2016: A Look Ahead at the Year in California Government

Forget Star Wars. New Year will see existential battle between innovation and regulation

In the classic MAD comic strip, Spy vs. Spy, a spy dressed in black battles with one dressed in white. They use a variety of contraptions and booby traps to ensnare each other, with the spies see-sawing between victory and defeat. The comic, created in the 1960s, was an allegory for the Cold War, but these days it's a good allegory for something else: that endless cat-and-mouse game between innovators and regulators.

Some of the biggest issues for 2016—the growth of the sharing economy, education reform, emerging transportation methods, resurgent efforts to improve municipal services, and the continuing evolution of green energy—all reflect some aspect of that game. Historically, emerging ideas and new business models have always threatened the status quo. So, this back-and-forth is nothing new, but this year expect an unusually large number of such battles.

SHARING ECONOMY FACES OFF AGAINST ESTABLISHED INDUSTRIES

The rapid increase in the development of Internet-based and smartphone applications means the above-described game is proceeding at an accelerated pace. We're witnessing innovations that are building a loyal following among customers, but are posing serious and even existential threats to entrenched businesses. Expect these battles to soon reach a fevered pitch.

The newcomers complain the old industries use their political connections in the state Capitol, Congress and city halls to pass regulations to hobble the upstarts (all in the name of protecting the public, of course). The old industries complain the newbies have an unfair advantage because they don't have to labor under existing regulations and that tech-savvy companies have also used their political power to forestall higher taxes and new rules.

The common playing field is in the "sharing economy"—online services that connect buyers and sellers with each other rather than serving as traditional businesses that sell products or services directly to consumers. Last year, Uber, Sidecar and Lyft—app-based ride-sharing services that offer alternatives to taxicabs—were the target of regulatory efforts, with mixed results. The regulators were aiding the taxi companies, which argued these new companies should be forced to deal with the same rules they deal with. The two sides are gearing up again in 2016.

Another big battle centered on Airbnb, the online service that lets property owners rent out their homes, rooms or condos to vacationers. As with the ride-sharing platforms, these innovators are just facilitating this connection—they aren't selling the service themselves. Some of the efforts to clamp down on rentals were the result of an alliance between annoyed neighbors and the hotel industry, which wants to nip this competitive model in the bud. They argue that current zoning doesn't account for homes that become de facto hotels.

The last couple years were simply Round 1, according to Adrian Moore, vice president of the Reason Foundation. He sees the biggest battles coming in 2016. "(Legislators) are trying to write a rule that covers everybody—and then somebody does something that's not quite within those rules," he said. Then it starts another round of gamesmanship.

For instance, we're seeing new restrictions on Airbnb in many locales, but something called Couchsurfing is a bit different. This app arranges for travelers to crash on a couch or extra bed only while the owner is home. It's not entirely the same thing, and some limits on vacation rentals won't necessarily clamp down on this new model. The potential for myriad apps can be vexing to regulators.

Some of the legislative proposals are driven by a legitimate problem (the lack of sufficient insurance by drivers, for instance), but others clearly are about turf protection. There may be alternative ways to address these issues. San Diego, for instance, last year deregulated the taxi-medallion system, thus giving cab drivers the ability to start their own companies and compete (without having to spend six figures on a medallion). It offended another group, taxi-medallion owners—some of whom paid prices inflated by the restricted market—but the changes were driven in part by new economic realities.

Now, Los Angeles residents and officials are trying to put limits on the application known as Waze, which gives drivers alternative routes around packed freeways (and often through mostly residential areas, which is the source of dismay). Expect other little-known apps to grab attention this year.

In 2016, California legislators also will be looking at new efforts to regulate—and even shut down—the fantasy-sports industry, where online companies give players the chance to assemble make-believe teams and win jackpots based on their success. Opponents, backed by the casino industry, insist these are games of "chance" that are illegal under state law. Backers, of course, say these are games of skill and should be allowed. In this case, the newcomers welcome regulations that might impose new burdens, but will clarify their legal standing.

An impressive array of lobbyists is assembled on both sides. This high-stakes battle is no fantasy—and it's the latest evidence to back the prediction that regulators will be extremely busy this year playing whack-a-mole with every new Internet-based innovation that pops up.

SUPREME COURT CASE ON UNIONS MIGHT TRIGGER PUBLIC SCHOOL SHAKE UP

Here's one area where a bold prediction is in order: The U.S. Supreme Court will issue a ground-breaking ruling that will affect the way public education and other public services are provided in California and elsewhere. Indeed, the long-awaited case and ultimate decision could dramatically change the way public-employee unions operate in about half of the states (the ones that are not "right-to-work" states). There's widespread agreement across the ideological spectrum on the significance of this coming decision for all public-sector unions.

The case is Friedrichs v. the California Teachers Association, which will be argued before the high court in January, with a decision in June. The issue goes to the heart of union power—the way the CTA and other public-sector unions collect mandatory dues from their members. The unions are so mindful of the case that they are already preparing in a variety of ways for a post-Friedrichs landscape.

At issue is a 1977 U.S. Supreme Court case known as Abood v. Detroit Board of Education in which some Detroit teachers challenged the law requiring them to pay dues to the teachers' union. The court split the baby by requiring the payment of dues for collective-bargaining purposes, but allowing union members to opt out of that portion of dues used for political lobbying and organizing.

Toward the latter point, the court relied on the First Amendment: "(The) notion that an individual should be free to believe as he will, and that, in a free society, one's beliefs should be shaped by his mind and his conscience, rather than coerced by the State… thus prohibit(s) the appellees from requiring any of the appellants to contribute to the support of an ideological cause he may oppose as a condition of holding a job as a public school teacher…"

Since then, those members who object to a union's political agenda can opt out, but must pay the so-called "agency fees" based on the argument they benefit from the agreements the union hammers out. Union critics have long complained that unions make it overly cumbersome to opt out. And, more significantly, Anaheim teacher Rebecca Friedrichs and 10 other plaintiffs have argued that everything the union does is inherently political. That's the main argument before the court.

For instance, when a union negotiates, say, higher salaries or pensions using tax dollars, that's arguably a political question given that taxes or public debt will rise—or other services will have to be pared back. But the unions counter that not requiring such agency fees would allow employees to become "free riders," who gain union benefits but don't have to pay for them. No one knows how the court will rule, but justices have in past cases invited a challenge to Abood. The court's more conservative composition (compared to 1977) leads many observers to believe something will change, ranging from the end of compulsory union dues to streamlining of the opt-out process.

Union backers last year tried unsuccessfully to pass a bill that would have given various unions the right to provide a "public-employee orientation" in which they can promote the benefits of union membership to new employees. That was one of those more controversial approaches to an expected decision in Friedrichs.

In 2014, the CTA published a brochure called Not If, But When: Living in a World Without Fair Share. (Fair share is what unions call those agency fees.) It included these suggestions: Researching the kind of services that young members want from their union, packaging union benefits in a way that appeals to them, getting to know teachers "well enough to be able to effectively market membership to them." In other words, CTA (and other unions) might have to convince people to join rather than force them to hand over a portion of their paycheck. Evidence from other states suggests a large majority of union members will opt to stay in the union, but a significant portion may leave.

Many teachers' union critics have been focused on the Vergara decision, a ruling by a Los Angeles County Superior Court judge that found the state's system of tenure and teacher protection unconstitutional. The appeal of that case also may come to a head in 2016. The legislative proposals that would address the issues identified by the judge are fairly modest (i.e., eliminating seniority in layoff decisions or adding a year to the tenure process.) They wouldn't mean dramatic changes in the current system.

Friedrichs could mean bigger change for teachers and others. The state's public-sector unions, by their own admission, might have to take on more of a consumer-oriented twist—and they could have fewer dollars to spend on political campaigns and Capitol lobbying. That could alter the political dynamic in the Capitol, where unions are among the state's most powerful players. The courts could spark potentially the biggest shake up in education (and other public services in general) in decades. The merits of the possible changes already are hotly debated, but both sides agree about their potential significance.

FUTURE MODES OF TRANSPORTATION READY TO DRIVE ONTO CENTER STAGE

For years, California's transportation debates have been stuck in the slow lane. Politicians battle over insufficient infrastructure spending to upgrade the state's once-enviable system of roads and bridges. Legislators from both parties are pondering ways to make Caltrans more efficient. Even the governor's newest idea—the creation of a $68 billion-dollar high-speed rail system linking Los Angeles and San Francisco—is really based on an old technology.

But whatever happens this year with transportation funding, Caltrans reform and the rail project, this much seems certain: futuristic travel systems that echo something from a science-fiction movie are heading into hyper-drive. Their speedy emergence may depend on how heavy or light-handed state officials are as they write new ground rules. As we head into 2016, a handful of these new travel technologies are grabbing the Capitol's attention.

In mid-December, for instance, the California Department of Motor Vehicles released 22 pages of draft regulations for "autonomous vehicles," in preparation for public workshops in late January and February. Such "self-driving" vehicle technology is advancing rapidly (to the likely chagrin of driving enthusiasts). The state wants to jump out in front of the curve to prevent collisions and protect public safety. It sounds perfectly reasonable, but critics worry if this will stifle an important industry.

Lt. Gov. Gavin Newsom, the San Francisco Democrat who is planning a 2018 gubernatorial run, released a terse statement shortly after DMV issued its preliminary regulations: "These latest draft regulations may prove too onerous, create roadblocks to innovation, and may ultimately drive the development of this promising industry to other states. … We must guard against unreasonably holding back California from doing what it does best—inventing the future."

The main requirement: A specially licensed driver must be at the wheel of a driverless car at all times to respond to emergency situations. Yet the requirement neglects the main benefit of driverless cars, which is, of course, eliminating the driver. The regulations also require third-party testing of vehicles and forbid the sale (only leases are allowed) of such cars to the public.

"The safety gains of self-driving cars—as well as the associated savings in health care, litigation and insurance costs— are tied closely to eliminating the leading cause of automotive death and destruction: human drivers," wrote Ian Adams, director of the R Street Institute's Sacramento office, in a recent Sacramento Bee column. Caltrans wants to be sure these cars don't drive themselves into accidents.

This is shaping up to be one of the biggest and most interesting political battles of the year. The other one involves those pilotless flying vehicles—drones. In 2015, Gov. Jerry Brown vetoed the major attempts to limit these flying devices. The main bill, by Sen. Hannah-Beth Jackson, D-Santa Barbara, would have made it illegal to fly a drone over someone else's property without their permission. "(It) could expose the occasional hobbyist and the FAA-approved commercial user alike to burdensome litigation and new causes of action," the governor wrote in his veto message.

He also vetoed three other bills limiting drone use, while signing one that adds some protections to property owners from drone-flying paparazzi. The governor's approach is designed to add some protections to property owners, without putting a crimp on an emerging industry. We'll see if legislators strike a similar balance this year.

Meanwhile, an even niftier transportation system is at least making its way onto the drawing boards. Elon Musk, whose Tesla electric-car line has made international headlines, is moving ahead with the Hyperloop. As Wired magazine wrote, it is "a transportation network of above-ground tubes that could span hundreds of miles. With extremely low air pressure inside those tubes, capsules filled with people would zip through them at near supersonic speeds."

This idea at first sounds science-fiction-like preposterous, but it has been attracting serious attention and investment. It's a long way from construction, but Wired thinks it's looking a "little less crazy" that we might "leapfrog high-speed rail and go right to packing us into capsules that fling us across the country in hours using what are, essentially, pneumatic tubes."

It won't be built in 2016, but it will be discussed a lot. The question is whether the state follows Brown's model on drones—or the more-restrictive DMV model on autonomous vehicles and other revolutionary transportation inventions.

LOCAL SQUEEZE REVIVES PENSION REFORM

Municipal services remain a meat-and-potatoes function. Cities and counties provide basic and necessary services such as policing, firefighting, trash collection and the issuing of building permits. Technology (cameras, facial scans, databases, online access to services) has affected local government as it has affected everything else in society, but there's not much new under the sun here. Yet city government is facing its own type of long-term threat.

The problem has for several years been obvious in some of California's most economically hard-pressed cities, such as Stockton, Vallejo and San Bernardino. Those cities have all declared bankruptcy because the costs of providing services (including salaries and pensions) have skyrocketed. In some cases, they've encountered something called "service insolvency," by which the cities can pay their bills, but don't have enough left over to provide a decent level of public service.

But even some healthier cities, from San Diego to San Jose, have faced financial stresses and as a result have tried to rein in the costs of benefits to public employees. A few years ago, the movement was burgeoning as a tough economy was focusing attention on the issue of unfunded liabilities (i.e., the debt cities face to pay for future benefit promises). Several cities passed reform. Statewide reformers were readying a measure for the ballot. The governor signed into law a pension-reform measure that reined in some costs, but which didn't mollify critics.

But the issue dissipated from public attention, as the overall state deficit was slashed (following the passage of Proposition 30) and the economy began to recover. Yet despite the fading attention, those pension liabilities haven't gone away. Indeed, the California Public Employees' Retirement System (CalPERS) has been raising the rates it charges to cities to cover their expanding costs and lowering its expected rates of return. That means that local governments will be feeling the pinch in 2016—and there are limits to which city voters will accept higher taxes.

Those contribution rates may spur a renewed look at reform, especially regarding public-employee pensions and medical insurance. The past movement was surprisingly bipartisan, with Democrats such as former San Jose Mayor Chuck Reed and San Francisco Public Defender Jeff Adachi and Republicans such as former San Diego Councilman Carl DeMaio all pushing for reform as a way to save endangered public services.

DeMaio and Reed are circulating a statewide initiative for 2016 or 2018, but regardless of its success in qualifying for the ballot, there seems to be a re-emergence of a bipartisan reform movement. Rhode Island's pension-reforming Democratic governor, Gina Raimondo, always said that it's about math, not politics. The math still isn't adding up.

'DEATH SPIRAL' VERSUS GROWING SOLAR BUSINESS

California has long been a leader in the development of solar-energy technologies, thanks not only to its sunny weather but to state-backed environmental incentives. But even as the governor and legislators embrace more aggressive greenhouse-gas-reduction goals, the rooftop solar business faces a push back. It's the same dynamic described earlier, as utilities claim solar companies are receiving unfair subsidies while solar companies complain about efforts to slow their growth.

At issue is something called "Net Energy Metering." As the California Public Utilities Commission explains, "Customers who install small solar, wind, biogas, and fuel cell generation facilities (1 MW or less) to serve all or a portion of onsite electricity needs are eligible… to receive a financial credit for power generated by their onsite system and fed back to the utility. The credit is used to offset the customer's electricity bill."

Utility companies have long been required by law to pay credits to solar users for the electricity they generate. There's no way to store extra kilowatts, so utilities say they are forced to pay overly generous rates and must buy the electricity at times (during sunny days, for instance) when they don't really need it. Meanwhile, these small solar generators—homes, offices, stores—are still dependent on the electricity grid.

"Not only is there an investment needed by the customer to install solar panels on their roof, but the utility must also continually invest in the lines, poles and other equipment to connect that home to the power network, so that the home gets power 24/7," according to a statement from Southern California Edison, the state's largest utility company.

Those infrastructure investments the statement refers to are fixed costs. Under state law, solar customers don't have to pay for the distribution of the electricity they generate and they are exempt from paying many other "stranded" costs, such as those related to nuclear-plant decommissioning or for many programs for low-income customers.

This raises an economic issue known as the "death spiral." The more customers who install solar, the fewer customers there are to pay all those fixed costs. That means higher rates for everyone else. The high rates then create incentives for more people to install solar, which then continues the cycle of higher costs and fewer customers. But without these state requirements, solar advocates worry that a crucial form of climate-change-battling energy will never reach its potential.

With high rates from traditional utilities and favorable state laws, the solar industry is soaring and utilities are pushing back. "Solar is the victim of its own success," said Robert Michaels, an economics professor and energy expert at Cal State Fullerton. He says utilities are facing a threat to their basic business model, and are finding it tougher to set rates in the same old way with these new competitors.

As a result of their concerns, the state's major utility companies had approached the state's main utility regulatory body, the California Public Utilities Commission, for new rules relating to Net Energy Metering. The companies touted their commitment to solar and other alternative energy forms—but were looking for reduced incentives and higher costs for these operations. Solar companies viewed it as a means to derail their industry via regulation.

In late December, the agency gave what most observers view as a win for the solar industry by rejecting a reduction in those credits for solar users. The decision does add connection fees of up to $150 for new solar users and a small hike in per-kilowatt charges to pay for some of those stranded costs (e.g., programs for low-income consumers).

This dynamic will heat up as two high-priority state objectives—ramping up new "green" energy alternatives and upgrading the electricity grid all of us depend upon— run into each other. The real game-changer is around the corner: the development of new battery technologies that will allow new neighborhoods to be built without any grid connection. That may be still be far off, but in the meantime utilities are still struggling to rethink their business model as the solar industry thrives.