Programs and fees may be impacted by state budget shortfall

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By Vicky Boyd

The proposed state 2024-25 budget is a work in progress as the governor and lawmakers try to close a shortfall estimated at between $38 billion and $73 billion, depending on the analysis.

Among the proposed fixes are increasing fees, fund shifting, reducing or eliminating programs including farm equipment replacement, and dipping into the so-called “rainy day” fund.

What programs survive the budget process and how cuts might affect agriculture remain to be seen, said Roger Isom, president and CEO of the Western Agricultural Processors Association.

“I think everything is on the chopping block. Which ones ultimately get cut or eliminated, we don’t know,” he said.

Ken Vogel, who grows cherries and walnuts with his son near Linden, said the actual impacts will depend on what deficit figures budgeters use – the governor’s $38 billion or the Legislative Analyst Office’s $73 billion.

The governor has said education remains one of his top priorities. As president of the San Joaquin County Board of Education, Vogel said the county office has reserves to carry them over during state financial woes. But he worries that some of the smaller school districts don’t have that large a contingency fund.

“It’s still up in the air,” Vogel said. “We’re nervous because of the differences between what the governor says and what the auditor says. If they don’t get it right the first time, how are they going to make it up during the year?”

Programs in peril

The FARMER, or Funding Agricultural Replacement Measures for Emission Reductions, program is also in peril. But Isom said he’s hopeful that at least a portion of its funding can be saved.

During 2023-24, it provided $75 million in incentives to replace older Tier 0-, Tier 1- and Tier 2-engine tractors and other self-propelled ag equipment with cleaner running machinery. Since the voluntary program’s inception, farmers have replaced about 12,000 pieces of equipment that also included older nut shakers, sweepers, swathers and combines.

More importantly, the program helped the San Joaquin Valley reduce nitrous oxide emissions by 11 tons in the latest round and come into Environmental Protection Agency compliance for that pollutant. Had that not occurred, he said the valley could have been under a mandated farm equipment replacement rule like heavy duty trucks currently are.

Also in jeopardy is the Alternatives to Ag Open Burn program, which provides growers with cost-share to remove and chip old orchards and vineyards. The most recent round of funding, which is depleted, included $150 million for growers and an additional $30 million to purchase chipping and grinding equipment.

Currently, it costs about $1,500 to $1,600 per acre to remove and chip an orchard. And with low commodity prices, “you need that incentive money to help,” Isom said.

Incentives ranged from $300 to $1,300 per acre, depending on the type of orchard or vineyard and planned use of the leftover woody material. Small-scale growers with less than 100 total acres in the San Joaquin Valley could receive an additional $400 per acre.

Vogel is in the process of either removing or top working about half a block of Vina walnuts, a variety that has fallen out of favor. He’s cut off the limbs and chipped them, but he’s hesitant to remove the stumps for fear it will damage an underground irrigation system that serves existing cherries.

Should he decide to pull the stumps, Vogel said he’d like to have the option of receiving funding to grind them through the Alternatives to Ag Open Burn program if it’s still available.

“The bad thing is the California economic deficit, and the economy for ag isn’t good either,” Vogel said.

Although he hasn’t seen the numbers, Isom said there’s speculation that several other programs, including soil health and SWEEP – or State Water Efficiency and Enhancement Program – also may not survive the budget review.

For James Chinchiolo, who farms walnuts and cherries with his father near Linden and Lodi, respectively, SWEEP has been a savior. It has allowed them to add a variable frequency drive, or VFD, to their pump as well as purchase a weather station, flow meter and drip irrigation.

While the weather station and drip are nice, he said the VFD is the most beneficial and will give them added flexibility to help survive the current agricultural downturn. It also can significantly reduce water and energy use.

“For me, (the VFD) is critical because it positions our blocks so that we have more options,” said Chinchiolo, San Joaquin Farm Bureau second vice president. “It provides the ability to pivot without the need to absorb the cost that quite frankly, we can’t absorb right now.”

Before the new pump, they could only irrigate large blocks, such as 30 acres at a time. But the VFD slows down the pump so they can water much smaller areas, opening up the possibility of establishing a few acres of U-pick apples to replace some of the walnuts, which currently aren’t profitable.

Pesticide fees may go up

As part of the budget, the California Department of Pesticide Regulation has proposed raising mill assessments on pesticides to fund 117 new positions. The fees, levied on retailers, manufacturers and wholesalers when pesticides are first sold in the state, generate about 80% of the department’s funding.

The mill assessment is currently fixed at 2.15 cents per dollar under state statutes. Of that, 0.76 cents per dollar is passed along to county agricultural commissioners.

In 2023, CDPR hired Crowe LLP to conduct a review to determine what type of mill tax would be needed to support programs the department thought necessary. In 2022, the last year for which figures are available, state pesticide sales for all uses totaled $4.5 billion and about 640 million pounds of active ingredient were sold.

Based on the report, CDPR is proposing to increase mill assessments to 2.86 cents per dollar over three years with a statutory cap of 3.39 cents per dollar after public review.

Analyst’s Office: Spending not sustainable

The proposed $291.5 billion 2024-25 state budget is the second in a row with historically large deficits, following two years of large surpluses. The current swings are due in part to higher-than-expected tax revenues following the COVID-induced recession, followed by revenue reductions due to the stock market decline in mid-2022.

The Internal Revenue Service and the Franchise Tax Board then extended tax deadlines to Nov. 16, 2023, for nearly all California counties because of floods, complicating budgeting. Without April tax collections on which to base last year’s May budget revisions, the state was essentially flying blind for much of 2023.

The governor has already proposed $17.3 billion in cuts as part of his “early action plan,” designed to shrink shortfalls in the 2023-24 budget. Even with the cuts, the Legislative Analyst’s Office, which provides nonpartisan fiscal review, said the state’s spending is probably not sustainable.

“The state faces significant operating deficits in the coming years, which are the result of lower revenue estimates, as well as increased cost pressures,” the analyst’s office wrote in its budget analysis. “These deficits are somewhat compounded by the governor’s budget proposals to delay spending to future years and add billions in new discretionary proposals.”

In addition, the governor’s budget includes withdrawing $13 billion from the state reserve – or so-called rainy day – fund, which represents nearly one-fourth of its total.

Under the administration’s projections, the state faces operating deficits of $37 billion in 2025‑26, $30 billion in 2026‑27 and $28 billion in 2027‑28. For state spending to be balanced, it would have to take in about $50 billion annually above current forecast levels, according to the analyst’s office

One factor contributing to the difference of opinions is how quickly the state economy will rebound from the current doldrums. The governor’s figures assume an 8% increase in tax revenues in 2023-24. While the analyst’s office says such a turnaround is possible, it doesn’t think it will happen. To back its opinion, the office pointed out that the state has yet to see clear signs of a rebound. Income tax withholding this year is up only 2%, and sales tax collections are down slightly.

Gov. Gavin Newsom has until May 14 to update his January proposed 2024-25 budget, taking into account revised general fund revenues and proposed cuts. The proposed budget then goes to the Assembly and Senate, where it undergoes subcommittee hearings.

A legislative conference committee resolves differences, and the spending package moves to the governor for his approval or veto. A constitutional mandate requires the budget be balanced.

Under voter-passed Proposition 25, the Legislature must pass a budget by June 15 or lose pay for every day after the deadline. The state fiscal year runs July 1 to June 30 of the following year.