business as
usual’ baseline?”
California Supreme Court Decision: On November 30,
2015, the California Supreme Court struck down the EIR’s
analysis of greenhouse gas impacts in a 5-2 decision. First, the
court examined whether the methodology the EIR used to
evaluate the project’s greenhouse gas emissions impacts was valid
as a legal matter, and answered this question in the affirmative.
Second, the court examined whether the EIR’s conclusion that
the project’s greenhouse gas emissions would result in a less than
significant impact was supported by substantial evidence in the
record, and answered this question in the negative.
In its legal analysis, the court made three rather significant
findings.
• First, it found that the EIR did not violate CEQA when it
used—as a significance threshold—the standard of “consistency”
with the ARB’s Scoping Plan and AB 32’s statewide goal for
greenhouse gas reduction. The court stated that such an approach
was consistent with the CEQA Guidelines issued pursuant to SB
97, noting: “Given the reality of growth, some greenhouse gas
emissions from new housing and commercial developments are
inevitable. The critical CEQA question is the cumulative significance of a project’s greenhouse gas emissions, and from a climate
change point of view it does not matter where in the state those
emissions are produced. Under these circumstances, evaluating
the significance of a residential or mixed use project’s greenhouse
gas emissions by their effect on the state’s efforts to meet its
long-term goals makes at least as much sense as measuring them
against an absolute numerical threshold.”
• Second, the court found that the EIR, which was prepared
in 2010, appropriately looked at the Scoping Plan’s goal for
greenhouse gas reductions by the year 2020 and not beyond.
The court did note, however, that later EIRs may have an
obligation to look beyond the year 2020. Specifically, the court
stated: “Plaintiffs do not claim it was improper for this EIR,
issued in 2010, to look forward only to 2020 for a guidepost
on reductions in greenhouse gas emissions, and we therefore do
not consider the question whether CEQA required the EIR to
address the state’s goals beyond 2020. Nevertheless, over time
consistency with year 2020 goals will become a less definitive
guide, especially for long-term projects that will not begin
operations for several years. An EIR taking a goal-consistency
approach to CEQA significance may in the near future need to
consider the project’s effects on meeting longer term emissions
reduction targets.”
Interestingly, in suggesting that future projects may need to
look beyond 2020, the court in a footnote cited Governor Brown’s
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EO B-30-15, which sets an interim target of emissions reductions
for 2030, as well as SB 32, which, while still pending before the
Legislature, would codify Governor Brown’s EO if enacted.
• Third, the court rejected the Center for Biological Diversity contention that DFW violated CEQA by comparing the
project’s expected emissions to a hypothetical business as usual
scenario rather than to a baseline of emissions in the existing
environment. In doing so, the court stated that the EIR used
the business as usual scenario “merely as a means of comparing the project’s projected emissions to the statewide target set
under the Scoping Plan. The business as usual emissions model
is used here as a comparative tool for evaluating efficiency and
conservation efforts, not as a significance baseline.”
In its factual analysis, the court found that DFW abused
its discretion in concluding that the project’s greenhouse
gas emissions would result in a less-than-significant impact.
According to the court, the administrative record contained no
evidence that Newhall Ranch’s project-level reduction of 31% in
comparison to business as usual was consistent with achieving
AB 32’s statewide goal of a 29% reduction from business as
usual. According to the court, the Scoping Plan nowhere related
the statewide level of reduction effort to the percentage of
reduction that would or should be required from individual
projects. In fact, the court implied that a greater degree of
reduction may be needed from new land use projects from the
economy as a whole to compensate for past and current sources
of emissions, which are substantially less efficient and will
continue to exist and emit.
The court also noted that, even if the statewide percentage
reduction set out in the Scoping Plan were shown to be generally appropriate for use as a criterion of significance for individual
projects, the EIR’s conclusion still would be unsupported.
According to the court, this is because the EIR’s business as
usual scenario assumes residential density equal to that currently
found in the Santa Clarita Valley. Because Newhall Ranch as
designed would have greater residential density than the existing
average for the Santa Clarita Valley, the EIR “makes a downward
adjustment from business as usual in projected vehicle miles
traveled, and consequently in greenhouse gas emissions from
mobile sources.” But according to the court, the Scoping Plan’s
statewide business as usual model is not necessarily based on
residential densities equal to the Santa Clarita Valley average.
The court concluded its analysis by noting that DFW
and other lead agencies have several options for evaluating
greenhouse gas emissions. Those options include:
• Examining the “data behind the Scoping Plan’s methodology” to determine the level of expected project-level reductions
from new land development at the proposed project’s location.
• Analyzing the project’s “compliance with regulatory
programs designed to reduce greenhouse gas emissions from
particular activities.”
• Utilizing previously adopted local plans, such as general
plans or climate action plans, or metropolitan regions’
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“sustainable communities strategies” that may analyze
greenhouse gas emissions for the relevant area.
• Relying on “existing numerical thresholds of significance
for greenhouse gas emissions” adopted, for example, by local
air districts. The court noted that using numerical thresholds
for a large project like Newhall Ranch would likely result in
significant greenhouse gas emissions, which may not even be
able to be mitigated to a less-than-significant impact. In such
circumstances, DFW could adopt whatever feasible mitigation
measures exist beyond the efficiency and conservation measures
already incorporated into the project, and nonetheless approve
the project after issuing a “statement of overriding” considerations explaining the countervailing benefits of the project.
Cleveland National Forest Foundation v. San Diego Association
of Governments
Project Background: This case involves the SANDAG
certification of an EIR for its 2015 Regional Transportation
Plan/Sustainable Communities Strategy (RTP), the first in the
state to be prepared and adopted by a Metropolitan Planning
Organization pursuant to SB 375. The RTP is intended to
serve as the long-range plan designed to coordinate and manage
future regional transportation improvements, services and
programs among the various agencies operating within the
San Diego region. The RTP lays out a plan for investing an
estimated $214 billion in local, state, and federal transportation
funds expected to come into the region over the next 40 years.
The largest proportion of the funds will go toward transit,
which will receive 36% of the funds in the first 10 years, with
34% going to highway improvements (largely for adding high
occupancy vehicle lanes to existing freeway corridors), and 21%
to local roads and streets. The percentage dedicated to transit
will grow each decade, up to 44% from 2021 to 2030, 47% in
the third decade, and 57% in the last decade of the plan. After
two years of extensive public input, SANDAG adopted the RTP
on October 28, 2011.
EIR’s Greenhouse Gas Significance Determination:
The EIR concluded that the RTP complied with the ARB’s
greenhouse gas reduction targets through 2020, but that
emissions would substantially increase after this point and
through 2020. Thus, the EIR concluded that the RTP’s
implementation would lead to an overall increase in greenhouse
gas emission levels. The EIR did not analyze, however, whether
this consequence conflicted with Executive Order S-03-05
with respect to post-2020 emission reduction targets, or
would impair or impede the achievement of the EO’s goals.
Although the EIR did not analyze the transportation plan’s
consistency with the state climate policy reflected in the
EO, the EIR nevertheless analyzed the RTP’s greenhouse gas
emissions impacts against three significance thresholds for each
of the planning years 2020, 2035 and 2050. Under the first
threshold, the EIR posited the transportation plan’s impacts
would be significant if the RTP implementation were to increase
greenhouse gas emissions compared to existing, or 2010,
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conditions. Under the second threshold, the EIR posited the
RTP’s impacts would be significant if the RTP’s implementation
conflicted with the ARB’s regional automobile and light truck
emissions reduction targets. Under the third threshold, the
EIR stated the RTP’s impacts would be significant if the RTP’s
implementation conflicted with either the ARB’s Scoping
Plan or SANDAG’s own Climate Action Strategy. The EIR
concluded the RTP’s greenhouse gas emissions impacts would
be significant under the first significance threshold for the 2035
and 2050 planning years because the emissions would be higher
in those planning years than in 2010. The EIR concluded the
greenhouse gas emissions impacts would be less than significant
in all other respects analyzed.
Lawsuit and Procedural History: After SANDAG certified
the EIR for the RTP, Citizens for Responsible Equitable
Environmental Development-21 and Affordable Housing
Coalition of San Diego filed suit, challenging the EIR’s
adequacy under CEQA. Cleveland National Forest Foundation
and the Center for Biological Diversity filed a similar suit, in
which the Sierra Club later joined.
The superior court ruled in favor of the opponents, finding
that the EIR failed to carry out its role as an informational
document because it did not analyze the inconsistency between
the state’s policy goals reflected in EO S-03-05 and the RTP’s
greenhouse gas emissions impacts after 2020. The court also
found the EIR failed to adequately address mitigation measures
for the RTP’s greenhouse gas emissions impacts.
SANDAG appealed the ruling to the Court of Appeal,
contending that its decision to omit an analysis of the transportation plan’s consistency with the EO did not violate CEQA
because CEQA does not require a consistency analysis of executive order targets that are not statutorily codified. Whether the
EIR’s analysis complies with CEQA depends on whether the analysis reflects a reasonable, good faith effort to disclose and evaluate
the transportation plan’s greenhouse gas emissions impacts.
California Court of Appeals Decision: On November 24,
2014, the California Court of Appeal upheld the superior court’s
ruling. According to the appeals court, SANDAG’s decision to
omit an analysis of the RTP’s consistency with the EO “did not
reflect a reasonable, good faith effort at full disclosure and is not
supported by substantial evidence because SANDAG’s decision
ignored the Executive Order’s role in shaping state climate policy.
The Executive Order underpins all of the state’s current efforts to
reduce greenhouse gas emissions.” The court noted that the EO
led directly to the enactment of AB 32 and SB 375 and thus will
“continue to underpin the state’s efforts to reduce greenhouse gas
emissions throughout the life of the [RTP].” The EIR’s failure
to analyze the RTP’s consistency with the EO, or more particularly with the EO’s overarching goal of ongoing greenhouse gas
emissions reductions, was therefore a failure to analyze the RTP’s
consistency with state climate policy.
In response to SANDAG’s contention that the EIR cannot
analyze the RTP’s consistency with the EO because there is no
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statute or regulation translating the EO’s goals into comparable
scientifically based emissions reduction targets, the court noted that
the lack of such targets does not preclude the EIR from performing
a meaningful consistency analysis. According to the court, although
SANDAG may not know precisely what future emissions reduction
targets the RTP will be required to meet, it knows from the information in its own Climate Action Strategy the theoretical emissions
reduction targets necessary for the region to meet its share of the
EO goals. With this knowledge, SANDAG could have reasonably
analyzed whether the RTP was consistent with, or whether it would
impair or impede, state climate policy.
On March 11, 2015, the California Supreme Court granted
a petition for review of the Court of Appeals decision. The
Supreme Court provided the following statement of issue for
the case: “Must the environmental impact report for a regional
transportation plan include an analysis of the plan’s consistency
with the greenhouse gas emission reduction goals reflected in
Executive Order No. S-3-05 to comply with the California
Environmental Quality Act (Pub. Resources §21000 et seq.)?”
The California Supreme Court will likely issue a decision in this
case by the end of 2016.
Challenges for Current and Future Development in
California
Notwithstanding the plethora of laws, regulations, plans,
executive orders governing climate change and the statutes,
regulations and case law interpreting their applicability and
relevance to the CEQA process, lead agencies and developers
continue to have very little guidance with respect to how to
conduct a legally adequate greenhouse gas emissions analysis.
The lack of guidance on this issue has resulted in even
more uncertainty in the already notoriously uncertain and
complicated CEQA process, and consequently environmental
documents continue to remain vulnerable to challenge on
inadequate greenhouse gas emissions analyses.
In addition to the lack of guidance, analyzing the
significance of a project’s greenhouse gas emissions is innately
difficult because unlike virtually every other resource area that
must be examined under CEQA, climate change presents a
global rather than a local issue. As the California Supreme
Court explained in Center for Biological Diversity v. Department
of Fish and Wildlife:
“[T]he global scope of climate change and the fact that
carbon dioxide and other greenhouse gases, once released into
the atmosphere, are not contained in the local area of their
emission means that the impacts to be evaluated are also global
rather than local. For many air pollutants, the significance of
their environmental impact may depend greatly on where they
are emitted; for greenhouse gases, it does not. For projects, like
the present residential and commercial development, which
are designed to accommodate long-term growth in California’s
population and economic activity, this fact gives rise to an
argument that a certain amount of greenhouse gas emissions
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is as inevitable as population growth. Under this view, a
significance criterion framed in terms of efficiency is superior to
a simple numerical threshold because CEQA is not intended as
a population control measure.”
Understanding these basic challenges and the difficulty
of achieving meaningful CEQA reform in the California
Legislature, the California judiciary is the only branch of
government that has had several opportunities to provide
adequate direction on how to conduct an appropriate
greenhouse gas emissions analysis under CEQA. As Loren Kaye,
president of the California Foundation for Commerce and
Education, aptly stated in a 2014 article, “[t]he best prospect
for reform of [CEQA] is no longer with the Legislature or
the Governor, but at the California Supreme Court.” Kaye
also noted, however, that the Supreme Court’s motivations
remain obscure: “Have the justices decided to finally step into
a policy chasm vacated by the political branches? Or have they
recognized that most of CEQA’s litigation land mines were
created by the courts themselves —with vague and sometimes
contradictory case law inviting litigation rather than clarifying
the law?” (www.foxandhoundsdaily.com/2014/09/supreme-courteyes-ceqa, September 3, 2014.)
Unfortunately, despite the recent Newhall Ranch and
SANDAG cases, it appears that, apropos to Kaye’s article, the
judiciary will continue to create litigation land mines with
respect to greenhouse gas emissions analyses rather than clarifying the law to provide certainty to developers moving forward.
State of the Law Regarding How to Conduct an Adequate and
Defensible Greenhouse Gas Reduction Analysis Remains Uncertain
The Supreme Court in Center for Biological Diversity v.
Department of Fish and Wildlife appropriately upheld consistency with the ARB’s Scoping Plan and AB 32’s statewide goal
for greenhouse gas reduction as a legally permissible significance
threshold under CEQA. In doing so, however, the court suggested that in order to avoid the “analytical gap” in the Newhall
Ranch EIR, lead agencies must embark on a nearly impossible
analysis to examine the data behind the Scoping Plan’s methodology to determine the level of expected project-level reductions
from new land development at the proposed project’s location.
This analysis, in turn, would provide lead agencies with the
data to appropriately determine what level below business as
usual a project would need to satisfy to be consistent with AB
32 and the Scoping Plan. According to a recent legal analysis,
“[t]his would appear to be very difficult for a local agency to do
because it would involve a comprehensive statewide analysis of
projected and existing sources of emissions.” (Tom Henry, How
to Fix Your GHG Analysis After the California Supreme Court’s
Newhall Ranch Decision, December 3, 2015) While some lead
agencies and developers may have the resources to embark on
this type of complicated and highly technical analysis, most do
not and, as such, the business as usual scenario for determining
greenhouse gas emissions impacts under CEQA will likely be
used less frequently in the future.
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As for some of the other alternatives the court outlined,
analyzing a project’s compliance with regulatory programs
designed to reduce greenhouse gas emissions from particular
activities may be a good approach for lead agencies going
forward where the emissions result from sources subject to
the cap-and-trade program. For example, fuel producers and
importers were subject to AB 32’s cap-and-trade program
beginning in 2015 and accordingly are required to obtain
allowances or offsets for the greenhouse gas emissions produced
from the consumption of their fuel. Based on this, lead agencies
from Southern California to the San Joaquin Valley have
published CEQA documents finding that no significant impacts
can result from the consumption of fuel given that these
emissions are effectively mitigated at the refiner/importer level.
Next, relying on “existing numerical thresholds of
significance for greenhouse gas emissions” adopted, for
example, by local air districts, may be easier said than done. The
Newhall Ranch court noted that using numerical thresholds
for a large project like Newhall Ranch would likely result in
significant greenhouse gas emissions, which may not even be
able to be mitigated to a less than significant impact. In such
circumstance, the lead agency could adopt what is called a
“statement of overriding considerations.” Specifically, when an
agency approves a project with significant environmental effects
that will not be avoided or substantially lessened, it must adopt
a statement that because of the project’s overriding benefits, it is
approving the project despite its environmental harm.
Adopting a statement of overriding considerations, however,
has both political and legal challenges. From a political
perspective, some locally elected officials are hesitant to approve
a project that an EIR determines will have a significant impact
on the environment. From a legal perspective, a statement of
overriding considerations must be treated like findings and
therefore must be supported by substantial evidence (Cherry
Valley Pass Acres & Neighbors v. City of Beaumont (2010) 190
Cal.App.4th 316, 357). Whether a determination under CEQA
is supported by substantial evidence is an unpredictable factbased inquiry, the outcome of which is impossible to predict.
Accordingly, even if lead agencies proceeded with adopting a
statement of overriding considerations, as the court suggests
they may do, it is far from certain whether such an approach
would be upheld against the inevitable legal challenge. Further,
the court’s suggested pathway is difficult to square with its
previous statement in the decision that “a significance criterion
framed in terms of efficiency is superior to a simple numerical
threshold because CEQA is not intended as a population
control measure.”
The Governor and the Judiciary—Not the Legislature—May
Become the Primary Arbiters of the Future of Greenhouse Gas
Reduction Policies
Subsequent to EO S-03-05, California adopted AB 32,
codifying only the EO provision that the state achieve 1990
levels by 2020. However, AB 32 was silent on the question
19
of what happens after 2020. In the absence of any legislative
directive, the vast community of stakeholders involved with
greenhouse gas regulation was left only with the older EO that
established a “target” of 80% below 1990 levels by 2050.
The California Supreme Court, in the SANDAG case,
now has before it the question of exactly what is the import
of such a “target,” adopted purely by gubernatorial decree and
without legislative directive. Interestingly, if the California
Supreme Court rules that environmental documents must
include an analysis of the project’s consistency with reduction
goals reflected in executive orders that have not been codified
in statute, both the Governor and the Supreme Court, not the
Legislature, will be the primary arbiters of the future of state
greenhouse gas regulation.
Unfortunately, the California Supreme Court decision in
the Newhall Ranch case went above and beyond the issue before
the court and proceeded to discuss the application of post-2020
greenhouse gas emissions guideposts to the CEQA process:
“A qualification regarding the passage of time is in order
here. Plaintiffs do not claim it was improper for this EIR,
issued in 2010, to look forward only to 2020 for a guidepost
on reductions in greenhouse gas emissions, and we therefore do
not consider the question whether CEQA required the EIR to
address the state’s goals beyond 2020. Nevertheless, over time
consistency with year 2020 goals will become a less definitive
guide, especially for long-term projects that will not begin
operations for several years. An EIR taking a goal-consistency
approach to CEQA significance may in the near future need to
consider the project’s effects on meeting longer term emissions
reduction targets.”
In support of its statement with respect to post-2020
guideposts, the court, in a footnote, cited Executive Order
B-30-15, which established a greenhouse gas reduction target
of 40% below 1990 levels by 2030 but which has not been
codified legislatively, as well as “pending legislation” (that is,
SB 32) that, if ultimately enacted, would codify this target.
It is well-established that, under the doctrine of separation
of powers, the judiciary generally does not make the law
(a responsibility of the Legislature) or enforce the law (a
responsibility of the executive branch). Rather, the judiciary
interprets law and applies it to the facts of each case. Yet in
relying on a nonlegislatively codified executive order and
pending legislation for the proposition that those mechanisms
may serve as guideposts for future CEQA analyses, the court is
attempting to give full force and effect of the law to an executive
order for which there is no statutory basis and legislation that
has yet to even make its way to the Governor. The court’s
analysis therefore is troubling from a legal standpoint, both
in its deviation from the principle of separation of powers, as
20
well as its likelihood to invite even more legal challenges to
greenhouse gas emissions analyses in CEQA documents.
CalChamber Position
The California Chamber of Commerce supports the underlying
goals of California’s greenhouse gas reduction policies. In
implementing such policies, however, political leaders must be
mindful regarding how such policies impact other statewide
development priorities, such as smart growth, affordable
and infill housing, school construction, transportation
infrastructure, renewable energy, transit and water projects.
Unfortunately, all these projects, which are needed to
achieve the state’s greenhouse gas reduction targets, are currently
required to undergo greenhouse gas emissions analyses without
any concrete guidance or certainty. The lack of direction and
certainty underlying the CEQA process in the context of
greenhouse gas reduction breeds litigation, which in turn stifles
the state’s ability to accommodate population growth and
expeditiously achieve its greenhouse gas reduction targets.
The CalChamber is mindful that achieving meaningful
CEQA reform continues to be one of the most substantively
and politically difficult issues in the Capitol. We are hopeful,
however, that the issue of greenhouse gas reduction policies and
the role they play in the CEQA process will spark a muchneeded conversation with respect to how the state can achieve
its climate change goals while creating more legal certainty for
the very projects that are needed to achieve these goals.
Staff Contact
Anthony Samson
Policy Advocate
[email protected]
California Chamber of Commerce
P.O. Box 1736
Sacramento, CA 95812-1736
(916) 444-6670
www.calchamber.com
January 2016
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CLIMATE CHANGE
Post-2020 Greenhouse Gas Regulation in California:
Balancing Business and Economy
How should California address climate change post-2020?
Current law sets carbon reduction limits for 2020. For the
last nine years, politicians, regulators and special interests have
claimed success, all while writing and amending regulations,
litigating and spending money taxed from just a few obligated
companies under the current climate programs.
Carbon Regulation in California
California is a national and international driving force in
climate change regulations, conspicuous in the absence of
comprehensive regulation in other states or by the federal
government.
In 2006, Governor Arnold Schwarzenegger and the
Legislature passed a landmark statute setting mandatory
greenhouse gas emission reductions. AB 32, by then-Assembly
Speaker Fabian Núñez, directed the California Air Resources
Board (ARB) to develop a regulation to reduce greenhouse gas
(GHG) emissions to 1990 levels by 2020, equivalent to a 30%
reduction compared to a business as usual trend.
Unfortunately, though, many of the mechanisms the state’s
regulatory agencies have used to reduce carbon emissions have
increased costs for businesses, and it is not clear that regulators
always opted for the most cost-effective approach or gave
sufficient consideration to the economic impact their policy
choices might have, both in the short-term and the longterm. Furthermore, the reductions made to date have mostly
targeted the low-hanging fruit. Continued progress toward
these aggressive targets will require increasingly more difficult
and costly changes that may be harder for businesses to absorb,
limiting their ability to grow despite the overall improvements
in the economy.
The ARB’s efforts to implement AB 32 and its myriad
of measures continue to be a major issue for businesses and
industries statewide that will be affected, either directly or
indirectly. California’s GHG emission reduction strategies
comprise more than just AB 32. Numerous complementary
measures are helping reduce GHG emissions:
• Vehicle fuel efficiency (set by federal agencies).
• Renewable portfolio standards (set by statute and the
Public Utilities Commission).
• Low Carbon Fuel Standard (set by the ARB).
• Energy efficiency standards (set by the California Energy
Commission).
Policy Environment
Climate change policy was a major focus of Governor Edmund
G. Brown Jr. and the Legislature in 2015.
Governor Brown set the agenda by highlighting climate
change issues in his second inaugural address. The Governor
®
stated that “(W)e are well on our way to meeting our AB 32 goal
of reducing carbon pollution and limiting the emissions of heattrapping gases to 431 million tons by 2020. But now, it is time to
establish our next set of objectives for 2030 and beyond.”
The Governor laid out a three-point plan to increase from
one-third to 50% electricity derived from renewable sources,
reduce petroleum use in cars and trucks by up to 50%, and
double the efficiency of existing buildings and make heating
fuels cleaner.
New Senate Leader Kevin de León (D-Los Angeles) quickly
took up this challenge, introducing SB 350 to enshrine these
aspirational goals into statute. Opposed by the California
Chamber of Commerce and designated a job killer, the bill was
heavily amended in the closing days of the legislative session.
Key members of the Assembly objected to the lack of detail in
achieving the petroleum reduction goals and the overly generous
grant of authority to the ARB. Ultimately passed and signed into
law was a mandate that the state double the energy savings in
buildings and procure 50% of its energy from qualified renewable
resources by 2030. (For more information, see Energy article.)
Seeking an approach more consistent with the original
path blazed by AB 32, Senator Fran Pavley (D-Agoura Hills),
one of AB 32’s original authors, introduced SB 32, which set
a new GHG emission reduction goal for 2030. Senator Pavley
recognized that the Legislature must be involved in setting the
state policy to be implemented by the ARB. However, the bill
stalled on the Assembly floor.
Some of the key issues highlighted by CalChamber and
others that will necessitate further work include right-sizing
the authority granted to regulatory agencies; ensuring adequate
legislative oversight; insisting on an adequate economic analysis
to drive policies; and the effect of the new GHG requirements
on the cost and availability of housing, as a result of its interaction with the California Environmental Quality Act (CEQA).
(See CEQA article for more information.) SB 32 will likely
continue to be central to the climate change debate in 2016.
Short-lived climate pollutants will be focus of the Governor
in 2016, judging by his speech on this issue to the United
Nations Climate Summit in France. Senator Ricardo Lara
(D-Bell Gardens) has declared that he will run legislation to
reduce emissions from black carbon, methane and fluorinated
gases by 2030. Short-lived climate pollutants remain in the
atmosphere for a shorter period than CO2, but their impact
often is more intense. In 2014, Senator Lara carried legislation
directing the ARB to develop and submit a plan to the
Legislature to address short-lived climate pollutants; his new
legislation will likely build on that mandate.
21
CLIMATE CHANGE
California’s Pathway to a Low Carbon Future
Energy efficiency programs
launched that deliver $1.8 2004
billion of net benefits from
2006-2015
SB 107 requires 20%
2006
renewable electricity by 2020
AB 118 invests $600 million
for clean fuels and vehicles 2007
2009-2015
California signs MOU
establishing the Governors’
2008
Climate and Forests Task Force
with 8 founding members
Low Carbon Fuel Standard
requires 10% carbon
2009
intensity reduction of
vehicle fuels by 2020
Cap and trade regulation
approved covering 85%
of California’s largest GHG
sources & generating 2011
billions in auction
proceeds for emissions
reduction investments
Advanced Clean Cars
regulation requires vehicles 2012
emit 50% less GHGs in 2025
Proposition 39 passes,
generating $550 million
annually for energy 2012
efficiency & clean energy in
public schools
AB 1493 requires world’s 1st
2002 GHG standards for passenger
vehicles
California Climate Change
Scoping plan released
2008
22
Goals
50%
Renewable
Electricity
50% Reduction
In Petroleum
Use in Vehicles
Double Energy
Efficiency Savings
at Existing Buildings
Carbon
Sequestration
in the Land Base
Reduce
Short-Lived
Climate Pollutants
Safeguard
California
SB 375 requires regional
2008 planning strategies to reduce
vehicle miles traveled
California Climate Adaptation
plan released
2009
Source: California Air Resources Board, 2030 Target Scoping Plan
(October 1, 2015).
SB2X requires 33%
renewable electricity by 2030
2011
SB 535 directs 25% of
2012 cap and trade proceeds to
disadvantaged communities
Governor Brown calls for
2012 1.5 million zero-emission
vehicles by 2025
California & Quebec link cap
2014
and trade programs
Source: California Air Resources Board
Vision
Reducing Greenhouse Gas Emissions to
40% Below 1990 Levels by 2030
California Solar Initiative,
2006 invests $1.8 billion
2006-2015
2014
Governor Brown calls for
cleanup of state freight 2015
system
An Integrated Plan for Addressing Climate Change
AB 32 sets GHG reduction
2006 target 15% below 1990
levels by 2020
Bioenergy Action
2012
Plan released
Governor Brown sets GHG
reduction target 40% below 2015
1990 levels by 2030
California Climate Strategy
SB 605 mandates reductions
from short-lived climate
pollutants: methane, black
carbon, HFCs
California and BadenWürttemberg launch Under
2 MOU with 10 founding
signatories
2015
SB 350 requires 50%
renewable electricity &
2015
50% energy efficiency in
existing buildings by 2030
Scoping Plan Update
Although the AB 32 mandate does not vanish in 2020, neither does
it give the ARB authority to adopt a more stringent greenhouse
gas reduction level than was originally set by AB 32. Indeed, AB
32 itself requires the ARB to recommend to the Governor and the
Legislature strategies for further GHG reductions.
Nonetheless, even though the Legislature has not acted on
any post-2020 GHG emission reduction policy, the ARB has
initiated a proceeding toward a goal of reducing GHG emissions
40% below 1990 levels by 2030 under the direction of
Governor Brown’s Executive Order B-30-15. In October 2015,
the 2030 Target Scoping Plan update process was introduced,
and the draft will be released in the spring of 2016. Embedded
in the Scoping Plan are six goals to help the ARB in achieving
the 40% GHG emission reduction goal:
• 50% renewable electricity;
• 50% reduction in petroleum;
• Double energy savings at existing buildings;
• Protecting ecosystems;
• Reduce short-lived climate pollutants;
• Climate adaptation.
In addition to these goals, the ARB will integrate additional
policies that provide co-benefits and associated emissions reductions. See chart: California’s Pathway to a Low Carbon Future.
Related Activities
The more GHG emissions are reduced, the more difficult and
costly the reductions will be to achieve. For this reason, the
2030 target scoping plan will also be coordinating additional
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CLIMATE CHANGE
CalChamber Lawsuit Over Cap-and-Trade Auction
In 2012, the California Chamber of Commerce sued the Air Resources Board
(ARB) seeking to invalidate the cap-and-trade auction. The complaint asserts that
AB 32 does not authorize the ARB to impose fees other than those needed to
cover ordinary administrative costs of implementing a state emissions regulatory
program. What was not authorized by AB 32 is the ARB’s decision to withhold
for itself a percentage of the annual statewide greenhouse gas (GHG) emission
allowances and to auction them off to the highest bidders, thus raising from
taxpayers up to $70 billion or more of revenue for the state to use.
The lawsuit does not challenge any of the provisions of AB 32 nor the merits
of climate change science. The only issue addressed in the litigation is the
portion of the ARB’s regulatory program that seeks to permit the ARB to allocate
to itself GHG emission allowances and to profit by selling them to GHG emitters.
The CalChamber, other members of the business community, members of the
Legislature, the Legislative Analyst’s Office and ARB have all highlighted the fact
that the auction is not needed to achieve the goals of AB 32.
The business community has repeatedly underscored the fact that the
auction will raise energy costs significantly in the state and affect California’s
competitiveness, without providing any additional environmental benefits.
California leaders have promoted AB 32 as an example of climate regulation for the rest of the nation to emulate. But to be a successful leader in
attracting other participants in this type of regulation, the state must use the
most cost-effective process—not the most expensive.
In an initial ruling in 2013, the Sacramento Superior Court found for the
state. The CalChamber has appealed that decision to the 3rd District Court of
Appeals, and expects to make oral arguments in early 2016. A decision on this
matter would influence the structure of any future cap-and-trade program.
®
Path to 2050 Greenhouse Gas Target
Pre-2020 and Post-2020 Emissions Trajectories
California annual GHG emissions (MMT CO2e)
policies that will aid in reducing GHG emissions. While the
ARB has set six goals, it also has stated its intent to coordinate
efforts with other plans to achieve co-benefits and cross-agency
coordination, including, but not limited to:
• Cap-and-Trade. The ARB adopted the cap-and-trade
regulation, which placed a cap on aggregate emissions from
entities responsible for roughly 80% of the state’s GHG
emissions. Entities emitting in excess of 25,000 metric tons of
GHGs are subject to the cap-and-trade scheme.
The cap-and-trade program has been operating since 2013
with the prices hovering around the floor. In 2014, Quebec
joined California’s program and in January 2015, motor vehicle
fuels also came under the cap, significantly expanding the scope
of the regulation. Over time, the majority of emission
allowances will be auctioned by the ARB, creating an enormous
revenue stream from this regulation—but adding nothing to the
rule’s emission reduction levels. CalChamber has sued the ARB
to reverse the part of the cap-and-trade regulation that provided
for the auction of allowances (see box nearby).
• Federal Clean Power Plan. In mid-2016, the U.S.
Environmental Protection Agency (U.S. EPA) should finalize its
Clean Power Plan, which sets limits on GHG emissions from
existing power plants. The final rules are expected to set GHG
targets for 2030 on a state-by-state basis.
500
400
-4.7 MMT CO2e per Year
-1.0 percent per year
-11.4 MMT CO2e per Year
300
-5.2 percent per year
~ 260 MMT CO2e
200
100
Constant percentage reduction
Constant MMT reduction
2000
2010
2020
2030
2040
2050
Source: California Air Resources Board, 2030 Target Scoping Plan
(October 1, 2015).
While California is well-placed to achieve the targets, other
states have filed suit claiming the U.S. EPA has overstepped its
authority by regulating the state-based energy sector. The ARB
is focusing on a compliance plan that will continue GHG
reductions from the electricity sector.
• Mobile Source/Sustainable Freight Strategy. A major
component of the updated State Implementation Plan (SIP),
due to the U.S. EPA in 2016, is the mobile source strategy,
which simultaneously purports to address air quality standards,
achieves GHG emission reduction targets, and reduces
petroleum consumption.
The strategy includes both short- and long-term goals.
For passenger vehicles, the strategy calls for an increasing
penetration of plug-in hybrid electric and zero-emission
vehicles. To support those vehicles, the electrical grid and
hydrogen supply will need to be supplied by 50% renewable
energy. Heavy-duty vehicles, in the near term, will continue to
be dominated by combustion technology; the SIP will call for
an increase in the efficiency of those engines. In addition, the
mobile source strategy calls for reducing vehicle miles traveled
by improving community designs and making efficiency
improvements to the freight transport system.
In July 2015, Governor Brown issued Executive Order
B-32-15, which is an integrated plan to improve freight
efficiencies, transition to zero-emission technologies and
increase competitiveness in California’s freight system. This
strategy ties into the Mobile Source Strategy since both seek a
transition to cleaner transportation systems.
• State Implementation Plan (National Ambient Air
Quality Standards). On October 1, 2015, the U.S. EPA
strengthened the National Ambient Air Quality Standards
for ground-level ozone to 70 parts per billion (ppb) amidst
disappointment from both the business and environmental
23
CLIMATE CHANGE
communities. The business community urged the administration to maintain the current standard of 75 ppb, which has not
yet been attained in some areas and is costly to achieve, while
the environmental and public health communities claimed that
60 ppb was necessary for public health.
The SIP is a compilation of plans submitted by local air
districts, which rely on the same set of control strategies to
achieve federal ozone standards. The ARB is the lead agency in
the state for the SIP, and compiles the local plans to present to
the U.S. EPA for approval. SIPs must identify the quantity of
emissions reductions needed to meet the air quality standards
and the actions necessary to achieve them.
International Climate Change
Internationally, California has been working with other nations
and jurisdictions to share best practices, develop policies, and
make commitments under the United Nations Framework
Convention on Climate Change, as well as under other bilateral
agreements. (As a state, California cannot enforce international
agreements, but can state its aspirations and intent, and pass
laws that implement those aspirations.)
Under a December 12, 2015 deadline, international leaders
negotiated an agreement on a climate agreement. Included
in this deal is nonbinding language on “Intended Nationally
Determined Contributions.” These contributions are a public
declaration of what actions each country intends to take to
address climate change. For example, the United States intends
to reduce greenhouse gas emissions by 26%–28% below 2005
levels by 2025.
The contributions from this agreement will include
approximately 90% of global emissions (compared to 14%
in the Kyoto Protocol). Seen as a success, the Paris agreement
envisions that all nations will contribute to the reductions;
would in the aggregate limit temperature rises below 2
degrees Celsius; calls on developed nations to donate $100
billion annually to developing nations by 2020 to help those
nations achieve GHG reduction goals without derailing their
economies; and seeks publication of GHG reduction targets and
a goal of carbon neutrality by 2050.
Governor Brown, along with a delegation from California
consisting of lawmakers, business leaders and academics,
attended the United Nations climate change conference in Paris
to sell the successes of California’s climate change program and
promote it as a model to the rest of the world. Before traveling
to Paris, in a December 1, 2015 interview, Governor Brown
stated that “Our goal is to take what we are doing in California
and get others to join us, so we don’t put ourselves as an outlier
in an uncompetitive position.”
Elements to Consider for a Post-2020 Climate Policy
California represents less than 1% of global GHG emissions.
Any solution that does not involve a global agreement will cause
California to suffer very high costs without any benefits. With
24
this in mind, noted environmental economists Todd Schatzki
and Robert Stavins produced a report outlining elements of
a possible post-2020 climate change policy (Beyond AB 32:
Post-2020 Climate Policy for California, January 7, 2014).
This approach considers a balance between the goals of global
leadership and a broader participation in reducing GHGs with
the health of the state’s economy.
The seven elements of such a policy are:
• In light of ongoing international negotiations on climate
change, preserve flexibility by avoiding firm targets that go
too far into the future. This is an important consideration as
policymakers consider a next-step target of 2030.
• Make increasingly aggressive targets conditional on
reciprocal actions by other states or nations. This provides
incentive for other states/nations to take action, and avoids
leaving California holding the bag on costs, without any real
environmental benefits.
• Carefully assess the environmental and economic
performance (as well as distributional implications) of existing
policies in the AB 32 scoping plan to determine whether
existing policies should be modified or eliminated and whether
new policies should be developed.
• Linkage with other countries can help reduce the costs
of meeting GHG reduction targets (and equalize burdens),
especially to the extent California increasingly relies on an
economy-wide cap-and-trade program.
• Continue to promote policies that encourage innovation in
carbon-reducing technologies. Without question, innovation is
key to stabilizing global GHG concentrations and lowering costs.
• Recognize that increasingly aggressive GHG reduction
policies—without reciprocal actions by other states and
nations—will lead to greater leakage risks (both emissions and
economic). This will require equivalency in policy stringency
and, especially, universal participation.
• Recognize that cost-containment will become increasingly
important as emissions targets are tightened.
Most of these elements are policy choices that should be
openly debated and adopted by the California Legislature and
administration.
The integration between the mandatory measures
and market-based incentives “can produce perverse policy
outcomes,” according to Schatzki and Stavins. California’s
current Scoping Plan relies on a suite of control measures to
reduce GHG emissions, including a market-based cap-and-trade
program, along with specific mandates, called “complementary
measures” (Low Carbon Fuel Standard, Renewable Portfolio
Standard, energy efficiency, and increased automotive fuel
efficiency, among others).
Preparations for a post-2020 policy should examine the
economic efficiency and environmental effectiveness of the
complementary measures, especially as they may have added to
or subtracted from efficiencies by cap-and-trade. This analysis
would inform a post-2020 policy whose goal should be:
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CLIMATE CHANGE
increasing the likelihood of broader international action while
protecting the economic well-being of the state.
CalChamber Position
Climate regulations should be monitored vigilantly to ensure
they are meeting their GHG reduction goals in a way that minimizes adverse effects on economic growth and development.
The proof of California’s leadership on climate change
policy will be in how other states, and even nations, look to our
example as one worthy of emulating. Since climate change is a
global phenomenon, California’s most important response will
be designing and implementing efficient and effective policy
mechanisms to reduce GHG emissions and encourage policy
and technological innovation.
As the Legislature and administration consider additional
climate change policies in 2016, the CalChamber will advocate
three themes:
• That state leaders examine how well GHG regulations
have worked to date, their impacts on the economy overall
and on various industrial and economic sectors, and how those
regulations can be improved.
• That any new legislative or regulatory scheme use market
mechanisms as its foundation, with the goal being the most
cost-effective solutions to GHG reduction mandates.
• That the Legislature exert its appropriate authority and
®
responsibility to set state climate change policy, especially since
the economic effects will be very expensive and reverberate for
many years, and that the Legislature exert its oversight
responsibilities regularly and extensively as the regulatory
implementation develops.
Staff Contact
Amy Mmagu
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
25
EDUCATION
High-Quality Education System Essential to Preparing
Students to Meet Projected Workforce Needs in 2030
26
Demand for Highly Educated
Workers Will Exceed Supply in 2030
38.4
40
35
Supply
33
Demand
30
Share (%) of all workers
Introduction
The survival of California employers in the global economy
depends upon the state’s ability to maintain a high-quality education system that adequately prepares all students to compete in
the workforce. Without this, a growing number of employers will
be forced to recruit qualified workers from outside of the state,
which can be quite expensive given California’s high cost of living.
Some employers may eventually choose to relocate or expand into
other markets rather than take on this added expense. Others may
simply see their profit margins shrink.
The quality of the state’s education system also is critical
to ensuring that individual Californians develop the skills and
credentials they need to compete for middle-class jobs that can
support their families. Increasingly, these jobs require some level
of postsecondary education or training. According to a 2012
report issued by the Institute for the Study of Societal Issues at
the University of California, Berkeley (UC Berkeley Report),
lack of educational attainment continues to be strongly correlated with unemployment, poverty and incarceration rates.
A report by the Public Policy Institute of California (PPIC)
from September 2014 similarly highlighted the link between
educational attainment and unemployment, and noted that
individual income also is affected. Individuals with even some
college earn an average of 20% to 30% more than their peers
with only a high school diploma, and as education increases,
so does an individual’s earning capacity. According to the UC
Berkeley Report, individuals with a bachelor’s degree or higher
spend an average of four fewer years in poverty than individuals
who have only a high school diploma, earn an average of $1.34
million more over their lifetimes, reduce the expected number
of years they will require state aid by more than two years, and
reduce their chances of incarceration to nearly zero.
California’s economy, in turn, is affected by all these
impacts. When jobs go unfilled because employers cannot find
enough qualified workers, businesses are less productive and the
state loses out on valuable corporate tax revenue that could be
used to support critical government programs and services,
including education. At the same time, individuals who cannot
find jobs that match their skills, content knowledge or level of
educational attainment pay less to the state in taxes, and if they
end up unemployed or incarcerated, they increase what the state
must spend on its social programs and its correctional justice
system. According to the UC Berkeley Report, individuals who
earn a bachelor’s degree yield the state an average of $140,000
more over their lifetimes when compared to individuals who
complete only high school. Even individuals who complete
some college but never earn a degree will yield the state an
average of $45,000 more during their lifetimes.
Given these realities, improving educational attainment
25
20
15
10
5
0
Less than High school
high school graduate
Some
college
Associate Bachelor’s
degree degree or more
Source: Public Policy Institute of California, “Will California Run Out of
College Graduates?” (October 2015).
rates is arguably one of the most important things policymakers can do to ensure the long-term health of the economy,
and to improve the lives of future generations of Californians.
Although the percentage of Californians who have attended at
least some college has grown in recent years, student attainment
rates are increasing far too slowly to keep pace with the growing
needs of California’s economy. If current college participation
rates continue, the state will be short 1 million to 1.5 million
workers with some college training by 2025, and at least 1.1
million workers with bachelor’s degrees by 2030.
This potential mismatch between the preparation of California’s workforce and the level of training needed by employers
has serious long-term implications for the state’s budget,
employers, and families. The recent effort to reinvest in our
schools and postsecondary institutions is a good start, but it will
require more than simply sending more money to our schools
to close this gap. The challenges that contribute to California’s
college attainment rates are complex, and success will require
changes in many areas.
The Achievement Gap
One pervasive problem that must be addressed in order to meet
California’s future workforce needs is the achievement gap that
exists between white and Asian/Pacific Islander (API) students
and those of other racial and ethnic backgrounds. African
Americans and Latinos, in particular, are significantly underrepresented in college classrooms and are less likely to finish college
when they do enroll. These two groups together account for
approximately 45% of the state’s total population, which means
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EDUCATION
that policies designed to help more African Americans and
Latinos go to college and complete their degree and certificate
programs will make a sizable dent in the state’s overall shortage
of qualified workers. According to a 2012 report by California
Competes setting forth a framework for how policymakers
can improve the state’s higher education system: “If the gaps
in enrollment and achievement were to be entirely closed [for
African Americans, Latinos and Native Americans], an additional 790,000 four-year degrees would be produced in California,
bringing us more than two-thirds of the of the way to the 2030
attainment goal.”
According to two recent reports by the Campaign for
College Opportunity, there are 2.1 million African Americans
living in California, representing 5.7% of the state’s population, while Latinos represent 38% of all Californians, with an
estimated population of 14.5 million. At the same time, only
23% of African Americans age 25 or older have a bachelor’s
degree, as opposed to 39.3% of white adults, and 47.9% of API
adults. For Latinos, the number is even lower, with only 10.7%
of adults over age 25 having a bachelor’s degree. Even when
foreign-born Latinos are excluded from the total, only 16.2% of
native-born Latinos have a bachelor’s degree.
The achievement gap is even wider when attainment rates
for different ethnic and racial groups are compared by looking
at those with a high school diploma or less versus those with
at least some college. In 2011, for example, 35.7% of African
Americans and 66.1% of Latinos age 25 or older had earned a
high school diploma or less, compared to 26.1% of white adults
and 29.4% of API adults. When foreign-born Latino adults
are excluded from the calculation, only 47.2% of native-born
Latino adults have a high school diploma or less, but Latinos
still have, far and away, the lowest college attainment rate of any
ethic group. Furthermore, while the percentage of individuals
with a bachelor’s degree has risen for all ethnic and racial groups
since 2000, as of 2011, the achievement gap had decreased by
only 1 percentage point for African Americans and 1.8 percentage points for Latinos compared to their white peers.
One factor contributing to this gap in college attainment
is that only 68% of African Americans graduate from high
school—the lowest percentage of any of the ethnic/racial
populations measured, meaning that fewer are eligible to
pursue college degrees to begin with. In addition, among both
African American and Latino high school graduates, only 3 in
10 complete the A–G curriculum, a prerequisite for admission
by the California State University (CSU) and University of
California (UC), compared to 50% of white students and
two-thirds of API students.
African American and Latino students who do graduate from high school and are accepted to one of California’s
three public higher educational institutions also tend to be less
prepared for college-level work when they start, and as a result
they are more likely to be assigned to pre-college level or remedial courses. This is troubling because, according to a recent
®
Educational Attainment of California Adults
25 Years and Older, 2011
Bachelor's degree
or higher
Some college,
no degree
Associate degree
HS diploma
or equivalent
30.3
10.7
5.3
17.9
23.0
39.3
9.3
7.7
22.1
24.6
No HS diploma
or equivalent
9.0
32.0
25.6
21.1
41.5
18.9
California
Latino
47.9
7.4
15.3
24.3
15.1
6.1
11.4
14.3
White
African
American
Asian/
Pacific
Islander
20.0
Source: U.S. Census Bureau, 2011 American Community Survey 1-Year
Estimates, Public Use Microdata Sample, in The Campaign for College
Opportunity, The State of Latinos in Higher Education (November 2013).
report by the California Budget Project, only 20% of students
enrolled in remedial courses at the community college level earn
a certificate, an associate of arts (AA) degree, or transfer to a
four-year degree program within six years of their enrollment.
The Campaign for College Opportunity reports reveal that
African Americans and Latinos also struggle disproportionately
at the CSU level. Only 8% of African Americans entering the
system in 2008 graduated within four years, and only 35%
graduated within six years. Similarly, only 10% of Latinos entering the system in 2008 graduated within four years, and less
than 50% did so within six years.
These achievement and attainment gaps do not start in high
school, though. They are visible at all levels of the education
system and have remained relatively stable over the last 15 years
despite overall increases in high school graduation rates and
college attainment rates.
Ongoing Changes in K–12 Education
Early childhood education has a huge impact on long-term
educational attainment. Students who fall behind in the first
few years of school often never catch up to their peers, and
are more likely to drop out of school. According to a 2010
report by the Annie E. Casey Foundation (AECF Report), “the
process of dropping out begins long before the child gets to high
school. It stems from loss of interest and motivation in middle
school, often triggered by retention in grade and the struggle to
keep up academically.” The AECF Report cites the inability to
read proficiently by the end of third grade as one of the main
contributors to this cycle, in large part because starting in fourth
27
EDUCATION
grade, the curriculum switches focus from teaching students to
read, to having students read to learn. As a result, students who
are not proficient at this point are likely to fall behind in every
area of the curriculum. At the same time, their teachers will have
much less time during the school day to help them catch up.
The AECF Report examined scores in reading proficiency
for 4th graders on the 2009 National Assessment of Educational
Progress (NAEP) and found that low-income children are much
less likely to achieve reading proficiency by 4th grade than their
higher-income peers. Eighty-three percent of low-income fourth
graders scored “below proficient,” while only 55% of moderateincome and high-income students scored at the low level. The
data also revealed that the achievement gap for African American, Latino and Native American children was already present
by the fourth grade, and these ethnic and racial subpopulations
scored substantially lower on reading proficiency than their
white and API peers, regardless of their income level. Based on
the scores on the most recent 2015 NAEP exam, it appears that
little has changed in the last five years.
The results of AECF Report suggest that making sure every
student can read proficiently by the 4th grade could, by itself,
lead to significantly improved high school graduation rates and
better college readiness among graduates. Improving educational
attainment in preparation for the state’s 2030 workforce needs
also will require policy changes that support early childhood
development and improve individual skill development and
academic performance at all ages and grade levels. Two key
policy changes at the K–12 level are already in the early stages
of implementation and have the potential to improve education
outcomes for California students dramatically over time.
Local Control Funding Formula
In 2013, California overhauled its school funding system
and implemented the Local Control Funding Formula (LCFF).
The old school funding system was based on per-student
funding with supplements from more than 55 categorical funds,
and greatly limited the ability of school districts to allocate
resources based on the unique needs of their student populations. The new law eliminated three-fourths of these categorical
funds and established a flat, base level of per-student funding
for each of four grade spans. The base rate for each grade span
varies based on the needs of students at different grade levels.
For example, the base rate for students in grades K–3 includes
extra funding to support class-size reduction, while the base rate
for high school age students includes funds to support career
technical education (CTE) courses. School districts also receive
supplemental funds for each of their English-language learners and low-income (EL/LI) students. In addition, the law will
gradually increase the annual level of funding flowing to K–12
schools by $18 billion above 2013–14 funding levels.
The LCFF also established a new system of transparency and
accountability to ensure that this additional funding and spending flexibility leads to higher student achievement and the closing
of achievement gaps for key subpopulations of students. It directs
28
school districts to adopt and periodically update Local Control
and Accountability Plans (LCAPs) that lay out how they will allocate their resources to provide high-quality education programs
to all of their students. Districts must set annual goals in eight
specified areas, including student achievement, student engagement, school climate, basic services, implementation of Common
Core state standards, course access, parent involvement, and other
student outcomes. The LCAPs also must include district-wide
goals, and goals for each numerically significant student subpopulation in the district, and each LCAP must specify what actions
the district plans to take to achieve these goals. Updated LCAPs
must review the district’s progress toward meeting the goals it has
set for itself, assess the effectiveness of the actions it has taken, and
describe any changes it plans to make as a result of the review.
Finally, districts must submit their LCAPs to their local county
offices of education for approval.
The LCFF also envisions a system of interventions for schools
and districts that are struggling to meet the objectives they established in their LCAPs. For example, if a district fails to improve
outcomes in at least two priority areas for at least one subgroup,
it will receive support from the county office of education, and
if a school district is deemed to persistently underperform, the
new law authorizes the state Superintendent of Public Instruction
to intervene and change the district’s LCAP, impose conforming budget revisions, and stay or rescind actions by the district
governing board to improve student outcomes.
Two years into the implementation of the new law, many
of the details about how individual school performance will be
reported and evaluated, as well as what types of interventions the
state will use to help struggling schools, are still unclear. Work is
continuing at the Department of Education and State Board of
Education to establish additional regulations and create rubrics
that will allow members of the public, including parents, to
see how their local schools are performing. It is critical that the
rubrics, expected to be finalized this summer, provide meaningful, easily understandable information to the public so that
schools can be held accountable for ensuring all students succeed.
Completion of the regulations is equally important, as they will
govern how supplemental and concentration grants may be used
by districts, what will constitute satisfactory and unsatisfactory
progress for schools, and what interventions will be implemented
to help schools that struggle to meet their objectives. It is also
important that the state continues to work to fully fund the new
formula on schedule so that schools have the resources they need
to address all the goals in their LCAPs.
Common Core
Another recent policy change affecting K–12 education was
the adoption of the Common Core State Standards in 2010.
The standards provide a framework for what all students should
know and be able to do at the end of each grade level in English
and mathematics, and 42 states along with Washington D.C. are
working to implement them. The Common Core was developed
at the request of state school chiefs and governors from across
®
EDUCATION
the country, and designed by teachers, school chiefs, administrators and other experts. The overarching goals of the Common
Core are to increase uniformity among districts, regions, and
states, so that all graduates are equally prepared, and to emphasize important skills like analytical thinking over memorization
of dates and facts. In general, the standards require less content
to be covered each year than California’s previous standards did,
but students are expected to develop a deeper understanding
of what they study. The standards also emphasize reading from
expository materials and a more conceptual approach so that
students learn to apply general concepts to real-world problems,
similar to the types of problems they will face once they leave
school and enter the workforce.
California belongs to the Smarter Balanced Assessment
Consortium, one of two groups of states that developed new
student assessments tied to the Common Core standards. The
new Smarter Balance assessments are administered electronically
and are adaptive, meaning the test questions change based on
whether students correctly answer earlier questions. In this way,
the program slowly builds a picture of what each student does
and does not know. Unlike prior statewide tests, Smarter Balance
assessments provide diagnostic information about each student’s
skills and will serve as a useful tool for educators by helping them
focus remediation efforts on each student’s specific needs.
The first official administration of the Smarter Balance
assessments took place this past spring, and they were given to
all public school students in grades 3–8 and 11. While students’
scores on this first round of testing cannot be compared to
scores from prior tests, it was widely expected that, on average,
scores for the Smarter Balance assessments would be lower
because students, teachers and parents are still adjusting to the
new standards and testing format. In fact, on this baseline round
of testing, only 44% of students statewide met or exceeded the
standard for English/language arts and literacy, and only 33% of
students met or exceeded the standard for mathematics.
Students in 11th grade and nearing graduation scored slightly
better on the English/language arts and literacy portion, with
54% of them meeting or exceeding the standards, but only 29%
of them met or exceeded the standards in mathematics. These
initial results would appear to confirm what employers and
postsecondary educators have been saying about the lack of
college and career readiness among California’s high school
graduates. The good news, though, is that the shift to the LCFF
and Common Core should start to increase their level of
preparedness in the years to come if these policies are implemented and overseen properly.
The Elementary and Secondary Education Act
On December 10, 2015, the President signed the newest
iteration of the Elementary and Secondary Education Act
(ESEA) into law, replacing the prior version from 2002, which
usually is referred to as the No Child Left Behind (NCLB) law.
The new law overhauls the federal government’s role in K–12
education and will likely influence California’s own education
®
First Round Test Results:
Smarter Balanced Assessment Consortium
English Language Arts/Literacy
Achievement Level Distribution
100%
75%
50%
25%
0
3rd
Grade
4th
Grade
Standard Not Met
5th
Grade
6th
Grade
7th
Grade
Standard Noearly Met
8th
Grade
Standard Met
11th
Grade
All
Standard Exceeded
Mathematics
Achievement Level Distribution
100%
75%
50%
25%
0
3rd
Grade
4th
Grade
Standard Not Met
5th
Grade
6th
Grade
7th
Grade
Standard Noearly Met
8th
Grade
Standard Met
11th
Grade
All
Standard Exceeded
Source: California Department of Education
reform efforts. The new ESEA, similar to the LCFF at the state
level, seeks to shrink the federal government’s role in the day-today decision-making about how states should educate students
but maintain a strong framework of federal accountability.
It collapses nearly 50 federal categorical funds into a single
block grant program, and places new limits on the power of
the U.S. Secretary of Education. The law still requires states to
administer statewide assessments in grades 3–8 and once during
high school, but it allows states to consider multiple measures
of student achievement when holding schools accountable,
unlike NCLB, which looked solely at standardized test scores.
Going forward, states also will be free to stop implementing the
Common Core without fear of losing federal funding or their
waiver from NCLB requirements and penalties, and states will
29
EDUCATION
no longer be required to use measures of student achievement in
their teacher evaluations.
The law also substantially redefines the federal government’s
role in holding states accountable for student performance.
ESEA requires that states set ambitious goals for student
achievement and ensure that key student subgroups make
meaningful progress toward college and career-readiness. States
also will have to develop tailored interventions and support
strategies to help schools that are failing to meet these goals,
and use evidence-based approaches to turn around the lowestperforming 5% of schools. If school districts are unable to turn
struggling schools around, the law requires states to step in to
help. Finally, the law also seeks to increase the types of opportunities students have throughout the country by encouraging
states to:
• Establish or expand access to high-quality, state-funded
preschool for low-income children.
• Develop innovative and effective reforms to close achievement gaps in key student subgroups.
• Expand incentives to recruit, develop and retain effective
teachers and principals.
• Leverage resources to help students living in high-poverty
communities and support a full continuum of services from
early childhood through college.
• Expand support for high-performing public charter schools.
Many of the law’s changes are consistent with changes California embraced when it adopted the LCFF, but it also requires that
an entirely new system of federal accountability be developed just
as California is working to develop its own new system of state
accountability. This means that, for the time being at least, there
will be limited oversight of how schools in California are using
the additional funding they receive under the LCFF, and the
progress that their students are making.
Health of California’s Public Higher Education System
While improving the way the state educates young Californians
and reducing achievement gaps will have a big impact on high
school graduation rates and college readiness, these actions will
do little to address California’s looming skills gap if the state’s
colleges and universities do not have the capacity to take on
more qualified high school graduates, or if qualifying students
cannot afford to attend college. As such, it is equally important
that policymakers look for ways to increase the state’s college
and university capacity and affordability.
More than three-fourths of all California students attend
one of the three public higher education segments, and these
public colleges and universities award approximately 75% of
all undergraduate degrees as well as 60% of the certificates
requiring more than one year to complete. The California
Community Colleges currently serve approximately 2.1 million
students. Under the terms of the state’s Master Plan for Higher
Education (Master Plan), community colleges must admit
all students who would benefit from instruction, and are
30
responsible for offering coursework leading to an AA degree
or transfer to a four-year institution, providing vocational
and career technical education, supporting students who need
remediation before undertaking college-level courses, and offering self-enrichment courses to local communities. In 2015–16,
the total budget for the system is nearly $9 billion, up 8% from
2014–15, and includes $5.7 billion from the state General
Fund, $2.6 billion from local property taxes, $416 million from
student fees, and $186 million from the state lottery.
The recession that began in 2007 had a dramatic impact on
the state’s General Fund revenues, which led to major cuts to
state funding for important programs and institutions, including K–12 schools and all three branches of the state’s higher
education system. Even though Proposition 98 protects funding
for the community colleges to some extent, their budget still
was reduced by $1.5 billion between 2007–08 and 2011–12.
Passage of Proposition 30 in 2012, which has temporarily
increased the state sales tax and income tax rates for the state’s
highest earners, allowed for $210 million of that funding to be
restored, but the system still has been operating on a significantly smaller budget in recent years.
The community college system is not allowed to increase
student fees without legislative authority, and has few sources of
revenue other than the state’s General Fund, making it hard to
offset major budget reductions of this magnitude. In addition,
the Master Plan does not allow community colleges to limit
student enrollment to control costs. As a result, the community
colleges have had to reduce their spending by reducing the
number of full-time faculty they employ, freezing benefit and
salary increases for faculty, reducing course offerings and cutting
sections (thereby driving up class sizes), and limiting support
services for students. All these changes have made it harder for
students to accomplish their educational goals, and have indirectly reduced enrollment at the community colleges by nearly 1
million students.
The CSU is devoted primarily to undergraduate education
and master’s degree programs, although several changes to the
Master Plan have allowed CSU to conduct faculty research,
particularly in applied fields, and to award doctorates in educational leadership, nursing and physical therapy. Its budget for
2015–16 is nearly $5.5 billion, a 5% net increase over the prior
budget year, and includes $3.2 billion from the General Fund,
$2.2 billion from tuition and fees, and $59 million from the
state lottery.
The UC and CSU together serve 25% of the state’s college
students. The UC serves as the state’s primary academic research
institution and is charged with providing undergraduate, graduate and professional education. It is the only one of the three
public higher education institutions that may award doctoral
degrees (with three exceptions) and instruction in law, medicine,
dentistry and veterinary medicine. Its budget for 2015–16 is
$6.5 billion, a 6% net increase over the prior budget year, and
includes $3.2 billion from the General Fund, $2.9 billion from
®
EDUCATION
®
State Support for UC and CSU Has Declined
30,000
General Fund Spending per Student ($)
tuition and fees, $323 million from other nonstate sources, and
$39 million from the state lottery.
General Fund support for both the UC and CSU also has
been curbed sharply in recent years. Between 2007–08 and
2013–14, the General Fund contribution to both institutions’
budgets fell approximately 20%, from $6.3 billion to $5 billion.
It is worth noting that state financial support for the UC and
CSU has actually been on the decline since 2002, although it
did drop more precipitously during the recession. According
to a recent report by the Public Policy Institute of California
on the institutional costs of the state’s public postsecondary
institutions, the UC and CSU have both worked to hold their
costs steady and minimize tuition increases even as the state
has reduced its contribution. The only area where spending
has risen significantly is in student services, including remedial
education, counseling, and financial aid administration.
Annual tuition for a full-time undergraduate student at the
CSU in 2015–16 is $5,472, the same as it was in 2011–12.
In addition, more than half of CSU undergraduate students
receive a fee waiver or grant and pay no tuition as a result. In
total, 75% of all CSU students receive some form of financial
assistance, meaning that the majority of CSU undergraduates
take on no student debt, and those that do take on student debt
accrue far less than the national average for public universities.
UC undergraduate tuition, currently $12,240 annually, also
has stayed nearly level since 2011–2012. At the end of 2014,
the UC Board of Regents authorized a plan that would have
allowed tuition increases of up to 5% a year for five years, but
after working with the administration and Legislature through
the budget process last spring, the UC agreed to hold tuition
flat at least through the 2016–17 school year.
The UC has a greater capacity to backfill cuts to state
funding than the other two sectors. Not only can it raise tuition,
it also can increase the number of out-of-state and foreign
students it admits. Non-California residents pay as much as
53% more for their tuition, and the additional revenue they
generate helps support higher enrollment for in-state students
and general university operations. The CSU and community
colleges generally lack this option due to the low number of
out-of-state students who enroll in these systems.
The impact of tuition increases at the UC and CSU has varied
from student to student. As the PPIC report notes, the state has
established a variety of targeted aid programs for students with
financial need and strong academic performance, and both the
UC and CSU have their own grant programs that use institutional funds to help make college more affordable for low-income
students. For lower-income families that know to apply for them,
the higher tuition rate often is substantially, if not completely,
offset by available grants and scholarships, and California’s new
Middle Class Scholarship Program expands available aid to
families that make up to $150,000. However, other costs like
room and board, books and related education and living expenses
often are more costly than the tuition itself, and can price
25,000
UC
CSU
20,000
15,000
10,000
5,000
0
80
84
88
92
96
00
04
08
12
Source: California Budget Project, From State to Student (May 6, 2014)
students out of these institutions even after their tuition has been
covered. In addition, many low-income students do not know to
apply for grants or scholarships at all, and it can be hard for
students to determine what their net tuition after grants and
scholarships would be, which means the apparent cost can deter
students from applying to the UC and CSU at all.
In May 2012, the PPIC issued another report analyzing how
reductions in state support for higher education have affected
enrollment at these institutions. The report found that the UC
has reduced its overall enrollment targets by 7%, which equates
to 2,600 fewer students per year. More notably, reductions in
enrollment targets have not been distributed equally across all
UC campuses. Instead, the more prestigious campuses have
made the biggest cuts to their enrollment targets, pushing more
students into the referral pool for less selective campuses, and
many students will not attend a school that is not their first
choice. The CSU has since restored its enrollment targets to
near pre-recession levels, but a significant portion of this enrollment growth is considered unfunded as it has not been matched
by state dollars. Even with this enrollment restoration, the CSU
is failing to keep up with rising demand and is turning away
thousands of qualified applicants each year.
As public universities have been adjusting their practices due
to limited state funding, the overall number of students graduating from high school has been increasing, and more qualified
students have been applying to the UC and CSU. According to
PPIC, if enrollment targets at the institutions had stayed at 2007
levels, 20,000 more students would have attended each year,
and approximately 12,000 more would have earned a bachelor’s
degree each year. In addition, although many students who were
not accepted into their UC or CSU of choice did decide to attend
college somewhere else, there is evidence that as many as 10%
never ended up enrolling in any college or university.
31
EDUCATION
The Role of Private Colleges and Universities
Although the vast majority of postsecondary students in
California attend one of the state’s public colleges or universities, approximately 20% of students attend a private college or
university instead. This sector typically is viewed as having two
distinct types of institutions: nonprofit colleges and universities
that often are founded by charitable or religious organizations,
offer a wide range of academic programs and award a variety
of degrees; and for-profit colleges and universities, which often
focus on a narrower range of academic programs that lead to a
certificate of some kind, although there are a number of larger
for-profit schools that offer a range of degree programs, from
associate to master’s degrees.
Private Nonprofit Colleges and Universities
The Association of Independent California Colleges and
Universities (AICCU) represents more than 70 of California’s
200 private, nonprofit colleges and universities, and its members
all are accredited by the Western Association of Schools and
Colleges (WASC). Collectively, these institutions serve close
to 185,000 undergraduate students each year and award more
than 20% of all undergraduate degrees in the state. According to
AICCU’s 2014 Factsheet, 40% of students who attend a CSUequivalent nonprofit university graduate within four years, while
only 16% of CSU students do. Similarly, nearly 70% of AICCU
students graduate from UC-equivalent universities within four
years, while only 56% of UC students can say the same.
These private, nonprofit colleges and universities sometimes
are criticized as less attractive options for students because
they are more expensive than California’s public postsecondary institutions. In 2012, the average cost of attending an
AICCU institution, including tuition and fees, was $32,000,
compared to $14,800 for the UC and $5,472 for the CSU,
but a comparison of the percentage of students who graduate
from each type of institution with federal loan debt suggests
that the differences in the net tuition they actually pay may not
be quite so disparate. In 2012, for example, 59% of graduates
from AICCU institutions owed an average of $20,753 in federal
loans, compared to 46% of graduates from the UC or CSU,
who owed an average of $16,603. According to AICCU, 79%
of its students receive institutional grants averaging $13,604 per
student, 35% receive Pell grants from the federal government,
and 18% receive Cal Grants from the state.
The extent to which these private, nonprofit institutions
actually are more expensive than public ones, to some extent,
also reflects how much support the state offers students who
choose to attend a public university versus a private one. In
addition to offering larger Cal Grant awards to students attending one of the state’s public colleges or universities, the state
also provides other types of financial aid for students at public
universities that are not available to students who attend a
private nonprofit university. According to AICCU, the amount
of state aid available for a Cal Grant-eligible student to attend
an AICCU campus for four years is only $36,892, compared
32
to $51,940 to attend a CSU and $97,036 to attend a UC. One
way policymakers might increase the state’s overall higher education capacity is to offer more support to students who choose to
attend a private nonprofit college or university.
Private For-Profit Colleges and Universities
Approximately 11% of students in California choose to
attend one of California’s private, for-profit colleges and universities. These institutions are designed to appeal to working
adults, part-time students, and students with children, due
to their flexible scheduling, online options and convenient
locations. While for-profit institutions offer attractive options
for Californians who might otherwise not be able to fit college
coursework into their schedules, some for-profits have drawn
attention and criticism from policymakers and student advocates at both the state and federal levels. A recent report by the
California Legislative Analyst’s Office (LAO) noted that private,
for-profit colleges account for 10%–13% of student enrollment
nationally, but their students receive 25% of federal financial
aid dollars and account for as much as 50% of federal student
loan defaults. In general, critics have argued that these institutions have been inconsistently regulated, are more likely to take
advantage of students to turn a profit for their owners, and some
have very low graduation/completion rates.
While the intention has been to protect students by discouraging them from enrolling in programs that are not apt to lead to
improved job prospects, the criticisms and reform efforts have been
based on federal completion-rate data, which look only at first-time
full-time students who often make up a small percentage of a
school’s actual enrollment. Critics also have not, by and large, taken
into account that adult students with full-time jobs and families,
who tend to make up a large percentage of the student population
at for-profit colleges and universities, have a harder time balancing
the demands of school with other responsibilities, and are more
likely to lack financial assistance from parents and family than their
public and private nonprofit counterparts. These factors, which also
have an impact on community colleges and UCs, are as likely to
affect completion rates and loan default rates as school quality, and
good oversight and regulation should take this into account.
Private for-profit colleges and universities are regulated by
a variety of independent entities. First, the U.S. Department of
Education (USED) imposes standards on all private for-profit
institutions and nonprofit certificate programs that accept federal
financial aid, seeking to ensure their financial stability, limiting
how much of their income can come from federal student aid, and
establishing a maximum student loan default rate. The USED also
requires that each institution be accredited by a federally recognized
regional or national accrediting body that promotes best practices
and establishes additional standards for continued accreditation
and eligibility for federal student aid dollars. Finally, states now are
required to explicitly approve the operation of all private for-profit
institutions that operate witin their boundaries and have a procedure in place to process and resolve student complaints in order for
those institutions to be eligible for federal student aid dollars.
®
EDUCATION
®
Unemployment Rates
Lower for More Highly Educated Workers
16
14
2007
13.4%
2014
12 11.6%
Unemployment rate (%)
California’s track record for overseeing for-profit colleges
and universities, however, has been quite inconsistent. In 2007,
unable to develop a compromise to improve oversight without
stifling the development of quality programs, the Legislature
allowed existing law authorizing state oversight of these institutions to expire, leaving no oversight authority for more than a
year. In 2009, the California Private Postsecondary Education
Act was enacted, creating the Bureau for Private Postsecondary Education (BPPE) within the Department of Consumer
Affairs, and charging it with oversight of for-profit colleges and
universities. This entity went unfunded until the following July,
and a state hiring freeze further prevented the BPPE from filling
a reduced number of positions until mid-2012, by which time
there was a significant backlog of license applications.
California’s inconsistent regulation of this sector has allowed
some unscrupulous for-profit colleges to operate in the shadows
and take advantage of students and financial aid dollars without
producing meaningful student outcomes, hurting the reputation of the entire sector. Inconsistency also has driven lawmakers
to enact less reasoned policies than might have been developed
by a properly empowered regulatory body. For example, the
Legislature has limited the availability of Cal Grants to students
who attend private for-profit colleges by reducing the maximum
dollar amount of applicable Cal Grant awards, and by prohibiting schools that exceed specified default rates or fail to meet
minimum completion rates from being able to receive Cal
Grant funds through their students. Unfortunately, though, the
parameters California law uses to limit access to financial aid for
students at these institutions rely on the same limited federal data
on completion rates mentioned above, and similarly ignore the
demographics of for-profit student populations, unfairly denying
financial support to some students and schools as a result.
In 2014, the Legislature temporarily reauthorized the
California Private Postsecondary Education Act through 2016,
strengthened its mandate to meet new federal requirements and
better protect consumers, and provided funding for additional
staff to help with licensing, oversight and handling of student
complaints. As one policy committee analysis of the legislation
noted: “The challenge for the Legislature is to ensure the
continuance of an oversight structure that supports innovative
programs while also preventing predatory practices.” Even now,
there are concerns that the BPPE’s mandate is too broad to be
carried out effectively despite its new resources, and some
private institutions worry about unreasonable burdens caused by
overlapping regulation by the BPPE and regional and national
accrediting bodies. On the other hand, some consumer
advocates argue that the law did not go far enough to allow the
BPPE to weed out bad actors in the sector. Clearly, proper
oversight of private colleges and universities is not easy, but it is
critical that the state preserve, and where possible, expand access
to high-quality for-profit certificate and degree programs for
those students who need an alternative to more traditional
colleges and universities.
11.3%
9.4%
10
8
6.3%
6
5.4%
4.3%
4
3.5%
4.5%
2.6%
2
0
No high
High school
school diploma diploma
Some
college
Associate Bachelor’s
degree degree or more
Source: Public Policy Institute of California, “Will California Run Out of
College Graduates?” (October 2015). Authors’ calculations based on March
2007 and 2014 Current Population Survey data.
Note: These numbers include all members of the labor force ages 16 and older.
Meeting the Demands of 2025
Knowing all of this, what should our priorities be when seeking
to increase educational attainment to meet the growing needs
of the workforce and ensure that Californians are better off in
2030 than they are today? In the short term, one of the biggest
obstacles to increased educational attainment for soon-to-be
high school graduates is limited access to the state’s three public
higher education segments. The state is, in essence, throwing
degrees away because it does not have the financial capacity to
provide them to existing qualified high school graduates. As
a result, those individuals will earn less and be more likely to
experience poverty and unemployment over their lifetimes.
Policymakers have approved several annual budget increases
for all three public higher education sectors in recent years. As a
result, these sectors have been able to hold tuition and fees steady
and make room for more students. Still, funding for these institutions has not been adjusted enough to ensure that every qualified
high-school graduate can find a spot at his/her campus of choice,
and the Governor has made it clear that, even though the state
has started to reinvest in the public higher education institutions,
it cannot afford to fund the business-as-usual model.
All three public postsecondary segments have committed
to finding new operational and educational innovations that
can better serve students without further straining the state
budget. The community colleges have begun to change how they
approach remediation for students who enter the system unprepared for college-level coursework. For example, it is now possible
for many students to complete a short module covering a math
skill they lack rather than having to spend the time and money to
complete a full semester review course. For those instances where
a full course is necessary, the faculty has begun developing courses
that integrate review material and allow students to earn some
33
EDUCATION
credit toward graduation while they catch up.
The CSU system also is in the second phase of implementing its Graduation Initiative, aimed at significantly improving
bachelor’s completion rates by 2025, and has embraced “highimpact learning practices,” such as undergraduate research,
service-learning projects, student learning communities, online
learning tools and enhanced student advising. In addition, a
draft report recently released by the Task Force on a Sustainable Financial Model for the CSU included recommendations
designed to make the university less dependent on state revenue
as it continues to expand enrollment in the coming years.
Notably, these recommendations included annual tuition
increases and a change to year-round schools.
The UC also has committed to increasing its online course
offerings, hiring more academic advisers, and where possible,
reducing the requirements for each major to help students graduate more quickly. To help rein in its growing pension liability,
the university has agreed to give new employees hired after July
2016 a choice between a defined benefit pension plan capped
at $117,000 a year and a defined contribution plan. It also has
agreed to work toward the goal of making transfer students from
the community colleges one-third of all its new enrollees.
The 2015–16 Budget Act also established new enrollment targets for UC and CSU. The UC is expected to enroll
at least 5,000 additional resident undergraduate students by
the 2016–17 academic year, compared to enrollment numbers
during the 2014–15 academic year, and the CSU is expected to
increase enrollment by at least 10,400 resident full-time equivalent students in the same period. The budget also made changes
to the Middle Class Scholarship program by excluding students
whose household assets exceed $150,000 starting in 2015–16.
Starting in 2016–17, award recipients also will be prohibited
from receiving more than the equivalent cost of four years of
full-time attendance, and income and asset limitations for eligibility will be adjusted annually for inflation. Finally, the budget
included an additional two-year delay in the planned reduction
of the maximum Cal Grant award for students attending private
WASC-accredited colleges and universities originally adopted as
part of the 2012–13 Budget Act.
Conclusion
In many ways, California’s economy has improved significantly
over the last few years. The state’s operating deficit has been
eliminated, its long-term obligations are being paid off, and
the statewide unemployment rate was down to 5.7% as of
November 2015. Just below the surface, though, there are signs
of trouble. Not all industry sectors and regions of the state have
rebounded equally, and the unemployment rate in six counties
remains at double-digit levels. More than 2 million children
in the state are living in poverty and nearly one-third of all
34
Californians are enrolled in Medi-Cal, meaning they are living
at or below 138% of the federal poverty line, even though many
of them are employed full time.
We know that poverty and unemployment are closely tied
to educational attainment, and that the jobs that pay the most
and offer the most security require some college-level training,
a certificate or a degree. We also know that the children in lowincome households are less likely to make it to college and earn
a certificate or degree. Millions of adult Californians do not
have the education they need to find good jobs, and as a result
their children will likely have a harder time getting to college. At
the same time, state aid for those families is using up valuable
resources, making it harder for the state to invest adequately in
the education system today to protect future generations from a
similar fate.
It is of the utmost importance that policymakers work diligently to increase educational attainment rates in the state. This
will undoubtedly require policy changes and sacrifices in other
areas of the budget, but if California reinvests in postsecondary
education now and finds more effective ways to move students
from kindergarten through high school and eventually into the
workforce, the return on that investment will be substantial—
individuals and their families will be better off, employers will
be more competitive, and the state will have the resources it
needs to invest in infrastructure and new programs that improve
the quality of life for everyone.
CalChamber Position
The California Chamber of Commerce seeks to ensure that all
students graduate from high school adequately prepared to enter
the workforce or continue their education without the need for
remediation. All students should be exposed to high-quality
courses related to science, technology, engineering, and
mathematics throughout their education, and be taught to
develop critical thinking and analytical skills. More high school
graduates should be prepared to continue their education by
earning a certificate, associate or bachelor’s degree, and postsecondary education should be affordable and attainable within a
reasonable period of time.
Staff Contact
Mira Morton
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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ENERGY
Multiple Policies Affect Energy Affordability, Reliability
The production, transmission and cost of energy continue to be
an issue for California residents, the business community and
economy. In order for the state to remain competitive, opinion
leaders should adopt policies to minimize costs while upgrading
and expanding the energy system to electricity customers
while meeting California environmental goals. Reliability and
affordability need to be at the forefront of California’s energy
policies. Multiple, and sometimes competing, regulations placed
on the energy sector affect the price and availability of energy.
Electricity prices have increased over the past decade and are
anticipated to increase an additional 26%–42% by 2020.
The 2000–01 energy crisis and numerous energy mandates
have made the per kilowatt hour cost of energy in California
higher than the national average and significantly higher than
neighboring states.
According to a study released by Navigant, “Energy costs in
California are expected to increase sharply in the next several
years as a result of several contributing factors. In particular,
the cost of providing electricity service to California ratepayers
is projected to increase at a more significant pace compared to
historical rate increases. These cost increases are based on several
factors—some of which are necessary to maintain reliable
service to retail customers. These include the need to modify
and/or replace an aging generation fleet, upgrade distribution
systems and modify or expand electrical transmission systems.
However, there are direct and indirect energy system costs
primarily attributable to specific California policies focused on
greenhouse gas reduction and other environmental objectives.”
(Preliminary Assessment of Regulatory Cost Drivers in California’s
Energy Market, August 16, 2013)
In response to increasing electricity prices, AB 327 (Perea;
D-Fresno, Chapter 611, Statutes of 2013) was signed into
law in October 2013. AB 327 removed some of the statutory
restrictions placed on the California Public Utilities Commission (CPUC) during the energy crisis and allows the CPUC to
re-evaluate residential electricity rates in an effort to make them
more equitable across the state. In addition, the bill allows the
CPUC to apply a fixed charge on electricity bills for residential
customers beginning in 2015, which will ensure that all customers pay the costs associated with the administration of electricity.
Although some residential ratepayers may see relief, energy
prices will continue to rise in California due to the mandates
described below.
Implementation of SB 350
SB 350 (de León; D-Los Angeles; Chapter 547, Statutes of
2015) was signed into law in October 2015. Although the
initial version of this bill included increasing the Renewable
Portfolio Standard (RPS) to 50%, allowing for the creation of a
regional energy market, doubling of energy savings in existing
buildings and reducing petroleum usage by 50%, the final
®
version did not include the petroleum reduction. The three
provisions of the legislation which did pass, however, do carry
significant changes for California’s energy market.
California’s RPS is the most ambitious renewable energy
mandate in the country. An RPS is a regulation which mandates
that a utility company procure a specified amount of the energy
it generates from eligible renewable resources. In California
those resources include: small hydro, solar, wind, biomass,
biogas, fuel cells, geothermal and some tidal technologies. The
first RPS was signed into law in 2002, requiring utilities to
procure 20% of their electricity from eligible renewable energy
resources by 2010. In 2011, the RPS was increased to 33% by
2020, and in 2015 the RPS was increased to require utilities to
procure at least 50% of their electricity from eligible renewable
resources by 2030.
With the passage of a 50% RPS, the current program was
modified to ease compliance for utilities beginning in 2021.
• Requires utilities to procure at least 65% of their contracts
for a 10 years or longer duration, allowing 35% of contracts
to be short-term, permitting more flexibility in contracting for
utilities.
• Allows for banking of specified renewable resources, which
will permit a utility to procure an excess of power to keep and
apply toward a future compliance period.
Currently, 25% of energy in the state comes from renewable
resources eligible under the RPS and utilities are on target
to meet the 2020 RPS mandate. Given the new 50% RPS
mandate and other energy policies that are being implemented
simultaneously, however, there are concerns regarding the price
and intermittency of the electricity being purchased.
In-State Wholesale Renewable Capacity by Resource
Type (As of June 30, 2015)
Biomass 1,300 MW
Wind
6,000 MW
Solar Thermal
1,300 MW
Geothermal
2,700 MW
Solar PV
4,800 MW
Small Hydro
1,600 MW
Source: California Energy Commission staff, based on Quarterly Fuel and
Energy Report.
35
ENERGY
In-State Operating Renewable Capacity: 2001-2014
(As of June 30, 2015)
18,000
Nameplate Capacity (MW)
16,000
14,000
12,000
Solar PV
Solar Thermal
10,000
8,000
Wind
6,000
4,000
Geothermal
2,000
Small Hydro
0
Biomass
‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14
Source: California Energy Commission staff based on Quarterly Fuel
and Energy Report. Data for facilities online as of December 31, 2014.
Residential self-generation not included.
Regional Energy Market
A regional energy market has the potential to reduce energy
costs in all participating states by integrating a diverse portfolio
of resources on one coordinated grid. SB 350 included intent
language to transform the California Independent System
Operator (CAISO) into a regional organization, upon the
approval of the Legislature. The CAISO must prepare specified
governance modifications, conduct studies on the impacts of a
regional market, and receive approval by the Legislature no later
than January 1, 2019.
A regional energy market also increases the reliability of
power delivery as energy losses can be devastating to businesses.
A regional grid would increase reliability by providing operators
a better system that integrates diverse sources of renewable
energy throughout the Western Region. For example, when
there is excess generation of energy from solar power within the
state and demand is low, that energy can be exported cheaply
to other states. Likewise, when there is an abundance of wind
generation in the Northwest and creating a surplus, that energy
can be imported to meet demand in California.
Existing Building Energy Efficiency
SB 350 set a goal of doubling the energy savings in existing
buildings, which includes both electricity and natural gas. To
achieve this goal, there will have to be coordination among
agencies and an incentive for upgrades. In order to ensure that
energy efficiency savings are being made, and are cost-effective,
the California Public Utilities Commission (CPUC) is required
to conduct a comprehensive review of the feasibility, costs,
barriers and benefits to achieving the energy savings.
To complement the provisions of SB 350, AB 802
(Williams; D Santa Barbara, Chapter 590, Statutes of 2015) was
enacted to aid building owners in achieving energy efficiency
goals. The California Chamber of Commerce supported AB
36
802. There are two components of AB 802: the benchmarking
of energy data and a re-examining of utility energy efficiency
incentives. Before the passage of AB 802, electrical and gas
corporations were allowed to offer energy efficiency incentives
only for measures that improved buildings beyond existing
efficiency codes and standards. The CPUC will now be required
to authorize incentives for energy efficiency upgrades for
projects that would improve a building’s efficiency beyond its
current condition. This will allow incentive programs to reach
more buildings, lower costs and improve efficiency throughout
the state.
Implementation of AB 32
Implementation of AB 32, The Global Warming Solutions
Act of 2006, will increase electricity costs throughout the
state. Roughly 40% of the state’s greenhouse gas emissions are
associated with the energy sector. Electric utility producers were
among the first industries to be affected by the regulations,
coming under the cap on January 1, 2013. This means the
electricity utility producers will be allowed only a certain
volume of greenhouse gas emissions per year.
The mechanism that has been set up for the utilities to
comply with their greenhouse gas obligation is complicated,
and has been designed in a way to help create a market for
the state’s auction. Electric utility producers will be given all
of their greenhouse gas allowances for free, but are required
to sell them in the auction. In return, they have to purchase
whatever allowances they need to comply with their greenhouse
gas emission cap. The revenue they receive from selling their
allowances will be returned only to certain classes of ratepayers.
The California Air Resources Board is in the process of
developing its 2030 Scoping Plan Update, which is the roadmap
for achieving the state’s greenhouse gas emission reduction goals.
Within the scoping plan, it is anticipated that much emphasis
will be put on the energy sector’s need to further reduce
emissions and develop a near-zero carbon emission strategy. In
addition, the Federal Clean Power Plan being developed will
have an impact on both new and existing power plants. (See
article on Climate Change.)
Distributed Generation
Another tool intended to help California meet its climate goals
is distributed generation. Distributed generation is electricity,
generally renewable, produced on-site or near where electricity
is consumed. Governor Edmund G. Brown Jr. set a goal for
California to receive 12,000 megawatts (MW) of its electricity
(about 5%–8% of current consumption) from distributed
generation by 2020.
California has made progress toward achieving the
Governor’s 12,000 MW renewable distributed generation goal;
more than 6,800 MW of distributed generation was online as
of June 30, 2015. To encourage utility customers to participate
in distributed generation, incentives often are provided. The
®
ENERGY
incentives often taken the form of rate subsidies or programs
that will benefit the customer who is participating in the
program, but will come at a cost to all utility customers.
Reduced Building Energy Consumption per
Capita by Doubling Energy Savings
California Energy Demand Updated Forecast, 2015-2025
Energy Storage
Although renewable energy presents a great alternative to
traditional energy sources, it comes with limitations. Because
the amount of renewable energy available depends greatly on
the climate (solar, wind, water), the state’s energy providers need
to be able to store energy so that it is available when needed.
AB 2514 (Skinner; D-Berkeley, Chapter 469, Statutes of 2010)
allows for the adoption of requirements for utilities to procure
energy storage systems. The legislation instructed the CPUC to
open a proceeding by March 1, 2012 to consider adopting these
requirements. The CPUC issued the final rule on September
3, 2013, requiring investor-owned utilities (IOUs) to purchase
1,325 MW worth of energy storage projects by 2020.
Although there have been some promising advances,
energy storage technology is in its early stages and still is
expensive. While prices are expected to fall over the next 15
years as technology advances, utilities will be required to make
investments before 2020. California’s energy experts agree
that in order to maintain grid reliability, the state must have a
generation mix with complementary resources, as well as storage
systems in place to ensure the lights stay on.
Transmission Limitations
Financing transmission projects relies on a developer’s ability
to justify the cost and satisfy state and federal cost recovery
regulations. Moreover, developers must satisfy both state and
federal environmental regulations. Developers must seek
approval from at least three state agencies and several federal
agencies, depending on the location of the project. Assuming
agency approval is forthcoming, developers still must overcome
opposition from various interest groups, which often takes
the form of legal challenges. Given the rigors of the approval
process, transmission upgrades and construction can take
anywhere from five to 20 years.
®
36
Thousand Btu per Capita
Net Energy Metering
Net energy metering (NEM) is a type of distributed
generation and is an additional tool available to encourage
on-site renewable generation. NEM is a program that uses a
bidirectional meter to track the “net” difference between the
amount of electricity produced and the amount consumed in
each billing period. Customers with renewable energy installed
on site that are able to take advantage of NEM are able to offset
the cost of their energy by selling back to the utility company
the excess energy not consumed on site. The NEM cap is set at
5% of aggregated peak load.
In May 2012, the CPUC clarified the definition of the
aggregated peak demand in a way that will bring more NEM
customers under the cap than the definition used previously.
37
Incremental Savings
Under Development
35
34
33
20%
reduction
in building
energy use
Accelerated
Deployment
32
31
30
29
2014
Remaining Energy Consumption
2018
2022
2026
2030
Source: California Energy Commission, Existing Buildings Energy Efficiency
Action Plan (September 2015).
Recently, the California Energy Commission (CEC),
CPUC, and the CAISO reported the results from the
Renewable Energy Transmission Initiative (RETI) to help
identify the transmission projects needed for the state. The
RETI found that numerous new transmission lines and
upgrades to existing transmission lines throughout the state
need to be made to meet growing electricity demands and to
provide renewable sources of energy. Detailed information from
the report, the 2020 Renewable Transmission Conceptual Plan,
is broken down by area and time of year and can be found at
www.caiso.com. The most recent 2012–2013 Transmission Plan
released by the CAISO identified a need for 36 transmission
projects with an estimated $1.35 billion price tag to maintain
system reliability.
The CEC, CPUC and CAISO are all participating in the
newly formed RETI 2.0 in order to help the state achieve its
current energy policy goals for a 50% RPS and inform future
transmission planning cycles.
Aging Power Plants and Once-Through Cooling
Once-Through Cooling (OTC) is the process by which a power
plant system uses open intakes to pump water from an ocean,
estuary or bay to cool generators or turbines and then discharges
the water after one cycle of cooling. This process increases the
temperature of the water surrounding the discharge site of the
power plant, thereby having an impact on the aquatic life in the
area. The State Water Resources Control Board adopted a policy
to phase out OTC and, as a result, new generation sources will
be needed to replace the 19 existing power plants to which the
OTC policy applies.
It is forecasted that by 2020, California power plants
generating more than 15,000 megawatts (MW) of energy from
37
ENERGY
2011 Average Retail Electricity Price
4
2
0
Residential
Commercial
13.05
U.S. Average
10.11
Industrial
9.71
8.97
8.04
6.78
9.9
6
Washington
6.55
6.65
5.47
4.09
6.82
8
Oregon
13.05
10
Nevada
9.5
9.05
8.15
7.49
10.23
Cents/kWh
12
11.08
11.61
9.54
8.28
11.72
14
Arizona
14.78
California
16
All Sectors
Source: U.S. Department of Energy – Energy Information Administration.
2011 Average Retail Electricity Price for Bundled and Unbundled Customers.
State Electricity Mandates
• SBX1 2 – 33% Renewable Portfolio Standard
• Once-Through Cooling (OTC) Policy
• California Emission Performance Standards – SB 1368
• Transmission Access Charge (TAC)
• California Solar Initiative (CSI)
• Self-Generation Incentive Program (SGIP)
• Feed-In Tariffs (FIT)
• Renewable Auction Mechanism (RAM)
• Jet Energy Metering (NEM) – AB 920
• Energy Efficiency – AB 2021
• Waste Heat and Carbon Emissions Reduction Act – AB 1613, AB 2791
• Resource Adequacy – AB 380
• Transmission Corridors – SB 1059
• Energy Storage - AB 2514
• Smart Grid Deployment – SB 17
• Distributed Generation Goals
fossil fuels will be retired, replaced or divested. Loss of current
power plants will increase the need to find replacements as well
as increase costs on Californians. California is further limited
on what types of power may be used to serve the current and
increased demand for energy. Although energy conservation,
energy efficiency standards and increased energy sources have
helped keep supply greater than demand, continued population
and economic growth edges the state closer to an imbalance
between supply and demand.
At this point, most plants have phased out OTC systems,
while those in the Los Angeles area will have until 2020 due
to the city’s more complex and challenging power needs. The
Diablo Canyon nuclear power plant has until 2024 to comply.
Smart Grid Technology
Smart grid technology modernizes the electric grid by using a
distribution system that allows for two-way information flow
38
from a customer’s meter: both inside the house/building to
thermostats, appliances and other devices, and from the house/
building back to the utility. Smart grid can include a variety
of operational and energy measures, such as smart meters,
smart appliances, renewable energy resources, energy efficiency
resources, demand response measures, and energy storage.
Because the existing grid is increasingly costly to maintain
and will not be able to meet the demands placed on it in the
future, smart grid technology is a reliable, efficient, affordable
and interoperable system that, according to the CPUC, is
a better fit for integrating and accommodating renewable
technology. While there will be an upfront investment, it is
believed that end use customers will benefit by having more
information and tools to manage their electricity usage and
thereby the ability to educate themselves on where they can
conserve or alter their energy consumption to save on utility
bills.
Natural Gas
California ranks the second highest in consumption of natural
gas in the United States and natural gas plays an important
role in California’s energy sector as a flexible energy source. In
addition to helping integrate intermittent renewable electricity
and generating electricity, natural gas also is used for cooking,
space and water heating as well as transportation.
Natural gas-fired power plants can be ramped up quickly to
produce energy in order to help maintain grid stability while
integrating the intermittent renewables. In order to ensure that
the state is using natural gas in the most effective way possible,
AB 1257 (Bocanegra; D-Pacoima; Chapter 749, Statutes of
2013) requires the CEC to evaluate and recommend natural
gas strategies to reduce greenhouse gas emissions and cultivate a
clean energy economy to ensure the efficient use of natural gas.
The final report was released in November 2015.
Need for Coordinated Planning
Planning needs to be coordinated throughout the state’s various
energy programs. Currently, more than a dozen programs aim
to support energy efficiency development and alternative energy
in California. A report released by the Legislative Analyst’s
Office on December 19, 2012, stated: “The state currently
lacks a comprehensive framework that fully coordinates these
activities to help ensure that the state’s goals are being achieved
in the most cost-effective manner.” As a result, there is program
duplication and policies in place that are not aligned with
legislative priorities, in turn making it difficult to know the
effectiveness of the various energy programs. In the end, this
lack of coordination increases the cost of energy and makes
California less competitive.
A report by the Little Hoover Commission, Rewiring
California: Integrating Agendas for Energy Reform, also
summarized the complexities of the laws and regulations
affecting energy production and the associated costs in
®
ENERGY
California: “...the Renewable Portfolio Standard is being
implemented simultaneously with numerous other far-reaching
policies, including greenhouse gas reduction and the associated
cap-and-trade program; regulations to reduce the use of coastal
water to cool power plants; the expansion of distributed
electricity generation to 12,000 megawatts; and potential
regulations dictating water flow from the state’s hydroelectric
facilities to improve the health of the Delta’s ecosystem. On its
own, each policy or regulation could influence electricity rates
and reliability. Combined, the impact is far greater.”
CalChamber Position
As California pursues its clean energy goals, the driving
force for the state’s energy policies needs to be maintaining a
reliable, efficient and affordable energy system. Although the
economic downturn has reduced energy demand in the short
term, demand is expected to grow as the economy recovers. It
is important that when making energy decisions, policymakers
and stakeholders be flexible enough to respond to future
fluctuations in the economy in a way that enables the state to
continue to develop and adopt energy policies and technologies
that are critical for long-term reliability and economic growth.
With the various new programs being implemented,
California will be required to have a far more diversified
portfolio of energy sources. In order for the state to meet
these requirements for energy efficiency, renewable standards
and greenhouse gas reductions, projects must be streamlined
through the approval process, which means that effective interagency collaboration and communication is necessary.
It is critical that California’s electricity generation keeps pace
with its growing population and increasing demand. The state
should focus its attention on flexible resources to sustain future
economic growth and to ensure renewables are able to come
®
on line in time to keep up with the various programs being
implemented across agencies.
Maintaining and expanding the state’s energy infrastructure
is vital to the economic growth of California. Moreover,
investments must be made in natural gas pipelines to move gas
more efficiently to where it is needed. Continued research and
development is needed in technologies like smart grid that help
advance energy efficiency goals, reduce costs and increase grid
reliability. With the implementation of the renewable portfolio
standard, research and development in energy storage will be
necessary to keep up with daily energy demands.
Staff Contact
Amy Mmagu
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
39
ENVIRONMENTAL REGULATION
Regulatory Overhaul, Wave of Legislation Will Adequately
Address Deficiencies in Haz Waste Permitting Program
The federal Resource Conservation and Recovery Act (RCRA)
of 1976 is the primary law governing the disposal and treatment
of hazardous waste. RCRA is a comprehensive “cradle to grave”
regulation that imposes stringent recordkeeping and reporting
requirements on generators, transporters, and operators of treatment, storage and disposal facilities handling hazardous waste.
The California Department of Toxic Substances Control
(DTSC) has administered the federal RCRA program in California since 1982. Specifically, in 1982, the California Legislature
declared that “it is in the best interest of the health and safety of
the people of the State of California for the state to obtain and
maintain authorization to administer a state hazardous waste
program in lieu of the federal program... pursuant to the Resource
Conservation Recovery Act of 1976.” Indeed, Congress designed
RCRA so that it could be administered by the states because states
are closer to, and more familiar with, the regulated community
and are therefore in a better position to administer the programs
and respond to local needs effectively.
Most California hazardous waste regulations are very similar
to federal RCRA regulations. In many circumstances, however,
the California regulations are more stringent and broader in
scope than federal regulations. For example, in California,
certain wastes beyond RCRA’s scope are nonetheless considered
hazardous and therefore subject to California’s hazardous waste
regulations. These wastes are called “non-RCRA” hazardous
wastes. By way of example, approximately 85% of the waste
deposited at one of the largest hazardous waste facilities in
California is treated as non-RCRA waste. If and when the waste
leaves the state, however, the waste is treated as nonhazardous.
For this reason, treating and disposing of hazardous waste in
California is preferable in terms of environmental protection
because California’s protocols are more rigorous in comparison
to those in federal RCRA regulations and other state regulations.
There are 117 permitted operating hazardous waste facilities
in California, including 28 post-closure facilities (closed and
going through final remediation) that provide for the treatment,
storage or disposal of substances regulated as hazardous waste
under federal and state law. A total of 1.82 billion pounds of
California hazardous waste was disposed of in these facilities in
2012. Of this total, 62% was treated to the point where it no
longer met toxic standards, and 38% was placed in landfills.
Hazardous Waste Permitting Process
Anyone in California who owns or operates a facility where
hazardous waste is treated, stored or disposed is required to
obtain a hazardous waste permit. There are two parts to a
hazardous waste permit application:
• The Part A application defines the processes to be used for
treatment, storage, and disposal of hazardous wastes, the design
40
capacity of such processes, and the specific hazardous wastes to
be handled at a facility.
• The Part B application contains detailed, site-specific
information, and typically takes longer to complete due to the
iterative nature of the Part B application process. The iterative
nature of the Part B application process is important because
it allows the permit applicant to address any deficiencies in the
application or conduct additional studies as may be required.
The permitting process begins when an applicant submits
or when DTSC calls in a Part A permit application. Within
30 days of receipt of the application, DTSC must make
a “Completeness Determination,” a finding whether the
application has all the required parts. If the application is
incomplete, DTSC issues a “Notice of Deficiency.”
Once the application is deemed complete, DTSC begins its
detailed, in-depth Technical Review (Part B), which evaluates
facility operations for compliance with applicable technical
standards. The Technical Review often results in a request for
additional information and amendments or resubmittal of the
application to meet these standards. This phase generally leads
to DTSC accepting the application as technically complete, and
the applicant is so notified in writing. DTSC then prepares a
draft permit and begins a 45-day public comment period.
A Full Permit decision is subject to compliance under the
California Environmental Quality Act (CEQA). Appropriate
CEQA analyses and documents are completed before the
beginning of the public comment period for the draft permit.
Generally, the public comment periods for the CEQA
document and the draft permit are conducted concurrently.
During the public comment period, DTSC generally holds
a public hearing in the vicinity of the facility. After the close
of the public comment period, DTSC issues a final permit
decision accompanied by a written response to all comments
received. The applicant and the public have 30 days to
appeal DTSC’s decision. Appeals must be limited in scope to
comments regarding the findings in the final permit. Comments
related to CEQA compliance are considered only during the
public comment period on the draft permit.
DTSC’s ‘Fixing the Foundation’ Initiative
In early 2012, DTSC launched the “Fixing the Foundation”
initiative to address issues that threatened DTSC’s ability to
achieve its mission and ensure accountability. As part of the
initiative, DTSC contracted in early 2013 with an independent
consulting firm to conduct a comprehensive report of DTSC’s
existing permitting program and to develop a recommended
standardized process for issuing hazardous waste permits.
The purpose of the report was to address concerns raised by
certain stakeholders directed at the cost and length of time in
®
issuing permit decisions and a perception that DTSC does not
adequately address community concerns.
The final report, Department of Toxic Substances Control
Permitting Process Review and Analysis, was issued on October 2,
2013. The report made several findings, including the following:
• Permitting decisions are not made on a timely basis,
and lengthy and potentially preventable delays occur due to a
lack of standard process and a failure to include all processing
requirements in a predictable, standard order that is identified
and shared with permitting staff;
• Permitting delays are due to recent staff reductions and
poor management practices;
• While many aspects of the work process required for a
permit renewal are well-defined and well-known, most of the
difficult or complex steps are not clear or well-defined; and
• There are no clear and objective criteria for making
denial/revocation decisions that are based on valid standards of
performance and threats.
The report made 17 recommendations to address the above
findings. DTSC has responded with a list of tasks and timelines
for implementation. All the tasks can be and currently are being
implemented on the regulatory level; statutory amendments are not
necessarily required to address the deficiencies the report identified.
In response to the report, DTSC released a Permitting
Enhancement Work Plan (PEWP) in 2014. According to
DTSC, the PEWP is a “comprehensive roadmap to guide
efforts to improve [DTSC’s] ability to issue protective, timely
and enforceable permits using more transparent standards and
consistent procedures.” DTSC notes that the PEWP “provides
a critical link to help DTSC move forward and modernize its
permitting process.”
The PEWP is the second part of a three-part plan that
DTSC has identified to address certain deficiencies in its
administrative and technical processes and practices. The
PEWP incorporates the report’s goals, and also includes the
basis for selecting each goal, an outline of strategies and desired
outcomes, and specific deliverables needed to achieve each goal.
The 10 goals, which are scheduled to be achieved within a
two-year timeframe, are as follows:
1) Define processes that will reduce permit processing times
whenever feasible while maintaining quality and protectiveness;
2) Establish clear permitting performance metrics;
3) Standardize the technical review process materials and
vocabulary used to review, approve or deny applications or
permit modifications;
4) Coordinate intradepartmental support during the
permitting process;
5) Update permitting standards to increase protections for
human health and the environment;
6) Enhance enforcement;
7) Inform public of progress in processing permits;
8) Identify and address environmental justice concerns early
in permitting actions;
®
9) Develop and maintain staff capacity;
10) Address data management needs.
In 2014, the Department of Finance requested and the
Legislature approved $699,000 and five three-year, limited-term
positions to implement the PEWP. Once the PEWP is fully
implemented by 2016, DTSC will identify areas, if necessary,
for additional regulatory or legislative changes.
2015: Wave of Haz Waste Permitting Legislation
Notwithstanding the significant regulatory efforts underway
at DTSC, in 2015 the California Legislature introduced four
proposals to reform different aspects of DTSC’s hazardous
waste permitting program. The basis for the proposals,
according to the bills’ authors, was to respond legislatively to
repeated environmental violations that had occurred at Exide
Technologies’ battery recycling plant in Vernon, California.
The plant, which had been operating on interim status for
decades, was found to be in violation of air pollution standards
and hazardous waste laws on several occasions. In March 2015,
under an agreement between Exide Technologies and the
U.S. attorney’s office, Exide acknowledged criminal conduct,
including the illegal storage and transportation of hazardous
waste, and agreed to permanently close its plant in exchange for
avoiding criminal charges.
SB 654: Unworkable Solution to Permitting Deficiencies
SB 654, introduced by Senator Kevin de León (D-Los
Angeles) in 2015, sought to create an unworkable hazardous
waste permitting regime that failed to effectively address the
underlying problems in the current system as identified in the
2013 report. The California Chamber of Commerce identified
SB 654 as a job killer bill.
Specifically, under SB 654, the facility for which a
permit application renewal has been submitted would have
automatically been deemed an illegal operation and would
have been required to shut down—absent any due process
protections—if DTSC failed to take final action on the permit
renewal application within 36 months after the expiration of
the permit’s fixed term. SB 654 would have shut down facilities
even if the permit applicant had acted diligently and in good
faith throughout the entire permit application process.
SB 654 was a flawed proposal, both from a legal and
practical standpoint. From a legal standpoint, SB 654 would
have created the first permitting regime on the federal, state or
local level that would shut down a facility merely because the
permitting agency had not acted within a specified timeframe.
In contrast, permit applications on the local level are approved
automatically if the permitting authority fails to act within
a specified timeframe. Although this “deemed approved”
timeframe does not apply to permits for hazardous waste
facilities, the law states that if the permitting agency fails to take
action on a permit application for a hazardous waste facility
within the timeframe, the applicant may seek legal recourse
to compel the agency to approve or disapprove the permit for
41
the project within a reasonable time. Under SB 654, permit
applicants would not be permitted to seek a legal remedy
without first having to shut down.
From a practical standpoint, SB 654 failed to take into
account that there are several factors beyond the permit
applicant’s control that can have an impact on the timeliness
of a permit issuance, including the complexity associated with
the application and proposed use, the level of public input
received regarding the permit, procedural setbacks related
to the environmental review process under the California
Environmental Quality Act (CEQA), DTSC workload issues
or staff vacancies, and the time associated with data gathering
and expert input. The fact that the process may take several
years is a good thing, because it ensures that the proposed use
is adequately understood and studied. Under SB 654, however,
permit applicants would have had no legal right to continue
operating if DTSC didn’t act within the specified timeframe,
notwithstanding all the time and resources expended and any
good faith efforts on the part of the permit applicant to move
the application process along expeditiously.
SB 654 also would have required the project applicant to
submit a complete application two years before the expiration
of the existing permit’s fixed term. As noted above, the Part A
application is relatively simple because it merely defines the
processes to be used for treatment, storage and disposal of
hazardous wastes, the design capacity of such processes, and the
specific hazardous wastes to be handled at a facility. The Part
B application, however, typically takes much longer because
it contains detailed, site-specific information, and requires
the completion of highly technical studies that can take many
months if not years to complete. This iterative process, as with
any permitting process for complex land use projects subject to
a myriad of local, state and federal requirements, is necessary
and important because it allows the permit applicant to address
any deficiencies in the application or conduct additional studies
as may be required. By the end, the Part B application process
equips DTSC with the relevant information so that it can make
a well-informed and fact-based decision on the application.
SB 654 would have completely undermined this process by
imposing an arbitrary deadline by when this iterative process
must take its course.
Aside from amounting to a blatant due process violation,
SB 654 would have made hazardous waste operators think
twice before upgrading and improving their facilities. Imposing
unworkable and arbitrary timing requirements for permit applications and issuance—and further shutting down hazardous waste
facilities for circumstances beyond the operator’s control—would
have done absolutely nothing to address the core deficiencies that
currently exist in DTSC’s permitting program.
While SB 654 made it out of the Senate, the bill was
never taken up for a vote on the Assembly Floor and the bill is
currently on the Assembly inactive file.
42
SB 673: Last-Minute Changes Made Reform Bill Workable
In its original form, SB 673 (Lara; D-Bell Gardens) required
DTSC to adopt permitting criteria that DTSC must use in
determining whether to issue either a new or renewed hazardous
waste permit. According to SB 673, these criteria shall include:
• Number and types of past violations that will result in a denial.
• The vulnerability of, and existing health risks to, nearby
populations. Vulnerability and existing health risks shall be
assessed using the CalEnviroScreen tool, local and regional
health risk assessments, the region’s federal Clean Air Act attainment status, and other indicators of community vulnerability,
cumulative impact, and potential risks to health and well-being.
• Minimum setback distances from sensitive receptors, such
as schools, child care facilities, residences, hospitals, elder care
facilities, and other sensitive locations.
• Evidence of financial responsibility, qualifications of
ownership, and financial assurances.
• Training of personnel in the safety culture and plans,
emergency plans, and maintenance of operations.
• Completion of a health risk assessment.
The permit criterion related to minimum setbacks from
sensitive receptors fails to take into account that virtually every
application for a hazardous waste permit is for a renewal of
an existing facility. With this understanding in mind, some
sensitive receptors have located near hazardous waste facilities
after the facility had already been operating for years within
an existing, permitted footprint. SB 673, in its original form,
would have required DTSC to potentially impose new, more
restrictive setback requirements which would, in turn, require
existing facilities to change their operating footprint. This
would be impossible for many facilities as a practical matter, and
would further raise serious legal implications with respect to the
vested property rights of existing facilities.
Next, use of the CalEnviroScreen tool in permitting
decisions belies the purpose for which it was intended. The
CalEnviroScreen tool was designed to identify communities
at greatest risk from environmental contamination, air quality,
pesticide use, etc., and to use that information as a basis for
awarding grants to these communities. It was not designed to
be a permitting tool. Doing so here would be inappropriate,
and would further set a bad and indeed confusing precedent for
statewide and local permitting decisions.
In the final weeks of the legislative session, Senator
Ricardo Lara amended the bill to remove the reference to the
CalEnviroScreen tool and to further make the permitting
criteria permissive instead of mandatory. CalChamber removed
its opposition based on those amendments. Governor Edmund
G. Brown Jr. signed SB 673 into law.
AB 1075: A Reasonable Approach to Penalizing Bad Actors
Current law allows DTSC to deny, revoke or suspend
hazardous waste permits for serious and recurring violations;
however, the law does not define what “serious” and “recurring”
means. AB 1075 (Alejo; D-Salinas) defines the types of serious
®
and recurring violations that would give rise to a permit denial,
revocation, or suspension. As originally introduced, however,
AB 1075 would have given DTSC authority to deny, revoke or
suspend a hazardous waste permit for mere minor or paperwork
violations that pose absolutely no endangerment to the public
health, safety or the environment.
In the final weeks of the legislative process, the author agreed
to several favorable amendments, including eliminating the
language in the bill that would give DTSC authority to take
action based on minor or paperwork violations. In its final form,
AB 1075 gives DTSC “compelling cause” to deny, revoke or
suspend a hazardous waste permit in the following circumstances:
• Three violations that create a significant risk of harm to the
public health/safety/environment resulting from acute or chronic
exposure to hazardous waste or hazardous waste constituents;
• Three federal or state felony convictions related to the
hazardous waste control law; or
• One violation of or noncompliance with an order issued
by DTSC
The CalChamber removed opposition based on the author’s
amendments. Indeed, the regulated community believes that
the state should have the appropriate tools to penalize bad-faith
hazardous waste permit holders or applicants who commit
serious and repeated violations of the law that present imminent
and substantial endangerment to the public health, safety or the
environment. The Governor signed AB 1075 into law.
SB 83: Additional Financial Resources May Help Address
Permitting Backlog
SB 83, the Public Resources Budget Trailer Bill, provided
increased funding to DTSC and proposed some structural
reforms. Specifically, SB 83:
• Provides DTSC with $16.8 million in new funding for a
total of 52 new staff positions.
• Establishes an independent review panel (IRP), made up of
three members chosen respectively by the Assembly, Senate and
the Governor, charged with 1) reviewing and making recommendations to the Legislature and Governor regarding various
departmental programs; 2) advising DTSC on issues related
to its reporting obligations; 3) advising DTSC on increasing
the levels of environmental protection by its programs; and (4)
reporting to the Governor and the Legislature.
• Establishes a new assistant director for environmental justice.
The IRP established pursuant to SB 83 held several
public meetings at the end of 2015 and is poised to submit
several recommendations to the Legislature in each of the
following categories in early 2016: permitting, enforcement,
public participation, cost recovery and site mitigation. The
CalChamber anticipates that the IRP’s recommendations will
trigger even more regulatory and legislative activity related to
DTSC’s hazardous waste program.
®
CalChamber Position
The CalChamber supports treating, storing and disposing of
hazardous waste in California, where protocols are more rigid
than other states in terms of environmental protection.
Understanding the importance of keeping hazardous waste
in California, hazardous waste permits should be issued in a
timely manner and subject to clear and predictable procedures,
while also allowing flexibility for the iterative application process
to take its course. Indeed, the iterative nature of the hazardous
waste permitting process is critical; it allows DTSC to adapt and
respond to issues raised by stakeholders and the public during
the administrative process, and ultimately ensures that final
permits are both protective and defensible.
The CalChamber also is mindful that DTSC’s current
permitting procedures are imperfect and need refinement.
Accordingly, we agree with DTSC’s stated goals of issuing
protective, timely and enforceable hazardous waste permits
using more transparent standards and consistent procedures.
DTSC, with the assistance of legislatively approved funding, is
currently implementing its PEWP to achieve these stated goals.
The CalChamber also believes that the hazardous waste
permitting legislation passed by the Legislature and signed by
the Governor in 2015, such as AB 1075 and SB 673, is
sufficient to address some of the deficiencies in the program
while also ensuring that DTSC can make any needed reforms
on the regulatory level through the PEWP.
Staff Contact
Anthony Samson
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
43
HEALTH CARE
Cost Pressures Threaten Affordability
of Employer-Sponsored Coverage
Implementation of the Patient Protection and Affordable
Care Act (ACA) began in earnest two years ago at the start of
2014 when, for the first time, large employers and individuals
were required by law to purchase health care coverage or pay
a penalty. States also were required to simplify their eligibility
rules for Medicaid to make it easier for low-income individuals
to qualify, and lawmakers in 16 states further opted to expand
their Medicaid programs to cover all individuals making less
than 138% of the federal poverty level. Since then, six more
states have opted to expand their programs, and several others
are still considering doing so. At the same time, the federal
health care exchange and a number of state-run exchanges,
including Covered California, opened to allow individuals and
families that do not qualify for Medicaid or have employersponsored coverage to purchase coverage on their own.
While many big changes took effect at the start of 2014,
several components of the law were designed to take effect later,
including a change to the definition of “small employer,” which
just took effect at the start of 2016. Another provision, the
so-called “Cadillac tax” on high-cost plans, was supposed to take
effect at the start of 2018, but it has now been pushed back two
years as part of the federal budget deal that was approved this
past December. Implementation of several other significant parts
of the law have also been delayed or changed during the last
two years due to concerns about how they would affect small
employers. These last-minute changes have provided some relief,
but they also have created a degree of uncertainty for employers,
health insurers and state regulators struggling to implement the
law’s many requirements.
The gradual roll-out of the ACA has made it difficult to
evaluate its impact on different parts of the health care market,
as has the fact that health care spending naturally tends to slow
during economic downturns and to accelerate during periods of
recovery. For all of these reasons, it is difficult, if not impossible,
to know what the long-term impact of the ACA will be. In the
meantime, many of the health care policy changes being debated
today continue to center around issues of access and affordability,
and a few, in particular, have implications for employer-sponsored
coverage. These are discussed in more detail below.
Rising Cost of Employer-Sponsored Coverage
High-Deductible Health Care Plans
One growing trend in health care is the shift toward highdeductible health care plans (HDHPs), which tend to have
lower monthly premiums than traditional health care plans,
but are accompanied by higher deductibles and higher out-ofpocket costs that must be paid for by enrollees when they
utilize health care services. HDHPs often are paired with some
sort of savings account, and are designed to encourage plan
44
Average Annual Firm and Worker Premium
Contributions and Total Premiums for Covered
Workers
for Firm
Single
and Family
Average
Annual
and Worker
PremiumCoverage,
Contributionsby
andPlan
Total
Premiums
for Covered Workers for Single and Family Coverage,
Type, 2015
by Plan Type, 2015
HMO
Single
$1,179 / $5,032 = $6,212
PPO
Single
$1,145 / $5,430* = $6,575*
POS
Single
$1,027 / $5,231 = $6,259
$5,410
Family
HDHP/SO
Single
$11,503
$16,913
$868* / $4,699* = $5,567*
$3,917*
ALL PLANS
Single
Family
$13,253 $18,469*
$5,216
Family
Family
$11,801 $17,248
$5,447
Family
$12,053
$15,970*
$1,071 / $5,179 = $6,251
$4,955
Worker Contribution /
$12,591 $17,545
Employer Contribution
*Estimate is statistically different from All Plans estimate by
coverage type (p<.05).
Source: Kaiser Family Foundation and Health Research & Educational Trust,
2015 Summary of Findings, Employer Health Benefits.
enrollees to consider the cost and value of different health care
services and providers when deciding what care they need and
who should provide it. This push to make health care enrollees
thoughtful consumers of health care services often is referred to
as “consumerism.”
The percentage of employers that offer HDHPs to their
employees has grown steadily since 2003 when Congress first
authorized the creation of health savings accounts (HSAs), a type
of savings account that allows individuals and/or their employers to set aside money tax-free for use on their future health care
expenses. The ACA has accelerated this trend by proposing to tax
high-cost health care plans. High-cost health care plans tend to
encourage utilization of health care services unnecessarily, which
then drives up the cost of health care services for everyone. To
discourage employers from continuing to offer overly generous
health care plans, the ACA established the Cadillac tax, which
imposes a 40% tax on the value of employer-sponsored coverage
that exceeds a certain dollar amount. As a result, many employers already have begun offering HDHPs to employees, or made
their sole health care plan offering an HDHP, to ensure that they
would not be subject to the tax.
At the same time, employers, labor unions and consumer
advocates have grown increasingly concerned about the
®
HEALTH CARE
Annual Growth Projections:
Health Spending vs. The Economy
7%
ACA implementation: 5.5%
6.1%
6%
5%
4.5%
4%
3%
2%
National Health Spending
Gross Domestic Product (GDP)
1%
0%
‘13
‘14P ‘15P ‘16P ‘17P ‘18P ‘19P ‘20P ‘21P ‘22P ‘23P
Note: Health spending refers to national health expenditures.
Projections shown as P.
Source: California HealthCare Foundation
potential unintended consequences of the tax. One concern
raised by employers and labor groups is that the threshold for
the Cadillac tax was set too low and will not grow as fast as
health care costs, causing more and more modest health care
plans to become subject to it over time. Consumer advocates
also have argued that by raising deductibles and out-of-pocket
costs for enrollees, HDHPs and the Cadillac tax may discourage enrollees from seeking necessary care and lead to higher
health costs in the long-term. Due to these concerns and the
broad opposition to the provision, Congress agreed to delay
implementation of the Cadillac tax until 2020 as part of its
most recent budget deal, but because employers have had to
plan ahead for its implementation and already have started to
embrace HDHPs, a short delay to the start date of the tax is
unlikely to stop this trend.
Another factor driving employers to shift to HDHPs is the
fact that, even though the growth of health care costs has slowed
significantly in recent years, it continues to outpace inflation,
making it harder for employers to afford to offer the same level
of coverage to their employees. For example, even though the
growth of health care spending reached a record low of 3.6% in
2013 and is expected to stay relatively low over the next decade,
health care spending continues to grow as a share of the gross
domestic product (GDP). Health care spending is expected
to reach 19.3% of the GDP by 2023, up from 17.4% during
the recession and 18% in 2015. This means that, even though
health care spending has been reined in significantly, it has not
come close to being sustainable, and all purchasers are having to
adjust their benefit offerings to control their costs. HDHPs are
growing in appeal because their premiums are more affordable
than premiums for traditional plans.
®
Today, approximately 24% of all workers nationally are
enrolled in an HDHP compared to just 8% of workers in 2009.
If this trend continues, we can expect millions more to enroll
in one in the coming years, making it increasingly important to
understand how these consumer-driven plans affect long-term
health care outcomes for employees, and to examine different
ways they can be designed to maximize health care outcomes
while maintaining affordability.
Workplace Wellness Programs
Another way employers are working to control health care
costs is by using workplace wellness programs to incentivize
employees to engage in healthy behaviors and take responsibility
for their own health. Workplace wellness programs are designed
to encourage employees to educate themselves about how to stay
healthy, enroll in classes that address particular health concerns,
like obesity or smoking, or use biometric screening to identify
health problems early or prevent them altogether. Employers
can incentivize these types of activities by providing time for
employees to participate during the workday, providing free
access to programs and screenings, and by offering cash rewards
and discounted premiums to employees who participate.
Workplace wellness programs have a demonstrated ability to
improve public health and lower employer health care costs over
time, more than paying for employers’ up-front investment.
The ACA included a number of provisions designed to
encourage more employers to establish workplace wellness
programs as a general public health strategy, and it also allows
employers to offer larger financial incentives to employees who
participate. The rationale for these changes is that workplacebased programs have a broad reach since more than 60% of
Americans obtain their health coverage through their employers.
In addition, the social and organizational structures of the
workplace are uniquely able to help promote and support
healthy lifestyles and habits among individual employees.
In fact, according to the U.S. Centers for Disease Control
and Prevention (CDC), employers can build a culture of health
that facilitates healthy lifestyles among their employees by
providing:
• Financial and organizational support for evidence-based
health promotion interventions.
• Consistent communication with workers that encourages
positive health behaviors.
• Social and organizational supports from peers and supervisors.
• Policies, procedures, practices and organizational norms that
support a healthy lifestyle (for example, access to healthy foods
and physical activity or banning smoking on company grounds).
• Financial or other types of incentives for participation in
health improvement activities.
• A common purpose that is dedicated to a healthier workforce.
Despite the benefits associated with workplace wellness
programs and their endorsement by the federal government,
they are not without their critics. Traditional, participationbased wellness programs that provide small incentives to
45
HEALTH CARE
employees who participate in optional nutrition classes or
smoking cessation programs tend to be noncontroversial, but
a growing number of employers are starting to offer larger
incentives to encourage more employees to participate. At the
same time, many workplace wellness programs are starting to
go beyond the use of informative classes and instead tie these
incentives to medical screening requirements and specific
health-outcome goals, both of which may involve employees
having to give private health information to a third party with
which their employer has contracted. The Americans with
Disabilities Act (ADA) allows employers to require workers
to undergo medical exams only as part of a voluntary wellness
program, but there has never been clear guidance about how big
an incentive an employer can offer before it violates the ADA.
A proposed regulation by the Equal Employment
Opportunity Commission (EEOC) released in May 2015
seeks to address this problem by deeming workplace wellness
programs to be voluntary so long as the incentives offered do
not exceed 30% of the cost of individual health care coverage,
about $1,800 for the average health plan. However, critics of
the proposal argue that incentives of this size are coercive and
effectively force employees to participate in wellness programs
and share their private health information. The EEOC has
not indicated when it plans to issue the final regulation, but
however it turns out, discussions about how best to ensure
voluntariness, adequately protect private health information,
and promote important public health goals in the workplace are
apt to continue as more and more employers look to implement
workplace wellness programs in the future.
Increased Spending on Prescription Drugs
When the hepatitis C drug Sovaldi entered the market in
2014 at a wholesale list price of $84,000 for a 12-week course
of treatment, its manufacturer, Gilead Sciences Inc., instantly
became the poster child for unreasonable drug prices. This past
fall, another drug company, Turing Pharmaceuticals, also ignited
a firestorm when it announced a more than 5,000% increase in
the price of a drug it had just acquired, taking it from $18 per
pill to $750 per pill overnight. While few, if any, purchasers of
prescription drugs actually pay the wholesale list price, these and
other stories like them have helped fuel a national debate about
whether drug prices in the United States are reasonable, whether
they are sustainable, and what, if anything, can be done to make
them more affordable.
According to a recent poll by the Kaiser Family Foundation,
72% of Americans feel the cost of prescription drugs is unreasonable, and in recent months nearly every presidential candidate has
offered up an idea or two about how to make prescription drugs
more affordable. But is this statistic a reflection of an unreasonable increase in drug prices and higher spending on prescription
drugs in recent years, or it is merely a reaction to recent headlines
that focused on a few anecdotal situations?
46
Are Prescription Drug Prices Unreasonable?
Last year, California lawmakers set aside $228 million in the
2015–16 budget to spend on the new class of hepatitis C drugs that
include Sovaldi, and the Governor convened a working group to
help revise “the state’s approach regarding high-cost drug utilization policies and payment structures.” This past December, the
California Public Employees Retirement System (CalPERS), the
state agency responsible for managing the pensions and health care
of more than 1.6 million public employees, retirees and their families, announced that it spent $1.86 billion on prescription drugs in
2014, a 7.5% increase from the year before. The primary driver of
that increase was a 32% increase in spending on high-cost specialty
drugs, like those used to treat hepatitis C, which accounted for
only 1% of all prescription drug orders by its members, but nearly
25% of its total drug costs. This dramatic increase in spending also
occurred despite the fact the total number of prescription drug
orders for its members declined by 0.5%.
Rising drug prices also are affecting spending at the federal
level. For example, premiums for Medicare Part D plans that
cover prescription drugs for seniors are increasing due to
pressure from higher drug costs. According to the consulting
firm, Avalere, premiums for the 10 most popular Medicare Part
D plans will increase by an average of 8% in 2016.
Similarly, Congress ran into difficulty this past year when
negotiating the defense budget, and rising drug costs for
veterans was the main reason. After much debate, legislators
were able to agree on a modest increase to prescription drug
co-payments for veterans to help offset the Defense Health
Agency’s growing expenditures on medications, but the
Pentagon has suggested that co-payments need to be increased
even further to fully mitigate this rising cost. As was the case for
CalPERS, increases in prescription drug spending for veterans
also is being driven largely by a single category of medications—
in this case, compound drugs. Compound drugs typically are
prepared by licensed physicians or pharmacists who combine,
mix, or alter ingredients of one or more individual drugs to
create a single customized medication for a particular patient.
In the first half of 2015, the Defense Health Agency spent $1.7
billion on compound drugs, up from just $23 million in 2010.
These are a few examples of how the entry of more expensive
medications into the market and increasing utilization of high-cost
drugs are forcing public health care purchasers to question the longterm sustainability of their prescription drug programs, but private
purchasers are very much feeling the pinch too. In a recent article
in the Wall Street Journal, Drew Altman, president and CEO of the
Kaiser Family Foundation, noted that spending on prescription
drugs makes up almost 20% of all spending in employer-sponsored
health care plans, which means that rapid growth in this segment
of employer health care spending can easily jeopardize the overall
affordability of employer-sponsored coverage.
High-Cost Drugs
A recent report from Express Scripts, the nation’s largest
pharmacy benefit manager (PBM), highlights how significant the
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HEALTH CARE
Plan Type
2013
% Patients
2014
% Total Cost
% Patients
% Total Cost
Medicaid
0.05%
7.3%
0.10%
14.0%
Medicare
0.30%
9.1%
0.50%
14.9%
Commercial
0.11%
9.7%
0.18%
16.1%
Overall
0.14%
9.5%
0.22%
15.7%
Source: Express Scripts, Super Spending (May 2015).
The report also reaffirmed that some categories of
prescription drugs are more responsible for driving this trend
than others. Drugs to treat hepatitis C and cancer came in first
and second as contributors to spending among all individuals
with extremely high prescription drug costs. Thirty-two percent
of individuals with annual drug costs exceeding $100,000 had
been treated with a cancer medication, and the number of
patients in both of the two highest-cost categories who received
a hepatitis C medication jumped 733% in 2014. Compound
drugs, which were responsible for much of the increase in
spending on veterans’ health care, also were the third-largest
contributor to high prescription drug costs in the Express
Scripts study, and the use of compound drugs grew by 30%
among patients with drug costs higher than $100,000 in 2014,
compared to 2013. Increased spending on high-cost specialty
medications, which are more expensive to manufacture than
traditional drug formulations and often require special handling,
is also partly responsible—90% of patients with drug costs
of at least $50,000 took one in 2014. Nationwide, specialty
drugs represent just 3% of all brand name drugs dispensed, but
account for 73% of the growth in spending on prescription
drugs over the last five years.
®
Medications introduced years ago now cost as much as newer, high priced therapies
What it cost when it came out
What it cost in 2013
70k
60k
50k
40k
30k
20k
Tecfidera (2013)
Aubagio (2012)
Gilenya (2010)
Extavia (2009)
Tysabri (2004)
Rebif (2002)
0
Copaxone (1996)
10k
Avonex (1996)
Percent of Patients with Annual Drug Costs Above
$50,000
Multiple Sclerosis Drug Prices Rise Over Time
Betaseron (1993)
impact of these high-cost drugs can be for purchasers’ bottom
lines, and how quickly they are driving up health care spending even though relatively few people take them. According to
the report, the number of Americans with annual drug costs
of at least $50,000 grew 63% in 2014, and the number with
annual drug costs of at least $100,000 increased by 193%. Taken
together, those individuals with prescription drug costs of at least
$50,000 made up just 0.2% of patients, but accounted for 16%
of all spending on prescription drugs, while the costliest 5% of
patients accounted for 61% of all spending on prescription drugs
in 2014. In addition, even though the report estimates public
and private purchasers, who paid these patients’ premiums or
directly paid for their care, covered an average of 98% of the
total expense, these individuals almost certainly faced significant
out-of-pocket costs due to the high co-payments that usually
accompany expensive prescription drugs.
Source: Neurology, cited by Bloomberg Business (April 24, 2015).
Drug Pricing Policies
Another issue that has received a lot of attention recently
involves the practice of some drug companies to dramatically
increase prices on medications that have been on the market for
years, similar to what Turing Pharmaceuticals did. For example,
the price for Doxycycline, a commonly prescribed antibiotic,
skyrocketed more than 9000%, from $20 per bottle to $1,850
per bottle, between October 2013 and April 2014. The price
of Pravastatin, a cholesterol medication, also climbed from $27
per bottle to $196 per bottle in just six months, and the price of
Vimovo, used to treat arthritis, jumped from $161 for 60 tablets
to $959 in a single day.
There also are recent examples of two or more manufacturers
of competing drugs making identical upward price adjustments
within days of each other. This was the case when the prices
for Sanofi’s Lantus and Novo Nordisk’s Levemir, both used to
treat diabetes, jumped 16% within a day of each other last May,
and then another 11.9% within a one-day period six months
later. Manufacturers of multiple sclerosis drugs also have drawn
attention due to their practice of increasing prices on older
medications to match the prices of newer, competing drugs as
they enter the market. These examples suggest that prescription
drug pricing may not be as affected by normal market forces as
pricing for other commercial goods.
Debate on Effectiveness vs. Cost
Health insurers and PBMs, who often negotiate prescription
drug prices for insurers and self-insured employers, have been
struggling to constrain drug prices for years, but recently
doctors have started to wade into the debate too. This past
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HEALTH CARE
November, the American Medical Association called for a ban
on direct-to-consumer advertisements for prescription drugs
and medical devices, noting, “a growing proliferation of ads is
driving demand for expensive treatments despite the clinical
effectiveness of less costly alternatives.”
There also has been a growing movement to provide an
alternative source of information about the efficacy and value of
prescription medications on the market to help guide physicians
in their treatment and prescribing practices, and to help health
insurers and PBMs negotiate fairer prices for prescription drugs.
For example, the nonprofit Institute for Clinical and Economic
Review (ICER) has started to gather data about the comparative
clinical effectiveness and comparative value of different prescription drug treatments and use this information to determine
whether a drug’s list price is reasonable given its expected benefits.
In cancer treatment, ensuring that prescription medications
are priced reasonably and remain affordable is particularly
important because chemotherapy drugs tend to be some of the
most expensive drugs on the market and they will naturally
grow even more so as the science of cancer treatment moves
toward customized medications that target particular cancers
in particular patients. Last July, more than 100 oncologists
published a letter criticizing soaring prices for cancer
medications and proposing a number of reforms to help rein
them in, including the use of value-based scores and ratings,
similar to the one ICER has developed. The American Society
of Clinical Oncology also has developed a Value Framework
that gives a score to cancer drugs based on their safety, efficacy
and cost. Oncologists at Memorial Sloan-Kettering have just
finished developing their own online tool that suggests a drug’s
fair price be based on its benefits and side effects.
Historically, prescription drug spending has made up a
fairly consistent share of all health care spending, but that may
be changing. According to America’s Health Insurance Plans
(AHIP), an association of national health insurers, spending on
prescription drugs increased by 13% in 2014, the largest annual
increase in drug spending in over a decade and significantly
more than the 2.5% increase that occurred in 2013. However,
although it is clear that the entry of a few high-priced drugs
into the market can have a significant impact on short-term
spending, it is much harder to predict which medications and
how many will be approved in the coming years, how high they
will be priced, or how effective they will be. All these factors will
affect spending on prescription medications.
Impact of Demographics
Changes in national demographics also are contributing to
the rise in prescription drug spending. Each day, as the baby
boomer generation is aging, 10,000 people turn age 65, and
individuals over age 65 use significantly more health care than
younger ones. The average person between the ages of 19 and
44 uses about $4,422 in health care a year, while those age 65 to
84 use an average of $15,857 a year, and those age 85 and older
use an average of $34,783 a year in care.
48
What’s more, this trend is just beginning. The percentage
of the population that is older than age 65 is expected to grow
from 13% today to 20% by 2030, which means, all things
being equal, we are likely to continue spending more each year
on all categories of health care, purely as a result of increased
utilization by our aging population. Even if the average
growth rate for health care spending stays relatively low, this
demographic shift will place enormous strain on the system and
the ability of purchasers to afford coverage. If, however, spikes in
prescription drug spending become more common at the same
time as our demographics are driving up utilization, the nation
could quickly find itself facing a health care affordability crisis.
Drug companies often counter that prescription drug spending actually reduces overall health care spending by managing
chronic conditions and preventing the need for costlier care
down the road. A 2011 study by Health Affairs found that, for
each dollar spent on prescription drugs used to treat high blood
pressure, heart failure, diabetes, and high cholesterol, the health
care system realizes a savings of between $3 and $10 due to
fewer emergency room visits and hospitalizations.
If, in fact, the use of prescription drugs to control high blood
pressure, high cholesterol, and other precursors of more serious
health conditions in younger populations today can help avert
the need for more expensive care down the road, we could start
to see the average cost of care for older individuals fall, offsetting
what we are spending today on prescription medications. When
individuals change health insurance carriers or switch jobs after
receiving an expensive treatment, however, insurers and employers
that paid for the expensive treatment never realize the savings
that result from that up-front investment. In today’s economy,
individuals are likely to change jobs and insurers with increasing
frequency, meaning drug companies may be overestimating
the value of their products’ long-term savings for purchasers
when they set their prices. Even if this is not the case, though,
in the short term, health care plan sponsors and patients do not
have an unlimited capacity to invest in preventative treatments
and cures, like those offered by the new class of hepatitis C
medications, even if the long-term savings would be substantial.
What Are the Risks of Over-Regulating Drug Prices?
If it is true that the current rise in spending on prescription
drugs is a long-term investment that ultimately will pay for itself
by lowering health care costs in the coming decades, aggressive
regulation of the pharmaceutical industry could have significant
unintended consequences. Not only would such regulation
undermine potentially significant future savings in the health
care system, it also could chill investment in the development of
new life-saving or life-extending drugs.
Bringing drugs to market is extremely expensive. It has been
estimated that it takes an average of $2.6 billion and 10 years
to develop a successful new medication, and only about 12% of
drugs that make it to clinical testing will ever be approved by the
Food and Drug Administration (FDA). A PBS story from 2014
noted that drug makers often choose to launch new products in
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HEALTH CARE
the United States because it represents 34% of the global market,
drug prices here are subject to comparatively fewer restrictions
than in other countries, and once a drug has received FDA
approval, there are few additional barriers to market entry.
In other words, it is precisely because the United States is a
very lucrative market for drug manufacturers that they tend to
focus on developing treatments for conditions that are common
here and release new drugs here first. Any new regulations or
restrictions that eliminate the advantage drug manufacturers
get by focusing their work on U.S. health problems also will
jeopardize these benefits.
At the same time, there clearly are situations where drug
companies engage in pricing tactics that reduce patient access
and threaten the sustainability of the U.S. health care system.
After all, it makes little difference if a drug’s price is justified
in the long term if the burden of paying for it undermines
our ability to afford other health care that is equally necessary
today. Value-based pricing tools like those being developed by
oncology doctors and ICER have the potential to curb some of
these pricing practices over time, but with so many states and
the federal government feeling the pinch to their budgets, it
is very likely that we will see increasing attempts to regulate at
least some of this behavior through the legislative process.
What Policy Solutions Have Been Suggested?
The Kaiser Family Foundation poll referenced earlier also
indicates that the public is interested in seeing prescription
drug prices regulated more aggressively. For example, the poll
found that 86% of people believe drug companies should have
to disclose how they set their prices, 83% want Medicare to be
able to negotiate drug prices, 76% think that drug costs should
be capped for medications used by individuals with serious
illnesses, and 72% want to be able to purchase prescription
drugs from neighboring countries with lower prices.
Bills were introduced in a handful of states during 2015,
including California, to require prescription drug manufacturers
to publicly disclose their research and development, manufacturing, and advertising costs for all drugs with a wholesale list
price of more than $10,000, as well as their profit margins.
Proponents hoped to increase transparency about how drug
companies set their prices to encourage drug makers to set them
more reasonably, but so far none of these measures has passed.
Another type of proposal that has popped up in several
states recently, and that passed in California in 2015, focuses
on the availability of specific medications and enrollees’ outof-pocket costs associated with them. The new state law caps
prescription drug co-payments for all commercial enrollees
at $250 for a month’s supply, and undermines several of the
utilization management1 tools health insurers use to make coverAccording to the Utilization Review Accreditation Commission,
utilization management is the evaluation of the medical necessity,
appropriateness, and efficiency of the use of health care services,
procedures, and facilities under the provisions of the applicable health
benefits plan, sometimes called “utilization review.”
1
®
age decisions. It did nothing to address the underlying cost of
these medications, however. While this legislation will provide
some short-term relief for Californians who rely on expensive
medications, its one-sided approach will actually make it harder
for health insurers to negotiate lower drug prices going forward,
and limit their ability to steer enrollees to their most affordable,
safe and effective treatment options. In this way, this legislation
will drive up spending on prescription drugs and make health
insurance less affordable. Due to concerns about the law’s longterm impact, the measure includes a partial sunset provision,
and the co-payment cap will be repealed automatically at the
end of 2019 unless the Legislature acts to extend it.
Proposals to Reduce Prescription Drug Prices
Some other commonly mentioned proposals to help reduce
prescription drug prices and make drugs more affordable for
enrollees include:
• Having an independent commission evaluate the
effectiveness of new drugs and require that the results be
included in advertisements.
• Reforming patent law to make it harder for manufacturers
to extend patents on existing drugs or pay generic manufacturers
to keep their drugs off the market.
• Requiring drug companiues to spend a specific amount of
their annual revenue on research and development.
• Granting insurers and PBMs exemptions from anti-trust
laws so they can negotiate better prices by pooling their buying
power.
• Ending the tax deduction that drug manufacturers
receive for their spending on direct-to-consumer television
advertisements.
• Speeding up approval of generics and biosimilars to
increase competition with brand name drugs.
• Capping an individual’s total annual out-of-pocket limit
for all prescription drugs at $3,000.
• Providing a tax credit for families that spend in excess of
5% of their income on health care.
A Fine Line
It is not clear yet whether the current spike in prescription
drug spending is part of a larger trend, but it already has had an
impact on the affordability of premiums and co-payments for
purchasers and enrollees, triggering state and federal policymakers to consider how drug prices might be better contained going
forward. Increased utilization of prescription drugs by the aging
population is adding to this cost, and there also is some evidence
that the market may not be doing an adequate job of regulating
drug prices. This increased spending on prescription medications is, in turn, putting pressure on individuals and families,
employers, and state and federal governments.
What is less clear, though, is whether this rise in spending
in the short term will ultimately lead to reduced health care
spending down the road, or whether purchasers can afford to
make such an investment now, however wise it may be. Given
this uncertainty and the potentially negative consequences
49
HEALTH CARE
associated with over-regulating prescription drugs, policymakers
will need to walk a fine line to preserve the incentives that drive
health care innovation and save lives while ensuring that health
care coverage remains affordable and accessible to all.
Growing Medicaid Costs Squeeze State Budgets
One of the two main ways the ACA has helped provide health
care coverage to millions of Americans is by expanding enrollment in state Medicaid programs for low-income individuals,
which are paid for jointly by states and the federal government.
Prior to passage of the law, only certain categories of individuals were eligible for Medicaid coverage—children, their parents,
pregnant women, the elderly, and individuals with disabilities.
Under most circumstances, these individuals had to have household incomes at or below 100% of the federal poverty line.
The ACA made two major changes to increase enrollment
in the program. First, it required all states to adopt looser rules
for calculating household income and determining Medicaid
eligibility, which made it easier for individuals to qualify for,
and stay enrolled in, the program. This change often is referred
to as the “mandatory expansion,” and the federal government
maintains its traditional 50/50 match of state funds spent on
individuals who qualify for Medicaid based on these rules. The
second change allows states to choose to expand eligibility for
the program even further to include all individuals living at or
below 138% of the federal poverty line. This second change
often is referred to as the “optional expansion,” although it was
made optional only by a ruling of the U.S. Supreme Court.
The federal government has agreed to pay 100% of the cost
of covering individuals who qualify for Medicaid through this
second, optional expansion, but only through 2016. After that,
the federal government will gradually reduce its contribution
until it reaches 90% in 2020, leaving states that chose to
expand their programs to cover the remaining 10% of the cost
associated with these enrollees going forward. So far, only 30
states, including California and the District of Columbia, have
elected to participate in the optional expansion due to concerns
about its long-term cost.
Since the start of 2014, Medicaid enrollment has increased
by 23% nationally, and 1 in 5 Americans are now enrolled in
the program. The majority of states that did fully expand their
programs have, so far at least, seen program costs stay static or
even fall due to decreases in costs for mental health care and
uncompensated care in hospitals. But California and a handful
of other states have not been as lucky. In California, enrollment
in Medi-Cal, the state’s Medicaid program, has increased by
more than 3 million since the start of 2014, almost three times
more than state policymakers originally predicted it would, and
they now must figure out how to fund the state’s share of this
much larger pool of Medi-Cal enrollees. In California, one-third
of the enrollment growth is attributable to the mandatory
expansion, while two-thirds of it was the result of the state’s
decision to participate in the voluntary expansion.
50
In all, between the growth in Medi-Cal enrollment
that occurred before the ACA due to the recession, and the
subsequent increases triggered by these two expansions, 12.2
million Californians are now enrolled and the program has
nearly doubled in size in just eight years. Total spending on
the program has gone up by 94% since 2007–08, although
changes in the way it is funded have resulted in the share of
federal funds used to pay for the increase rising from 43% in
2007–08 to 62% in 2015–16. In 2007–08, the total budget
for the Medi-Cal program was $47.3 billion, with the state’s
share totaling $27 billion ($17.4 billion from the General Fund)
and the federal share totaling $20.2 billion. For 2015–16, the
total Medi-Cal budget is projected to be $91.9 billion, with the
state’s share totaling $34.8 billion ($21 billion from the General
Fund) and the federal share totaling $57.4 billion.
When looked at as a share of California’s budget, including
all funding sources, Medi-Cal now accounts for 20.7% of
all state spending, up from 18.7% in 2007-08. State costs
associated with the program are set to grow significantly
between now and 2020.
Growth of Medi-Cal Enrollment Over Time
Average Monthly Enrollees (In Millions)
14
12
10
8
6
4
2
06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16
Estimated
Projected
Other Patient Protection and Affordable Care Act Caseload
(Includes hospital presumptive eligibility, expansion to newly
qualified immigrants, and express lane enrollment.)
Mandatory Expansion
Optional Expansion
Families and Children
(Includes refugees and certain undocumented immigrants)
Seniors and Persons with Disabilities
Source: Legislative Analyst’s Office, The 2015–16 Budget: Analysis of the
Health Budget (February 2015).
As mentioned above, starting in 2017, the federal share of
costs associated with enrollees in the program who were made
eligible by the optional expansion will begin to decline, dropping
to 90% by 2020. The Governor’s May Revise in 2015 projected
that, by 2018–19, California’s share of costs associated with this
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HEALTH CARE
group of enrollees will be $1 billion, and presumably it will total
more than $2 billion once the state picks up its full 10%. In
addition, there has been considerable pressure from health care
providers, patient advocates, and enrollees in the Medi-Cal system
to increase provider and hospital reimbursement rates, many
of which were cut during the recession and remain some of the
lowest in the country. Legislation introduced during 2015 that
would have reversed these cuts would also have increased MediCal spending from all sources by $538 million annually.
Lawmakers also have considered expanding Medi-Cal to
cover undocumented immigrants living in the state. In 2015,
legislators approved a more limited proposal expanding coverage
to the children of undocumented immigrants, which is expected
to cost $132 million a year (General Fund only). The original
proposal would have extended Medi-Cal coverage to the entire
population of undocumented immigrants at an estimated
annual cost of as much as $740 million (General Fund only).
Several other recent or pending changes to the MediCal program also have implications for the state budget.
California’s Medicaid waiver, which granted the state flexibility
in administering the Medi-Cal program, and also entitled it to
$10 billion in additional federal funding over the course of the
five-year waiver, originally was scheduled to expire on October
31, 2015. That deadline was later extended until December
31, 2015 to allow time for the state and federal governments
to finalize the terms of a new waiver. When this Business Issues
and Legislative Guide went to print, it appeared that the level of
additional federal funding available with the new waiver would
be closer to $6 billion.
The federal Centers for Medicare and Medicaid Services
(CMS) also have recently proposed broad changes to the
regulations governing state Medicaid programs, including
modifications that would require states to better ensure that
there are adequate numbers of health care providers and
hospitals available for Medicaid enrollees. To the extent that
existing provider and hospital shortages in California reflect
the state’s low reimbursement rates, these changes could force
the state to cut other programs to pay for rate increases. Other
provisions in the proposal could have an impact on the state’s
ability to draw down federal funds through certain fee-based
mechanisms, such as provider taxes and fees. Final regulations
are expected to be out sometime during 2016.
Finally, the state’s existing provider tax on Medi-Cal
managed care health plans (the MCO Tax), is set to expire at
the end of June, and CMS has separately indicated that the
tax cannot be renewed its current form. That tax was expected
to generate more than $1 billion in General Fund revenue
in 2015–16, and lawmakers have struggled to find a viable
replacement so far. For a discussion of the Governor’s recent
proposal to replace the existing MCO tax with a broader tax on
®
commercial health insurance, see the issue summary “A New
Tax on Health Care?”
Today, nearly 1 in 3 Californians are enrolled in the MediCal program, which consumes a significant and growing share
of the state budget. As the program and its costs continue to
grow, it will only increase the pressure on lawmakers to find
new revenue sources to support that growth so they can avoid
having to cut other important state programs and services.
Many of the revenue proposals being considered as replacements
for the expiring MCO tax could have an impact on California
businesses, either by imposing targeted taxes on specific
industries or taxing employer-sponsored health care coverage,
demonstrating why the looming challenges facing Medi-Cal are
as important to employers as they are to program enrollees.
CalChamber Position
CalChamber supports efforts to contain health care costs
and improve access to high-quality health care by avoiding
unnecessary, expensive regulatory controls and the imposition
of new coverage mandates, and by allowing market forces to
continue playing a predominant role in driving innovation and
transforming health care delivery. In addition, CalChamber:
• Opposes proposals to mandate specific levels of cost
sharing or otherwise shift health care costs from some enrollees
to others.
• Supports policies that promote personal responsibility for
individual health care coverage and wellness, and that encourage
and better enable enrollees to make value-based decisions about
their care.
• Supports policies that encourage continued medical
discoveries and innovations that improve the quality of care. 
• Supports continuing to allow health insurers and PBMs
to design prescription drug formularies that encourage prudent
utilization of prescription drugs and help them negotiate lower
drug prices.
• Opposes legislation that would limit the ability of
employers to require prior-authorization and encourage the
efficient and safe utilization of health care services, procedures,
and prescription drugs by their employees.
Staff Contact
Mira Morton
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
51
INFORMATION SECURITY
Protecting Privacy while Allowing Innovation,
Information Sharing Remains Challenge in Evolving Arena
As Californians increase their daily interaction with technology,
the public policy conversation around personal information and
information security continues to take on a more prominent
role. Personal information has been the subject of many laws
and regulations over the last decade and new technology is
constantly changing the landscape of how information is used,
shared, protected, transmitted and disposed. Safeguarding
electronic information is challenging; what is considered safe
and adequate protection this month often is outdated the next.
California Leads Way on Information Security
Trying to stay up-to-date in this new world of rapidly changing
technology is a full-time effort, but California has been at the
forefront of protecting information.
In 2003, California was the first state in the nation to
mandate data breach notifications. Today, there are numerous
California privacy laws covering a wide variety of circumstances,
ranging from how a business shares customer information to
privacy provisions governing “black box” data event recorders
in cars newer than 2004. In short, California is far ahead
of federal law when it comes to privacy, and other states are
beginning to pass laws based on California provisions, although
with variations. Those variations cause national companies to
grapple with numerous and varying privacy laws, which is time
consuming and expensive.
Over the past year, both the state and federal governments
have examined and proposed legislation on a number of privacy
and technology issues, including large data breaches, data
security requirements, cybersecurity, consent and disclosure
policies for personal information, and drones. Although
legislation passed in 2015 addressing these issues, this policy
area will continue to develop into the foreseeable future.
Data Breaches
Recent and highly publicized data breaches involving both
government and business have fostered an air of uncertainty
regarding the collection, storage, and use of personally identifiable
information. Breaches with the most media attention involved
large U.S. retailers and compromised customer credit card
information. It is important to note that, generally, these breaches
did not involve identity theft, which is different from credit card
theft, although the two often are confused with one another.
Identity theft is the unauthorized use of another person’s personal
identifying information to obtain credit, goods, services, money
or property. Credit card theft, however, results when a credit card
or credit card number is used by an unauthorized person to buy
goods or services, usually for a short period before the victim,
retailers or banks discover the misuse and close the account. The
latter generally results in no financial loss to the consumer as
compromised cards are replaced and accounts refunded.
As large data breaches continued to occupy headlines, both
the federal and state governments held hearings and introduced
legislation.
Federal Activity
At the federal level, the focus remained on creating a national
data breach notification standard. In 2014, the U.S. Senate
Banking and Judiciary committees and the U.S. House of
Representatives Energy and Commerce Committee all held
hearings on data breach issues and recommended, among
other proposals, developing a national standard for consumer
notification.
In 2015, both the U.S. Senate and the U.S. House
introduced different versions of the Data Security and Breach
Notification Act of 2015. One of the policies driving these
legislative efforts is to eliminate the patchwork of state laws that
govern notifications. When data breaches do occur, businesses
must comply with the state law where the consumer resides.
Data breaches—particularly for large companies—often
involve consumers in multiple states. With 47 different breach
notification laws across the nation, compliance with each
jurisdiction creates significant burden, costs and litigation risks
for businesses. Enacting a national standard would alleviate
a number of these issues and provide notice consistency to
consumers.
To date, a national standard bill has not moved forward.
With the current partisan gridlock and disagreement among
stakeholders, most remain skeptical that the current bills will be
signed into law.
California Legislation
In California, data breach legislation involved creating more
prescriptive notification requirements and a new notification
timeline. SB 570 (Jackson; D-Santa Barbara) sought to mandate
a specific form for breach notifications. Specifically, it would
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have required businesses to utilize a one-page format containing
the statutorily required information. The policy behind the bill
had merit: the author’s intent was to make breach notifications
easier to read and understand for consumers. The bill created
significant compliance issues, however. As described above,
businesses must comply with up to 47 state notification laws
for a single breach. To ensure compliance, businesses often draft
notices that satisfy all or nearly all jurisdictions. SB 570 would
have essentially created a prescriptive California-only form that
would not have satisfied many other state notification laws,
thereby increasing notification burdens and costs.
The California Chamber of Commerce initially led a
coalition in opposition to the bill, but was able to reach a
compromise with the author that makes notifications more
consumer-friendly while maintaining the flexibility in the
structure for businesses issuing notices in multiple states.
The amended version of SB 570 was signed into law by the
Governor, but represents another example of the need for a
national data breach law.
The other significant data breach bill, AB 964 (Chau;
D-Monterey Park), would have created an arbitrary 30-day
deadline for businesses to notify consumers of personal
information breaches. Current law already mandates that
consumers are notified “in the most expedient time possible,
and without unreasonable delay.” This allows for businesses
and law enforcement to conduct complete investigations of
suspected breaches in order to fully inform consumers while still
providing timely notifications. The 30-day deadline would have
resulted in premature, incomplete or unnecessary notifications
being sent out prior to completion of an investigation.
The bill ultimately was amended to remove the 30-day
deadline. In its amended form, AB 964 defined “encrypted” for
purposes of the data breach notification laws. Under current
law, encrypting information creates a safe harbor from data
notification laws—notification is not required if the breached
information was encrypted. Once the bill was amended,
CalChamber removed opposition and this bill eventually was
signed into law.
Data Security
Data security legislation also took a prominent role over the
last year. While data breach laws prescribe what businesses
and government agencies must do when breaches occurs, data
security laws focus on the level of protection organizations must
provide to personally identifiable information (PII). Current
law requires businesses to “provide reasonable security” for PII,
which is defined as an individual’s first initial or first name and
last name in combination with: 1) Social Security number; 2)
driver license number or identification number; 3) credit card
information; and 4) medical information.
A bill introduced in 2015, AB 83 (Gatto; D-Glendale),
sought to further define “reasonable security” and expand the
data components contained within the PII definition. Currently,
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no statutory definition exists for “reasonable security” and there
is a dearth of case law explaining what level of protection is
needed for compliance. AB 83 creates a factor test to evaluate
security measures. This factor test was similar to the national
data security standard proposed by the Obama administration.
It would require businesses to secure PII “to the degree that any
reasonably prudent business would.” At a minimum it requires
businesses to:
• Identify the foreseeable risk to the information;
• Establish, implement and maintain safeguards;
• Regularly assess the sufficiency of the safeguards;
• Evaluate reasonableness of the security procedures in
light of the type of information, the foreseeability of threats,
the existence of widely accepted practices and the cost of
implementing and regularly reviewing the safeguards.
Conceptually, CalChamber and the business community
did not have an issue with these requirements. The business
community remains focused on flexibility in data security laws.
Codifying any specific security technology or procedure will
stymie advancements needed to keep up with ever-evolving and
sophisticated security threats.
CalChamber opposed the second part of the bill that
expanded the definition of PII. Each expansion requires
significant costs and resources, and brings litigation risk
associated with protecting the new information and providing
notices if it is breached. As such, expansion of the PII definition
should be limited to information that would be harmful to
consumers if misused and each additional PII element should be
defined precisely.
Some of the new data elements in AB 83 did not meet
these requirements and were either benign to the consumer
or imprecisely defined. CalChamber worked with the author’s
office throughout the year to find a viable solution to the
expansion of the PII definition. Ultimately, AB 83 transitioned
into a two-year bill and work will continue on this bill in 2016.
Additionally, the Legislature will likely introduce more bills
dealing with data security this year.
Cybersecurity
The U.S. Senate recently passed the Cybersecurity Information
Sharing Act (CISA) as another tool to combat malicious
breaches and hacks. This bill encourages businesses,
government agencies and other entities to share cybersecurity
threat information with each other. Swift distribution of this
information will allow organizations to better react and defend
against further and future attacks.
The major hurdle to information sharing has been litigation
exposure faced by organizations when handing over personal data
as part of sharing information regarding the threat. To address this
issue, CISA limits liability from lawsuits over providing information to other organizations and the government.
CISA also balances this immunity with increased privacy
protections. Previous versions of CISA failed to make it through
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the Senate after President Barack Obama threatened a veto
due to what he viewed as a lack of privacy protections. The bill
was reintroduced in March 2015 with added protections by
California U.S. Senator Dianne Feinstein (D-San Francisco) and
Senator Richard Burr (R-North Carolina) and, with the Obama
administration indicating support, the bill passed the U.S.
Senate by a vote of 74-21 in October 2015. The bill proceeded
to a conference committee where it was reconciled with two
similar bills from the U.S. House of Representatives. Ultimately,
the final language was included in the federal budget bill and
signed into law in December 2015.
Similar efforts were undertaken last year in California to
encourage information sharing among organizations. AB 739
(Irwin; D-Thousand Oaks) contained many of the same policies
as CISA. This bill transitioned into a two-year bill as the author
and stakeholders waited to see the outcome of CISA. With the
passage of CISA over the interim, AB 739 likely will not move
forward. The CalChamber did not develop an official position on
AB 739, but worked with the author and other stakeholders to
develop language. The CalChamber supports policies that assist
in the fight against the constantly growing threat of cyber attacks.
Government Requests for Digital Information
Businesses have long sought guidance on how to respond to
government requests for digital information. Well-developed
case law exists for producing physical documents—generally,
with some notable exceptions, production requires a warrant.
These laws, however, did not govern electronically stored
information. As such, when the government would request
information, businesses faced the choice of either not complying
with the request at the risk of potential legal repercussions or
providing the information and undercutting customer confidence while also risking civil liability.
Last year, Senator Mark Leno (D-San Francisco) introduced SB 178 to address this issue. SB 178 modernized digital
surveillance laws regarding when and how the government can
access electronically stored information. In many ways, SB 178
sets the rules governing requests for electronic information on
par with nonelectronic information. Additionally, it provides
clarity to businesses about how to respond to requests and, in
doing so, reduces litigation risk. The CalChamber supported
this bill and it was ultimately signed into law by Governor
Edmund G. Brown Jr.
Notice
The debate continues over what constitutes sufficient notice for
collecting, storing or using information. Current law requires
businesses that collect personal information to develop and
conspicuously post privacy policies. And, as a matter of practice,
most businesses also seek consumer consent before collecting
information. This is another area in privacy policy, however,
where consumer protection and the demand for innovation
must be balanced carefully.
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A bill introduced in 2015, SB 576 (Leno; D-San Francisco),
threatened to stifle innovation and growth in the mobile
application economy by mandating impractical and unnecessary
consent mandates. The bill would have required consent
each time a business used a consumer’s GPS information.
For example, a mobile application that provides route
information to a consumer is constantly updating and using
GPS information as the consumer travels to determine present
location. Under SB 576, a consumer may have to provide
consent hundreds of times to complete one trip. This would
have rendered mobile applications nearly unusable.
SB 576 was turned into a two-year bill. The author will
likely move the bill forward in 2016 and the Legislature will
continue to introduce other bills dealing with consent and
disclosure in the future. Policymakers must be thoughtful in
their approach to these issues. While maintaining consumer
privacy protections remains an important policy goal shared by
all stakeholders, the Legislature should refrain from moving bills
that will provide few additional protections and result in chilling
continued technological advancement.
Drones
The proliferation of unmanned aerial vehicles (commonly
known as drones) for commercial use and by hobbyists has
prompted state legislatures and the federal government to
address this burgeoning policy area. Industry reports forecast
that the commercial drone market will grow from $3.6 billion
to $16.1 billion by 2021 with drone usage touching nearly every
sector and industry. Some notable commercial uses include:
• Delivery/Shipping: A number of companies are
developing technology to deliver packages quickly.
• Infrastructure Inspection and Monitoring: Drones can
be utilized to monitor pipelines, power lines, facilities, wind
turbines and ports. Drones will potentially reduce health and
safety risks for these dangerous activities.
• Disaster Response: The small size and mobility of
drones allow them to travel into dangerous areas during natural
disasters or other emergencies. The drones can assist first
responders by locating individuals, surveying damaging and
ongoing threats, and delivering supplies.
• Agriculture Monitoring: With vast amounts of land,
crops and livestock to monitor, drones are an efficient tool to
survey acreage and collect information. For example, drones are
useful in water management, allowing farmers to track irrigation
issues and soil hydration—a critical function in California’s
current drought. Drones also can assist in detecting crop disease
and targeted spraying of pesticides.
• Insurance Claims: Drones allow insurance companies to
quickly and safely evaluate and document property damage after
an accident or natural disaster. This will reduce recovery time
for the insured.
• Film and Television Production: Drones already are
being used by the entertainment industry to film scenes that
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would previously have been too dangerous or cost prohibitive.
• Security: Drones permit the monitoring of large facilities,
such as a college campus or mall parking lot. Abnormal activity or
threats can be recorded instantly and law enforcement notified.
With the anticipated expansion in drone usage, there also
have been a number of safety and privacy concerns. These
concerns include dangerous interference with commercial
flights, hazards to individuals and property on the ground
from a malfunctioning drone, and recording or monitoring
individuals and personal property.
Federal Regulation
In response to these concerns, the Federal Aviation
Administration (FAA) promulgated draft regulations on
commercial drone usage in February 2015. These regulations
included airspace restrictions, operator certification and speed
limits. They also contained a rule that the drone operator must
be within the line of sight of the drone—a potential prohibition
on many commercial uses, including package delivery.
The rulemaking process will continue into 2016. Numerous
discussions continue between the FAA and industry. Most
stakeholders remain optimistic that current issues with the rules
can be worked out so that the final regulations do not chill
commercial drone innovation and usage.
California Legislation
In 2015, 166 bills dealing with drones were introduced
in 45 states. The California Legislature introduced five of
these bills. The CalChamber positioned on one bill—SB
142 (Jackson; D-Santa Barbara)—that would have stymied
commercial drone operation in the state. This bill would have
restricted flying drones to 350 feet above personal property
without the owner’s permission.
In addition to being an unprecedented expansion of airspace
property rights, SB 142 potentially would have conflicted
with the FAA regulations. Currently, aircraft must maintain an
altitude of 500 feet. Between 400 feet and 500 feet generally is
considered a buffer zone between the minimum aircraft altitude.
Proposals to the FAA are seeking airspace between 200 and
400 feet for commercial drones. SB 142 potentially would have
limited commercial drone airspace to an unworkable 50 feet
(between 350 and 400 feet) should the FAA implement some
version of the current proposals.
Governor Brown vetoed SB 142 and, in his veto message,
urged patience in evaluating and creating new drone laws. This
is an important message for state policymakers. The drone
industry is in its infancy and the FAA has yet to finalize its
regulations. While thoughtful rules protecting safety and privacy
may be needed in the coming years as drones become more
ubiquitous, policymakers should not encumber innovation by
rushing to pass premature, unnecessary or conflicting legislation.
What to Expect in 2016
Employers can expect another busy year for privacy legislation in
2016. Last year, the California Assembly created a new standing
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committee on Privacy and Consumer Protection. Assembly
Speaker Toni Atkins (D-San Diego) indicated that the committee was created because privacy and technology issues needed a
“specific focus.” The topics heard by this committee will likely
include bills that: regulate online brokers and the big data industry; expand the definition of personal information; create data
security standards; clarify data breach rules and responsibilities;
involve more transparency and disclosure in privacy policies; limit
collection of personally identifiable information regarding minors;
modify information sharing among affiliated businesses and partners; develop rules on drone usage; and increase rules protecting
family activities from the paparazzi.
Additionally, more pressure to push legislation will likely
come from national privacy groups that view California as
the most likely jurisdiction to pass new legislation. With the
partisan gridlock at the federal level, enacting new national
privacy laws has proved challenging. The California Legislature,
however, has historically been more receptive to enacting these
types of proposals. Also, as a large state that is home to the
technology industry, California often serves as a model for other
states’ privacy legislation.
CalChamber Position
The CalChamber supports protection of privacy rights and
privileges, uniform national laws, and regulations governing
privacy issues. Increased penalties and incarceration for thefts of
personal information is proper for violations.
The CalChamber supports continued research, development
and use of radio frequency identification device technology;
development of industry standards for protecting data rather
than embedding static technology in statute; and the ability for
companies to share information.
Staff Contact
Jeremy Merz
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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INTERNET/COMMUNICATIONS TECHNOLOGY
New Internet/Communications Technology Empowers
Economic Development, Enhances Business Community
California’s technology sector earned its reputation as a
powerful economic engine in 2015. California’s 1.1 million
employee-strong technology sector leads the nation, creating
more jobs than the next two largest states by technology sector
employment—Texas (581,200) and New York (346,500)—
combined. In addition to being the nation’s largest technology
sector, California also had the fastest growing, adding nearly
33,000 jobs in 2015, and the best paying, with an average
annual wage of $139,500.
With Californians continuing to embrace cutting-edge
technologies, including Internet of Things (IoT), wearables,
sharing-economy platforms, and mobile applications, it’s clear
that California’s economic growth and technology adoption
go hand in hand. Today, as the Internet increasingly becomes
a part of everyday life for Californians, promoting broadband
everywhere—and for more people—is essential to supporting
continued economic growth and technology leadership.
More Californians Choosing Wireless
In Millions
2000
2013
40
35
30
25
20
15
10
5
0
wireless
broadband
wireline
population
Sources: Federal Communications Commission, U.S. Census Bureau
Growth of Wireless-Only Households
2007
21.8%
Landline-Only
8.9%
Wireless-Only
1.5% Neither
7.4%
Landline-Only
69.3%
Combined or
Neither
58.4%
Combined
32.6%
Wireless-Only
Source: U.S. Centers for Disease Control and Prevention
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2012
Technology Growth/Adoption
Growth in the technology sector has all kinds of benefits
throughout the economy. A recent study showed that for every
job created in the technology sector, approximately 4.3 jobs are
created in other sectors throughout the local economy, positively
benefiting all income groups. In addition to the economic
benefits, there’s also the consumer benefit of enjoying the new
goods and services produced by the technology sector.
Consumers are increasingly using broadband, thanks to
significant investment and the large-scale build-out of high-speed
Internet infrastructure. U.S. consumers are streaming movies and
downloading content more than ever, fundamentally changing
the communications, entertainment and technology landscape.
According to Pew Research, 87% of Americans use the Internet.
In the coming years, the Internet will become even more inextricably linked to Americans’ lives as the Internet of Things—smart
appliances and connected cars for instance—quickly comes
online. According to McKinsey & Company, there are projected
to be 20 billion to 30 billion “things” connecting wirelessly with
the Internet around the world by 2020.
With some 92% of Californians using a cellphone or smartphone, and more than 18 million Californians using their mobile
device to access the Internet, it’s clear that mobile devices are an
important portal to the 21st century information economy. And
for many communities, low-income Californians in particular,
mobile devices are the preferred source of Internet access.
Consumers are actively choosing new and innovative
products, services and devices that require faster, more robust
and more advanced technology—whether wired or wireless.
Every month, 450,000 U.S. consumers switch to phone services
that run on wireless and Internet-based networks. In fact, across
the United States, more than two in every five adults lived in
homes that were wireless-only and 40.2% of homes utilize
Voice over Internet Protocol (VoIP) technology. Perhaps it’s no
surprise that the United States ranks second globally in average
mobile subscriber data consumption.
Individuals and households are not the only ones going
wireless. Businesses increasingly depend on strong wireless
service to carry their employees through the work day. In
fact, 94% of small businesses surveyed use smartphones to
conduct business, and mobile technologies are saving U.S. small
businesses more than $65 billion a year.
The transition from antiquated to modern communications
technology is largely complete. Today, only 7% of Californians
rely only on landlines for phone service, and that population
continues to shrink year over year. Consumers are making this
shift because of the inherent benefits of mobile and broadband
technologies—just as they once shifted from typewriters to
computers. With consumers increasingly going wireless, using
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Internet Users: Digital Tech Makes Them Better
Informed than 5 Years Ago
% of Internet users who say the Internet and cellphones help them be better
informed about:
81%
Products / services to buy
75%
National news
74%
International news
72%
Popular culture
68%
My hobbies / personal interests
67%
My friends
65%
My health / fitness
62%
Local news
60%
My family
49%
Local civic activities
My neighorhood / neighbors
35%
Source: Pew Research Center (August 2014 Panel Survey)
wearables and embracing newer IoT services rapidly coming
online, mobile data capacity and coverage is more important
than ever.
Significant Investment/Innovation
Venture capital has played a large role in the growing technology
sector in recent years—both in California and the nation more
broadly. In 2014, nearly 2,000 companies in California received
a total of more than $28 billion in venture funding, 57% of the
$50 billion venture capital invested nationwide.
Investment and innovation have been extraordinarily strong
in the mobile wireless ecosystem. Annual investment in U.S.
wireless networks grew more than 50% between 2009 and
2013, from $21 billion to a record $33 billion. In 2014, capital
investments made nationally by telecom, cable and technology
companies totaled $78 billion. Several markets around
California and the country have seen this investment manifested
in 100% fiber-optic networks, delivering unprecedented
Internet capabilities to consumers.
Investing to expand broadband access to all Californians
also brings economic growth and new jobs. Private investment
in mobile wireless infrastructure over the next five years will
generate $1.2 trillion in economic growth and create 1.2
million jobs, according to a recent study. The Progressive Policy
®
Institute reports that four of the top 25 markets for technology
sector jobs can be found in California, including each of the top
three. Furthermore, all four California markets in the top 25
saw significant growth in nontechnology sector jobs in addition
to the rapid growth rates in the technology sector.
The explosion in innovative broadband services and
applications, or apps, is driven by consumers but realized by
the enormous infrastructure investments by wired and wireless
providers.
These providers must increase the value of their networks
to recover those investments. Accordingly, the value of the
networks depends on how many end users subscribe to them
and how much data those users consume. Thus, mobile
providers have an incentive to continue to ensure that customers
can access the applications, services, and content of their
choosing, regardless of whether those services compete with
services mobile providers also offer.
Advanced Technology Benefits Consumers
Providing Information
The Internet and mobile devices have enabled Americans to
become better informed about products and services available
for sale, national and international news, and popular culture.
Average Americans and American students are better informed:
overall, Internet users believe that both the average American
and the average student today are better informed thanks to the
Internet.
• 76% of online adults say access to the Internet has made
average Americans better informed.
• 77% of adult Internet users say the Internet has made
today’s students better informed.
Advancing Health Care
According to the Federal Communications Commission,
mobile health (mHealth) reduces the number of face-to-face
consultations necessary and can reduce medical costs by 25%
for seniors.
In the near future, mHealth is expected to save patients
$21.1 billion per year. Telehealth reduces days spent hospitalized
by 25% and reduces the number of hospitalizations by 19%.
Between 2005 and 2030, broadband-based health resources
will save approximately $927 billion in health care costs for
seniors and people with disabilities. The growth of IP-powered
telehealth and telemedicine makes life easier for patients
requiring specialty care. Consumers seem to sense the value
of mHealth devices, with 33% of broadband households in a
recent survey reporting use of digital health and wellness devices
in 2015, a jump from 26% in 2014.
The number of patients using telehealth services will rise
to 7 million in 2018, up from fewer than 350,000 in 2013. In
2013, more than 78% of office-based physicians were using an
electronic health records (EHRs) system, compared with only
48% in 2009. As of September 2013, 51% of doctors were
using a tablet device for professional purposes. As of February
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2014, some 42% of U.S. hospitals already have adopted
telehealth platforms to assist in treating their patients.
According to the American Telemedicine Association,
patients with congestive heart failure who used telemedicine
reduced their hospital admissions by 60%, reduced emergency
visits by 66% and reduced utilization of pharmacies by 59%.
In contrast, patients who did not use telemedicine experienced
increases in these three areas. Patients with congestive heart
failure who used telemonitoring saw a 44% reduction in
re-admission rate.
In order make it possible for everyone to benefit from
these technological advances in the health care industry, public
policies should reflect the choices that consumers are making
today and encourage the investment and innovation needed to
meet consumer demand.
Increasing Education Access, Quality
Investment in high-speed broadband Internet and next
generation IP-based networks helps bring communities across
the nation the faster, more reliable service they demand. The
benefits of IP-enabled products, offerings and services are far
reaching and can positively affect every area of our lives.
High-speed broadband Internet and next-generation
IP networks help educators meet students’ specific needs
and customize their education. Products and devices like
smartphones, netbooks and tablets help students and teachers
access distance-learning applications anywhere and anytime,
allowing them to learn and explore beyond their classrooms and
the local library.
Video conferencing via wireless and broadband-enabled
technology offers face-to-face communication. With a few
clicks, teachers can quickly access lectures and colleagues from
near and far. IP technology also allows students and teachers to
access a multitude of services, applications and capabilities that
exist in “the cloud.”
Helping Communities Bridge Educational Divides
Online classes made more widely available through IP
networks can help address the shortage of advanced and
expanded course offerings in rural schools, only 69% of which
are able to provide Advanced Placement classes, compared to
93% of city schools.
Mobile learning platforms, digital content, and adaptive
software allow students to utilize the technologies and devices
with which they are already familiar to help them learn and
access educational information, anywhere and at any time. This
can especially benefit African-American and Hispanic-American
students, who are leading adopters of smartphones and mobile
technology.
At the higher education level, more students than ever are
taking advantage of distance education opportunities. According
to the U.S. Department of Education, nearly 27% of all
undergraduate students enrolled in at least one online course
in the 2013–14 school year, with more than 11% enrolled
exclusively in distance education. At the postbaccalaureate level,
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the numbers jump even higher, as 31% participated in some
form of distance education and 23% enrolled exclusively online,
underscoring the value of high-quality bandwidth access for all
levels of education throughout the country.
Investing in, expanding access to and encouraging the
nation’s transition to IP-based networks will increase the
quality and accessibility of education for the benefit of parents,
students, educators and employers.
Modernizing Regulations, Promoting Competitive
Marketplace
More and more everyday activities are migrating online. Recent
studies show that more than half of Americans apply for jobs
online. We get our entertainment online, with Netflix streaming
more than 6.5 billion hours of video per quarter, mostly in the
United States. And we certainly shop online, with Amazon
selling $85 billion in merchandise, digital content and cloud
services in the past year.
The United States, with 4% of the world’s population, has
10% of its Internet users, 25% of its broadband investment and
32% of its consumer Internet traffic. Clearly, the U.S. policy of
Internet freedom has worked.
While most agree in principle that state and local regulations
should not impose rules that can stifle innovation and growth,
the details are important. As California policymakers look
toward the future, modernizing policies now will set up a
sensible path forward that expands broadband opportunity and
supports consumers.
Policy Initiatives Benefitting Consumers
AB 57
In 2015, the California Legislature passed and Governor
Edmund G. Brown Jr. signed into law California Chamber of
Commerce-supported AB 57 (Quirk; D-Hayward; Chapter
685). The bill provides important time certainty in the process
for installing the infrastructure needed to improve wireless
service for all Californians.
Despite the growing demand for improved wireless coverage
across California, the prevailing local jurisdiction approval
process often was unworkable. The result was a permitting
process that could stop needed infrastructure investment in
its tracks. AB 57 works within rules enacted by the Federal
Communications Commission to keep the local permitting
process moving without limiting or restricting the authority of
local governments in the process.
AB 57 provides for important guidelines and the appropriate balance for parties to work together to keep the permitting
process moving and promote needed wireless service improvements for consumers, business, government and public safety.
SB 1161
In 2012, with support from California’s business
community, the California Legislature passed and Governor
Brown signed into law SB 1161 (Padilla; D-Pacoima; Chapter
®
733). SB 1161, identified by the CalChamber as a job creator
bill, protects against the Public Utilities Commission and any
other department agency or commission regulating VoIP- and
IP-enabled service without specific legislative authority.
SB 1161 establishes regulatory certainty for California
Internet companies so they can invest, innovate and grow their
Internet businesses without unnecessary rules and protracted
state regulatory proceedings that create delay and expense, and
impact their ability to meet the growing demand of consumers.
DIVCA
Consumers and the California economy won another significant victory when California passed CalChamber-supported
AB 2987 (Núñez; D-Los Angeles; Chapter 700), “The Digital
Infrastructure and Video Competition Act of 2006” (DIVCA),
which reduced regulations on television services, shifted video
franchising from a local to a statewide process, and opened up
the state’s sizable market to competition. DIVCA increased
industry investment in broadband infrastructure and improved
the California economy by creating jobs and benefitting
consumers (particularly low-income consumers).
The View Ahead
California has long been a leader in advanced infrastructure
and technological innovation. California’s success as a leader
in the tech economy is due in large part to the substantial
investment California businesses have made in the infrastructure
and technological innovation that have propelled California’s
economy forward. This investment is largely due to California
economic policies that incentivize competition and bolster
investment by businesses in the state.
This investment is not only providing all Californians with
the high-quality broadband access they deserve, but also laying
the groundwork for the next great wave of innovation and
growth driven by IP technologies: the Internet of Things. With
California’s enhanced digital infrastructure leading the way, IoT
technologies are expected to be as revolutionary for the everyday
life of Californians tomorrow as mobile technologies are today.
Consumers are increasingly choosing advanced technologies
such as mobile because they see the inherent benefits, and
policymakers need to keep up. As IoT technologies and other
innovations become a part of everyday life for Californians,
policies that support broadband deployment, access and
adoption will become vitally important.
In light of the technological dynamism and multiplatform
competition that exists in the broadband marketplace—with
cable, telephone, fiber, satellite and various wireless companies
all offering consumers alternative choices for Internet
service—California businesses should be free to invest in the
advanced infrastructure and technological innovation that have
enhanced the California economy and empowered California
consumers without being hindered by outdated and unnecessary
regulations.
In order for California to remain a leader in broadband
deployment, speed and quality, California lawmakers should
continue to support innovation and growth by encouraging
greater investment in modern infrastructure and supporting
policies that modernize regulations and promote competition
going forward. Preserving this commitment to the streamlined
regulations that have encouraged businesses to enhance the
California economy and empower California consumers is
necessary to ensure that the Internet remains a vibrant driver of
jobs, growth and innovation.
Staff Contact
Valerie Nera
CalChamber Position
A combination of rapid technological innovation, consumer
choice and disruptive changes in the communications market
has altered forever the traditional competitive landscape. These
profound structural and technological changes point to the need
for economic policy that leaves free from government regulation
those market processes that continue to propel further
innovation and competition for new services.
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Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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LABOR AND EMPLOYMENT
Classification Confusion in State as Employers Struggle
to Comply with Ambiguous, Differing Standards
One area of labor and employment law that California
employers continue to struggle with is the proper classification
of employees as exempt versus nonexempt, or independent
contractor versus employee. In California, the tests to determine
whether an employee is exempt are different than the federal
standards and extremely subjective, thereby leading to differing
interpretations and expensive litigation.
Similarly, the analysis in California as to who qualifies as
an independent contractor is overwhelming and confusing.
Different state agencies utilize different factors to determine
independent contractor status, thereby leaving an employer
with little guidance or certainty on the issue. The consequences
an employer faces for misclassifying an employee as exempt or
as an independent contractor are devastating and fail to take
into consideration the employer’s good faith efforts to get the
classification correct.
The brief summary below of the classifications tests
California employers are forced to navigate, as well as the severe
penalties they face for misclassification, emphasizes the need for
immediate reform in this area.
Exempt or NonExempt?
An employee who is properly classified as exempt under one
of California’s six main exemptions generally is excluded
from the wage-and-hour requirements in California, such as
minimum wage, overtime pay, and meal and rest periods, as
well as recordkeeping requirements. The problem for many
employers is that aside from the salary basis requirement in each
exemption, the criteria utilized to decipher between an exempt
employee versus a nonexempt employee is ambiguous, thereby
creating a significant risk for employers.
Executive Exemption
The primary inquiry under this exemption is whether the
employee’s monthly salary is more than two times the minimum
wage, which as of January 1, 2016 became $3,200 due to the
minimum wage increase in California to $10. If the employee
does not satisfy this salary basis test, there is no need to examine
any further.
Assuming, however, that the employee earns at least the
minimum requirement, then an employer must evaluate
whether the employee spends more than 50% of time
customarily and regularly exercising his or her independent
judgment and discretion in performance of the following duties:
• Responsibilities involving the management of the business
and/or an established department within the business;
• Directing the work of two or more employees; and
• The authority to hire or fire other employees, or has
ability to make recommendations regarding the hiring, firing or
promotion of other individuals.
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The challenge for a lot of employers under this exemption
is what activities qualify as use of independent discretion
and judgment as opposed to routine duties. The Division of
Labor Standards Enforcement (DLSE) has defined this term
to mean “the comparison and evaluation of possible courses
of conduct and acting or making a decision after the various
possibilities have been considered. The employee must have the
authority or power to make an independent choice, free from
immediate direction or supervision and with respect to matters
of significance.”
The DLSE states that for the executive exemption, the most
frequent problem employers encounter is “the failure to distinguish
discretion and independent judgment from the use of independent
managerial skills. An employee who merely applies his or her
memory in following prescribed procedures or determining which
required procedure out of the company manual to follow, is not
exercising discretion and independent judgment.”
Administrative Exemption
Similar to the executive exemption, an employee classified
under this exemption also must receive a minimum monthly
salary of two times the minimum wage. Additionally, the
employee must spend more than 50% of time customarily
and regularly exercising his or her independent judgment and
discretion in performance of the following duties:
• Responsibilities involving office or nonmanual work that is
directly related to the business’s management policies or general
business operations;
• Regularly and directly assisting a proprietor or an employee
employed in a bona fide executive or administrative capacity; or
• Performing specialized or technical work that requires special
training, experience or knowledge with limited supervision.
One of the key provisions of this exemption that has
caused numerous employers confusion is what duties qualify
as office or nonmanual work that is directly related to the
management of the business. In 2001, the First District Court
of Appeal issued a decision that indicated the determination
of this provision depends on whether the activities performed
fulfill the administration of the business versus simply the
ultimate end product of the business—widely referred to as
the “administrative/production dichotomy.” Bell v. Farmers
Insurance Exchange, 97 Cal.App.4th 805 (2001).
In Bell, the court determined that claims representatives who
worked for an insurance company were not properly classified
as exempt because claims adjusting was the end product for the
company, rather than administrative work. For years following
the decision in Bell, employers have struggled with determining
whether an employee’s duties fall neatly into one category of the
administration/production dichotomy as opposed to the other,
which they generally do not.
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In 2011, the California Supreme Court provided somewhat
further guidance on the issue by stating that the administrative/
production dichotomy is not a dispositive test on this issue and
should be utilized in the analysis only after reviewing and applying
the actual language of other primary sources such as statutes and
regulations. Harris v. Superior Court, 53 Cal.4th 170 (2011). Despite
this clarification, the administrative exemption continues to be an
ongoing source of litigation for employers throughout California.
Professional Exemption/Learned Exemption
An employee under this exemption must also meet the
monthly salary basis test of two times the minimum wage,1 as
well as the following:
• Licensed or certified by the State of California and primarily
engaged in the practice of law, medicine, dentistry, optometry,
architecture, engineering, teaching, or accounting; or
• Is primarily engaged in an occupation commonly
recognized as a learned or artistic profession. “Learned or artistic
profession” has been defined as the customary and regular
exercise of independent judgment and discretion in: (a) work
requiring knowledge of an advanced type customarily acquired
by a prolonged course of specialized intellectual instruction and
study; or (b) work that is original and creative in character in
a recognized field of artistic endeavor and the result of which
depends primarily on the invention, imagination, or talent of
the employee; and (c) that is predominantly intellectual and
varied in character such that the output produced or the result
accomplished cannot be standardized in relation to a given
period of time.
Similar to the other exemptions listed above, the
determination as to what responsibilities qualify as the exercise
of independent judgment and discretion is the most problematic
factor for employers under this exemption.
Computer Professional Exemption
This exemption also has a salary basis test, yet is unique as
compared to the other exemptions. Specifically, in order to qualify
for this exemption, as of January 1, 2016, the employee must
receive a minimum monthly salary of $7,265.43/annual salary
$87,185.14.2 The employee also must be primarily engaged in
duties that require the use of independent discretion and judgment in performance of one or more of the following duties:
• The application of systems analysis techniques and
procedures;
• The design, development, documentation, analysis, creation,
testing, or modification of computer systems or programs;
• The documentation, testing, creation, or modification
of computer programs related to the design of software or
hardware for computer operating systems; and
• The employee is highly skilled and is proficient in the
A licensed physician under this exemption must receive an hourly
wage of $76.24 or higher as of January 1, 2016 in order to satisfy the
minimum salary requirement.
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This minimum salary requirement is adjusted annually by the DLSE
according to the rate of inflation.
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theoretical and practical application of highly specialized
information to computer systems analysis, programming, and
software engineering.
Again, what tasks qualify as the use of independent discretion and judgment versus simply complying with directions is
difficult for employers to determine under this exemption.
Outside Sales Exemption
This exemption is available to any person, 18 years of age or
older, who customarily and regularly works more than half the
working time away from the employer’s place of business selling
tangible or intangible items or obtaining orders or contracts for
products, services, or use of facilities. In 1999, the California
Supreme Court provided some clarification on this exemption
by stating that duties which are only incidental to the outside
sales work, such as delivery, repair or maintenance, are not
considered exempt work that applies toward the time requirement. Ramirez v. Yosemite Water, 20 Cal. 4th 785 (1999).
Notably, there is no salary basis test for this exemption,
only a time requirement as to the amount of time the employee
must spend engaged in outside sales activities. Given that
the employees are outside of the office, as required by the
exemption, it is difficult for employers to monitor them and
make sure they are spending most of their time engaged in
exempt work, as opposed to incidental duties.
Commissioned Salesperson Exemption
This exemption applies to any employee who earns more
than 1.5 times the minimum wage, of which half must
be derived from commissions. If an employee satisfies this
requirement, then he or she is exempt only from the payment of
overtime. Unlike the other exemptions, individuals who satisfy
this criterion are still entitled to receipt of other wage-and-hour
requirements such as meal and rest periods.
Consequences for Misclassification as Exempt v. NonExempt
The financial consequences for misclassifying an employee
as exempt instead of nonexempt are devastating for an employer.
First, in almost every misclassification claim, there is an
allegation of unpaid overtime. Given that exempt employees
generally are neither required nor expected to track their time,
employers do not have time records that document the hours
worked. Accordingly, it is a “he said/she said” dispute and the
burden falls on the employer to disprove an employee was
misclassified and therefore entitled to overtime pay for up to the
past four years.3
In addition to alleged unpaid overtime wages, there are
piggyback claims that usually are asserted as well, including
inaccurate itemized wage statement for failing to list the hours
worked and the hourly rate on the wage statement, missed meal
Most unpaid wage claims under the Labor Code are filed concurrently
with an Unfair Business Practice claim under Business and Professions
Code section 17200. Accordingly, although the statute of limitations for
an unpaid wage claim under the Labor Code is only three years, when
filed with a unfair competition law claim, the time period in which to
file is extended to four years. Cortez v. Purlator Air Filtration Products
Co., 23 Cal.4th 163, 178-179 (2000).
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and rest periods, as well as statutory penalties under the Labor
Code Private Attorneys General Act, Sections 2699 et seq. When
the misclassification affects a category of employees as opposed to
just one employee, the litigation is usually filed as a class action,
thereby significantly increasing even further the cost for the
employer to defend. Of course, if the employee is able to recover
even one dollar of his/her alleged unpaid wages or penalties, the
employee’s attorney can also recover reasonable attorney fees,
thereby adding another layer of cost onto the employer.
Federal Law and Recent Activity
Federal law also sets forth four exemptions for employees
to be excluded from both minimum wage and overtime
pay.4 These exemptions are similar to California, yet less
restrictive. Specifically, federal law has a salary basis test for the
administrative, professional, and executive exemption as well,
but the salary basis is limited to $455/week. For the outside
sales exemption, there is no minimum salary requirement, and
for computer professional employees, the salary basis test is
either $455/week or $27.43/hour.
With regard to the “duties” test, unlike California, there is
no specified amount of time that an employee must spend on
exempt duties in order to qualify as an exempt employee. While
it is a “’rule of thumb’” that the term “primary duty” means the
duty upon which the employee spends more than 50% of his
or her time, a duty may nonetheless still be the “primary” duty
even if he or she spends less than the majority of time on that
task (see 29 Code of Federal Regulations, Section 541.103).
When the amount of time falls below the 50% threshold,
the analysis of “primary duty” includes several factors including
the importance of the exempt duties versus nonexempt duties,
freedom from supervision, frequency of the employee’s exercise
of discretion, and the amount of time spent on the duties (see
Donovan v. Burger King Corporation, 675 F.2d 516 (2nd Cir.
1982), stating that federal law for the executive exemption
analysis does not focus solely on amount of time spent on
exempt duties; Spinden v. GS Roofing Products Company, Inc., 94
F.3d 421 (8th Cir. 1996), quoting an “‘employee’s primary duty
is that which is of principal importance to the employer, rather
than collateral tasks which may take up more than fifty percent
of his or her time.’”(citations omitted)).
Federal law also has a highly compensated employee
exemption that exempts employees from the minimum wage
and overtime pay if the employee’s annual compensation is
$100,000 or more and the employee primarily performs at least
one exempt duty and nonmanual work. California does not
have a similar exemption.
On March 13, 2014, President Barack Obama announced
an executive order to modify the federal exemptions to
make sure that more employees are nonexempt and eligible
for overtime pay. The basis for this modification is that the
Federal law does not have a meal and rest period mandate such as
California, and therefore the federal employee exemptions are limited to
minimum wage and overtime pay.
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President believes too many employees are being denied
compensation to which they are entitled for their hard work.
On July 6, 2015, the U.S. Department of Labor (DOL)
released its Notice of Proposed Rulemaking regarding changes
to the “white collar” exemptions, including the administrative,
executive, professional, and highly compensated exemptions. The
main changes set forth in the proposed regulations included:
• Increase the minimum weekly salary from $455 to $921;
• Increase the minimum amount for a highly compensated
employee from $100,000 to $122,148; and
• Include a mechanism to automatically increase both
amounts according to inflation or some other economic factor.
The proposed regulations also raised the question as to
whether the federal government should change the duties
test for exempt employees from a qualitative approach to a
quantitative approach like California. Interested parties were
invited to submit comments to the proposed changes by
September 4, 2015. The DOL is reviewing the comments
received and further action is expected in 2016.
Independent Contractor or Employee?
The hiring of independent contractors is a popular and lawful
tool employers use as a part of their overall business model.
For businesses, it is a cost-effective way in which to address
specialized needs. For entrepreneurs, it is a way in which to
maximize profits and grow their own business.
A September 2011 report by Dr. Philip J. Romero, “The
Economic Benefits of Preserving Independent Contracting,”
concluded that California’s economic success depends heavily
upon small businesses and independent contractors. The study
references the fact that the use of independent contractors
provides a benefit to both parties: “The contractor earns great
autonomy and higher compensation because they are paid based
only on productivity; and the client gains higher productivity
and more long-term flexibility from reduced fixed costs.”
Another study published in August 2013 by Steven Cohen
and William B. Eimicke, “Independent Contracting Policy
and Management Analysis,” echoed the same comment that
“[i]ndependent contracting similarly encourages the growth
of small business, which has proven to create jobs and is a key
ingredient to overall economic recovery.”
The main concern from all parties involved in the independent contractor relationship, however, is the subjective and
inconsistent analysis used to determine whether an individual
qualifies as an employee versus an independent contractor. The
common law test for determining the status of an individual as an
employee versus an independent contractor focuses primarily on
who has the right to control the details of the work performed,
but also includes consideration of the following factors:
• Whether the relationship may be terminated “at will”;
• Whether the individual performing services is engaged in a
business distinct from the principal’s;
• Whether the work performed is typically done under the
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direction of the principal or without supervision;
• What the required skill is to perform the job;
• Whether the principal supplies the tools and the worksite;
• What is the length of time for which the services are to
be performed—is it ongoing or is there a set deadline for the
services to end;
• What is the method of payment—hourly or by the job; and
• Whether the parties believe they are creating the
relationship of employer-employee.
No one factor in this analysis, including the right to control,
is determinative. Moreover, the analysis is not based upon the
“totality of the circumstances,” meaning that even if an employer
satisfies a majority of these factors in favor of independent
contractor classification, there is no guarantee that such a
classification is accurate. Rather, the application and importance
of each factor is determined on a case-by-case analysis.
To add to the confusion and intimidation of this analysis for
employers, not all state or federal agencies utilize the common law
test. In fact, the California Department of Industrial Relations,
which utilizes the common law test, admits that an individual
may be considered an independent contractor for its purposes,
but an employee for another state agency’s test, and vice versa.
Accordingly, even if the Internal Revenue Service or DLSE
confirms that in their opinion the individual is an independent
contractor, another federal or state agency, such as the DOL or
Franchise Tax Board could subsequently determine otherwise.
In March 2015, the Little Hoover Commission released
a report titled “Level the Playing Field: Put California’s
Underground Economy Out of Business,” in which the
commission set forth several recommendations to limit activity
in the underground economy. Recommendation No. 3 by the
commission was for the Legislature to enact a law that defines
independent contractor and is applicable to all state agencies.
Recent Litigation
A recent appellate decision in Dynamex Operations West, Inc.
v. Superior Court, 2014 WL 5173038 (2014), complicated the
issue even further by providing another interpretation as to
whether an individual is an employee versus an independent
contractor. Specifically, in Dynamex, the court relied upon the
Industrial Welfare Commission (IWC) Wage Orders definition
of an “employee,” rather than the common law factors set
forth above to determine the proper classification. The IWC
definition is potentially broader than the common law factors,
and therefore arguably includes more individuals as employees
rather than independent contractors.
In August 2014, the Ninth Circuit Court of Appeals
issued a significant decision in Alexander et al. v. FedEx Ground
Package System, Inc., 765 F.3d 981 (9th Cir. 2014), wherein
it determined that despite the entrepreneurial aspects of the
relationship between the drivers of FedEx, evidence that FedEx
had the right to control and actual control over the drivers was
the primary factor.
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In 2015, the “shared economy” became a focus of the independent contractor debate. In November 2014, drivers for Uber
Technologies, Inc. filed a class action in the Northern District
Court of California, claiming that they were misclassified as
independent contractors. Shortly thereafter, a similar lawsuit
making the same allegation was filed by drivers against Lyft, Inc.
Uber and Lyft both filed a motion for summary judgment,
requesting the court to determine as a matter of law that the
drivers were classified correctly. Both motions were denied.
In the Lyft case, the court in its order denying the motion for
summary judgment made the following observation: “The test
the California courts have developed over the 20th Century for
classifying workers isn’t very helpful in addressing this 21st Century
problem... [a]bsent legislative intervention, California’s outmoded
test for classifying workers will apply in cases like this. And because
the test provides nothing remotely close to a clear answer, it will
often be for juries to decide.”
On September 2, 2015, the court granted the Uber drivers’
motion for class certification, thereby allowing the case to move
forward as a class action. As of the date of this publication, the question of class certification in the Lyft case had not yet been decided.
Similarly, in October 2015, Amazon “Prime Now” drivers
filed a class action in Los Angeles Superior Court, claiming they
were misclassified by the company as independent contractors.
These recent cases illustrate the uncertainty employers
face with regard to the proper classification of an individual
as an independent contractor versus employee. As the court
in the Lyft case observed, the outdated common law test
for distinguishing between an independent contractor and
employee does not accurately reflect the labor market today and
there is a need for legislative intervention.
Recent Federal Activity
In 2011, the DOL released its five-year strategic plan, which
focused heavily on going after the misclassification of workers
as independent contractors. The DOL estimates that at least
30% of individuals are misclassified as independent contractors.
Since the release of this plan, the DOL has certainly ramped up
its efforts on this issue. It has entered into multiple inter-agency
agreements with numerous states, including California, to join
efforts at investigating and eradicating worker misclassification.
The DOL’s 2014 budget reflected its ongoing efforts at
combating misclassification. The DOL requested $14 million
to identify misclassification, unpaid taxes and investigate
violations, with $10 million in grants to 19 states that have
entered into agreements with DOL, including California, to
enhance their efforts at detecting misclassification. The DOL
believes this grant will provide a “high performance bonus”
to states that investigate and prosecute employers who fail to
adequately pay their share of unemployment insurance due to
misclassification, as well as wages and unpaid taxes.
In July 2015, Administrator David Weil published
Administrator’s Interpretation 2015-1, which outlined the Fair
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Labor Standards Act’s (FLSA) “suffer or permit” standard for
employee status. The interpretation warns that “most workers
are employees under the FLSA’s broad definitions. The very
broad definition of employment under the FLSA as ‘to suffer
or permit to work’ and the Act’s intended expansive coverage
for workers must be considered when applying the economic
realities factors to determine whether a worker is an employee or
an independent contractor.”
Recent California Activity
In 2013, California Labor Commissioner Julie Su recovered
more than $1 million in unpaid wages, penalties and fines for
misclassification of employees as independent contractors. In
May 2014, Commissioner Su issued a citation against two
janitorial companies for more than $1.5 million in unpaid
wages, penalties and fines for the misclassification of 52 workers
as independent contractors.
Notably, in July 2013, a California Court of Appeal issued
a decision in Happy Nails & Spa of Fashion Valley, LP, v. Julie
Su, that specifies California agencies do not get to re-litigate the
issue of independent contractor classification. In Happy Valley,
the California Employment Development Department had
challenged the nail salon about classifying various individuals
as independent contractors, yet lost on appeal before the
Unemployment Insurance Appeals Board. Several years later,
DLSE cited the nail salon for failure to provide individuals
with itemized wage statements, which the nail salon challenged
on the basis that the individuals were properly classified as
independent contractors. On appeal, the court sided with the
nail salon, relying on the doctrine of collateral estoppel, which
basically precludes the same party (California) from re-litigating
the legal issue of classification.
In 2014, AB 1897 (R. Hernández; D-West Covina) was
signed into law, generally imposing joint and several liability
on “client employers” that contract for labor or services as a
usual course of business, for the wage-and-hour violations and
workers’ compensation violations of the contractor’s employees. Although the bill specifically states that the provisions do
not have an impact on a client employer that is utilizing an
independent contractor and does not change the definition of
independent contractor, it is unquestionable that it will. Specifically, in order to avoid liability under AB 1897, client employers
may exercise more control over the working conditions of the
contractor’s employees, thereby satisfying one primary element
for determining employee versus independent contractor status.
In 2015, the Governor signed AB 621 (R. Hernández;
D-West Covina), which creates an amnesty program for any
company that utilizes port drivers and reclassifies the drivers
as employees instead of independent contractors. The amnesty
program relieves the company of penalties and taxes for
misclassifying the employee for the amnesty period.
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Consequences for Misclassifying an Employee as an
Independent Contractor
If the employer gets the independent contractor status analysis
wrong, even if the mistake is inadvertent, the employer could
suffer significant consequences from both the state and federal
government, including the following:
• Unpaid wages, plus statutory penalties ranging from $50
per pay period to $10,000 per pay period;
• Unpaid unemployment insurance compensation, plus up
to a 10% penalty on the amount assessed;
• Unpaid payroll taxes, plus statutory penalties ranging
from 5% of the unpaid taxes to 75% of the unpaid taxes if the
underpayment was due to fraud;
• Up to $25,000 statutory penalty for “willful”
misclassification;
• $10,000 criminal fine with imprisonment up to five years;
• Workers’ compensation insurance, plus penalties; and
• Attorney fees.
CalChamber Position
Many employers do not intentionally misclassify their
employees as exempt or as independent contractors. Rather,
most employers conduct an analysis of the subjective factors
utilized to determine the appropriate classification and assume
they have labeled their employees or contractors correctly. The
significant financial consequences an employer faces as a result
of misclassification fails to take into consideration their good
faith efforts to navigate through ambiguous standards or their
reliance on a state agency’s determination that the employer’s
classification was correct.
Before imposing such devastating penalties, fines and costs
against an employer for misclassification, the state should revise
the underlying tests for exempt status and independent
contractor to make the factors objective and consistent in order
to eliminate confusion. Once the factors are clear, state agencies
and courts will be able to separate the good actors who are
trying to comply from the bad actors that disregard the law, and
impose penalties accordingly.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Mandated Predictability Jeopardizes Workplace Flexibility
Predictable scheduling has become a national issue for labor
groups over the last several years. Labor has focused on five
areas: 1) lack of adequate notice of work schedules—“just-intime scheduling”; 2) “clopening,” which is working a closing
shift and an opening shift back-to-back; 3) on-call shifts; 4)
last-minute requests to work a shift or last-minute cancellation
of shifts; and 5) guaranteed hours, or a lack thereof.
Proponents of predictable scheduling have stated that these
issues have an impact on low-wage workers and part-time
employees who try to work multiple jobs, as well as women who
struggle with child care.
Opponents argue that mandating scheduling requirements
will limit an employer’s flexibility to accommodate employee
requests for time off, limit offers of additional hours for
employees who seek or want to work more, and significantly
increase the cost of doing business.
This national debate between predictability versus flexibility
will continue to be a policy consideration in California in 2016.
Predictability vs. Flexibility
Scheduling Concerns
A policy brief highlighting concerns with lack of predictable
schedules was published by the Center for Law and Social
Policy, Retail Action Project, and Women Employed. The brief,
“Tackling Unstable and Unpredictable Work Schedules,” argues
that low-wage workers are “disproportionately affect[ed]” by
“just-in-time scheduling” that contributes to income instability
and threatens their eligibility for government income support
and benefits.
The brief also states that lack of control over schedules
and hours creates stress, marital strife and challenges with day
care as well as transportation. The authors claim employers
are responsible for this instability through the increased use
of scheduling software that allows employers to “manipulate
workers’ schedules in response to changes in demand,” with
little notice to the employee.
The policy brief offers several recommendations, including:
1) guaranteed minimum hour policies; 2) reporting time pay; 3)
advance notification of schedules; and 4) laws that make union
organizing easier.
Notably, California is one of nine states that already have
a reporting time pay law, as discussed below, in which an
employee is compensated a minimum amount for simply
showing up to the scheduled shift.
Another study conducted by Susan J. Lambert and Julia R.
Henly, published by the University of Chicago, documented
the various challenges managers face when producing schedules
(“Work Scheduling Study: Managers’ Strategies for Balancing
Business Requirements with Employee Needs”). The study
surveyed managers of 139 retail stores and highlighted the
struggle of scheduling hours within the labor goals and
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limitations set by the company, while still providing employees
with enough hours of work as well as the shifts they prefer.
The study indicated that obtaining a sufficient number
of hours was employees’ main priority as opposed to advance
notice of schedules. Although one-third of the managers
surveyed provided two-weeks of notice of employee schedules,
the majority provided approximately four days’ notice. More
than 53% of the managers reported that, once posted, changes
to the schedule are common. “[N]ot every life circumstance can
be anticipated,” thereby leading to numerous employee-initiated
changes to the schedule once posted.
Flexibility
Workplace flexibility also is a significant factor for
employees. The need for and importance of flexibility in the
workplace was emphasized in the Executive Summary published
by President Barack Obama in March 2010, “Work-Life
Balance and the Economics of Workplace Flexibility.” One of
the issues raised in this summary was the ability of employees
to have input on their schedule. The summary focused on
businesses that allow employees the ability to change their start
and end times on shifts periodically, even on a daily basis, as a
positive attribute of flexibility.
Additionally, the CitiSales Study, conducted by Jennifer
E. Swanberg, JacQuelyn B. James, Mac Werner, et al. with
the University of Kentucky Institute of Workplace Innovation
and Boston College’s Center for Work and Family in 2008,
interviewed more than 6,000 hourly employees and senior
management in 388 stores across the country. The intent of
the study was “to examine the employee and organizational
benefits associated with a work environment that is responsive
to the needs of workers employed in lower-wage hourly jobs.”
The study found “that six workplace dimensions are critical
components of employee engagement and customer satisfaction
in the retail industry.” The dimensions are 1) effective
supervisors; 2) job fit and adequate resources; 3) opportunities
for career development; 4) teamwork; 5) schedule satisfaction;
and (6) schedule flexibility.
With regard to schedule flexibility, the study found that
flexibility optimizes recruitment of quality employees, boosts
retention, promotes productivity, engages employees, reduces
turnover, and creates quality customer service. The study noted
that the two largest burdens with providing flexibility, however,
were accommodating employee scheduling requests while still
meeting the business demands. The study quoted one manager
regarding employee requests: “There is only so much time that
you can spend constantly changing the schedule before you have
to just make it what it should be.”
To ensure flexibility and schedule satisfaction, the CitiSales
Study promoted the following six practices for workplace
flexibility: 1) allow employees to provide input on their schedule
preferences such as days, shifts, or hours of work; 2) opportunity
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to request times or days off in advance; 3) permit employees
to work at more than one store location; 4) allow employees
to work reduced hours and maintain benefits; 5) provide
employees job security if they take a week or more off work; and
6) provide employees with “just-in-time” schedule changes.
Contrary to the studies referenced above regarding the need
for predictability, the CitiSales Study found that employees want
flexibility and the opportunity to “modify their schedule when
unexpected events” arise with just-in-time schedule changes.
These just-in-time changes include swapping shifts with other
employees and having management help with finding someone
to cover the shift.
In contemplating the two competing issues of flexibility and
predictability, the Mobility Agenda, in its report “Scheduling in
Hourly Jobs: Promising Practices for the Twenty-First Century
Economy” by Susan J. Lambert and Julia R. Henly, stated: “An
overemphasis on any one of these dimensions could result in
unintended consequences for workers. If workers have little
input into their work schedules or if posted schedules are
not amenable to change, predictability can turn into rigidity.
Similarly, as argued above, flexibility can result in unstable hours
and thus precarious earnings, reducing the prospects of financial
stability among hourly workers.”
San Francisco Ordinance
In November 2014, San Francisco passed two ordinances
referred to as the “Formula Retail Worker Bill of Rights,” which
included multiple provisions on applicable hours, schedules and
worker benefits at large retailers. A formula retail company is
defined in the city ordinance as any retail employer with 20 or
more employees, at least 11 locations anywhere in the world,
and a standardized array of merchandise, facade, decor and color
scheme, uniform apparel, signage, trademark or a service mark.
Such employers include, but are not limited to, restaurants,
banks, retail stores, and movie theaters.
Provisions in the Formula Retail Worker Bill of Rights are
a 14-day notice of employees’ schedules with financial penalties
imposed against the employer for changes made to the schedule
with fewer than seven days notice; same hourly rate of pay for
full-time and part-time employees who perform the same duties;
same paid and unpaid time off for part-time and full-time
employees; and written offer of additional hours of work to
part-time employees before hiring additional employees. The
Formula Retail Worker Bill of Rights was passed by the Board
of Supervisors in November 2014, but was not signed by Mayor
Ed Lee. The ordinance went into effect in July 2015.
Before the effective date of the formula retail bill of rights,
the Office of Labor Standards Enforcement for the City
and County of San Francisco promulgated implementation
regulations. Issues focused on in the regulations included how
to determine the number of employees an employer has in
a calendar year; whether an employer has to offer part-time
employees hours that would force the employer to pay overtime;
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what employer conduct triggers an obligation to pay penalties
for schedule changes, such as inviting, soliciting or suggesting
that the employee can change his/her schedule; and how to
reconcile predictability penalty pay with California’s reporting
time pay.
Although the Formula Retail Worker Bill of Rights has been
in effect only for several months, employers and employees are
already feeling the impact. Feedback from several employers on
the ordinances is as follows:
• Employers are unable to adjust to staffing needs based
upon changes to consumer demand as offering part-time
employees additional hours or reducing hours triggers an
obligation to pay penalties, which employers are not willing to
absorb;
• Employees do not always know their availability to provide
input for a two-week schedule and are frustrated with the hours
and days of work they ultimately are provided;
• Part-time employees who want additional hours of work,
even last-minute offers, are not getting those hours because
employers are concerned they will be exposed to financial
penalties for offering those hours of work;
• Employee requests for schedule changes after the schedule
is posted cannot be accommodated as employers are not willing
to expose themselves to financial penalties for making these
accommodations. Employees are frustrated with the lack of
flexibility.
State Legislation: AB 357
Assemblymember David Chiu (D-San Francisco) was elected to
the Assembly in 2015. He was previously a member of the San
Francisco Board of Supervisors, and one of the authors of the
Formula Retail Worker Bill of Rights. Assemblymember Chiu
introduced AB 357, which mirrored provisions of the Formula
Retail Worker Bill of Rights.
Specifically, AB 357 mandated a two-week notice of an
employee schedule, financial penalties associated with changes
made within seven days before the scheduled shift, penalties for
on-call shifts, exposure to civil litigation, and a protected leave
of absence for an employee to attend appointments with the
county human services agency for government assistance. The
bill was sponsored by United Food and Commercial Workers
and supported by numerous labor organizations as well as
plaintiff ’s attorneys.
Proponents argued that the legislation was important to assist
low-wage workers, who have two jobs and need predictability
of their schedule. AB 357 was widely opposed by numerous
business-related organizations and labeled a job killer by the
California Chamber of Commerce. Opponents argued that the
financial penalties associated with schedule changes as proposed
by AB 357 would eliminate employers’ willingness to accommodate last-minute employee requests for schedule changes.
The bill moved through the Assembly committees, but was
never taken up for a vote on the Assembly Floor. As of the date
®
of this publication, AB 357 was on the Inactive File on the
Assembly Floor and eligible for consideration by the Assembly
before January 31, 2016.
Activity Across the Nation
To date, San Francisco is the only locality that has enacted
an ordinance regarding predictable scheduling. Several cities
throughout the country are considering local ordinances,
including Albuquerque, New Mexico; Chicago, Illinois;
Washington D.C.; and Minneapolis, Minnesota.
Several other states have introduced legislation similar to
AB 357; however, none have been enacted. These states include
Connecticut, Illinois, Indiana, Maryland, Massachusetts,
Minnesota, Oregon, New York, and Maine. In 2015, Michigan
passed a law (HB 4052) that pre-empts any local jurisdiction
in the state from enacting an ordinance imposing mandates
on employers to pay higher wages or benefits to employees or
provide leave other than those required by state law.
Existing California Law
Although California does not have a law that specifies the
required time in which to post an employee’s work schedule, it
has several laws that regulate the hours and days of work for an
employee, as follows:
• Reporting Time Pay: California law requires an employer
to provide employees with at least partial compensation
when they report to work but are sent home by the employer
for some reason such as lack of work/customer demand,
improper scheduling, or lack of notice. The Industrial Welfare
Commission wage orders require that employers pay nonexempt
employees “half the usual or scheduled day’s work, but in no
event for less than two hours nor more than four hours, at his or
her regular rate of pay.” So, if an employee is scheduled to work
8 hours, but is sent home after 1 hour, the employer must pay
the employee 4 hours of reporting time pay.
In Aleman v. Airtouch Cellular, 209 Cal.App.4th 556
(2012), the court clarified this requirement to specify that an
employer is required to pay reporting time pay only when the
employee works for less than half of the scheduled shift. In
Aleman, the employee was scheduled for only a 1-hour-and30-minute meeting, which ended early and lasted only an
hour. The employer paid the employee for an hour and the
employee sued the employer, claiming he should have received
the minimum 2 hours of compensation for reporting time pay.
The court disagreed and stated that reporting time pay requires
an employer to pay the minimum 2 hours of pay only when an
employee has worked less than half of the scheduled shift. In
Aleman, the scheduled shift was 1 hour and 30 minutes, and the
employee worked over half of the shift, for which he was paid.
Accordingly, the employer was not required to pay reporting
time pay.
• Split Shift Pay: California also requires employers that
®
have employees work two separate shifts in a day which are
separated by a break longer than 1 hour to provide split-shift
pay. The employer must pay the employee an extra hour of pay
at minimum wage, unless the employee earns an hourly wage
wherein the total amount earned for all hours worked is greater
than the minimum wage for all hours worked, including the
extra hour of pay. See Aleman, 209 Cal.App. at 574-575.
• Daily and Weekly Overtime: California is one of only
three states in the country that requires employers to pay
employees both daily and weekly overtime. Specifically, Labor
Code Section 510 requires an employer to pay 1.5 times the
employee’s regular rate of pay for hours worked over 8, but
under 12, and double the regular rate of pay for hours worked
over 12 in a workday. California also requires 1.5 times the
regular rate of pay for all hours worked over 40 in a workweek.
• One Day of Rest: Labor Code Section 552 mandates
employers to provide employees one day of rest in a workweek.
Labor Code Section 510 specifies that any work in excess of 8
hours on any seventh day worked in a workweek shall be paid at
twice the employee’s regular of pay.
CalChamber Position
Legislation that seeks to micromanage a private employer’s
business, such as mandating when schedules must be posted,
what changes to the schedule an employer may make, when
an employer can make schedule changes, or guaranteeing
minimum hours of work, will have negative consequences for
the business as well as its employees.
Government is not in a better position to determine how to
manage a workforce effectively, especially in various industries
where customer demand, location, employee needs and business
needs are constantly changing. Strict statutory standards that
seek to regulate such issues with the threat of financial penalties
and litigation will ultimately force businesses into rigidity with
regard to employee requests for schedule accommodations,
other workplace flexibility, or even the number of full-time
versus part-time employees they hire.
These unintended, but likely consequences should prompt
the Legislature to pause before seeking to impose such broad
and onerous laws on California employers.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Efforts to Expand Protected Employee Classifications
Merely Add Opportunities to Sue Employers
On April 15, 1959, California Governor Edmund G. “Pat”
Brown signed the Fair Employment Practices Act (FEPA) into
law, prohibiting discrimination in the workplace based upon
race, religious creed, color, national origin, and ancestry. This
law was later joined with the fair housing law that also prevented
discrimination to create California’s Fair Employment and
Housing Act (FEHA). FEHA has been amended over the last
several decades to include additional protected classifications
of sex (includes gender, gender identity, gender expression,
breastfeeding), age, disability, genetic information, marital status,
medical condition, physical disability, mental disability, sexual
orientation and, most recently, military and veteran status.
Similarly, in 1964, the federal Civil Rights Act was signed
into law, explicitly prohibiting private employers with 15 or
more employees from discriminating against applicants or
employees in the workplace based upon protected characteristics
that include: race, color, national origin, religion or sex. The
purpose of the law was to address documented evidence of
discrimination that was occurring primarily on the basis
of race, under the holding of the U.S. Supreme Court in
Plessy v. Ferguson, which stated that separate but equal was
constitutional. Thereafter, several other federal laws expanded
upon these existing protected classifications to also include age,
disability and, most recently, genetic information.
‘Right to Sue’ Letter Easy to Obtain
Both the federal and state anti-discrimination/retaliation laws
require an employee to exhaust his/her administrative remedies
before pursuing civil litigation. This requirement is negligible as
EEOC Dismisses 64.6% of Discrimination Complaints
88,778
Complaints
Received
both agencies have an expedited process through which an employee can satisfy this obligation and obtain a “right to sue” letter within
minutes in order to proceed immediately with civil litigation.
EEOC Claims
The Equal Employment Opportunity Commission (EEOC)
is the agency charged with enforcing the federal laws that prohibit
discrimination and retaliation, which includes investigating
complaints of discrimination or retaliation on one of the
protected bases. In 2014, the EEOC received 88,778 complaints,
approximately 5,000 fewer complaints than in 2013. Of the
88,778 complaints, 6,363 were from California, with national
origin discrimination being the most frequent allegation.
Notably, the EEOC dismissed 57,376 of the charges due to
“no reasonable cause,” meaning the EEOC determined there
was no factual basis for the complaint alleged. Approximately
14,000 of the complaints were administratively closed, which
includes closing the case due to pending civil litigation.
Based upon these statistics and given that employees can
immediately pursue civil litigation upon receipt of a “right
to sue” notice, without any factual review or determination
regarding the merit of the complaint by the EEOC, it is
reasonable to presume that there is a high probability a
percentage of the discrimination/retaliation cases ultimately filed
in court are frivolous.
DFEH Claims
Similar to the EEOC, the Department of Fair Employment
and Housing (DFEH) is charged with enforcing FEHA, including
investigating complaints of discrimination and retaliation.
In 2014, there were 17,632 FEHA employment complaints
California Dismisses About 1 in 5 Discrimination
Complaints
4,100
Complaints
Dismissed
57,376
Complaints
Dismissed
19,500
Complaints
Received
Source: Equal Employment Opportunity Commission (2014)
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Source: California Department of Fair Employment and Housing (2011)
®
filed, with disability discrimination and retaliation being the
most common allegations. Of these complaints, more than
10,000 immediate right-to-sue notices were issued.
The DFEH filed only 18 civil complaints, which are cases
where the agency has determined there is merit and the cases
have not been resolved through the agency’s Enforcement
Division or Dispute Resolution Division.1
The 2014 annual report does not include the number of
complaints the agency dismissed due to lack of evidence that a
violation occurred. As a reference, however, of approximately
19,500 complaints filed in 2011, approximately 4,100 were
dismissed due to lack of evidence that any violation occurred.
Recent Legislative Activity
In the 2013–2014 legislative session, bills that expanded or
attempted to expand upon the existing California protected
classifications included the following.
• AB 60 (Alejo; D-Salinas) expanded the FEHA to protect
individuals who possess a driver license that indicates they are
not documented citizens from discrimination. Signed by the
Governor.
• AB 556 (Salas; D-Bakersfield) expanded the FEHA to
include a protected classification for military and veteran status.
Signed by the Governor.
• AB 1443 (Skinner; D-Berkeley) expanded the FEHA to
protect interns from discrimination or harassment. Signed by
the Governor.
• AB 2053 (Gonzalez; D-San Diego) expanded the harassment
training requirements under the FEHA to include a section
regarding “abusive conduct” in the workplace. Signed by the
Governor.
• SB 400 (Jackson; D-Santa Barbara) created a protected
classification in the Labor Code for victims of stalking and
expanded upon the existing protections afforded to victims of
domestic abuse and sexual assault. Signed by the Governor.
• SB 404 (Jackson; D-Santa Barbara) would have expanded
the FEHA to include a protected classification for “familial
status.” Held in the Assembly Appropriations Committee.
Several of the bills listed above were either sponsored or
supported by employment plaintiff attorney groups, which favor
more protected classifications, as they create new opportunities
for litigation. Undoubtedly, there will be further attempts to
expand upon the existing protected classifications in the next
legislative session.
CalChamber Position
The protected classifications initially put into place by
federal and state law sought to address documented, systemic
discrimination. Recent efforts to expand upon the existing
protected classifications in state law, however, have sought to
address isolated incidents of alleged discrimination that are not
a general problem.
Unnecessarily adding to the list of protected classifications
hampers a business’s ability to effectively manage its workforce,
as each addition provides a new basis upon which to challenge
any decision.
Specifically, although federal and state anti-discrimination
laws have reduced the number of discriminatory acts in the
workplace, such laws also have created avenues for frivolous
litigation as even employees who are terminated from their
employment for cause challenge such decisions on the basis of
discrimination based on a protected classification.
While the California Chamber of Commerce certainly
supports anti-discrimination laws, it is concerned with the
adoption of new classifications that do not address any actual
discrimination and serve only to create opportunities for new,
potentially frivolous litigation.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
The DFEH has an Enforcement Division and Dispute Resolution
Division that attempt to resolve cases through mediation or settlement.
Of 17,632 FEHA complaints filed with the DFEH in 2014, 279 cases
were resolved through mediation or settlement.
1
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California Protected Leaves of Absence
California has numerous labor and employment regulations
that far exceed those mandated at the federal level. A clear
example of this is California’s multiple protected leaves of
absence available to employees. Although other states may have
one or two similar leaves of absence, the California Chamber of
Commerce is unaware of any other state that imposes the list of
protected leaves of absence available in California.
Each leave independently may not seem to impose a
significant burden on businesses; however, the cumulative
impact of administering all the available protected leaves in
California while still managing a productive and profitable
business concerns employers. The CalChamber understands
that employees have personal needs that must be considered.
Such needs, however, must be balanced with an employer’s
ability to manage its workforce. Accordingly, any new proposed
leave of absence for employees should be considered in light of
the existing leaves of absence that employers already are required
to provide in California.
Federal Leave Laws
FMLA
Under the Family and Medical Leave Act (FMLA), all
employers with 50 or more employees are required to provide
eligible employees with up to 12 weeks of medical leave per
calendar year to:
• care for their own serious injury or illness;
• care for the serious injury or illness of a family member,
defined as a child, spouse or parent; or
• bond with a newborn or adopted child.
FMLA also provides an employee up to 26 weeks of leave
to care for an ill or injured military service member who is their
spouse, son, daughter or next of kin.
Recently, the U.S. Department of Labor (DOL) expanded
the leave protections under FMLA for veterans with a serious
medical condition, as well as expanded the definition of “serious
injury or illness” for current service members and veterans to
include pre-existing injuries that were aggravated by service
in the line of duty or active duty. The recent expansions also
expanded the definition of “qualifying exigency leave” and
increased the amount of time off from 5 days to 15 days. These
new expansions went into effect on March 8, 2013.
In June 2014, the DOL proposed new regulations to revise
the definition of “spouse” under FMLA to recognize same-sex
marriages. The DOL issued a final rule on March 27, 2015
that revised the definition of “spouse” to include the individual
to whom the employee entered into marriage as defined and
recognized by the laws of the state where the marriage took
place as opposed to the laws of the state where the individual
resides. The purpose of this language was to grant employees
who enter into same-sex marriages the same federal rights as
others, regardless of whether the state where the employee
resides or works recognizes same-sex marriages.
FMLA is a “protected” leave of absence, meaning an
employer cannot terminate and/or retaliate against an employee
as a result of the employee requesting or taking a leave of
absence pursuant to this law. Additionally, an employer must
maintain the employee’s position or a similar position to which
the employee may return at the conclusion of his/her leave.
USERRA
The Uniformed Services Employment and Re-employment
Rights Act of 1994 (USERRA) also requires employers of any
size to provide an employee up to five years of protected leave for
military service. The employee must be a member of “uniformed
services,” including the Army, Navy, Air Force, Marine Corps,
Coast Guard, Army National Guard or Air National Guard, and
engaged in active duty, active duty for training, initial active duty
for training, inactive duty training, full-time National Guard, or
absences for fitness for duty examinations.
The five years is calculated according to the cumulative
amount of time the employee spends in the uniformed
California-Required/Protected Leaves of Absence for Employers of 50 or More
One Calendar Year
70
9
10
11
12
Spouse of Military Member
8
Volunteer Firefighting
7
School Activites
6
CFRA
5
Care for Sick/Injured
Military Member
4
Pregnancy Disability
3
FMLA
2
Organ Donation
Bone Marrow Donation
1
®
military service. The new expansions of FMLA also requires
an employer to consider all periods of absence from work due
to or necessitated by covered service under USERRA when
determining whether the employee is eligible for FMLA.
ADA
The Americans with Disabilities Act (ADA) applies to
employers with 15 or more employees and requires an employer
to reasonably accommodate a qualified employee with a disability. A reasonable accommodation may include a protected leave
of absence from work, the duration of which is dependent upon
the disability.
California Leave Laws
CFRA
In addition to complying with federal leave laws, California
employers are required to comply with state-specific leave laws,
including California Family Rights Act (CFRA). CFRA closely
resembles FMLA and also requires employers with 50 or more
employees to provide an employee up to 12 weeks of medical
leave per calendar year to:
• care for their own serious medical condition;
• care for the serious medical condition of a family member,
defined as a child, spouse, or parent; or
• bond with a newborn or adopted child.
Although CFRA and FMLA often overlap so that the
two leaves run concurrently, there are significant differences
where the two leaves do not run concurrently, which provide
a California employee up to 6 months of protected leave.
For example, any pregnancy-related disability is considered
a “serious medical condition” under FMLA, but not CFRA.
Accordingly, a pregnant employee in California can take 12
weeks of leave under FMLA for pregnancy-related conditions,
and then an additional 12 weeks of protected leave under CFRA
after the baby is born for bonding.
Another deviation between FMLA and CFRA is leave
to care for an injured military service member. If the service
member is the son, daughter or spouse of the employee, then
the employee’s leave under CFRA and FMLA would likely
run concurrently. If the service member is the “next of kin,”
however, only FMLA leave would be triggered, providing a
California employee with up to 26 weeks of leave under FMLA
and an additional 12 weeks of leave under CFRA.
Other Protected Leaves
Other California protected leaves of absence include:
• Pregnancy Disability Leave: This leave applies to
employers with five or more employees and provides up to four
months of protected leave. This leave runs concurrently with
FMLA, but not CFRA. Therefore, an employee could take up to
four months for pregnancy disability/FMLA leave, and still have
another 12 weeks of protected leave under CFRA for bonding
with a new child or to care for the employee’s/family member’s
serious medical condition.
• Military Spouse Leave: This leave applies to employers
®
with 25 or more employees and allows an employee to take up
to 10 days to spend time with a military spouse who has been
deployed in military conflict.
• Organ Donation Leave: This leave applies to employers
with 15 or more employees and provides eligible employees
with up to one month of paid protected leave in a year to
donate an organ. This leave is explicitly excluded from running
concurrently with FMLA or CFRA.
• Bone Marrow Leave: This leave applies to employers with
15 or more employees and provides eligible employees with up
to one week of paid protected leave in a year to donate an organ.
This leave is explicitly excluded from running concurrently with
FMLA or CFRA.
• School Activities Leave: This leave applies to employers
with 25 or more employees and provides eligible employees
with up to 40 hours of leave per year to participate in school
activities with their children. It was amended in 2015 by SB
579 (Jackson; D-Santa Barbara), to specify the circumstances
under which school activities leave can be utilized.
• School Appearance Leave: This law applies to all
employers and requires them to provide employees with time
off in order to appear at school on a child’s behalf with regard to
school suspension.
• Domestic Abuse/ Sexual Assault/Stalking Leave: This
leave applies to any employer with 25 employees or more and
requires an employer to provide an indefinite leave of absence
to an employee who is seeking services or medical attention as a
result of domestic violence, sexual assault, or stalking.
• Civil Air Patrol: This leave requires any employer with 10
or more employees to provide no less than 10 days per calendar
year of unpaid leave for an employee who is responding to an
emergency operational mission of the California Wing of the
Civil Air Patrol. If it is only a single emergency operational
mission, only three days of leave is required.
• Victims of Crime Leave: This leave applies to any
employer and requires the employer to provide an indefinite
amount of leave to an employee who is a victim of crime as
defined in statute, or has an immediate family member who was
a victim of crime in order to attend judicial proceedings.
• Volunteer Firefighting, Reserve Peace Officer, and
Emergency Rescue Personnel Leave: This leave applies
to employers with 50 or more employees and requires the
employer to provide an employee who is a volunteer firefighter,
reserve peace officer, or emergency rescue personnel with up to
14 days of leave per year to engage in fire, law enforcement, or
emergency rescue training.
• Voting Leave: This leave applies to all employers and
requires employers to provide employees with as much time off
as needed to vote. A maximum of two hours of time off to vote
is paid.
• Jury Duty/Witness Leave: This leave applies to all
employers and requires employers to provide any employee
called upon for jury duty or subpoenaed as a witness time off
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from work for the duration of the employee’s civil service on a
jury or witness.
• Fair Employment and Housing Act (FEHA): FEHA
requires all employers with five employees or more to reasonably
accommodate employees who have a disability. A reasonable
accommodation can and may include a leave of absence, the
duration of which depends upon the employee’s disability.
Paid Sick Leave
In 2014, Assemblymember Lorena Gonzalez (D-San
Diego) introduced AB 1522, which mandated that employers
provide employees with paid sick leave in California. AB 1522
is applicable to all employees who have worked in California
for more than 30 days. If an employer does not have a policy
that provides otherwise, an employee accrues one hour of paid
sick leave for every 30 hours worked. An employer can cap the
employee’s accrual of paid sick leave to 6 days or 48 hours each
year, and may limit the employee’s use of paid sick leave to three
days or 24 hours.
Due to the anti-retaliation provisions included in AB 1522,
paid sick leave is a protected leave of absence. Specifically, AB
1522 prohibits an employer from discriminating or retaliating
against an employee who requests or exercises his or her right to
use accrued paid sick days.
AB 1522 also creates a rebuttable presumption of unlawful
retaliation if any adverse employment action is taken against
an employee within 30 days of the employee’s cooperation in
an investigation regarding the employer’s policy and practice
of implementing paid sick leave, filing a complaint with the
Labor Commissioner, or of opposing any practice or policy that
violates the paid sick leave law.
Within hours of AB 1522 passing the Legislature, Governor
Edmund G. Brown Jr. released a public statement that
supported AB 1522. Shortly thereafter on September 10, 2014,
Governor Brown signed AB 1522, making California only the
second state in the country to require employers to provide
employees with paid sick leave.
In order to respond to some of the questions left lingering
after the passage of AB 1522, Assemblymember Gonzalez
introduced AB 304 in 2015 that was the “clean-up” bill to AB
1522. After months of negotiations on the various provisions of
the bill, the key components of AB 304 were as follows:
• grandfathering in of existing paid time off policies that
accrue in a different manner other than hours worked, yet
provide at least the same amount of annual leave;
• delayed front-loading paid sick leave policies for newly
hired employees;
• clarification of how to calculate paid sick leave; and
• specifying the employee must work for 30 days for the
employer before the employee is eligible to accrue paid sick
leave.
AB 304 was signed into law and went into effect
immediately as it included an urgency clause.
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Paid Sick Leave Initiative
On November 3, 2015, the California State Council of
Service Employees (SEIU) filed an initiative with the Attorney
General’s Office entitled “Raise California’s Wage and Paid
Sick Days Act of 2016.” The proposed initiative increases the
minimum use of paid sick days from 3 days a year to 6 days a
year. At the time of this publication, the initiative had received
title and summary and was cleared for circulation to obtain
signatures. The proponents must submit at least 365,880 valid
signatures by July 5, 2016 to qualify for a spot on the November
2016 ballot.
Burden of Leaves of Absence on Employers
A protected leave of absence, such as those set forth above,
imposes several burdens on employers other than just the
extensive time off of work.
• First, there is an administrative burden of obtaining the
necessary documentation from an employee to certify the
need for the leave. FMLA and CFRA are especially document
intensive as employers may obtain proper certification from
medical providers regarding the basis for the employee’s leave
as well as the duration. This documentation can be ongoing
depending upon the specific situation of the employee.
• Second, an employer must track the employee’s time out
on leave. This may seem straightforward, however, many of
these leaves of absences provide for “intermittent” leave, which
allows the employee to take sporadic leaves of absences in
increments as small as 30 minutes.
• Third, an employer has to allow the qualified employee
to take the protected leave, regardless of the employer’s current
business condition. For example, an employer could already
have several employees out on other protected leaves of
absences, but still would be required to provide a statutory leave
of absence to another employee, thereby making management
of the workforce extremely difficult.
• Finally, each protected leave of absence brings with it
a potential threat of litigation. If an employee is terminated
or disciplined in proximity to a recent request or taking of a
leave of absence, there is a significant risk of a lawsuit claiming
retaliation or wrongful termination. Basically, the allegation is
that the personnel action taken against the employee was a result
of the employee’s leave of absence, rather than the employer’s
stated reason for the termination or discipline.
Recent Legislation
• AB 1522 (2014) (Gonzalez; D-San Diego) mandates paid
sick leave for all employees who have worked in California for
more than 30 days.
• AB 304 (2015) (Gonzalez; D-San Diego) clarifies
provisions of the paid sick leave law.
• AB 357 (2015) (Chiu; D-San Francisco) sought to
include a protected leave of absence for employees to attend
®
appointments at the county human services agency. This bill is
on the Inactive File in the Assembly.
• AB 2030 (2014) (Campos; D-San Jose) would have
turned the current unpaid school activities leave into a paid
leave of absence. This bill failed to pass out of policy committee.
• SB 406 (2015) (Jackson; D-Santa Barbara) would have
expanded the California Family Rights Act to include five new
family members that are not covered under federal law, which
would have created the potential for a 24-week mandated leave
of absence. This bill was vetoed by the Governor.
• SB 579 (2015) (Jackson; D-Santa Barbara) clarifies the
basis for an employee to take the existing school activities leave
and amends the family members under the existing kin care
law to mirror the family members under the paid sick leave law.
This bill was signed by the Governor.
Given the pattern of the Legislature over the last several
years, a bill for some issue-specific type of employee leave will
likely be introduced in 2016. Many legislators are sympathetic
to the need for employees to take time off from work for
personal issues, such as to care for extended family members
with a serious medical condition.
are more appropriately addressed between an employer and
employee, taking into consideration the needs of the employee
and the business needs of the employer. The new paid sick leave
mandate already has created another burden on all California
employers, especially small employers with a limited workforce.
California cannot jeopardize the growth of the business
community by burdening employers with any additional,
mandatory leaves of absences that the employer must
accommodate regardless of its existing business needs.
Staff Contact
Jennifer Barrera
Policy Advocate
CalChamber Position
As set forth above, California already has an extensive list of
protected leaves of absences available to employees for a wide
range of personal needs. Although such leaves certainly do not
address every potential personal situation that may arise, this
does not mean that additional, statutory protected leaves of
absences are necessary in California.
Rather, the CalChamber believes that such individual issues
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[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Cost-Effective Way to Improve Jobs Outlook:
Improving California’s Legal Climate
The legal climate of a state is a significant consideration when
a company is deciding where to locate or expand its business.
The opportunity to obtain a fair and efficient resolution of legal
disputes, access to courts, as well as threats of frivolous litigation all
contribute to the overall decision. In a report released by the U.S.
Chamber of Commerce Institute for Legal Reform (ILR) in 2015,
75% of the 1,203 in-house counsel or senior executives surveyed
confirmed that a state’s lawsuit environment has a significant
impact on their decision regarding where to locate or expand.
Judicial Hellholes 2015–16
1. California
6. Louisiana
2. New York City Asbestos Litigation
7. Hidalgo County, Texas
3. Florida
8. Newport News, Virginia
4. Missouri
9. U.S. District Court for the
5. Madison County, Illinois
Eastern District of Texas
Source: American Tort Reform Foundation
The Wall Street Journal reported in March 2014 in an article
titled “The Top Issues CEOs Face These Days,” that one of the
top concerns for CEOs is “[g]overnment compliance, regulation
and litigation.”
Unfortunately, California continues to rank poorly in its
overall legal climate. According to the ILR, California ranked
47th for the fairness of its litigation environment in 2015 and
has consistently placed among the bottom six states over the
last decade. California also topped the American Tort Reform
Foundation’s “Judicial Hellholes” list for 2015–2016 because of:
• The rise of public nuisance lawsuits pursued through
contingency fee arrangements (“Contingency Fee Arrangements
for Public Entities” on page 164);
• Predatory lawsuits against small businesses regarding technical violations of the Americans with Disabilities Act (“California’s
Small Businesses Need ADA Reform” on page 137);
• Growing asbestos litigation; and
• Lawsuits regarding failure to post notices under California’s
Proposition 65 (“Regulatory ‘Tidal Wave’ Will Result in More
Warnings, Increased Litigation” on page 80).
In addition to these areas of litigation, California continues
to lead the country in the number of labor and employment
lawsuits, including class actions, that are filed (“Employment
Litigation on the Rise” on page 154).
Reducing litigation and maintaining the opportunity for
parties to resolve disputes through other mechanisms, such as
arbitration, is an inexpensive way for state policymakers to help
increase California’s competitiveness to lure new businesses to the
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state, and also free up resources within existing businesses so they
can expand and hire new workers. The Wall Street Journal article
referenced above stated: “Many companies now spend a great deal
more on attorneys, compliance staff and consultants. Those funds
often come from other areas of operation, including research
and innovation.” Such growth and investment in California
companies would not only help new employees, but also benefit
the state through increased income tax revenues.
Reducing Private Rights of Action and Litigation Costs
One way to improve California’s legal climate is to limit any
attempts to create new private right of actions or increased
litigation costs. Consumer activists generally argue that the vast
web of laws in place today regulating the legal environment are
necessary to protect Californians and ensure big corporations do
not shirk responsibility for the harm they cause. This argument,
however, is based on an oversimplified view of the employer
community and how the legal system works. Although such
laws on the surface may target only businesses, the actual impact
of such laws has impacts on all Californians.
For example, in 2010 the U.S. tort system cost the economy
$264.6 billion, which averages to $857 per person, according
to the 2011 report “U.S. Tort Costs Trends” released by
professional services group Tower Watson. The ILR found
that in 2008, tort costs for small business, characterized as a
business with less than $10 million in annual revenue, was
$105.4 billion. This amount includes money spent pursuing
and defending lawsuits, as well as money paid to plaintiffs.
According to the ILR, these litigation costs are passed on to
consumers through higher prices for products and services,
averaging approximately $3,500 per year for a family of four.
The Pacific Research Institute estimated a much higher annual
average of $9,827 per family of four.
Following the November 2012 election, the ILR surveyed
more than 1,600 voters and found that 89% believe there
are too many meritless lawsuits filed and 8 of every 10 voters
believe Congress should continue to reform the legal system.
(Notably, approximately half of the voters who were surveyed
voted for President Barack Obama, while 48% voted for Mitt
Romney.) The majority of the voters confirmed they agree with
the statement contained in a 2006 national survey by Public
Opinion Strategies that “You know the legal system has gone
too far when parks remove teeter-totters and swing sets, and
schools won’t let kids play tag, for fear of someone getting hurt
and filing a lawsuit.”
Jonathan Sourbeer effectively summarized the cost of tort
litigation in a November 23, 2014 Wall Street Journal article, “A
Close Reading of My $20.91 Settlement Check.” In this article,
an owner of a Toyota vehicle received a settlement check for
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$20.91 for the class action litigation regarding the unintentional
acceleration alleged product defect in Toyota vehicles. The
check was sent to the recipient for any potential personal injury
or property damage, even though the recipient never claimed
to have suffered either. The recipient went to the website
referenced on the check to find out more about the lawsuit
and learned that the court awarded attorney fees totaling $200
million, plus $27 million for expenses. The 25 primary plaintiffs
and class representatives received $395,270.
After learning this information, the recipient commented:
“For me to get that $20.91 check is costing Toyota more than
half a billion dollars in litigation, fees and the settlement awards.
How much will that cost me in the future? Will it add $200 to
the price of my next car? Or $500? Or $1,000? Maybe that’s
too much of an add-on in this case. But is it too much when
we start totaling the lawsuits that hit all the products we buy
every year? Why do we have so much litigation, and why are
courts (and the juries of our peers), awarding so much money in
situations when lawyers have produced so little, comparatively,
for their clients? . . . Ultimately, we’re sticking it to ourselves.”
Cost of Defending Litigation
Although some suggest that companies settle litigation only
when there is liability, oftentimes companies settle to avoid the
cost of defending the litigation. This phenomenon is the subject
of a discussion paper by Randy J. Kozel and David Rosenburg,
published in March 2004 in the Virginia Law Review, “Solving
the Nuisance-Value Settlement Problem: Mandatory Summary
Judgment.” The authors summarize the issue as follows: “Civil
litigants often exploit the litigation process strategically for
private gain at the expense of social welfare . . . One of the most
significant exploitative strategies entails asserting a claim or
defense to obtain a ‘nuisance-value settlement.’”
The nuisance-value settlement is essentially “paying off
the proponent of the meritless claim or defense rather than
incurring the greater expense of litigating to have it dismissed...”
Class actions exacerbate this problem given the significant
increased cost of defending such claims.
In November 2015, insurance provider Hiscox released a
study about the cost of employee lawsuits. The study analyzed
discrimination complaints filed by employees throughout the
country and identified states that had stricter anti-discrimination
laws, which increased the risk of litigation. California was ranked
as exposing employers to a 40% higher risk of a discrimination
claim than other states given its state-specific statutes. The
study estimated that the cost for a small to mid-size employer
to defend and settle a single plaintiff discrimination claim was
approximately $125,000. This amount, especially for a small
employer, reflects the financial risk associated with defending a
lawsuit and the ability to leverage an employer into resolving or
settling the case regardless of merit.
Recent Legislation That Would Have Had a Negative Impact on
California’s Legal Climate
• In 2013, SB 404 (Jackson; D-Santa Barbara), named a
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Arbitration Cases Take Less Time to Resolve
(Median Time from Filing to Award)
Claim Size
Up to $75,000
175 Days
$75,000–$499,000
297 Days
$500,000–$999,999
356 Days
Source: American Arbitration Association
job killer by the California Chamber of Commerce, would
have created a new protected classification under the Fair
Employment and Housing Act (FEHA) for an employee’s
“familial status,” broadly defined as any employee who is, who is
perceived to be, or who is associated with a person who provides
medical or supervisory care to a listed family member.
Given that almost all employees would fall within the
scope of SB 404, it would have created a new litigation avenue
for plaintiffs’ attorneys to file numerous lawsuits against
employers on the basis that any adverse employment action
taken was due to the employee’s “familial status” rather than
for a nondiscriminatory reason. SB 404 also did not seek to
address any general problem or widespread discrimination in
the workplace. Rather, the study upon which the proponents
of the bill relied emphasized that existing laws already
provide sufficient protection for employees who are suffering
discrimination as a result of needing time off from work to care
for a family member.
Accordingly, SB 404 would have been duplicative in its
protection, yet expansive in its creation of new litigation. SB
404 was sponsored by the California Employment Lawyers
Association (CELA), which is a membership organization of
plaintiffs’ attorneys who represent employees.
• In 2014, job killer SB 1188 (Jackson; D-Santa Barbara)
attempted to expand the Consumer Legal Remedies Act to
allow class action lawsuits regarding product claims that arose
after a warranty expired, for “material” issues that were unrelated
to health or safety. The bill failed to pass the Assembly Judiciary
Committee. If it had passed, SB 1188 would have encouraged
even more class action litigation in California for any product
defect or omission regarding a product that a consumer deemed
“material” after the fact. SB 1188 was sponsored and supported
by the Consumer Attorneys of California (CAOC), which is a
membership organization that represents plaintiffs’ attorneys.
• In 2015, SB 406 (Jackson; D-Santa Barbara), another job
killer, sought to expand the California Family Rights Act (CFRA)
to include five additional family members for whom an employee
could take a 12-week protected leave of absence to care for the
family member’s medical condition. CFRA already includes
a private right of action with the opportunity for significant
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damages, including punitive damages. The number of CFRA
complaints filed tripled from 2011 to 2014. Expanding the family
members under CFRA would also have expanded the opportunity for litigation. The bill was sponsored and supported by CELA
and was vetoed by Governor Edmund G. Brown Jr.
CalChamber Position
The CalChamber opposes making sweeping changes to the
legal system that unfairly tip the scales of justice in favor of one
party versus the other and do not address any systemic problems
within the judicial system, but rather deal with only isolated
issues. New and expanded private rights of action and increased
litigation costs serve to further enhance California’s reputation
as a poor legal environment and continue to overwhelm the
already-overburdened court dockets.
Frivolous and unnecessary litigation delays the opportunity
for those truly harmed and in need of justice to efficiently
receive their day in court. Improving California’s legal system by
limiting litigation is a cost-effective way that the Legislature can
improve California’s business climate and make California even
more competitive with other states.
Cost
Cost of
of Litigation
Litigation
$3,500/Year
Family of Four
Source: U.S. Chamber Institute for Legal Reform
Source: U.S. Chamber Institute for Legal Reform
Protecting Arbitration
Efficient Process
Continuing to protect the option for alternative dispute
resolution processes, such as arbitration, is another way to
improve California’s legal climate. The Federal Arbitration Act
(FAA) and the California Arbitration Act (CAA) provide that
arbitration agreements are “valid, enforceable, and irrevocable,
save upon such grounds as exist at law or in equity for the
revocation of any contract.” Both statutes evidence a strong
preference for enforcement of arbitration agreements, so long as
the underlying contract is fair, and the FAA generally prohibits
state laws that restrict enforcement of arbitration agreements.
As pointed out in Armendariz v. Foundation Health Psychcare
Services, Inc. 24 Cal.4th 83 (2000), “California law, like federal
law, favors enforcement of valid arbitration agreements.”
Many businesses favor arbitration because it is more
efficient and therefore, less costly than litigation. According to
the U.S. District Court Judicial Caseload Profiler, there were
27,956 cases filed in California in 2015. As of June 2015,
approximately 2,175 cases had been pending in a federal district
court in California for more than three years and the median
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time from filing of a civil complaint to trial was approximately
31 months. State courts also have seen an increase in delays for
civil trials given the reduced budgets they have been required to
manage. In large cities such as Los Angeles, the number of civil
cases pending for more than two years has tripled since 2012.
Comparatively, the American Bar Association’s 2011 guide
to the “Benefits of Arbitration for Commercial Disputes,”
points out that one of the benefits of commercial dispute
arbitration is it generally takes between 7 to 7.3 months for
a final award to be issued, compared to the median national
average of 23.4 months for a civil case in a district court, which
is better than the average in Northern California.
A 2007 study by the American Arbitration Association,
“AAA Arbitration Roadmap,” provided the following statistics:
for cases involving a claim of up to $75,000, the median time
for a final resolution was 175 days; for claims between $75,000
and $499,999, the median time for final resolution was 297
days; and for claims between $500,000 and $999,999, the
median time for final resolution was 356 days.
Similarly, a 2011 Cornell University study, “An Empirical
Study of Employment Arbitration: Case Outcomes and
Processes,” demonstrated the mean time from the filing of an
employment arbitration claim to the issuance of an award was
361.5 days.
Success Rates and Awards
Although there is a general consensus among studies that
arbitration is a more efficient and therefore cost-effective forum,
the studies are mixed as to whether a consumer or employee
fares better or worse in arbitration compared to litigation.
Some reports conclude that a consumer or employee fares
better in arbitration:
• A 2006 study by Mark Fellows, legal counsel at the
National Arbitration Forum, “The Same Result as in Court,
More Efficiently: Comparing Arbitration and Court Litigation
Outcomes,” concluded that consumers and employees actually
fare better in arbitration than in court. Fellows analyzed data
from California and found that consumers prevail in arbitration
65.5% of the time, compared to 61% of the time in court.
California businesses paid an average of $149.50 in arbitration
fees whereas consumers paid only an average of $46.63.
• Cornell Law School Professor Theodore Eisenberg and
attorney Elizabeth Hill reported in a 2004 article in the Dispute
Resolution Journal that aside from civil rights disputes, higherpay employees’ success rate in arbitration was basically the same
as in litigation, with equivalent awards.
• In a presentation to the George Washington University
Law School in March 2011, attorney Andrew Pincus also agreed
that the national data and available evidence demonstrate
that consumers do the same if not better in arbitration than
litigation, as one of the largest arbitration providers documented
at least 45% of consumer arbitrations result in a damages
award, while more than 70% of consumer-initiated securities
arbitrations result in a recovery to the consumer.
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Another Perspective
• Comparatively, a 2011 article by Alexander Colvin
published in Cornell University ILR School, “An Empirical Study
of Employment Arbitration: Case Outcomes and Process,”
concluded that the differences in litigation and arbitration awards
are much more significant, with employees obtaining higher
awards in litigation than arbitration.
• Similarly, a 2014 study by Dr. Mark D. Gough and Alexander Colvin of Cornell University, “Comparing Mandatory
Arbitration and Litigation: Access, Process, and Outcomes,”
also concluded that average awards for plaintiffs in employment
litigation were much higher, at approximately $676,688 versus an
average arbitration award of $362,390.
Both studies also concluded that employees’ success rates in
litigation are higher than their success rates in arbitration.
Notably, Colvin acknowledges in his 2011 study that “the
present data does not allow a comparison of systematically
matched cases in litigation and arbitration . . .” Also, the data
utilized as the basis for the 2014 study was surveys issued only to
attorneys who represent plaintiffs, not defendants.
Low-Wage Employees’ Limited Access to Litigation May Explain
Differing Opinions Among Scholars Regarding Size of Awards
in Arbitration Versus Litigation
As recognized by Colvin, one explanation for the differing opinions among scholars regarding success rates and size of
awards for employees who arbitrate claims instead of pursuing
litigation is the type of employee involved. Multiple scholars
have found that an employee who earns mid- to lower-level
wages simply cannot obtain legal representation in court and
cannot afford to pursue a case on his/her own. One scholar has
stated the reason lower-paid employees cannot obtain counsel is
the “potential dollar recovery will simply not justify the investment of time and money of a first-rate lawyer in preparing a
court action.” See Theodore J. St. Antoine “Mandatory Arbitration: Why It’s Better Than It Looks,” (2008).
Data showing that 95% of employees seeking legal
representation are turned down by attorneys was set forth in an
article by Lewis Maltby, president of the National Workrights
Institute, “Employment Arbitration and Workplace Justice.”
St. Antoine includes similar data in his study: “The vast
majority of ordinary, lower-and middle-income employees
(essentially, those making less than $60,000 a year) cannot get
access to the courts to vindicate their contractual and statutory
rights. Most lawyers will not find their cases worth the time
and expense. Their only practical hope is the generally cheaper,
faster, and more informal process of arbitration.”
In reference to the judicial system, Maltby stated: “[a]
dispute resolution system that renders perfect justice but cannot
be accessed is worthless.” Comparatively, arbitration allows an
employee to pursue a claim either on his/her own or through
legal representation, with much lower cost.
A table Colvin included with his article demonstrated that
82.4% of the employees who filed arbitration claims earned less
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than $100,000, thereby supporting prior findings that lowerwage employees are much more likely to pursue arbitration
instead of litigation.
Employee Protections
Although California courts certainly recognize the benefits
of arbitration and seek to enforce arbitration agreements where
appropriate, the courts have imposed certain safety requirements
that such agreements must include in order to be enforceable.
For example, in Armendariz v. Foundation Health Psychcare
Services, Inc. (24 Cal.4th 83 (2000)), the California Supreme
Court held that for employment arbitration agreements
that encompass unwaivable statutory rights, the following
protections must be included:
• provide for a neutral arbitrator;
• no limitation of remedies;
• adequate discovery;
• written arbitration award and judicial review of the award;
and
• no requirement for the employee to pay unreasonable costs
that he/she would not incur in litigation or arbitration fees.
In addition to these provisions, arbitration agreements,
like any other contract, cannot be both procedurally and
substantively unconscionable. Substantive unconscionability
means the terms would not fall within the reasonable
expectations of the weaker party (the employee or consumer),
and thus create overly harsh, one-sided results. Procedural
unconscionability means the terms of the agreement are not
unduly oppressive or surprising as a result of being imposed on
a weaker party.
Examples of terms in an arbitration agreement that would
most likely lead to a finding of unconscionability include:
• Requiring an employee to arbitrate his/her claims without
imposing the same restriction on the employer;
• Limiting access to commonly imposed contractual
damages like “front pay”;
• Failing to prominently distinguish an arbitration clause
from other employment clauses to notify the employee that he/
she was agreeing to arbitration; or
• Presenting the arbitration agreement in a language not
primarily spoken by the employee.
See Sparks v. Vista Del Mar Child and Family Services, 207
Cal.App.4th 1511 (2012); Carmona v. Lincoln Millenium Car
Wash, Inc., 226 Cal.App.4th 74 (2014).
Ethical Standards
In California, arbitrators also are required to comply with
specific ethical standards to ensure their neutrality, including:
• Disclosure of any type of relationship with the parties or
their representatives that could create reasonable doubt as to the
impartiality of the arbitrator, including familial relationship,
professional relationships as an attorney, former arbitrator, or
other business dealings;
• Professional disciplinary actions; and
• Past, current or future relationships between the provider
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organization and any of the parties or their representatives.
This duty to disclose is ongoing throughout the arbitration
proceeding. Failure to timely comply with these required
disclosures may result in disqualification of the arbitrator.
Federal Preemption
• In April 2011, the U.S. Supreme Court held in AT&T
Mobility LLC v. Concepcion (131 S.Ct. 1740) that the FAA
prohibits states from conditioning the enforceability of
an arbitration agreement on the availability of class-wide
arbitration procedures, as such a requirement would be
inconsistent with the intent of the FAA. This holding by the
Supreme Court reinforced the preference for alternative dispute
resolution, such as arbitration.
• Following Concepcion, the California Supreme Court ruled
in Sonic-Calabasas A, Inc. v. Moreno (57 Cal.4th 1109 (2013))
that an arbitration agreement requiring an employee to waive
his/ her administrative “Berman hearing “before the Labor
Commissioner is not per se unconscionable, and precluding
such a waiver would frustrate the intent of the FAA. Specifically,
the court stated “[i]n light of Concepcion, we conclude that
because compelling the parties to undergo a Berman hearing
would impose significant delays in the commencement of
arbitration, the approach we took in Sonic I is inconsistent
with the FAA. Accordingly, we now hold, contrary to Sonic
I, that the FAA pre-empts our state-law rule categorically
prohibiting waiver of a Berman hearing in a predispute
arbitration agreement imposed on an employee as a condition
of employment.” This opinion is significant as it reflects the
strength of federal pre-emption in this area and the California
Supreme Court’s unwillingness to interfere.
• In Sanchez v. Valencia Holding Co., LLC (61 Cal.4th
899 (2015)) the California Supreme Court unanimously held
that a mandatory, consumer adhesion arbitration agreement
which contained a class action waiver is enforceable as the FAA
pre-empts any state statute, including the California Consumer
Legal Remedies Act, which includes a provision stating that a
consumer has an unwaiveable right to pursue a class action.
• As a further reinforcement of the FAA, the U.S. Supreme
Court in DIRECTV, Inc. v. Imburgia, on December 14, 2015,
addressed the issue of whether a contract that specifically defers
to the law of the state where the consumer resides to govern
the arbitration provision that contains a class action waiver
supersedes the FAA. In DIRECTV, the service agreement
contained an arbitration clause that included a class action
waiver and stated it would be governed by the “law of the state”
where the consumer resides, which in this case was California.
The California Court of Appeal interpreted this section to
include even state laws that have been deemed pre-empted
and unenforceable by federal law. Specifically, in 2005, the
California Supreme Court held in Discover Bank v. Superior
Court that class action waivers in arbitration agreements were
unconscionable and unenforceable (36 Cal.4th 148). This
decision was later struck down and reversed by the Supreme
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Court in Concepcion, as pre-empted by FAA. Accordingly,
the Discover Bank holding was invalid and unenforceable.
Despite this, the Court of Appeal relied upon the ruling of
Discover Bank to deem the class action waiver in the arbitration
agreement invalid.
In reversing the Court of Appeal decision, the Supreme
Court stated that recognition of an invalid law (Discover Bank)
to interpret an arbitration agreement singled out arbitration
agreements from other contracts and placed those agreements on
unequal footing. The court found no other example in California
of another contract being struck down based upon an invalid
statement of law, and therefore, applying an invalid law only
to arbitration agreements is pre-empted by the FAA. While the
FAA allows states to enact laws applicable to contracts in general,
it cannot enact laws that target only arbitration agreements.
Accordingly, the Supreme Court reversed the Court of Appeals
decision that invalidated the class action waiver in the arbitration
agreement and remanded the case for further proceedings.
Private Attorneys General Act Waivers
While the enforceability of class action waivers contained
in arbitration agreements has consistently been upheld under
the FAA, the enforceability of waivers of representative actions
under California’s Labor Code Private Attorneys General Act
(PAGA) remains questionable. On June 23, 2014, the California
Supreme Court ruled in Iskanian v. CLS Transportation Los
Angeles, LLC, that an arbitration agreement containing a class
action waiver is not unconscionable or against public policy,
based upon FAA pre-emption. Comparatively, the Supreme
Court further held that an arbitration agreement requiring an
employee to waive his/her right to bring a representative action
under the Labor Code Private Attorneys General Act section
2699 et seq., does violate public policy, is not pre-empted by the
FAA, and therefore is unenforceable. The U.S. Supreme Court
denied review of Iskanian.
Before and since Iskanian was issued, multiple federal
courts have refused to render an arbitration agreement invalid
that contains a PAGA waiver or to deem a PAGA waiver
unenforceable, stating: “[d]espite the holding of the California
Supreme Court, federal law is clear that a state is without
the right to interpret the appropriate application of the FAA.
District courts within the 9th Circuit have generally held that
PAGA claims are subject to Arbitration Agreements and any
waiver clauses within those agreements.” Ortiz v. Hobby Lobby
Stores, Inc., 52 F. Supp.3d 1070 (E.D.Cal. 2014); Parvataneni v.
E*Trade Fin. Corp., 967 F.Supp.2d 1298, 1305 (N.D.Cal.2013),
stating that following Concepcion, an arbitration agreement is
still valid even if it has a PAGA waiver; Morvant v. P.F. Chang’s
China Bistro, Inc., 870 F.Supp.2d 831, 846 (N.D.Cal.2012),
enforcing the arbitration agreement even if it denies the plaintiff
the ability to act as a private attorney general; Quevedo v. Macy’s,
Inc., 798 F.Supp.2d 1122, 1140–42 (C.D.Cal.2011), enforcing
the arbitration agreement that contained a PAGA waiver.
In September 2015, however, the 9th Circuit ruled in
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Sakkab v. Luxottica Retail North America, Inc., (803 F.3d 425)
that the FAA does not pre-empt California’s rule barring waivers
of PAGA claims. The court distinguished PAGA claims from
class actions and determined that California’s PAGA enforcement scheme is within California’s police powers to determine
how to enforce its labor laws, and refusing to enforce PAGA
waivers does not frustrate or interfere with the purpose of the
FAA. As of the date of this publication, the employee had filed a
petition with the 9th Circuit for a review by the entire court.
California Action
A common legislative attack from advocates for consumer
attorneys each year is undermining or limiting the right to
arbitrate legal disputes rather than engage in litigation. The
2015 legislative year was no exception, as the consumer
attorneys joined forces with labor unions to push AB 465 (R.
Hernández; D-West Covina), which sought to render invalid
mandatory arbitration agreements made as a condition of
employment. Modeled after AB 2617 (Weber; D-San Diego),
a job killer bill from 2014 that was signed into law, AB 465
deemed any agreement made as a condition of employment that
included a waiver of any right, forum, or penalty allowed under
the Labor Code involuntary, unenforceable, unconscionable
and against public policy. AB 465 was widely opposed by
various business organizations and labeled a job killer by the
CalChamber. AB 465 made it to the Governor’s desk, but
ultimately was vetoed. The Governor’s veto message referenced
the existing protections for employees in mandatory arbitration
agreements and indicated his concern that such a far-reaching
approach as AB 465 may be pre-empted by the FAA.
Federal Action
On July 31, 2014, President Obama signed Executive
Order—Fair Pay and Safe Workplaces, which included a
provision that precludes pre-dispute arbitration agreements
for federal contractors under certain conditions. The executive
order states that any contract where the estimated value of
supplies or services exceeds $1 million can arbitrate a tort, civil
rights, or sexual harassment claim only after the dispute arises
and with the voluntary consent of the employee or independent
contractor.
The U.S. Department of Defense General Services
Administration and National Aeronautics and Space
Administration proposed amendments to the Federal
Acquisition Regulation in May 2015 to implement the
President’s executive order. The comment period closed in
August 2015, with a final rule expected by 2016.
In July 2015, a U.S. House of Representatives bill was
amended to require the Consumer Protection Finance Bureau to
study the impact of arbitration in consumer financial contracts
before the bureau moves forward with any regulations to
prohibit or limit pre-dispute arbitration agreements for financial
contracts. The bill was approved by the House Appropriations
Committee and placed on the Union Calendar.
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In November 2014, the National Labor Relations Board
(NLRB) reaffirmed that an arbitration agreement requiring
employees to waive their right to pursue a class action violates
Section 7 of the National Labor Relations Act, which allows
employees to act in concert with one another with regard to
employee rights and protections (Murphy Oil USA, Inc, 361
NLRB No. 72). The NLRB reached this decision despite the
fact that numerous state and federal courts rejected the NLRB’s
prior holding on this issue in D.R. Horton, Inc. v. NLRB, 737
F.3d 344 (5th Cir. 2013).
On October 13, 2015, the U.S. Court of Appeals for the
5th Circuit overturned the NLRB decision in Murphy Oil
USA, citing its holding in D.R. Horton, Inc., supra, and stated
that the company did not commit an unfair labor practice by
requiring employees to sign an arbitration agreement. The court
did, however, uphold the NLRB’s direction for the company
to clarify the arbitration agreement to ensure employees
understood that by signing the agreement, they were not
waiving their right to file a charge with the NLRB.
CalChamber Position
The CalChamber supports the freedom of businesses to utilize
arbitration as a means of resolving disputes. When an
arbitration agreement is fair for both parties, courts should
respect the parties’ intent and enforce the agreement. Alternative
dispute resolution options are beneficial to the parties involved
and reduce the already-overcrowded dockets of the court system.
Any legislation that seeks to undermine the right of parties to
agree to arbitration or enforcement of the terms of a valid
contract should be rejected.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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PROPOSITION 65
Regulatory ‘Tidal Wave’ Will Result in More Warnings,
Increased Litigation
Background
Proposition 65, the Safe Drinking Water and Toxic Enforcement
Act of 1986, is the most far-reaching consumer “right to
know” law in the nation. Proposition 65 requires California
businesses with 10 or more employees to provide a clear
and reasonable warning before knowingly and intentionally
exposing individuals to chemicals known to cause cancer and/
or reproductive toxicity. The law has conferred some benefit on
the public by allowing consumers to make informed choices—
assuming they acknowledge the warning—when they purchase
products or enter certain establishments. Although the law only
requires businesses to warn, some businesses have voluntarily
renovated their facilities or updated their manufacturing
processes to eliminate or otherwise reduce the use of listed
chemicals. For example, the plastic face of a “Curious George”
doll being sold in California once contained high lead contents.
Because of Proposition 65, the face is now made entirely of
cloth with no detectable lead.
Unfortunately, the positive aspects of Proposition 65 have
been overshadowed by individual attorneys who use the law
solely for personal financial gain. Proposition 65 contains a
private right of action provision, which allows private persons
or organizations to bring actions against alleged violators of
Proposition 65 “in the public interest.” It is well understood
that many lawsuits or threatened lawsuits are not pursued in the
public interest. Proving this fact, however, often is impossible
because mounting a litigation defense in Proposition 65 cases is
extraordinarily expensive and far exceeds the cost of settlement.
Accordingly, private enforcers continue to abuse the law
while falsely claiming to be working in the public interest. In
fact, although plaintiffs are required to submit a “Certificate of
Merit” to the Attorney General demonstrating that “there is a
reasonable and meritorious case for the private action,” even if
the Attorney General objects to such a showing, the objection
may not be shared with the defendant nor publicized. Thus,
the Attorney General’s objections do not deter plaintiffs from
bringing unmeritorious lawsuits.
The business community’s concern regarding Proposition
65 litigation abuse is not anecdotal; it is well founded and
grounded in statistical data. To wit, the California Attorney
General’s Office recently released its Annual Summary of
Proposition 65 Settlements. According to the 2014 summary,
there were 663 in-court settlements in 2014 amounting to
$29,482,280. By way of comparison, in 2013, there were 352
settlements amounting to $17,409,756. The total figures have
nearly doubled in only one year.
Of the 2014 total, only 13% went to the State of California,
4% went directly to private enforcers as their share of total
statutory civil penalties, 12% went indirectly to private
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enforcers in the form of “payment-in-lieu-of-penalties,” or
PILPs (a form of payment not contemplated by the statute but
which has nonetheless become a significant source of revenue
for certain plaintiffs to fund their operations), and remarkably,
71% went directly in the pockets of plaintiffs’ attorneys.
To further underscore the absurdity of these statistics, one law
firm had 245 in-court settlements in 2014 totaling $11,193,768.
The firm’s attorney fees totaled $8,628,593, or 77% of its total
settlements. One is hard-pressed to understand how the public
interest is benefiting from this law when personal gain quite
evidently serves as one of the primary motivators for bringing
suit. To this point, the Attorney General’s Office, in a letter to
Proposition 65 attorneys in May 2014, noted that the summary
“shines a light on some of the aspects of private enforcement of
Proposition 65 that result in unnecessary burdens for businesses
and are cause for public concern.”
Understanding the business community’s primary concern
regarding Proposition 65, the balance of this article summarizes and
discusses 1) Proposition 65’s basic requirements; 2) the Governor’s
calls for Proposition 65 reform; 3) a recent legislative proposal
to reform Proposition 65; 4) a recent “tidal wave” of regulatory
efforts by the Office of Environmental Health Hazard Assessment
(OEHHA) and how such regulatory efforts collectively undermine
the intent of Proposition 65 as well as the Governor’s calls for
Proposition 65 reform; and 5) a recent proposal by the California
Attorney General’s office to amend its regulations regarding settlement terms for private enforcement actions.
Proposition 65’s Basic Requirements
Although Proposition 65 also prohibits listed chemicals from
being discharged to sources of drinking water, the law is best
known for its broadly crafted warning requirement. In order to
comply with Proposition 65’s warning requirements, a business
2014 Proposition 65 Settlement Disbursements
Civil Penalties (OEHHA)
$3,686,736
13%
Payments in Lieu of Penalty
$3,519,885
12%
Attorney Fees and Costs
$21,047,746
71%
Civil Penalties (Plaintiffs)
$1,228,912
4%
Source: California Office of the Attorney General
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PROPOSITION 65
must follow three basic steps:
• Assess whether it releases, or its products contain,
Proposition 65-listed chemicals;
• Determine whether individuals (consumers or bystanders)
may be exposed to a listed chemical at levels that necessitate a
warning (“when” to warn); and
• Determine (if a warning is required) what the warning
must say (“how” to warn).
This section discusses each of these steps in detail.
The Listing Process
In order to comply with Proposition 65, a business must
first assess whether it releases (environmental exposure), or its
products contain (products exposure), Proposition 65-listed
chemicals, even in trace concentrations.
The Governor is required to keep a list of all substances
known to cause cancer or birth defects or other reproductive
harm. OEHHA is charged with administering the program and
maintaining the list of chemicals on its public website. Since first
published in 1987, the list has grown to include more than 800
chemicals. This list of chemicals includes a broad spectrum of
substances, including those that can be found in dyes, solvents,
drugs, food additives, byproducts of certain processes, pesticides,
tobacco products, common household items, consumer products,
alcoholic beverages, vitamins and hormones.
There are four principal ways for substances to be included
on the list:
1. State’s Qualified Experts Mechanism
The Governor appoints the members to the Science
Advisory Board and they are designated as the “State’s Qualified
Experts.” The Science Advisory Board evaluates chemicals to
determine if they have been clearly shown to cause cancer or
birth defects or other reproductive harm. The Board consists
of two independent committees of scientists and health
professionals:
• Carcinogen Identification Committee (CIC);
• Developmental and Reproductive Toxicant Identification
Committee (DARTIC).
OEHHA staff scientists compile relevant scientific evidence
on various chemicals for the committees to review before
deciding whether to list a chemical.
2. Authoritative Body Mechanism
Chemicals can be listed if an organization designated as an
“authoritative body” by the state’s Science Advisory Board has
identified the chemical as causing cancer or birth defects or
other reproductive harm.
The designated authoritative bodies are:
• U.S. Environmental Protection Agency;
• U.S. Food and Drug Administration (FDA);
• National Institute for Occupational Safety and Health;
• National Toxicology Program;
• International Agency for Research on Cancer.
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3. Formally Required to Label Mechanism
A chemical can be listed if an agency of the state or federal
government requires that the chemical be labeled or identified
as causing cancer or birth defects or other reproductive harm.
Most chemicals listed in this manner are prescription drugs that
are required by the U.S. FDA to contain warnings relating to
cancer or birth defects or other reproductive harm.
4. Labor Code Listing Mechanism
Chemicals also may be listed if they meet certain scientific
criteria and are identified by the California Labor Code as
causing cancer or birth defects or other reproductive harm.
This method established the initial chemical list following voter
approval of Proposition 65 in 1986 and continues, following
some legal controversy over its scope, to be used as a basis for
listing as appropriate.
When to Warn
California allows a business to use a chemical without providing
warning as long as exposure does not exceed a specified threshold
level. The mere presence of a Proposition 65-listed chemical does
not trigger the warning requirement; instead, the threshold question is whether the chemical would expose persons at levels that
would require a warning. Of the more than 800 substances on
the list of chemicals known to cause cancer, birth defects or other
reproductive harm, OEHHA has developed threshold levels for
only 300 chemicals to guide businesses in determining whether
a warning is necessary. If the chemical is at or below the levels
listed, the business has a “safe harbor” from providing a warning.
These safe harbor numbers consist of no significant risk
levels (NSRLs) for chemicals listed as causing cancer, and
maximum allowable dose levels (MADLs) for chemicals listed
as causing birth defects or other reproductive harm. The NSRL
is defined as the level of exposure that would result in not more
than one excess case of cancer in 100,000 individuals exposed to
the chemical over a 70-year lifeline. For reproductive toxicants,
before establishing a MADL, one must identify the level of
exposure that has been shown not to pose any harm to humans
or laboratory animals. This level is known as the “no observable
effect level” (NOEL). The statute then requires the NOEL to be
divided by 1,000 (also referred to as the 1000-fold safety factor)
in order to provide an ample margin of safety. The number,
once divided, is called the MADL. If there is no safe harbor
number established for a given chemical, then it is the business’s
burden to undertake the necessary expert analysis to establish it.
Determining with scientific certainty whether a warning
is required, even when a safe harbor threshold exists, is nearly
impossible. This is in part because safe harbor numbers are
expressed in terms of amounts of exposure to a chemical per
day and not in terms of the amount of a chemical found in
a product or facility. A business must engage an expert to
undertake this complex analysis; the burden is doubled if
the business also must develop its own NSRL or MADL.
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PROPOSITION 65
In OEHHA’s own words, “determining anticipated levels of
exposure to listed chemicals can be very complex.”
The difficulty of determining with certainty whether a
warning is required has led to a rather absurd outcome. Namely,
if a business rightfully elects not to warn on the basis that its
exposure and risk assessment concluded that the exposure does
not exceed the threshold level, its risk of being sued is actually
greater than if it unnecessarily provides a warning. This is because
private enforcers rarely, if ever, abandon a 60-day notice in the
face of assessments concluding that no warning is required. Thus,
there is no upside to not warning even when an exposure and risk
assessment concludes that no warning is required.
The practical reality facing businesses in today’s Proposition
65 climate is that they must either warn or be sued. Rather than
risk being embroiled in litigation involving a battle of the experts
at trial, businesses often will instead elect to voluntarily provide a
warning out of an abundance of caution in order to shield themselves from the inevitable threat of litigation that would otherwise
exist if they did not warn. This is an unfortunate but nonetheless
safer approach; indeed, the vast majority of threatened or actual
Proposition 65 lawsuits relates not to the contents of a given
warning, but rather to whether a business has warned. Accordingly, if a business warns (regardless of whether such warning is
required), the potential for litigation is effectively eliminated.
How to Warn
The current regulations allow businesses to prove that the
warnings they provide are “clear and reasonable” by any
means they wish, but also set forth criteria to establish when
the warnings will be deemed “clear and reasonable” per se for
purposes of Proposition 65.
For example, the regulations lay out prescribed warning
language for consumer products.
• For consumer products that contain a chemical known
to the state to cause cancer, the warning may read as follows:
“WARNING: This product contains a chemical known to the
State of California to cause cancer.”
• For consumer products that contain a chemical known to
the state to cause reproductive toxicity, the warning may read
as follows: “WARNING: This product contains a chemical
known to the State of California to cause birth defects or other
reproductive harm.”
The regulations also lay out warning language and methods
for occupational and environmental exposures, alcoholic
beverages, and restaurants. Businesses using these so-called “safe
harbor” warnings are protected from the threat of litigation and
can carry out their business with a sense of certainty.
Alternatively, the regulations allow businesses to provide
warnings other than those specified, so long as 1) the method
employed to transmit the warning is reasonably calculated,
considering the alternative methods available under the
circumstances, to make the warning message available to
the individual before exposure; and 2) the warning clearly
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communicates that the chemical in question is known to the
state to cause cancer, or birth defects or other reproductive
harm. Many businesses have successfully relied on these criteria
in providing alternative “clear and reasonable” warnings and
have done so without ever being sued.
Governor’s Calls for Proposition 65 Reform
In May 2013, noting that Proposition 65 has been abused by
“unscrupulous lawyers driven by profit rather than public health,”
Governor Edmund G. Brown Jr. proposed certain reforms to
strengthen and restore the intent of Proposition 65. Specifically,
the Governor proposed to 1) end frivolous, “shakedown” lawsuits;
2) improve how the public is warned about dangerous chemicals;
and 3) strengthen the scientific basis for warning levels.
These proposed reforms, according to the Governor, were
intended to eliminate the practice of bringing “nuisance lawsuits
to extract settlements from businesses with little or no benefit to
the public or the environment.” As an example, the Governor
cited a case wherein one group brought 45 Proposition 65
notices of violation against banks based on second-hand smoke
near bank entrances or ATMs. The group claimed that the
banks had failed to post warnings, and alleged that the banks
controlled the behavior of smokers in those areas. In responding
that there was no basis for the claim and misrepresentations
within the notices, the Attorney General warned that the group’s
notices could “constitute unlawful business practices.”
After announcing his reforms, Governor Brown convened
multiple stakeholder meetings to develop legislation. Reforming
Proposition 65 statutorily is difficult because it requires twothirds vote of each house of the Legislature and the amendment
must “further the purpose of the law.” Unfortunately, stakeholder groups could not agree on a solution, and the Legislature did
not propose any Proposition 65 reform legislation in 2014.
Recent Legislative Proposals: AB 543
AB 543 (Quirk; D-Hayward), introduced in 2015, was a legislative response to the unfortunate reality that businesses elect to
provide Proposition 65 warnings solely to protect themselves
from the inevitable threat of litigation. Specifically, private
enforcers routinely take the position that businesses “knowingly and intentionally” cause an exposure merely by placing
a product containing a Proposition 65-listed chemical in the
stream of commerce. The question posed in a typical litigation
proceeding, therefore, is whether the exposure was caused at
levels that required a warning. This is a fact-intensive inquiry
that can be extraordinarily costly for defendants, who bear the
statutory burden of proving that no warning was required.
Unfortunately, exposure assessments, which are toxicological
assessments that evaluate whether a business is causing an
exposure under Proposition 65, cannot viably be used to negate
the “knowingly and intentionally” element of the law. In other
words, a business’s decision to rely on a scientific evaluation of
its products or facility does not provide it with any protection
®
PROPOSITION 65
OEHHA Warning Regulation
January 19, 2015 Proposal
November 27, 2015 Proposal
CalChamber Response
Instead of requiring warnings to state that a
product or facility “may contain” chemicals,
required warnings to state that a product or
facility “can expose you to” chemicals.
No change.
While “may exposure you to” is less alarming and thus more
preferable, this change is consistent with the statute, which
requires businesses to warn for “exposures” to chemicals.
Required warnings to specifically identify one
or more of 12 specific chemicals if the product
contained those chemicals at levels requiring
a warning.
Would instead require warnings to name any of
the listed chemicals for which the warning is
being provided.
Although the requirement to specify any of the listed chemicals
will likely cause undue alarm, the new requirement is more
workable than the 12 chemical proposal and will likely lead
to far less “bad warning” litigation. The new requirement,
however, suffers from significant drafting flaws that create
practical difficulties and confusion, thus undermining OEHHA’s
intent.
Established an effective date of two years after
the date of adoption.
Continues to establish a two-year effective date,
but states that warnings for consumer products
manufactured prior to the effective date is
“clear and reasonable” so long as it complies with
the warning regulations in effect as of the date of
manufacture.
This change will avoid frivolous litigation targeting products
that have a longer shelf life.
Required most warnings to contain a pictogram
of an exclamation point encompassed by an
equilateral triangle.
No change
This symbol is associated with more significant or acute hazards
than those that fall within Proposition 65’s reach, such as
choking or allergic reaction risks. It would be more consistent
with the statute to use within a symbol a “P65” or “65” that
associates the basis for why the warning is being given.
Permits warnings to provide supplemental
information, but such information may not
contradict, diminish, or dilute the warning.
Continues to allow warnings to provide
supplemental information, but eliminates the
words “diminish” and “dilute.”
The requirement that supplemental information can’t
“contradict” the warning potentially infringes on businesses’
First Amendment right to commercial speech.
Impliedly allowed warnings subject to
previously court-approved settlements and
final judgments to be deemed compliant with
the new regulation.
Expressly allows warnings subject to previously
court-approved settlements and final
judgments to be deemed compliant with the new
regulation.
This change will eliminate any questions or litigation regarding
whether warnings subject to previously court-approved
settlements and final judgments are compliant with the new
regulation.
Required warnings to be presented in
additional languages if those languages are
used on the product label for any other purpose.
No change
This proposal suffers from vagueness, does not give proper
guidance to businesses on how to comply, and thus will
directly lead to more lawsuits.
Permitted businesses to warn in any way they
pleased so long as they could defend the
warning as “clear and reasonable” if challenged,
but eliminated existing regulatory guidance
on which businesses have historically relied.
No change
If the current regulation’s language explaining what it means
for a warning to be “clear and reasonable” is not retained,
businesses will be forced to use the warnings OEHHA has
provided or risk being subjected to litigation over whether the
alternative warnings they use are “clear and reasonable.”
from warning, and thus warnings are provided unnecessarily.
To address this issue, AB 543 provided that a business does
not knowingly and intentionally cause an exposure if its exposure
assessment is conducted by a “qualified scientist” and meets other
criteria. The bill would have incentivized businesses to warn based
on science, not the threat of litigation, by allowing them to fight
to negate the “knowing and intentional” element of the law in
court instead of merely conceding on that issue.
Notwithstanding the support of more than 100 organizations,
AB 543 was never even brought up for a vote in the Assembly
Environmental Safety and Toxic Materials Committee.
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Recent Regulatory Proposals: OEHHA Proposes a
‘Tidal Wave’ of Regulations
OEHHA’s Warning Regulation: an Improved Draft
After several pre-regulatory iterations, on November 27,
2015, OEHHA released a formal rulemaking proposal overhauling the existing requirements for “clear and reasonable” warnings
under Proposition 65. The proposal, according to OEHHA, is
“designed to provide more meaningful information for individuals in Proposition 65, facilitate the public’s understanding of these
warnings and make the warnings more consistent.”
OEHHA had released its first formal rulemaking proposal on
January 19, 2015 after a year-long pre-regulatory process. Due
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PROPOSITION 65
to significant concerns from both sides, however, including the
nearly 200-member California Chamber of Commerce coalition,
OEHHA was unable to adopt a final rule within one year as it was
required to do under the California Administrative Procedure Act.
The table compares some of the major aspects of the
January 19, 2015 proposal with OEHHA’s November 27, 2015
proposal, as well as CalChamber’s position on each.
As evidenced by the table, OEHHA’s November 27,
2015 proposal is much-improved but still contains significant
problems from both a compliance and a litigation standpoint.
CalChamber and its 200-member coalition submitted public
comments on this proposal on January 22, 2016. CalChamber
comments outlined the concerns identified in the table and
others in great detail, as well as proposed recommendations to
address those concerns.
OEHHA’s Pre-Regulatory Proposals: The Beech-Nut Backlash
In March 2015, the business community secured a significant victory in Environmental Law Foundation v. Beech-Nut
Corporation. The Beech-Nut case involved claims that manufacturers of fruits and fruit juices failed to provide Proposition 65
warnings for exposures to lead. There was no dispute that the
products contained trace amounts of lead; instead, the threshold question in the case was whether the amount of exposure
exceeded the level at which a warning was required.
The trial court ruled in favor of the defendants, holding that
the amount of lead to which average users were exposed did not
exceed the MADL of 0.5 micrograms per day. In issuing this
holding, the court agreed with the defendants’ position that it
is appropriate to average exposures based on the amount of lead
to which a consumer was exposed over a two-week period when
there are intervening days of no exposure. For example, if the
average user eats a can of peaches once every 14 days, then the
appropriate “safe harbor” from which to base a warning decision
is the 0.5 micrograms per day MADL multiplied by 14 days,
or 7 micrograms per day. The Court of Appeal upheld the trial
court’s ruling.
Perhaps understanding that plaintiffs were poised to lose in
Beech-Nut, another Proposition 65 private enforcer, the Mateel
Environmental Justice Foundation, sued OEHHA in January
2015, contending that the existing safe harbor level of 0.5
micrograms per day was derived impermissibly by OEHHA’s
predecessor agency back in 1989. Since Mateel asserts that there
is no demonstrated threshold for lead as a reproductive toxin,
it argues for repeal of the lead MADL. CalChamber and the
California Farm Bureau Federation intervened as defendants
alongside OEHHA in the case, and the court is expected to
issue a decision in early 2016.
The Mateel lawsuit is widely viewed as a hedge against
a favorable ruling to the business community by the Court
of Appeal in Beech-Nut. To add yet even more pressure
on OEHHA with respect to the lead safe harbor, another
Proposition 65 private enforcer, the Center for Environmental
Health, submitted a regulatory petition to OEHHA on July 3,
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2015, requesting that OEHHA repeal or amend the lead safe
harbor. On August 28, 2015, OEHHA agreed to consider the
petition and released a pre-regulatory proposal establishing a
significantly lower lead MADL, as well as other pre-regulatory
proposals that fundamentally undermine the Beech-Nut ruling
and the Governor’s calls for reform.
• Slashing the Lead MADL by 60%: In response to the
wave of legal and regulatory activity discussed above, OEHHA
is proposing to reduce the lead safe harbor by 60% (from 0.5
micrograms/day to 0.2 micrograms/day) for exposures that
occur on a daily basis. The current safe harbor for lead has been
in place for more than 25 years, and thousands of businesses
have relied on it in developing their products, operating their
facilities, and instructing their suppliers. The proposal marks
an extremely significant reduction in the safe harbor that will
present substantial challenges for businesses to meet.
Although OEHHA also is proposing a series of safe harbor
MADLs that are higher than 0.2 micrograms/day for exposures
that occur less frequently than every day (which, like the single-day
MADL, are extraordinarily and unjustifiably low) consistent with
Beech-Nut, the reality is that the proposal will increase both litigation risk and warnings. While the Beech-Nut court endorsed a 7
microgram per day MADL when the average consumer is exposed
to lead only once every 14 days, OEHHA’s proposal would establish a MADL of 2 micrograms per day for the same duration.
Of the more than 800 chemicals on the Proposition 65 list,
lead is the one that has produced the most pre-litigation notices.
Of those notices, the vast majority concern alleged consumer
product exposures. To this day, Proposition 65 litigation involving lead remains very active. In light of the litigation risks and
burdens placed on businesses, the MADL that will give them the
greatest certainty of avoiding an enforcement action (which is the
purpose of a safe harbor) is the MADL for single-day exposures.
On October 28, 2015, CalChamber and a broad coalition
of California-based and national organizations and businesses
submitted a comment letter raising serious policy concerns, as
well as objections to the science underlying OEHHA’s proposal.
OEHHA is expected to release a formal rulemaking lead MADL
proposal in early 2016.
• ‘Clarifying’ that all MADLs Except for Lead Are Based
on a Single-Day Exposure: Although the Center for Environmental Health did not request that OEHHA make any changes
to its regulations beyond repealing the lead MADL, OEHHA has
nonetheless proposed to “clarify” that all existing MADLs except
for lead were established as a single-day MADL as part of the same
regulatory package as the lead MADL proposal. In other words,
according to this new policy, businesses that rely on OEHHA’s
MADLs in making warning decisions would not be permitted to
average exposures over time consistent with the approach endorsed
by the court in Beech-Nut.
Notwithstanding its stated position that this proposal is a
“clarification” of existing policy, OEHHA has never published
a policy that all safe harbor MADLs are single-day limits only.
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PROPOSITION 65
Indeed, OEHHA’s published regulations lead to exactly the
opposition conclusion. OEHHA’s own regulations and the
regulatory history expressly anticipate that in evaluating whether
exposures exceed a MADL, one may average exposures over
more than a single day when it is appropriate.
Although the plaintiff in Beech-Nut argued that a 1991
declaration from OEHHA employee James Donald that
was submitted in a case involving crystalware demonstrated
a “policy” of a single-day limit for one safe harbor MADL
(for lead), the trial court disagreed and did not give this view
any weight. That ruling was upheld by the Court of Appeal
in a binding decision. As a result, this one declaration of an
OEHHA employee is not a statement of OEHHA policy, even
for the lead safe harbor MADL.
OEHHA’s proposal also is flawed from a scientific standpoint. The record on this proposal does not show that OEHHA
has reviewed the scientific literature on all 36 reproductive toxicants at issue to conclude that exposures must always be based
on a single day for the corresponding MADLs. OEHHA would
need to undertake that analysis before making this categorical
statement, for the first time, in a rulemaking process.
Nothing in the record allows OEHHA to categorically
foreclose this scientific evidence from being developed on
a case-by-case basis. Just as the Beech-Nut court found,
after considering expert testimony and evidence, that it is
toxicologically appropriate to average exposures for lead based
on the exposure levels in that case, there is no reason this could
not be shown for other safe harbor MADLs and exposures.
Accordingly, in its October 28, 2015 letter, the CalChamber
coalition requested that OEHHA eliminate this proposal from
further consideration.
OEHHA is reviewing public comments and it is unclear at
this time whether the single-day proposal will accompany the
lead MADL proposal in the next regulatory iteration.
• Requiring Use of Arithmetic Mean When Determining
the Average Rate of Exposure: As part of its pre-regulatory
package, OEHHA also proposed to require the use of the arithmetic mean in all circumstances to calculate the average user
under Proposition 65. For more than 25 years, the regulations
have required compliance with Proposition 65 to be measured
based on “the reasonably anticipated rate of intake or exposure
for average users of the consumer product” at issue. The term
“average” recognizes that different consumers use the same type
of product in varying amounts and with varying frequencies.
If a Proposition 65 warning were required based on exposures
to those few consumers who use a product in large quantities
and very frequently, then there would be unnecessary warnings
provided to the large base of consumers who use the product in
smaller quantities and less frequently. The regulations therefore
appropriately refer to the exposure level of “average” users.
There are various approaches to determining this exposure
level, and courts have applied the term “average” on a caseby-case basis, and with no difficulty, to different patterns of
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consumption and exposure, based on expert testimony and
other evidence. Indeed, the arithmetic mean proposal directly
contradicts the court’s finding in Beech-Nut. In that case, after
taking expert testimony and considering other evidence, the
trial court determined that the use of the geometric mean
was more appropriate than the arithmetic mean in calculating
the reasonably anticipated rate of intake for average users of
the food products at issue. The Court of Appeal upheld this
determination. This proposal is an obvious and misguided
reaction to the Beech-Nut ruling.
OEHHA’s draft proposal would categorically define what
the “average” rate of intake or exposure means in all cases. This
is bad policy and bad science. Estimates of consumer exposure
are only as good as the data and methods used to evaluate the
data. There can be bell-shaped exposure distributions, rightskewed distributions, left-skewed distributions, and bi-modal
and tri-modal distributions. Requiring the arithmetic mean
as a one-size-fits-all measurement of the average will lead to
biased calculations of the “reasonably anticipated rate of intake
or exposure by average users” in many, many cases. Indeed, as
the California Attorney General argued in a Proposition 65
enforcement action almost a decade ago, “the arithmetic mean
can lead to a deceptive idea of who is typical.”
In its November 17, 2015 comment letter, the CalChamber
coalition asked that OEHHA eliminate the proposal from
further consideration. The proposal would mark a new policy
for OEHHA, and one that is inconsistent with sound principles
of statistics and data evaluation. It would make OEHHA an
outlier among risk assessment agencies, and would further
contradict court rulings as well as the California Attorney
General’s application of the law. It would substantially increase
the number of warnings provided to consumers when there is
no sound legal, policy or scientific basis for providing one. This
result undermines the intent of Proposition 65 as well as the
reforms the Governor proposed in May 2013.
this time whether and when it will proceed with this proposal.
• Prohibiting Averaging of Concentration Levels Across
Food Lots: In yet another pre-regulatory proposal to undermine
Beech-Nut, OEHHA has proposed to prohibit averaging of
concentration levels across lots of food products for purposes
of determining the “level in question” under Proposition 65.
This proposal would categorically require that the concentration
“level in question” be “based on a single lot of the final product
in the form it will be purchased by the consumer.” It would
also define a lot as the “quantity of a food product offered for
consumer purchase having uniform characteristics and quality
that is generated by one producer during a single production
run, on a single processing line.”
The proposal is directly at odds with the court’s finding in
Beech-Nut and, equally as problematic, it is unworkable and
cost-prohibitive for many companies. Ultimately, the difficulty
if not impossibility of complying with the single-lot proposal
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PROPOSITION 65
will lead to overwarning, an issue that Governor Brown sought
to address in his Proposition 65 reform effort.
In its proposal, OEHHA does not reject the concept that
averaging concentration levels may be appropriate to determine the “level in question.” Indeed, averaging is important to
calculate a reliable concentration level where levels can vary. For
example, heavy metals that are present as contaminants in foods
through presence in the environment can vary significantly
from one unit of sale to another. OEHHA recognizes the need
to average concentration levels within a lot. The same considerations apply across lots in many—if not most—circumstances.
Prohibiting averaging of samples across lots as OEHHA
categorically proposes, however, is arbitrary and very often will
lead to unreliable estimates of concentration levels for purposes
of Proposition 65. To evaluate the “reasonably anticipated rate
of exposure” by average users to the level in question, exposures
must likewise be based on typical concentration levels.
Concentration levels can vary from lot to lot, just as they can
vary from unit to unit within a lot.
For food products in particular, multiple samples of the
same lot of food often can result in different estimates of levels
of heavy metals such as lead, which is not present in food in
homogenous solution, but rather binds differently to various
components. Thus, average users who purchase products from
different lots at different times have variable exposure patterns.
Indeed, the variability of concentration levels within a lot may
be as great as the variability across lots.
Beech-Nut confirms that cross-lot averaging is consistent
with the regulations in cases where exposure patterns are variable
because of the variability of concentration levels in different lots.
Despite arguments to the contrary by the plaintiff and the California Attorney General in that case, the Court of Appeal upheld
the use of cross-lot averaging to determine the most reliable
measure of the level in question for lead in the foods at issue. In
the case of both consumers’ consumption patterns and lead levels
of foods they consume, it is necessary to collect and evaluate data
that most appropriately characterizes the distribution of lead levels
in order to reliably measure typical exposures.
In the case of lead, for example, OEHHA recognizes that
the duration of exposure is relevant to evaluating lead exposure
levels. It makes no sense for OEHHA to foreclose cross-lot
averaging categorically in all circumstances and for all types of
listed chemicals because it will lead to unreliable results on a
very broad scale.
In its November 17, 2015 comment letter, the CalChamber
coalition asked that OEHHA eliminate the proposal from
further consideration. Ultimately, it should be left to businesses
to decide the most appropriate way to obtain representative
concentration levels on a case-by-case basis, to make their own
compliance determinations, and to be prepared to defend those
determinations in court if challenged. For some businesses, this
may indeed mean single-lot testing, but this is not question that
can be answered by a “one-size-fits-all” rule.
86
this time whether and when it will proceed with this proposal.
• Establishing Naturally Occurring Background Levels
of Arsenic in Rice and Lead in Some Foods: In the only
attempt to provide the business community any relief, OEHHA
also has proposed to establish naturally occurring background
levels of arsenic in rice and lead in some foods. The Proposition
65 regulations exempt naturally occurring levels of chemicals
in foods. When the regulation was adopted in 1988, it was
expected to reduce the number of lawsuits and the number of
warnings posted by food manufacturers and retailers in order to
prevent lawsuits. The regulation has fallen short of these goals,
however; in fact, with one exception, the only defendants that
have obtained adjudicated naturally occurring allowances have
done so through court-approved settlement agreements.
The reason it is so difficult for businesses to rely successfully
on the naturally occurring exemption is because the regulation
requires businesses to prove a series of negatives: 1) that the
chemical did not result from any known human activity; 2)
that the chemical was not avoidable by good agricultural or
manufacturing practices; and 3) that the chemical is not present
above the “lowest level currently feasible,” a term that is not
defined in any meaningful way.
In a November 12, 2015 comment letter, the CalChamber
and a coalition of food, agricultural, dietary supplement, and
personal care products organizations thanked OEHHA for
the proposal, but provided the following recommendations to
make the exemption more workable and effective: 1) propose
additional allowances for other foods; 2) increase the naturally
occurring allowances to address variability; 3) include naturally
occurring allowances for mineral compounds and other food
ingredients; and 4) remove the term “unprocessed” in the title
of the regulation to clarify that the background levels apply to
processed foods containing naturally occurring constituents.
OEHHA is reviewing public comments. It appears OEHHA
would like to ensure that this proposal moves along a similar
regulatory track as the lead MADL proposal.
Attorney General’s Proposition 65 Proposals: WellIntended, but Likely to Increase Cost of Settlements
In October 2015, the California Attorney General proposed
amendments that would affect settlement terms for enforcement
actions filed by private parties under Proposition 65. The
objectives of the amendments, according to the Attorney
General, are to constrain private parties’ use of payments-inlieu-of penalties, increase transparency and accountability in
private settlements, and reduce excessive attorney fees awards.
While the CalChamber supports and appreciates the Attorney
General’s stated objectives, two key aspects of the Department
of Justice (DOJ) proposal will fall short of its stated objectives
and, worse, may increase businesses’ costs in resolving private
enforcement claims. Indeed, an attorney who represents private
enforcement groups in Proposition 65 actions has recently
®
PROPOSITION 65
been quoted in Inside Cal/EPA as predicting that very outcome,
noting that the DOJ proposals are likely to have unintended
consequences and fail to accomplish the DOJ’s stated objectives
(Inside Cal/EPA, “Prop. 65 ‘Enforcer’ Argues A.G.’s Litigation
Penalty Reforms Will Hike Fees,” October 8, 2015).
Rebuttable Presumption of “Significant Public Benefit” for
Reformulation
One amendment would create a rebuttable presumption
that changes in a settling defendant’s practices which reduce or
eliminate the exposure to a listed chemical are presumed to confer
a “significant public benefit” justifying an award of fees to the
settling plaintiff. In order to establish this presumption, supporting evidence must show that the product at issue either is or was
at one time exposing consumers to Proposition 65-listed chemicals at unlawful levels and the product as reformulated would no
longer do so. By way of contrast, today, product reformulation is
deemed sufficient to confer a “significant public benefit” even if
no unlawful exposures had ever occurred.
This proposal is intended to curb private enforcements
whose settlement outcome confers little public benefit. The
underlying concern is that today, many businesses agree to reformulate their products to settle a case even if their products had
never even exposed consumers at unlawful levels.
The proposed amendment, although well-intended, is
drafted in a way that has the potential to increase the costs
of, and to disrupt, the settlement process in the private
enforcement proceedings, when both parties are equally invested
in ensuring that the settlement is finalized.
The proposal raises the risk that private enforcers, as part
of negotiations, will ensure that all their fees and costs will be
covered in the event that additional, high-cost evidence, such as
exposure assessments, must be generated to respond to inquiries
from the Attorney General or a court. Thus, settling defendants
may be put in the untenable position of having to justify the
terms of the settlement—at their own expense—by undertaking
precisely the same costly exercise that they hoped to avoid in the
first place. The increased scrutiny that the Attorney General is
proposing, while plausible from a substantive standpoint, comes
too late in the process when the parties simply want to settle the
case and move on.
If the Attorney General proceeds with this proposal, the risk
of this inadvertent outcome may be reduced if it and/or the Final
Statement of Reasons clarify that an exposure assessment is not
necessarily required to support a finding of significant public
benefit, and that other forms of evidence may establish it. Beyond
this, the Attorney General’s goal and the public interest would
be best served by imposing increased scrutiny early in the private
enforcement process, and requiring plaintiffs at the 60-day notice
stage, with their Certificate of Merit, to provide some degree
of evidentiary support that use of a product presents a level of
exposure likely to exceed the relevant warning level.
This “up-front” approach would be more likely to deter
private enforcers from pursuing unnecessary actions in the
®
first place, since they would have no opportunity to later shift
the burden of generating the necessary evidence to the settling
company in the context of settlement negotiations.
Additional Settlements
Another amendment would require that payments-in-lieu of
penalties, also referred to as “Additional Settlement Payments”
(ASPs), should not exceed the amount of any noncontingent
civil penalty. A “noncontingent” civil penalty is one that must
be paid by the business irrespective of what additional actions
that entity may take; a “contingent” civil penalty is one that may
be waived if the business undertakes additional, specified actions
under the settlement.
ASPs have been components of Proposition 65 settlements
for many years. These payments are not specifically authorized
by Proposition 65 and are not subject to the statutory
allocation of 25% to the named plaintiff and 75% to OEHHA,
since they are not civil penalties subject to that allocation.
Accordingly, a fairly significant amount of settlement payments
are not allocated to OEHHA to support its Proposition 65
implementation duties. Further, settlements containing these
payments frequently are vague about the purpose to which they
will be put, and/or what third party guarantees may receive
these funds, and for what purpose.
The provisions proposed by the Attorney General are an
attempt to enhance transparency and accountability in ASPs
and ensure that those payments further the intent of the law.
However, the best and most effective course of action for the
Attorney General to take at this time would be to prohibit ASPs
in any Proposition 65 settlement, whether court-approved or
out-of-court. If the DOJ elects to continue allowing ASPs in
Proposition 65 settlements, the proposal should be reviewed
to require private enforcers receiving ASPs to demonstrate, as
a threshold matter, why they are necessary and in the public
interest given the availability of statutory penalties.
The CalChamber and its coalition of more than 200
entities submitted a comment letter to the Attorney General on
November 4, 2015 outlining the concerns discussed above. The
Attorney General’s Office is reviewing public comments and will
likely release a revised proposal in early 2016.
CalChamber Position
The CalChamber supports the underlying intent of Proposition
65, which is to ensure that consumers can make reasoned and
informed choices when they purchase consumer products
or enter certain establishments. Unfortunately, the intent
of Proposition 65 has been undermined by ever-increasing
attempts to use the law solely for personal profit. For this
reason, CalChamber ardently supports the Governor’s recent
calls for reforms to end frivolous, “shakedown” lawsuits,
improve how the public is warned about dangerous chemicals,
and strengthen the scientific basis for warning levels.
While achieving these goals legislatively has proven to be
difficult, the CalChamber remains committed to initiate or
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PROPOSITION 65
otherwise support legislative efforts that seek to restore the
original intent of the law. Indeed, legislative reforms aimed
solely at addressing the law’s unintended consequences can be
achieved without undermining the underlying intent of law.
Whether changes are proposed in the legislative or regulatory
forum, the CalChamber will continue to engage policymakers
and OEHHA to ensure that any proposed changes to Proposition
65 are in line with the Governor’s calls for reform.
Staff Contact
Anthony Samson
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
88
®
RETIREMENT SAVINGS
California Secure Choice Retirement Savings Program:
Legislative Criteria Must Be Met Before Planning Can Proceed
Background
According to a 2011 report by the University of California,
Berkeley Center for Labor Research and Education, Meeting
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California’s Retirement Security Challenge, 62% of private sector
workers in California do not participate in an employer-sponsored retirement plan, compared to 57% nationally. The study
notes that 84% of California workers in firms with 25 or fewer
employees do not participate in an employer-sponsored plan.
The gap between what U.S. households have saved for
retirement and what they should have saved in order to
maintain their pre-retirement standard of living is $6.6 trillion,
according to the state Treasurer (www.treasurer.ca.gov/scib/).
Forty-seven percent of California workers are on track to
retire with income below 200% of the federal poverty level, a
commonly used threshold for economic hardship.
Because of the discouraging lack of savings, and lack of
voluntary participation in retirement savings programs, the
supporters of the Secure Choice Program believed that California employees need a state-run program to ensure that workers
accumulate the savings they need for a secure retirement.
Activity to Date
On September 4, 2013, the Secure Choice board held its first
meeting and has continued to meet monthly. A consultant was
contracted with to conduct the mandated study, and a legal
firm was contracted with to communicate with the federal
government on legal issues, and to respond to legal concerns
as the study moves forward. Both contractors report to the
board on a regular basis. The study is anticipated to be final
and recommendations made to the board in early 2016. The
California Chamber of Commerce has closely monitored the
activities of the board and the consultants, providing written
comments and public testimony from the employer perspective
as appropriate.
Private Employer-Sponsored Retirement Plan
Coverage
60%
50%
Share of Workers
Signed by Governor Edmund G. Brown Jr. in 2012, SB 1234
(de León; D-Los Angeles; Chapter 734) and SB 923 (de
León; D-Los Angeles; Chapter 737) laid the groundwork for
the California Secure Choice Retirement Savings Investment
Program by authorizing a feasibility study and market analysis.
The program, for private sector employees, would be funded by
an automatic payroll deduction.
If implemented, the program would create a state-run
retirement savings plan for private employees that includes
automatic enrollment with an opt-out provision for an
estimated 6.3 million California workers whose employers
do not currently offer a retirement savings program. Private
employers with five or more employees would be required to
provide access to and make payroll deductions for retirement
accounts offered through the program. Employers that do not
auto-enroll their employees in the program would be subject
to a penalty; otherwise the program is intended to impose no
risk or liability to the employer or to the state. Implementation
of the program is contingent upon enactment of legislation
subsequent to and based on the results of the feasibility study
and market analysis.
The legislation establishes a board to conduct the market
analysis and feasibility study to determine whether the practical
and legal conditions for implementing the program can be
met. Certain federal approvals must be granted in order for
the program to go forward. The board must be assured by the
Internal Revenue Service and the U.S. Department of Labor
(DOL) in advance to request that contributions made by
employees be on a pre-tax basis, and that no part of the program
is subject to the Employee Retirement Income Security Act of
1974 (ERISA). Funding for this study must come from private
or federal entities—the use of state funds is prohibited. Upon
completion of the study, which is projected in early 2016, the
board will report its findings and make recommendations to
the Legislature and await further authorizing legislation to
implement the program.
Secure Choice may proceed only if the following criteria are
met:
• Retirement accounts must qualify for the favorable
federal tax treatment ordinarily granted Individual Retirement
Accounts (IRAs) under the federal Internal Revenue Code.
• The program must not be considered an employee benefit
plan under ERISA.
• The program must create no liability for the state or for
employers.
40%
52.8%
43.5%
45.1%
Access
Participation
37.4%
30%
20%
10%
0
California
United States
Source: Nari Rhee, Ph.D., Research Brief, University of California, Berkeley
Center for Labor Research and Education (June 2012).
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RETIREMENT SAVINGS
Anticipated Action 2016
During the legislative progress of SB 1234, a large coalition that
included many employers expressed significant concerns with
the proposed plan. Although the coalition and CalChamber
ultimately removed their opposition, they did so to allow the
feasibility study to be conducted to fully address concerns
regarding the implementation and operation of the program,
and for the Legislature to reapprove the program only if
the findings support the required criteria, as outlined in the
legislation. It is anticipated that early in 2016 the study will
be complete and the board will make program and legislative
recommendations.
In November 2015, the federal Department of Labor
(DOL) issued draft regulations as instructed by President
Barack Obama to set forth a safe harbor for employers under
ERISA, for a program such as Secure Choice. The rule describes
circumstances in which a payroll deduction savings program,
including one with automatic enrollment, would not be subject
to ERISA. The program would have to be established and
maintained by the state, and mandate that employers make
it available to their employees. The proposed DOL rule is
intended to guide states as they create state legislation necessary
to establish programs to meet the requirements of the safe
harbor established in the new federal rules. The objective is
to reduce the risk of such state programs being pre-empted
by ERISA if they were ever challenged. However, the DOL
acknowledged that such a risk cannot be eliminated. Comments
were due in January 2016.
includes individuals who are risk averse and lack basic
investment knowledge. The research suggests that the biggest
challenge to the program will be positioning and explaining the
investment options to potential users. Thus, the education for
employees about the program is especially important.
It is estimated that more than 6 million employees will be
eligible for Secure Choice. That is an enormous number of
individuals to educate and enroll, as well as the corresponding
education and support for employers for an orderly, smooth
enrollment, and avoidance of liability and risk for employers.
Employers must be educated regarding their responsibility for
withholding and directing contributions, and for opting
employees in and out. Administrative provisions must be
established and effectively communicated to both employees
and employers. The CalChamber will continue to monitor the
activities of the board and provide input as appropriate
regarding program design and employer risk.
Staff Contact
Marti Fisher
CalChamber Position
The Secure Choice program must be easy for employees and
employers to understand, easy to implement and easy to comply
with its requirements. Employers must not be exposed to risks
for employee assets or investment choices and must not face
traps that could cause inadvertent liability.
The CalChamber continues to be concerned that the
implementation of the program is likely to be more complex
and problematic for employers than envisioned. The market
analysis has revealed that the target market for this program
90
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
®
TRANSPORTATION
Transportation Infrastructure Funding:
New Financing Options for a Changing Economy
Overview
California’s transportation infrastructure is facing a crisis. The
state needs more investment in road systems but the current
financing methods are insufficient for the magnitude of work.
According to the 2015 Ten-Year State Highway Operation
and Protection Program (SHOPP) plan, maintenance and
repair of the state’s highway system is undersupplied by $5.7
billion a year. In addition, a report by the California Legislative
Conference Committee on Transportation Funding (Committee
Report) recently estimated that it would require $7.8 billion
annually to bring local street and road repair up to the best
management practice level. In comparison to other states, the
Reason Foundation ranked California’s highways 45th in overall
performance and 49th in maintenance in 2014. These deficits
and rankings reveal that the state needs new funding solutions.
In response to this crisis, Governor Edmund G. Brown Jr.
called for a special session on transportation and infrastructure
funding in June 2015. This special session continued through
the 2015 legislative year and the interim. The Legislature
must navigate a number of policy and political hurdles before
agreement is reached on a legislative funding proposal. Debate,
discussion and negotiations will continue throughout 2016.
Commission (CTC), 58% of our state’s roadways require
rehabilitation or pavement maintenance and 26% of our
bridges require major maintenance, preventive maintenance, or
complete replacement. The Federal Highway Administration
estimates that California will need approximately $70 billion to
modernize and fix its highway systems and another $118 billion
to widen its busy highways, sticking California with the largest
reconstruction cost as compared to other states.
Additionally, in 2011, the state Legislative Analyst’s
Office (LAO) found that the level of funding for California’s
transportation infrastructure was less than 30% of the requisite
amount. Looking forward 10 years, the CTC estimates that
California will face $300 billion in unmet transportation
funding over and above what is currently available for base levels
of maintenance and preservation.
The lack of investment in the transportation system will
have real consequences for Californians. The Road Information
Program (TRIP) calculated that California’s substandard roads
cost the average California motorist $585–$700 out of pocket
each year, about double the national average of $335. According
to TRIP, the roads in Los Angeles are the most deteriorated in
the United States, costing Southern California drivers more
than $955 a year in automobile repairs, tune-ups, tires, and
accelerated depreciation. The total cost to drivers of California’s
dilapidated road systems is $17 billion a year.
Most troubling is that this bleak scenario is not improving.
The CTC estimates that the amount of freight on California’s
highways will increase by 75% within the next 20 years and
TRIP estimates that total vehicle miles traveled will increase
20% by 2030.
In addition, deferring maintenance and preventive improvements compounds the funding problem as streets, roads and
highways that are not properly maintained necessitate costlier
rehabilitation and reconstruction—up to 10-12 times the cost
California’s Transportation Funding Needs
Since the 1980s, California’s population has increased by more
than 50%, and the rate of automotive travel has mirrored this
growth. In fact, the Federal Highway Administration reports that
more than 80% of California’s urban interstates are congested
every single day. Although residents are driving more, improved
vehicle efficiency and consumer demand for high miles-per-gallon
and zero-emission vehicles has cut fuel consumption, thereby
reducing revenues that would have been expected from normal
increased usage. According to the state Board of Equalization,
gasoline consumption has increased by only 25% since the
1980s, and has actually declined in recent
years. This decline is attributed to both the
Annual Cost per Driver on Inadequate Transportation Network
recession and technological advancements
Location
VOC* Congestion
Safety
Total
in automobile fuel efficiency. The slump
in gas tax revenue coupled with both the
Los Angeles
$955
$1,300
$203
$2,458
exhaustion of bond funds approved in 2006
Sacramento
$592
$699
$282
$1,543
by Proposition 1B, and rising construction
costs will mean that much-needed mainteSan Diego
$876
$774
$236
$1,886
nance projects and new construction will be
San Francisco-Oakland
$795
$1,266
$145
$2,206
deferred or cancelled.
Each year, Californians drive an average San Jose
$760
$800
$163
$1,723
of 13,000 miles and the roads suffer wear
California – Statewide Total
$17 Billion $20.4 Billion $6.6 Billion $44 Billion
and tear accordingly. According to the
most recent Needs Assessment conducted
*VOC: Vehicle Operation Costs
by the California Transportation
Source: California Transportation By The Numbers, TRIP, September 2014 Report
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TRANSPORTATION
Overview of the Maintenance Problem
2008
2014
Pavement Condition Index
71-100 Good
50-70 At Risk
0-49 Poor
Source: Conference Committee on SB 4 and AB 3, California’s
Transportation Funding Challenge (October 21, 2015).
of maintenance. According to the Committee Report, 68% of
California roads are in “poor” or “mediocre” condition with
much of this deterioration occurring over the last six years. This
deterioration has and will continue to exacerbate funding issues.
The state must soon address the transportation funding
problem and explore other financing opportunities to
modernize the road systems.
Funding Sources
Policy debates continue throughout the state—including the
current special legislative session—on the most effective way
to adequately fund California’s transportation infrastructure.
These policies range from more of the same (increased gas taxes
and additional bonds) to new ideas untested at scale (mileagebased user fees). Each concept differs in its funding mechanism,
amount of funding burden, and political viability. Highlighted
below are some of the options discussed by state organizations
and leaders.
Gas Tax
California receives a large portion of its transportation
funding from a per gallon gasoline excise tax and a per gallon
diesel fuel excise tax. The gasoline excise tax was modified (and
increased) by the Fuel Tax Swap Fix passed in 2011, which
eliminated the state sales tax on gasoline, reduced the state excise
tax on diesel fuel, and increased the state sales tax on diesel fuel.
This plan was designed to generate revenues commensurate with
the previous state gasoline sales tax.
Historically, these excise tax revenues have generated
more than $3 billion a year. In recent years, however, the gas
tax revenue has decreased due to higher fuel efficiencies and
increased use of alternative fuels and electric cars. The LAO
estimates fiscal year 2014–2015 receipts from the gas tax will
be about $2.6 billion—$400 million below average yields.
92
According to the California Center for Sustainable Energy,
Californians own more than one-third of all electric vehicles
in the country and the trend shows no signs of slowing as
approximately 1,000 new electric cars are sold in the state each
month. Additionally, Governor Brown recently adopted a goal
of having all new passenger vehicles sold in the state zeroemission by 2050.
Although fuel consumption has decreased, the excise tax rate
has remained largely stagnant since 1994, resulting in declining
tax revenues for California’s transportation infrastructure. As a
result, some groups, including Transportation California, argue
that the state should increase the gas tax in order to make up the
financing gap. Opponents contend, however, that Californians
already face one of the highest transportation tax burdens in the
country and increasing the excise tax is not a viable solution.
Further, some experts argue that raising the gasoline excise tax
could have a disparate impact on low-income residents who
already spend a significant portion of their income on gasoline.
A number of proposals being considered in the special
session contain different gas taxes, including per gallon sales
taxes, excise taxes and tax indexing on both gasoline and diesel.
The LAO estimates that every one-cent increase will raise $150
million with respect to the gasoline excise tax and $30 million
with respect to the diesel excise tax.
Vehicle License and Registration Fees
The vehicle license fee, introduced in 1935, was initially
designed to replace a personal property tax levy on automobiles
by cities and counties. Historically, the fee was 2% of vehicle
value. The Legislature began reducing the fee in 1998, lowering
it to 0.65% of the vehicle’s market value, paid annually with
registration and set to a charted depreciation schedule. In 2003,
Governor Gray Davis increased the fee to its original value of
2% to combat budget deficits. The decision was later rescinded
by Governor Arnold Schwarzenegger when he took office
months later. Although the fee was temporarily increased to
1.15% from May 2009 through June 2011, it was subsequently
returned to 0.65% in the 2011 budget and it has remained at
that level since. Almost all revenue derived from the vehicle
license fee is distributed to California’s cities and counties.
While the current special session funding proposals do
not contain any license fees, they do contain registration fees,
which are flat fees set by statute and paid concurrently with the
annual vehicle registration. One proposal adds an additional
fee for zero-emission vehicles on the basis that the gas tax paid
by owners of these vehicles is not reflective of road usage. The
LAO estimates that each $1 increase in the registration fee will
produce $33 million in new revenue and for each 1% increase
in the license fee, $3 billion will be created.
Local Funding
Transportation funding of $11 billion is derived from
county sources, which include local voter-approved sales
taxes, property taxes, and fares from public transit. Voters
have historically approved most local taxes for transportation
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TRANSPORTATION
purposes and this trend continued in 2014 with the passage of
a $500 million transportation bond in San Francisco and three
local road and street improvement measures.
While local funding has served as a valuable tool to fund
local transportation projects, it has been historically insufficient
to cure statewide infrastructure problems. The amount of
funds available can fluctuate significantly by county, and many
counties focus these funds on local transportation issues rather
than a comprehensive state plan.
While none of the current special fund proposals have a
local funding source, two of the proposals—including Governor
Brown’s— would divide new revenues equally between state and
local programs.
Bonds
Proposition 1B was approved in 2006 and allowed the
state to issue almost $20 billion in general obligation bonds
over a 10-year period for transportation purposes. These
bonds are subject to annual appropriations by the state
Legislature and will expire soon. While many view bonds as
an effective funding source, there is skepticism that voters
will approve another proposition given California’s substantial
debts and need to spend available monies on services other
than transportation and the significant bond funding already
committed to construction of the high-speed rail. Additionally,
the interest payments for bonds substantially add to the overall
transportation project costs when compared to a pay-as-you-go
system, like a fuel tax.
Proposing another bond has not been part of the special
session discussions as Governor Brown indicated he is not
willing to take on additional debt for transportation projects.
Mileage-Based User Fees
Another option is to collect mileage-based user fees by
relying on existing technology to collect data on individual
motorists’ mileage use, convey that information to data
processing centers, evaluate the data, and collect fees from
drivers based on usage levels.
According to a report by the nonpartisan Congressional
Budget Office released in 2011, mileage-based user fees would
provide more efficient highway financing than fuel taxes
because usage pricing is directly connected to how often a
person uses surface transportation. Motorists would receive
a bill for the amount they drove the previous month. The
Reason Foundation and other groups support the concept as
a straightforward and transparent approach that will allow
individuals to adjust their usage as needed.
Others, however, argue that the costs of implementing new
technology associated with a mileage-based user fee will negate
the prospective earnings. Additionally, opponents contend that
it will result in more out-of-pocket spending than the gas tax.
According to Transportation California, a charge of one cent per
mile would raise about $3.3 billion per year, but the cost this
approach may have on individual drivers is unknown.
In 2014, the Legislature passed legislation that authorized a
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mileage-based user fee pilot program in California. The program
is administered by a 15-member panel that will report findings
on the viability of the program back to the Legislature. This
panel issued its initial recommendations for the pilot project in
December 2015. The panel envisions the user fee will replace
the gas tax—it would not be additive—and there would be
no exemptions or rate differentials among drivers. In addition,
the project provides test participants with a menu of options
for recording mileage information, including pre-paid mileage,
odometer checks and automated reporting with or without data.
This broad range of options will allow the committee to conduct
a more robust policy analysis in its report, evaluating convenience,
administrative and privacy issues, and pricing. Based on this
report, the Legislature will ultimately determine the components
of any potential mileage-based user fee program.
Truck Weight Fees
California instituted a commercial weight fee schedule in the
first half of the 20th century. The fees are based on commercial
vehicle weight and generate about $1 billion per year. This
fee was enacted to reimburse the state for the wear and tear of
heavy trucks on streets and highways. In 2011, however, AB
105 diverted the revenue from truck weight fees from the State
Highway Account to the General Fund, where it is used to
pay general obligation bond debt service for specified voterapproved transportation bonds.
Last year, multiple bills were introduced to redirect truck
weight fees away from bond debt service and back to new
transportation projects. Both bills made it out of their respective
policy committees, but ultimately failed to pass through the
appropriations committees. This policy has been reintroduced,
however, in the special session proposals.
Priced Managed Lanes
Managed lanes are highway lanes that restrict vehicle
eligibility, often taking the form of carpool lanes, transit bus
lanes, and truck-only lanes. Priced managed lanes—a subset of
managed lanes—charge users a fee for lane access. A common
example of priced managed lanes is toll roads. The usage fee for
these lanes can vary based on the level of congestion and/or the
time of day. These lanes combine congestion pricing and lane
management to moderate demand during peak driving periods
of the day, with the twin goals of incentivizing motorists to
shift their driving habits and generate infrastructure funds. The
number of priced managed lanes throughout the United States
has increased in recent years and new projects are planned.
All-electronic highway tolling is technologically simple and
relatively inexpensive to establish. According to a September
2013 nationwide study by the Reason Foundation, expanding
the use of toll financing is an ideal funding mechanism to
replace the gas tax. The study found that a majority of states
could charge a toll of 3.5 cents per mile for cars and 14 cents
per mile for trucks. In California, however, the recommended
toll charge would have to double to make any impact on
infrastructure financing due to high construction costs.
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TRANSPORTATION
California began using priced managed lanes in Orange
County almost 20 years ago. Recently, the Orange County
Transportation Authority (OCTA) proposed a $1.47 billion
plan to add toll lanes to particularly congested areas of the
405 freeway but was met with widespread local opposition.
Although Caltrans supported the plan due to the additional
revenue that would be raised for road improvement projects,
critics claim that toll lanes would cause traffic on local streets
and those motorists paying the toll would be less likely to
exit the freeway to frequent local businesses. Opponents also
complained that the fees would be exorbitant with the most
expensive tolls reaching almost $10 one-way. Ultimately, the
OCTA voted to not move forward with the project, but Orange
County’s experience, along with the experience of other counties
with priced managed lanes, such as San Diego and Alameda,
will be analyzed by policymakers as the infrastructure funding
discussion progresses.
Public-Private Partnerships
A public-private partnership occurs when a public agency
and a private sector organization join forces to provide a service
or build a project for the public. Advocates of this funding
avenue stress that because public transportation budgets are
sparse, bringing on a private entity to support and expedite
projects is a win-win for the public agency, the private
organization, and the public at large who benefits from project
completion in less time.
Many transportation experts hail the use of public-private
partnerships for building infrastructure because each party
has distinct capabilities and unique resources at its disposal.
Expertise by the government includes knowledge of the
legislative and decision-making processes, political savvy
know-how regarding public financing methods, ability to
mitigate risks, and a good command of local, state and federal
regulations. Private entities also contribute with project
management skills, considerable financial resources, ability to
expedite infrastructure investment, knowledge of operations and
best practices, and construction and design acumen.
While public-private partnerships create opportunities
to address some transportation funding issues, they still
require underlying revenue streams to finance projects. The
use of private financial resources can reduce—but does not
eliminate—the public cost. State and local governments still
must find financing mechanisms to pay for these projects.
Federal Funding
Nearly a quarter of California’s transportation funding
comes from the federal government. In December 2015,
Congress passed the first major transportation funding bill
since 2005, which will provide California with $26 billion for
projects over the next five years, a 14.5% increase.
Over the last decade, Congress was unable to pass
comprehensive legislation and had relied on a series of
two-year stopgap bills. These short-term bills created funding
uncertainties for planning and developing transportation
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projects that have long completion timelines. While the most
recent bill expands funding for five years, it did not include
any new dedicated and sustainable funding sources, such as
an increase in the federal gas tax. Rather, it relies on shifting
revenue from other areas of the budget. This has created
skepticism that the cycle of short-term fixes will return once the
bill expires in five years.
Additionally, despite the increase in federal funding,
California remains a donor state when it comes to the portion of
federal transportation revenue the state receives. California will
receive only 8.5% of the $305 billion allocation, while paying
between 11% and 12% of the total federal gas tax revenue.
Special Session
Last June, Governor Brown announced an extraordinary
legislative session dedicated to enacting legislation that would
create additional and stable long-term transportation and
infrastructure funding. In response, the Legislature held a
number of committee hearings and considered different funding
proposals from the Governor and caucuses in both houses. At
the end of the 2015 legislative year, the Legislature was unable
to reach consensus on any one proposal and the special session
was continued over the interim where a conference committee
made up of members from both houses has held numerous
hearings throughout the state.
To date, four funding proposals have been developed by:
the Governor; Senate Transportation Committee; Senate
Republican Caucus; and Assembly Republican Caucus. Each
differs in the total amount of funding and the mix of revenue
proposals utilized to achieve that funding level.
While there have been a number of hearings and proposals,
policy and political challenges remain before the Legislature
passes transportation funding reform. It is unlikely that any one
of these proposals will be adopted in its entirety as there will
most likely be a compromise on the total amount of funding
and the revenue sources. It is expected that debate and hearings
on the funding issue will continue this year.
It is also expected that the final proposal will contain a tax
increase. This will trigger a two-thirds vote of the Legislature,
meaning passage will necessitate some Republican and moderate
Democratic members voting for the proposal. Presently, neither
of the Republican caucus proposals contains a tax increase and
each caucus has publicly stated that funding goals can be achieved
without increasing new revenue. The debate over taxes and new
revenue represents the biggest political hurdle to passing a bill.
CalChamber Position
Many transportation projects for both new and existing
infrastructure in California need stable funding sources. The
California Chamber of Commerce supports a well-financed,
dependable and efficient transportation financing mechanism that
allows for maintenance of deteriorating infrastructure, encourages new construction projects, and ultimately creates well-paying
®
TRANSPORTATION
Comparison of Major Funding Proposals
Governor
Senate Committeeb
Senate Republican
Assembly Republican
$400 Million Annually
• $400 million from cap-andtrade
$2.9 Billion Annually
• $1.9 billion from cap-andtrade
• $1 billion from weight fees
• $1.2 billion from cap-and-trade
• $1 billion from weight fees
• $1 billion General Fund
• $685 million from vacant positions
• $500 million Caltrans efficiency
savings
$1 billion in various loan repayments
$2.4 billion in various loan repayments
New Taxes
a
$3 Billion Annually
• $65 vehicle registration fee
• 6 cents per gallon gasoline excise tax
• 11 cents per gallon diesel excise tax
• Index gasoline and diesel excise tax
rates for inflation
• $70 from two vehicle registration
fees and $100 additional fee for zero
emission vehicles
• 12 cents per gallon gasoline excise tax
• 22 cents per gallon diesel excise tax
• Index gasoline and diesel excise tax
rates for inflation
• 3.5 percent diesel sales tax
Allocate Existing Revenuea
$600 Million Annually
• $500 million from cap-and-trade
• $100 million Caltrans efficiency
savings
One-Time Fundinga
$879 million in loan repayments
Revenue estimates provided by proponents of each proposal.
b
Proposals approved by the Senate Transportation and Infrastructure Development Committee.
a
Source: Legislative Analyst’s Office, Overview of Proposals to Address Transportation Challenges (October 16, 2015).
and reliable jobs for Californians. The CalChamber encourages
California’s leaders to ensure a fair share of funding for state transportation proposals and policies that encourage growth.
California’s continued economic development will be closely
tied to an improved transportation system, both for workers and
students commuting to jobs and classes, and for the movement
of goods around the state and to our international seaports and
airports. Transportation improvement will necessarily require
more funding overall and a more stable financing system. None
of the options outlined above is perfect; indeed, one or another
user or interest group will oppose any new tax or fee or revenue
source. The key to optimizing a financing solution for surface
transportation will be to ensure that any solution:
• Does not discriminate against any user or economic sector;
• Is broadly spread among all road and highway users;
• Is stable and grows with the economy;
• Is sufficient to address the system’s legitimate maintenance
and expansion needs; and
• Is packaged with cost-saving reforms to reduce administrative and litigation overhead.
®
Staff Contact
Jeremy Merz
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
95
UNEMPLOYMENT INSURANCE
UI Trust Fund Deficit Remains, Causing
Employer Federal Taxes to Continue to Increase
The Problem
California’s Unemployment Insurance Trust Fund continues
for the sixth straight year to be in debt to the Federal Unemployment Trust Account (FUTA). With an outstanding debt
forecast at $6.7 billion at the end of 2015, dropping from $8.6
billion at the end of 2014, California maintains the largest debt
of the four states still in debt to the federal fund (Connecticut,
Ohio, Virgin Islands). By the end of 2016, California’s negative
balance is projected to decrease to $4.5 billion, if changes are
not made to the financing structure of the state’s unemployment
insurance (UI) system. Furthermore, benefit, eligibility and
integrity structures are in need of comprehensive updating and
streamlining in order to maintain the health of the fund into the
future and withstand the next recession.
Because California remains in debt to the federal unemployment insurance (UI) fund, California employers are paying a
higher FUTA tax to pay off the debt. Each year that a balance is
owed to the federal fund, California employers pay a higher tax
that goes to pay down the debt and the state must pay interest
on the outstanding debt. By the end of 2015, the state will have
paid almost $1.3 billion in interest to the federal trust fund.
The federal tax on employers increases $21 per employee,
per year until the debt is eliminated. The federal UI tax to
be paid by employers in California for 2014 was $126 per
employee (1.8% on a $7,000 tax base, which includes an
additional 1.2% on top of the normal 0.6%). The maximum
tax for 2015 is $147 per employee, and in 2016 it is projected
to be $168 per employee (see computation of federal tax in
table “Cumulative UI Tax Increases as Long as California Owes
Federal Unemployment Debt”). FUTA taxes are due January
31 of the year following the year in which the taxes are applied.
The federal UI tax is in addition to the state UI tax (maximum
6.2% on the first $7,000 of wages per employee).
Background
Through federal and state cooperation, UI benefits act as a
stabilizer during economic downturns by providing a source of
temporary, partial wage replacement for workers who have become
unemployed through no fault of their own and are looking for
employment. To induce states to enact UI laws, the Social Security
Act of 1935 provided a tax offset incentive to employers and authorized grants to states to meet the costs of administering the state
systems. Employers receive an offset against federal taxes if state UI
programs meet certain requirements.
Aside from federal standards, each state has major
responsibility for the content and development of its UI law.
The state itself decides the amount and duration of benefits
(except for certain federal requirements concerning federal-state
extended benefits); the contribution rates for employers (with
96
limitations); and, in general, the eligibility requirements and
disqualification provisions to collect benefits. The states also
directly administer the programs by collecting payroll taxes,
maintaining wage records, taking claims, determining eligibility,
and paying benefits to unemployed workers.
One federal requirement is that all contributions collected
under state laws be deposited in the Unemployment Trust
Fund (UI Trust Fund) of the U.S. Treasury Department.
States withdraw money from their account in the trust fund
exclusively to pay UI benefits. Private plans may not be
substituted for the state plan.
Funded by Taxes on Employers
California’s UI program is funded exclusively from taxes on
wages paid by employers, with the exception of temporary
federal grants for administration and certain emergency and
extended benefits paid by the federal government. The state of
California administers its UI program through the Employment
Development Department (EDD) within the guidelines
established under federal law.
California employers pay annual state taxes on the first
$7,000 in wages paid to each employee during a calendar year.
Each employer pays a tax rate based in part on the amount
of benefits that have been paid to former employees, so the
tax is partly experience rated. During good economic times,
employers that have fewer claims generally are rewarded with
a lower tax rate. Because the California UI Trust Fund has
been facing financial difficulties for some time, all employers
in California are paying taxes under the highest rate schedule
allowable under state law, plus a 15% solvency surcharge which
makes the highest state UI tax rate 6.2%, plus the higher federal
UI tax that goes to pay down the debt.
Reduced Federal Tax Offsets Result in Higher Taxes
on Employers
Employers receive a credit against the FUTA tax rate. Due to
California’s outstanding debt, however, California employers
are subject to a credit reduction that results in an employer-paid
federal tax increase on wages paid. The federal statute requires
the federal government to incrementally reduce the offset credits
to employers in states that do not timely repay their federal
unemployment trust fund loans. A federal tax is normally due
on wages paid by employers at a rate of 6%, offset by a credit of
5.4%, for a payable rate of 0.6% on wages up to $7,000 a year.
Since January 1, 2011, California employers have been paying
higher taxes because the state has not repaid money it borrowed
from the federal government to pay UI benefits since 2009. The
higher tax will remain in effect through 2016 and continue to
increase each year the state has an outstanding loan balance.
®
The table illustrates the FUTA
Cumulative UI Tax Increases as Long as
tax increase and the cumulative
California Owes Federal Unemployment Debit
impact on California employers
from 2011 through 2017. The tax
Annual Federal Tax*
will continue to increase 0.3% per
Total FUTA Tax Total FUTA Tax
year (approximately $21 per year
Percent
Per Employee Per Employee
Total FUTA
per employee who makes $7,000
Regular FUTA Increase
Tax Increase
(Regular
(Regular
Tax Increase
Tax After
(+ 0.3% Per Employee FUTA 0.6% +
FUTA $42+
Statewide
per year) until such time as the
Tax Year Offset Credit per year) (+$21 per year)
% Offset)
$ Offset)
(in year paid)
offset credit is exhausted, or the
2011
0.6
0.3
$21
0.9
$63
$288,500,000
loan is paid off and the trust fund
has a zero or positive balance as
2012
0.6
0.6
$42
1.2
$84
$593,763,000
of November 10 each year. The
2013
0.6
0.9
$63
1.5
$105
$948,876,000
offset credit will be fully restored
2014
0.6
1.2
$84
1.8
$126
$1,313,725,000
once the trust fund reaches or
2015
0.6
1.5
$105
2.1
$147
$1,699,582,000
exceeds a zero balance.
2016
0.6
1.8
$126
2.4
$168
$2,084,296,000
EDD projects that at this rate
2017
0.6
2.1
$147
2.7
$189
$2,464,550,000
of increasing FUTA taxes—and
absent any change to the revenue
2018
California is not projected to have a FUTA credit reduction for tax year 2018.
or projected payment of beneCumulative Projected Total Increase of FUTA Tax for 2012 through 2018 = $9,393,292,000
fits—the debt to the federal trust
*Tax computation reflects the amount an employer pays on the first $7,000 of wages per employee in a year.
fund will be paid off in 2017.
Note: Increased FUTA taxes for a given tax year are payable during the following calendar year (for example,
This projection also assumes
2011 increases were payable beginning in January 2012).
that the unemployment rate will
decrease to 5.2% in California by
the end of 2015, California’s loan had contracted to $6.7 billion
2017. These projections are subject to change over time.
due to employers paying increased federal taxes (which are
applied to the loan balance) and a lower payout of benefits.
Unemployment Levels Remain High
California has taken the largest loan and is the only state
California’s unemployment rate has decreased to 5.9%, from 7.3%
that is carrying a loan balance greater than $1 billion. In 2011,
in 2014—significantly lower than the high of 12.4% in 2010.
10 states had loans exceeding $1 billion (but less than $2
The rate increased steadily from 2006 to 2011 before beginning a
billion). Eight states eliminated their outstanding debt in 2014,
gradual reversal. California’s rate of unemployment is higher than
and an additional five states eliminated their debt in 2015,
the national rate of 5% (U.S. Bureau of Labor Statistics).
bringing the number of states still in debt to four, with a total
The large increases in the ranks of the unemployed, coupled
amount of outstanding debt of approximately $6.9 billion.
with benefit increases over the last decade, have led to a dramatTax-exempt bonds were used before 2014 to restructure the debt
ic increase in expenditures from the UI Trust Fund. The regular
in seven states (Idaho, Texas, Michigan, Nevada, Pennsylvania,
UI benefit payments were $6 billion in 2014 and $5.7 billion
Illinois and Colorado). The other five states either utilized
in 2015. From 2001 to 2012, California’s total benefit costs had
special funds or addressed solvency issues early in the year and
exceeded its revenue in all but two years. From 2014 through
did not have deficits as high as other states. In 2015, five states
2017, the fund revenue is expected to exceed benefit payout.
eliminated their UI debt—Indiana, Kentucky, New York, North
Carolina and South Carolina. All of them cut benefits and/
UI Fund Insolvency
or raised taxes. No states issued bonds to eliminate UI debt in
California, like three other states and territories (down from 28
in 2012), is struggling with a UI Trust Fund insolvency resulting 2014 or 2015.
Compared to other states, California’s benefit eligibility
from sudden and severe increases in unemployment associated
with the worldwide recession. California’s UI Trust Fund techni- requirements are more generous, requiring a lower attachment to
the workforce, which further stresses the state’s benefit payout.
cally became insolvent in January 2009, and by November 2009
California employers are paying a much higher FUTA tax rate
the state had borrowed more than $5.5 billion from the federal
than states without debt to the federal trust fund. Continual
unemployment fund in order to pay benefits to California’s
borrowing has serious consequences for the state, particularly in
unemployed. As of September 2012, outstanding federal loans
the form of ongoing interest payments and increases in the effecto 28 states totaled $37 billion, with California comprising
tive federal UI tax rate on California employers.
more than 27% of the total. At the end of 2012, California’s
Insolvency Factor
outstanding federal loan was $10.3 billion, more than $6.5
California’s current UI fund insolvency is caused not only
billion greater than the next highest state loan, New York. By
®
97
by significant unemployment, but also can be traced back to the
UI benefit increases imposed in 2001. The California Chamber
of Commerce opposed this increase in benefits because it
was not coupled with cost savings. Further exacerbating the
situation, as unemployment and duration of benefits increased,
the state collected fewer tax revenues and paid more benefits to
unemployed Californians.
With the annual UI benefit obligation projected to be
around $5.7 billion in 2015 and $5.6 billion in 2016 and
2017, California can expect its UI Trust Fund to be in debt
about $2 billion to the federal trust fund by the end of 2017. If
California’s economy continues to improve as anticipated while
generating sufficient UI tax receipts to pay ongoing benefits, the
principal debt will be paid off and the FUTA offset credit will
be fully restored to employers for tax year 2018.
The first annual interest payment on the federal loan was
slightly more than $303.4 million, which was paid in September
2011. The second interest payment, made on September 30,
2012, was $308.2 million. The interest payment was $259
million in 2013 and $171 million in 2015. An estimated $124
million in interest will be owed for 2015 and about $123
million is projected to be due for 2016. Federal law prohibits
the payment of interest from the UI Trust Fund. The interest
payments in 2011 and 2012 were loaned from the State
Disability Insurance account, and have been paid back with
interest from the General Fund. In 2013 through 2015, the
interest payments were made from the General Fund.
Congressional Activity
While various proposals were floated in 2015, Congress or the
President took little concrete action to address UI solvency, taxes
or benefits. Legislation backed by the professional employer
organizations (PEOs) was enacted and effective January 1,
2016. The legislation recognizes PEOs as employers for federal
unemployment tax reporting purposes.
President Barack Obama’s budget proposed an increase in the
FUTA wage base but was not considered by Congress. Given the
improving economy nationwide, most states have resolved their
UI fund issues by paying off their federal loans and implementing
a variety of reforms, including decreasing benefit payout, relieving
the urgency for federal action to resolve state debt issues.
A number of states have implemented or begun
implementing reforms spanning benefit rates, base period
wage eligibility, indexed wage workforce attachment, benefit
schedules and duration, disqualification and overpayment
penalties, and enhanced collection, as well as increased tax rates.
California’s UI system would be difficult to address with
simple changes to the base UI tax system or benefit cuts. A
combination of long-term and short-term strategies must be
considered as a package to resolve the state’s long-term outlook.
Increased state taxes in addition to increasing federal taxes could
harm the fragile economic recovery.
Strategies must include improved system efficiencies,
enhanced opportunities for employers to manage claims
effectively, and the appropriate alignment of benefit eligibility
with workforce attachment. Future stability and sufficient
reserves for another economic crisis depend on aligning tax
revenues with benefit payouts and handling accumulated debt
so that there can be a prudent, positive balance moving forward
without overly burdensome tax rates.
CalChamber Position
The CalChamber believes that the state must be diligent in its
policymaking to improve the business climate in California and
strive to combat rising unemployment, which results in a more
stable UI Trust Fund.
The UI system cannot be viewed in isolation from the
overall business climate in the state, and in surrounding
states that compete for California businesses. The state needs
a sustainable UI system that protects both workers who are
temporarily unemployed through no fault of their own, and
employers who spur investments and job creation.
Any solution to resolve the ongoing deficit, to prevent
further debt to the federal trust fund and to return the fund to
stability must include significant changes to improve system
integrity, including fraud and overpayments; encourage employers and the state to appropriately address claims; and update
eligibility determinations in line with today’s wages. Both tax
and benefit levels must be consistent with other states so that
California remains competitive to attract and retain businesses.
Staff Contact
Marti Fisher
UI State Reform and Policy Outlook
The UI situation in California remains unchanged—our federal
UI tax is going up, the state remains in debt to the federal UI
Trust Fund and unemployment levels higher than the national
average are likely to continue through the next few years.
With a continuing UI Trust Fund debt and an ever-increasing
federal tax on employers, it is likely that the Governor may
again examine the potential for UI tax increases on California
employers, along with system and integrity reforms.
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Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
®
WAGE THEFT
Wage Theft: Balanced Approach Keeps Focus on
Wrongdoers, Not Employers Trying to Comply
One of the premier issues in the labor and employment arena
is “wage theft.” Since her appointment in April 2011, Labor
Commissioner Julie Su has highlighted wage theft as one of her
primary targets and has actively focused the efforts of the Division of Labor Standards Enforcement (DLSE) to crack down on
wage theft throughout the state. Wage theft not only harms the
employees, but also those employers who are trying to comply
with the law, as it places them at a competitive disadvantage.
The business community is supportive of Commissioner Su’s
efforts to stop wage theft through her targeted investigations on
employers operating in the underground economy.
Although wage theft is a valid issue of concern that should
continue to receive attention, it unfortunately has been misused
to push legislative proposals that would severely punish employers who make unintentional, good faith errors. Given California’s
onerous wage-and-hour laws, there is a significant potential for
good actor employers to make innocent mistakes that should
not be considered “wage theft.” In 2015, SB 588 (de León;
D-Los Angeles) sought to carefully target the bad actor employers by providing the Labor Commissioner with additional tools
to address actual wage theft. The Legislature should allow the
Labor Commissioner the opportunity to utilize these tools before
imposing new laws that could have a negative impact on good
employers who simply make unintentional mistakes.
What Is Wage Theft?
“Wage theft” is a term broadly used to refer to an employer’s
failure to adhere to wage-and-hour laws. The California Labor
Commissioner defines wage theft as “when employers do not
pay workers according to the law.” Examples of wage theft
provided by the Labor Commissioner are paying less than
minimum wage, failing to pay employees overtime, failing to
provide employees with meal or rest breaks, or taking tips from
employees. Within the last five years, various studies on wage
theft have examined its prevalence and impact on workers.
• In 2009, Annette Bernhardt with the National Employment Law Project, and several co-authors published “Broken
Laws, Unprotected Workers,” investigating approximately 4,300
workers in low-wage industries. The study found that “workplace violations are profoundly shaped by job and employer
characteristics,” including: 1) employers with 100 employees or
fewer; 2) employers who paid workers in cash or a flat weekly
rate; and 3) employers engaged in apparel and textile manufacturing, personal or repair services, and private households.
Notably, employers that offered employees health insurance,
provided paid vacation and sick days, and regularly provided
employee raises were found to have a low rate of workplace
violations. The most common wage theft violations were failure
to pay minimum wage, failure to pay overtime, work performed
®
“off-the-clock,” failure to provide meal periods, failure to
provide paystubs, illegal payroll deductions, failure to provide
workers’ compensation coverage, and stealing of tips.
• Another study, published in 2010 by Ruth Milkman and
several co-authors with the Institute for Research on Labor
and Employment, University of California, Los Angeles, found
similar results regarding characteristics of employers with high
rates of wage violations after surveying approximately 1,800
workers in Los Angeles County. The primary wage violations
these workers suffered were failure to pay minimum wage,
failure to pay overtime, failure to provide required breaks, work
performed “off-the-clock,” and failure to provide workers’
compensation coverage.
Similarly, the study stated that “there is considerable variation in violation rates across occupations and industries” as
well as company size. Violation rates were higher in domestic
services, garment workers, and building services, as well as
smaller employers with fewer than 100 employees.
In May 2013, Labor Commissioner Su reported on the state
of the DLSE and its accomplishments from 2011 and 2012. The
report referenced significant increases in the highest total wages
and penalties assessed in almost a decade, as well as a record
amount of wages and penalties recovered. Although there were
significant improvements, the report noted that the DLSE was
able to recover only about 15% of the final judgments issued. The
employers that violate labor laws and fail to satisfy final awards
usually are small, undercapitalized and often shut their businesses
once a violation is noticed, according to the report.
Enforcement Efforts
On April 30, 2014, Labor Commissioner Su announced her
statewide, multilingual campaign to combat wage theft. The
campaign seeks to combat wage theft by educating employers
and employees about their rights and responsibilities. It
also seeks to inform employees of their ability to obtain
unpaid wages through the Labor Commissioner enforcement
mechanisms of a citation or administrative hearing, as well as
obtain workplace protection from reporting such violations.
Christine Baker, director of the Department of Industrial Relations, stated: “This campaign increases familiarity with workers’
rights and employers’ responsibilities, and supports our efforts to
level the playing field for law-abiding businesses.” This wage theft
campaign is paid for by penalties the Labor and Workforce Development Agency receives from lawsuits filed under the Labor Code
Private Attorneys General Act. Both business and labor groups
supported the launching of this campaign.
Since the campaign launch, the Labor Commissioner has
announced several significant wage theft citations against various
employers in the state. In 2014, Commissioner Su cited several
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WAGE THEFT
companies for unpaid wages and civil penalties of more than
$18 million. In 2015, Commissioner Su issued several significant citations for wage theft as well, including citations against
three residential care facilities in San Diego for more than $2.2
million. The allegations that served as the basis for the citations
were failure to pay minimum wage and overtime, meal period
violations, and workers’ compensation violations. While the case
was pending before the Labor Commissioner’s office, the owners
of the companies shut down the facilities and reopened under
another business name. Commissioner Su responded: “[t]his is a
classic example of the steps scofflaw employers will take to avoid
paying exploited workers wages owed.”
On October 13, 2015, Commissioner Su organized the
Workplace Justice Summit in Los Angeles. Invited stakeholders
included unions, community organizations, employers
and enforcement agencies. Discussions covered wage theft
issues, including local minimum wage ordinances, criminal
prosecution, human trafficking, and the underground economy.
Legislative Efforts Regarding Wage Theft
Notice and Bonding Requirements
In 2011, Assemblymember Sandré Swanson (D-Alameda)
introduced AB 469, the Wage Theft Protection Act, which
contained numerous provisions to prevent or combat “the
intentional theft of earned wages by unscrupulous employers”
(Assembly Committee on Labor and Employment Analysis,
April 13, 2011). Included within these provisions was a required
notice that must be issued to newly hired hourly employees that
sets forth the name and address of the employer, the employee’s
hourly rate of pay, as well as the workers’ compensation policy
under which the employee is covered.
AB 469 also provided the Labor Commissioner with
authority to require an employer that has previously been
convicted of a wage-and-hour violation to post a wage bond and
to obtain an accounting of the employer’s assets. AB 469 was
signed into law on October 9, 2011 (Chapter 655).
Registration and Bond Requirements
In 2013, the Assembly Labor and Employment Committee
introduced AB 1387, which increased the bond requirement for
any employer operating a car wash in California from $15,000
to $150,000. The committee analysis of the bill on April 24,
2013 referenced the history of wage-and-hour violations in this
industry, including the Bureau of Field Enforcement assessing
more than $3 million in wages and penalties in 2011. This bill
was largely unopposed and AB 1387 was signed into law on
October 11, 2013 (Chapter 751).
Post-Judgment Liens
In 2013, the Assembly Labor and Employment Committee
introduced AB 1386, authorizing the Labor Commissioner
to immediately record a lien on an employer’s real or personal
property anywhere in the state, for an unpaid, final order. This
bill authorized a post-judgment lien, meaning the employer
received notice of the allegations, had an opportunity to defend
100
itself and present evidence that the claims alleged were invalid at
an administrative hearing. Following this hearing, a final order
was issued and the employer had an opportunity to appeal.
AB 1386 removed the requirement for the Labor Commissioner to obtain judgment from a court before recording a lien
on the employer’s property after a final judgment or award. This
bill moved through the Legislature unopposed and was signed
into law on October 11, 2013 (Chapter 750).
Joint and Several Liability for Contractors
In 2014, Assemblymember Roger Hernández (D-West
Covina) introduced AB 1897, which created joint and several
liability between a “client employer” and a “labor contractor”
for the wage-and-hour violations of the labor contractor and
the labor contractor’s failure to maintain adequate workers’
compensation coverage. AB 1897 defined a client employer as
any person or business that contracts for labor or services as a
part of its usual course of business.
The author and proponents of AB 1897 argued that it was
necessary to encourage client employers to engage responsible
contractors; and provide an employee with another avenue to
obtain payment of wages owed. AB 1897 was strongly opposed
by numerous business organizations and named a job killer
bill by the California Chamber of Commerce because despite
the client employer’s best efforts to prevent wage-and-hour
violations by a labor contractor, the client employer still could
be held liable. Despite this substantial opposition, AB 1897 was
signed into law on September 9, 2014 (Chapter 728).
Pre-Judgment Wage Liens
• In 2012, Assemblymember Mike Eng (D-Monterey Park)
introduced AB 2517, which would have allowed an employee
in the car wash industry to record a pre-judgment wage lien
for an alleged, yet unproven wage claim, on an employer’s
real or personal property or on any property where work was
performed. The bill was intended to respond to a history of
wage-and-hour violations in the car wash industry.
A large coalition of business organizations not involved
in the car wash industry strongly opposed the bill and the
CalChamber named it a job killer due to concerns of the
problematic precedent the bill would set in the wage-and-hour
arena, as well as the unintended consequences it would create.
Specifically, employers in other industries were concerned
with the ability for an employee or his/her representative to
file a lien on property without any oversight and review by the
Labor Commissioner or a judge to determine the validity of the
claim alleged or the requested amount of the lien. Employers
also were concerned with the potential for harassment by
employees or their representatives to record invalid or frivolous
wage liens, as well as the burden it would place on employers to
seek legal relief to have unwarranted liens removed from the title
of their property. AB 2517 failed to obtain the necessary votes
to pass off the Assembly Floor.
• In 2013, Assemblymember Bonnie Lowenthal (D-Long
Beach) introduced AB 1164, which would have allowed any
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WAGE THEFT
employee in any industry to record a pre-judgment wage lien
on an employer’s real or personal property as well as on any
property where work was performed. This bill also failed to pass
the Assembly Floor. Several months later, Assemblymember
Mark Stone (D-Scotts Valley) introduced AB 2416, which
was very similar to AB 1164, but was more expansive in that
it allowed an employee, the employee’s representative, or an
employee’s creditor to file a pre-judgment wage lien on an
employer’s or third party’s property. AB 2416 received only 13
aye votes on the Senate Floor, and therefore also failed to pass.
Both bills were placed on the CalChamber job killer list.
The authors and proponents of AB 1164 and AB 2416 both
argued that a pre-judgment wage lien was necessary to address
the low recovery rate on final judgments. They essentially
claimed that a pre-judgment wage lien would allow an employee
to freeze the assets of the employer so that the employer could
not shut down before any final judgment or effort to recover the
unpaid wages was pursued. Notably, the Labor Commissioner’s
report referenced three similar characteristics of employers who
predominately failed to pay final awards: 1) small businesses;
2) underfunded or undercapitalized; and 3) shut down and
reopened as a new business before a final order was issued.
Despite these three specific characteristics of the type of
employers who were committing wage theft by not paying final
judgments, AB 1164 and AB 2416 applied to all employers,
regardless of size, and regardless of the employer’s capitalization
or ability to pay any potential judgment issued.
Labor Commissioner Judgment Enforcement
In 2015, Senate President Pro Tem Kevin de León (D-Los
Angeles) introduced SB 588 as an alternative approach to
addressing wage theft, other than prior legislative efforts
involving pre-judgment liens. SB 588 had several significant
provisions that enhanced the Labor Commissioner’s authority to
obtain payment on final judgments, including the following:
• authority to issue a stop order and assess civil penalties up to
$100,000 for an employer’s failure to pay a final judgment within
30 days after entry by the Labor Commissioner, agree to a payment
schedule to pay the final judgment, or post a surety bond;
• lien authority against an employer that fails to pay a final
judgment, enter into a payment agreement, or post a bond;
• successor employer liability for payment of a final
judgment from the Labor Commissioner’s office; and
• criminal liability for an employer that fails to observe a
stop order.
In addition, SB 588 imposed joint and several liabilities on
a contractor for property services defined as janitorial, security
guard, valet, landscaping, and gardening services, but exempted
such claims from civil litigation under the Labor Code Private
Attorneys General Act. SB 588 also expanded the violations
for which any “person acting on behalf of an employer” can
be personally liable under Labor Code Section 558 to include
waiting time penalties and reimbursement of expenses incurred
as a result of the employee’s duties. However, SB 588 limited the
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“persons” who could be responsible for these violations to only
owners, officers, directors, or managing agents of a company who
cause the violation.
The Service Employees International Union (SEIU)
sponsored SB 588. Governor Brown signed the bill and it went
into effect January 1, 2016.
CalChamber Position
CalChamber is opposed to wage theft. All employees are entitled
to receive the proper amount of wages earned and due for all
hours worked. Yet, there needs to be a distinction made between
employers that truly are stealing wages from an employee and
operating in the underground economy versus employers which
are trying to comply with the law, but are not aware of the
various nuances of California wage-and-hour requirements. For
example, while it may be simplistic to figure out that an hourly
employee must be paid at least minimum wage for each hour
worked, it is not as easy to determine whether an employer has
properly classified an employee as exempt versus nonexempt, or
as an independent contractor versus an employee.
The CalChamber is supportive of Labor Commissioner Su’s
efforts to educate and work with employers that want to comply
with the law, but are not sure how to do so. This education
campaign will help reduce or eliminate further wage-and-hour
violations, which benefits both the employer and employee.
Given the various statutes that have been signed into law
within the last three years to address wage theft, as well as the
active involvement of the Labor Commissioner on this issue, the
Legislature should allow these new tools sufficient opportunity
to work before proposing any additional legislation that may
harm good actor employers and innocent third parties who are
not actually engaging in wage theft.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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WATER
Preparing for Future with Diversified Water Supply Solutions
Another long dry hot year, fraught with water shortages and
controversy is how 2015 played out. It was another year of
hardship. For the first time since the 1976–1977 drought,
senior water rights holders’ supplies were cut off. For the first
time mandatory conservation measures were imposed on all
water users. It was also the first time in 75 years that there was
no snow on the ground to measure at the Phillips snow course
in April. It was also the hottest year on record with most of
California in extreme drought status. It is unknown whether
2016 will begin another year of drought or if the El Niño
system sitting in the tropical Pacific Ocean will bring rain and
relief to parched California.
Last year continued the news bulletins on the everdeepening drought. Every day brought more news about
receding levels of water in the state’s reservoirs, more urgent
requests from the Governor to conserve water, pictures of hard
cracked land that once produced crops or supported cattle,
pictures of dead fruit trees and pictures and stories of small rural
towns whose wells had dried up, forcing residents to truck in
water or go fill up containers and bring them back.
In April 2015, the Governor, by executive order, directed the
State Water Resources Control Board (SWRCB) to implement
mandatory water reductions in cities and towns across the state
to reduce potable urban water usage by 25% of 2013 levels
statewide. Within three weeks, SWRCB drafted emergency
regulations that are to run through February 2016.
Against the backdrop of drought, the environmental
documents for the twin tunnel project to deliver water
around the Delta were partially redrafted and recirculated for
comments. Activists from the Delta were able to qualify an
initiative that would force the tunnel project and any other
project costing more than $2 billion paid for with revenue
bonds onto the ballot for statewide approval, thus delaying the
state’s ability to move water where and when it’s needed.
Further exacerbating a difficult water year was a very active
wildfire season, a number of old water pipe leaks and ruptures
in urban areas that wasted thousands of acre-feet of water,
an unknown number of acre-feet of water diverted by illegal
marijuana growers in the northern part of the state, a die off
of endangered salmon from too warm water in the Sacramento
River, and the U.S. Environmental Protection Agency seeking
to extend its jurisdiction over more water bodies, causing more
regulations under the Clean Water Act.
Much-needed federal drought relief legislation bogged down
in Washington, D.C., once again leaving California without any
funding for projects needing federal matching funds and
projects for drought relief in low-income areas.
Current Conditions
An El Niño system sitting out in the tropical Pacific Ocean is
likely to bring a normal to wet winter. If that system proves
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California Drought Monitor
Released Thursday, January 7, 2016
Exceptional Drought
Extreme Drought
Severe Drought
Moderate Drought
Abnormally Dry
Source: The National Drought Mitigation Center
to be as large as some climatologists believe, it will help soften
the effects of the prolonged drought, but not cure it. Breaking
the drought will take a series of wet years and mild to normal
summers. There is a very real threat of flooding if it rains hard
for several days. The ground is so dry, saturation may take a bit
longer and soil erosion from wildfires won’t provide any help
holding the water on the ground. So far, much of California
remains in extreme and exceptional drought status. The key
to drought relief comes down to the amount of snow in the
Sierra Nevada mountain range. The eight-station index in the
Northern Sierra has been running way below average for the last
few years. The snowpack from these areas fills reservoirs during
the spring snow melt.
Many major reservoirs, lakes and dams around the state
are extremely low. In the north, Shasta Reservoir is at 34% of
capacity, Folsom Lake is at 28% and Lake Oroville is at 30% of
capacity. Moving toward the middle part of the state, Don Pedro
Reservoir is at 36% of capacity, New Melones is at 14% and San
Luis Reservoir is at 27%. In the south, Diamond Valley Lake is at
39% of capacity, Perris Lake at 36% and Castaic Lake at 38%.
California is chronically short of water, even in normal years.
But after four dry years, most of the state is in extreme drought
status (see map). Most of the rainfall and snowpack is in the
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northern part of the state and much of the need is in the coastal
and central southern parts of California.
The new water year began October 2015 with 2.9 million
acre-feet of water in six key Central Valley Project (CVP)
reservoirs. That’s less than half of the 15-year average annual
carryover of 6.4 million acre-feet. One acre-foot is enough water
for a family of four for one year. The CVP, operated by the U.S.
Bureau of Reclamation, is one of the world’s largest water storage
and transport systems. Its 22 reservoirs have a combined storage
of 11 million acre-feet, of which 7 million acre-feet is delivered
in an average year. In comparison, the California State Water
Project’s (SWP) 20 major reservoirs can hold 5.8 million acre-feet,
with annual deliveries averaging up to 3 million acre-feet.
The CVP typically provides irrigation water critical to
about 3 million acres of agricultural land in the San Joaquin
and Sacramento valleys and along California’s central coast,
but that was significantly reduced in 2014. The CVP also
provides urban water for millions of people and industrial water
essential to the San Francisco Bay Area’s economy and for the
environment, wildlife, fishery restoration, and hydroelectric
power production.
The SWP stores water and distributes it to 29 urban and
agricultural water suppliers in Northern California, the San
Francisco Bay Area, the San Joaquin Valley, the Central Coast,
and Southern California. Of the contracted water supply, 70%
goes to urban users and 30% goes to agricultural users. The
SWP provides supplemental water to approximately 25 million
Californians and about 750,000 acres of irrigated farmland. As
indicated on the map, storage levels are very low, in some cases
perilously close to the water intakes.
Drought
Two periods of three-year droughts (one period from 2007–2009
and another from 2012–2013) have changed the water landscape
in California. Even though 2010 and 2011 were wet precipitation
years, they proved insufficient to recover storage levels. The
year 2014 was the third driest in 119 years of record and 2015
continued the drought cycle. There is no real relief for the state in
wet years because California is chronically short of water, even in
normal years. The only way to resolve the chronic shortage is to
move forward with a comprehensive, long-term fix for the Delta,
which is how water is moved around the state, plus increased
storage and conveyance capabilities. Reuse, recycling, desalination
and conservation are necessary tools to complete the water
strategies for the state. Preparedness through diversification is how
to ensure California has an adequate water supply.
Initial water allocations for 2016 are 20% of the requested
contract amount from the SWP. The 2015 initial allocation was
10% of contract amount, but increased to 20% from a wetterthan-anticipated winter. The allocation is always conservative
because it doesn’t reflect that the state normally receives more
than 90% of its snow and rain from December through April.
The initial forecast of the CVP water supply allocations for
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the contract year (which begins March 1) will be made in late
February. Allocations will be adjusted monthly or more often
to reflect the updated snow pack and runoff. The latest data
from the CVP indicates that none of the agricultural contractors
received any water in 2015 and municipal and industrial
contractors received about 50%.
Water levels in reservoirs throughout the state are extremely
low. Even if the state were to have a very wet winter, it would
not be enough to recover because many of the state’s dams and
reservoirs serve flood control purposes and can’t be allowed to
fill completely. Unpredictable precipitation years combined
with court-ordered cuts in water deliveries, slow groundwater
recovery and limited surface storage capabilities create challenges
for businesses, agriculture and consumers.
Changed Conditions
When the State Water Project was built, the population was
about 15.85 million. The project was meant to supply water for
the next 25 million people, bringing the population to about
40.85 million by 2040. According to the California Department
of Finance, California’s population passed 39 million in 2015,
surpassing the population growth models used in the State
Water Project almost 25 years early. California has less water
available due to the reduced draw from the Colorado River
per legal agreement, a court settlement requiring restoring
water flows to dry parts of the San Joaquin River, Owens River
watershed and the CVP due to environmental reallocations.
There are many more restrictions on how water is moved within
the state, especially through the Sacramento-San Joaquin Delta.
Many in the environmental community contend that climate
change threatens to make future droughts even more severe.
For the first time in 75 years, the State Water Resources
Control Board (SWRCB) imposed restrictions called curtailments
on some of the most senior water rights holders, those with
pre-1914 rights. The order affected 276 rights held by individuals
and several agricultural water districts, amounting to 1.2 million
acre-feet of waters. Curtailments had been imposed on the
junior rights holders in 2014 and 2015 to ensure senior water
rights holders would have access to water during the drought, a
requirement of state law that governs water rights priority. More
than 10,000 holders of “junior” water rights—those awarded
after 1914 and another set awarded after 1953—were required to
cease diverting water from certain rivers and streams. Water rights
holders can be individuals, cities or counties or water districts.
Curtailments were lifted late in the year, but can be reinstated if
nature does not provide enough water.
In an effort to save the endangered winter-run Chinook
salmon, SWRCB released plans to hold back even more water
at Shasta in 2016 than it did 2015. The plan calls for holding
back an additional 200,000 acre-feet through spring to keep the
water cold enough when it’s released to give the juvenile salmon
a better chance of survival. The 2015 effort failed in part because
the U.S. Bureau of Reclamation, (USBR) which operates Shasta,
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Conditions For Major Reservoirs: January 14, 2016
LEGEND
Total Reservoir Capacity
Thousands of acre-feet (TAF)
4,552
2,000
Capacity (TAF)
3,538
2,000
0
0
Capacity (TAF)
Trinity Lake
21% of Capacity
Historical Average 31%
As of 1/14/16 Percent of Capacity
0
2,000
1,000
2,000
1,000
3,000
1,000
3,000
Historic Average for date
Shasta Reservoir
34% of Capacity
1,000
Capacity (TAF)
Capacity (TAF)
4,000
2,448
977
0
Folsom Lake
28% of Capacity
Capacity (TAF)
0
Lake Oroville
30% of Capacity
1,000
0
Don Pedro Reservoir
36% of Capacity
2,420
2,000
1,000
0
New Melones
14% of Capacity
2,039
Capacity (TAF)
Capacity (TAF)
2, 030
Capacity (TAF)
Capacity (TAF)
1,000
0
Millerton Lake
36% of Capacity
Capacity (TAF)
520
0
Capacity (TAF)
San Luis Reservoir
27% of Capacity
Capacity (TAF)
2,448
500
0
Lake Perris
36% of Capacity
1,025
0
Exchequer Reservoir
10% of Capacity
1,000
0
Pine Flat Reservoir
17% of Capacity
325
0
Castaic Lake
38% of Capacity
Source: California Department of Water Resources
didn’t realize until too late that its temperature gauges were faulty
and the river ran warmer than predicted, which hampered fish
survival. Preliminary data shows even more juvenile salmon
died in 2015 compared to 2014 when 94% perished. Salmon
have a three-year spawning cycle, so 2016 will be a critical
year. Holding back an additional 200,000 acre-feet means less
water for downstream farms and cities. Business and agriculture
104
representatives commented that the plan was too rigid and would
deprive them of sorely needed supplies. Environmentalists said
the plan didn’t go far enough to guarantee the species’ survival.
Both agreed the plan was premature.
The SWRCB ultimately decided to require that the
Department of Water Resources (DWR) and USBR work
together to ensure Sacramento River temperatures don’t exceed
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56 degrees this year, the maximum at which juvenile winter-run
Chinook can survive. The new plan establishes 1.6 million acrefeet in Shasta as a “planning target.” The regulators are required
to submit a definitive temperature plan by March 15, 2016.
SWRCB also ordered that Folsom Lake not go below 200,000
acre-feet, which brings some relief to Sacramento area water
agencies. Folsom was required to release more water than usual
in 2015 to make up for the lack of flows from Shasta to hold
back salinity levels in the Delta.
Mandatory Conservation Measures
Governor Brown’s April 2015 executive order directed the State
Water Resources Control Board to adopt emergency regulations
to impose mandatory water reductions across the state to
reduce water usage by 25% over 2013 levels. The emergency
regulations were to be in force from June 2016 to February
2016. In November, however, the Governor extended the
order through October 2016 if California still faces a drought
in January 2016. Areas with higher per-capita water use were
required to achieve proportionally greater reductions in water
use than areas with lower usage. Water districts were assigned
a conservation standard with reductions ranging from 4% to
36%. Penalties would be imposed for noncompliance.
Of tremendous importance to the business community is
the acknowledgement of State Water Board members that these
conservation measures were not meant to harm the economy.
Water being used in the commercial, industrial and institutional
sectors for health and safety regulations was not to be penalized.
It was not the intent of the measures to cause a loss of business
productivity or a reduction in workforce.
Key Elements for Urban Water Conservation
• Mandatory water reductions to reduce water usage by 25%
over 2013 levels.
• An emergency regulation requiring local water agencies to
implement new “conservation pricing” water rate structures.
• Making permanent monthly reporting of water usage,
conservation and enforcement actions.
• Temporary statewide consumer rebate program to replace
old appliances with water efficient models.
• Expedited regulation to update the Model Water Efficient
Landscape Ordinance.
• New requirements to reduce commercial, industrial, and
institutional landscape irrigation.
• Restrictions on use of potable water for landscape
irrigation in new developments.
• Prohibition on irrigation on ornamental grass on public
street medians.
• New emergency regulations by the Energy Commission to
improve water appliance standards.
Key Elements for Agricultural Water Use
• New requirement for drought plan and water supply and
demand data for 2013–2015 in Ag Water Management Plans
due in 2015.
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• New requirement of Ag Water Management Plans for
suppliers between 10,000 and 25,000 acres due in July 2016.
• New requirement for water agencies to submit to the state
groundwater monitoring data for priority groundwater basins.
Other Elements—Prohibitions for all Californians
• Using potable water to wash sidewalks and driveways
• Runoff when irrigating with potable water.
• Using hoses with no shutoff nozzles to wash cars.
• Using potable water in decorative water features that do
not recirculate the water.
• Using outdoor irrigation during the 48 hours following
measurable precipitation.
• Using potable water to irrigate ornamental turf on public
street medians.
• Using potable water to irrigate landscapes of new homes
and buildings inconsistent with building stands requirements.
By year’s end almost all water districts had met or exceeded
their conservation standard. Districts having trouble meeting
the requirements were counseled by the State Water Board
and in some cases alternative measures were put in place. Four
districts did not come near meeting their targets and were fined
$61,000 each. If they do not make significant progress, the State
Water Board can ramp up penalties to $10,000 per day or even
issue cease-and-desist orders. None of the districts imposed
penalties on egregious water users in their areas.
So far, the state is ahead of the 25% reduction target. Saving
water during the winter months will be challenging. Most of the
big reductions in usage were focused on outdoor landscaping.
There aren’t any big opportunities to save water indoors beyond
updating appliances.
Costs of Drought
According to the University of California, Davis, California lost
more than 10,100 seasonal and part-time jobs in the agricultural
sector as 542,000 acres of irrigated cropland went idle in 2015.
Economic losses are estimated at $1.84 billion. As the price of
water increases, the profit margin for water-intense business
enterprises decreases, creating an uneven playing field for
California businesses, such as agriculture, chip manufacturers,
breweries, utilities and hospitals.
Ultimately, cyclical or ongoing droughts will result in higher
production costs for businesses, more pressure on the state’s
groundwater resources, higher prices for produce and other food
products, and explosive fire seasons that will be hard to combat,
given limited resources—especially water. California’s 2015 fire
season saw about 6,265 fires burning approximately 307,591
acres which is very costly to fight in terms of water and budget
pressures. Twenty-two million trees perished in the drought,
adding significantly to the fuel load in the forests. Ancillary to
the cost of fighting fires is the cost to prevent mudslides in areas
denuded of vegetation.
Prices continue to rise, much to the dismay of ratepayers,
because using less does not mean paying less, as the fixed costs
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of buying and delivering water and maintenance and operations
costs must be met regardless of much water is used. Looking
into the future, when droughts will continue to be cyclical,
many localities are expected to step up local conservation with
new rules and stronger enforcement. Further exacerbating
the issue is that much of the piping carrying drinking water
and sewage is aging and must be replaced in order to meet
tightening water quality standards.
Outdoor watering restrictions burden the warmer parts of
the state, such as the Central Valley, causing a trade-off of less
water usage but increased energy costs as a result of operating
air conditioning when temperatures are in the 100s for days at
a time. Trees and lawns keep temperatures more moderate and
provide defensible space as required by fire safety rules.
Proposition 218
In general, the intent of Proposition 218 (passed in 1996 to
amend the California Constitution by adding Articles XIII C and
D) is to ensure that all taxes and most charges on property owners
are subject to voter approval. Voters also were given the ability to
reduce or repeal charges by voter initiative. In the case of benefit
assessments, benefits must be calculated based on the benefit
received by the parcel. Water districts are subject to Proposition
218 when setting rates. A recent court decision ruled that a water
district incorrectly imposed a tiered rate structure penalizing
higher tier users without showing the relationship of the tier to
the cost to the district of providing the water.
One of the Governor’s mandated conservation measures is
implementation of conservation pricing. Use more, pay more.
The difficulty for water districts is showing the conservation
measures’ benefit per parcel as required by Proposition 218.
Most local agencies handle changes in rates by mailing notices
to each parcel owner giving information about the rates and the
reasons for the changes. If they receive a majority of protests to
the changes, the changes can’t be imposed.
Looming on the horizon is the State Water Resources
Control Board strategy of using stormwater as a water supply
source, which would require an affirmative vote of the people to
impose since it is a new assessment not covered by Proposition
218. Additionally, the Governor has been vocal about the need
to provide lifeline rates for low-income users which cannot be
blended into a rate increase for all ratepayers as there would be
no equitable benefit per parcel.
At the end of 2015, a coalition including the Association of
Water Agencies, the California State Association of Counties
and the League of California Cities filed a constitutional
amendment initiative that would create a new, optional funding
method local agencies could use at their discretion to finance
stormwater, flood control and other water- and sewer-related
projects, and pursue conservation-based water rates or lifeline
rates for low-income households. The measure was submitted
to the Attorney General’s office for title and summary as a
potential statewide ballot initiative. The measure would amend
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Article X of the California Constitution, which deals specifically
with the management of the state’s water supplies. The proposed
amendment seeks to create an optional funding method in
Article X while preserving the ability for public agencies to
continue establishing rates under existing law found in Article
XIII D. The proponents indicate that they may pursue the
initiative or pursue a legislative fix in 2016.
Groundwater: The New Frontier
Unlike almost all other Western states, California has never had
a comprehensive system for regulating groundwater. A body of
common law grew that governs extraction and use of groundwater. Management generally has been in the form of plans
developed by local agencies that focused primarily on information gathering. Farmers and other groundwater users have
pumped at will without having to obtain government approvals.
Changing demands over time—like shifting to more
water-intensive crops, new environmental restrictions on the
availability of surface water, and increased urban usage—have
resulted in chronic overdraft and noticeable increases in
subsidence (permanent loss of below-ground storage capacity)
in many basins and sub-basins. Just about everyone agrees that
something has to be done to prevent further losses.
The Legislature passed a comprehensive groundwater management package of bills in the waning days of the 2013–2014
session. Three bills, SB 1168 (Pavley; D-Agoura Hills), SB
1319 (Pavley; D-Agoura Hills) and AB 1739 (Dickinson;
D-Sacramento), taken together enact the Sustainable Groundwater Management Act. The bills were developed over several
months by legislative consultants in a process that included many
meetings with stakeholders. The process was very challenging
for all parties with many versions of the bills in circulation at the
same time. The organization of the bills is confusing with many
ambiguous provisions. It is a foregone conclusion that litigation
will ensue and unintended consequences are inevitable.
Key Provisions
• Each groundwater basin or sub-basin will be regulated
separately. There are 127 of them designated as “high” or
“medium” priority by the Department of Water Resources
(DWR) that will be required to comply with the act. “Low” and
“very low” priority basins may be considered later.
• Existing local agencies overlying each basin will be
given both the mandate and a broad array of tools to regulate
groundwater in their basin or sub-basin. Key among those tools
is the ability to limit extractions and to impose fees related to
groundwater use.
• The goal of regulation will be to achieve “sustainability.”
Sustainability generally means bringing the basin or sub-basin
into balance by eliminating overdraft. Local agencies will make
that determination based on local conditions.
• For portions of regulated basins not served by existing local
agencies, the overlying county will be the default agency unless
landowners quickly form a new local agency.
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WATER
• For basins or sub-basins covered by multiple local agencies,
those agencies must coordinate their individual plans, or form a
joint powers authority or some similar mechanism to develop a
single plan for the basin or sub-basin.
• For basins or sub-basins in which regulation is mandatory,
deadlines will be established for local agencies to assume the
groundwater regulation role by July 1, 2017 and to adopt
a “groundwater sustainability plan” by January 31, 2020 in
some basins and January 2022 for others. If those deadlines are
missed, or if DWR determines that a plan is not adequate or
cannot achieve the sustainability goal, the State Water Resources
Control Board will have the authority to impose its own
“interim” plan until an acceptable local plan is in place.
• Groundwater sustainability plans and progress toward
meeting the sustainability goal will be evaluated every five years.
• Plans will not establish or determine groundwater rights.
They will govern how those rights are exercised.
• Metering and reports of groundwater use will likely be
required from each groundwater user.
The groundwater act does not mandate groundwater
pumping restrictions or require the imposition of groundwater
fees, but allows both. It’s hard to imagine the basins or
sub-basins achieving sustainability without imposing some sort
of pumping restrictions or limitations. Looking at the amount
of work needed to design plans to achieve basin sustainability
and then to implement the plans, fees are going to be necessary.
There really isn’t a way to avoid them.
The question of “grandfathering” existing wells or historical
uses is largely unaddressed in the legislation. Those are
important issues in adjudication actions. If the plans become
too cumbersome or burdensome, it is very likely that there will
be movement toward adjudication. It is important to reiterate
that the groundwater act does not establish, determine or
confirm water rights. It regulates the exercise of those rights.
However, adjudication will establish or determine water rights
Two issues of importance were resolved in 2015. A
streamlined adjudication process supported by business and
agriculture was adopted that reduces the burden of groundwater
adjudications on both the courts and claimants without
altering the law of groundwater rights and without disrupting
the groundwater act. Second, DWR implemented new basin
boundary regulations that effectively give local agencies an
additional six weeks to prepare their requests for any basin
boundary changes. Also, DWR established a new Web-based
reporting system that allows local agencies to submit basin
boundary modification requests and provides public access to
view the information. Much more must be done before the
groundwater act will be fully implemented.
Bay Delta Conservation Plan
The Bay Delta Conservation Plan (BDCP) was a key part
of the 2009 comprehensive water package that addressed
California’s long-term water strategy. It is a 50-year, ecosystem
®
plan to restore fish and wildlife species in the Delta in a way
that provides for the protection of reliable water supplies while
minimizing impacts to Delta communities and farms. The
BDCP has been the works for more than seven years. It focuses
on the Sacramento-San Joaquin Delta, where water is diverted
to serve 25 million Californians and 3 million acres of farmland.
One of the most controversial elements of the plan is the
proposal to construct two tunnels that have the capacity to
move 9,000 cubic feet of water per second, which is much
lower than an earlier proposal of 15,000 cubic feet of water per
second. The tunnels would divert a portion of the Sacramento
River’s flow at three intakes proposed near Courtland, routing
the water to existing diversion pumps near Tracy. The goal is to
avoid reverse flows in the estuary caused by the current diversion
pumps, which are one cause of ecological trouble in the Delta.
The new intakes would also have modern fish screens, which
the current intakes do not. The proposed tunnels are routed to
the east side of the valley to reduce impacts to the Delta. The
BDCP described and analyzed 15 alternatives, but the twin
tunnels were the preferred alternative.
Critics caution that the new intakes simply move the harm
to endangered fish species to a different part of the estuary,
damage the Delta as a community and potentially jeopardize the
agricultural economy. Proponents warn that one big earthquake
in the Delta would leave 25 million people living south of the
Delta with very limited water supplies.
The mandated Environmental Impact Report/Environmental
Impact Statement (EIR/EIS) was released for public comment
from late December 2013 to July 2014. A Draft Implementing Agreement also was circulated for 60 days ending in July.
Thousands of comments regarding the twin tunnels alternative led to the state and federal agencies making changes and
recirculating the environmental documents in April 2015 with
the comment period closing in October 2015. The biggest change
was in Alternative 4 and the twin tunnels. The new Alternative
4A includes the conveyance facilities proposed under Alternative
4, but does not include the elements of a habitat conservation
plan, which is now separate and embodies a different regulatory
approach for gaining necessary permits and authorizations for
implementation under the state and federal endangered species
acts. What happens next is all comments must be reviewed and
responses made, then preparation of a Final EIR/EIS that must
have a 30-day comment period and then a public hearing must
be scheduled. The Final EIR/EIS will be submitted to state and
federal regulatory agencies for approval and permit authorization,
after which implementation could begin.
Water Bond
Proposition 1: Water Quality, Supply and Infrastructure
Improvement Act of 2014
Passage of Proposition 1 is a key element to the success of
the state’s long-term strategy to provide an adequate supply of
water in future years. A water bond had been pending on the
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WATER
ballot since 2009 when a major package of bills was passed that
laid out the inextricable linkages between the health of the Delta
and California’s statewide water supply management practices
and policies.
The strategy covered governance for the Delta; put in place
the Bay Delta Conservation Plan to restore fish and wildlife
species in the Delta in a way that provides for the protection
of reliable water supplies while minimizing impacts to Delta
communities and farms; mandated urban and agricultural
management plans, recycling plans and new conveyance in the
Delta. Passage of Proposition 1 was the last piece needed to
complete the strategy.
The bond was much slimmer at $7.5 billion than the
original bond of $11.4 billion, but funds investments in water
projects and programs as part of a statewide, comprehensive
water plan for California. Of keen interest to the business
community is the $2.7 billion for water storage capacity. It
funds a share of new water storage projects to add flexibility to
the state’s water system and creates more places to store water in
wet times for use later. Funding is not tied to specific projects;
dollars are to be allocated on a competitive basis to projects
ranging from local and regional surface storage to groundwater
storage and cleanup to reservoir reoperation. Bond funds are
for “public benefits” of projects only, such as improved water
quality, flood control and habitat restoration.
Storage was a critical component of the business
community’s support for the bond. Storage is needed to
control the amount and timing of water flowing through the
Delta to meet endangered species requirements, which affects
the amount of contracted water available for farms and cities
downstream. It also provides the opportunity to store more
water in wet years to offset needs in drier years. It may offset
cutbacks already in place for the Delta smelt and salmon.
The bond not only provides funds for increased storage; it
also provides funds for projects that lead to more reliable sources
of water. For instance, cleaning up groundwater provides more
local supplies. Increased recycling also increases the amount of
water available for drinking water. Substituting recycled water
for outdoor usage on landscaping, golf courses, parks, etc.
could be a major water savings. Funds invested in strategies to
treat wastewater to drinking water quality as is done in Orange
County and contemplated in San Diego County are well spent.
The Water Commission is tasked with allocating the money
among eligible projects. With input from the public and the
aid of a stakeholder advisory group of which the California
Chamber of Commerce was a member, the commission crafted
draft regulations that will soon be submitted to the Office of
Administrative Law (OAL) to start the process of finalizing
the regulations. OAL could take up to a year to approve the
regulations, but hopefully will act sooner. Project proponents
have been tracking the work of the commission in order to have
their projects meet the requirements for consideration.
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Initiatives
No Blank Checks
The initiative amends the Constitution to require voter
approval for certain revenue bonds to build large California
infrastructure projects. It has qualified for the November 2016
ballot. Dean Cortopassi, a farmer from the Sacramento-San
Joaquin Delta, is sponsoring and financing the measure. He is
a leading opponent of the tunnels alternative to improve the
efficiency of water deliveries to the San Joaquin Valley, Silicon
Valley, Central Coast and Southern California. He argues that the
new facilities would irreparably harm the Delta ecosystem and
farming that relies on the water that presently flows through it.
Key Provisions
• The measure does not expressly stop the Delta
construction project or any other project. Instead, the measure
takes aim at the financing mechanism that underlies these
projects.
• The measure requires statewide voter approval for revenue
bonds for all state-owned, -operated or –financed projects that
exceed $2 billion. Projects could not be broken up into smaller
stages to avoid the intent of the law.
This simple requirement places the Delta tunnels project in
peril. The heart of the project’s financing scheme is the use of
revenue bonds, repaid from users’ water rates. A requirement for
a public vote for a revenue bond for the Delta tunnels is akin to
a statewide referendum on the project itself. Moreover, a future
measure to authorize the revenue bond would require a “yes”
vote to sustain the project, which traditionally is harder and
more expensive to secure than a “no” vote.
Other projects likely to fall under this requirement would
be the high-speed rail and storage funding in the Proposition
1. Also, no provisions are made for natural disasters or states
of emergency. Should a major earthquake befall California,
requiring the quick repair of substantial portions of a region’s
transportation system (or the Delta levees), a statewide vote
would be necessary to approve revenue bond financing for more
than $2 billion of repairs. The CalChamber Board voted to
oppose this measure.
The Water Supply Reliability and Drought Protection Act of 2016
Gerald Meral, proponent of the initiative, submitted eight
versions of the basic bond to the Attorney General for title and
summary. The bond purports to fund projects left out of the
2014 Proposition 1 bond. Four versions of Meral’s bond are at
$4.9 billion; the other four are $6.02 billion. The core bond is
the same. The variations are based on inclusion of a continuous
appropriation to fund the Wildlife Conservation Board and/or a
provision to reimburse the Department of Water Resources and the
Metropolitan Water District of Southern California for compliance
costs associated with the Greenhouse Gas Reduction Fund.
Key Provisions - Funds
• Projects that capture and use urban runoff and stormwater;
• Recycling and desalination (noncoastal) projects;
• Water conservation projects;
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WATER
• Watershed improvement for water supply and water
quality enhancement;
• Land and water management for water supply
improvement;
• Flood management for improved water supply;
• Groundwater sustainability and storage;
• Water for wildlife;
• Water measurement;
• Conservation Corps;
• Safe drinking water.
The bond specifically excludes any funds for Delta
conveyance, surface storage, and expansion of the Colorado
River Aqueduct.
Stop the Train-to-Nowhere Act of 2016
The initiative redirects unspent High-Speed Rail Proposition
1A (2008) and Proposition 1 (2014) water bond money to build
new surface and groundwater storage projects without adding
more debt or levying new taxes. The measure adds a new section
to Article X of the California Constitution making drinking
water and irrigation the primary beneficial water use priority for
the people of the state.
The initiative was submitted to the Attorney General for
title and summary in November 2015. Proponents Senator Bob
Huff (R-San Dimas) and Board of Equalization member George
Runner (R) have stated they will have a well-funded signature
campaign to qualify the measure for the November 2016 ballot.
Federal Issues Pending
Legislation
Congress recessed for the year without passing water legislation
that could deliver more water for farms and help the environment
in the drought-stricken West and Southwest. Two bills, H.R. 2898
(Valadao; R-Hanford) and S. 1894 (Feinstein; D-San Francisco),
were being negotiated in the waning days of the 114th Congress,
First Session. Both sides thought a deal was close, but the differences in approaches proved to be insurmountable.
H.R. 2898, the Western Water and American Food Security
Act of 2015, set procedures for the U.S. Department of the
Interior, the Department of Commerce and the Department
of Agriculture to address drought conditions in California by
revising regulatory standards for managing conveyances of water
to individual, agricultural, municipal and industrial users from
the Central Valley Project (CVP) and the State Water Project
(SWP) in coordination with the requirements for protecting
threatened or endangered species in the Endangered Species Act,
including fish species of salmonid and smelt in the Delta and
Suisun Marsh.
S. 1894, the California Emergency Drought Act of 2015,
required the Interior and Commerce departments, in response
to a California drought emergency declaration, to approve
projects and operations to provide the maximum quantity
of water supplies to the CVP for agricultural, municipal
and industrial users, and refuge services and repayment
®
contractors, SWP contractors, and other California localities or
municipalities.
Regulation
The U.S. Environmental Protection Agency (EPA) and
the U.S. Army Corps of Engineers have proposed rules under
the Clean Water Act that will have a huge impact on ordinary
business activities by dramatically expanding federal authority
over water and land uses across the country. By redefining
what constitutes “waters of the United States” governed by the
federal Clean Water Act, the proposed rule could expand federal
jurisdiction over waters from 3.5 million river and stream miles
to well over 8 million river and stream miles.
The proposal also would likely result in more stringent
storm water management requirements, which would affect
retailers, companies with large parking lots, “big box” stores,
etc. The two agencies are overreaching in an attempt to replace
longstanding state and local control of land uses near water with
centralized federal control.
Some impacts include:
• Making most ditches into “tributaries,” resulting in routine
maintenance activities, and on-site ponds and impoundments
subject to permits costing around $100,000 or more, affecting
agriculture and local/state agencies;
• New permitting requirements likely would trigger additional environmental reviews adding years to the completion for
ordinary projects; and.
• There is a real possibility that in order to get permits,
project proponents will have to agree to mitigate environmental
“damage” with costly restoration/mitigation projects. Ditches
can be dug on farms for irrigation purposes, along highways and
roads for runoff, storm water purposes, in housing developments to avoid flooding or ponding, etc.
The CalChamber joined with 375 trade associations and
chambers in voicing strong objections to the proposal, asking
that the agencies withdraw it and start over. The agencies went
forward to finalize the rule. Several states and private parties
filed lawsuits in federal district courts challenging the rule.
In October 2015, the Sixth Circuit Court of Appeals stayed
the rule while it sorts out whether the courts of appeal or
district courts have jurisdiction to handle challenges filed by
various states and private parties. Industry groups, states and
environmentalists argue that challenges to the U.S. EPA and
Army Corps waters of the United States rule should be decided
at the district court level. The government agencies argue that
the appeals courts have jurisdiction.
What to Expect in 2016
Finer tuning to the Groundwater Sustainability Management
Act is certain. Below is a short list of some of the outstanding
issues:
• Define groundwater recharge beneficial uses.
• Sideboards for groundwater and surface water connectivity.
• Increase the minimums up from 2 acre-feet.
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WATER
• Allow for a three- to four-year timeframe for setting up
governance.
• Set up a regulatory framework for unique basins.
• Clarify basins or sub-basins or areas defaulting to Water
Board jurisdiction.
• Clarify what “equity” is with tribes.
The list is daunting and will take time to work through. The
question becomes can these fixes be accomplished before any
more litigation ramps up? There is real concern that if the local
agencies can’t work through logistical problems with designing
plans or if the plans are too burdensome, there will be a rush to
adjudicate, which will take years, even with the recent changes
to the adjudication process.
The recirculated Draft Bay Delta Conservation Plan (BDCP),
EIR/EIS, and Implementing Agreement will be finalized early
in 2016. The public will have another opportunity to review
the final documents before their adoption and any decisions
about the proposed actions. The business community should be
prepared to comment when the 30-day window opens.
The CalChamber is part of a coalition formed to support the
BDCP. Californians for Water Reliability is made up of business leaders, family farmers, labor, community leaders, elected
officials, water experts and others focused on generating support
to improve the security of California’s water supplies through
supporting the BDCP. In light of the No Blank Check initiative’s
qualification for the ballot, the coalition began planning an opposition campaign. This year will see a lot more activity and a more
aggressive outreach to business to help defeat the initiative.
The business and agriculture communities should pay
special attention to all the pending initiatives regarding water.
Now is not the time to be diverted away from the main goal of
developing additional storage. The issue of how to address the
Governor’s desire to fund low-income lifeline rates and how
to charge for stormwater infrastructure will probably lead to a
discussion of a public goods charge in the coming year.
Given that the California Water Commission will determine
water storage projects’ viability for funding under Proposition
1, constant monitoring of commission activities, meetings and
notices will be crucial.
On federal issues, continuation of negotiations on a federal
drought bill is certain. The White House announced at the
end of 2015 that it is pursuing enlisting the private sector in
an effort to reclaim and conserve water. The strategy focuses
on encouraging technological advances and private-sector
110
investment to rebuild water projects like reservoirs, boost data
collection, support water-sharing agreements, and finding
new technologies to recycle and conserve water. Business and
agriculture should watch federal EPA closely as it continues
to administer the current regulations on waters of the United
States while waiting for the Sixth Circuit Court of Appeals to
decide who has judicial jurisdiction over the issue and ultimately
if the new rules will be applied.
CalChamber Position
The CalChamber supports a comprehensive solution to
California’s chronic water shortage. It is vitally important that
all Californians have an adequate and reliable source of water
while safeguarding the environment. Developing additional
water supplies and conveyance facilities can no longer be
postponed without subjecting the state to long-term economic
damage. One serious earthquake or a series of Delta levee
failures could leave millions of people and businesses without a
water supply for the foreseeable future. Every means of
providing more water should be vigorously pursued.
Preparedness through diversification is the path to a
comprehensive solution to California’s water future.
Staff Contact
Valerie Nera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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WORKERS’ COMPENSATION
Protecting Reforms Can Keep System Balance,
Provide Timely Benefits, Minimize Employer Costs
Background
Created in 1913, the California workers’ compensation system
constitutionally guarantees workers the right to compensation
for workplace injuries, including coverage of medical treatment
required to “cure and relieve” the injury. When injured workers
are unable to work or suffer severe injuries, they also may receive
indemnity benefits in the form of temporary or permanent
disability payments.
Over the last 25 years, the California workers’ compensation
system has been in a cyclical state of reform and re-reform.
In the late 1990s, the system began to experience massive
cost increases. These increases resulted from overutilization
of medical services, higher-than-normal indemnity benefit
costs, and increased litigation. At the height of the workers’
compensation crisis in 2003, employers faced double-digit
insurance premium increases, resulting in California having the
most expensive workers’ compensation premiums in the nation.
In the 2002–2004 legislative sessions, broad reforms were
presented to reduce medical care and indemnity benefit costs in
the system. The reforms focused on delivery management and
treatment cost containment while also ensuring appropriate
delivery of quality care. These reforms proved successful and, for
the next few years, medical costs and costs per claim declined
sharply. This decline was reflected in the insurance rates paid by
employers, which dropped by more than 60%, according to the
Workers’ Compensation Insurance Rating Bureau (WCIRB).
This trend began to reverse in 2008 when system costs
started rising once again. Data from the Commission on Health
and Safety and Workers’ Compensation (CHSWC) revealed
that the average cost per indemnity claim was much higher than
before implementation of the 2003 reforms. Specifically, costs
per claim increased 43% from the post-reform low in 2005
and were up approximately 14% from the pre-reform all-time
high in 2003. In addition, overall system costs rose by almost
$1 billion per year, making California the third most costly
workers’ compensation system in the nation, according to the
biennial national study conducted by the Oregon Department
of Consumer and Business Services. Numerous cost drivers
throughout the system share responsibility for these increasing
costs. Not only had savings from the 2004 reforms been diluted
or undercut by incomplete implementation, judicial activism
and exploitation by system vendors, but medical and frictional
costs (such as litigation) also had increased since 2005.
As system costs trended up, so did insurance premiums.
According to the WCIRB, workers’ compensation insurance
rates have climbed every year since 2009 due to rising claims
costs. The average rates filed with the Department of Insurance
increased by 19% between January 2009 and January 2010,
and by 3% between January 2010 and June 2011 when the
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estimated rate per $100 of payroll was $2.37. The rise in claims
costs also had an impact on employers that self-insure. The
California Workers’ Compensation Action Network estimated
that between 2005 and 2011, the claims costs for public entities
that self-insure increased by 32%—even though the number of
claims remained essentially unchanged.
The post-2004 reform issues within the California workers’
compensation system were not limited to employers, as many
injured workers were receiving inadequate permanent disability
benefits. These benefits were reduced during the prior round
of reform in response to higher-than-normal costs. As part of
the 2004 reform deal, however, these benefit reductions were to
be re-evaluated and adjusted within five years. This evaluation
never occurred and the gap between injured workers’ wage loss
and the benefits they received in permanent disability payments
widened. All system stakeholders acknowledged that permanent
disability benefits needed proper augmentation.
2012: Balanced Reform
In September 2012, Governor Edmund G. Brown Jr. signed
into law a workers’ compensation reform package negotiated
by employers and labor that sought to address both system
costs and permanent disability benefits. The goal of this reform
legislation was to offset an increase in permanent disability
benefits with cost-saving proposals. On paper, SB 863 (de
León; D-Los Angeles, Chapter 363) struck this balance. It
increased benefits to injured workers through direct increases
in permanent disability benefits and through the creation of
a $120 million fund for injured workers whose permanent
disability award inadequately reflects wage loss. The total level
of increase was estimated at just under $1 billion a year. These
benefit increases were projected to be offset by reforms that
should reduce frictional costs, decrease litigation, stem abuses by
vendors within the system, speed up the claims administration
process, and make delivery of benefits more efficient.
Implementation Process Nearly Complete
The passage of SB 863 represented a major first step to
reform the California workers’ compensation system. Much
of this bill, however, including many of the major cost-saving
reforms, was not legislatively self-executing, meaning that the
system savings associated with this reform is a function of
effective regulatory implementation.
California’s track record for workers’ compensation reform
demonstrates that there was much more work to do in order
to ensure maximum savings. The regulatory implementation
process can dilute and eliminate savings when regulations veer
from the intent of legislation. Also, the benefit increase of SB
863 is self-executing. Therefore, it was necessary to limit the
time gap between enactment of the legislation (when benefits
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increase) and the regulatory implementation (when cost savings
are implemented) so that the cost-saving reforms are realized as
quickly as possible after the benefits increase.
Over the last three years, the Division of Workers’
Compensation (DWC) and Department of Industrial Relations
(DIR) have put in place nearly all the regulations required to
implement SB 863. Throughout 2015, the implementation
process continued for the final sets of regulations, including
fee schedules for both home health care and copy services. In
total, DIR and DWC should finish implementing all 14 sets of
regulations by the beginning of 2016 at the latest. The pace of
the implementation for legislation of this size and complexity
has largely met employer goals for minimizing the time gap
between enactment and final regulatory implementation.
Challenges Remain Despite Positive Trends for
Reform Savings
The most recent analysis of the reforms brings cautious
optimism for employers. Overall, the 2015 WCIRB Cost
Monitoring Report (Report) now projects $770 million in
yearly net system savings—a 4.1% total reduction in system
costs. Initially, when SB 863 was passed, WCIRB projected
1% in savings, which matched the 2014 Report. The jump in
system savings this year is largely attributed to a decrease in
medical costs, which were not initially “priced” by the WCIRB
because too many variables and unknowns existed with regards
to regulatory implementation when SB 863 passed.
The medical savings broke down into two areas: reduction
in medical costs; and reduction in utilization of medical
services. Together, these reductions resulted in $520 million in
yearly system savings. While the Report determined that it is
impossible to isolate the specific effect of any individual reform
component of this savings, together they “have had a significant
impact” on medical costs.
Although this is encouraging news, it is important to note
that the system experienced significant medical cost savings
after the 2004 reforms and soon saw those savings replaced by
significant inflation as stakeholders adjusted to the new cost
containment laws and courts issued rulings altering the initial
intent of the laws. Additionally, medical cost inflation is down
countrywide and this phenomenon is not expected to continue.
In short, the history of medical savings is tenuous and likely
cannot be exclusively relied upon for long-term structural savings.
The Report illuminated two other broad positive system
trends beyond a reduction in medical costs.
• First, lien reforms continue to match expectations. The filing
fees and statute of limitations have reduced lien filing by 41% and
are on pace to hit the estimated $480 million in system savings.
This positive news is bolstered by the dismissal of constitutional
challenges to the new lien laws (discussed below).
• Second, the cost side of the reforms is currently on track to
meet expectations after concerns that the initial projection had
underestimated the number of indemnity claims—claims where
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injured workers receive disability benefit payments. At the
beginning of 2014, the increase in indemnity claims outpaced
the initial estimate which, coupled with the increase in amount
of benefits per claim provided by the reforms, threatened to
unbalance the reform. New WCIRB estimates now show
indemnity claim frequency stabilizing and costs from the benefit
increases meeting projections.
It is not all positive news, however. Concerns still exist
over the long-term stability of the savings, which initially were
premised on a reduction in system friction. Most alarming
has been the performance of Independent Medical Review
(IMR)—a cost-saving anchor of the reform. The purpose of
IMR is to resolve medical disputes in a timely manner, reducing
the timeframe for dispute resolution from up to a year down
to 30 days. Frictional savings are derived from a reduction in
lien costs, medical-legal reports, expedited hearings, temporary
disability duration, and litigation costs. The Report found that
IMR has had no effect in reducing costs associated with any of
these areas and, in fact, IMR has actually created $70 million in
new system costs. These costs are due primarily to unexpected
IMR volume—more than three times initial projections.
Most stakeholders believe that achieving long-term structural savings requires reducing frictional costs which, by extension,
requires a well-functioning IMR process. It is important to keep
this in mind as system stakeholders, regulators and policymakers
continue to identify, evaluate and address IMR process issues.
Reform history suggests it is unlikely that medical savings alone
can continue to mitigate the increased IMR costs and the costs
associated with increased benefit levels.
Insurance Rates Stabilize But System Remains Most
Expensive
The initial reform savings have been accompanied by stabilization
of the workers’ compensation insurance rates. California Insurance Commissioner Dave Jones recently issued a recommended
2% rate reduction, which comes on the heels of a 10% reduction
earlier in 2015. Collectively, this represents a 12% rate reduction over the last year. Although the commissioner’s rate is purely
advisory, it reflects the trends of insurance rates actually paid by
employers, which have largely stabilized or decreased slightly. It is
important to note that there are a number of factors that go into
determining insurance rates. Both the Insurance Commissioner
and the WCIRB, however, attributed much of the rate stabilization to the initial reform savings.
It also should be noted, however, that both the advisory
rate and the rates paid by employers are aggregate numbers that
represent a snapshot of the system as a whole. There still remain
certain industries and geographical regions where employers
continue to see rates increase.
In contrast to the news on insurance rates, California
employers continue to pay for the most expensive workers’
compensation system in the country. In 2014, the Oregon
Department of Business and Consumer Services released
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its biennial national study comparing each state’s workers’
compensation costs. The study revealed that California regained
the top spot with employers paying 188% more in workers’
compensation costs than the national median and 33% more
than the second most expensive state (Connecticut). Although
California has consistently ranked among the most expensive
states in this study for more than a decade, it has not been
tagged with the No. 1 spot since 2004. With the recent news
on savings, it is possible that there will be some shift in these
numbers when the new report is released in 2016.
California Workers’ Compensation Costs
Compared to Other States, National Median
Year
2000 2002 2004 2006 2008 2010 2012 2014
Rank by
Most
Expensive
3
1
1
2
13
5
3
1
% of
National
Median
148%
216%
236%
166%
121%
131%
155%
188%
Source: Oregon Department of Consumer and Business Services
Legal Attacks on Reforms Continue
Three years after the reform, a number of legal challenges have
made it through the Workers’ Compensation Appeals Board
(WCAB) and to the Court of Appeals. These challenges align with
the historical trends: opponents undertake legal and legislative
efforts to undercut, dilute and completely unravel the reforms.
Lien Litigation
In 2015, the Ninth Circuit Court of Appeals issued the first
major decision on the constitutionality of the reforms. Angelotti
Chiropractic v. Baker involved a challenge to lien activation
fees that the Legislature put in place to reduce the number of
frivolous liens filed with the WCAB.
Before 2012, the high volume of liens created significant
strain on the workers’ compensation system—reducing injured
workers’ access to the courts and costing employers hundreds
of millions of dollars in administrative and settlement costs.
In response to this issue, the Legislature created lien filing
fees as part of the reform. Specifically, SB 863 contained two
types of filing fees: 1) a $100 fee on all liens filed after SB 863
took effect; and 2) a $150 “activation fee” on all existing liens
filed before the law took effect. The goal of these fees was to
discourage the filing of liens that lacked merit in order to reduce
the backlog. To date, this policy change has proven successful.
A group of providers challenged the constitutionality of
the “activation fee” in federal court on the grounds that it
violated the takings clause, the due process clause and the equal
protection clause of the U.S. Constitution. The district court
dismissed the takings and due process claims. But it found that
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plaintiffs had established a probability of prevailing on the equal
protection claim on the grounds that there was no rational
basis for the Legislature exempting large institutional lien
holders from the filing fee. The district court issued a temporary
injunction that prohibited the DIR from enforcing the lien
activation fee and/or dismissing the liens.
This decision was appealed to the Ninth Circuit Court of
Appeals, which reversed the district court’s ruling on the equal
protection clause, vacated the injunction, and, in an unusual
step, dismissed the equal protection claim. The appellate court
found that the filing fees were constitutional because the Legislature had a rational basis to create filing fee exemptions—the
fees were targeted on lien holders that most frequently file liens.
Angelotti was a resounding win for employers. First, as a
practical effect, the “activation fee” was reinstated—lien holders
must pay the fee by December 31, 2015, or their lien will
be dismissed. Many lien holders had awaited the resolution
of Angelotti before either paying the fee or resolving the lien.
Reinstating the lien fee should continue to clear the backlog
of liens in the system. Second, Angelotti likely will serve as
precedent for other challenges to the lien reform statutes. Other
pending cases challenge these statutes and more may be filed in
the future. Angelotti provides employers a level of certainty that
the lien filing fees are constitutional and that savings derived
from these laws will not be undermined.
Independent Medical Review Litigation
There also have been a number of constitutional challenges
to the IMR process. In Stevens v. Workers’ Compensation Appeals
Board, the petitioner contended that the process violated the
State Constitution’s separation of powers clause, due process
principles, and Article XIV, Section 4 requirements (Section 4)
that the workers’ compensation system allow for review of decisions and “accomplish substantial justice,” as well as the U.S.
Constitution’s due process rights. The Stevens court rejected the
state constitutional claims, finding that the plenary powers vested
in the Legislature by the constitution to create and enforce the
entire workers’ compensation system superseded the separation
of powers and due process clauses and that the IMR process does
not conflict with Section 4.
The court also found that the IMR process did not violate
federal due process rights. In its analysis rejecting this claim,
however, the court may have opened the door to increased
WCAB review of medical decisions. Among other arguments
rejected by the court, petitioners contended that the IMR
process did not allow for meaningful appeal of medical treatment decisions. The court countered that there were sufficient
avenues of review under the IMR statutes. Specifically, the court
cited the section of the Labor Code that allows the WCAB to
determine whether the Administrative Director acted outside
of his or her authority or whether the IMR determination was
plainly erroneous. In interpreting these sections of the Labor
Code, the court determined that the WCAB has “considerable”
grounds to review IMR determinations and could evaluate
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whether a medical treatment request was permitted by the
Medical Treatment Utilization Schedule (MTUS).
The Legislature designed the IMR process to increase
efficiency for treatment disputes and to ensure physicians, not
judges, make medical decisions. The language used by the
Stevens court may have undermined these goals by broadening the WCAB’s authority to review IMR determinations and
substitute its judgment for the physician’s. But, this is not
completely clear. The court also stated that the WCAB could
review only decisions based on plainly erroneous facts that were
not a matter of expert opinion. Presumably, nearly all decisions
regarding the MTUS would necessitate an expert opinion,
meaning that the WCAB’s review of the IMR process may
remain limited.
Overall, the Stevens decision cuts both ways for employers.
On one hand, the court found the IMR process constitutional,
which is encouraging news. On the other hand, the language
in the case will likely encourage more IMR appeals, thereby
increasing system litigation and costs. Stevens will not be the
last word on IMR’s constitutionality as a number of challenges
are pending in other districts. Workers’ compensation legal
experts believe that these issues eventually will be decided by the
California Supreme Court.
prescription medication formulary that will ensure clinically
appropriate medications are provided to injured workers,
potentially decrease dispute-driven procedural delays and reduce
costs in the workers’ compensation system. Formularies have
proven successful in managing pharmaceutical costs in other
health systems—including Medi-Cal, private group health care
and other state workers’ compensation systems. Formularies
also can serve as an important tool to fight the opioid epidemic
(discussed below). The CalChamber worked with the author’s
office and other system stakeholders to develop the language in
the bill and it ultimately was signed into law.
• SB 623 (Lara; D-Bell Gardens; Chapter 290) clarifies
current law to ensure that no injured worker is refused benefits
from the Uninsured Employers Benefit Trust Fund (UEBTF)
and the Subsequent Injuries Benefit Trust Fund (SIBTF) based
on their immigration status. The UEBTF provides workers’
compensation benefits to injured workers who have been
injured on the job and work for an illegally uninsured employer.
The SIBTF is a source of additional compensation for injured
workers who already had a disability or impairment at the time
of injury. These funds ensure all workers receive appropriate
benefits when they suffer an industrial injury. The CalChamber
supported this bill and it was signed by the Governor.
2015 Legislative Activity
While stakeholders’ attention largely remained focused on finishing
reform implementation and on the courts, there were a number of
workers’ compensation bills introduced by the Legislature.
• SB 563 (Pan; D-Sacramento) would have undermined the
utilization review and IMR process by barring treatment review
in certain circumstances. As mentioned above, the medical review
process—including both utilization review and independent
medical review – was updated as part of the 2012 reforms. The
goals of these updates were to: 1) ensure timely, evidence-based
treatment for injured workers; 2) allow physicians, not judges, to
make medical decisions; and 3) reduce system litigation and friction. SB 563 threatened to obstruct each of these goals by creating
ambiguous exceptions to the review process, each of which would
have resulted in more treatment delays and disputes. The California Chamber of Commerce labeled this bill a job killer, and it was
held in the Senate Appropriations Committee.
• AB 305 (Gonzalez; D-San Diego) would have required
employers to compensate some injuries that occurred outside
the workplace. The California workers’ compensation system
was designed to cure and relieve industrial injuries or, more
simply put, injuries that occur at work. As such, when making
permanent disability determinations, physicians may apportion
between industrial and nonindustrial causes of the disability. AB
305 would have eliminated apportionment for certain conditions,
thereby expanding the workers’ compensation system beyond
industrial injuries. The CalChamber worked with coalition partners to stop this bill and it ultimately was vetoed by the Governor.
• AB 1124 (Perea; D-Fresno; Chapter 525) creates a
Looking to the Future
Opioids
Controversy has arisen regarding opioid misuse and abuse
by patients suffering from chronic pain within the California
workers’ compensation system, highlighting the need for
reform. This issue is not unique to California or the workers’
compensation system as fatal and nonfatal opioid overdoses
(the majority resulting from legal prescriptions) have risen
dramatically over the past decade throughout the United
States. The Prescription Drug Monitoring Program Center for
Excellence states that emergency department visits related to
the abuse of oxycodone rose 242%, hydrocodone 124%, and
all pharmaceuticals 98% over the last several years. Since 2002,
the number of opioid prescriptions has increased six-fold in the
California workers’ compensation system.
According to the California Workers’ Compensation Institute (CWCI), only 3% of the roughly 10,000 physicians in this
system are responsible for just more than half of all Schedule
II opioid prescriptions. CWCI noted that injured workers who
receive high doses of opioids for injuries (such as back strains)
take nearly three times as long to return to work as compared
to workers with similar injuries who were prescribed low doses.
These statistics demonstrate a need to create stronger uniform
guidelines for opioid prescriptions. Some of the issues that need
to be addressed are:
• Determining under what circumstances it is absolutely
necessary to use opioids as treatment;
• Refocusing treatment goals more broadly, rather than using
pain reduction as the sole purpose;
114
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• Developing opioid abuse screening tools that explore
patient histories of substance abuse, psychiatric conditions and
prolonged disability;
• Committing to a careful process of monitoring a patient
using opioids; and
• Planning how to achieve a patient’s pain management with
minimal opioid use.
California has initiated certain efforts to combat opioid
abuse by chronic users through monitoring and regulatory
controls. Within the last few years, the state has implemented an
online prescription monitoring database, as well as regulations
released by the Division of Workers’ Compensation in its
Medical Treatment Utilization Schedule. Legislation passed and
signed in 2013 provides a constant stream of funding for the
Controlled Substance Utilization Review and Evaluation System
(CURES) database. The state Department of Justice plans to
use this new funding to update the database and create CURES
2.0, an integrated approach that combines accurate and easyto-access information technology with the oversight of medical
professionals and the efforts of law enforcement.
Another possible tool to address the opioid problem is adopting drug formularies in the state workers’ compensation system.
Formularies are lists of approved drugs that can be prescribed for
different therapeutic categories and are utilized by group health
plans, Medicare and workers’ compensation systems in other
states, primarily to contain pharmaceutical costs. Formularies also
have proven effective, however, in restricting opioid access. After
examining workers’ compensation systems utilizing formularies
in other states, the CWCI concluded that if California adopted a
similar model, there would be a significant restriction in Schedule
II opioids prescriptions and a moderate restriction in Schedule
III, IV and V opioid prescriptions.
As mentioned above, the Governor recently signed
legislation—AB 1124—that directs the DWC to create a
prescription medication formulary for the California workers’
compensation system. This is an important first step in
developing this tool. The bulk of the formulary, however, will
be developed through the regulatory process. The formulary’s
ability to curb inappropriate opioid prescribing practices will
largely be a product of program design through this process.
Finally, the DWC continues to work on an update to the
Chronic Pain Medical Treatment Guidelines and creating
a separate Opioids Treatment Guidelines that will provide
treatment protocols for appropriate use of opioids across the
workers’ compensation system. The rulemaking process on these
guidelines will likely conclude in 2016.
Combating the opioid epidemic is a complex and
serious problem that will continue to require thoughtful
input and effort on both the state and national levels by all
system stakeholders, government regulators and the medical
community in order to develop a comprehensive solution.
Cumulative Trauma
There is both anecdotal and statistical evidence that the
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frequency of cumulative trauma claims has been increasing in the
state workers’ compensation system in recent years. The nature
of cumulative trauma creates difficulties for determining clear
eligibility rules and policy surrounding these claims. Since cumulative trauma derives from a “continued event,” it is more difficult
to evaluate the appropriateness of a claim compared to workers’
compensation claims that occur as the result of a “singular event,”
such as a slip-and-fall accident or an acute injury, such as a broken
arm. Thus, it is difficult to delineate the cumulative trauma attributable to the current job, previous jobs, or other outside factors
such as natural aging or nonwork-related activities.
In its most recent report, the WCIRB has documented a
continued increase in cumulative trauma claims. Since 2005,
these claims have increased by more than 50% as a portion of all
indemnity claims. The WCIRB reported that in 2012 nearly 40%
of cumulative trauma claims were “permanent indemnity injury
types,” meaning there was some level of permanent disability
payment. Additionally, the WCIRB found that the increase in
cumulative trauma claims is spread across multiple sectors of the
economy, including manufacturing, finance and clerical.
These numbers, paired with anecdotes of employees filing
cumulative trauma claims post-employment, indicate that a
worrisome trend may be emerging in which costs are shifting
from the realm of unemployment insurance or retirement benefits
to that of workers’ compensation. Accordingly, injured workers,
insurers and employers must come together to formulate a
balanced approach to evaluating the appropriateness of cumulative trauma claims before misuse becomes unmanageable.
CalChamber Position
Workers’ compensation costs for California employers must
decrease to become more competitive with employer costs in
other states. The California Chamber of Commerce-supported
cost-saving reforms were designed to both increase benefits and
reduce overall system costs. These reforms must be protected
from any attempts to dilute or undercut savings through
subsequent legislation or judicial activism. The ultimate goal is a
balanced workers’ compensation system that efficiently provides
timely and fair benefits to injured workers and minimizes
administrative and frictional costs to employers.
Staff Contact
Jeremy Merz
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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WORKPLACE SAFETY
Marijuana: Legalizing Medical, Recreational Uses
Has Implications for Workplace Drug Use Policies
In 1996, voters passed Proposition 215, making California the
first state in the country to allow for the medical use of marijuana. Since then, 22 more states, and the District of Columbia
have enacted similar laws. In 2012, Washington state passed a
voter initiative to allow recreational use of marijuana by adults,
followed by Colorado, Oregon, Alaska and Washington, D.C.
Separate from medical and recreational marijuana is
cannabidiol (CBD) oil. States that have legalized the oil are not
considered medical marijuana states. Cannabidiol oil is made
from strains of marijuana with less THC, producing fewer or no
psychoactive effects. The oil reportedly has therapeutic qualities
and is widely considered helpful for children with epilepsy.
There are 15 states that have legalized it, and states that have
legalized a comprehensive medical marijuana program generally
permit CBD oil use as well.
Media reports speculate that many states will legalize recreational marijuana use in the near future. In addition to California,
Arizona, Arkansas, Maine, Massachusetts, Michigan, Mississippi,
Missouri, Montana, Nevada and Wyoming are expected to place
initiatives on the 2016 ballot. An initiative in Ohio failed to pass
in 2015, but another attempt in 2016 is anticipated.
According to Gallup (2015), 58% of Americans support
legalizing marijuana, a percentage that has grown markedly in
the last two decades, possibly aided by strong medical marijuana movements in many states. According to health surveys
sponsored by the National Institute on Alcohol Abuse and Alcoholism, marijuana use among U.S. adults doubled over the last
decade, rising to more than 22 million mostly recreational users.
The National Organization for the Reform of Marijuana
Laws (NORML) reports that among the 75 million Americans
over age 26 (38% of adults, according to Gallup) who report
having used marijuana, more than 70% are employed full-time. All 50 states allow employers to restrict marijuana use.
Workplace drug testing policies are allowed and facilitate
essential workplace safety and productivity standards for
employers as well as employees. Job seekers and employees often
are surprised, however, that even though marijuana use may be
legal for medical or recreational use in their state, they still can
face sanctions or dismissal by their employers, or may not be
hired for a job if they test positive for the drug.
2016 California Ballot Initiatives
In California, more than a dozen ballot initiatives have been
submitted to legalize the recreational use of marijuana. One
initiative in particular appears to be the frontrunner. It is backed
by Lieutenant Governor Gavin Newsom and has received financial support from former Facebook President Sean Parker. Other
marijuana advocacy groups have abandoned their filed initiative,
and moved to support this measure as well. It is still too early to
tell if one or more initiatives will appear on the 2016 ballot.
Any ballot initiative to legalize the recreational use of
marijuana may or may not build upon the recently enacted rules
to regulate and tax medical marijuana. Of particular note, the
aforementioned ballot initiative contains the same employment
language as the recently enacted rules for medical marijuana.
Even though this language was designed to be protective of
drug-free workplaces, the provisions may be challenged and
interpreted by the courts.
Percent of Americans in Favor of Legalizing Marijuana
58%
60%
50%
40%
30%
20%
12%
10%
0
‘69
‘72‘73
‘77
‘79‘80
‘85
‘95
‘00‘01
‘03
‘05
‘09
‘11
‘13
‘15
Source: Gallup and The Washington Post
116
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WORKPLACE SAFETY
State vs. Federal Perspective
Marijuana remains illegal under federal law regardless of state
law. However, guidance issued by the U.S. Department of
Justice (DOJ) in 2009 and updated in 2013 essentially expresses
its intent not to pursue federal prosecutions against individuals
in states where marijuana use is legal. This guidance rests on
the DOJ’s expectation that these states have strong, effective
regulatory and enforcement systems that address threats to
public safety, public health, and other law enforcement interests.
In 2013, the DOJ updated its marijuana enforcement
policy. The statement reads, in part, that while marijuana
remains illegal federally, the DOJ expects states like Colorado
and Washington to create “strong, state-based enforcement
efforts... and will defer the right to challenge their legalization
laws at this time.”
The DOJ further expresses its right to challenge any
regulatory structure of a state’s legal marijuana system if the
department believes the state structure is not sufficiently robust
to protect against “harms.” DOJ also may enforce the federal
law through criminal prosecutions, based on those “harms.”
These harms essentially include illegal activities that arise from
legalized marijuana, such as violence, illegal cultivation, drugged
driving, and growing marijuana on public lands.
The fact that marijuana use is illegal federally creates complexities where it is legal under state law. While the DOJ has stated its
intent not to pursue federal prosecutions in states with laws that
permit marijuana use, there is a risk states accept—that federal
enforcement may be imminent. The guidance can be withdrawn
or revised.
Noteworthy Federal Bills
A number of bills related to easing various restrictions on
marijuana were introduced in Congress in 2015. We discuss
here the most noteworthy.
• The bipartisan Compassionate Access, Research
Expansion, and Respect States (CARERS) Act was introduced
in March 2015 by Senators Cory Booker (D-N.J.), Rand Paul
(R-Ky.), and Kirsten Gillibrand (D-N.Y.).
The CARERS Act, along with the U.S. House companion
bill, H.R. 1538, aims to effectively legalize medical marijuana
in states that have approved its use. The bill would amend the
Controlled Substances Act (CSA) of 1970—which classifies
marijuana as a Schedule I drug—and reschedule marijuana as
a Schedule II drug. The revised designation would open new
research opportunities by removing marijuana-specific barriers
to research, in addition to the barriers already eliminated by
executive action from the Obama administration.
Additional aspects of the bill amend federal laws to allow
banks to service legally operating medical marijuana dispensaries
and specifically allow states to dictate their own medical
marijuana policies. The willingness of the U.S. Senate to at least
deliberate the legitimacy of medical marijuana is evidenced by
the recent passage—with bipartisan support—of three Senate
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appropriation amendments during the summer of 2015 that
mirror the major spending provisions in the CARERS Act,
albeit on a temporary one-year time horizon.
• On November 4, 2015, Democratic presidential candidate
Senator Bernie Sanders (I-VT) introduced the Ending Federal
Marijuana Prohibition Act of 2015. The legislation proposes,
in part, that marijuana be removed from the schedule of
controlled substances listed in the CSA; that the prohibition
on import and export of marijuana be removed from the CSA;
and that marijuana be explicitly excluded from the prohibition
on certain shipping or transportation also in the CSA. These
actions would serve to legalize the drug under federal law
and effectively remove the banking obstacles for those in the
marijuana industry.
• Additionally, the Marijuana Businesses Access to
Banking Act of 2015 was introduced in both the U.S. House
and Senate—as H.R. 2076 and S. 1726 respectively. The
legislation proposes to insulate depository institutions from
potential penalties associated with providing services to legal
marijuana businesses, such as the termination or limiting of an
institution’s deposit or share insurance.
Federal regulators would be prohibited from encouraging
depository institutions to either refuse to offer financial
services or cancel or downgrade services offered to individuals
involved in legal marijuana businesses. Regulators also would be
prohibited from obstructing loans connected to legal marijuana
businesses solely because of the type of business.
The legislation further proposes that depository institutions
be granted immunity from federal criminal investigations and
prosecutions related to providing financial services to marijuana
businesses that operate legally in states wherein such businesses
are permitted. The protections afforded by this legislative
proposal also would seem to eliminate many of the impediments
to banking legal marijuana businesses; however, there has been
minimal action on either bill at this juncture.1
Accommodating Marijuana Use by Employees
While state laws vary, most states do not require employers
to accommodate medical marijuana use by their employees.
Employers in some states, such as Arizona, Connecticut,
Delaware, Illinois, Maine, Nevada, New York and Minnesota,
need to consider the specific requirements of that state because
these states require some form of accommodations for registered
medical marijuana users. Even in those aforementioned states
and in every state, these laws don’t require employers to permit
drug use in the workplace or tolerate employees who report to
work under the influence. But beyond that, the issues become
more complex, and sometimes more difficult to resolve.
For example, courts in Montana, Washington and California
have considered the issue and ruled on the side of employers:
Jequetta Byrd and Laura Lieberman, “Marijuana in America, 2015:
A Survey of Federal and States’ Responses to Marijuana Legalization
and Taxation.” Bloomberg BNA (November 13, 2015).
1
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WORKPLACE SAFETY
• Johnson v. Columbia Falls Aluminum Co. (350 Mont.
562, 2009 WL 865308, at *2 (Mont. 2009)): “The [Medical
Marijuana Act] MMA specifically provides that it cannot be
construed to require employers ‘to accommodate the medical
use of marijuana in any workplace.’”
• Roe v. TeleTech Customer Care Mgmt. LLC (152 Wash.
App. 388, 216 P.3d 1055 (2009)): “[I]t is unlikely that voters
intended to create such a sweeping change to current employment practices [under the Medical Use of Marijuana Act].”
• Ross v. RagingWire Telecommunications, Inc.( 42 Cal.4th
920, 70 Cal.Rptr.3d 382, 174 P.3d 200, 203 (2008)): “Nothing
in the text or history of the Compassionate Use Act [California’s
medical marijuana law] suggests the voters intended the measure
to address the respective rights and duties of employers and
employees.”
California’s recently adopted laws to tax and regulate
medical marijuana include a provision designed to allow
employers to continue to maintain drug-free workplaces.
While on its face the language allows employers to continue to
prohibit the use of marijuana by employees, maintain the right
to drug test job applicants, and not hire those who test positive
for marijuana, the language could ultimately be interpreted by
the courts. Furthermore, ballot initiatives have the potential
to undermine the recently adopted rules. The current medical
marijuana law reads:
“19330. This chapter and Article 2 (commencing with Section
11357) and Article 2.5 (commencing with Section 11362.7) of
Chapter 6 of Division 10 of the Health and Safety Code shall not
interfere with an employer’s rights and obligations to maintain a
drug and alcohol free workplace or require an employer to permit
or accommodate the use, consumption, possession, transfer, display,
transportation, sale, or growth of cannabis in the workplace or
affect the ability of employers to have policies prohibiting the use
of cannabis by employees and prospective employees, or prevent
employers from complying with state or federal law.”
Legalized adult recreational use of marijuana is sparking
new conflicts between employers trying to maintain drug-free
workplaces and workers who say they’re being punished for their
legal medical use of marijuana, or legal off-duty indulgences
in states where recreational use is legal. As the legalization and
use of marijuana becomes more prevalent, employers need to
be diligent and be aware of any changes that occur to these
employer rights through the courts, regulation, and state and
federal laws.
Employment Provisions in State Recreational
Marijuana Laws
Workers still can be terminated or refused a job for using
marijuana where employers maintain anti-marijuana policies.
Adults who legally consume marijuana after work, away from
the job site or the office, must remain mindful of the drug rules
at their workplace.
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Percent of People Who Have Tried Marijuana
50%
44%
40%
30%
20%
10% 4%
0
‘69
‘73 ‘77
‘85
‘99
‘13 ‘15
Source: Gallup and The Denver Post
Alaska, Colorado and the District of Columbia have
recreational marijuana laws providing express protection for
employers. The laws in all three jurisdictions clearly71indicate
employers are not required to permit or accommodate64the use,
58
18 to 34
consumption,
possession, transfer, display, transportation, sale
35 to 39
or growing of marijuana in the workplace,
and that they are
44
50 to 64
not intended
to
affect
the
ability
of
employers
to have policies
65+
35
34
restricting the use of
Driving
under the
32 marijuana by employees.
30
influence of marijuana is specifically prohibited in Alaska and
22
20
Colorado,
and the recreational
marijuana laws
17 in those states
16
11
specifically
allow employers to13regulate on-premises use and
possession6of 4marijuana.
The1969
Washington law
is silent on2000-2001*
employers’ right to2015
1985
maintain a drug-free workplace while Oregon’s law indicates
it is not to be construed to amend/affect laws “pertaining to
employment.” The state Supreme Court of Washington issued
a decision in 2011 upholding the right of an employer to
terminate an employee who violated the company’s drug policy
through medical marijuana use that was lawful under state
statute. State supreme courts in some other states with medical
marijuana laws—California, Montana, and Oregon—have
made similar decisions.
Accordingly, states may offer employees even less protection
for employer action on the basis of recreational marijuana use.2
Therefore, at least for now, legal experts suggest that employers
can continue to enforce their various drug testing and drug-free
workplace policies in those states with statutes allowing for some
types of marijuana use.
In fact, David Rheins, CEO of the Seattle-based Marijuana
Business Association, stated: “Employers do hold all the cards.
You’re not guaranteed a job. If not using marijuana is in the
contract, or in the terms of the job, you can get fired.”
Dale L. Deitchler, “Employers can still ‘just say no’ to recreational
marijuana even where legalized under law,” Inside Counsel (May 14,
2015).
2
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WORKPLACE SAFETY
California Workplace Concerns
The legal use of marijuana has raised questions and challenges
in the workplace and could be exacerbated in the event that
recreational use of marijuana becomes legal in California. This
is an area of law that is evolving and could change with future
state legislation, congressional action or court decisions. Some
areas that may continue to evolve and change include:
• Employer’s right to enforce a zero-tolerance drug use policy
that includes prohibition on marijuana use either medically or
recreationally, on and off the job.
• Employer’s right to terminate employees who test positive
for marijuana, even if the employee is not impaired.
• The development of a definitive test to determine
impairment.
• Challenges to employers with zero-tolerance drug policies
in terms of recruitment, hiring and retention of employees.
• Implications for injured workers (workers’ compensation)
when an employee tests positive for marijuana, or is prescribed
marijuana for a condition covered by workers’ compensation.
• Unemployment insurance benefits for employees who are
terminated for a positive test without signs of impairment.
Drug Testing: Marijuana in the Workplace
U.S. workers are increasingly testing positive for drugs,
according to an analysis by Quest Diagnostic in September
2014. Quest looked at 8.5 million drug tests in the United
States and concluded that positives increased for the first
time since 2003; up to 5.7% from 2012 to 2013. Marijuana
continues to be the most commonly detected illicit drug,
according to the analysis of urine drug tests. Positive marijuana
drug tests in the U.S. workforce increased 6.2%, to 1.7% in
2013, compared to 1.6% in 2012.
Furthermore, positive test rates for marijuana use among
workers in Colorado and Washington where recreational use
is legal, increased more than 20% in 2013. Colorado and
Washington tests showed marijuana positivity rates increased
20% and 23%, respectively, in the general workforce between
2012 and 2013, compared to the 5% average increase among
the U.S. general workforce in all 50 states. Both Colorado
and Washington experienced dramatic increases in marijuana
positivity rates prior to legalization at the end of 2012.
Washington and Colorado are believed by many to foreshadow
future trends in recreational marijuana use.
Currently, there’s no test that can determine whether
someone is actually impaired and under the influence of
marijuana. This is because marijuana can remain in the body
long after any intoxicating effects of the drug have worn off,
sometimes weeks after use. This creates a problem for employers
attempting to determine impairment. In contrast, an employer
can use a breath test to see whether a worker has been drinking
on the job. There is no such test for marijuana.
At this time, reports confirm several companies are close
to creating a device much like a breathalyzer that will measure
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THC and help determine impairment from recent marijuana
use. An Oakland-based company working with the University
of California at Berkeley hopes to begin clinical trials in early
2016, with a product on the market by the end of the year. A
retired Canadian police officer and a physician also have teamed
up to create a breathalyzer that will detect marijuana use in
the past two hours, potentially a measure of impairment since
the effects generally last two to three hours. The technology is
anticipated to become more precise as legalization spurs further
research.Until such time as impairment can be measured and
confirmed, however, employers should stick to the usual tests
identifying THC in the system.
Given the upward trend in marijuana use nationally and the
changing state-based laws with regard to marijuana, employers
must address marijuana use in the workplace. Employers must
choose whether to implement drug-free workplace policies, or
allow marijuana use by their employees. Either way, employers
should consider their decision carefully.
Drug Testing: California Rules
California is one of seven states whose constitution guarantees
an individual’s right to privacy. This guarantee places additional
restrictions on laws and regulations applying to alcohol and
drug testing programs. California courts have found that
employers may require employees to pass a drug test as a
condition of employment. As long as an employer tests all
applicants for particular job positions and doesn’t single out
certain applicants based on protected characteristics (such as
race or disability), courts have upheld this type of testing.
According to a 2008 California Supreme Court decision
(Ross v. RagingWire Telecommunications, Inc.), it is not a
violation of California law for an employer to terminate an
employee who tests positive for marijuana, even though the
employee was prescribed the marijuana for medical purposes.
Adopting and administering reasonable policies to prevent
drug use, possession or sale in the workplace does not violate
protections against discrimination provided by the Americans
with Disabilities Act (ADA) or California’s Fair Employment
and Housing Act (FEHA). In California, an employer may be permitted to conduct
drug testing in five circumstances:
• Pre-employment screening;
• As part of a physical examination;
• Under reasonable suspicion;
• Post-accident testing;
• Random testing.
Pre-Employment
The California Supreme Court held that an employer may
refuse to hire an applicant who tests positive for marijuana, even
if the drug is legally prescribed for a disability.
Physical Exams
Although the issue is not yet determined in California,
federal courts and some state courts have approved testing as
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0
‘69
‘73 ‘77
‘85
‘99
‘13 ‘15
WORKPLACE SAFETY
part of annual or periodic physical examinations, particularly
in union employment relationships governed by collective
bargaining agreements. Under the ADA and FEHA, however,
the physical examination must be either part of a voluntary
employee health program or job-related and consistent with
business necessity (employers should seek advice from counsel
before implementing such a program).
Reasonable Suspicion
An employer having a reasonable suspicion that an employee
is using drugs may be on safe legal ground in testing, provided
that the suspicion is based on objective facts and rational
inferences drawn from the facts.
Post-Accident
Courts generally have upheld post-accident drug testing
where an employer has reasonable suspicion that an employee
involved in the accident was under the influence of drugs and/or
alcohol or if the accident was a serious one.
Random Testing
Although courts have upheld random testing for very safetysensitive positions, the legality of random drug tests, particularly
in California, is extremely limited.
Cases upholding random drug testing are limited to those
involving employees in the following situations:
• Employees in specific, narrowly defined job classifications;
• Employees in professions that can be categorized as part
of a pervasively regulated industry, where the employee has less
expectation of privacy given the nature of employment;
• Employees in positions that are critical to public safety or
the protection of life, property or national security.
With these exceptions, random drug testing is not allowed
in California. Driving Under the Influence of Marijuana
As more states legalize marijuana for medical or recreational
use, concern is rising about the risk of people getting behind
the wheel while high. The latest highway safety statistics
confirm the number of drivers testing positive for marijuana
has increased dramatically—but driving under the influence of
alcohol remains a far more deadly threat.
The National Highway Traffic Safety Administration survey,
conducted in 2013 and 2014, found that the number of drivers
with marijuana in their systems grew by nearly 50% since 2007,
rising from 8.6% in 2007 to 12.6% in 2014.
The report cited “evidence that marijuana use impairs
psychomotor skills, divided attention, lane tracking, and
cognitive functions”—all essential skills for safe driving.
But a separate survey—the largest of its kind—assessing
the comparative risk of drunk and drugged driving in Virginia
Beach, Virginia, over a 20-month period, offered another take
on the issue. The survey highlighted the fact that driving under
the influence of marijuana may not be nearly as hazardous as the
impairment caused by alcohol.
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Marijuana Legalization Support
Percent in favor, by age group
71
64
58
18 to 34
35 to 39
44
50 to 64
65+
34
32
22
20
11
16
6
1969
13
35
30
17
4
1985
2000-2001*
2015
Source: Gallup and The Denver Post
*Note: Years combined because the 2000 survey asked the question of a
half-sample of respondents.
The survey found that while marijuana users are more likely
to be involved in accidents, the increased risk may be largely
due to the fact that marijuana users are more likely to be part
of demographic groups at higher risk of crashes generally. In
particular, marijuana users are more likely to be young men—a
group already at high risk.
But unlike with alcohol, drivers under the influence of
marijuana tend to be aware that they are impaired and try to
compensate by driving slowly, avoiding risky actions such as
passing other cars, and allowing extra room between vehicles.
On the other hand, combining marijuana with alcohol appears
to eliminate the marijuana user’s exaggerated caution and
to increase driving impairment beyond the effects of either
substance alone.3
Clearly, scientists do not agree on the level of risk that
marijuana-impaired drivers pose. The body of scientific
work on marijuana’s effect on motor vehicle operation is
small. Nonetheless, it is illegal to drive under the influence of
marijuana in every state.
As in the workplace, the question remains: how do you
prove the driver was under the influence? According to an
October 13, 2014 article in Time magazine, a handful of states
have set a numeric limit for THC (the active ingredient in marijuana) in the blood. States have a difficult decision regarding
what limit to set; if it is set too high, like the 5-nanogram limit
in Washington, it could be a “license to drive stoned.” If the
limit is set too low, impairment convictions could be possible
when marijuana had not been consumed in a month.
Workers’ Compensation Implications
Among the legal issues plaguing the workers’ compensation
system is whether an injury is compensable if a postaccident drug screen is positive for a claimant who has been
CBS/AP, “Stoned driving on the rise, but is it as risky as drinking and
driving?” (February 11, 2015).
3
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WORKPLACE SAFETY
prescribed medical marijuana. In fact, the National Council
on Compensation Insurance Inc. (NCCI) in its paper “High
Times in Workers’ Comp: The Impact of Medical Marijuana”
highlighted medical marijuana as one of the top emerging
workers’ compensation issues to watch in 2014, with workers’
compensation insurance carriers already getting an increasing
number of requests to pay for prescribed marijuana.
According to some experts, the lack of approval from the
U.S. Food and Drug Administration and a federal law banning
its use would preclude most workers’ compensation insurers
from paying for marijuana as a treatment for injured workers.
Others in the industry disagree and say that the federal law isn’t
enough to stop more marijuana workers’ compensation claims
from being made, and paid by the insurer.
New Mexico, however, already has ruled in favor of insureds
seeking reimbursement for medical marijuana use on three separate occasions. The New Mexico Court of Appeals ruled that the
state’s Compassionate Use Act in conjunction with its Workers’
Compensation Act authorizes reimbursement for medical
marijuana as “reasonable and necessary” medical care. These
rulings, which cite a 2013 U.S. Department of Justice memo
declaring that the federal government generally will defer to
state authorities on issues involving medical marijuana, present
a stark contrast to the Colorado Supreme Court ruling in Coats
v. DISH Network (discussed below) and illustrate the uncertainty surrounding where the ultimate legal authority lies when
state and federal laws conflict. Whether the New Mexico rulings
carry over and affect reimbursement requirements in other states
remains to be seen, but certainly the possibility exists that courts
in other jurisdictions could make similar interpretations.4
“Some states subscribe to the theory that since it is a
controlled dangerous substance under federal law, it is illegal
regardless of state law; therefore, if an employer can prove it
is the cause of a work-related injury, then it is a noncompensable injury,” said Albert B. Randall, Jr., a Baltimore-based
attorney with the firm Franklin & Prokopik, P.C. “Other
states take a different approach and find that as long as it is a
lawful medication prescribed or recommended by a licensed
healthcare provider, you were, therefore, legally entitled to
take it, and even if it were a cause of the accident … it would
be a compensable accident.” (Nancy Grover, “High Times
in Workers’ Comp: The Impact of Medical Marijuana,”
Workers’ Compensation 2014 Issues Report)
But the issue is far from clear-cut, even in states that
deny compensability when marijuana is involved. “The proof
problem, as we see in intoxication situations, is whether the
presence in the system is what led to the accident,” Randall said.
“Because it can’t be objectively measured in the system, it is
much harder to pin the use of marijuana to being a sole cause or
contributing cause.”
While a positive test may result in a compensable injury,
Thomas M. Prince, “Developments in federal marijuana policy and
workers’ compensation insurance,” Milliman (November 4, 2015).
4
®
the employer has the right to discipline the worker, up to and
including termination, for violating the company drug policy.
Bringing an injured worker back to the job may present
additional concerns if the person is using medical marijuana.
The safety of the workplace, as required by Cal/OSHA must be
considered.
There also may be concerns that the Equal Opportunity
Commission (EEOC) may take the position that employers
accommodate the use of medical marijuana as an
ADA-protected disability or treatment for a disability. Knowing
that such an employee is using medical marijuana could create
tort liability and other safety concerns. There is not necessarily a
right answer.
In California, the burden of proof is on the employer to
show that the employee was impaired, and that the impairment
was the cause of the injury. Without a definitive test for
impairment, the employee still may be eligible for benefits
although the employee could be terminated for violating the
employer’s drug-free workplace policy.
Recruiting and Retaining Employees
Drug-free workplace policies plus increasingly more positive
drug tests are resulting in the need to recruit more applicants in
order to find those who can pass the drug test. The experience
in Colorado and Washington with the legalization of marijuana
for recreational use has sparked a flurry of anecdotal evidence
pointing to this new problem for employers. Many applicants
and employees are unaware that although the use of marijuana is
legal for medical and recreational use in these states, employers
still may enforce zero-tolerance drug use policies.
The Society for Human Resource Management (SHRM)
reports that the vast majority (94%) of organizations that
operate in states in which marijuana is legal for either medical
or recreational use indicated they have a formal, written
substance abuse policy in place. Furthermore, according to
the SHRM survey released December 14, 2015, those policies
were reportedly stricter in states that have legalized medical
and recreational marijuana use than in states that have legalized
marijuana use only for medical purposes. Businesses operating
in states where marijuana is legal only for medical use were more
likely to include exceptions in their policies allowing medical
use than organizations operating in states where marijuana is
legal for both recreational and medical use.
Staffing agencies report they must recruit more applicants
than prior to legalization because many refuse the pre-hire drug
test when they discover a positive test will eliminate them from
being hired, and many fail the test.
Employers report a higher incidence of positive tests in
random testing, and therefore are facing a retention problem.
While the reports are preliminary, there is some indication that
this could be a problem in the future and employers need to
consider the implications for their workforce recruitment, hiring
and retention policies.
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WORKPLACE SAFETY
Unemployment Insurance (UI) Benefits
The California Employment Development Department (EDD),
in its UI Benefit Determination Guide, which provides guidance
regarding adjudicating benefit eligibility issues provides the
following guidance regarding substance abuse: In summary,
if an employer has a substance abuse policy which prohibits
employees from reporting to work or being on the job under
the influence of intoxicants, including marijuana, an employee
could be terminated for misconduct. If the evidence shows that
the employee willfully violated a reasonable employer rule that
resulted in a substantial breach of duty and harmed or intended
to harm the employer’s interest, then the termination would be
for misconduct. (Misconduct MC 270).
The termination may not be considered for misconduct,
however, if he/she had an “irresistible compulsion” to use or
consume intoxicants. In such cases, the individual may be
disqualified from benefits under a separate UI code until the
claimant completed a drug or alcohol treatment program or
continuously receives treatment for the addiction. Each case is
adjudicated individually based on the facts obtained during the
adjudication process by the EDD.
In a closely watched case in Michigan, the state Court
of Appeals (October 2014) ruled that under the Michigan
Medical Marijuana Act (MMMA), an employee terminated may
collect unemployment benefits if he is fired solely for a positive
marijuana test.
The Michigan Chamber of Commerce described the ruling of
the Michigan Court of Appeals in a message to its members. The
ruling issued is a key decision for employers maintaining drugfree workplace policies. The court, in a 3-0 decision, held that,
although claimants testing positive for marijuana would ordinarily
be disqualified for UI benefits under the law, the same does not
hold true for employees using marijuana under the MMMA.
The state court upheld three separate Circuit Court
orders that granted unemployment benefits to employees who
possessed medical marijuana cards but were discharged for
failing a drug test in violation of their employers’ drug-free
workplace policies. The Court of Appeals determined the
MMMA pre-empts the Michigan UI law and disqualifying
an eligible claimant for UI benefits due to a positive medical
marijuana drug test represents a “penalty” under the MMMA.
(The court cited a clause in the MMMA providing: “A
qualifying patient who has been issued and possesses a registry
identification card shall not be subject to arrest, prosecution, or
penalty in any manner, or denied any right or privilege....”)
The court likewise rejected the contention that in upholding
an award of benefits, the court would have to disregard the law’s
provision that employers are not required to accommodate the
use of marijuana in the workplace. Instead, the court concluded
that only the ingestion of marijuana in the workplace or
working while under the influence need not be accommodated.
The Michigan Chamber Litigation Center filed a friend-ofthe-court brief challenging the lower courts’ decisions on this
122
issue because it puts employers in a no-win situation: Either
accommodate medical marijuana users and jeopardize workplace
safety or discharge those employees and pay their UI benefits
and, subsequently, higher UI taxes.
Colorado Supreme Court Decision
In the case of Coats v. Dish Network, the Colorado Supreme Court
held that the state’s “lawful activities” statute did not protect an
employee from termination after he tested positive for marijuana,
despite his status as a licensed medical marijuana patient. The court
reasoned that because marijuana is still illegal under federal law, its
use is not a “lawful activity” receiving protection.
The case looked at the termination of an employee of Dish
Network who sued under Colorado’s lawful off-duty activities
law for failing a random drug test despite having a medical
marijuana license. In a unanimous decision, the court found
in favor of the company based on the fact that federal law still
classifies marijuana as a controlled substance.
The outcome of the Colorado Supreme Court could have
implications for other states, and for recreational marijuana use.
Environmental Concerns
California has some of the most stringent environmental
regulations in the nation. Legalizing marijuana brings additional
concerns to landowners adjacent to or near legal and illegal grow
operations.
Outdoor grow operations in some parts of the state are
causing environmental damage through the use of pesticides
that run off into rivers and lakes and into the ground. Pesticides
are not labeled for use on marijuana in California. Restricted
materials, which include many pesticides and herbicides, require
specific handling and recordkeeping.
Landowners and chemical manufacturers are concerned
that they will be required to clean contaminated waters and
land. Even though landowners (forestry, farmers and ranchers,
etc.) keep their records, it is very hard to prove that their legal
usage of a chemical did not cause the contamination. Further,
chemical companies are concerned that they will be required to
clean contaminated water or soils because they can be identified
and tied to a product. Cleanup of contaminated areas is very
expensive and time consuming.
Conclusion
As legal recreational use of marijuana becomes more widespread
throughout the country, and some say imminent in California,
the reality of off-duty legal use could have an impact on the
workplace in new and different ways than currently exist and
could challenge the right of employers to prohibit employee
use of marijuana. The development of a tool to determine
impairment could create a dramatic shift for employers and law
enforcement, as would a change in the federal classification or
decriminalization of marijuana.
The question for the future is whether employers will
®
WORKPLACE SAFETY
maintain the right to enforce drug-free workplace policies in
order to enforce a prohibition on activity that is otherwise legal
under state law, but not under federal law. Further complicating
this question is the lack of a drug test for impairment from
marijuana. The law at this time allows an employer to terminate
an employee or refuse to hire an applicant who tests positive,
regardless of impairment.
The trend toward legalization of marijuana at the state level
is well underway, although the ultimate impact on workforce
risk issues remains uncertain. For now, employers can feel
confident about their ability to enforce drug-free workplace
policies, although it may be prudent to review and update them
as appropriate. Employers should stay abreast of legislation
and court decisions governing marijuana use and the potential
impact on such risk management areas as workers’ compensation,
unemployment insurance, workplace safety and liability.
CalChamber Position
The California Chamber of Commerce continues to support the
right of an employer to maintain a safe workplace by enforcing
zero-tolerance drug use policies through drug testing, including
pre-employment testing.
The CalChamber opposes legislation that incentivizes or
creates new employment litigation, or adds new protected
classes or activities (such as marijuana use) to the Labor Code,
Fair Employment and Housing Act, or Civil Code.
®
As such, the CalChamber opposes legislation that creates an
opportunity for litigation or undermines employers’ ability to
maintain a safe and drug-free work environment.
Staff Contact
Marti Fisher
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
123
IMMIGRATION
Immigration Reform Is Important to California
Status of Federal Immigration Reform
The current federal debate on immigration can be traced back
to 2004, when then-President George W. Bush proposed an
immigration reform framework. Throughout 2005 and 2006,
Congress unsuccessfully attempted immigration reforms. Due
to the failure of the 2004 framework, President Bush proposed
a new broad reform framework in 2007, which formed the basis
of the initial California Chamber of Commerce immigration
policy and has evolved over the years to what it is today.
In 2013, the U.S. Senate passed S. 744, a comprehensive
immigration reform bill that included provisions for border
security, improvements to legal immigration and a 13-year
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Priorities for Immigration Policy
Securing the border
40
Status of illegal immigrants
Both (volunteered)
59
60
Percent all adults
Background
Immigration has a significant impact on California’s economy,
affecting both the labor force and the movement of goods.
Approximately 1.85 million undocumented immigrants are
estimated to be working in California or approximately 1 in
10 workers in California is an undocumented immigrant.
Immigration, both documented and undocumented, is expected
to account for almost all of the growth in the labor force.
America’s current immigration system is broken, however,
and does not meet the needs of our citizens or businesses.
Immigration reform is especially important to California as
there are approximately 2.6 million undocumented immigrants
in California—23% of the nation’s total and about 6% of the
state’s population—half of whom have lived here for more than
10 years. The vast majority of these individuals are holding
jobs and doing work upon which employers and our economy
depend. These individuals have developed roots in this country,
leaving little incentive to return to their country of origin. The
uncertainty over their legal status is a drag on our economy and,
if resolved, would stimulate consumer spending and investment.
The number of U.S. citizens available and willing to do
a wide range of essential jobs is wholly inadequate, yet legal
options for employing foreign workers are limited. The current
level of immigration is too small compared to demand, wait
times for legal immigration are long, and the cost of obtaining
visas is high.
California is home to the technology industry, which relies
on highly skilled talent to innovate, design, manufacture, create
jobs and grow the economy to enable success in the global
marketplace. Employers cannot find enough “home grown”
engineers and scientists and urge reforming the inadequate
H-1B visa program. If the industry can’t find and bring enough
skilled workers to California, it will go to where the engineers
and scientists live—most likely offshore, which would not be a
good outcome for the state.
California’s unique and successful agriculture industry needs
a temporary worker program that will provide a predictable
workforce. Immigration reform should bring certainty to
employers, employees and families.
41
46
31
20
8
0
Californians
5
Adults nationwide*
Source: Public Policy Institute of California, Californians and Their
Government (September 2014).
pathway to citizenship for undocumented immigrants who
can remain in the country. That same year, the U.S. House
of Representatives neither made progress on a package of
immigration bills (they were not taken up on the floor) nor
considered S. 744. No immigration reform legislation has
been considered since, and there does not appear to be any
momentum or consensus at this time to adopt any reforms.
Executive Orders
Following the November 2014 elections in which the
Republicans not only retained a majority in the U.S. House
but also gained a majority in the U.S. Senate, President
Barack Obama announced a series of executive actions
regarding immigration reform that would primarily defer
deportations. House Republicans objected to the action, calling
it unconstitutional and dangerous, and held oversight hearings
during the lame duck session. At the same time, various
polling shows widespread public support for the policies in the
President’s executive orders.
Perhaps the most significant provision of the action is the
opportunity for some illegal immigrants to stay temporarily
in the United States by passing a criminal background check
and paying taxes. The immigrants eligible for this program are
parents of U.S. citizens or lawful permanent residents, spouses
and children of U.S. citizens or lawful permanent residents, and
children who came to the U.S. before the age of 16.
Sources estimate that about 5 million immigrants are eligible
for the program. Other provisions in the executive orders
address enforcement and border control. No changes have been
made to the E-Verify system.
Lawsuit Challenge
Texas led a coalition with 16 other states, launching a
lawsuit challenging the President’s executive actions, arguing
that he violated his constitutional duty to enforce the laws
and illegally placed new burdens on state budgets. At the
same time, the House voted to bar the President from limiting
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IMMIGRATION
deportations, a largely symbolic measure to express Congress’
opposition to his executive action, pre-empting Congress’
opportunity to address reform.
Currently, the executive action is blocked from proceeding
until the matter is fully decided on the merits of the case.
The lawsuit was filed in late 2014; in February 2015 a judge
temporarily blocked the plan pending a full trial on the matter,
and continued to stop the administration from laying the
groundwork on its Deferred Action for Parents of Americans
and Lawful Permanent Residents (DAPA) while the case is
litigated. Finally, on November 9, 2015, after the judge upheld
injunctions during appeals, the court concluded that the states
had legal standing to bring their challenge, and found the states
have a “substantial likelihood of success” on the merits of the
case, blocking the executive action pending a full trial.
If the U.S. Supreme Court agrees to hear the case during
its current term, a ruling could come by this summer, just days
before both political parties hold their presidential nominating
conventions. A June decision by the court could ensure a full
debate on immigration reform in the election process.
• Support a bipartisan solution in Congress for borders as
a line of defense against those who enter illegally and against
those who pose security threats to this country. Border security
shouldn’t be at the expense of our trade and commerce, which
must continue between Mexico and California.
• Temporary worker programs should be reformed to meet
the needs of employers for high- and low-skilled jobs that
cannot be filled by U.S. workers. The current system leaves
many hard-working immigrants in a state of limbo waiting for
approvals while employers struggle to keep their most valued
asset, a trained workforce.
• Strict enforcement of employment verification has to
be combined with 100% reliable employment eligibility
information (E-Verify). Employers and individuals who
knowingly hire undocumented workers should be punished.
• An earned pathway to legal status for undocumented
workers should be created, but should not permit line jumping
in front of the current immigrant visa backlog, and the
processing of legal immigration needs to occur simultaneously
to avoid creating incentives for illegal immigration.
Anticipated Action
Immigration reform continues to be a challenge for both parties
in Congress. Many components have broad-based, bipartisan
agreement, while other areas create great partisan division, even
intraparty disagreement.
In arguing for the Democratic view of reform, Obama said
an overhaul of the broken system is a way to strengthen the
economy and national security. Given the lack of consensus and
motivation, no congressional action is expected in 2016.
Staff Contact
CalChamber Position
America cannot compete and win in a global economy without
attracting and retaining a talented workforce of big dreamers.
Immigration reform is one of the compelling challenges of our
time. Immigration reform should bring certainty to employers,
employees, and families. We need a comprehensive national
program that addresses border security, temporary worker
programs, employment verification and enforcement, as well as
a path to legal status The CalChamber supports the following
comprehensive reform principles:
®
Marti Fisher
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
125
INTERNATIONAL TRADE
State Competitiveness in Global Market
Depends on Strong Trade Opportunities
California is one of the 10 largest economies in the world with a
gross state product of more than $2 trillion.
According to a California state government international
trade and investment study, “International trade and investment
is a major economic engine for the state of California that
broadly benefits businesses, communities, consumers and state
government. As has been described at length in other reports,
California’s economy is more diversified than ever before, and
the state’s prosperity is tied to exports and imports of both
goods and services by California-based companies, to exports
and imports through California’s transportation gateways, and
to inflows and outflows of human and capital resources.”
Although trade is a nationally determined policy issue,
its impact on California is immense. California exports to
approximately 229 foreign markets. Trade offers the opportunity
to expand the role of California’s exports. In its broadest terms,
trade can literally feed the world and raise the living standards of
those around us.
Leading California Export Markets (In $ U.S. billions)
Global Trade Facts
Growth will pick up only slightly over the next two years, rising
from 2.8% in 2014 to 3.3% in 2015 and eventually to 4% in
2016, according to the April 2015 World Trade Organization
(WTO) report. WTO economists cautioned that preliminary
trade figures for 2014 and forecasts for 2015 were difficult to
gauge due to the extraordinary levels of volatility in financial
markets and in the broader economy for the last few years.
increased in all six major general-merchandise end-use categories, but decreased in nonmonetary gold. The largest increases
were in capital goods except automotive, in consumer goods
except food and automotive, and in industrial supplies and
materials. The increase in capital goods except automotive
reflected increases in machinery and equipment except consumer-type and in civilian aircraft, engines and parts. The increase
in consumer goods except food and automotive was largely
accounted for by an increase in durable goods. The increase in
industrial supplies and materials was mostly accounted for by an
increase in exports of petroleum and products.
For 2014, goods imports increased to $2.371 trillion from
$2.295 trillion. Five of the six end-use categories increased, with
the largest increases being in imports of capital goods except
automotive and imports of consumer goods except food and
automotive. The increase in capital goods except automotive was
mostly accounted for by increases in machinery and equipment
except consumer-type. The increase in consumer goods except food
and automotive partly reflected increases in imports of medicinal,
dental and pharmaceutical products and in other household goods,
including cell phones. Imports decreased in industrial supplies and
materials, a decrease that was more than accounted for by a decrease
in imports of petroleum and products.
• Services: For 2014, the surplus in services increased to
$231.1 billion from $225.3 billion in 2013. Services receipts
increased to $709.4 billion from $687.4 billion. Exports
increased in seven of the nine major services categories. The
largest increases were in other business services—particularly
professional and management consulting services and research
and development services—and in financial services.
U.S. Trade and Investment Facts
The United States is the world’s largest economy with a gross
domestic product (GDP) of $17.4 trillion, according to the
World Bank.
The largest export markets for U.S. goods in 2014 were
Canada ($312.1 billion, up 3.5%), Mexico ($240.3 billion, up
6.3%), China ($124 billion, up 1.9%) and Japan ($67 billion,
up 2.7%).
Annual Summary for 2014
Source: Bureau of Economic Analysis
• Goods and Services: The deficit on goods and services
increased to $504.7 billion in 2014 from $476.4 billion in
2013. The U.S. current-account deficit—the combined balances
on trade in goods and services, income, and net unilateral
current transfers—increased to $410.6 billion (preliminary)
in 2014 from $400.3 billion in 2013. The deficit was 2.4% of
current-dollar GDP in both 2014 and 2013.
• Goods: The deficit on goods increased to $735.8 billion
in 2014 from $701.7 billion in 2013. For 2014, goods exports
increased to $1.635 trillion from $1.593 trillion. Exports
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Partner
2011
2012
2013
2014
World Total
159.136
161.880
168.045
174.129
Mexico
25.807
26.370
23.904
25.419
Canada
17.261
17.424
18.887
18.249
China
14.194
13.970
16.298
16.060
Japan
13.096
13.033
12.733
12.263
South Korea
8.425
8.246
8.363
8.580
Hong Kong
7.664
7.826
7.793
8.502
Taiwan
6.245
6.318
7.519
7.467
Germany
5.307
4.979
5.591
5.427
Netherlands
4.417
4.344
4.755
5.370
India
3.793
3.209
5.264
5.276
Source: U.S. Department of Commerce
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INTERNATIONAL TRADE
California Trade and Investment Statistics
The U.S. Department of Commerce reported that in 2014,
California exports amounted to more than $174 billion. This is
an increase from the 2013 total of more than $168 billion. California maintained its perennial position as a top exporting state.
Exports from California accounted for 10.7% of total U.S.
exports in 2014. California’s top export destinations are Mexico,
Canada, China, Japan and South Korea. California trade and
exports translate into high-paying jobs for more than 1 million
Californians.
Top Export Sectors
California is a top exporter in the nation of computers,
electronic products, and sales of food and kindred products.
Computers and electronic products are California’s top export,
accounting for 24.5% of all the state’s exports.
Other top categories included transportation equipment;
machinery, except electrical; and miscellaneous manufactured
commodities.
• Mexico: Mexico continues to be California’s No. 1 export
market. California exports to Mexico increasead to $25.4 billion
in 2014. Mexico purchases 14.5% of all California exports.
California’s exports to Mexico are driven by computers and
electronic products, which account for 21% of all California
exports to Mexico. Other top categories included transportation
equipment, machinery, except electrical, and petroleum and
chemicals.
• Canada: Canada is California’s second largest export
market, purchasing 10.5% of all California exports. In 2014,
California exported more than $18.2 billion to Canada.
Computers and electronic products remained California’s
largest exports, accounting for 31.4% of all California exports
to Canada.
• Asia-Pacific: California is the largest exporting state to
Asia. In 2014, California exported more than $71 billion in
goods to the region.
• Greater China: California exports to Mainland China
totaled $16.1 billion in 2014. Computers and electronic
products accounted for nearly 28% of exports to China. Exports
to Hong Kong increased to $8.5 billion in 2014.
• Japan: California exports to Japan totaled $12.3 billion in
2014. Computers and electronic products accounted for more
than 22% of total exports.
• European Union: California exports to the European
Union (28) increased in 2014 to total $29.6 billion. California
is one of the top exporting states to Europe. Computers,
electronic products and chemicals are the leading export sectors
to the region. European Union countries purchase nearly 17%
of all California exports.
NAFTA and the Americas
The California Chamber of Commerce actively supported
the creation of the North American Free Trade Agreement
(NAFTA) among the United States, Canada and Mexico,
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Exports from California to World
Grand Total $173.78 billion
Misc. Manufactured
Commodities
8.4%
Machinery,
Except Electrical
8.6%
Transportation
Equipment
10.8%
All Others
47.7%
Computer and
Electronic Products
24.6%
Source: U.S. Department of Commerce (2014)
comprising nearly 480 million people, with combined annual
trade with the United States being nearly $1.2 trillion in 2014.
In 2014, goods exports totaled nearly $553 billion while goods
imports totaled nearly $642 billion. (U.S. Department of
Commerce; World Bank)
NAFTA Benefits
CalChamber support for NAFTA is based on an assessment
that it serves the employment, trading and environmental interests of California, the United States, Canada and Mexico, and is
beneficial to the business community and society as a whole.
The objectives of NAFTA are to eliminate barriers to trade,
promote conditions of fair competition, increase investment
opportunities, provide adequate protection of intellectual
property rights, establish effective procedures for implementing
and applying the agreements and resolving disputes, and to
further trilateral, regional and multilateral cooperation.
Hemisphere-Wide Agreement
On December 11, 1994, at the Summit of the Americas
held in Miami, leaders of the 34 Western Hemisphere nations
(excluding Cuba) agreed to establish the world’s largest free
trade bloc. A Free Trade Area of the Americas (FTAA) would
unite the economies of the Americas into a single free trade area
and progressively eliminate barriers to trade and investment.
Following the fourth Summit of the Americas in November
2005, talks were put on hold.
The FTAA would be a nearly $21 trillion economic area
with more than 955 million consumers. The Summit of the
Americas is held every three to four years. The 2015 summit
was held in Panama City, Panama on April 10–11, for the first
time with Cuba. The 2018 summit will be held in Lima, Peru
on March 23–25.
U.S.-Dominican Republic/Central America Free Trade
Agreement
The U.S.-Dominican Republic/Central America Free Trade
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INTERNATIONAL TRADE
Exports from California to
North American Free Trade Agreement (NAFTA)
All Others
51.2%
Machinery, Except Electrical
7.1%
Agricultural Products
7.5%
Transportation
Equipment
8.9%
Computer and
Electronic Products
25.2%
Agreement (DR-CAFTA) was approved in 2005 with the governments of El Salvador, Nicaragua, Honduras, Guatemala, Costa
Rica and the Dominican Republic. The agreement resulted in
gains for U.S. exports, economic welfare and market access.
Under the agreement, more than 80% of U.S. exports were
able to enter DR-CAFTA countries duty-free immediately, with
all products having duty-free access in 10 years.
Leading U.S. exports to Central America include petroleum,
computer and electronic products and chemicals. Leading U.S.
imports from Central America include computer and electronic
products, apparel products and edible fruits. The United States
is the main supplier of goods and services to Central American
economies.
The DR-CAFTA is expected to contribute to stronger
economies, the rule of law, sustainable development and more
accountable institutions of governance, complementing ongoing
domestic, bilateral and multilateral efforts in the region.
U.S.-Chile Free Trade Agreement
The U.S.-Chile Free Trade Agreement (FTA) was implemented on January 1, 2004. Under the agreement, 85% of industrial
products will be traded without duties. In 2008, 75% of farm
production became freely traded. After just 10 years of the agreement, all trade in nonagricultural goods takes place without tariffs
or quotas; for agriculture; the phase-out will take 12 years.
Two-way trade in goods between the United States and
Chile has risen dramatically since implementation of the
agreement. Petroleum, machinery and fertilizer from the United
States experienced a marked improvement.
Top imports from Chile to the United States include
primary metal manufacturing and agricultural products. Top
exports from the United States to Chile include petroleum
and coal products, machinery, transportation equipment, and
chemicals. Chile is California’s 15th largest export market. In
2014, California exported approximately $2.7 billion to Chile.
Chile is roughly equal in size to California, and is home to 17.8
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million people and renowned copper mines. Chile has the most
stable and fastest-growing economy in the region, which puts it in
the best position to promote democracy and political freedom.
Since September 2010, the CalChamber has served on the
Chile California Council as part of the Chile-California Plan.
U.S.-Peru Free Trade Agreement
The U.S.-Peru FTA went into effect in 2008. Total trade
in 2014 between Peru and the United States was nearly $16.2
billion. The United States exported $10.1 billion worth of
goods to Peru.
According to the U.S. Department of Commerce, in 2014,
California exported $581.1 million to Peru, making it the state’s
40th largest export destination.
Peru is the third largest country in South America and is
approximately three times the size of California. It is the fifth
most populous country in Latin America (after Brazil, Mexico,
Colombia and Argentina), and has an annual GDP of $202.9
billion, according to The World Bank.
Peru is a source of both natural gas and petroleum. It also
is the world’s second largest producer of silver, sixth largest
producer of gold and copper, and a significant source of the
world’s zinc and lead. Mineral exports make up around half of
Peru’s total export revenue.
About 500,000 U.S. citizens visit Peru annually for business,
tourism and study. Nearly 16,000 Americans reside in Peru
and more than 400 companies are represented in the country,
according to the U.S. Department of State.
U.S.-Colombia Free Trade Agreement
In November 2006, the United States and Colombia signed
an FTA. Colombia’s Congress approved the agreement in 2007
and the U.S. Congress in 2011.
Per the U.S. Department of Commerce, International
Trade Administration, the U.S.-Colombia Trade Promotion
Agreement offers tremendous opportunities for California
exporters. Eighty percent of U.S. consumer and industrial
exports to Colombia—including nearly all information
technology products; mining, agriculture and construction
equipment; medical and scientific equipment; auto parts; paper
products; and chemicals—were duty-free immediately. The
remaining tariffs phase out over 10 years.
Colombia is an emerging economy that is providing
California with a quickly expanding export market and
opportunity for future collaboration.
In 2014, the United States exported $20.1 billion worth
of goods to Colombia, a 40% increase from 2011. Total trade
between the U.S. and Colombia amounted to $38.4 billion.
Since 2006, California exports to Colombia have more than
quadrupled. In 2014, California exports to Colombia totaled
more than $827 million, making it California’s 30th largest
export destination.
U.S.-Panama Free Trade Agreement
In June 2007, the United States and Panama signed an FTA.
The Panamanian government approved the FTA in 2007 and
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INTERNATIONAL TRADE
the U.S. Congress approved it in 2011.
Per the U.S. Department of Commerce, International
Trade Administration, the U.S.-Panama FTA offers tremendous
opportunities for California exporters. Panama’s strategic location as a major shipping route and the massive project underway
to expand the capacity of the Panama Canal enhance the importance of the U.S.-Panama FTA for California exporters.
Panama’s GDP has seen consistent yearly growth in the
realm of 8%–11% since 2011, according to the World Bank.
Roughly 80% of Panama’s GDP is created within its services
sector. Operation of the Panama Canal, the banking industry,
container ports, and medical and health are the largest factors of
this service economy.
In total, California exported a value of $558.2 million to
Panama in 2014, making it California’s 41st largest export
market. The development of the Panamanian economy reflects
its growing place as a valuable trading partner of California.
Asia-Pacific
The Asia-Pacific region is a key driver of global economic
growth, representing nearly half of the earth’s population,
one-third of global GDP and roughly 50% of international
trade. Since 1990, Asia-Pacific goods trade has increased by
300%, while global investment in the region has increased by
more than 400%. Two-way U.S. trade in goods with Asian
countries totaled more than $1.3 trillion in 2014.
Association of Southeast Asian Nations (ASEAN)
The Association of Southeast Asian Nations (ASEAN) was
established in 1967 with the signing of the ASEAN Declaration
by Indonesia, Malaysia, Philippines, Singapore and Thailand.
Since then, Brunei Darussalam, Vietnam, Lao People’s
Democratic Republic, Myanmar and Cambodia have joined,
making up what is today the 10 member states of ASEAN.
The ASEAN Vision 2020, adopted by the ASEAN leaders
on the 30th anniversary of ASEAN, agreed on a shared vision of
ASEAN as a concert of Southeast Asian nations.
Greater China
According to the U.S. State Department, China has been
one of the world’s fastest-growing economies over the last several
years, and its efforts to reform and modernize have helped transform China into a large trading economy. China’s total trade
was $4.3 trillion in 2014, making it the largest trading nation
and the country with the second largest economy in the world,
according to the Central Intelligence Agency (CIA). This translates into enormous opportunities for U.S./California exporters.
U.S.-China trade has risen rapidly over the last several
decades. Total trade between the two nations has increased from
$4.8 billion in 1980 to slightly more than $590.7 billion in
2014. U.S. exports to China in 2014 were approximately $124
billion, a steady increase from previous years.
Hong Kong GDP per capita is comparable to other developed countries. The United States has substantial economic ties
with Hong Kong. A report done by the U.S. State Department
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Asia-Pacific Economic Cooperation (APEC)
Food Manufactures
7.3%
Machinery,
Except Electrical
9.7%
Transportation
Equipment
10.5%
All Others
46.5%
Computer and
Electronic Products
26%
in August 2014 indicates that there are some 1,400 U.S. firms
and more than 80,000 U.S. residents in Hong Kong. Another
1.2 million people visited Hong Kong last year from the United
States. The latest available figures on U.S. direct investment in
Hong Kong show investment at about $66.2 billion, making
the United States one of Hong Kong’s largest investors.
Trade between the United States and Hong Kong has been
increasing in the last few years, with a growth in U.S. exports
from $26.6 billion in 2010 to $40.9 billion in 2014. Total trade
between the United States and Hong Kong totaled $46.7 billion
in 2014, according to the U.S. Department of Commerce.
California exports to Mainland China were $16.1 billion
in 2014, making it the state’s third largest export destination.
California exports to Hong Kong were $8.5 billion. California
exports to Taiwan were nearly $7.5 billion.
Japan
The United States is a large supplier of computer and
electronic products, chemicals, and transportation equipment
to Japan. Japan also is one of California’s largest foreign markets
for agricultural products.
U.S. exports to Japan totaled nearly $67 billion in 2014,
making it the fourth largest export destination for the United
States. Imports from Japan to the United States were $133.9
billion, with transportation equipment accounting for 41.6%.
Foreign direct investment from the United States to Japan
totaled $108.1 billion in 2014, largely in financial, software and
Internet services. In 2014, $372.8 billion of direct investment
came from Japan into the United States.
California continues to be the top exporting state to Japan,
accounting for 18.3% of total U.S. exports. California exports
to Japan, the world’s third largest economy, totaled $12.3 billion
in 2014. Computers and electronic products accounted for
22.2% of total exports.
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INTERNATIONAL TRADE
2014 Exports from California
Total in thousands ($USD)
$188,155 - $25,419,676
$18,418 - $188,155
$2,178 - $18,418
$8 - $2,178
zero
Source: U.S. Department of Commerce.
U.S.-Korea Free Trade Agreement
After a year and a half of negotiations, the U.S.-Korea FTA
was signed on June 30, 2007. The FTA is the biggest free trade
pact the United States has reached since it entered into NAFTA.
This comprehensive agreement was approved by the U.S.
Congress and Korean government in 2011.
The U.S. International Trade Commission estimates that
with full implementation of the U.S.-Korea FTA, U.S. goods
exports to Korea will likely increase by $9.7 billion–$10.9
billion, and U.S. imports of goods from Korea will likely
increase by $6.4 billion–$6.9 billion, enhancing the alreadybalanced trade partnership.
Korea is California’s fifth largest export destination. In 2014,
California exported nearly $8.6 billion to Korea. Korea is a
significant market for U.S. small and medium-sized companies,
which make up a majority of U.S. businesses exporting to Korea.
Korea is a $1.4 trillion economy and is the United States’
seventh largest goods export market. Korea’s commercial
relationship with the United States is largely complementary. In
2014, two-way trade between the two countries totaled nearly
$114.1 billion. In 2014, U.S. goods exports to Korea were
$44.5 billion, a 6.8% increase from 2013.
Asia-Pacific Economic Cooperation
The Asia-Pacific Economic Cooperation (APEC) was
formed in 1989. It serves as a multilateral forum in which
Asian and Pacific economies can solve economic problems, and
cooperate in developing key economic sectors.
Collectively, the 21 economies of APEC, which touch the
Pacific Ocean, represent a large consumer market—nearly half the
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world’s population, nearly half of all world trade and approximately $42.8 trillion in economic output (APEC Statistics).
The APEC economies are: Australia, Brunei Darussalam,
Canada, Chile, People’s Republic of China, Hong Kong, Indonesia,
Japan, Republic of Korea, Malaysia, Mexico, New Zealand, Papua
New Guinea, Peru, Republic of the Philippines, Russia, Singapore,
Chinese Taipei, Thailand, United States and Vietnam.
In 2014, the U.S. exported more than $1 trillion to the
countries of APEC. California exported approximately $117.1
billion to APEC in 2014, 11.7% of the national total. Of this,
approximately 26% consisted of computer and electronics
($30.5 billion).
Trans-Pacific Partnership
See individual issue report.
U.S.-Singapore Agreement
The U.S.-Singapore FTA went into effect in January 2004.
Under the agreement, most tariffs were eliminated immediately,
with the remaining tariffs phased out over a three- to 10-year
period.
A major strategic trading partner of the United States
and one of the nation’s closest friends, Singapore has one of
the most open, well-regulated, safe and secure investment
climates in the world. It is consistently rated among the most
competitive economies in the world. The FTA is making
this remarkably productive relationship even closer. In 2015,
the U.S. State Department estimated that approximately
3,600 U.S. companies are established in the country, a large
number of which use Singapore as their regional headquarters.
Additionally, a large number of Americans live in Singapore.
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INTERNATIONAL TRADE
Since implementation of the U.S.-Singapore FTA in
2004, U.S. exports to the nation have increased. New market
opportunities also have been created, including those for
pharmaceutical products and organic chemicals, according to
the Office of the U.S. Trade Representative.
Singapore is the 12th largest foreign market for California.
In 2014, California exported nearly $4.6 billion to Singapore.
The U.S.-Singapore FTA enhances mutual interests in
a stable, prosperous ASEAN and East Asia, and will further
strengthen the partnerships across the Pacific. With 5.47 million
people, Singapore, one of the busiest port cities in the world,
already has free trade pacts with New Zealand and Japan,
according to the World Bank and the CIA.
The U.S.-Singapore agreement represents the new economy,
focusing on removing Singapore restrictions on a wide range of
services, including high technology sectors, such as engineering,
medical, information technology, environmental, legal,
financial, education and distribution. Investment in Singapore
can strengthen the region as an integrated production space
and help anchor U.S. leadership in the global manufacturing
operations of Southeast Asia.
With the bilateral relationship, the United States and Singapore can put in place systems and procedures to ensure that only
legitimate goods can claim preferential treatment under the FTA.
The exchange of information will be increased so that both sides
can use risk management techniques to block illegal trade.
U.S.-Australia Agreement
On January 1, 2005, the U.S.-Australia FTA came into effect.
The agreement eliminated tariffs on 99% of U.S. manufactured
goods exported to Australia, accounting for 93% of all U.S.
exports to the nation.
A comprehensive FTA combines more than 342 million
consumers in a market of $18.9 trillion annually. The agreement
has improved the business climate between the two nations.
This was the first FTA between the United States and a
developed country since the U.S.-Canada FTA in 1988. Some
of the industries that benefit the most from the increase in
exports include coal, oil, gas, machinery and equipment.
The United States and Australia share impressive
economic growth and productivity growth. Both have a strong
commitment to trade and investment liberalization. With the
legal, regulatory and ideological similarities between the United
States and Australia, Australia is an ideal trading partner.
The United States and Australia have major interests in each
other’s economies. The United States has long had a large trade
surplus with Australia and is the largest investor there, while
Australia is a major investor in the United States.
Transportation equipment, nonelectrical machinery, computer and electronic products, and chemicals are the strongest U.S.
exports to Australia. Australia’s strength as a producer of agricultural crops has made it a magnet for U.S. exports of related
products, including machinery, fertilizers and chemicals.
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Exports from California to Middle East
Agricultural Products 11.9%
All Others
26.9%
Misc. Manufactured
Commodities
24.9%
Computer and
Electronic Products
14.3%
Transportation
Equipment
21.9%
U.S. consumers, including manufacturers of products in the
United States, import a wide variety of goods from Australia.
Manufactured food products, including meat products and
transportation equipment, are the largest U.S. imports from
Australia. Other key imports are primary metal manufacturing
products, beverages (including wine) and chemicals. More than
half of U.S. imports from Australia are inputs or capital goods
used to manufacture products in the United States.
Australia is California’s 13th largest export market. California is the largest state exporter to Australia, with approximately
$3.8 billion in exports from California to Australia in 2014.
Middle East
U.S.-Israel Free Trade Agreement
In 1985, President Ronald Reagan signed the U.S.-Israel
FTA. It was the first FTA the United States entered into, and
has served as a model for many subsequent trade agreements.
The FTA eliminates all custom duties between the two
countries, and has resulted in a huge increase in the overall
volume of binational trade to total $38 billion in 2014.
U.S. exports account for more than one-tenth of all Israeli
imports, with a value of $15.1 billion. Israeli exports to the
United States also have increased since the FTA’s implementation. In 2014, Israeli imports to the United States were $23
billion, an increase of more than 300% since 1985. Israel is the
23rd largest export market for U.S. goods and services.
California exports to Israel were $2.3 billion in 2014, with
manufactured goods accounting for the majority of these exports.
U.S.-Jordan Free Trade Agreement
The U.S.-Jordan FTA (JFTA) has brought significant
benefits to both nations since its implementation in 2002.
Jordan’s exports to the United States increased from $228
million in 2001 to $1.4 billion in 2014. U.S. exports to Jordan
grew from $343 million in 2001 to $2.1 billion in 2014. The
positive impact on some of the United States’ major industries
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INTERNATIONAL TRADE
has been staggering. Exports of U.S. automobiles to Jordan have
risen by 1,500%. Corn exports have increased 2,300% and
exports of TV and radio transmitters have grown by 500%.
The JFTA eliminates duties and commercial barriers to
bilateral trade in goods and services originating in the United
States and Jordan. It is America’s third FTA, following the U.S.Israel FTA and NAFTA, and the first with an Arab country.
The JFTA supports Jordan’s domestic economic reforms,
encourages efforts by other Middle East countries to open their
economies and enhances regional stability. The JFTA plays a
role in fostering closer bilateral business ties between American
and Jordanian firms. It also provides benefits to consumers and
businesses in the United States and Jordan by increasing choices,
and lowering the prices of goods and services.
The JFTA also included, for the first time ever in the text of
a trade agreement, provisions addressing trade and environment,
trade and labor, and electronic commerce. Other provisions
address intellectual property rights protection, balance of
payments, rules of origin, safeguards, and procedural matters
such as consultations and dispute settlement.
U.S.-Bahrain Free Trade Agreement
Since 2006, the U.S.-Bahrain FTA had opened the way
for tariff-free bilateral trade in all industrial and consumer
goods, and creating new opportunities for trade in services and
agricultural goods.
The agreement eliminates duties on all consumer and
industrial products and 81% of U.S. agricultural exports.
This FTA is particularly beneficial to U.S. exports of aircraft,
machinery, pharmaceuticals and agricultural products.
Two-way trade between the United States and Bahrain was
more than $2 billion in 2014. U.S. goods exports were $1.1
billion, including vehicles, machinery, aircraft, toys and other
manufactured products. In 2014, California exports to Bahrain
were $89.3 million.
U.S.-Morocco Free Trade Agreement
The U.S.-Morocco FTA was implemented on January 1,
2006. The agreement eliminated tariffs on more than 95% of
bilateral trade in consumer and industrial products, with all tariffs
being phased out within nine years. This reduction in duties
creates a huge opening in Morocco’s market for U.S. exports, such
as information technology, machinery and agriculture.
The United States currently has a trade surplus with
Morocco. In 2014, U.S. annual imports from Morocco totaled
$992.1 million, with U.S. exports reaching $2.1 billion. Some
of the major products the United States exports to Morocco
are petroleum and coal, food manufactures, transportation
equipment, minerals and ores, aircraft, corn and machinery.
There are significant growth prospects for U.S. products
under the agreement in areas such as oilseeds, feed grains, and
products in the energy, tourism and environmental sectors.
In 2014, California exported $148.9 million to Morocco,
more than double the amount exported in 2009. California’s
main exports to Morocco are food manufactures.
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U.S.-Oman Free Trade Agreement
On September 26, 2006, Oman became the fifth Middle
Eastern country to have a free trade deal with the United States.
Under this agreement, all bilateral trade in consumer goods and
industrial products became duty-free.
The U.S.-Oman FTA benefits both California and the United
States. In 2014, California exports to Oman were $104.4 million,
more than double the amount of exports in 2009. The U.S.Oman FTA continues to increase the state’s exports in primary
metal manufacturing, transportation equipment, computers,
electronics, machinery, and agricultural products.
Oman is a potential market for U.S. oil equipment and
services, transportation equipment, water and environmental
technology, medical equipment, electrical and mechanical equipment, and many other competitive U.S. products and services.
Bilateral trade between the United States and Oman totaled
nearly $3 billion in 2014. U.S. goods exports to Oman were $2
billion, with significant growth in sales of aircraft and machinery.
Africa
The African Growth and Opportunity Act (AGOA), extended
to 2025, initially was enacted in 2000, eliminating duties on
imports from African nations into the United States if those
nations made significant efforts to open their economies.
Since its inception, AGOA has helped increase U.S. two-way
trade with sub-Saharan Africa. In 2014, U.S. exports with
the AGOA nations totaled $24.4 billion, more than triple the
amount in 2001. U.S. total imports from sub-Saharan Africa
were $26.1 billion in 2014. At year end 2014, U.S. direct
investment in Africa was $64.2 billion.
On August 24-27, 2015, the United States and Gabon
partnered to host the 2015 U.S.-Sub-Saharan Africa Trade and
Economic Cooperation Forum in Washington, D.C. The theme
was “AGOA at 15: Charting a Course for a Sustainable U.S.Africa Trade and Investment Partnership.”
U.S. Trade Representative Michael Froman stressed the
need to help AGOA reach its full potential, saying, “We need
to make sure AGOA’s potential is fully explored and its benefits
fully utilized. That will require work on both sides of the AGOA
equation. Our African partners will need to design strategies to
take full advantage of AGOA’s tariff preferences, and the United
States will need to work to make sure we are providing the trade
capacity building and other assistance necessary to support
those strategies. But we also need to start thinking about our
long-term, trade and investment relationship today, just as the
theme of this summit encourages. We do not come to the table
with a predetermined outcome in mind, but rather with the
perspective that we need to start a dialogue about the emerging
opportunities and challenges that will shape the global economy
during the next decade, and how we might best navigate this
fast-changing landscape together.”
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European Union 28 (EU 28)
Misc. Manufactured
Commodities
11.6%
Agricultural
Products
9.9%
All Others
39.2%
Chemicals
15.2%
Computer and
Electronic Products
24.1%
European Union
See individual issue report on Transatlantic Trade and
Investment Partnership.
CalChamber Positions
The CalChamber, in keeping with long-standing policy,
enthusiastically supports free trade worldwide, expansion of
international trade and investment, fair and equitable market
access for California products abroad, and elimination of
disincentives that impede the international competitiveness of
California business.
Recognizing the current state and federal trade deficits, the
CalChamber:
• supports reducing the federal budget deficit by controlling
federal spending;
• supports efforts to achieve and maintain a stable and
competitive relationship between the U.S. dollar and the
currencies of major trading partners;
• supports actions designed to eliminate barriers that impede
U.S. and California commerce domestically and abroad by
aggressively negotiating fair and equitable market access for
California agriculture, and manufactured products and services
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by aggressively negotiating to reduce trade barriers; and
• promotes educating California’s citizens, legislators and
businesses about the benefit of trade to the state economy.
Legislative Issues
The CalChamber has supported a number of state and
federal programs, but it should be noted that the CalChamber
also dissuades the introduction of legislation that is unnecessary,
unconstitutional or violates existing trade agreements.
The CalChamber:
• opposes protectionist-oriented legislation that leads to
higher prices and limited choices for consumers. The negative
impact of this sort of policy often expands to include job loss
in related industries, retaliation by our trade partners and
violations in WTO provisions;
• opposes state and local legislation that impose sanctions on
businesses engaged in international trade, and/or conflicts with
federal international policies; and
• supports legislation that allows California companies to
compete more effectively in foreign markets, as well as to attract
foreign business to California.
Staff Contact
Susanne T. Stirling
Vice President, International Affairs
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com/international
January 2016
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Agenda for
2016 Issue Summaries
AMERICANS WITH DISABILITIES ACT
Implementing ADA
California’s Small Businesses Need ADA Reform
Summary
One of the top concerns of small businesses in California is a growing epidemic of lawsuits being filed by
a select group of attorneys who allege technical violations of the Unruh Civil Rights Act regarding denial
of equal access for individuals with a disability. California’s unique law regarding the civil rights of disabled
individuals has provided an opportunity for lawsuits to be filed for construction-related violations that do not
necessarily deny actual access to a business establishment, yet nonetheless constitute a violation of the law.
Each of these violations equals $4,000 statutory damages with the right for the individual to recover attorney
fees for filing such claims, as well as other damages.
In 2015, there was a significant legislative effort to resolve this litigation by Senator Richard Roth
(D-Riverside) with SB 251. Unfortunately, the bill was vetoed due to fiscal concerns. Given the continued and
growing problem in California, there are likely to be further legislative attempts to resolve the issue in 2016.
California Law
In 1990, then-President George Bush signed into the law the federal Americans with Disabilities Act (ADA)
(42 U.S.C.A. 126, et seq.). The law was designed to eliminate discrimination against individuals with
disabilities and to help ensure equal access for the disabled. The ADA prohibits discrimination on the basis of
disability in employment, state and local government services, public accommodations, commercial facilities,
transportation, and telecommunications. Notably, it also provides that federal laws shall not supersede state
laws with more stringent accessibility provisions.
In California, disability was added to the Unruh Civil Rights Act, which prohibits discrimination by all
business establishments in California based on age, ancestry, color, national origin, race, religion, sex, and
sexual orientation (Civil Code Section 51). California law also provides that individuals with disabilities shall
be entitled to full and equal access to public accommodations, such as businesses, transportation and housing
(Civil Code Sections 54, et seq.; Government Code Sections 12900, et seq.), as well as any governmental
program (Government Code Sections 11135, et seq.).
Both federal and state laws are lengthy and complicated, setting out technical regulations for everything
from the height of a bathroom mirror and angles of striping on parking, to the appropriate color of striping.
Both change over time, making it difficult for property owners to know what exactly is required of them in
order to make their facilities accessible.
Although federal law allows the Attorney General of the United States to sue for damages for claims
that a person has been denied access to a public facility, a person is otherwise limited in a private lawsuit to
injunctive relief and awards of attorney fees are discretionary. In California under the Unruh Act, however,
a plaintiff may recover three times the actual damages or $4,000 per violation—whichever is greater—plus
attorney fees. In 2012, the law was amended to reduce the statutory penalty to $1,000 if the business could
show that it had relied upon an inspection report from a certified access specialist (CASp)that the business was
ADA compliant and repaired any alleged violations within 60 days of the complaint being filed.
Cottage Industry of Litigation
Approximately 40% of all accessibility lawsuits in the nation are filed in California due to the lucrative statutory
scheme available in this state. A review of 10,000 federal ADA lawsuits filed since 2005 in the five states with the
highest disabled populations (California, Florida, Pennsylvania, Texas and New York) found that California had
the highest number of lawsuits, more than the number of lawsuits in the other states combined, according to an
article by Vicky Nguyen, Jeremy Carroll and Kevin Nious, published by NBC Bay Area on February 27, 2014.
As Nguyen, et al. reported, although some of the allegations seemed legitimate denials of access, others appeared
to be mere technical violations for things such as a mirror that was hung 1.5 inches too high, or a disabled access
emblem that was not the correct size and not at the correct height next to the restroom door.
The latter technical violations have, unfortunately, been used as a litigation tool by a small group of
unscrupulous attorneys and plaintiffs to pressure businesses into quick settlements, without actually improving
access for patrons with disabilities. Nguyen reported that, of the 7,188 federal ADA lawsuits filed in
California, 4,215 were filed by a plaintiff who had filed at least 30 other ADA lawsuits. In an article published
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AMERICANS WITH DISABILITIES ACT
in the Modesto Bee on June 12, 2014, Assemblymember Kristen Olsen (R-Modesto) reported a lawsuit had
been filed against a gas station owner in Manteca, California by a Sacramento-based attorney who had more
than 3,000 ADA lawsuits pending throughout California.
SB 251: Reform Effort
In 2015, Senator Roth introduced SB 251, which sought to create a balance between limiting frivolous litigation
for technical violations, while still maintaining and improving accessibility for individuals with disabilities.
The main provisions of the bill were as follows: 1) 120 days from a CASp inspection to resolve any violations
identified without being subject to statutory damages or litigation costs; 2) presumption that certain technical
violations, such as signage or striping in a parking lot, did not create any denial of accessibility; and 3) a tax credit
to incentivize businesses to obtain a CASp inspection and become compliant.
SB 251 received unanimous support from the Senate, and overwhelming support from the Assembly with a
70-6 vote. Unfortunately, the Governor vetoed the bill based upon the tax credit and the cost to the state. Given
the overwhelming bipartisan support for this legislation, it is likely there will be a new bill introduced in 2016.
Other Legislative Efforts
• AB 1521 (Assembly Judiciary Committee) (2015): Increases pleading requirements on “highfrequency” litigants for ADA/Unruh Civil Rights lawsuits and revises advisories for business owners and
tenants. Signed—Chapter 755.
• AB 1230 (Gomez; D-Los Angeles) (2015): Creates a loan program of up to $50,000 for businesses
with only 15 or fewer employees, $1 million gross receipts or less, and that does not provide overnight
accommodation, for repairs, construction, or alterations to become compliant with construction-related
disability standards. Signed—Chapter 787.
• SB 1186 (Steinberg; D-Sacramento) (2012): Reformed various provisions of the Unruh Civil Rights
Act, including banning pre-litigation, monetary demand letters, increased pleading requirements, and
providing an opportunity to reduce statutory damages. Signed—Chapter 383.
• AB 1885 (Bigelow; R-O’Neals) (2014): Sought to provide a business owner with notice of the alleged
violations and a right to cure those violations before civil litigation could be filed. Failed to obtain the
necessary votes to pass the policy committee.
CalChamber
Position
The ADA and Unruh Civil Rights Act were enacted with the intent to improve accessibility for individuals
with disabilities and to prevent discrimination on that basis. It is unlikely, if not impossible, that the intent
was ever to create a lucrative litigation tool for technical construction-related violations, such as the wrong
height of a bathroom mirror or the wrong shade of color on a parking lot striping. These types of lawsuits
actually weaken the rights of the disabled community as the unfortunate, targeted businesses spend more
money on litigation fees and costs rather than improving their businesses to remove any actual physical
barriers that prevent the disabled community from entering their establishments.
The law needs to be reformed in an effective manner that maintains the right for individuals with
disabilities to have equal access, but also protects businesses from predatory lawsuits. Although disability rights
advocates have opposed past efforts to allow a business to cure a violation before being hit with litigation,
claiming businesses will wait for litigation before complying with the law, it seems as if this may be an area
worth exploring. For violations that truly are technical and do not deny an individual with a disability the
opportunity to gain access to a business, there should be a right for the business to cure the violation before
being sued. Such a right would reduce predatory lawsuits while improving overall access for the disabled.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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EDUCATION
Litigation Update
Pending Cases Challenge Teacher Tenure/Evaluation, Union Fee Laws
Summary
In recent years, many of the policy debates in California about how to improve education outcomes and
increase academic attainment have moved into the courts. Several cases pending in California and in federal
court could have a significant impact on the future of California’s education system and the tenor of future
conversations about education policy in the state Capitol.
Vergara v. State of California
Date Filed: May 14, 2012
Legal Issue: Nine public school students argued that five state statutes governing teacher tenure, teacher
dismissal procedures, and seniority rights for public school teachers during layoffs collectively violate the
California Constitution because they lead to “grossly ineffective teachers obtaining and retaining permanent
employment, and that these teachers are disproportionately situated in schools serving predominantly
low-income and minority students.”
Status: In June 2014, the Los Angeles County Superior Court ruled in favor of the plaintiffs and declared
that all five statutes violate the state Constitution. The court’s order was stayed pending appeal, which was
promptly filed with the Second District Court of Appeal. Both sides have submitted their opening briefs,
and the deadline for third parties to submit amicus briefs in support of either side was September 16, 2015.
The California Chamber of Commerce and several other business groups submitted a brief in support of
the trial court ruling, noting, “California cannot afford to allow the inequitable distribution of teachers to
impede the educational advancement of low-income and minority students, upon whose educational success
our state’s future economic prosperity depends. Indeed, if the achievement gap between students of different
ethnic, racial, and income backgrounds could be closed, it would enrich the American economy—of which
California is the largest part—by hundreds of billions of dollars.” The appellate court has not set a date for
oral arguments in the case, but a decision is anticipated sometime in 2016.
Worth Noting: Between 1999 and 2015, state lawmakers introduced more than 30 measures attempting
to modify one or more of the challenged statutes, but none of these proposals has been signed into law.
Friedrichs v. California Teachers Association
Date Filed: April 29, 2013
Legal Issue: Ten California teachers and the Christian Educators Association International have
challenged California’s so-called “fair-share” law and the U.S. Supreme Court’s 1972 decision in Abood v.
Detroit Board of Education declaring laws like these constitutional. Twenty-three states currently have “fair
share” laws, which permit arrangements between government employers and unions that require nonunion
employees to pay an “agency fee” equivalent to the dues paid by union employees to cover the cost of general
union services like collective bargaining, contract administration and grievance adjustment, since they benefit
both union and nonunion employees.
In Abood, the Supreme Court ruled that agency fee provisions do not unnecessarily interfere with
nonunion employees’ First Amendment right to freedom of association, but also clarified that nonunion
employees cannot be required to fund a union’s “expression of political views, on behalf of political candidates,
or toward the advancement of other ideological causes not germane to its duties as collective-bargaining
representative.” The court acknowledged that there would not always be a clear distinction between collectivebargaining activities and ideological ones, but left that problem for the lower courts to resolve. The Supreme
Court did not require unions to presume that all nonunion employees oppose political uses of their “agency
fees.” Instead, it held that unions must identify what portion of their dues and agency fees are used on
ideological activities and either not collect that portion or return it to those employees who clearly express
opposition to the unions’ ideological expenditures.
California is one of the 23 states with a “fair share” law. Public school teachers in the state pay an average
of $1,000 annually in union dues unless they opt out of the union at the start of each year. Nonunion
members pay an average of $600 in agency fees, meaning the other $400 paid by union members is dedicated
to ideological expenditures.
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EDUCATION
Status: In December 2013, the Central District Court of California entered a judgment on behalf of the
Defendant-Union because the case clearly is governed by the decision in Abood. The Ninth Circuit quickly
affirmed this ruling in November 2014, and this past summer, the U.S. Supreme Court agreed to hear the
case. Oral arguments were heard on January 11, and a decision must be made before the court adjourns at the
end of June.
Worth Noting: Wisconsin repealed its “fair share” law in 2011, and since then, a third of the state’s
teachers have stopped paying their dues. If the Supreme Court overrules Abood and a similar percentage of
teachers in California opt out, the California Teachers Association (CTA) could lose nearly $100 million in
annual income. Between 2001 and 2010, CTA spent $211 million on political activities, nearly two times
more than any other organization in the state. Significantly, the ruling in the case also would affect “agency
fees” for all public unions, not just CTA.
Doe v. Antioch Unified School District, et al.
Date Filed: July 16, 2015
Legal Issue: Six parents, teachers, and concerned taxpayers are asking the Contra Costa Superior Court
to force 13 school districts to comply with a state law requiring school districts to evaluate teachers using
multiple measures of performance, including student progress toward district and state academic content
standards, as measured by standardized tests. The plaintiffs allege that these school districts have explicitly
agreed not to use standardized test scores to evaluate teachers as part of their collective bargaining agreements
with their local teachers’ unions, in clear violation of state law.
Status: The first hearing is scheduled for March 2016.
Worth Noting: The state Legislature considered two bills in 2015 that would have repealed the current
law governing teacher evaluations and replaced it with one requiring school districts to collectively bargain all
aspects of their teacher evaluation systems, including whether standardized test scores could be considered.
Both measures were stopped, but can be reconsidered during the second half of the two-year legislative session
in 2016.
CalChamber
Position
The CalChamber supports efforts to evaluate and compensate teachers based on their ability to improve student
achievement, as determined using multiple measures, including standardized test scores. The CalChamber
supports efforts to protect high-quality teachers from seniority-based layoffs and transfers. The CalChamber
also supports investments in teacher training and professional development, particularly when it relates to
implementation of the Common Core or the fields of science, technology, engineering and mathematics.
Staff Contact
Mira Morton
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Safer Consumer Products Regulation
Questions Remain After Release of Draft Stage 1 Alternatives Analysis Guide
Summary
Background
In 2008, California lawmakers passed two bipartisan measures that sought to create a new, science-based
framework for regulating chemicals in consumer products. The Safer Consumer Products Initiative,
authorized by AB 1879 (Feuer; D-Los Angeles; Chapter 559) and SB 509 (Simitian; D-Palo Alto; Chapter
560), was the product of a collaborative effort by legislators, the Schwarzenegger administration, and
stakeholders to give the California Department of Toxic Substances Control (DTSC) the authority to regulate
potentially hazardous substances in consumer products. The primary purpose of the consumer products
initiative was to eliminate the adoption of piecemeal legislation regulating one chemical at a time, in favor of
one comprehensive regulatory framework based on scientific judgment. After 11 iterations, DTSC finalized
the consumer products regulations in October 2013.
The regulations establish an immediate list of approximately 1,200 candidate chemicals based on the
work already done by other authoritative organizations, and further specify a process for DTSC to identify
additional chemicals as candidate chemicals. Not all consumer products containing candidate chemicals are
subject to the regulations. Only manufacturers of so-called “priority products”—those products specifically
targeted by DTSC that contain one or more candidate chemicals—fall within the gambit of regulation. A
candidate chemical that serves as the basis for a product being listed as a priority product is designated as a
chemical of concern (COC) for that product.
Instead of banning the use of COCs without knowing the availability or safety of alternatives, the
regulations provide manufacturers with an opportunity to determine whether the chemical is necessary and
whether a safer alternative exists. To this end, manufacturers of priority products must either remove the COC
from the marketplace or conduct what is called an “alternatives analysis”—a process that compares the existing
priority product with potential alternatives using 13 factors evaluated at each stage of the product’s life cycle
to determine how to best limit exposure to, or the level of adverse public health and environment impacts
imposed by the COCs in the product.
The alternatives analysis is divided into two stages:
• During the first stage, a preliminary alternatives analysis report must be submitted 180 days after a
product is listed as a priority product. The preliminary alternatives analysis report must provide DTSC with
information regarding whether the specified candidate chemical or substitute chemical is necessary to make
the specified product. Alternative chemicals then must be identified and evaluated.
• During the second stage, a final alternatives analysis report must be submitted one year after DTSC
approves the preliminary alternatives analysis report. The final alternatives analysis must evaluate each product
and alternative with respect to relevant factors and associated exposure pathways, and life cycle segments.
During this stage, the business will either select an alternative chemical that will replace or modify the
priority product, do nothing to modify the priority product, or discontinue the distribution of the product in
California.
After evaluating the final alternatives analysis report, DTSC is required to select what the regulations
refer to as a “regulatory response” for a priority product (if the manufacturer decides to retain it), or for an
alternative product selected to replace the priority product. In selecting a regulatory response, DTSC may
consider the following factors: 1) public health and environmental protection; 2) private economic interests of
responsible parties; and 3) government interest in efficiency and cost containment.
Recent and Anticipated Regulatory Developments
Initial List of Priority Products
On March 13, 2014, DTSC released a Draft Initial Priority Products List. The three priority products are:
• Spray polyurethane foam (SPF) systems containing unreacted diisocyanates;
• Children’s foam-padded sleeping products containing tris (1,3-dichloro-2-propyl) phosphate (TDCPP);
and
• Paint and varnish strippers, and surface cleaners with methylene chloride.
DTSC selected these priority products based on two criteria in the regulations: 1) the products have the
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potential to expose people or the environment to one or more candidate chemicals and 2) this exposure has
the potential to “contribute to or cause significant widespread adverse impacts.”
The initial listing does not constitute a product ban. Instead, once the initial priority products are adopted
in final regulation, manufacturers of the priority products will be required to notify DTSC and begin the
alternatives analysis process. The findings of each manufacturer’s alternatives analysis report ultimately will
determine what regulatory response, if any, DTSC may impose.
Three-Year Work Plan
In April 2015, DTSC issued its much-anticipated Priority Product Work Plan (Work Plan). DTSC
prepared the Work Plan pursuant to the regulations, which require DTSC to prepare a plan every three years
describing the product categories that it will evaluate to identify product-chemical combinations to be added
to the priority products list. The Work Plan, which covers 2015 to 2017, identifies seven product categories:
• Beauty, Personal Care and Hygiene Products: Examples include body wash and soaps, deodorants, lip
balms and gloss, lotions, ointments, hair care products, pomades, cosmetics and nail care products.
• Building Products: Paints, Adhesives, Sealants, and Flooring: Examples include adhesives and glues,
carpeting, caulking, paints and primers, paint and graffiti removers and cleaners, engineered wood, plywood
subfloors, compressed wood flooring products, sealants, stains and varnishes, vinyl flooring and roof coatings.
• Household, Office Furniture and Furnishings: Examples include bedding, seating and sofas, fabric and
textile furnishings, and curtains.
• Cleaning Products: Examples include air fresheners, floor cleaners, oven cleaners, bathroom cleaners,
carpet cleaners, floor waxes, detergents, general-purpose cleaners, scouring cleaners, spot removers and window
cleaners.
• Clothing: Examples include full body wear, lower body wear, upper body wear, sportswear, sleepwear
and underwear.
• Fishing and Angling Equipment: Examples include fishing weight and gear.
• Office Machinery (consumable products): Examples include ink cartridges, thermal paper, and toner
cartridges.
DTSC selected the product categories considering factors and criteria required by the consumer products
regulations, including potential exposures, significant adverse impacts or end-of-life effects, as well as the
availability of information, other regulatory programs, and safer alternatives.
DTSC will identify future potential priority products by choosing specific products from the categories
identified in the Work Plan, in conjunction with chemicals found on the candidate chemicals list. Although
the Work Plan noted that DTSC anticipated announcing as many as three new priority products in 2015,
DTSC did not do so. We can anticipate that DTSC will announce several priority products in 2016. Indeed,
the Work Plan notes that DTSC intends to improve procedural efficiency and effectiveness in the coming
years and will likely increase the number of priority products it announces as time ensues. According to the
Work Plan, each selection will follow the regulatory framework established through the collaborative efforts of
manufacturers, retailers, consumers, scientists and environmentalists, and stakeholder engagement is critical
for successful implementation.
Draft Stage 1 Alternatives Analysis Guidance Document
The regulations do not include an alternatives analysis template or tools to which a business can refer
when deciding how to conduct an alternatives analysis. For this reason, in September 2015, DTSC released
a much-awaited Draft Stage 1 Alternatives Analysis Guide (Draft AA Guide). The Draft AA Guide covers
only the first stage alternatives analysis required by the consumer products regulations. During Stage 1, the
responsible entity identifies the goal, scope, legal, functional and performance requirements of the priority
product and the chemical of concern, and uses this information to identify alternatives to consider, if any
exist. Stage 2 of an alternatives analysis contains an in-depth analysis that refines the relevant factors and
product function descriptions of the first stage and expands the analysis to consider additional impacts,
including life cycle and economic effects. The guide also points out (and very briefly describes) that there are
alternative compliance options other than a full alternatives analysis, such as an abridged alternatives analysis,
alternative process alternatives analysis, and previously completed alternatives analysis. A draft including the
second stage alternatives analysis will likely be released in the first quarter of 2016.
Although a second stage AA Guide is needed for businesses to understand what the comprehensive
alternatives analysis process will look like, the Draft AA Guide provides some general overview regarding
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what DTSC is looking for in the beginning processes for Stage 1 in an alternatives analysis. When beginning
a priority product analysis, responsible entities must clearly describe the product requirements (functional,
performance, and legal). They also must determine if the COC is even necessary to meet those product
requirements. Potential alternatives also can be initially identified under the same evaluation. When looking
at the impact of the priority product, the responsible entity must look at the entire life cycle, and not just the
period when the product is in use, such as processing, manufacturing, transportation and waste treatment. The
guide also offers some scientific and government resources to turn to when assessing impact, and screening
alternatives. Finally, several appendices in this draft offer other resources, such as some regulation requirements
and tables with various factors and subfactors to consider with the priority products and COCs.
On November 16, 2015, the Green Chemistry Alliance, of which the California Chamber of Commerce
is a member, submitted a comment letter outlining several concerns with the Draft AA Guide. Specifically,
the alliance had expected and hoped for a more detailed description of DTSC perspectives and expectations
in conducting alternatives analyses based on sound science, credible data and information that are in line with
statutory and regulatory authority. To this end, the alliance requested definitive information regarding what
is required in an alternatives analysis as opposed to what would be optional for an alternatives analysis. The
alliance also urged DTSC to provide specific examples of alternatives analyses that meet DTSC’s expectations.
This recommendation was in direct response to the Draft AA Guide’s repeated statements that the Guide is an
advisory resource only and is not a regulatory document or legal standard, either for conducting an alternatives
analysis or for reporting alternatives analysis results. Of course, this leaves open-ended the question of whether
responsible entities may deviate from the Guide and yet still conduct a sufficient alternatives analysis.
The alliance attached some more specific concerns to the letter. Some of these concerns included requests
for more guidance from the DTSC for small businesses that do not have resources to rely on in-house or
contract resources, and more information in compliance options outside of a full alternatives analysis, such
as those listed above. Perhaps most significant, there are no established criteria setting forth how DTSC will
respond to the alternatives analysis. This means a business can spend a year or longer, and tens of thousands of
dollars, only to be told that the alternatives analysis it performed was inadequate and that more information
is needed. Further, because the consumer products regulations do not establish a finite list of regulatory
responses, a business has no way of knowing what costs it might incur once it completes the alternatives
analysis. All these questions must be addressed in order to provide the business community with a sense of
certainty and predictability.
CalChamber
Position
The CalChamber supports the underlying goal of the consumer products initiative to significantly reduce
adverse impact to human health and the environment. Further, with respect to the nature of the alternatives
analysis process, the CalChamber supports the creation of an alternatives analysis guidance document that
clearly defines the process step-by-step, sets reasonable parameters with respect to cost and compliance, and
provides certainty and predictability.
As this process moves forward, the CalChamber believes that a proactive dialogue with product manufacturers
will allow DTSC the opportunity to better understand what chemicals are being used, for what purpose they are
being used, in what quantity they are being used, and whether any potential alternatives have been evaluated already.
In some cases, alternatives that have been identified are in fact a greater concern and would fall into the category
of “regrettable substitutions,” a situation DTSC has repeatedly stated it seeks to avoid. Accordingly, DTSC should
consider the regulated community a knowledgeable and indispensable resource.
Staff Contact
Anthony Samson
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Endangered Species
Science-Based Requirements Should Present Balanced Approach
Summary
Background
Endangered species protections continue to confront and confound business activities in California. Housing,
transportation, agriculture, and basic infrastructure needs, including water, gas, electricity and alternative
energy sources like wind and solar, are complicated by encroaching environmental laws like the federal
and state endangered species acts. It becomes a balancing act to provide basic human needs with species
protections while trying to invigorate business productivity that adds to a stable economy.
Current State and Federal Regulations
California is one of a handful of states that is subject to regulation by three endangered species laws—the
federal Endangered Species Act, the California Endangered Species Act (CESA) and the California Fully
Protected Species Act. Endangered species laws require that no activity be allowed which threatens the wellbeing of the listed species unless permission to “take” the species is granted. “Take” is defined in Section
86 of the state Fish and Game Code as “hunt, pursue, catch, capture, or kill, or attempt to hunt, pursue,
catch, capture, or kill.” In California, the Department of Fish and Wildlife may authorize individuals, public
agencies, universities, zoological gardens, and scientific or educational institutions to take an endangered
species for scientific, educational, or management purposes.
The classification of “fully protected” was the state’s initial effort in the 1960s to identify and provide
additional protection to those animals that were rare or faced possible extinction. Lists were created for fish,
mammals, amphibians, reptiles and birds. Most fully protected species also have been listed as threatened or
endangered species under the more recent endangered species laws and regulations.
Fully protected species may not be taken or possessed at any time, and no licenses or permits may be
issued for their take, except for collecting these species for necessary scientific research and relocation of the
bird species for the protection of livestock.
Federal endangered species law has similar provisions for take and in addition, federal law requires critical
habitat designations within one year of listing. Critical habitat is a “specific geographic area(s) that contains
features essential for the conservation of a threatened or endangered species and that may require special
management and protection. Critical habitat may include an area that is not currently occupied by the species
but that will be needed for its recovery.”
The process for listing a species as endangered or threatened generally begins with the species being placed
on the candidate list while undergoing consideration. Once information has been collected, a decision is made
to either start the process to list the species as endangered or leave the species on the candidate list because not
enough information is currently available to list it, or the species is found not to be endangered or threatened
and should be removed from the candidate list.
Recent Activities
California placed two animal species and one plant on the state’s candidate list: the flat-tailed horned lizard
located in San Diego, Riverside and Imperial counties; the Livermore tarplant, mostly in Alameda County;
and the Pacific fisher, which ranges from Napa County through most of Northern California. If listed, the flattailed horned lizard and the Pacific fisher’s large ranges could pose many difficulties for landowners, requiring
special management and protection, limiting landowners’ ability to use the acreage. Listing also poses
problems for transportation and water infrastructure development.
As the result of a settlement agreement with the environmental community, the U.S. Fish and Wildlife
Service agreed to make initial decisions on 757 species for listing purposes. So far, more than 138 species have
been listed or formally proposed for protection under this agreement.
Additionally, the service must make final decisions on 251 species that are pending on the candidate list.
In the space of five years, the list of endangered species may increase by 70%.
The U.S. Fish and Wildlife Service and the National Oceanic and Atmospheric Administration’s National
Marine Fisheries Service proposed rules to revise the definition of “destruction or adverse modification of
critical habitat” in 2014. The changes are designed to increase predictability and transparency, according to
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the agencies. The proposed changes are necessary because the courts invalidated the definition of “adverse
modification.” Stakeholders commented that the proposal further expanded the definition and therefore
included more land that would have to be considered as critical habitat. Comments are still being evaluated.
Expected Activity in 2016
The California Department of Fish and Wildlife will likely continue its work on regulations protecting
bird nests or eggs under Sections 3503 and 3503.5 of the Fish and Game Code, which provides: “It is
unlawful to take, possess, or needlessly destroy the nest or eggs, except as otherwise provided by this code or
any regulation made pursuant thereto.” The regulation was adopted to limit rampant collection of nests and
eggs for sale as food and use in ladies’ hat fashions in the early 20th century.
A couple of drafts outlining the department’s proposed regulations have been circulated for informal
review by stakeholders. The drafts have been overly restrictive concerning adverse impacts that a project may
have to nests or eggs of common species. The drafts also appear to expand the list of birds whose nests may
not be disturbed beyond those originally intended. Industry groups offered comments outlining the problems
with the proposed regulations and the misinterpretation of existing law. At this time, the proposed regulations
have not been submitted to the Office of Administrative Law. A final rule is forthcoming in early 2016.
The U.S. Fish and Wildlife Service will continue to review species as required under its settlement
agreements. It also will continue its effort to designate critical habitat. More litigation will likely result from
the stepped-up timetable for listings and continued critical habitat designations. On the list for review in
California are the tricolored blackbird, California spotted owl, Inyo Mountains salamander, Kern Plateau
salamander, lesser slender salamander, limestone salamander, Panamint alligator, Shasta salamander, and the
southern rubber boa. The tricolored blackbird was listed under CESA on an emergency basis, but the listing
expired in June and the California Fish and Game Commission declined to renew the listing. A new petition,
however, was submitted and will be considered soon. The Center for Biological Diversity also petitioned the
U.S. Fish and Wildlife Service to list the bird under the federal act.
The state Fish and Wildlife Service will be gathering information and reviewing submittals on the three
candidate species — the flat-tailed horned lizard, the Livermore tarplant, and the Pacific fisher.
The agricultural industry and the business community should continue to submit comments on regulatory
proposals as well as meeting with the regulators. Privately funded research results, and research funded through
universities, should be shared with regulators to help them form a better understanding of species, habitat
needs, and possible mitigation techniques.
CalChamber
Position
The California Chamber of Commerce supports reforms to state and federal laws that achieve a balanced
approach between environmental protection and social economic progress. Environmental regulations should
be based on sound science, subject to peer review. Economic impacts should be evaluated to ensure that the
benefits outweigh the social costs of imposing mitigation measures.
Staff Contact
Valerie Nera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Mineral Resources Extraction
Surface Mining and Reclamation Act Reform to Be Revived in 2016
Summary
Background
The Surface Mining and Reclamation Act (SMARA), passed by the California Legislature in 1975,
regulates surface mining operations and the reclamation of mined lands. SMARA provides certain protections
for the state’s mineral resources in order to ensure a continuing supply of building and industrial materials, but
also contains policies intended to minimize impacts to public health, property, and the environment associated
with mining and reclamation activities. Today, the vast majority of mining operations in California—and
those to which SMARA applies—are surface mining operations, often referred to as “open pit mines” or
“quarries,” not underground mines, as were common during California’s gold rush era, and which are still
operated in other parts of the United States in order to mine certain metals and coal.
California’s mining industry is focused on “construction aggregates” and industrial minerals. Construction
aggregates include sand, gravel, and crushed stone. These materials, by themselves and when used to make
concrete and asphalt, are critical construction products. Construction aggregates are used to build public
infrastructure such as roads, bridges, railways and sidewalks, as well as homes, schools, hospitals, shopping
centers, dams, canals, and water systems and treatment facilities. Industrial minerals mined in California are
utilized by California’s manufacturing sector to create wine bottles, windows, wall board, roofing shingles, paint,
paper, agricultural feed supplements, cleaning supplies, low-energy light bulbs, soil amendments, filter materials
utilized by beverage industries, and electronics components. California even has one of two developed sources
worldwide for rare earth elements used for advanced hybrid batteries and alternative power technologies.
Mining and Reclamation Process
California surface mines typically operate in two phases: the mining phase and the reclamation phase.
During the mining phase, soil and rock overlying the mineral deposit (the overburden) are removed. The
target minerals are then extracted in a gradual, stepped fashion, and then processed to produce a final product.
In the case of most construction aggregates, extracted sand, gravel and hard rock may be crushed, washed,
sorted into stockpiles, and then shipped out for use by truck or train.
Mined lands in California are not disturbed indefinitely. Once all or a part of the mine is fully excavated,
the reclamation phase begins (often concurrently with mining). Reclamation is the process of restoring mined
lands to allow for a specified end use, such as open space, park lands, wildlife habitat, grazing, agricultural
lands, water storage, and preparing the land for future industrial, commercial or residential use. All surface
mining operations in California must be reclaimed.
The California Department of Conservation (DOC) has noted the following examples of successful
reclamation projects:
• One mining company in Ventura County reclaimed its mining pit to a strawberry field.
• A gravel extraction area at Mississippi Bar in Sacramento County was returned to a riparian (water)
wildlife habitat.
• An aggregate mine on agricultural land in Yolo County operates in four phases. The intent is that not
more than 95 acres is out of agricultural production at any time during the project’s life.
• Other mined lands have been reclaimed to grazing and production of crops, such as alfalfa, corn, grapes
and tomatoes.
Economic and Environmental Benefits
The California Legislature expressly recognized the economic benefits of mineral extraction when it passed
SMARA in 1975. Specifically, SMARA states that “[t]he Legislature hereby finds and declares that the
extraction of minerals is essential to the continued economic well-being of the state and to the needs of
society....” (Public Resources Code, Section 2711(a))
As noted in a recent report by the California Geological Survey (Aggregate Sustainability in California,
2012), demand for construction aggregates has increased since SMARA’s enactment, and is expected to further
increase over time as the state’s population continues to grow and infrastructure is maintained, improved and
expanded:
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“The building and paving industries consume large quantities of aggregate and future demand for this
commodity is expected to increase throughout California. Aggregate materials are essential to modern society, both
to maintain the existing infrastructure and to provide for new construction. Therefore, aggregate materials are a
resource of great importance to the economy of any area.”
The California Geological Survey report also noted the environmental benefit of maintaining nearby, local
sources of construction aggregate as opposed to transporting the materials from distant sources, such as out-ofstate or out-of-country operations:
“Because aggregate is a low unit-value, high bulk weight commodity, it must be obtained from nearby sources
to minimize economic and environmental costs associated with transportation. If nearby sources do not exist, then
transportation costs can quickly exceed the value of the aggregate. Transporting aggregate from distant sources results
in increased construction costs, fuel consumption, greenhouse gas emissions, air pollution, traffic congestion, and road
maintenance.”
Accordingly, maintaining local sources of aggregate supplies is critical to the state’s economy and
environmental goals of reducing vehicular transportation and greenhouse gas emissions.
SMARA’s Requirements
Prior to initiating mining and reclamation activities, SMARA requires mining operators to obtain a mining
permit (unless the mine is a “vested,” or “grandfathered” mining operation), a “reclamation plan” for returning
the land to a usable condition that is readily adaptable for alternative land uses, and financial assurances to
guarantee costs for reclamation (typically in the form of surety bonds). Mining permits and reclamation plans
that require discretionary approvals are subject to the California Environmental Quality Act (CEQA).
SMARA is a “home rule” statute, meaning that it recognizes local agencies’ traditional land use regulatory
power, including authority over surface mining operations. Under SMARA, local “lead” agencies are tasked
with reviewing and approving applications for permits, reclamation plans and amendments thereto, and
financial assurances. Before approval, lead agencies must submit reclamation plans and financial assurances
to the State Office of Mine Reclamation for technical review and comment. Lead agencies also conduct an
annual inspection of mining operations for compliance and take enforcement actions when necessary.
The Office of Mining Reclamation and the State Mining and Geology Board administer SMARA on the
state level. The office and board are jointly charged with ensuring the proper administration of SMARA’s
requirements. The board promulgates regulations to clarify and interpret SMARA’s provisions, and also
serves as a policy and appeals board. The office provides an ongoing technical assistance program for lead
agencies and operators, maintains a database of mine locations and operational information statewide, and
is responsible for certain compliance-related matters. Because SMARA is a home-rule statute, the primary
permitting, administration, and enforcement responsibilities rest with the lead agencies.
AB 1142: SMARA Reform
In response to Governor Edmund G. Brown Jr.’s calls in 2013 to reform SMARA “top to bottom,”
Assemblyman Adam Gray (D-Merced) introduced AB 1142 in 2015. AB 1142 provides much-needed
clarification about the duties and responsibilities of mining operators, lead agencies and the state under the
SMARA. AB 1142 also makes needed procedural improvements to the annual inspection process, the financial
assurance process, the reclamation plan approval process, and other administrative processes that will help
ensure that critical aspects of SMARA are carried out properly.
AB 1142 appropriately ensures that lead agencies continue to administer SMARA’s primary requirements.
The bill improves and clarifies SMARA, however, by creating a clearer and more efficient regulatory process
at the local level while also ensuring that the state can administer its SMARA responsibilities more effectively.
Specifically:
AB 1142 Improves SMARA’s Inspection Process
AB 1142 proposes several beneficial changes to SMARA’s inspection process, including:
• Improving the quality of mine inspections by requiring annual mine inspections to be performed by
licensed professionals or a local lead agency employee who is experienced in land reclamation;
• Clarifying the scope of SMARA mine inspections; and
• Ensuring that the inspector indicates on a form whether the surface mining operation is in compliance
with its approved reclamation plan, and if not, which aspects are not in compliance, whether those aspects
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have been resolved, and how the lead agency will address remaining areas of noncompliance.
In short, these changes will improve the integrity of annual inspections by ensuring that inspections occur
each year, are performed by qualified experts, and that the state received clear reports for local lead agencies on
each operation’s compliance with SMARA.
AB 1142 Creates a More Robust Financial Assurances Process
AB 1142 also makes important changes to SMARA to ensure that financial assurances are both adequate
and assessed in a timely fashion. Specifically, AB 1142 clarifies that financial assurances must be reviewed
annually, and adjusted, if necessary, to ensure that the financial assurances are adequate to reclaim the site in
accordance with the approved reclamation plan.
AB 1142 also creates more uniform and consistent timing requirements. Currently, SMARA does not
contain a timeframe for the annual review and update of financial assurances. AB 1142 closes this regulatory
gap by requiring an operator to submit its financial assurance cost estimate (FACE) within 30 days after its
annual inspection.
Perhaps more important, AB 1142 provides the DOC with more oversight of the FACE process.
Specifically, AB 1142 gives the DOC the ability to make a “completeness” determination of the FACE once
the lead agency has reviewed it for completeness and adequacy. If the DOC determines that the FACE
is incomplete, it must notify the lead agency and indicate which aspects are incomplete. Once it receives
a complete FACE, the DOC has 45 days to review the FACE and submit comments to the lead agency.
Importantly, if a lead agency ultimately approves a FACE that the DOC believes is inadequate, AB 1142
provides the DOC with the power to appeal the approval to the State Mining and Geology Board. Overall,
this new process will ensure that adequate FACEs are being approved, while also ensuring that FACEs will be
adjusted appropriately to ensure that the site can be reclaimed in accordance with the approved reclamation
plan and subject to inspection.
AB 1142 Ensures State Has Access to Complete Reclamation Plans
Reclamation plan requirements can be located in multiple documents. Specifically, while most reclamation
requirements are contained in the reclamation plan itself, the CEQA document, for example, may contain
mitigation measures that are not in the reclamation plan, but which nonetheless relate to the reclamation of
mined lands.
In order to ensure that the state can more easily identify all reclamation requirements for a given site, AB
1142 requires a reclamation plan to include a chart identifying the page number, chapter, appendix or other
specific location in the reclamation plan where content meeting reclamation requirements is located. Such
items may be included in the reclamation plan by reference if those items of information are attached to the
reclamation plan when the lead agency submits it to the DOC for review. Under AB 1142, such items and/or
documents would become part of the reclamation plan.
SB 209: SMARA Reporting, Financial Tests
SB 209 (Pavley; D-Agoura Hills), another SMARA bill, but less significant in terms of its scope, proposed to:
• Increase the maximum reporting fee for a single mining operation from $4,000 to $10,000 annually over
a three-year period;
• Increase the total allowable revenue generated by the reporting fees from $3.5 million to $8 million
annually;
• Requires, under certain circumstances, the lead agency to provide the operator with a minimum five-day
written notice of a pending inspection;
• Allows a lead agency employee to inspect surface mining operations that are owned by the local agency;
and
• States that a financial assurance mechanism may include corporate financial tests combined with surety
bonds, irrevocable letters of credit, or trust funds, so long as certain conditions are met.
AB 1142 and SB 209 are currently two-year bills on the Senate and Assembly floors, respectively. Due to
last-minute procedural issues associated with clarifying inconsistencies between the bills, neither AB 1142 nor
SB 209 made it to the Governor in 2015. The California Chamber of Commerce, however, fully expects both
AB 1142 and SB 209 to pass their respective legislative houses in early 2016.
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CalChamber
Position
The CalChamber agrees with SMARA’s overall purpose and is mindful that SMARA, like any comprehensive
land use law, requires periodic updating. Understanding that demand for construction aggregate is expected
to rise due to California’s increasing infrastructure needs, any refinements to SMARA must not hinder the
construction aggregate industry’s ability to produce construction aggregates and other industrial minerals.
Further, local sources of aggregate are needed in order to achieve California’s greenhouse gas reduction goals.
Policies that increase construction aggregate and industrial mineral production costs will harm the state
and the consumer. Local agencies will pay more to maintain roads and public infrastructure. The California
Department of Transportation will pay more to build bridges and repair highways. Costs for other major
public projects, including California’s high-speed rail project and water projects, will increase. These impacts
could severely hinder critical infrastructure development, and could further jeopardize the thousands of
workers employed by the construction aggregate industry statewide.
The CalChamber is hopeful that AB 1142 and SB 209 together will implement needed reforms while also
ensuring that the market for construction aggregates and industrial materials remains viable and cost effective
to meet California’s infrastructure needs.
Staff Contact
Anthony Samson
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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FOOD LABELS
Food Labeling
Uniform National Labeling, Education Better than State-Only Rules
Summary
Background
Over the years, there have been many attempts to pass legislation or initiatives to require state-only labeling
on raw agricultural produce, and packaged foods and beverages, or outright bans on genetically modified or
engineered food and cloned animals. Last year, a couple of bills were introduced that required specific labeling for
genetically modified foods, and the origin of fish and sugar-sweetened beverages. The last big initiative in California to require mandatory labeling was the California Right to Know Genetically Engineered Food Act in 2012,
which was defeated at the polls. Only Vermont passed an initiative a couple of years ago with an implementation
date of July 2016. A group of food manufacturers sued to block implementation and lost in the district court,
but the case is on appeal. Federal and state legislation and initiatives are being contemplated in a variety of states.
The issue of labeling genetically modified foods is driven largely by local and grassroots groups, although
organizing at the national level is picking up. Science doesn’t support the allegation that genetically modified
crops or fish are inherently bad. Organic growers are surfacing more and more in literature as backing these
initiatives, as are citizens with food allergies. The friction between conventional growers and organic growers
escalates from time to time, especially regarding buffer zones between the fields.
The rise of obesity rates in the populace is driving the move to label sugar-sweetened beverages. Several bills
over the last few years have been introduced to either tax the beverages or require specific warnings on the labels.
So far, none have passed. In addition, a couple of cities have tried to impose local taxes on the sale of those beverages; one ordinance failed and one passed. Given the local, state and national level of attention the beverages have
received as a significant contributor to obesity, it is likely that more bills and local initiatives will be introduced.
Obesity is not caused by any one food or drink. According to the Centers for Disease Control and Prevention, “The key to achieving and maintaining a healthy weight isn’t about short-term dietary changes. It’s
about a lifestyle that includes healthy eating, regular physical activity, and balancing the number of calories
you consume and the number of calories your body uses.” A stronger effort to inform and educate the public
about lifestyle choices is crucial.
Current Regulations
The Federal Food, Drug, and Cosmetic Act has authority to ensure the safety and proper labeling of most
foods (except meat and poultry), including foods developed through biotechnology. It currently requires
labeling of genetically engineered foods if the food has a significantly different nutritional property; if a new
food includes an allergen that consumers would not expect to be present (for example, a peanut protein in a
soybean product); or if a food contains a toxicant beyond acceptable limits.
The U.S. Department of Agriculture regulates genetically engineered crops that may become pests by
setting limits on their importation, interstate movement, and release into the environment. The department
also has the authority to remove these restrictions if it is shown that the crop poses no additional risk of
becoming a plant pest than a nongenetically engineered variety of that crop.
In November 2015, the Food and Drug Administration (FDA) approved a genetically engineered salmon
as fit for consumption, making it the first genetically altered animal to be cleared for American supermarkets
and dinner tables. The fish has been modified to grow twice as fast by using a gene from the faster-growing
Chinook salmon and a gene from an eel which keeps the gene turned on. Approval of the salmon has been
fiercely opposed by some consumer and environmental groups, which have argued that the safety studies were
inadequate and that wild salmon populations might be affected if the engineered fish were to escape into the
oceans and rivers. The fish will not have to be labeled as being genetically engineered, a policy consistent with
FDA’s stance on foods made from genetically engineered crops. A consumer group has said it will file a lawsuit
challenging the approval. At the same time, the FDA issued new guidance to food makers about how to describe
their products and the bioengineering that may, or may not have gone into them. Labeling is voluntary.
The FDA is in the process of updating the Nutrition Facts label on food packages to reflect new public
health and scientific information, including evidence on nutrition, obesity and chronic disease.
In late November 2014, the FDA finalized two rules. One rule requires that calorie information be listed on
menus and menu boards in chain restaurants, similar retail food establishments, and vending machines with 20
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or more locations to provide consumers with more nutritional information about the foods they eat outside of
the home. The vending machine final rule requires operators that own or operate 20 or more vending machines
to disclose calorie information for food sold from vending machines, subject to certain exceptions. Vending
machine operators will have two years to comply with the requirements. Covered restaurants will have one year
to comply. The rules are required by the 2010 Patient Protection and Affordable Care Act.
California had an earlier law requiring labeling, but it was repealed and replaced by a law requiring the
state to enforce the federal law when it comes into effect.
Recent Activities
According to the Center for Food Safety, 40 genetically engineered food labeling bills were introduced in
20 states in 2015. None of them passed. On the federal level, H.R. 1599 (Pompeo; R-Kansas), the Safe and
Accurate Food Labeling Act of 2015, which would require the U.S. FDA to set standards for companies that
want to label food products as containing or not containing genetically modified organisms (GMOs) and
would pre-empt state action on the issue, was introduced and passed the U.S. House of Representatives. It’s
awaiting action in the U.S. Senate.
California 2015 Proposals
• AB 820 (M. Stone; D-Scotts Valley) requires all fish and shellfish sold in California for human
consumption be clearly labeled at the point of sale, whether they are wild caught or farm raised. Two-year bill.
• AB 2X 14 (Gatto; D-Glendale) requires labeling food products using fracked water. Not heard in policy
committee.
• SB 203 (Monning; D-Carmel) requires that certain sodas, energy drinks and fruit drinks be labeled
“STATE OF CALIFORNIA SAFETY WARNING: Drinking beverages with added sugar(s) contributes to
obesity, diabetes, and tooth decay.” Two-year bill.
San Francisco and Berkeley had local initiatives taxing sugar-sweetened beverages. San Francisco’s was
defeated. Berkeley’s initiative passed, imposing a 1-cent tax per fluid ounce for the privilege of distributing the
beverages in the city limits.
Anticipated Activity in 2016
It is likely that more legislation requiring state-only labeling will be introduced. Expect to see legislation
requiring labeling of genetically modified foods and warning labels on sodas. Also expect more ballot
initiatives to be introduced in various states limiting or banning genetically modified crops, or regulations that
require labeling of products containing genetically engineered ingredients. On the West Coast, proponents are
discussing and comparing the costs of running initiatives for labeling GMOs in Oregon and California.
The Berkeley initiative assessed a 1-cent-per-ounce tax on the sale of sugar-sweetened beverages. According
to a study conducted by two economists, only 21.7% of the tax was passed on to buyers, but the levy raised
$375,100 between March and May 2015. It was on track to raise $1.2 million by the end of the year. The
money collected is currently going to the city’s general fund. It’s likely that other cities will see attempts to
raise revenue using this model.
CalChamber
Position
The California Chamber of Commerce supports uniform national labeling laws. Our member companies
market products nationwide; therefore, uniform national labeling laws are more efficient and maintain a
level playing field in the marketplace. The CalChamber also supports public and private sector efforts to find
avenues to educate Californians about balanced diets and healthy lifestyle choices. The CalChamber encourages
California’s leaders to ensure that particular industries are not unfairly burdened by taxes and unworkable
regulations, and to avoid policies that charge one industry with responsibility for public health costs that are
caused by a variety of factors.
Staff Contact
Valerie Nera
Policy Advocate
[email protected]
P.O. Box 1736
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(916) 444-6670
www.calchamber.com
January 2016
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HEALTH CARE
A New Tax on Health Care?
Summary
Background
In 2014, the federal Centers for Medicare and Medicaid Services (CMS) informed California that its existing
provider tax on select managed care organizations (MCOs or MCO health plans) does not comply with
federal rules and cannot be renewed once it expires at the end of June 2016. This MCO tax currently offsets
more than $1 billion in General Fund expenditures on Medi-Cal, California’s Medicaid program, and helps to
draw down matching federal funds for use in the program.
The Governor has called a special session and charged legislators with finding an alternative funding
source to replace the expiring MCO tax, and to offset 7% of the cost of the state’s In-Home Supportive
Services (IHSS) program, which is largely funded through Medi-Cal. To meet both of these objectives, any
replacement proposal would have to generate at least $1.3 billion in 2016–17. If the Legislature decides to
impose a new MCO tax that complies with federal rules to generate this revenue, that tax would have to be
broadly applied to all MCO health plans, including those with few or no Medi-Cal enrollees, potentially
placing some plans at a competitive disadvantage and increasing premiums for employers and individuals who
purchase commercial health coverage.
Provider Taxes
The MCO tax is an example of a provider tax, which states can impose on health care services provided by
various types of providers. The proceeds of these taxes are used by states to help fund their Medicaid programs,
and to the extent that states use provider tax revenues to fund their Medicaid programs, those expenditures are
matched by the federal government.
For providers that serve a large percentage of Medicaid patients, provider taxes generally are beneficial
because they help draw down federal matching funds and increase how much the respective state has to pay
Medicaid providers like them. The vast majority of states impose at least one provider tax. Besides the MCO
tax, California also imposes the Hospital Quality Assurance Fee and the Skilled Nursing Facility Fee.
Expiring MCO Tax
In 2013, the Legislature approved the existing MCO tax, a 3.975% sales tax on the gross receipts of Medi-Cal
MCO health plans that serve California’s Medicaid recipients. The tax has allowed the state to draw down
additional federal funds for the Medi-Cal program, benefitting all the payers of the tax, without having to use
additional General Fund revenue. At the same time, because the tax is imposed only on those MCO health
plans that serve Medi-Cal patients, and because the state ultimately reimburses Medi-Cal plans for their costs,
including any taxes they pay, all the payers of this tax are made whole. As a result, the expiring MCO tax is
not really a tax at all because it does not impose a net tax on any of the payers.
The Hospital Quality Assurance Fee and Skilled Nursing Facility Fee are both broader than the current
MCO tax in that they apply to nearly all hospitals and skilled nursing facilities. Approximately two-thirds
of all nursing home patients are Medi-Cal enrollees, however, and all hospitals serve at least some Medi-Cal
enrollees. Therefore, the vast majority of providers paying these taxes benefit, at least to some degree, from the
increased federal funding they help generate for the Medi-Cal program.
Federal Compliance
Going forward, CMS has indicated it will approve an MCO tax only if it is broadly applied to all MCO
health plans, similar to how the state’s hospital and skilled nursing facility taxes are structured. Unlike
hospitals and skilled nursing facilities, however, business models vary dramatically among MCOs. Some
have no Medi-Cal enrollees at all, and many others have a large share of commercial enrollees with only a
small percentage of Medi-Cal enrollees. Because of this, an MCO tax that meets the federal rules is apt to
disadvantage some MCO health plans and increase premiums for employers and individuals who purchase
commercial coverage from MCOs.
Proposals Being Considered
In his January 2015 budget proposal, Governor Edmund G. Brown Jr. proposed a new MCO tax on all
managed care plans, using a tiered tax rate designed to minimize the tax burden on MCOs with few or no
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Medi-Cal enrollees. Less than half of the $1.3 billion the proposal would have generated would have been
paid for by commercial MCOs, but because of the significant differences in their size and patient mixes, it
still would have imposed a significant net tax increase on many MCOs that would have to be passed on to
purchasers, and a few small MCOs with no Medi-Cal enrollees would likely have been put out of business
because the tax would have increased their commercial premiums disproportionately compared to their
competitors. The Governor’s administration estimated that its proposal would have imposed a $658 million
tax on commercial MCOs, affecting premiums for more than 12 million employers, individuals and families
who purchase commercial health coverage. As a result, the proposal was opposed by a number of MCOs and
the California Chamber of Commerce.
The day after the 2015 state budget was approved, without a replacement proposal, the Governor called a
special legislative session and instructed the Legislature “to consider and act upon legislation necessary to enact
permanent and sustainable funding from a new managed care organization tax and/or alternative fund sources
to,” among other things, generate at least $1.1 billion to offset the revenue that would have been generated by
the expiring MCO tax, and to increase the budget of the state’s IHSS program by 7%.
As part of the special session, legislators have introduced several measures proposing new taxes to help
fund Medi-Cal, the IHSS program, and several other state health care programs, including a tax increase on
tobacco products, and new taxes on e-cigarettes and sweetened beverages. Three other measures were introduced
proposing alternative MCO taxes in an attempt to address the concerns raised over the Governor’s proposal:
• ABX2 4 (Levine; D-San Rafael) imposes a tax on all MCOs, but at a flat rate of $7.88 per enrollee, per
month, and raises $1.9 billion annually to replace the expiring MCO tax, increase IHSS funding, and increase
provider reimbursement rates in the developmental services program.
• ABX2 19 (Bonta; D-Oakland) imposes a tiered tax on all MCOs, but uses different tiers and tax rates
than the Governor’s proposal to try to reduce the impact on small MCOs with no Medi-Cal enrollees. It raises
approximately $1.3 billion annually.
• SBX2 14 (E. Hernandez; D-West Covina) increases taxes on tobacco products, imposes a new equivalent
tax on e-cigarettes, and tax on all MCOs with a modified tiered structure.
Recent Developments
This January in his proposed 2016–17 budget, the Governor indicated that his administration may be close
to an agreement with health plans that would impose an MCO tax but reduce other taxes they pay in order to
eliminate the need for premium increases. When this Guide went to press, the proposal was not yet available
in print. The administration has indicated, however, that it would like to have an MCO tax approved by the
Legislature by the end of January, so that it can begin discussions with CMS and have the new tax approved
before the existing one expires this summer. The CalChamber will be monitoring the issue closely to try to
ensure that the final proposal does not increase premiums for employer-sponsored coverage.
CalChamber
Position
The CalChamber favors maintaining adequate General Fund support for safety-net programs, including
Medi-Cal, and believes programmatic funding shortfalls should be addressed in the annual Budget Act in light
of the state’s overarching policy priorities. The CalChamber opposes the imposition of new taxes on employersponsored commercial health care coverage to subsidize other health care programs, as it penalizes responsible
employers, makes employee coverage less affordable and, over time, erodes the quality of the benefits
employers can afford to offer to attract workers and maintain their competitiveness in a global economy.
Staff Contact
Mira Morton
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Employment Litigation on the Rise
Summary
Labor and employment litigation is a growing threat to employers that continues to rise each year. As noted
in Norton Rose Fulbright’s Annual Litigation Trend Survey 2014, labor and employment disputes were one
of the top three types of litigation facing companies in 2013. In its updated report issued in 2015, Norton
Rose stated: “[o]f particular concern is the increasing number of class action lawsuits with a quarter of all
respondents reporting at least one call or group action against their companies in the preceding 12 months,
80% of which are based in the U.S.” Seyfarth Shaw’s Annual Workplace Class Action Litigation Report for
2015 indicates that wage-and-hour class action is the top area of litigation, with the Ninth Circuit (which
includes California) as the highest area for wage-and-hour class action filings. Specifically, Seyfarth’s report
stated: “[t]he most dominant trend has been a steep rise in the number of class action lawsuits filed in state
courts alleging violations of California’s overtime laws or the California Labor Code and wage & hour
regulations. This trend continued unabated in 2014. The rate of new case filings has continued to grow to the
point where multiple class actions are filed in California every day.” As noted by an article in the Los Angeles
Daily Journal in April 2014, representative actions under the Labor Code Private Attorneys General Act
(PAGA) have increased by more than 400% over the last eight years.
California’s labor and employment laws, housed in various code sections, all provide an opportunity for
costly civil litigation against an employer for any alleged mistake. These multiple threats of litigation create
significant costs for California employers and limit their ability to create new jobs and expand their business.
Below is a summary of the most common employment lawsuits under California law that employers face.
Labor Code Private Attorneys General Act (PAGA)
In 2003, Governor Gray Davis signed into law SB 796 (Dunn; D-Garden Grove; Chapter 906), which
created PAGA and went into effect January 1, 2004. PAGA basically allows an aggrieved employee to file a
representative action on behalf of the employee and all other current or former employees similarly aggrieved,
for civil penalties due to the violation of a Labor Code provision. PAGA separates the Labor Code violations
into two categories: 1) nonserious violations, which require an employee to provide the employer and Labor
and Workforce Development Agency (LWDA) with written notice of the alleged violation and thereafter, 33
days for the employer to cure the violation before pursuing a civil action; and 2) serious violations, which
allow an employee to pursue civil litigation without providing an employer with time to cure the violation.
PAGA also has a separate investigation procedure for occupational and health standards that is coordinated
with the procedures for the Division of Occupational Safety and Health. PAGA is not utilized for Labor
Code violations regarding workers’ compensation, as Labor Code Section 3602 sets forth that workers’
compensation is the exclusive remedy for work-related injuries.
The list of code sections considered serious violations are set forth in Labor Code Section 2699.5, and include such
claims as meal and rest period violations, minimum wage, overtime and payment of wages at time of termination.
When the Labor Code violation at issue has a penalty associated with it, then that is the penalty the
employee may collect on behalf of himself/herself and the “aggrieved employees,” in the PAGA action. If the
Labor Code provision does not have a specific penalty associated with it, then PAGA provides a penalty as
follows: 1) If at the time of the violation the employer does not employ one or more employees, the penalty is
$500; 2) If at the time of the alleged violation the employer employs one or more employees, the civil penalty
is $100 per employee, per pay period for the first violation and $200 per pay period, per employee, for each
subsequent violation. Notably, there is no requirement under PAGA that an employee actually suffer harm,
such as unpaid wages, as a result of the violation, nor is there any required intent by the employer to have
actually committed the violation for the penalties to apply. PAGA penalties are imposed regardless of whether
the employer simply made a good faith mistake and regardless of whether the employee is actually harmed.
The penalties collected under PAGA are supposed to be divided as follows: 75% to the LWDA and 25% to the
aggrieved employees. PAGA also provides a statutory right to attorney fees for the employee’s attorney only, thereby
adding another layer of cost onto employers and providing an incentive for plaintiff’s attorneys to file the case.
Legislative Action
The significant increase of PAGA lawsuits in California against employers for technical violations actually
served as the basis for limited reform in 2015. Assemblymember Roger Hernández (D-West Covina) authored
AB 1506, which moved the obligation for an employer to include the specific name, address, and inclusive pay
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dates on the paystub, from the list of serious violations under PAGA to the nonserious list in order to allow
an employer a 33-day right to cure such violations before a civil action is filed. AB 1506, designated a job
creator bill by the California Chamber of Commerce, received bipartisan support and was signed by Governor
Edmund G. Brown Jr. AB 1506 included an urgency clause and therefore went into effect immediately upon
being signed in October 2015 (Chapter 445).
The CalChamber is not aware of any other state that has a statutory representative action and penalty
scheme similar to PAGA, which makes California unique with this litigation opportunity against employers.
Misclassification of Employees as Salaried vs. Hourly Employees
A prime area for class action litigation as well as PAGA claims is the alleged misclassification of employees
as exempt, salaried employees versus hourly, nonexempt employees, as well as independent contractor versus
employee. Although there is no question that some employers intentionally misclassify their employees as
salaried or as independent contractors to gain a competitive advantage, a lot of employers try to classify
employees correctly by going through the subjective tests and simply get it wrong. California’s exempt
classifications for employees are confusing and differ from the federal test, which adds another layer of
complexity for California employers. Similarly, there is no consistent definition of independent contractor
versus employee in statute, and state agencies admittedly apply different tests to determine independent
contractor status, thereby making the challenge for employers to get it completely right almost impossible.
(For more detail on this issue, see the article on “Classification Confusion”)
Numerous industries, including financial services, restaurants, retailers, realtors, insurance, transportation,
and technology, have all been targeted with multimillion-dollar class actions for alleged “misclassification” of
employees. Given the significant costs involved in simply defending a class action, many of these cases settle
before trial. In each class action, the majority of the settlement award is allocated to the plaintiffs’ attorneys for
fees and costs. Two recent cases involving misclassification illustrate the typical breakdown of such settlements:
• Campbell v. Pricewaterhouse Coopers, LLC (2015): alleged misclassification of associates as exempt
employees. Total settlement award: $5 million (this amount does not reflect the costs incurred by the
defendant to defend the case, including defense attorney fees).
Plaintiffs’ attorney fees and costs: $2.9 million.
Class representative awards: enhancement of $10,000 for serving as representative.
Class member awards (injured employees): 1,900 members split the remaining $2 million based upon
weeks worked, which if split evenly would be approximately $1,000 to each employee.
• Boyd v. Bank of America (2015): alleged misclassification of appraisers as exempt employees. Total
settlement award: $36 million (this amount does not reflect the costs incurred by the defendant to defend the
case, including defense attorney fees).
Plaintiffs’ attorney fees: $11,988,000 (subject to approval by court).
Class representative awards: enhancement of $25,000 per representative.
Class member awards: approximately $64,000 (this amount assumes the attorney fee award referenced
above is granted by the court and each class member worked the same hours to equally divide the remaining
settlement award after deducting for attorney fees, costs, enhancement awards, and PAGA penalties).
Fair Employment and Housing Act and California Family Rights Act
The Government Code houses California’s Fair Employment and Housing Act (FEHA), which basically
precludes employers from discriminating against or harassing employees having a protected status, as well as
the California Family Rights Act (CFRA), which provides employees with 12 weeks of protected leave to care
for the serious medical condition of the employee or family member, or to bond with a new child.
FEHA and CFRA each have a private right of action for any alleged claim of discrimination, harassment,
or interference/denial of an employee’s rights under CFRA. The damages available for such a claim include:
1) backpay; 2) reinstatement or front pay; 3) injunctive relief; 4) attorney fees and costs; 5) compensatory
damages for pain and suffering; and 6) punitive damages.
In 2014, more than 17,000 employment claims were filed with the Department of Fair Employment
and Housing alleging violations of FEHA. Although there are some employers that may unlawfully harass
or discriminate against employees, many employers face litigation under FEHA for making an objective
employment decision that involves an employee who is a member of a protected classification or who recently
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engaged in protected activity. A basic example of this type of litigation is as follows:
Protected activity/status: Employee is over 40, transgender, and recently returned from medical leave
under CFRA.
Objective conduct: One week after returning from medical leave, the employee is caught on camera
taking merchandise without paying, which results in the employee’s termination.
Employee FEHA allegation: The employer’s adverse employment action of terminating the employee was
not based upon the employee’s misconduct, but rather was based upon the employee’s status as a transgender,
older worker, or because the employee recently took leave under CFRA.
Although this example may seem to lack merit, many employees and attorneys will file a claim with the
intent of extracting a “nuisance value” settlement. A recent study by Hilcox in 2015 found that the cost of a small
to mid-size employer to defend and settle a single plaintiff discrimination claim was approximately $125,000.
This amount, especially for a small employer, is a significant financial risk to just defend the lawsuit, much less
any potential award issued. Such a threat may force a small business to make a business decision to settle the case
for an amount lower than the cost of defense, referred to as a nuisance value settlement.
For more details on protected statuses under the FEHA, please see the article on “Efforts to Expand
Protected Employee Classifications.”
For more information on the cost of defense and nuisance value settlements, please refer to the article on
“Improving California’s Legal Climate.”
CalChamber
Position
The CalChamber does not defend employers who intentionally violate the law or discriminate against
employees based upon their protected statuses or protected activity. However, the current litigation
environment is not targeted at just employers who intentionally violate the law. Good employers who make
innocent mistakes, or who make objective, reasonable employment decisions still are subject to constant
threats of costly litigation in an attempt to leverage a settlement from the employer that is less than what it
would cost the employer to defend the lawsuit.
California needs to limit the numerous pathways of costly litigation against employers and either allow
employers an opportunity to resolve good faith mistakes before lawsuits are filed or allow employers to recover
their costs and attorney fees for successfully defending litigation in order to limit the nuisance value lawsuits filed.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Transatlantic Trade and Investment Partnership
Stable Market Represents Huge Opportunities
Summary
Background
Europe and the United States are negotiating trade talks for a potential Transatlantic Trade and Investment
Partnership (TTIP) to further the largest regional trading and investment relationship in the world.
The European Union (EU) consists of 28 countries: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, the Mediterranean Island of Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia,
Spain, Sweden and the United Kingdom.
The EU presidency rotates with each member country taking turns for six months at a time as chair of EU
meetings and representing the EU at international events.
Current
Europe and the United States are negotiating via rounds of trade and investment talks. Business and government
leaders from the United States and the European Union also regularly participate in the Trans-Atlantic Business
Dialogue to discuss priorities for eliminating trade and investment barriers across the Atlantic.
Impact
The trans-Atlantic economic partnership is a key driver of global economic growth, trade and prosperity, and
represents the largest, most integrated and longest-standing regional economic relationship in the world.
Together, the European Union and the United States are responsible for more than 11% of the world’s
population, nearly half of global gross domestic product (GDP), a third of global merchandise trade, and 40% of
world trade in services. The trans-Atlantic relationship defines the shape of the global economy as a whole; either the
European Union or the United States also is the largest trade and investment partner for almost all other countries.
According to the World Bank, the EU market represents 508.3 million people, and has a total GDP of
$18.46 trillion. The United States has 318.9 million people and a GDP of $17.42 trillion.
Total bilateral goods trade between the European Union and United States was $694.3 billion in 2014,
with the United States exporting $276.1 billion worth of goods to EU member nations.
California exports to the European Union in 2014 totaled $29.6 billion. California is one of the top
exporting states to Europe, with computers, electronic products and chemical manufactures as the state’s
leading export sectors to the region. EU countries purchase roughly 17% of all California exports. For
California companies, the single market presents a stable market with huge opportunity.
Tariffs on goods traded between the U.S. and the EU average less than 3%, but even a small increase in
trade could have major economic benefits. U.S. trade with Europe is much larger than with China. Although
there are numerous issues such as agricultural subsidies, privacy, aircraft subsidies, obtaining agreements on
issues such as uniform car safety testing could be a huge benefit.
EU-U.S. commercial links are unrivaled. U.S. goods and private services trade with the EU totaled over $1
trillion in 2014, according to the White House. Total U.S. annual investment in the EU is higher than in all of
Asia, while EU investment in the U.S. far outstrips EU investment in India and China combined. According to a
2013 study by the British Embassy Washington, Atlantic Council, and Bertelsmann Foundation, the TTIP could
create as many as 750,000 jobs in the United States and 75,340 jobs in California.
According to the U.S. Trade Representative, the United States and the European Union are the world’s largest
sources and destinations for foreign investment. Trans-Atlantic investment benefits companies and workers
by creating high- paying jobs, boosting exports, and spurring innovation in both the United States and the
European Union.
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Anticipated Action
Europe and the United States are set to continue negotiations in 2016 to deepen the world’s largest trading
and investment relationship with focus on trade and investment initiatives, including:
• eliminating tariffs on trans-Atlantic trade in goods;
• establishing compatible regulatory regimes in key sectors to address regulatory divergences that
unnecessarily restrict trade;
• a bilateral investment agreement;
• liberalizing cross-border trade in services; and
• bilateral expansion of government procurement commitments.
CalChamber
Position
The California Chamber of Commerce, in keeping with long-standing policy, enthusiastically supports
free trade worldwide, expansion of international trade and investment, fair and equitable market access for
California products abroad and elimination of disincentives that impede the international competitiveness
of California business. New multilateral, sectoral and regional trade agreements ensure that the United States
may continue to gain access to world markets, resulting in an improved economy and additional employment
of Americans.
Strengthening economic ties and enhancing trans-Atlantic regulatory cooperation through an agreement
that would include both goods and services, including financial services, are essential to eliminating
unnecessary regulatory divergence that may act as a drag on economic growth and job creation.
Staff Contact
Susanne T. Stirling
[email protected]
P.O. Box 1736
(916) 444-6670
January 2016
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Trans-Pacific Partnership Agreement
Elimination of Numerous Foreign Taxes Will Yield Multiple Benefits
Summary
Background
The United States, Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New
Zealand, Peru, Singapore and Vietnam have successfully concluded the negotiations of the Trans-Pacific
Partnership (TPP). In addition, more countries may join the trade partnership. According to the U.S. Trade
Representative’s Office, the TPP is the most significant trade negotiation in a generation, and promises
significant economic benefits for American businesses, workers, farmers, ranchers and service providers.
Impact
The Trans-Pacific Partnership Agreement contains 30 chapters of trade, labor, intellectual property, and
environmental regulations. Those chapters will eliminate 18,000 foreign taxes on U.S. products, boost
exports, protect intellectual property rights, and strengthen labor rights and human rights abroad. According
to the U.S. Department of Commerce, goods exported to TPP countries support an estimated 3.1 million U.S
jobs, with services exports supporting an additional 1.1 million U.S. jobs. TPP countries account for 43% of
all jobs supported by goods exports. California especially would benefit from the TPP, as 39,160 companies
from California exported goods to TPP countries in 2013. In addition, 41% of California’s good exports went
to TPP countries in 2014 (U.S. Department of Commerce).
A TPP agreement will provide global income benefits of an estimated $223 billion per year by 2025,
according to a 2013 analysis supported by the Peterson Institute. Real income benefits to the United States
are an estimated $77 billion per year. The TPP could generate an estimated $305 billion in additional world
exports per year by 2025, including an additional $123.5 billion in U.S. exports.
The market size exceeds 800 million consumers representing 40% of world gross domestic product. In
2014, U.S. exports with the TPP members reached $726.5 billion and California exports were $71.6 billion,
according to the U.S. Department of Commerce.
Anticipated Action
Although TPP negotiations concluded on October 5, 2015, each country’s government now has to approve
the text of the agreement. The United States has the most complicated review process. Under the rules of fast
track, once the President signs the TPP, Congress will be on the clock to have an up-or-down vote in both the
U.S. House of Representatives and the U.S. Senate without amendments or filibusters. After the negotiations
concluded, the White House formally sent Congress notice of intent to sign the agreement, which started a
90-day waiting period. Congress spent the first 30 days of that time privately reviewing the documents and
consulting the administration.
On November 5, 2015, the text of the trade agreement was released publicly by the U.S. Trade
Representative. The full trade deal then became open for anyone to review for 60 days, allowing interest
groups to provide feedback.
The next step will be for the U.S. International Trade Commission to conduct a full economic review of
the deal. The agency has up to 105 days to complete that work, but the process could take much less time.
Once the implemented bill is introduced in the House and the Senate, Congress has a maximum of 90
days to approve or disapprove the trade deal, but can move much more quickly. It is anticipated that the
Trans-Pacific Partnership will be considered in 2016.
CalChamber
Position
California products abroad and elimination of disincentives that impede the international competitiveness
of California business. New multilateral, sectoral and regional trade agreements ensure that the United States
may continue to gain access to world markets, resulting in an improved economy and additional employment
of Americans.
The TPP agreement is important as a vehicle for Trans-Pacific-wide economic integration. This regional
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agreement sets a high standard that will enhance the competitiveness of the countries that are part of it
and help facilitate trade and promote investment between them, increasing their economic growth and
development.
Staff Contact
Susanne T. Stirling
[email protected]
P.O. Box 1736
(916) 444-6670
January 2016
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World Trade Organization
Gives Businesses Improved Access to Foreign Markets
Summary
Background
The World Trade Organization (WTO) is the only global international organization dealing with the rules of
trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s
trading nations, and ratified or approved in their parliaments or legislatures. The goal is to help producers of
goods and services, exporters and importers conduct business.
In 1994, the U.S. Congress approved the trade agreements resulting from the Uruguay Round of
multilateral trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT).
The agreement liberalized world trade and created a new WTO, effective January 1, 1995, succeeding the
47-year-old GATT.
The GATT had been created in 1948 to expand economic activity by reducing tariffs and other barriers to
trade. The Uruguay Round agreements built on past successes by reducing tariffs by roughly one-third across
the board and by expanding the GATT framework to include additional agreements.
The WTO is a multilateral treaty subscribed to by 162 governments, which together account for the
majority of world trade (with more than 20 nations negotiating their accession).
WTO Functions
The basic aim of the WTO is to liberalize world trade and place it on a secure foundation, thereby
contributing to economic growth and development, and to the welfare of people around the world. The
functions of the WTO are:
• administering WTO trade agreements;
• providing a forum for trade negotiations;
• handling trade disputes;
• monitoring national trade policies;
• offering technical assistance and training for developing countries; and
• cooperating with other international organizations.
The ultimate goal of the WTO is to abolish trade barriers around the world so that trade can be totally
free. Members have agreed to reduce, over time, the most favored nation duty rates to zero—along with
abolishing quotas and other nontariff barriers to trade. Currently, there are more than 20 agreements dealing
with goods, services, investment measures and intellectual property rights.
Part of the Uruguay Round agreements creating the WTO requires the White House to send a report to
Congress evaluating U.S. membership in the organization every five years. Following the report, members of
Congress may introduce legislation opposing U.S. membership.
Past Negotiations
At the Fourth Ministerial Conference in Doha, Qatar, in November 2001, WTO member governments agreed
to launch new negotiations. They also agreed to work on other issues, in particular the implementation of the
present agreements. The entire package is called the Doha Development Agenda.
The 10th Ministerial Conference was held December 15–19, 2015 in Nairobi, Kenya, the first such
meeting hosted by an African nation. The conference resulted in the historic Nairobi Package, delivering
commitments to especially assist the poorest members of the WTO.
The ministers cited the “pre-eminence of the WTO as the global forum for trade rules setting and governance” and recognized the contribution the rules-based multilateral trading system has made to the strength and
stability of the global economy.
Following successful negotiations, WTO Director-General Roberto Azevêdo declared, “Two years ago in
Bali we did something that the WTO had never done before—we delivered major, multilaterally negotiated
outcomes. This week, here in Nairobi, we saw those same qualities at work. And today, once again, we delivered.”
The Nairobi Package contains a series of six ministerial decisions on agriculture, cotton and issues related
to least-developed countries:
• Export competition consists of eliminating export subsidies, new rules for export credits, international
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food aid, and exporting trade enterprises. Director-General Azevêdo described the commitment to abolish
export subsidies for farm exports as the “most significant outcome on agriculture” in the history of the WTO.
• Public stockholding for food security purposes is used by some developing countries to purchase food
at administered prices and distribute it to poor people. While food security is a legitimate policy objective, the
public stockholding programs are considered to distort trade when they involve purchases at prices fixed by
the governments, known as “supported” or “administered” prices. The Nairobi Decision commits members to
engage constructively in finding a permanent solution to this issue.
• Special safeguard mechanism for developing country members recognizes that developing members
will have the right to increase tariffs temporarily in the face of import surges by using this mechanism.
• The cotton decision helps level the playing field for cotton exporters in the poorest countries by
giving least developed countries (LDC) duty-free, quota-free access to the markets of developed countries;
encouraging domestic support reforms so that the foreign aid is temporary; prohibiting developed countries’
cotton export subsidies; and eventually phasing out LDC cotton subsidies.
• Preferential rules of origin for least developed countries will help facilitate opportunities for LDC
exports to developed and developing nations.
• Implementation of preferential treatment for developed countries creates the criteria for determining
whether exports from LDCs may benefit from trade preferences. This decision also focuses on increasing LDC
participation in trade in services.
Impact
According to the U.S. Chamber of Commerce, eight successful multilateral negotiating rounds have helped
increase world trade from $58 billion in 1948 to $23.8 trillion in 2014. The WTO estimates that the 1994
Uruguay Round trade deal added more than $100 billion to world income. The World Bank estimates that
successful world trade talks could bring nearly $325 billion in income to the developing world, and could
lift 500 million people out of poverty. Other studies have shown that eliminating trade barriers would mean
$2,500 per year in increased income to the average U.S. family of four. Trade liberalization can create new
jobs, higher incomes and economic growth for countries around the world.
California is one of the 10 largest economies in the world with a gross state product of more than $2 trillion.
International-related commerce accounts for approximately one-quarter of the state’s economy. Although trade is
a nationally determined policy issue, it has an immense impact on California; California exports goods to more
than 229 foreign markets around the world. Trade offers the opportunity to expand the role of the state’s exports.
For U.S. businesses, successful implementation of WTO negotiations would translate to:
• expanded market access for U.S. farm products;
• expanded market access for U.S.-manufactured goods;
• reduced cost of exporting to some countries; and
• improvement in foreign customs procedures that currently cause shipment delays.
Anticipated Action
A large number of WTO ministers point to the growing number of regional trade agreements and stress the
need to ensure that they remain complementary to, not a substitute for, the multilateral trading system. It is
hoped that substantive negotiating will continue in the Doha Round in 2016 leading up to the next gathering
of trade ministers in 2017.
CalChamber
Position
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California products abroad and elimination of disincentives that impede the international competitiveness of
California business.
The WTO is having a tremendous impact on how California producers of goods and services compete
in overseas markets, as well as domestically, and is creating jobs and economic growth through expanded
international trade and investment.
The WTO gives businesses improved access to foreign markets and better rules to ensure that competition
with foreign businesses is conducted fairly.
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Staff Contact
Susanne T. Stirling
[email protected]
P.O. Box 1736
(916) 444-6670
January 2016
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LEGAL REFORM AND PROTECTION
Contingency Fee Arrangements for Public Entities
Setting Parameters Can Help Ensure Government Neutrality
Summary
Civil litigation is a consistent concern amongst California businesses, given the cost, time and strain it creates.
This concern is significantly enhanced when the State of California or another governmental entity is the
party pursuing litigation, as government has more power, more authority, and potentially more resources than
just a private plaintiff.
In 2010, this threat of litigation was exacerbated by the California Supreme Court decision in County
of Santa Clara v. Atlantic Richfield Company, which held it was proper for a public entity to utilize private
attorneys through a contingency fee arrangement to represent the entity in civil litigation. Although it is
still unclear the extent to which a private attorney may be utilized through a contingency fee arrangement
with a public entity, the Supreme Court has opened the door, leaving an area ripe for either litigation or
the Legislature to set forth the parameters of such relationships to ensure the integrity and neutrality of the
government is not jeopardized.
County of Santa Clara v. Atlantic Richfield Co.
In March 2000, the County of Santa Clara filed a class action against Atlantic Richfield Company that ultimately
alleged a cause of action for public nuisance and abatement with regard to the defendant’s use of lead paint.
Throughout the litigation, the county was represented by private attorneys through a contingency fee arrangement,
meaning the attorneys would be compensated for their time by receiving a percentage of any recovery obtained from
the litigation. Contingency fee arrangements create an automatic financial incentive for the attorney in the litigation
as the attorney has a personal stake in getting the highest award of damages possible.
The defendant filed a motion to bar the county from using a private attorney through a contingency fee
arrangement on the grounds that such an arrangement eliminates the absolute neutrality of the representation
required for the prosecution of a public nuisance action due to the private attorney’s personal financial interest
in the litigation. The defendant compared the relationship to paying a prosecutor a contingency fee based
upon the number of convictions obtained, rather than protecting the public interest. The county disagreed,
claiming such a fee arrangement was not a complete bar to private representation of public entities, thereby
leaving the question to the California Supreme Court to answer.
On July 26, 2010, the Supreme Court issued its decision where it ultimately held there is no automatic
bar to public entities hiring private attorneys through a contingency fee arrangement. County of Santa Clara v.
Atlantic Richfield Co., 50 Cal.4th 35 (2010).
Although the court did not suggest that such an arrangement would always be acceptable, especially where
criminal liability is involved, in this particular case the court deemed it OK. Unlike prior cases in which a
contingency fee with a public entity was held as improper given criminal liability, loss of property or the
interruption of business operations, the defendant in this case was not at risk of losing its property or business.
Rather, the public nuisance claim was focused on the use of lead paint that was already illegal. Moreover, due
to contractual provisions that could be placed in the contingency fee arrangement on remand, which would
dictate the county retained absolute control over the litigation, the court determined that the fee arrangement
with the county was not improper.
Although the defendant filed a petition for writ of certiorari with the U.S. Supreme Court, asking it to
decide the constitutionality of such agreements, the U.S. Supreme Court denied review in July 2011.
Government Use of Contingency Fee Arrangements: Good or Bad?
As demonstrated by the County of Santa Clara, the public entity that seeks to use private attorneys through a
contingency fee arrangement believes that such arrangements are in fact proper and necessary. Arguments in
support include: 1) it enhances the public entity’s limited budget by obtaining subject matter legal experts who
the entity does not have to compensate until the litigation concludes; 2) it assists the public entity in matching
the potential resources of a defendant corporation; and 3) contractual provisions maintain the neutrality
necessary to advocate on behalf of the government.
Opponents to this arrangement, however, raise a number of concerns, including: 1) the loss of significant
revenue to the government and therefore public programs from the payout of the contingency fee to a private
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attorney; 2) the inability to ensure that contractual provisions dictating who maintains control of the litigation
are actually followed; and 3) the potential for corruption with regard to the public entity involved and the
private attorney retained, especially when political contributions are involved.
There is no question that representing a public entity is a lucrative arrangement for a private attorney.
The fee awards are significant, as the underlying damages are based upon representing the public rather than
a single plaintiff, notes the Legal Backgrounder by Victor E. Schwartz, Kevin Underhill, Cary Silverman
and Christopher Appel, “Government’s Hiring of Contingent Fee Attorneys Contrary to Public Policy.” An
example of such awards are the tobacco litigation cases wherein the fees awarded to private attorneys that
were hired in various states on behalf of the attorneys general ranged from $27 million to $150 million.
Confirming this advantage, Douglas McMeyer, Lise T. Spacapan and Robert George state in “Contingency
Fee Plaintiff ’s Counsel and the Public Good”: “[last], but certainly not the least benefit to the plaintiffs’ bar, is
the likelihood that the private contingency fee lawyer can recover even greater awards when representing the
state than he or she could when representing the corresponding private plaintiffs’ class.”
Representing the state can provide procedural advantages as well. McMeyer, et al., list several of these
benefits in their article: 1) broader causes of action that are not well-defined and lead to more liberal
interpretations, such as public nuisance vs. private nuisance; 2) some defenses applicable to private parties
are not applicable to the state; 3) recovery is based upon public interest, not individual injuries; and 4)
defendants, especially corporate defendants, are not likely to litigate against the state and will often settle,
as “[f ]ew corporations ‘are capable and willing to risk trial when the plaintiff is a state (or a consortium of
state attorneys general operating in concert) that may collect billions of dollars as a result of harms allegedly
suffered by millions of its residents.’”
Legislative Activity
Since the use of contingency fee agreements with government entities began in approximately 1980, the
recognition of the potential conflict of interest between a private attorney and the government has motivated
several states to take action. So far, 10 states have passed legislation regarding the use of private attorneys
by government entities. Some of the enacted laws cap the hourly fee and total recovery to the private
attorney, while other laws focus on transparency to the public of the arrangement and limitation of political
contributions to government officials.
California has not enacted any laws on this issue, despite the growing trend in this state for local and state
entities utilizing contingency fee arrangements.
CalChamber
Position
Litigation with a government entity is daunting enough for any defendant without the fear of the litigation being
influenced by the financial interest of a private attorney. If California continues to condone the use of private
attorneys to represent government entities through contingency fee arrangements, there must be enhanced
contractual requirements, ethical standards and required disclosures to ensure the neutrality of the government is
not jeopardized by such arrangements, thereby placing the defendant at a completely unfair disadvantage.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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TAXATION
Proposition 13 Protections Under Attack
Predictable Property Tax Rates Help Keep State Competitive
Summary
Proposition 13 was approved by the voters in 1978 to provide stability among property owners with regard
to tax increases. At the time, the demand for homes was high, thereby increasing the value of property. The
higher property values led to reassessments of the taxes owed based upon the current market value, which
dramatically drove up the property taxes for everyone, including homeowners who had been in their homes
for many years and could not keep up with the rising taxes.
Proposition 13 resolved this problem by capping property tax rates for both residential and commercial
properties at 1% of their assessed value. It also prevented a property’s assessed value from growing more than
2% a year. Generally, the value of residential or commercial property may be reassessed at a rate higher than
2% only when there is a change of ownership or new construction.
Since the passage of Proposition 13, there have been numerous efforts to limit or remove the rate
protections for commercial properties only, which has been termed “split roll.” In 2016, it will continue to be
a primary issue of debate at the legislative level and potentially a ballot initiative as well.
Legislative Attacks
Change of Ownership
Generally, the primary legislative attack has been to redefine “change of ownership” for commercial
property in order to accelerate how often the value of such property is reassessed in order to increase the tax
rate and potential revenue. In 2012, Assemblymember Tom Ammiano (D-San Francisco) introduced AB 448,
which sought to redefine the term “change of ownership” for commercial properties to mean any time 100%
of the interest in an entity that owns the commercial property is sold within a three-year period, regardless
of whether any person or entity actually obtains a majority interest of ownership. This bill was substantially
similar to Assemblymember Ammiano’s AB 2492 in 2010. In 2012, Assemblymember Ammiano also
introduced AB 2014, which would have created a split roll task force to study the impact of split roll. All three
bills failed passage in the Legislature.
In 2014, Assemblymembers Ammiano and Raul Bocanegra (D-Pacoima) co-authored legislation regarding
the term “change of ownership” that enjoyed the support of the business community. Specifically, AB 2372
specified that a change of ownership for commercial property occurs not only when one person obtains more
than 50% control of the property, but also when at least 90% of the property interests are transferred or sold.
Notably, AB 2372 excluded publicly traded stocks or interests from the definition of “transferred” in order to
avoid constant reassessment of publicly traded companies whose stocks are sold on a daily, weekly or monthly
basis. Despite having business support of expanding the definition of “change of ownership” for commercial
property, AB 2372 failed to pass the Senate Appropriations Committee.
Assessment Based Upon Fair Market Value
In 2015, Senators Loni Hancock (D-Berkeley) and Holly Mitchell (D-Los Angeles) introduced SCA 5,
which sought to amend the Constitution to assess commercial and industrial real property based upon the fair
market value of the property as of the date the property tax bill is issued, instead of the value of the property at
the time it was purchased, constructed, or when there was a change of ownership.
SCA 5 proposed a phase-in schedule for payment of this tax increase with all commercial and industrial
property being assessed upon its current fair market value by 2019–2020. Property owners that were
unfortunate enough to have a 25% increase in the current fair market value of their property compared to the
prior assessed value would be exempt from paying those taxes until after five years, at which point the property
owner would be liable for all taxes assessed. SCA 5 did not have a policy committee hearing or move through
the legislative process.
Two-Thirds Voter Threshold
Another legislative attack that encompasses split roll are the numerous measures that seek to amend the
Constitution to lower the current voter threshold to pass any parcel or special taxes from two-thirds to 55%. In
2013, there were eight constitutional amendments introduced—two in the Assembly and six in the Senate—that
would reduce the voter threshold to pass local taxes from two-thirds to 55%. One of the Senate proposals was
gutted and amended in June 2013 to deal with another subject, leaving only seven potential amendments to
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move in 2013. The “split roll” concern with these seven pending constitutional amendments is the ability for the
majority to impose discriminatory taxes, such as split roll, at the local level against the minority. Ultimately, all
these constitutional amendments died, failing to make it out of both legislative houses.
Nonuniform Parcel Taxes
Another example of a split roll legislative attack is nonuniform parcel taxes against property owners. The
existence of this issue was highlighted by the case of Borikas v. Alameda Unified School District, 214 Cal.
App.4th 135 (2013), in which Alameda Unified School District voters approved Measure H, imposing a
higher parcel tax rate against larger commercial properties as opposed to residential properties. Although
the Court of Appeal ultimately determined this disproportionate tax rate was unlawful given the lack of
uniformity, it demonstrates the potential for such discriminatory taxes to be imposed.
In 2013, Assemblymember Rob Bonta (D-Oakland) introduced AB 59 to overturn the Borikas decision.
The bill was never heard in a policy committee and therefore failed passage. In 2014, Senator Lois Wolk
(D-Davis) also sought to provide school districts with the authority to impose nonuniform parcel taxes. SB
1021 would have allowed school districts to base a parcel tax on square footage or according to the use of
the property, thereby authorizing them to impose higher, duplicative, parcel taxes only against commercial
property owners. For example, under SB 1021, a school district could have passed a parcel tax only on
properties above 5,000 square feet and/or properties used only for commercial purposes. SB 1021 passed the
Senate, but failed to pass the Assembly policy committee.
Ballot Initiatives
A ballot initiative titled “Property Tax Surcharge to Fund Poverty Reduction Programs” has been filed with
the Attorney General’s office. As this guide went to print, proponents still were gathering signatures to qualify
for the 2016 ballot. The proponents must submit 585,407 valid signatures by March 21, 2016.
Although the initiative does not necessarily distinguish between residential and commercial property,
it does impose a discriminatory property tax on real property that has a value of $3 million or higher. The
“surcharge” or tax proposed by this initiative would be in addition to the property tax under Proposition 13.
Any revenue generated by the surcharge would be divided among various programs intended to benefit health
services and education programs for children.
Arguments in Support and Opposition to Split Roll
Split roll proponents argue that commercial properties are not paying their fair share of property tax, which has a
negative impact on local communities that receive the tax revenue. Such proponents claim that the tax burden is
being shifted to residential property owners instead. They also label the existing “change of ownership” definition
for commercial property as a tax loophole that allows companies to avoid their tax liability.
Opponents of split roll argue that there has not been a significant shift in the tax burden from commercial to
residential properties, as alleged, but rather, commercial property owners are paying their fair share. Opponents
also argue that a significant tax increase on commercial property will have a detrimental impact on job growth as
businesses will have to cut benefits and wages or raise prices in order to absorb the additional cost.
A November 2012 report from the Legislative Analyst’s Office (LAO) regarding property taxes in
California indicated that commercial property makes up approximately 28% of the state’s property tax base,
investment residential and vacation properties make up 34% of the property tax base, while owner-occupied
residential property makes up 39% of the state’s property tax base. The LAO attributes this disparity in the
property tax base to several factors, including a growing trend for residential investment properties and the
growth of businesses that are less dependent on real property, such as in the technology industry. Combining
investment residential properties, such as apartment complexes, with traditional commercial property, more
than half the property tax base is not owner-occupied residential property.
California assessors also have expressed concern regarding various split roll proposals, as they believe it will
have a detrimental impact on their ability to timely and efficiently reassess property. The California Assessors
Association said requiring assessors to annually reassess most nonresidential properties “would create, in
the first five years, a nearly impossible situation to manage as the assessment of these types of properties are
typically the most complex and time consuming to complete.” In addition to the increased workload, the
assessors also have expressed concern with properly defining and determining a “nonresidential” property that
would be subject to more frequent reassessments.
A March 2012 report from Pepperdine University, An Analysis of Split Roll Property Tax Issues and Impacts,
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stated that implementing a split roll proposal could result in a $6 billion tax increase on commercial property.
Businesses strapped with this type of tax increase would not be able to absorb the entire cost and would have
to pass some, if not all, of the increase on to their tenants and customers through higher prices or rent. The
Pepperdine University report concludes that split roll also would force businesses to reduce labor given their
loss in revenue. Within the first five years, the report estimates a loss of more than 390,000 jobs, with an
additional loss exceeding 100,000 in each year thereafter. These significant consequences must be considered
as a part of any discussion regarding split roll.
A May 2015 University of Southern California report, Getting Real About Reform: Estimating Revenue
Gains from Changes to California’s System of Assessing Commercial Real Estate, predicted an $8.2 billion to $10.2
billion tax increase if all commercial property were assessed according to fair market value rather than acquired
value, similar to the proposal in SCA 5.
CalChamber
Position
Targeting one taxpayer with higher tax rates in order to generate state revenue is simply unfair. Split roll is just
another form of a targeted, discriminatory tax against commercial property owners that will drive up their cost
of doing business. Ultimately, those higher costs will be passed on to consumers through higher rent, higher
prices for goods, and higher unemployment.
California’s predictable property tax rates due to the protections put into place by Proposition 13 are one
competitive tool that California still has to keep businesses as well as the jobs they create in this state. To
protect the interests of all Californians, all legislators should defend against attacks to weaken Proposition 13.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Expansion of Sales Tax Base to Services
Summary
Background
The beginning of the 2015 legislative session was buzzing about a sales tax on services with the introduction
of SB 8 (Hertzberg; D-Van Nuys). While SB 8 has certainly brought the issue to the public’s attention, the
idea of expanding the sales and use tax base to include services is an idea that has been floating around the
Legislature for more than a decade. In December 2003, during Governor Gray Davis’ tenure, the California
Commission on Tax Policy in the New Economy issued a report that included a proposal to expand the sales
tax base to certain services, but reduce the overall sales tax rate. In 2008, Governor Arnold Schwarzenegger
proposed to tax various services such as veterinary services, amusement parks, furniture repair, vehicle repair,
and golf as a new source for additional revenue in the special budget session. In 2009, the Commission on the
21st Century Economy issued a report that also included a proposal to tax services. With the expiration of the
temporary tax increases included in Proposition 30, and the fear of lost revenue, the idea of a services tax will
likely be an issue for continued discussion and debate in 2016.
SB 8 (2015)
At the beginning of 2015, Senator Bob Hertzberg introduced SB 8. SB 8 was never a formal piece of
legislation, as it did not seek to amend or add any language to the Revenue and Taxation Code. Rather, SB 8
was an intent bill that summarized Senator Hertzberg’s vision of the “Upward Mobility Act.” SB 8 set forth
Senator Hertzberg’s intent to make three broad changes to the tax code:
• Expand the sales tax to services, except for those businesses providing health care or education services, or
those with gross sales under $100,000;
• Evaluate the corporate income tax; and
• Examine lowering and simplifying the personal income tax.
With the revenue received from these changes, Senator Hertzberg intended to fund higher education,
provide revenue to local government, create an income tax credit for low-income families, and help small
businesses with minimum wage relief. SB 8 was never amended into formal legislation and never moved
through the legislative process.
Prior Proposals to Impose Taxes on Services
Think Long Committee for California
The Think Long Committee for California was created by billionaire Nicolas Berggruen and is made
up of business and political leaders with an agenda to reform California government. In November 2011,
the committee released “A Blueprint to Renew California: Report and Recommendations Presented by the
Think Long Committee for California.” One of the key pieces of the report was to expand the sales and
use tax base to include services due to the committee’s perspective that “[o]ver the past 60 years, California’s
economy [has] moved from one that was fueled by agriculture and manufacturing to one that is increasingly
driven by services.” Given this shift, the committee recognized there is more fluctuation in the tax revenue
as the personal income tax is now the primary revenue source as opposed to the sales and use tax. In order to
mitigate the fluctuation and correct the shift, the committee proposed to:
• Tax all services, except health care and education;
• Reduce the state sales tax rate to between 4.5% and 5.5% from the current 7.25%; and
• Reduce/revise the personal income tax rate and brackets.
The committee initially intended to place an initiative on the 2012 ballot that would have included a
general tax on services. In January 2012, however, the committee decided to postpone pursuing an initiative,
stating “. . . we recognize the practical constraints of the 2012 election calendar—and have come to the
conclusion that it will take more time to perfect these proposals, eliminate unintended consequences and
provide every stakeholder and everyday Californians a meaningful voice in that process.”
Legislative Proposals
As initially introduced in 2012, AB 1963 (Huber; D-El Dorado Hills) would have proposed a tax on
services in general, exempting several industries, including services related to licensed medical providers,
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accounting, legal, agriculture, banking, securities, automotive, and education. AB 1963 also would have
reduced the sales and use tax rate to 4% and personal income tax rate for income greater than $56,000 to
6.5%. This bill was opposed by a broad coalition of different industries, largely due to the loss of income such
companies would suffer as a result of consumers changing behavior in order to avoid taxes and the competitive
disadvantage it would create with other states. AB 1963 ultimately was amended into a bill that would
have conducted a study regarding the impact of a tax on services, but still was vetoed by the Governor. The
Governor stated that a law was not necessary in order for the Legislature to conduct a study on this issue.
Also in 2012, Assemblymember Mike Gatto (D-Glendale) introduced AB 2540, which would have
imposed a tax on select services, identified as those services often consumed by the wealthy. The proposed
services to be taxed included yacht and boat repair, spa services for pets, party planning, personal shopping,
limousine rental, elective cosmetic surgery, pool maintenance, astrology, tarot, and palm reading. Although
this bill was promoted as targeting the highest-income earners, several associations opposed the bill on the
grounds that it would harm small businesses that provide these services. The bill ultimately was amended to
address a completely separate topic.
The legislative proposals referenced above would require a two-thirds vote of approval from the Legislature
given the significant tax increase proposed. Given the unlikelihood that Republicans would vote for such a tax
increase, and the hesitancy of many Democrat members to do so as well, the vote threshold is a sizable hurdle
to overcome.
Ballot Initiative
There has been speculation in the political community as to whether Senator Hertzberg will move forward
with his Upward Mobility Act through a ballot initiative, given the unlikely passage of such a bill in the
Legislature. As of the date of this publication, no ballot initiative on this issue has been filed with the Secretary
of State. Both Senator Hertzberg and the business community, however, have developed coalitions to study the
impact of a services tax in California, in preparation for any potential future legislation or initiative.
CalChamber
Position
According to the Legislative Analyst’s Office, California’s 2016–2017 proposed budget provides budget
reserves of approximately $8 billion. The need for any additional tax increase at this time is questionable.
Additionally, tax proposals that address only one portion of the tax system or target certain industries increase
the risk of unintended consequences that will harm the state’s economy and create more financial problems
than those that already exist.
The California Chamber of Commerce is willing to engage in tax reform discussions, but will continue to
oppose any taxes that are discriminatory, unfair or punitive.
Staff Contact
Jennifer Barrera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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TOURISM
Tourism
Tourism Continues to Bolster California economy
Summary
Background
Travel-related spending in California expanded for the fifth straight year since the recession, surpassing $100
billion for the first time in history in 2007, and exceeded $117 billion in 2014, providing $9.3 billion in tax
revenue. More than 250 million people traveled in California in 2014 reinforcing the tourism industry as one
of the state’s economic success stories, contributing significantly to both the national and state economy.
“Travel and tourism is one of California’s most important engines for economic growth. Travelers spend hundreds
of millions of dollars in communities across California every day. Travel is California’s second largest export industry,
providing $38.1 billion in earnings for over one million California employees. The industry is a major economic driver
in every region and county of the state, urban and rural, coastal and inland.”—Visit California
The multibillion-dollar travel industry in California is a vital part of the state and local economies. The
industry is represented primarily by retail and service firms, including lodging establishments, restaurants,
retail stores, gasoline service stations, and other types of businesses that sell their products and services to
travelers. The money that visitors spend on various goods and services while in California produces business
receipts at these firms, which in turn employ California residents and pay their wages and salaries. State and
local government units benefit from travel as well. The state government collects taxes on the gross receipts of
businesses operating in the state, as well as sales. Local and state governments also collect sales and use taxes
generated from traveler purchases as well as property taxes paid by travel-related businesses.
Impact of Tourism on State Economy
California has the nation’s largest tourism industry with more than 80 tourism business districts. The
following statistics reported by the California Travel & Tourism Commission demonstrate the significant
impact of tourism on the state’s economy. This data represents activity in 2014 (most recent data available):
• Travel spending in California directly supported more than a million jobs—an increase of 4.2% over the
previous year, with earnings of $38.1 billion.
• Travel spending in 2014 generated $4.2 billion in local taxes and $5.1 billion in state taxes. Travelgenerated state and local tax revenue represent 4.4% of all California state and local taxes.
• Hotel room occupancy rates were near 73% in 2014; 3.9% increased demand and high occupancy drove
revenue per room growth to 10.6%.
• California had 16.5 million international visitors in 2014 who spent approximately $23.3 billion.
California’s top markets in 2014 were Mexico (7.6 million), Canada (1.6 million), China (996,000), United
Kingdom (686,000), Australia (589,000), Japan (575,000), followed by France, Germany, South Korea,
Scandinavia, India and Brazil.
• Total visits in 2015 are forecasted to increase 2.1%, with domestic travel forecast to increase by 2.1% and
visitors from overseas growing by 2.2%.
• Total visitor spending is expected to increase 2.7% during 2015.
• From 2006 to 2015, new building and renovation projects related to tourism averaged $2 billion per year.
Anticipated Action
The state Legislature adopted AB 2592 in 2006 to allow the tourism industry to voluntarily assess itself in
order to fund a statewide marketing effort through Visit California. In 2014, the tourism industry voted
on increased assessment rates to increase the marketing budget for Visit California. The increased budget is
intended to maintain California’s market share of international travel in an increasingly competitive global
tourism environment. With the increased “Dream Big” budget, projections more than double the return
for California’s tourism industry, up to $12.9 billion. Increased marketing of California to national and
international travelers is expected to bring new opportunities and steady growth to the industry.
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CalChamber
Position
California annually generates billions of dollars in direct travel spending into the economy and directly
supports hundreds of thousands of jobs in the state. In support of the state and national economy, the
California Chamber of Commerce promotes policies that increase and protect travel and tourism within and
to the state to continue to stimulate the economy and provide jobs to Californians.
The CalChamber also will continue to:
• Support policies to ensure that the importance of the tourism industry to California’s economy is
understood by our legislators and regulators.
• Advocate legislation that supports the state’s position as a tourism leader and oppose legislation that
harms our ability to compete on a level playing field.
• Support continued funding for the tourism marketing act (Visit California) through voluntary selfassessment and continue to work with Visit California to ensure the enhanced promotion of California’s travel
and tourism industry in order to remain competitive in the tourism market.
• Oppose new entertainment tax proposals and travel-related services taxes that threaten tourism in our
state.
• Support tax policy that encourages travel to the state for business and pleasure.
• Recognize the importance of a balance between security and commerce, and remain committed to
ensuring that the need for homeland security does not have an adverse impact on international travel to
California. The CalChamber will advocate its position to the federal government as appropriate.
• Support expansion of the visa waiver program. This program, which includes enhanced security
information sharing between the United States and visa waiver countries, is critical to increasing foreign travel
to the United States.
Staff Contact
Marti Fisher
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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High-Speed Rail in California
Funding and Legal Challenges Continue as Project Moves Forward
Summary
Background
Approved by the voters in November 2008, Proposition 1A provided for the issuance of $9.95 billion in general
obligation bonds to partially fund the construction of the 800-mile statewide intercity high-speed rail system. As
promoted by the California High-Speed Rail Authority (CHSRA), the trains eventually will allow travel between
San Francisco and Los Angeles in less than 3 hours. Provided the existence of additional funding, the system will
stretch south to San Diego and north to Sacramento in subsequent years.
The project is expected to be completed in two phases comprised of five steps:
• Phase 1 will begin with the construction of 130 miles in the Central Valley, estimated to cost $6 billion (Step 1).
• The track will then extend from Merced to the San Fernando Valley with a projected cost of $25.3 billion (Step 2).
• The project will proceed with an estimated cost of $19.9 billion to continue the track from San Jose to
Bakersfield (Step 3).
• In an attempt to contain costs, the route will then blend in with the existing Caltrain routes in the Bay Area
and will utilize Metrolink for service between Los Angeles and Anaheim in Southern California (Step 4).
• Phase 1 will be completed after improvements
Map of Proposed California
have been made to the “blended” sections, providing
High-Speed Rail System
a bullet ride between San Francisco and Los Angeles.
Ultimately, Phase 2 will extend service to the San
Diego and Sacramento regions (Step 5).
Funding
The CHSRA released the updated business plan
for the high-speed rail system to the California
Legislature on April 20, 2014. The business
plan included an updated economic analysis and
financing plan that slightly reduced the construction
cost estimate from $68.4 billion down to $67.6
billion—a 1% decrease. The latest cost estimate is
still roughly $30 billion less than the 2011 estimate
that pegged costs at $98 billion for the entire
project. The decreased estimates result from the use
of “blending,” abandoning some initial construction
Initial Construction Segment
plans, and new assumptions of future interest and
Initial Operating Segment
inflation rates.
Bay to Basin
Blended
A primary focus for the 2014 business plan
Phase 2
was the cost and financing of the initial operating
Existing Passenger Rail Systems
Planned Station
segment that runs from Madera to the San Fernando
Valley. According to the Legislative Analyst’s Office
Source: Legislative Analyst’s Office, The 2012–13 Budget:
(LAO)
the funding plan for the initial operating
Funding Requests for High-Speed Rail (April 17, 2012).
segment remains incomplete; CHSRA has identified
only one-third of the projected $31 billion cost. The identified funds include $3.3 billion in federal funds and
$6.8 billion from Proposition 1A funds. The rest of the funding plan relies on acquisition of unsecured funds to
fill the $21 billion gap. The LAO indicates that the state is the only source to fill this gap as federal funds and
private sector investment are unlikely to materialize. At the federal level, increased funding depends upon the
passage of additional legislation and authorization. Given the congressional gridlock on spending, the federal
government’s budget situation, and the lack of any federal appropriation for the project since the 2009–10 fiscal
year, it is unclear when, or even if, additional funds would be awarded to the CHSRA.
Additionally, relying on private sector funding for building the initial operating segment seems dubious; in
the previous business plan, CHSRA stated that this funding would become available only after construction
of the initial operating segment was completed and the project demonstrated positive cash flow. Due to the
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magnitude of the project, and the risk and uncertainties it creates, it is highly unlikely for the private sector to
invest before the completion of the first operable sections of the system. Private funding is most likely when
the construction of “Bay to Basin” begins during Step 3 of construction. Even then, the level of interest in
investment will depend highly on the strength of ridership numbers, discussed in more
detail below.
Estimated Annual Capital Costs
CHSRA officials also face a 2017 deadline to finish the first leg of high-speed rail,
of Initial Operating Segment
or risk losing some of the federal funds that have been secured—a highly likely scenario
(In $ Millions)
given that construction work has been delayed repeatedly and acquisition of land parcels
YearAmount
has been exceedingly slow. Officials initially said construction would start in 2012;
2013$212
however, the projected start date has repeatedly been revised. There have been, however,
2014751
some initial signs that major construction may begin shortly as a construction team was
20154,003
selected in 2013 and smaller construction activities, such as demolition, began in 2014.
20164,008
In addition to federal funding and Proposition 1A bonds, the plan proposes using
20174,229
revenue from the state’s cap-and-trade auctions to finance continued construction.
20185,481
This method, however, has spurred various legal concerns, including the existing
20195,049
constitutional challenge at the California Supreme Court claiming that all cap-and-trade
20204,732
auction revenue is an illegal tax under Proposition 26. Additionally, the level of funding
20212,708
cap-and-trade can provide on a year-to-year basis is unknown and may prove insufficient
Total $31,173
to fill the large funding gap.
Source: Legislative Analyst’s Office, The
2014–15 Budget: Transportation Proposals
(March 6, 2014).
New and Continuous Concerns
Multiple concerns regarding the viability of the high-speed rail system in California
threaten the building and success of this project:
• Proposition 1A Legal Concerns. In August 2013, a Sacramento County Superior Court ruled that
CHSRA’s funding plan violated the language in Proposition 1A because it had not: 1) identified how to fill the
funding gap; 2) received all environmental clearances for the first part of the project; and 3) demonstrated on
the record why the issuance of bonds would be “necessary or desirable.” The court invalidated the funding, but
did not bar the project from moving forward or CHSRA from utilizing federal funds, leaving the Proposition 1A
funds in limbo.
In 2014, the ruling was appealed to the 3rd District Court of Appeals, which vacated the decision, and the
California Supreme Court declined to hear the case, clearing the way for CHSRA to proceed with its current
funding plan. This, however, is not the end of the legal challenges over Proposition 1A compliance. In issuing
its ruling, the appeals court warned that other legal issues remain over spending and construction requirements.
Additionally, litigation continues over whether CHSRA’s plan violates other parts of Proposition 1A, including
station locations, train speed, and service times.
• Difficulties in Acquiring Property. The initial construction segment, a subunit of the initial operating
segment, is a 249-mile section of land that starts in Madera and ends north of Bakersfield. To fully develop this
part of the project, the CHSRA indicates it needs to purchase 1,332 parcels of land and, as of February 2015,
had purchased only 23% of the parcels for the 29-mile section from Madera to Fresno. Offers to landowners
began more than two-and-a-half years ago, but many of these offers have been rejected and the CHSRA has
been forced to utilize eminent domain proceedings. The CHRSA recognized that land acquisition has progressed
more slowly than anticipated and is a primary reason that major construction has yet to start. The parcel
acquisition issue could worsen in the future as subsequent phases of the project enter more populated areas.
• Questions about reduced capacity and ridership estimates. The CHSRA’s ridership forecast is essential
in determining the financial feasibility and frequency of service. More important, injecting private investments
into the system will depend on assessing the profitability of the system based on these ridership numbers.
In the 2014 business plan, CHSRA revised the ridership and revenue projections. Compared to the 2012
projections, the number of overall riders increased, while business travel and miles traveled per trip decreased.
Essentially, the CHSRA estimates that there will be more riders traveling fewer miles. Overall, these revisions
cause revenue projections to decrease 5% by 2025 and 10% by 2040. Questions about the accuracy of these
revised estimates will likely continue as previous numbers faced criticism regarding the model used to obtain
them. A report released by the Institute of Transportation Studies at the University of California, Berkeley in
2010 concluded that the initial ridership forecasts were unreliable for policy analysis. In addition, an April
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2013 study by the Reason Foundation found that the revised forecasts in the 2012 business plan overestimated
ridership by 65% to 77%.
• Selection of the Central Valley as first part of construction. As the business plan indicates, federal
funding is integral to the success of this project. Securing the necessary federal funding, however, was contingent
upon building the first segment of the system in the Central Valley despite concerns of impracticality. The
majority of passengers are expected to come from the major urban locations in the San Francisco Bay Area and
Los Angeles, and ridership estimates for the intended initial portion are unknown. The Central Valley route was
chosen to show the abilities of a high-speed train because of the route’s flat landscape and dispersed population,
and therefore presents fewer challenges to building a new rail system. It is unclear, however, whether this
decision would do more harm than good in attracting foreign and private investments as it cannot offer the same
economic viability and passenger load of the more densely populated areas in the north and south.
• Cap-and-trade revenue and legal concerns. The 2015–2016 budget dedicates $500 million of cap-andtrade revenue to the high-speed rail. The California Supreme Court, however, is considering a constitutional
challenge to all revenue raised as part of the cap-and-trade auction. The lawsuit asserts that AB 32—the
bill creating California’s cap-and-trade program—did not authorize the Air Resources Board to impose fees
other than those necessary to cover ordinary administrative costs of implementing a state emissions reduction
regulatory program. Cap-and-trade auction revenue stretches well beyond administrative fees and amounts to
a tax, violating the California Constitution because AB 32 did not receive a two-thirds vote of the Legislature
required for all tax bills. If the court agrees with this claim, it would imperil a major funding source for the
project. A decision is expected in 2016.
• Lawsuits delaying environmental impact reports and construction, increasing costs. CHSRA is
still completing the environmental clearances for construction of usable segments and may not receive all the
necessary approvals in time for the planned construction date. Meanwhile, a number of lawsuits have been filed
against the CHSRA. Some of these lawsuits have since been dismissed or settled out of court, while others are
still advancing. More lawsuits are likely to materialize, as the CHSRA continues to certify final environmental
impact reports for different sections of the project.
• Shifting voter sentiment regarding the project. Although Proposition 1A passed in 2008 with 52.6% of
California voters in support of the project, a March 2015 poll by the Public Policy Institute of California (PPIC)
found that less than half of voters are in favor of the high-speed rail project. A September 2013 poll conducted
by the University of Southern California (USC) Dornsife College of Letters, Arts and Sciences and the Los
Angeles Times also found that 7 out of 10 California voters want another opportunity to vote on California’s
high-speed rail project. If constituents in California do not want the high-speed rail project to continue, it could
bolster the efforts of Central Valley congressional representatives to kill federal funding for the project.
CalChamber
Position
The California Chamber of Commerce opposed Proposition 1A because of concerns with sustaining substantial
amounts of additional indebtedness at a time when the state faced massive budget deficits. The CalChamber
remains skeptical of funding plans that rely heavily on uncertain federal funds and ambiguous ridership
numbers. In addition, there are many other high-priority issues that deserve legislative attention and funding.
Nevertheless, the CalChamber recognizes that despite the possibility that political viability of the project may be
lacking, voters passed Proposition 1A to make the initial investment in a high-speed rail system in California. Until
the will of the voting public changes, the CalChamber seeks to limit further increases in costs. The CalChamber
will seek to ensure that all interested private firms—whether foreign, out-of-state, or California-based—can bid for
contracts without constraints so that the system can be built in the most efficient and cost-effective manner.
Staff Contact
Jeremy Merz
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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WATER
Desalination
Offers Drought-Proof, Reliable New Supply of Drinking Water
Summary
Background
Desalination of the ocean or brackish groundwater is rapidly becoming a reality in California. The largest
ocean desalination plant in North America went into operation in Carlsbad, California in December 2015.
Several other coastal communities are investigating ocean desalination to add to their water supply portfolio.
Major industries in California, such as agriculture, aerospace, biotech, and computer manufacturing, require
highly reliable supplies of high-quality water. California residents also expect a reliable water supply at
affordable rates for home uses. Desalination has the potential of being a very reliable supply of high-quality
drinking water for local and regional systems because it does not depend on variable weather and hydrologic
cycles. Desalination will not typically replace traditional water supplies, but augment them to accommodate
growth or shore up reliability. As traditional water supply options become strained and unreliable, desalination
helps by providing a “drought-proof ” reliable drinking water supply.
Developing more desalination plants is one of the strategies Australians used during their Millennium
Drought. Although not all plants are operating at the moment, Australians are much better prepared to meet
the next drought cycle or population expansion through diversification of their water assets.
The Process of Desalination
About 97% of all water on Earth is saltwater. Water that can be desalinated includes seawater and brackish
groundwater. Desalination generates less than 0.4% of the water used in the United States, but desalination
capacity nationwide increased by 40% between 2000 and 2005. Desalination plants (mostly for brackish
groundwater) now exist in every state.
One desalination process is distillation, which involves turning water into steam, then condensing the
steam back into water. Reverse osmosis, widely used in the United States, is another process in which saltwater
is forced through a membrane with holes too tiny for salt molecules to pass.
Seawater desalination affects the environment in two main ways: drawing in fish and other sea life
through the intakes of water into the desalination plant; and the discharge of brine back into the ocean after
desalination. These environmental effects must be taken into account in the design of a desalination plant to
reduce and mitigate impacts. Every plant location is unique, with a different combination of factors, including
resident species and currents. Environmental protection and mitigation must be evaluated on a site-specific
basis, taking into account the features of the particular site.
Developments in fish screens and intake designs have helped to lessen the impact of intakes on sea life.
Different outfall designs help to diffuse the brine as it is discharged, preventing concentrations of salts and
other minerals that could be detrimental to sea life.
Economics of Desalination
When California began developing its water supply in the late 19th and early 20th centuries, little thought
was given to environmental impacts. Infrastructure such as dams and canals was built with the sole intent
of producing the greatest yield of water. In the 1970s, however, environmental concerns began to take
prominence in the Legislature. In addition, the state’s rapid population growth was outstripping supplies even
as they were being developed.
Water supply development impacts on fisheries and on water quality required an adjustment in the way
water supplies were viewed. Dedicating water resources to the environment and to water quality caused
shortages that increased the cost of water to agricultural, urban and industrial users. The 1987–1992 droughts
created additional shortages that forced water suppliers to consider diversifying supplies. Water use efficiency,
conjunctive use of groundwater, and integrated regional water management flourished in the 1990s and 2000s
as water suppliers sought innovative solutions to supply problems.
Throughout this period, desalination generally was regarded as too expensive to be of much economic
benefit. The rising cost of traditional supplies, however, has changed this perception in recent years. Compared
with other “new” water supply options, desalination is indeed cost competitive. For example, the West Basin
Municipal Water District is investigating high-quality water through both ocean desalination and recycling. In
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WATER
2009 dollars, the district calculates that desalinated water, assuming a 20 million gallons-a-day project, would
cost $1,700 per acre-foot. The average cost for similar high-quality recycled water would be $1,638 per acre-foot.
The cost of desalination will be blended into the overall costs of the water supply. Overall costs to water
users will rise, but only in proportion to the share of the supply from desalination. When this share is relatively
small, costs will not increase significantly. For example, San Diego County Water Authority ratepayers will
likely pay an additional $5 per month for water from the Carlsbad plant.
Desalination in California
According to the Department of Water Resources, 25 desalination plants were operating in California in
2009. Nineteen of the plants desalt brackish groundwater, and six plants desalt seawater. The production of
desalted water in 2009 was 83,000 acre-feet per year for urban use.
In 1991, Santa Catalina Island established a desalination facility that provides 200,000 gallons of potable
water per day. Santa Barbara built a desalination plant in the early 1990s to ensure against drought shortages.
That plant is being rehabilitated and will operate in late 2016 to help meet water needs during the current
extended drought.
In 2012, the San Diego County Water Authority signed a water purchase agreement with Poseidon Resources
for a 50 million gallon-per-day facility in Carlsbad. The plant went into operation in December 2015. The city
of San Diego is currently looking at a $3.5 billion plan to recycle treated sewage into drinking water to further
bolster its local supplies. Poseidon Resources is trying to get its Huntington Beach facility through the Coastal
Commission. A proposed ocean desalination facility serving South Orange County would utilize state-of-the art
“subsurface slant” wells off Doheny State Beach to draw as much as 30 million gallons a day of ocean water for
reverse osmosis treatment, yielding up to 15 million gallons of local potable water a day.
In Northern California, there has been discussion of a 65 million gallon-per-day plant in Marin to supply
water to the Bay Area, but it was sidelined by local opposition. Regional desalination facilities are being
proposed and studied in Monterey County to make up for the loss of water from the Carmel River. The West
Basin Municipal Water District is operating a pilot facility for seawater desalination in Redondo Beach.
Desalination Hurdles
Under current California policy, choosing a site for a desalination plant is challenging. It requires many permits,
such as a local land use permit, water discharge permit, drinking water permit, Energy Commission permit, State
Lands Commission permit, and, if in the coastal zone, a Coastal Development permit, just to mention a few. Of
course, an environmental impact report also has to be completed. Current federal law requires permits under the
Clean Water Act and, given the locale, permits under the River and Harbors Act, at a minimum.
Desalination faces hurdles that traditional water supplies have not confronted, although that may change.
Desalination has to meet 21st century environmental standards for intake of the ocean water and discharging
the brine back into the ocean. The State Water Resources Control Board amended its California Ocean
Plan to set new rules for ocean water desalination intakes, mitigation and brine discharge early in 2015. The
amendments provide for a uniform permitting process.
Naturally, there will be land use-related issues depending on the location of an ocean desalination facility.
Many project proponents have investigated co-locating their facility near a power plant that uses the ocean to
cool the plant. The power plants’ existing intake and brine disposal outfall would be used to also make drinking
water. However, most power plants that currently use the ocean for cooling will need to upgrade facilities or stop
using the ocean for cooling due to the State Water Board’s recently adopted once-through cooling policy.
CalChamber
Position
The California Chamber of Commerce supports a balanced approach to securing a safe and reliable supply and
conveyance of water for all businesses and residents of California. Desalination, like recycling, water reuse, water
use efficiency, conservation, conveyance and new storage, should be pursued to help increase water supply. Permit
streamlining among the various agencies should be undertaken to expedite the approval process.
Desalination is a viable option for the state’s future water supply picture. In order to meet its water supply
challenges, California needs to pursue desalination where appropriate and feasible. Desalination will provide an
invaluable addition to a well-balanced local or regional water portfolio with a reliable drought-proof component.
The CalChamber will support any legislation streamlining the permit process for establishing the sites of
desalination projects.
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WATER
Staff Contact
Valerie Nera
Policy Advocate
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
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Agenda for
Campaign for California Jobs
CAMPAIGN FOR CALIFORNIA JOBS
CalChamber Job Killer Tag Identifies Worst Proposals
Economic growth and job creation are the keys to making California a
great place to live, work and do business. To help lawmakers focus on the
full ramifications of proposed laws, the California Chamber of Commerce
identifies each year the legislation that will hinder job creation. The job
killer list highlights those bills that truly are going to cost the state jobs.
The CalChamber policy staff is very judicious about the difference between
legislation that merits opposition and a job killer.
The goal is to remind California policymakers to keep their focus on the No. 1 issue affecting their
constituents—economic recovery and job creation. Each bill designated as a job killer would increase uncertainty
for employers and investors, and lead to higher costs of doing business, which will undermine the economic
health of the state. Individually, the job killer bills are bad, but cumulatively they are worse.
Jobs are killed when employers lay off workers or can’t afford to hire workers to provide goods and services
to consumers. Workers are laid off (or wages are reduced) if consumers do not buy goods and services from
businesses, or because the cost of providing those goods or services has increased to the point where the business
is not competitive. Consumers will not buy goods and services if they have less money to spend, or if the goods
and services are a lesser value (higher cost/lesser quality) than alternatives in the marketplace. Lower wages and
fewer jobs are the result of an employer not being successful in the marketplace—when an employer is not
competitive and/or consumers have no money to spend.
Government kills jobs when it passes laws, rules and regulations that discourage investment and production,
that add unnecessary cost and burdens to goods and services, or that make California employers uncompetitive.
Job killer bills make employers less competitive or take resources from consumers.
Criteria
Factors that have earned job killer status for legislation include:
• imposing costly workplace mandates;
• creating barriers to economic development/economic recovery;
• requiring expensive, unnecessary regulations;
• inflating liability costs;
• imposing burdensome or unnecessary requirements that increase costs on businesses;
• expanding government at businesses’ expensive;
• criminalizing inadvertent business errors;
• imposing new or higher fees and taxes.
Bills Stopped
Since starting the job killer bill list in 1997, the CalChamber has prevented 93% of these onerous proposals
from becoming law. Every job killer stopped means the state will at least do no more harm to businesses and
their ability to compete in the national and global markets.
Updates appear at cajobkillers.com and calchamber.com/jobkillers.
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®
CAMPAIGN FOR CALIFORNIA JOBS
Job Creator Bills Help California Economy Grow
Alongside the California Chamber of Commerce list of job killer legislation is the job creator
bill list. Since 2008, the CalChamber has identified and strongly supported legislation that will
stimulate the economy and improve the state’s jobs climate. The Business Issues and Legislative
Guide explains the policies that would improve California’s business climate and nurture our
economy—the principles that determine which bills are job creators. If adopted, job creator
legislation would encourage employers to invest resources back into our economy and their local
communities rather than spend them on unnecessary government-imposed costs. Job creating
legislation promotes the following policies:
• Keeping taxes on new investment and business operations low, fair, stable and predictable.
• Reviving local economic development tools.
• Reducing regulatory and litigation costs of operating a business—especially when hiring and keeping
employees.
• Reducing the cost and improving the certainty and stability of investing in new or expanded plants,
equipment and technology.
• Investing in public and private works that are the backbone for economic growth.
• Ensuring the availability of high-quality skilled employees.
Signed into Law
Among the 26 job creators signed into law to date are bills:
• giving employers a limited opportunity to cure technical violations in an itemized wage statement before
being subject to costly litigation.
• reforming disability access requirements;
• expediting the environmental review process for projects related to energy or roadway improvements, repair
and maintenance;
• creating a predictable and easy-to-track schedule for implementation of new regulations;
• extending and expanding the film and television tax credit;
• stopping drive-by Proposition 65 lawsuits for alleged failure to post specific required warnings;
• repealing a retroactive tax on small business investors;
• encouraging aerospace projects to locate in California; and
• restoring funding to the California Competes Tax Credit Program.
Removing unnecessary regulatory hurdles makes it easier for California employers to create the jobs needed
to maintain the state’s economic recovery.
Updates on the job creator bills appear at calchamber.com/jobcreators.
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Agenda for
About CalChamber
California
CEQA Healthcare
Public
Policy
Finance CARB
Legislature
Education
Technology
Governor
CalPERS
Bipartisan
Solutions
Attorney General
Infrastructure
Advocacy
Renewables
Treasurer
Success
Procurement
Budget
Manatt and the California Chamber of Commerce
At the Intersection of Business and Public Policy
McKay Carney
Steve Coony
Jon Costantino
Kristina Lawson
Phyllis Marshall
Alfredo Medina
Che Salinas
Nancy Whang
Kathleen Brown
Richard Costigan
George Kieffer
Thomas McMorrow
Board Member, CA
Chamber of Commerce
Former VP of Government
Relations, CA Chamber of
Commerce
Prior Board Member, CA
Chamber of Commerce
Chair, California Government
Practice
Manatt, Phelps & Phillips, llp
manatt.com
ABOUT CALCHAMBER
Policy/Executive Team
President and Chief Executive Officer
Allan Zaremberg is president and chief executive
officer of the California Chamber of Commerce.
He took over the top staff position in 1998 after
six years as executive vice president and head of the
CalChamber’s legislative advocacy program.
Enhancing the state’s economic growth has been
the goal of Zaremberg’s activities. He has headed
statewide ballot campaigns to close the legal loophole
that permitted shakedown lawsuits, to assure
adequate funding for transportation infrastructure
and to oppose anti-business proposals that would
have raised the cost of health care, electricity and
public works. He led negotiations culminating in
comprehensive reforms of workers’ compensation,
endangered species laws and other key issues.
He oversees the CalChamber Business Services
Division, which provides employment law expertise
through handbooks, services and products, including
HRCalifornia, a continually updated website.
Before joining the CalChamber, Zaremberg
served as chief legislative advisor to and advocate for
Governors George Deukmejian and Pete Wilson.
Zaremberg served as a captain and flight
navigator on a KC-135 jet air refueling tanker while
in the U.S. Air Force from 1970 to 1975.
He holds a B.S. in economics from Penn State
University and a J.D. from the McGeorge School
of Law, University of the Pacific, where he was a
member of the Law Journal.
Executive Vice President, Policy
Jeanne Cain oversees the development and
implementation of policy and strategy as executive
vice president, policy, for the CalChamber.
She has more than 25 years of executive
experience in both the private and government
sectors and brings a wealth of expertise in designing
and implementing advocacy and business strategies.
Her experience includes serving as legislative
secretary and deputy chief of staff for Governor Pete
Wilson; regional vice president, Western Region,
for the American Insurance Association (AIA); and
deputy director for administration and fiscal integrity
at the Major Risk Medical Insurance Board. With an
abundance of leadership experience in and with state
government, Cain has a strong understanding of
legislative processes, government reform, regulatory
issues, compliance and budgets.
In addition to her executive career, Cain has
extensive experience serving on boards of directors.
Currently, she is on the board of the Pacific Business
Group on Health, a nonprofit business coalition
comprised of California’s largest employers focused
on health care, and is board chair and president of
Fairview Farms, Inc., a family farming operation in
Northern California.
Previously, Cain served as chair of the board
for the State Compensation Insurance Fund, where
she was responsible for overseeing more than
7,000 employees and a $21 billion budget; and as
a board member of the Civil Justice Association
of California, a nonprofit, membership-supported
coalition of professionals, manufacturers, financial
institutions, insurers, and medical organizations.
Cain has a bachelor of arts degree from California
State University, Sacramento.
Policy Advocate
Jennifer Barrera joined the California Chamber of
Commerce in September 2010 as a policy advocate
for labor and employment and taxation issues. Since
June 2012, she has tracked legal reform issues as well.
She gains additional insights on the practical
implications of employment law changes through
interaction with CalChamber human resources
compliance specialists.
Since May 2003 she had worked at a statewide
law firm that specializes in labor/employment
defense, now Carothers, DiSante & Freudenberger,
LLP. She represented employers in both state and
federal court on a variety of issues, including wage
®
and hour disputes, discrimination, harassment,
retaliation, breach of contract, and wrongful
termination.
She also advised both small and large businesses
on compliance issues, presented seminars on various
employment-related topics, and regularly authored
articles in human resources publications.
Barrera earned a B.A. in English from California
State University, Bakersfield, and a J.D. with high
honors from California Western School of Law.
Staff to: Labor and Employment Committee, Legal
Reform and Protection Committee, Taxation
Committee
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ABOUT CALCHAMBER
Policy Advocate
Marti Fisher joined the California Chamber of
Commerce in January 2006 as a policy advocate.
She leads CalChamber advocacy on immigration,
unemployment insurance, regulatory reform, insurance,
occupational safety and health, and tourism.
She has specialized in workers’ compensation,
small business, and banking and finance issues.
From October 2006 to December 2012, she headed
CalChamber advocacy on health care issues.
Fisher brought to CalChamber more than
15 years of experience in occupational safety and
advocacy. She served as director of safety, health
and regulatory services with the Associated General
Contractors of California (AGC) immediately before
joining the CalChamber policy team.
Fisher earned a B.A. in public administration from
California State University, Chico, and an M.B.A.
from California State University, Sacramento.
Staff to: Tourism Committee, Immigration Ad Hoc
Committee
Policy Advocate
Jeremy Merz joined the California Chamber
of Commerce in December 2011 as a policy
advocate. He specializes in workers’ compensation,
transportation, taxation and privacy issues.
Merz came to the CalChamber from Downey
Brand, LLP, where he represented private defendants
in state and federal courts on business litigation,
employment law and workers’ compensation litigation.
Previously Merz served as a judicial extern to
the Honorable Frank C. Damrell, Jr., U.S. District
Court judge for the Eastern District of California.
He also was a workers’ compensation claims case
manager for Liberty Mutual.
Merz earned a B.A. in economics from the
University of California, Davis, and a J.D. with
distinction from the McGeorge School of Law,
University of the Pacific. While at McGeorge, he
served on the editorial board of the McGeorge Law
Review.
Staff to: Workers’ Compensation Committee,
Transportation and Infrastructure Committee,
Taxation Committee
Policy Advocate
Amy Mmagu has been lobbying for the California
Chamber of Commerce since April 2011. She has
presented the business perspective on climate change,
education, energy, environmental regulation, housing
and land use issues.
She joined the CalChamber staff in 2006,
working in a wide range of areas, including labor
and employment, health, education, climate change,
energy, and housing and land use. She also assisted
in workers’ compensation, transportation and
infrastructure, tourism, telecommunications, and
international relations/trade.
Before coming to the CalChamber,
Mmagu worked for the California Cable and
Telcommunications Association. She also worked
for a Spanish exporting company in China for
three years and was an intern for the U.S. State
Department in Peru.
Mmagu earned a B.A. in international relations
from California State University, Sacramento,
spending one year at the University of Denmark in
Copenhagen, studying European politics.
Staff to: Environmental Regulation Committee, Energy
and Telecommunications Ad Hoc Committee
Policy Advocate
Mira Morton has headed California Chamber of
Commerce advocacy on health care and education
since November 2013.
She joined the CalChamber in December 2009
as a policy advocate focusing on high technology,
legal, corporate taxation and education issues. From
November 2012 to November 2013, she spearheaded
CalChamber advocacy on environmental regulation
issues, including reform of California Environmental
Quality Act (CEQA) processes, Proposition 65
litigation, and green chemistry regulations.
Before joining the CalChamber, Morton was
a legislative advocate and regional director at
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TechAmerica, a high technology trade association,
where she handled public policy matters in all 50
states.
Morton holds a B.S. in psychology from Santa
Clara University. She worked for five years as a
middle school teacher in Cupertino, California
while earning an M.A. in education at Santa Clara
University. She earned a J.D. from the McGeorge
School of Law, University of the Pacific, with a
certificate in government affairs.
Staff to: Education Committee, Health Care Policy
Committee
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ABOUT CALCHAMBER
Policy Advocate
Valerie Nera specializes in advocacy on agriculture,
water, water storage, resources, telecommunications,
crime, and banking and finance issues for the
California Chamber of Commerce.
Priority issues include water supply and
conveyance, agricultural land use, balanced resource
development policies for timber, protection of private
property rights, federal and state endangered species
laws, banking rules, prepaid phones and secondhand
dealers, telecommunications infrastructure permits,
graffiti, and organized retail theft.
Policy Advocate
Anthony Samson joined the California Chamber of
Commerce in November 2013 as a policy advocate
for environmental regulation, products regulation,
housing and land use issues.
Before joining the CalChamber policy team,
Samson was an attorney at Harrison, Temblador,
Hungerford & Johnson LLP, a statewide law firm
that specializes in mining, land use, and natural
resources law. Samson defended land use project
approvals from legal challenges brought under the
California Environmental Quality Act (CEQA), the
Surface Mining and Reclamation Act (SMARA), and
local planning and zoning laws.
He defended approvals for a wide range of land
Nera joined the CalChamber staff in 1978 as a
legislative assistant on agricultural issues. She also has
lobbied air, environmental and privacy issues for the
CalChamber.
She earned a B.A. with honors from the University
of California, Berkeley, and a J.D. from the McGeorge
School of Law, University of the Pacific.
Staff to: Water Resources Committee, Agriculture and
Natural Resources Ad Hoc Committee, Energy and
Telecommunications Ad Hoc Committee
use projects, including mining, renewable energy,
industrial, commercial and residential developments.
His practice also extended to representing project
developers through the land use entitlement and
CEQA process.
Samson was formerly a deputy environmental
attorney with the California Department of
Transportation and a special assistant to the deputy
chief of staff for Governor Arnold Schwarzenegger.
Samson earned a B.A. from the University of
California, Santa Barbara, and a J.D. from Michigan
State University College of Law, where he served as
the articles editor of the Michigan State Law Review.
Staff to: Environmental Regulation Committee
Grassroots Coordinator/Local Chamber Program Director
supervising office, sales and marketing staffs and
Cathryn L. Mesch has been coordinating the
operational procedural programs in a variety of
California Chamber of Commerce grassroots
settings, including construction, realty companies,
advocacy program since December 2006.
courier services and packaging companies.
In that role, her primary duty is to enhance
She also served as director of marketing for
the CalChamber grassroots network throughout
the California Foreign Trade Zone at the Port of
the state, working closely with the public policy
Sacramento with responsibility for developing new
staff to secure business input as early as possible on
Foreign Trade Zone sites throughout Northern
priority issues. The CalChamber grassroots program
California and implementing an intern program in
received a Star Achievement Award for both 2012
partnership with the University of California, Davis.
and 2013 from the National Prosperity Project, an
Mesch earned an M.B.A. from the American
educational foundation to promote voter awareness
Institute of International Marketing in Arizona.
and registration.
Mesch joined the CalChamber in August 2005
as executive assistant in the public policy unit. She
brought with her 25 years of management experience
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ABOUT CALCHAMBER
Executive Vice President, Corporate Affairs
Dave Kilby, executive vice president, corporate
affairs, joined the California Chamber of Commerce
staff in December 1988 after more than 11 years in
local chamber of commerce management.
In addition to working with CalChamber major
members, he serves as CalChamber corporate
secretary and coordinates Board relations. Kilby
also serves as president/chief executive officer of the
Western Association of Chamber Executives.
During his first 11 years at CalChamber, Kilby
served as the CalChamber’s lobbyist on economic
development, land use and small business issues.
Executive Vice President, Public Affairs
Martin R. Wilson is the executive vice president
of public affairs at the California Chamber of
Commerce, a position he has held for more than
four years.
Wilson oversees all the CalChamber’s public
affairs and campaign activities, including the Public
Affairs Council, a political advisory committee
made up of the CalChamber’s major members;
its candidate recruitment and support program;
and its political action committees: ChamberPAC,
which supports pro-jobs candidates and legislators,
and CalBusPAC, which qualifies, supports and/or
opposes ballot initiatives.
He also serves as the CalChamber liaison to
JobsPAC, an employer-based, independent expenditure
committee that supports pro-business candidates.
Wilson has almost 40 years of experience in
California politics, playing leadership roles in the
election and re-election of two governors, and a U.S.
senator. He also has orchestrated numerous successful
ballot measure and public affairs campaigns.
In addition to his campaign experience, Wilson
has served in government as a senior staff member at
the local, state and federal levels.
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Over the years, he has coordinated local chamber
relations, grassroots legislative action efforts, the
CalChamber’s weekly legislative conference call and
the annual business legislative summit.
Kilby is a member of the U.S. Chamber’s
Committee of 100 and in 2011 the American
Chamber of Commerce Executives named him to its
“People Who Shape People” influential leaders list.
He has a B.A. in political science from California
State University, Fresno.
Staff to: Economic Advisory Council
Before joining the CalChamber, Wilson spent
seven years as managing partner of Wilson-Miller
Communications, where he also advised Governor
Arnold Schwarzenegger as head of the Governor’s
political and initiative committee, the California
Recovery Team.
Before founding his own firm, Wilson was
managing director for Public Strategies Inc. in
Sacramento for five years and held a similar position
with Burson-Marsteller for six years.
Wilson has served as senior fellow for the
University of California, Los Angeles School of
Public Affairs, board member for the California State
Fair and director of the Coro Foundation, a public
affairs training organization.
He graduated from San Diego State University
with a B.A. in history.
Staff to: Public Affairs Council, California Chamber
Fundraising Committee, ChamberPAC,
CalBusPAC, Candidate Recruitment and
Development Fund
Also: JobsPAC Executive Director
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ABOUT CALCHAMBER
Vice President, Legal Affairs, and General Counsel
California and federal employment law, she oversees
Erika Frank was named vice president of legal affairs
and contributes to CalChamber’s labor law and
in 2009. She joined the CalChamber in April 2004 as
human resources compliance products, including
a policy advocate and began serving as general counsel
HRCalifornia; co-produces and presents webinars
shortly thereafter, leveraging her 10 years of combined
and seminars; and heads the Labor Law Helpline.
legal, governmental and legislative experience.
Through their active involvement on the front
Before assuming full-time general counsel
lines of California’s legal and labor law compliance
responsibilities in late 2005, Frank also lobbied the
scene, Frank and her team are first to know when
legislative and executive branches on taxation, civil
and how changes in law affect employers. She
litigation and lawsuit abuse issues.
uses her employment law expertise to develop and
Frank leads CalChamber’s Legal Affairs
facilitate training courses for HR professionals, and is
Department, which participates in court cases having
a sought-after speaker at industry events.
a broad impact on California’s economy and business
Frank holds a B.A. in political science from
climate—including workers’ compensation reform,
the University of California, Santa Barbara, and
labor and employment, taxation, litigation reform
received her J.D. from the McGeorge School of Law,
and commercial free speech.
University of the Pacific.
As CalChamber’s subject matter expert on
Vice President, Communications
Ann Amioka has been a communications specialist
at the California Chamber of Commerce since
1980. Since 1982, she has been executive editor of
the CalChamber’s legislative newsletter, Alert. She
oversees editing and production of CalChamber
communications and the corporate website.
Vice President, Corporate Relations
Drew Savage was named vice president of corporate
relations at the beginning of 2001, a position
dedicated to enhancing the CalChamber’s profile
with major corporations.
Savage came to CalChamber in 1990 as a
membership specialist following three years in a similar
position at the Illinois Chamber. He was named manager
of the CalChamber’s membership sales team in October
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Before joining the CalChamber staff as editor
of the CalChamber’s agricultural labor relations
newsletter, Amioka was a reporter for a daily
newspaper in Yolo County. She has a B.A. in history
from Stanford University and an M.A. in history
from California State University, Sacramento.
1994. After taking on additional responsibilities for
working with the state’s growth industries and developing
relationships with larger companies, Savage was
promoted to vice president of membership in late 1999.
He holds a B.A. in political science from the
University of Illinois at Chicago.
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ABOUT CALCHAMBER
Susanne Thorsen Stirling has headed the California
Chamber of Commerce International Trade
Department since 1982.
She serves on the District Export Council
(appointed by the U.S. Secretary of Commerce), the
National Export Council Steering Committee, the
U.S. Chamber of Commerce International Policy
Committee, and the Chile-California Council, in
addition to serving as an alternate board member to
the California International Relations Foundation.
The CalChamber supports free trade worldwide,
expansion of international trade and investment, fair
and equitable market access for California products
abroad, and elimination of disincentives that impede
the international competitiveness of California business.
The department sponsors and participates in
trade, investment and other international events.
It also assists members with general export and
import activities, maintains www.calchamber.com/
international and provides international trade
publications, including a weekly enewsletter.
The CalChamber is a past recipient of the U.S.
Presidential Award for Export Service, and received
the Presidential Citation from the government of the
Republic of Korea.
Before joining the CalChamber, Stirling held
positions in public affairs and public relations
for Burmeister & Wain A/S, an international
shipbuilding company based in Copenhagen.
Stirling studied at the University of Copenhagen
and holds a B.A. in international relations from the
University of the Pacific, where she now serves as
a member of the Board of Regents. She earned an
M.A. from the School of International Relations at
the University of Southern California.
Staff to: Council on International Trade
Vice President, Local Chamber Relations
Russell Lahodny joined the California Chamber
of Commerce as vice president of local chamber
relations in October 2014. He serves as an
information resource for and CalChamber liaison
with local chambers of commerce.
From 2010 until joining the CalChamber staff,
Lahodny was senior vice president, communications
for the Anaheim Chamber of Commerce. His role
was to maintain the quality and consistency of the
chamber’s messaging to its members and the business
community. He created and oversaw all Anaheim
Chamber communication tools, including a member
newspaper, weekly e-newsletters, press releases,
marketing materials, and website design. He also
oversaw the Anaheim Chamber’s legislative actions
and coordinated monthly meetings featuring local
elected officials.
Before relocating to Anaheim, Lahodny was vice
president of communications at the Irvine Chamber
of Commerce. During his seven years in Irvine,
he helped the chamber earn 15 communications
awards from the Western Association of Chamber
Executives.
In his CalChamber position, Lahodny also will
serve as vice president of the association.
Lahodny received his B.A. in communications
with an emphasis in photojournalism from
California State University, Fullerton, where he
served as photo editor for the college newspaper, The
Daily Titan.
Vice President, Media Relations and External Affairs
victim advocate. She also directed media relations for
Denise Davis is the chief liaison with the news
a national, nonprofit legal foundation.
media for the California Chamber of Commerce. As
Over the course of her career, Davis has worked
vice president for media relations and external affairs,
closely with statewide officeholders, Cabinet
she oversees communications strategy and outreach,
members, major corporations and a variety of
and manages the CalChamber’s involvement in select
trade associations. As such, Davis has developed
issue advocacy and ballot measure campaigns.
expertise in the areas of environmental law, land use
Before joining the CalChamber, Davis was a
regulation, water law, resource management, criminal
senior-level communications consultant working
justice issues, correctional law, consumer law, health
on a number of high-profile campaigns, legal
care and labor relations.
matters and policy issues. She was Governor Arnold
Davis graduated from the University of California,
Schwarzenegger’s chief deputy communications
Davis, receiving a B.A. in communications.
director and has 14 years of experience serving three
California attorneys general as a spokesperson and
190
®
ABOUT CALCHAMBER
President
Loren Kaye was appointed president of the
in January 2006.
The Foundation is affiliated with the California
Chamber of Commerce and serves as a “think
tank” for the California business community.
The Foundation is dedicated to preserving and
strengthening the California business climate and
private enterprise through accurate, impartial and
objective research and analysis of public policy issues
of interest to the California business and public
policy communities.
Kaye has devoted his career to developing,
analyzing and implementing public policy issues in
California, with a special emphasis on improving the
state’s business and economic climate.
Kaye is also a gubernatorial appointee to the
state’s Little Hoover Commission, charged with
evaluating the efficiency and effectiveness of state
agencies and programs. He served in senior policy
positions for Governors Pete Wilson and George
Deukmejian, including Cabinet Secretary to the
Governor and Undersecretary of the California Trade
and Commerce Agency. Kaye also has represented
numerous private sector interests, managing issues
that affect specific business sectors to promote
an improved business climate or to resist further
regulation or costs on business.
Kaye is a graduate of the University of California,
San Diego, with a degree in political science.
Policy Issues and Staff Index
Agriculture..........................................................Valerie Nera
International................................................. Susanne Stirling
Banking/finance..................................................Valerie Nera
Labor and employment..................................Jennifer Barrera
Budget................................................................ Jeanne Cain
Land use...................................................... Anthony Samson
Climate change................................................. Amy Mmagu
Legal..............................................................Jennifer Barrera
Crime..................................................................Valerie Nera
Occupational safety and health............................Marti Fisher
Economic development...................................... Jeremy Merz
Privacy............................................................... Jeremy Merz
Education.......................................................... Mira Morton
Product regulation....................................... Anthony Samson
Energy............................................................... Amy Mmagu
Recycling........................................................... Amy Mmagu
Environment............................................... Anthony Samson
Regulatory reform...............................................Marti Fisher
Environmental justice........................................ Amy Mmagu
Resources............................................................Valerie Nera
Fair Political Practices Commission..................... Jeanne Cain
Taxation................................... Jennifer Barrera, Jeremy Merz
Grassroots......................................................... Cathy Mesch
Telecommunications...........................................Valerie Nera
Health care........................................................ Mira Morton
Tourism...............................................................Marti Fisher
Housing...................................................... Anthony Samson
Transportation.................................................... Jeremy Merz
Immigration........................................................Marti Fisher
Unemployment insurance...................................Marti Fisher
Infrastructure..................................................... Jeremy Merz
Water..................................................................Valerie Nera
Insurance.............................................................Marti Fisher
Workers’ compensation...................................... Jeremy Merz
®
191
ABOUT CALCHAMBER
CalChamber Committees
CalChamber Committees
California Chamber of Commerce policy committees draft and review policy and make recommendations to the Board of Directors
on a range of issues. The CalChamber also establishes ad hoc committees as the need arises to address other policy issues. Committees
range in size from eight to 100 members, and meet between two and four times a year (or, as needed) at locations throughout California
or via telephone conference calls. Committee chairs generally are members of the CalChamber Board of Directors and work closely
with CalChamber policy team members, permitting the CalChamber to act quickly as issues emerge. Membership in committees (other
than those whose membership is by appointment) is open to managers, technicians and/or policy experts with member firms. To get
involved, submit the form at www.calchamber.com/getinvolved.
Policy Committees
Education
Goal: Foster greater business involvement to improve
both teacher and student performance, and administrative
accountability in schools throughout California. (Membership
by appointment.)
Staff: Mira Morton
[email protected]
Environmental Regulation
Goal: Oversee issues related to the environment, such as
air quality, climate change and AB 32 implementation, the
California Environmental Quality Act (CEQA), Proposition 65
and green chemistry, hazardous and solid waste, surface mining
and land use issues. Recommends policies that meet the mutual
objectives of protecting human health and the environment
while conserving the financial resources of business to the fullest
extent possible in order to help California businesses grow and
promote their technologies/services.
Staff: Anthony Samson
[email protected]
Amy Mmagu
[email protected]
Health Care Policy
Goal: Promote a sound and affordable health care system. Work
to contain costs and avoid unnecessary and expensive regulatory
controls, including mandates.
Staff: Mira Morton
[email protected]
Labor and Employment
Goal: Protect employers’ rights to organize, direct and manage
their companies’ employees in an efficient, safe and productive
manner.
Staff: Jennifer Barrera
[email protected]
192
Legal Reform and Protection
Goal: Seek comprehensive tort reform that will prevent lawsuit
abuse, halt runaway liability risk, and promote greater fairness,
efficiency and economy in the civil justice system.
[email protected]
Taxation
Goal: Monitor legislation and regulatory activity to ensure that
California tax laws are fair and can be administered easily. Review
state spending plans to make certain that economy and efficiency
are the primary goals of government.
[email protected]
Jeremy Merz
[email protected]
Tourism
Goal: Encourage increased travel to California by fostering
investment in advertising and improvements to tourism
infrastructure, considering the important role of tourism in the
state’s economy and plans for economic recovery. (Membership
by appointment.)
Staff: Marti Fisher
[email protected]
Transportation and Infrastructure
Goal: Develop and maintain a statewide transportation network
that is adequate for the needs of business, agriculture and
individual citizens.
Staff: Jeremy Merz
[email protected]
Water Resources
Goal: Encourage responsible water quality goals and water
development policies to meet the increasing demand for reliable
water supplies. (Membership by appointment.)
Staff: Valerie Nera
[email protected]
®
ABOUT CALCHAMBER
Workers’ Compensation
Goal: Promote legislative, judicial and regulatory actions
that maintain an efficient workers’ compensation system
that provides adequate worker benefits while protecting the
competitive position of California employers.
Staff: Jeremy Merz
[email protected]
Ad Hoc Committees
Agriculture and Natural Resources
Goal: Provide agricultural employers with a conduit for
communicating with lawmakers and advocating
environmentally sound development and use of agricultural and
natural resources in a manner that provides optimum economic
benefits while protecting property rights.
Staff: Valerie Nera
[email protected]
Energy and Telecommunications
Goal: Recommend policies on issues concerning utilities
and commerce, including electricity, telecommunications,
commercial transactions, corporate governance, economic
stimulus and development.
Staff: Amy Mmagu
[email protected]
Valerie Nera
[email protected]
Immigration
Goal: Recommend policies on issues concerning immigration.
Staff: Marti Fisher
[email protected]
Political Action Committees
The California Chamber of Commerce has established two
political action committees (PAC) to help focus business efforts
to provide financial support to pro-jobs candidates or issues
campaigns.
ChamberPAC
Goal: Provide financial support to business-friendly incumbent
legislators and candidates for state legislative and local office.
Staff: Martin R. Wilson
[email protected]
CalBusPAC
Goal: Provide funding to help qualify, support and/or oppose
statewide ballot initiatives.
[email protected]
Special Committees
Public Affairs Council
Goal: Advise CalChamber on key political issues affecting the
business community. (Must be CalChamber Advocate-level
member to join.)
[email protected]
California Chamber Fundraising Committee
Goal: Provide guidance and assistance to the CalChamber
in its political fundraising efforts. (Must be a member of the
CalChamber Board of Directors to join.)
[email protected]
Council for International Trade
Goal: Support expansion of international trade and investment,
fair and equitable market access for California products abroad,
and elimination of disincentives that impede the international
competitiveness of California business.
Staff: Susanne T. Stirling
[email protected]
Economic Advisory Council
Goal: Provide quarterly forecasts of the California economy and
coordinate special economic studies. Council members include
business economists from a variety of industries and from
government.
Staff: Dave Kilby
[email protected]
®
193
MEMBERSHIP PROFILE
The California Chamber of Commerce is the largest
broad-based business advocate to government in California.
Membership represents one-quarter
of the
private 7%
sector jobs in California and includes firms of all sizes and
251-500
employees
501-999
employees
companies 101-250
from every industry within
the state.
Nearly2%
300 local chambers of commerce are affiliated with the
1,000+ employees
3%to promote business-friendly policy.
CalChamber,
and
are
solid
partners
in
CalChamber
efforts
employees
101-250
14%
employees
16%
Nearly Three-Fourths
of CalChamber Members Have 100 or Fewer Employees
51-100
By Employer
Size
employees
18%
101-250
employees
21-50
101-250
14%
employees
employees
251-500 employees 7%
0-20
0-20
0-20
501-999 employees 2%
employees
employees
employees
34%
34%1,000+ employees 3%
32%
16%22%
51-100
employees
18%
21-50
employees
22%
0-20
0-20
0-20
employees
employees
employees
34%
34%
32%
By Industry Classification
Public Administration 1%
Local Chambers 2%
Agriculture/Mining 3%
Construction 5%
Business/
Personal Services
45%
Public Manufacturing
Administration 1%
18%
Local Chambers
2%
Agriculture/Mining 3%
Construction 5%
Transportation/Communications/Utilities 4%
Business/
Personal Services
45%
Wholesalers 7%
Manufacturing
18% Retailers 6%
Finance/Insurance/Real Estate 9%
Transportation/Communications/Utilities 4%
Based on a survey of members in January 2016:
• 29% have been in existence for 50 years or more.
Wholesalers 7%
• 11% have been in existence for less
than 10 years.
• 18% are owned/co-ownedRetailers
by women.
6%
• 24% are owned/co-owned
by ethnic Estate
minorities
Finance/Insurance/Real
9% or persons of mixed ethnicity.
• 35% do business internationally.
• 43% plan to add employees in 2015, while 55% plan to maintain the size of their workforce.
• 91% offer health insurance coverage.
194
8/12
®
8/12
Agenda for
Candidate Recruitment/
Development
The Auto Club proudly supports the
CALIFORNIA CHAMBER
OF COMMERCE
AAA.com
Copyright © 2015 Automobile Club of Southern California. All Rights Reserved.
CANDIDATE RECRUITMENT/DEVELOPMENT
Bipartisan Approach to Electing Pro-Jobs Candidates
Fosters Environment Conducive to Problem Solving
Challenges and opportunities are the two sides of the coin in an election year and the 2016 California legislative
contests promise to offer plenty of both for the California Chamber of Commerce and our business allies.
CalChamber has played an integral role over the last two cycles in electing pro-business legislative members
from both major political parties. These members have proven themselves worthy of our past support repeatedly
through their willingness to vote “No” on scores of job-killing legislative proposals. Building on the momentum
we helped create by tallying more election victories in the handful of the remaining open legislative seats and
protecting past electoral gains are the twin 2016 election goals for CalChamber.
The CalChamber’s bipartisan approach is working. As noted Sacramento Bee columnist Dan Walters
commented in a November 20, 2015 opinion piece: “What happened—or in many cases, didn’t happen—in the
Capitol this year resulted from a concerted effort by the chamber’s political campaign arm and other business
groups to cultivate business-friendly Democrats in the past two election cycles, using the ‘top-two’ primary
system to their advantage.”
Election Landscape
In 2016 there are 18 open Assembly seats, with 10 being safe Democratic seats and eight that should be safe for
the GOP. In the open Democratic seats, CalChamber is carefully assessing the candidates and measuring their
viability with the goal of increasing the number of pro-business Democrats serving in the Legislature’s lower
house. On the Republican side of the aisle, there are six GOP incumbents running for re-election in districts
where the Democrats hold a registration advantage—some by as much as 8%—and our focus will be aimed at
the re-election efforts of these incumbents.
For the first time in a long time, the California Senate has a sizable number of open seats. In 2016, seven
seats are open with six of those seats occupied by a termed-out Democrat and one seat held by a Republican who
terms out this year. Based on the composition of the districts, half of the Democrat-held seats are considered
competitive, meaning they could change party hands and voters elect a Republican. Of the Republican-held
seats, only one is in danger of changing parties.
Track Record
CalChamber will continue to recruit and elect business-friendly candidates to maintain our superb track record
of beating job-killing legislative proposals by staying on the task of engaging our political action network.
Our focus will remain dedicated to finding and electing candidates from both political parties who possess the
courage to stand up to the liberal special interests and reject their philosophy of tax, spend and regulate.
If we are successful with our election strategy, then our opportunities will far outdistance our challenges.
Candidate Recruitment
Although not a political action committee, the Candidate Recruitment and Development Program provides
the resources necessary to build a bench of electable, pro-jobs candidates for state legislative and local office.
CalChamber partners with our local chamber network, as well as state and local member businesses, to ensure
the recruitment efforts are bipartisan and locally driven.
The primary component of this program is to identify potential candidates and put them on the path to
elective office. The secondary component is training and developing candidates for their positions. The program
has successfully recruited numerous local candidates who have won election to state legislative seats.
Political Action Committees (PACs)
The CalChamber’s Political Action Network includes three political entities:
• ChamberPAC is a bipartisan political action committee that makes direct contributions to incumbent
office holders and select candidates who promote and vote for an agenda of private sector job creation. Contributions to this committee are limited to $6,800 per year, person, organization or political action committee.
• JobsPAC is an independent expenditure committee, meaning it speaks directly to voters on behalf of the
business community to elect pro-jobs candidates. Co-chaired by CalChamber and the California Manufacturers
®
197
CANDIDATE RECRUITMENT/DEVELOPMENT
and Technology Association, JobsPAC may accept contributions
in unlimited amounts.
• CalBusPAC is a CalChamber committee that is formed
to primarily support or oppose ballot measures having an
impact on the state’s business climate. CalBusPAC may accept
contributions in unlimited amounts.
CalChamber Position
California’s business community is under constant pressure due
to the disproportionate influence that special interest and
government employee organizations have on the legislative and
regulatory process. CalChamber is committed to standing up
for and speaking out on behalf of the state’s employer community through political action, our advocacy network, and
constant and direct contact with elected officials.
198
Staff Contact
Martin R. Wilson
Executive Vice President, Public Affairs
[email protected]
P.O. Box 1736
(916) 444-6670
www.calchamber.com
January 2016
®
Agenda for
Legislative Guide
LEGISLATIVE GUIDE
Contacting Your Legislators: Protocol
California state senators and Assembly
members want to hear from their
constituents—you—the voters in their
districts. At times your association
may call on you to do some grassroots
lobbying. Often, the contact from a
district constituent can sway a legislator’s
vote.
Here are some guidelines for you to
follow in contacting your legislators in
person, by phone or by letter.
• Be thoughtful. Commend the right
things which your legislator does. That’s
the way you’d like to be treated.
• Be reasonable. Recognize that there are
legitimate differences of opinion. Never
indulge in threats or recriminations.
• Be realistic. Remember that most
controversial legislation is the result
of compromise. Don’t expect that
everything will go your way, and don’t
be too critical when it doesn’t.
• Be accurate and factual. The mere fact
that you want or do not want a piece
of legislation isn’t enough. If an issue
goes against you, don’t rush to blame
the legislator for “failing to do what you
wanted.” Make certain you have the
necessary information and do a good
job of presenting your case.
• Be understanding. Put yourself in a
legislator’s place. Try to understand his/
her problems, outlook and aims. Then
you are more likely to help him/her
understand your business and problems.
• Be friendly. Don’t contact your
legislator only when you want his/her
vote. Invite him/her to your place of
business or your group meetings. Take
pains to keep in touch with him/her
throughout the year.
• Give credit where it is due. If an issue
goes the way you wanted, remember
that your legislator deserves first credit.
He/she has the vote, not you. And,
remember also that many organizations
and individuals participated on your
side.
200
• Learn to evaluate issues. The
introduction of a legislative bill doesn’t
mean that it will become law. Whether
you’re for it or against it, don’t get
excited about it until you learn the who,
what and why of it.
• Support your legislator. If he/she
is running for re-election and if you
believe he/she deserves it, give him/her
your support. He/she needs workers
and financial supporters. Don’t become
aloof at the time when your legislator
needs your help.
• Don’t, don’t, don’t even hint that
you think certain bills, campaigns or
politics in general are not worthwhile
or may be dishonest.
• Don’t demand anything. And don’t
be rude or threatening. There is always
“the future,” and in many cases a
legislator may disagree with you on one
issue and be supportive on another.
• Don’t be vague or deceptive,
righteous or long-winded, and please
don’t remind the legislator that you
are a taxpayer and voter in his/her
district. (He/she knows it!)
• Don’t be an extremist. Remember,
your legislator represents all his/her
constituents—those you consider liberal
and those you consider conservative.
Don’t condemn a legislator just because
he/she supports a piece of legislation
that you think is too liberal or too
conservative.
• Don’t be a busybody. Legislators don’t
like to be pestered, scolded or preached
to. Neither do you.
• Be cooperative. If your legislator makes
a reasonable request, try to comply with
it. You can help him/her by giving him/
her the information he/she needs. Don’t
back away for fear you are “getting into
politics.”
Letter Writing
Following are guidelines for an effective
letter:
• Be brief.
• Make sure the legislator knows this
communication is from a constituent
who lives and/or does business in the
legislator’s district.
• Explain how the proposed legislation
affects your business, and why you
support/oppose it.
• Don’t attempt to give “expert” opinions.
Tell how the legislation would affect
your business, based on your experience
and knowledge.
• Refer to bill numbers whenever
possible.
• Ask for the legislator’s support or
opposition.
• Write the letter without copying any
association-provided background
information verbatim.
• Request that your legislator take a
specific action by telling him/her what
you desire. State the facts as you see
them. Avoid emotional arguments. If
you use dollar figures, be realistic.
• Ask the legislator what his/her position
is.
• Keep all communications friendly
and respectful. Be sure to thank your
legislator for considering your views.
• Write on your personal or business
letterhead if possible, and sign your
name over your typed signature at the
end of your message.
• Be sure your exact return address is
on the letter, not just the envelope.
Envelopes sometimes get thrown away
before the letter is answered.
• Be reasonable. Don’t ask for the
impossible. Don’t threaten. Don’t say,
“I’ll never vote for you unless you do
such and such.” That will not help your
cause; it may even harm it.
• Be constructive. If a bill deals with
a problem you admit exists, but you
believe the bill is the wrong approach,
tell what the right approach is.
®
LEGISLATIVE GUIDE
• Send your association a copy of your
letter and a copy of the response you
receive from your legislator.
• Address all letters in the following
manner, unless you are on a first name
basis:
State Legislature:
• Assembly Member
The Honorable Joe/Jo Doe
California State Assembly
State Capitol
Dear Assembly Member Doe:
• Senator
California State Senate
State Capitol
Dear Senator Doe:
Local Elected Officials:
• Council Member
Councilman/woman,
City of—
City Hall
City, State and Zip Code
Dear Mr./Ms./Mrs./Miss Doe:
• County Supervisor
Supervisor, —County
County Seat
City, State and Zip Code
Dear Sir/Madam:
or Dear Mr./Ms./Mrs./Miss Doe:
Guidelines for District Visits
The following guidelines may be helpful
when you make district visits:
• Members of the state Legislature rely
heavily on their staffs for a major
portion of their responsibilities,
®
i.e., scheduling, advice on specific
legislation, constitutent problems, etc.
This is why it is important to maintain
some familiarity with the district office
staff. However, you do want to become
acquainted and develop a working
relationship directly with the legislators
in your district.
• Generally, the legislative schedule
permits each legislator to visit the
district office on Fridays and holidays.
• Always call in advance for an
appointment and briefly explain
the purpose of the meeting. As a
business person, you are an important
constituent and the politician and his
aides are eager to get acquainted.
• If the meeting with the senator or
Assembly member is for the purpose
of discussing specific legislation, review
the background information and
position statements available from your
association and use the bill numbers
when possible.
• Ask the legislator for his/her position
on issues and how he/she will vote.
We encourage you to consider
other activities as ways of effectively
maintaining liaison with your district
legislators:
• Invite other members of your profession
to join you and your legislator for
lunch.
• Invite your legislator to visit your
company before opening. You may
want to have a short meeting between
your employees and the legislator. The
legislator could make brief remarks,
followed by a question-and-answer
period.
• Offer to help organize an information
business advisory group to meet
regularly with your legislators to discuss
business and key industry issues.
Telephone Procedures
• When the Legislature is in session, call
the Capitol office; during recess and on
Fridays, call the district office.
• Ask to speak directly to the legislator. If
he/she is not available, ask to speak to
the administrative assistant or legislative
aide.
• When the legislator or his/her assistant
is on the line, identify yourself and
mention the name of your company
and the fact that you are from the
legislator’s district.
• State the reason for the call. Use bill
numbers whenever possible.
• Explain how the proposed legislation
affects your business and why you
support or oppose it.
• Discuss only one issue per telephone
call.
• Ask the legislator’s position.
✔ If the legislator’s position is the same
as yours, express agreement and
thanks.
✔ If your position differs from
the legislator’s, politely express
disappointment and offer some
factual information supporting your
views.
• Don’t attempt to give “expert” opinions.
Tell how legislation would affect your
business, based on your experience and
knowledge.
• Request that your legislator take a
specific action by telling him/her what
you desire. State the facts as you see
them. Avoid emotional arguments. If
you use dollar figures, be realistic.
• Keep all communication friendly and
respectful.
• Thank the legislator or aide for his/her
time and for considering your views.
201
LEGISLATIVE GUIDE
The Legislative Process
• Senate: 40 members
• Assembly: 80 members
• Regular Session: Convenes on the
first Monday in December of each
even-numbered year and continues
until November 30 of the next evennumbered year.
• Special Session: May be called by the
Governor and is limited to a specific
subject. Length is not limited and may
be held concurrently with the regular
session.
• Effective Date of Laws: January 1 of
the year after enactment.
Procedure
• Introduction: The bill is introduced by
a member of the Senate or Assembly,
read for the first time, then assigned to
a committee by either the Senate Rules
Committee or the Assembly Speaker.
202
• Committee: Hearing(s) are held in
committee and testimony is taken from
proponents and opponents. Generally,
the committee will then amend, pass or
fail to pass the bill.
• Second Reading: Bills that are passed
by committee are read a second time
and sent to the full floor for debate.
• Floor Debate (in house of origin):
The bill is read a third time, debated
and voted on. Most bills need a
majority to pass (21 for the Senate, 41
for the Assembly). Bills with urgency
clauses, appropriation measures and
some tax-related bills need a two-thirds
majority (27 for the Senate, 54 for the
Assembly). If the bill is passed, it is sent
to the second house.
• Second House: Procedures for a bill
to pass the second house are similar to
consideration and passage in the house
of origin.
• Amendments: If the second house
passes a bill with amendments, then the
bill must be passed a second time by the
house of origin for concurrence. If the
amendments are rejected, a conference
committee is formed to iron out the
differences between the two houses.
• Governor: The Governor must act
on (sign or veto) any bill that passes
the Legislature within 12 days during
the legislative session. However, the
Governor has 30 days in which to act
at the end of each year of the legislative
session. Bills not acted on by the
Governor automatically become law.
A two-thirds vote of the Legislature is
required to override a Governor’s veto.
®
LEGISLATIVE GUIDE
How to Write an Effective Lobbying Letter
Use your business
letterhead when
communicating your
position on a bill.
Address lobbying
correspondence to
the author of the
bill with copies to
members of the
committee hearing
the bill and to your
local legislator.
®
March 18, 2015
The Honorable Ken Cooley
California State Assembly
State Capitol, Room 3146
Indicate
immediately
which bill you’re
addressing by its
bill number (AB__
if it originates in
the Assembly, SB__
if it originates in
the Senate), by an
identifying phrase
and whether you
support or oppose
the bill. This will
help legislative
staff in routing your
letter.
SUBJECT: AB 12 (COOLEY) STATE GOVERNMENT: ADMINISTRATIVE
REGULATIONS: REVIEW
SET FOR HEARING – MARCH 25, 2015
SUPPORT – AS INTRODUCED DECEMBER 1, 2014
Dear Assembly Member Cooley:
The California Chamber of Commerce SUPPORTS your AB 12 because it strengthens
the accountability and transparency of the state’s regulatory process, which paves the
way to effective and least burdensome regulations.
First, the bill requires a complete review of state regulations to ensure that they are not
duplicative, overlapping, outdated or inconsistent. Thoughtful and pragmatic review that
includes public and legislative input as proposed in this bill is likely to lead to improved
regulations that support good public policy in the most effective manner.
Be sure to make
clear for whom
you’re speaking.
Current law requires agencies to conduct economic impact analysis for major regulations
under consideration for adoption. AB 12 increases accountability and legislative
oversight in the rulemaking process by requiring the Department of Finance to review
those impact analysis reports and issue findings regarding state agency compliance in
this process.
Be sure to be
clear about what
action you want the
legislator to take.
AB 12 proposes important process improvements to work toward creating a more
favorable regulatory climate in which to create and grow California’s economy.
For these and other reasons, the California Chamber of Commerce SUPPORTS your
AB 12.
Sincerely,
If you have
a personal
relationship with
the legislator, take a
moment to write a
quick, handwritten
note to draw his
or her attention to
your letter.
Be sure to send a
copy of your letter to
the Governor. Also
please send a copy
to the CalChamber
staff members
assigned to the
bill so they can
include information
on your support
or opposition in
their committee
testimony.
Jacque Roberts, Office of the Governor
District Office, Assembly Member Cooley
Use boldface type,
underlining or italics
sparingly to emphasize
important points.
®
In many committees,
staff members file
correspondence
according to the
date of the bill’s next
hearing. If you know
the date, be sure to
include it. Including
such information will
help ensure your
letter is read in time
to have an impact.
Get to the point of
your letter quickly:
your support for or
opposition to the bill.
Provide concrete,
credible information
on the impact of
proposed legislation
on your business.
Elected officials
prefer to hear from
persons in authority
rather than just
from staff members.
A letter will have
more impact
if the business
owner or person
in a management
position signs the
letter.
Marti Fisher
Policy Advocate
cc:
Keep your letter
short. A succinct,
one-page letter will
have more impact
than a longer
one. If you have
documentation of
the bill’s impact
on your business,
enclose it, but keep
the letter short.
Act promptly. Too many
good lobbying letters arrive
after a vote already has
been taken.
Later…If the
legislator does what
you ask, be sure to
send a thank you
letter.
203
LEGISLATIVE GUIDE
Guide to Reading a Bill
Date noted
each time bill is
amended.
AMENDED IN ASSEMBLY APRIL 22, 2015
Indicates
house of
origin.
california legislature—2015–16 regular session
ASSEMBLY BILL
No. 12
Introduced by Assembly Member Cooley
(Coauthors: Assembly Members Chang, Daly, and Wilk)
Date
introduced.
December 1, 2014
An act to amend Section 11349.1.5 of, and to add and repeal Chapter
3.6 (commencing with Section 11366) of Part 1 of Division 3 of Title
2 of, of the Government Code, relating to state agency regulations.
Legislative
Counsel
drafts all
legislation
and writes a
summary.
Bills are
introduced
in sequential
number in each
house.
Code section
being added or
amended.
legislative counsel’s digest
AB 12, as amended, Cooley. State government: administrative
regulations: review.
(1) Existing
Existing law authorizes various state entities to adopt, amend, or
repeal regulations for various specified purposes. The Administrative
Procedure Act requires the Office of Administrative Law and a state
agency proposing to adopt, amend, or repeal a regulation to review the
proposed changes for, among other things, consistency with existing
state regulations.
This bill would, until January 1, 2019, require each state agency to,
on or before January 1, 2018, and after a noticed public hearing, review
and revise that agency’s regulations to eliminate any inconsistencies,
overlaps, or outdated provisions in the regulations, adopt the revisions
as emergency regulations, review that agency’s regulations, identify
any regulations that are duplicative, overlapping, inconsistent, or out
of date, to revise those identified regulations, as provided, and report
to the Legislature and Governor, as specified. The bill would further
Strikethrough
text indicates
language
that is being
deleted; italics
highlight
language
that is being
added by an
amendment.
98
The actual language that will be a part of the state code when the bill is
enacted into law appears following the line: “The people of the State of
California do enact as follows.”
204
®
LEGISLATIVE GUIDE
California Government Glossary
Legislature
The two “houses” that pass or reject
proposed new laws.
Assembly: 80-member lower house
of the Legislature. Its members serve
two-year terms. 80 members are elected
every two years.
Senate: 40-member upper house of the
Legislature. Its members serve four-year
terms. 20 members are elected every two
years.
Legislation
Bill: A proposed law or statute that
amends or repeals existing laws or
proposes new laws. Most bills require a
majority vote. If there is a fiscal impact, a
bill requires a two-thirds vote.
➤ AB 0000—Assembly Bill
➤ SB 0000—Senate Bill
Constitutional Amendment:
A proposed change in the state
Constitution, which, after approval of
two-thirds of the legislators, is submitted
to the voters.
• ACA 0000—Assembly (authored)
Constitutional Amendment.
• SCA 0000—Senate (authored)
Constitutional Amendment.
Concurrent Resolution: A legislative
proposal that commends individuals
or groups, adopts legislative rules or
establishes joint committees.
• ACR 0000—Assembly Concurrent
Resolution.
• SCR 0000—Senate Concurrent
Resolution.
Joint Resolution: A legislative opinion
on matters pertaining to the federal
government, often urging passage or
defeat of legislation pending before
Congress.
• AJR 0000—Assembly Joint Resolution.
• SJR 0000—Senate Joint Resolution.
®
Assembly and Senate Resolutions: An
expression of sentiment of one house of
the Legislature. Resolutions usually ask
a committee to study a specific problem,
create interim committees or amend
house rules. Resolutions take effect upon
adoption.
• AR 0000—Assembly Resolution.
• SR 0000—Senate Resolution.
Spot Bill: Bill introduced that usually
makes nonsubstantive changes in a law.
The spot bill is substantially amended at
a later date. This procedure evades the
deadline for the introduction of bills.
Legislative Process
Legislative Counsel: A staff of more
than 60 attorneys who draft legislation
(bills) and proposed amendments, review,
analyze and render opinions on legal
matters of concern to the Legislature. The
Legislative Counsel’s Digest is a summary
of a bill’s content contrasting existing law
with proposed law (in lay language) and
appears on the face of each bill.
Legislative Analyst: Provides advice to
the Legislature on anything with a fiscal
implication, which can cover virtually
every major bill. The analyst annually
publishes a detailed analysis of the
Governor’s budget, which becomes the
basis for legislative hearings on the fiscal
program.
Author: State senator or Assembly
member who submits or introduces a
bill and carries it through the legislative
process.
Floor Manager: Speaks as author when
the bill is being heard in the second
house. (Assembly members are not
allowed to present bills on the Senate
floor and vice versa.)
Sponsor: Interest groups or constituents
from the legislator’s district who bring
suggested legislation to the attention of
the prospective author (legislator).
Standing Committee: The forum used
in the Senate and Assembly for studying
bills and hearing testimony from the
author, proponents and opponents.
• Many bills are heard by two or more
committees in each house.
• If a majority of the committee members
approve the bill, it is sent to the floor
(or, if it has fiscal impact, to another
committee) with a recommendation
“Do Pass.” It takes a majority vote of
committee members present to amend
a bill.
• Your association’s legislative advocate
and other members often testify before
such committees.
Committee Consultants and Aides:
Every legislator has a personal staff plus
the assistance of specialists assigned to
committees and to the party caucuses.
This research staff is responsible for
analyzing the pros and cons of the
proposed legislation.
Introduction and First Reading: Bill
is submitted by senator or Assembly
member, numbered and read. It is
assigned to a committee by the Senate
Rules Committee or Assembly Speaker
and printed.
Second Reading: When the bill passes
out of its committee, it is read on the
house floor for a second time.
Third Reading: Bill is read a third time
and debated. A roll call vote follows.
If passed or passed with amendments,
the bill is sent to the second house (or,
if it already is in the second house, it
is returned to the house of origin) for
consideration of amendments.
Enrollment: Legislation that has passed
both houses is sent to enrollment for
proofreading for consistency before being
sent to the Governor for approval.
205
LEGISLATIVE GUIDE
Item Veto: Allows the Governor to veto
(return unsigned a legislative proposal
or indicate points of disagreement)
objectionable parts of a bill without
rejecting bills in their entirety.
Chaptered: A bill that has passed both
houses and has been signed by the
Governor is said to be “chaptered.”
The bill becomes law January 1 of the
following year unless it contains an
urgency clause (takes effect immediately)
or specifies its effective date.
Sunset Clause: Acts of the state
Legislature that expire after a certain date
unless renewed by the Legislature.
Voter Responses
In recent years there has been a renewal
of interest in the techniques of direct
democracy, whereby citizens are able to
bypass elected government bodies and act
directly on policy matters.
Recall: A procedure whereby petitions
are circulated calling for removal of a
public official from office. If a sufficient
number of signatures is obtained, an
election is held in which voters decide
whether to keep the official in office.
Initiative: A local or state measure that
is placed on the ballot after a certain
number of registered voters sign petitions
supporting its placement on the ballot.
Initiatives often are used by groups or
individuals when the Legislature fails to
pass a law they want to enact.
PAC: A Political Action Committee is
a nonprofit committee that provides a
lawful means to help elect and re-elect
political candidates selected on the basis
of their positions on industry-related
issues, committee assignments and
leadership in the Legislature. PACs make
contributions to candidates or in support
of or opposition to ballot measures.
Referendum: A procedure whereby
the voters may approve or disapprove
proposals recommended by a legislative
body, such as a proposal for an increase in
the tax rate.
Adapted from California Grocers
Association publication.
California State Government — The Executive Branch
The organizational structure of
the executive branch underwent a
comprehensive overhaul under Governor
Edmund G. Brown Jr.’s Reorganization
Plan. The plan took effect on July 1,
2013, and cut the number of state
agencies from 12 to 10, eliminating or
consolidating dozens of departments and
entities.
Many unrelated departments were
housed together, while many related
programs were scattered throughout
different agencies. In many cases,
departments and programs were
duplicative. The Reorganization Plan
changed the reporting relationships
of dozens of entities to improve
coordination and efficiency.
206
Upon implementation of the
reorganization, five state agencies were
replaced by the following three:
• The Government Operations
Agency: responsible for administering
state operations, such as procurement,
information technology and human
resources;
• The Business, Consumer Services
and Housing Agency: responsible for
licensing and oversight of industries,
businesses and other professionals; and
• The Transportation Agency: aligns
all the state’s transportation entities.
Governor Brown’s plan was
unanimously approved by the Little
Hoover Commission, the state’s top
independent government oversight body.
In a May 2012 report, the commission
stated the plan’s restructuring was “long
overdue,” and should provide “greater
transparency and accountability as well
as the opportunity for improved program
performance.”
The organization chart is available at
www.cold.ca.gov/Ca_State_Gov_Orgchart.
pdf.
Referral number for state agencies:
(916) 657-9900.
®
Agenda for
Media Guide
208
®
MEDIA GUIDE
Tips on Talking with the Media
Your attitude with a reporter often can be as important as
what you say. The more you know about his/her job, the more
comfortable you will feel with what is happening. The more
you understand your position in an interview, the more you
will feel in control. The more second nature the mechanics of
an interview situation become, the more you can concentrate
on getting your point across.
Following are some basic rules about dealing with the news
media, how various media operate and how to deal with reporters.
General Points to Remember
•The news media is not the enemy. Reporters will ask tough
questions—it’s their job. It’s easy to begin feeling defensive.
Don’t be.
• This is your chance to be heard. Thank the reporter for
making the effort to get your side of the issue. Be friendly,
helpful and sensitive to the time constraints and deadlines some
reporters will be under. If there is time, sit down with a broadcast reporter to provide background information on the issue
before the tape is rolling.
• Respond in a timely manner. Be aware of the reporter’s
deadines.
• If there is a microphone or camera, consider it on.
• There is no such thing as “off the record.” Consider everything you say to be eligible for the front page of tomorrow’s
newspaper. Do not make cracks about opponents or even selfdeprecating remarks about your company or organization. A
well-meaning reporter could misinterpret you; a mean-spirited
reporter could make you look horrible.
• Nice people ask tough questions. Do not be surprised if a
reporter’s demeanor changes drastically once discussion turns
to the subject at hand. Radio and television reporters may want
to use their question as part of the story and so they want it to
sound confrontational and cynical. Concentrate on the question and your answer and remain measured and calm in your
response.
• You are in control. This is the most important point to remember. If you don’t say something, it can’t be used. If you are asked
a question about something irrelevant to the issue, answer
politely that that was not what you understood the interview
was about and indicate the subject matter you were told you
would be discussing.
• Never say “no comment.” If you do not know an answer to a
question, say so. Promise the reporter you will find the answer
and get back to him/her. Then do it. You have agreed to be
interviewed on a certain subject. If you refuse to answer questions, you will appear to be stonewalling.
•A reporter’s responsibilities. Conflict of opinion is one of the
main ingredients of news. If you are criticized in a story, you
should be given the chance to respond. Likewise, you must expect
critics to respond to your points. Make sure a reporter knows how
to get in touch with you after the interview in case he/she needs
more information or a response to a new development.
Newspapers
•Dailies—Morning
ost large metropolitan daily newspapers are delivered in the
M
morning. Their readership generally can be regarded as the most
®
sophisticated, most educated and most likely to be active in the
community among all news media outlets. Deadlines for news
stories run from mid-afternoon until late evening.
• Dailies—Afternoon
Many local newspapers are delivered in the afternoon. They cater
to an interest in local issues, and readership is much the same as
morning newspapers. Deadlines for afternoon dailies are early in
the morning.
• Weeklies
Weekly newspapers have a variety of missions. Some cover
geographic areas, others cover ethnic, racial, religious or sexual
communities. Many California cities have weekly newspapers
with large circulations that cater to local entertainment and
have a liberal perspective. Typically a weekly paper is delivered
on Thursday with a deadline on Tuesday. However, there are
many variations on this schedule and it is best to check on each
paper’s deadline.
• Newspaper Reporters
It is common for newspaper reporters to conduct interviews
over the phone. It is also common for them to call back three,
four or five times to make sure they have the details straight.
Encourage this. Make the reporter feel welcome to get back in
touch with you if he/she has any questions. If you are going
to be away from the office, let him/her know how you can be
contacted. The interview might be quite lengthy. Remember,
everything you say is quotable.
Radio
• News
Many radio news interviews are conducted over the phone and
reporters are required to tell you they want to record you on
tape for airplay later. This is called an “actuality.” Have one or
two of the key points ready and stick to them. A long radio
story is 45 seconds. Your answers must be short and to the
point. If the reporter can come to you or meet elsewhere, all the
better. You will sound better without the phone line.
• Talk Shows
Talk is consistently among the highest-rated formats in radio.
It also is one of the rare times in dealing with the news media
where you will not be edited. Listeners will hear everything you
say, good and bad. Also, this format often pits one side against
the other and callers often can add wild card questions. Go to
the studio, if at all possible. You will sound better.
• Sound
Radio reporters love to be able to use sound in their stories.
Think about the key points you want to make and your organization or company and figure out what sounds, if any, are
associated with them. If a reporter uses a sound on the air, it
must be explained. Feel free to suggest certain sounds a reporter
may want to record, but don’t be pushy about it.
Television
Most people get their news from television. It is immediate and
visual, which can make it dramatic and powerful. To be part of a
television story, you must be on camera. Giving someone information over the phone is not enough.
Expect a television news crew to travel to you and to want to
take pictures of anything that goes with the story. Think of ways
to visualize your key points. If there is a better location, suggest
209
MEDIA GUIDE
meeting the crew there. Explain the pictures that will be available
and you’ll seldom hear a “no.”
• How you look is important. If your tie looks like a test pattern
or your hair is out of whack, the viewer will concentrate on
that and not on what you’re saying. The most important thing
to remember: be comfortable. If you don’t like ties, take it off,
or, at least loosen it. Use your common sense. Wear what you
normally would wear to work. Trying to look like something
you’re not will hurt your credibility.
• Sound bites
The typical television story will run about 80 seconds. Be concise
and to the point. You will be lucky to get 10 to 15 seconds for
your sound bite (that’s you talking). Keep in mind that even if you
are asked 20 questions, you still will fill up only a short part of the
story. Be wary of a reporter asking the same question in different
ways. He/she may be trying to elicit a different response. Stick to
your guns. Keep going back to your key points. Consider each
response to be the only one that will get on the air.
• Live shots
Sometimes a reporter may want to do a remote live shot with
you being interviewed on the air. Usually this will involve a
reporter’s introduction to a taped piece with questions of you
afterward. You should be fitted with an earpiece that will allow
you to hear the taped report. Listen to it. If the piece contains
factual errors, correct them briefly at the end of your first
answer. Concentrate on the reporter’s questions. A live shot is
especially distracting. There is the usual reporter plus camera
operator, as well as a monitor featuring you on television and a
microwave or satellite van nearby. Spectators also may gather.
Ignore them. Look at and listen to the reporter.
• Cable TV
Local cable news is of increasing importance. Local versions
of Cable News Network are springing up around the country.
Treat all news media representatives with respect. Organizing
responses by reporters’ deadlines can help you make sure you
meet all their needs.
Foreign Language Media
Every major market in California, and most of the smaller ones, have
Spanish language newspapers, radios and television stations. Other
languages, primarily Asian, also are represented in the news media.
These are important outlets and should be treated as such. Reporters
from foreign language outlets usually are bilingual and will interview
you in English and translate your remarks into the foreign language.
If you have someone who speaks the language in question and can be
briefed, it is valuable to offer him/her for the interview.
Preparing for the Interview
Before the Media Calls
• Look around your offices—if someone were to call today,
where would you suggest holding the interview? A newspaper
reporter will have the fewest needs as to location. A radio reporter
will want a room with peace and quiet. A television interview
conducted in a related environment is the best possible situation.
An interview conducted outside in front of a bush or a tree will
look good if the sun is in the interview subject’s face and the
noise level is low. Doing the interview in your office is fine. In
front of a bookcase is a good location.
What you don’t want: Don’t sit behind your desk. You will look
bureaucratic. Try not to stand in front of a plain white wall. Do not
210
pick a location with a lot of activity immediately behind you. The
movement could distract the viewers and keep them from listening
to what you have to say.
What does your office say about you? When a reporter walks
into your office, what impression will he/she get? Personal items—
pictures of family and friends, mementos, awards, indications of
charity work you do—will help a reporter realize you are a human
being. Don’t be afraid to have a little small talk with the reporter if
time permits. Don’t overdo it, but be friendly.
After the Media Calls
Between the time you are asked to be interviewed and actually are
talking with the reporter, there are a number of things you can do
to prepare.
•Get your thoughts in order.
✔ Write down the key points you want to highlight.
✔ Practice saying the key points aloud.
✔ Consider the toughest questions you could get.
•Check the physical arrangements.
✔
Notify the receptionist that a reporter will be arriving if the
interview is to be conducted at your office. The unannounced
arrival of the news media sometimes can bring a reaction that
creates a sense of suspicion on the part of the reporter.
✔
If you don’t want to hold the interview in your office, make
sure your preferred site is available.
•Check your appearance.
✔
If this is a television interview, get to a mirror and make sure
all the peripheral items—clothes, hair, tie, makeup—are in
order.
During the Interview
✔
Listen to the reporter. It is easy to concentrate so hard on your
key points that you forget to listen to the question. Make
sure your answer is responsive to the question or it will
appear you are trying to evade it.
✔Talk to the reporter. If this is a television interview, face the
reporter. Consider the camera a bystander listening in.
Listening to the reporter’s question and then turning your
head to the camera looks rude. (The exception is if you are
interviewed on camera by someone in another location. In
this situation, look at the camera and remember not to make
funny faces.)
✔
Be flexible. If a reporter doesn’t like the location you select for
the interview, try to accommodate him/her with another spot.
✔
Relax. If you stumble through an answer, start over again
at the beginning. Broadcast reporters are under severe time
constraints when they put together a story. Even the most
critical reporter can’t use you “um”ing and “aah”ing your way
through a sentence.
✔
Be friendly. Feel free to take time to talk about whatever
nonrelated subjects arise. Remember, you want the reporter
to realize you are a human being.
✔
Be reachable. Tell the reporter how to get in touch with you
should there be new developments.
✔ Be honest.
✔
Remember, you are in control of the interview. An interview is
an effective way to reach the public.
✔Don’t be afraid to show compassion. Sharing your concern
about health problems, for example, can be more effective
than a long string of scientific data.
®
The California Chamber of Commerce is the largest broad-based business
advocate to government in California. Membership represents one-quarter of the
private sector jobs in California and includes firms of all sizes and companies from
every industry within the state. Nearly three-fourths of CalChamber members are
companies with 100 or fewer employees.
The CalChamber’s full-time lobbying staff meets with legislators, regulators
and other key government staff members year-round to assure that they consider
employer concerns when proposing new laws and regulations. Backing up
this lobbying team are the representatives of member firms who serve on the
CalChamber’s standing committees, 200 member trade associations, 300 affiliated
local chambers of commerce and a statewide network of 300,000 small business
owners. The CalChamber promotes international trade and investment in order
to stimulate California’s economy and create jobs. In addition, the CalChamber is
involved in a number of coalitions on policy issues of concern to business. Updates on
coalition activities appear on the CalChamber website.
Leveraging its front-line knowledge of laws and regulations, the CalChamber
provides products and services to help businesses comply with both federal and state
law. The CalChamber is the authoritative source for California labor law and safety
resources and products. Each year, the CalChamber helps thousands of California
employers understand laws and regulatory issues, and advises employers on changes
that have occurred. The CalChamber offers posters, online tools, print and digital
publications, and training seminars/webinars to help businesses meet changing state
and federal employment law requirements.
CalChamber members have access to popular membership benefits such as:
HRCalifornia.com, a continually updated website for handling human resources
questions; and the Labor Law Helpline, a telephone service giving members with
specific labor law and safety questions a chance to talk to experienced advisers for an
explanation of laws and prompt, nonlegal advice. The CalChamber is a not-for-profit
organization.
For more information about membership benefits or to receive a complete catalog
of products, call 1-800-331-8877 or visit www.calchamber.com.
P.O. Box 1736
Sacramento California
95812-1736
916 444 6670
www.calchamber.com

2016 Business Issues - California Chamber of Commerce

Transcription

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