How These Public Schools Went from ‘Exemplary’ to 'Deteriorating' in Just Months

Just months before they told the public they need billions of dollars in new tax revenue for school repairs, school district officials across California were telling the state Department of Education a very different story: their facilities are in “good” condition — even “exemplary.”

The glowing self-assessments are contained in School Accountability Report Cards reviewed by California Policy Center.

In exchange for state funding, all public schools in California must publish annual SARCs to “provide the public with important information about each public school and to communicate a school’s progress in achieving its goals.”

School districts – under the leadership of the superintendent or deputy superintendent – are responsible for completing the SARCs and accurately representing the state of each school. They rank the condition of each facility ­– “good,” “fair,” or “poor” ­– and give an overall rating. After being published by the district and submitted to the California Department of Education, the report cards are made available to the general public.

A letter from Brea-Olinda Unified School District (BOUSD) superintendent Brad Mason announces a $288 million bond will enable that north Orange County district to repair “old and deteriorating schools.” The result will be “safe, healthy and modern learning environments.”

But in December, BOUSD schools reported that all features of each of its facilities were in at least  “good” condition, and that every facility was generally “exemplary.” A few months after that SARC report, Mason told voters that only a tax hike could address the district’s “serious school facility issues.”

South of BOUSD, in Huntington Beach, Ocean View School District officials claim they need a $319 million tax increase for “essential repairs and improvements.” But district officials had just reported that six out of the 11 elementary schools were in overall “exemplary” condition. The other five were in “good” condition. All four middle schools were also rated “good” overall.

Catrin Thorman is a California Policy Center fall Journalism Fellow. She is a graduate of Azusa Pacific University, and a former Teach for America corps member in Phoenix, Arizona.

California Cities Facing Huge Pension Increases from CalPERS

In their most recent actuarial reports CalPERS for the first time provided pension cost estimates for the next 8 years, from 2015 to 2023.

How high are these costs going for California’s cities who retroactively increased their pensions at CalPERS urging over the past 15 years? To answer that question I looked at the largest city in my county, Santa Rosa and this is what I found.

Data Sources for this Report

The data used to develop the spreadsheet analysis done as part of this report are NOT numbers that I calculated. The past numbers for 2002 to 2015 are taken directly from the City of Santa Rosa’s Comprehensive Annual Financial Reports found on the City’s website (This page has the links to Santa Rosa’s CAFRs from 2001 through 2015. In each of these CAFRs, the pension information is found in the section entitled “Notes to Basic Financial Statements” under the heading “Employees Retirement Plan.”). The projected growth of certain costs – such as retiree healthcare benefits (also known as “other post employment benefits,” or OPEB), the payroll and sales and property tax revenues – use inflation rates or growth rates similar to what CalPERS uses.

The future pension costs were obtained directly from the 2013 and 2015 Actuarial Reports prepared by CalPERS and found on the CalPERS website. Since the future costs are based upon CalPERS achieving a 7.5% net rate of investment return, I believe their costs are understated, but I used them anyway. But since the pension plan has $804 million worth of assets if the pension fund returns 6.5%, in a single year it will add $8 million to the City’s pension debt and a 5% return would add $20 million.

Looking at the data going back 16 years what I found is that in 2000, Santa Rosa’s pension contribution was $1.8 million and the plan was 122% funded, meaning there were $1.22 worth of invested assets in the fund for every $1.00 worth of benefits earned.

With CalPERS wholehearted support and assistance, on August 6, 2002, the Santa Rosa City Council passed a board resolution to enact a new contract with CalPERS that changed formulas from 2% per year of service at 55 years of age for non-safety Miscellaneous employees to a 3% at 60 formula.  The new formula was provided prospectively, meaning it only applied to future years of service, not past years.

For Police and Fire employees, the new contract was adopted retroactively so it applied to past and future years of service. Their formula went from 2% per year of service at 55 years of age to 3% at 50. This represents a more than 50% increase in the benefit, since along with the “multiplier” increasing from 2% to 3%, the age of eligibility dropped from 55 to 50. But it was the retroactive granting of this benefit that caused even more significant financial liability. This is because the multiplier was increased by 50% even for years already worked and raised pensions from 60% of salary to 90% of salary for 30 years of service.

These changes ended up having a serious impact on the pension costs and the unfunded liability because CalPERS used an overly optimistic rate of investment return of 8.25% compounded per year in their cost analysis. Over the past 15 years since the increase, CalPERS has only achieved a 5% compound rate of return. Many experts believe in this current low interest rate environment returns will remain at the 5% return level for the foreseeable future.

In July of 2003 the City took on $53 million worth of new debt by selling Pension Obligation Bonds (POB) and giving the proceeds to CalPERS to pay down the unfunded liability that was created by the new formulas. With interest these bonds will divert over $100 million from government services to debt service.

CalPERS Flawed Cost Analysis and Lack of Proper Disclosure

CalPERS cost analysis provided to the City in 2002 stated the cost for the new 3% at 50 formula for Safety members would be 13.27% of salary and the cost for the 3% at 60 formula for Miscellaneous members would be 9.87% of salary. However, as previously stated, these estimates were calculated assuming that pension assets would grow at 8.25% per year into the future. Since CalPERS investments have only averaged 5% over the past 15 years the increases have created $287 million in unfunded pension liabilities for the City as of 2015.

In addition, the analysis did not provide the City with any warning or disclosure regarding what would happen if the 8.25% investment return was not achieved. CalPERS simply wrote “For many plans at CalPERS the financial soundness of the plan will not be jeopardized regardless of the new formula choice made by the employer.”

The Growth of Pension Costs Since the Increase

In 2001, the City’s pension contribution was $1.5 million and in the first 4 years following the increase it grew to $11.5 million. In addition, the funding ratio dropped from 122% in 2001 to 70% in 2005 meaning the fund, instead of $63 million in excess assets now had $128 million in unfunded liabilities.

In 2006, the annual cost grew by another $5 million hitting $16.6 million and by 2015 had grown to $21 million. However, this was a very modest growth considering CalPERS lost 29% of its assets during the Great Recession in 2008 and 2009. CalPERS lowered contributions in order to help cities and counties who saw their tax revenues during the recession drop. So CalPERS extended the amortization period on the unfunded liabilities from 9 to 20 years and smoothed their investment gains and losses from 4 to 15 years into the future. Basically, these were accounting gimmicks that resulted in severe underfunding of the pension plan and these changes exist today. The chart below shows the growth of Santa Rosa public employee retirement costs (click here to see the underlying calculations).

Santa Rosa Retirement Cost Growth

However, now CalPERS is worried that the plans are not being properly funded and pension contributions need to be doubled over the next 9 years.

Projected Future Costs

In their 2015 actuarial reports, CalPERS provided the City with their normal employer contribution as a percentage of payroll and the unfunded actuarial liability (UAL) as a total cost each year from 2015 to 2023. Using a 3% payroll growth assumption and their UAL numbers, I calculated the annual costs going forward. In addition, I added the pension obligation bond debt service each year going forward along with the cost of retiree healthcare benefits using a 5% annual cost increase assumption as CalPERS does.

My analysis indicates that during the next 8 years, the cost for retiree benefits will increase from $31.0 million or 33.7% of payroll in 2015 to $59.1 million or 48% of payroll in 2023.

The nearly doubling of pension and retiree healthcare costs means the City will need to cut salaries, benefits, services and/or increase taxes each and every year going forward by $3.2 million per year to meet their retiree benefit costs.

Pension and Healthcare Costs as a Percentage of Tax Revenues

More important than pension costs as a percentage of payroll are pension costs as a percentage of tax revenues because tax revenues are what enables the City to pay for its benefits. Once retiree benefit costs exceed the City’s ability to pay them, they will no longer be able to be fully paid and at that point either they will need to be reduced in bankruptcy or through significant pension reductions. The chart below shows the growth of pension costs relative to that of general fund property tax and sales tax revenues.

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The results of my analysis are staggering. Over the past 15 years’ sales and property tax revenues have climbed an average of 3% per year, while employee retirement costs have increased an average of 19% per year. This has led to a growth of retiree benefit costs from 3.5% of major tax revenues in 2001 to 47% in 2015 and an estimated growth to 70% of major tax revenues by 2023 (Editor’s note:  the city receives other revenues which may also be available to finance pension costs).

Growth of the Unfunded Liability

The unfunded liability of the pension plan is calculated by taking the assets in the plan minus the present value of the benefits already earned by current employees and retirees, considered the plan’s liability. The funding ratio is determined by dividing the market value of assets in the plan by the liability.

CalPERS discounts the long term liability by assuming before the money is paid to retirees, it will earn investment income. CalPERS currently uses an assumed 7.5% rate of investment return to calculate the liability and payments to the plan. So if the assumed investment return is lowered, the unfunded liability of the plan increases along with the cost of paying off the liability. Unfunded liability costs are borne by taxpayers and are not a shared expense with the employees.

Currently, using a 7.5% assumed rate of return, the pension fund has $287 million worth of unfunded liabilities and pension bond debt and is 74% funded. However, many experts believe in this low interest rate environment a lower investment return assumption should be used. Many experts think that a 5.5% to 6.5% rate should be used. Other experts believe a 3.5% rate should be used since this is about the rate private pension plans are required to use and what CalPERS uses if a City wanted to buy their way out of the CalPERS system. I won’t guess what the future investment returns will be, but here is what happens to the unfunded liability at various rates of investment return assumptions:

  • At 6.5% the unfunded liability would increase to $426 million and $50 million per year to would be added to the City’s pension costs.
  • At 5.5% the unfunded liability would increase to $585 million and $97 million per year would be added to the City’s pension costs.
  • At 4.5% the unfunded liability would increase to $755 million and $137 million per year would be added to the City’s pension costs.
  • At 3.5% the unfunded liability would increase to $967 million and $187 million per year would be added to the City’s pension cost.

Santa Rosa Analysis of Unfunded Liability at Various Rates of Investment Return

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City Pension Plan Status Using ERISA Standards

Under the Federal ERISA rules for private pensions, a high quality bond rate of return is used to determine the assumed rate of investment return. Today that is around 3.5%. ERISA also defines the health of a pension plan as follows:

  • Less than 80% funded is considered “seriously endangered”
  • Less than 70% funded is considered “at risk”
  • Less than 65% funded is considered “critical status”

So under ERISA standards, the City of Santa Rosa’s pension plan at 45% funded when assuming a 3.5% return is 20 percentage points below what ERISA would consider “critical status”. So one could more accurately describe the pension system as being on “life support”.  Also, under ERISA rules the pension benefits each year would stop being accrued until the plan becomes 60% funded to keep the hole from going deeper.

ERISA also requires the plan sponsor pay off their unfunded liabilities over 7 years. CalPERS currently allows public agencies to pay off their liability over up to 30 years. If the City was required to pay off its unfunded liability over the next 7 years, their annual contribution to the pension fund would grow from $28 million to $146 million in 2015 alone. So under ERISA rules pension costs would increase by $120 million per year and take them to 145% of payroll.

Conclusion

The City of Santa Rosa and all cities in California who retroactively increased pensions need to restructure their pension systems. Otherwise it is increasingly unlikely they will be able to afford the benefits that have already been earned and provide taxpayers with the services they deserve for their tax dollars.

City officials can no longer pretend a crisis does not exist. They would be well advised to form a Pension Advisory Committee and bring all the stakeholders to the table to look at all the options, have an actuary determine the savings for each option and make informed decisions to save the pension plan and benefits people are counting on to fund their retirement.

 *   *   *

About the author:  Ken Churchill is the author of numerous studies on the pension crisis in California and is also the Director of New Sonoma, an organization of financial experts and citizens concerned about Sonoma County’s finances and governance.

REFERENCES AND RELATED ARTICLES

California Court Ruling Allows Pension Changes, August 26, 2016

How CalPERS has Created a Ticking Time Bomb, November 30, 2015

The Devastating Impact of Retroactive Pension Increases in California, April 27, 2015

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties, May 6, 2014

Sonoma County’s Pension Crisis – Analysis and Recommendations, January 12, 2014

The Sonoma County Retroactive Pension Increase: Gross Incompetence or Billion Dollar Scam?, April 15, 2012

How Retroactive Benefit Increases and Lower Returns Blew Up Sonoma County’s Pensions, April 5, 2012

 

West Contra Costa Healthcare District Goes Bankrupt Again; Time to Throw in the Towel

On October 20, the West Contra Costa County Healthcare District (WCCHD) filed for Chapter 9 municipal bankruptcy – its second such bankruptcy filing in ten years. In 2015, the district closed its one hospital – Doctors Medical Center in San Pablo – which had been hemorrhaging money for many years. Since WCCHD is insolvent and no longer operates a hospital, one might expect the district to simply dissolve; but instead it plans to continue collecting tax revenue and to do something, anything to justify its ongoing existence. As we explained in our 2015 study, California Healthcare Districts in Crisis, zombie public hospital districts exist across the state.

As reported in the East Bay Times, WCCHD decided to file for bankruptcy after a Davis, CA based hotel operator, Royal Guest Hotels, pulled out of a deal to buy the hospital building and eight acres of surrounding land owned by the district. In its filing, the district listed $5.4 million of cash and other current assets. The district also owns the hospital building and acreage, which appears to be worth something less than the $13.5 million Royal Guest Hotels had originally agreed to pay.

Against these assets, the district reported liabilities of over $100 million.  These include:

Type of Obligation Amount
Bonded Debt $ 57.0
Employee Pension Obligation 20.0
Loan from Contra Costa County 14.4
Workers Comp and Other Litigation Liabilities 4.0
General Trade Creditors 2.2
Center for Medicare and Medicaid Services (due to Medicare overcharges) 1.9
Unemployment Liability (California Employment Development Department) 1.6
Total (Approximate) $101.1

Among WCCHD’s “General Trade Creditors” is the Contra Costa County Clerk who is owed $414,920 for biennial district election expenses.  When combined with the $14.4 million unsecured county loan, it appears that Contra Costa taxpayers are in jeopardy of losing almost $15 million from this bankruptcy proceeding.

In terms of income, the district receives about $9.5 million in tax revenue each year. That includes a $4 million allocation from the standard 1% ad valorem property tax paid by district residents – who live in the cities of Richmond, El Cerrito, San Pablo, Hercules and Pinole as well as adjacent unincorporated areas – and commercial property owners. These same taxpayers also pay a separate parcel tax ranging from $52 for a single-family home to $1040 for a large commercial or industrial property. Parcel tax revenues amount to $5.5 million per year and will continue indefinitely unless repealed.

Bondholders have first claim on the parcel tax revenues and receive interest at rates of up to 6.25%. The district is also paying employees now acting in caretaker roles as well as pensions to retired employees. In March 2016, the district had nine employees performing Information Technology, Finance, Security, Plant Operation, Housekeeping and Administrative roles with payroll running at an annual rate of $2.5 million. According to Transparent California, WCCHD made over $900,000 in pension payments during 2014.

So the property and parcel tax revenue will be used to pay bondholders, employees and pensioners for years to come. None of this benefits the community, which is among the poorest in the Bay Area.

One option would be to dissolve the district. The County could then retain the $4 million in annual ad valorem tax revenue, and sunset the parcel tax once the bondholders have been paid off. But such a financially prudent approach is not on WCCHD’s agenda. According to the district’s bankruptcy filing:

The District intends to use this Chapter 9 case to effect a Plan of Adjustment so that the District can satisfy, to the extent possible, its obligations to creditors and potentially expand operations aimed at enhancing the health, safety, and welfare of the citizens of the District or otherwise provide for the future of the District.

Such an approach is wasteful because the district would have to continue paying election expenses of over $400,000 every two years. It also involves maintaining a separate bureaucracy with the amorphous purpose of providing healthcare services without a hospital.

One possibility would be for the County’s Local Agency Formation Commission (LAFCo) to dissolve WCCHD over the objections of district management. Dissolving the district was one of a number of options presented in a study commissioned by the Contra Costa LAFCo. The study outlines dissolution steps and notes that a newly enacted state law, AB 2610, permits a district to be dissolved without the need for a costly election.

It is understandable that bureaucracies tend to perpetuate themselves. Directors and staff members believe that they are doing something important and (the latter) want to continue being paid. But when a public agency with taxing authority has outlived its purpose, it is essential that the agency be terminated so that it stops burdening the community that it no longer serves.

Note:  The bankruptcy filing is 4:16-bk-42917 and the case is being handled by the U.S. Bankruptcy Court, Northern District of California. Documents related to this case can be obtained electronically through the PACER system at a cost of $0.10 per page.

Construction Firms Fund Orange County School Bond Campaigns

Companies linked to the school construction industry have placed their November bets on a number of Orange County school bond ballot measures, a California Policy Center investigation of campaign contribution reports collected by the Orange County Registrar of Voters show.

frequentcontributors

Atkinson, Andelson, Loya, Rudd & Romo (AALRR) is a law firm with eight offices across California. AALRR has donated $2000 to Anaheim Elementary School District’s bond measure, $12,000 to Orange Unified School District and $1000 to Fountain Valley School District. AALRR claims to represent nearly half the school districts in California and has previously represented both districts.

Bernards Builders Management Services is a general contractor located in San Fernando. Bernards has donated $2000 to Anaheim Elementary’s bond measure and $5000 to Brea-Olinda Unified School District’s measure. Bernards has worked with Brea-Olinda before on the Brea-Olinda High School and Olinda Elementary School. The subcontracted architecture firm for the Brea projects, LPA, has donated $10,000 this election cycle to Orange’s bond measure.

Ledesma & Meyer Construction Company Inc (LMCCI), located in Rancho Cucamonga, is a construction firm that proclaims to have completed “over a billion dollars of public works and K-12 school district projects.” LMCCI previously contracted with Ocean View Unified School District on asbestos removal projects amounting to over $3.4 million. Ocean View USD has a $148 million bond measure this fall and among their proposed projects is additional asbestos removal. LMCCI has contributed $25,000 in support of Ocean View USD’s measure. LMCCI has also contributed $5000 to Anaheim Elementary bond measures.

Pocock Design Solutions, Inc. is a Tustin-based full service design firm. Pocock has completed design projects for both new construction and modernization in over 60 schools districts in California. Pocock has donated $1500 each to the Anaheim Elementary and Ocean View Unified School District bond measures.

All firms worked throughout Southern California on previous school construction projects.

ocmeasures

In addition to this election cycle, California Policy Center examined contributions in 2014 made by construction firms to two incumbent Orange USD board members. Vanir Construction Management, a general contractor with offices throughout the Southwestern United States, contributed $1000 each to Timothy Surridge and Rick Ledesma. In addition, Arcadis, a design and consultancy firm, contributed $2000 to Rick Ledesma. Both Ledesma and Surridge voted in favor placing Measure S before voters in Orange USD this fall.

There’s of course no guarantee any of these firms will win lucrative contracts associated with new funding from the ballot measures. California State Public Contract Code Section 100 requires local governments to offer all businesses “a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices” in order to “eliminate favoritism, fraud, and corruption in the awarding of public contracts.”

But concern about what some state officials call “pay to play” campaign contributions has risen. California State Treasurer John Chiang issued a press release in July on the subject of pay-to-play, specifically addressing bond underwriters.

“Preying on school districts eager to win voter approval for bond elections, municipal finance firms, including bond counsel, underwriters, and financial advisors, are offering to fund or provide campaign services in exchange for contracts to issue the bonds, once approved by voters,” Chiang warned.

The concern about pay-to-play is not limited to underwriters. The California Building Industry Association has donated over $1,500,000 to Proposition 51, a statewide measure that would allow the state of California to issue $9 million in bonds for the State School Facilities Fund. The builders are the second-largest contributor in support of the proposition.

Andrew Heritage is a California Policy Center fall Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

Why are the Economy and Incomes Growing So Slowly?

Why are so many people unhappy and angry?  Why is the electorate turning to populist candidates like Bernie Sanders and Donald Trump?  Why are they so mad at the Washington D.C. establishment?  What’s the problem?

This is the second in a series of articles.  The first dealt with the fact that the cost of health care and education have been growing much faster than family incomes making these essential services unaffordable to more people.

This second article will discuss the other half of the problem, slow growth of the economy leading to low growth of household incomes and the shortage of good quality jobs.

The most important economic question facing the U.S. is how do we grow the economy faster?  Faster growth solves a lot of problems.  Growth increases government tax revenues without any tax rate increases, adds jobs and increases wages, and makes our debts and entitlement obligations easier to support.

Since the end of the Second World War until about 2000, the economy as measured by gross domestic product (GDP) grew an average of 3.5 %/year for over 50 years.  At that growth rate, the economy doubles about every 20 years raising incomes and living standards.  This is real GDP growth, nominal or current dollar GDP less inflation, as reported by the U.S. Federal Reserve.

Since 2000, the economy has grown less than 2.0 %/year.  This year, 2016, the economy has only grown about 1.5 %/year so far.  The latest official forecasts by the Congressional Budget Office and the Federal Reserve forecast real growth of only about 2.0 %/year.

The difference between 3.5%/year growth and 2.0%/year growth is not 1.5%, it’s almost 60% less, a very big deal.  What’s happening?  Why the slowdown and why can’t we grow the economy faster?  According to Stanford economist John Cochrane, “restoring sustained, long-term economic growth is the key to just about every economic and budgetary problem we face.”

If the economy had grown at 3.5%/year since 2000, the economy today would be $3.0 trillion larger and household incomes would be an estimated 18% larger, about $10,000 per household.

On a per capita basis, adjusting for a growing population, GDP has grown about 2.2 %year from the end of the Second World War until 2000.   But since 2000, GDP per capita has only been growing about 0.9%/year, a major slowdown.

A consequence of slower GDP growth is slower growth of wages and household incomes.  The Median household income peaked at $57,900 (2015 constant dollars) in 1999 when Bill Clinton was president. It is now $56,500 as of the end of 2015.  There is no improvement when adjusted for inflation.

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In addition, real average hourly wages have been flat at about $21/hour for decades, according to the Pew Research Center.

Where does growth come from anyway?

It’s really simple.  The economy only grows due to two factors, an increase in total hours worked (people with jobs) and productivity improvements (output per hour worked).

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Total labor hours are based upon the percent of the population of working age times the labor force participation rate (the % of the workforce employed or looking for work), and the average hours worked per employed person.

Demographics are leading to slower growth in the work force, from an average of about 1.2 %/year since World War II to about 2000 to about 0.5%/year today.

The more serious problem is below trend productivity growth.  This is especially serious since productivity improvements are the only source of rising living standards (higher incomes).  Without productivity improvements, we’d have on average the same incomes as our parents and grandparents. Non-farm business sector labor productivity growth has averaged about 2.2%/year from the end of the Second World War to 2000 but has dropped to less than 1.0%/year since then.  Over the past year, productivity grew at only 0.6%/year.

At 2.2%/year, incomes double about every 33 years.  At 1.0%/year, it takes about 70 years to double incomes.

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Let’s take a closer look at productivity first, then the labor force.

Why is productivity so low and what can we do about it?

To quote John Cochrane again, “Nothing other than productivity matters in the long run.”  It’s the only source of rising living standards.  However, the U.S. Federal Reserve believes that productivity growth will remain low for an “extended period of time.”  Why?

What could be the causes of the productivity slowdown?  Is it a permanent condition or will productivity improve on its own over time?  Surprisingly, there is very little agreement on why we are seeing a slowdown in productivity growth or what to do about it.  We can’t come up with effective solutions if we don’t know what’s causing the problem.  Several reasons have been proposed for the slowdown:

  1. A pessimistic assessment: An explanation is advanced by Professor Robert Gordon in his latest book entitled The Rise and Fall of American Growth.  He makes a strong argument that the growth we’ve seen over the past 250 years could be a unique episode in history.  There is no guarantee that we will progress at the same rate in the future.  Yes, we have the Internet and other recent advances.  However, they will not have the same impact on productivity and growth as, for example, the steam engine, indoor plumbing, electricity, and the internal combustion engine.  The major inventions that replaced repetitive manual and clerical labor happened in the past.  Recent inventions have centered on entertainment and communications and have made things smaller, cheaper, and more capable but don’t do much to enhance labor productivity.  The Internet may add to our convenience and entertainment but may not do much to boost productivity.  Are the Internet and wireless communications a problem?  On average, we spend a lot of unproductive time on social media and talking on our ever-present cell phones.

Others disagree with Gordon’s conclusions and say we just need more time for exciting new technologies to impact productivity.

  1. The switch from manufacturing to services: To date, productivity improvements have been lower in the labor intensive service sector of the economy which now makes up about 80% of nonfarm employment in the U.S.  There are more than 6 jobs in the service sector for every manufacturing (goods producing) job.

Health care, education, and government employment are an increasing share of the GDP and show low to no productivity growth.  They make up about 57% of the economy.  If the right kind of investment, new technologies, and other changes eventually lead to major productivity improvements in services such as retail, education, health care, and banking and finance, then output per service worker could rise.

  1. A potentially more optimistic assessment: Stanford Professor John Taylor and others believe that the decline in productivity is largely due to poor economic policies. There is a lot of unrealized potential that can be made available by making changes to improve productivity and get more people back into the workforce. In the past, there have been large swings in productivity growth depending upon government policies in effect at the time.  Professor Taylor concludes that today’s low productivity growth is largely due to a lower rate of investment in capital stock per worker.  This can be corrected by tax and regulatory reforms.

Note that investment in new equipment, software, and new product development is the primary means by which better tools and technology get into the hands of workers and contribute to productivity improvements.

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Part of the problem is that U.S. businesses are going into debt, $793 billion in 2015, largely to pay for stock buybacks and mergers and acquisitions rather than for productive investments in new equipment and new technology.  This “financial engineering” bids up stock prices and makes stock options more valuable for company executives.  These investments do nothing to improve productivity or add jobs.

Our tax code is probably discouraging capital investments.  There are also disincentives associated with the increasing number of government regulations at the state and federal level. Do we have too much bureaucracy?  The Dodd-Frank bill on banking reform was 2,300 pages long.  The Affordable Care Act was 961 pages long.  Each spawned thousands of pages of detailed regulations applied to the banking system and the health care industry.

Labor force growth:

The other reason for low GDP growth is the slower growth of the workforce in the U.S. from about 1.2%/year until about 2000, and 0.5%/year since then.  This is due to the ending of the baby boom, the increasing percentage of older retired citizens, and the fact that the percentage of working age women in the workforce is no longer increasing.  There has also been an increase in the number of people who are discouraged and no longer looking for work, mainly working age men.  This leads to a slower growing labor force.

This is reflected in the labor force participation rate, the percentage of the working age population who are employed or actively looking for work.  The participation rate peaked at 67% in 2000 and has since declined to slightly less than 63% today.  Due to this decline in the participation rate, there are over 7.0 million fewer people in the workforce.  Professor Taylor points out that only a small portion of this decline can be attributed to retiring baby boomers.  The rest is due to people deciding to exit the workforce for various reasons such as finding it difficult to find a job or deciding to apply for disability benefits instead.

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If the participation rate could be raised to say 65 percent over 5 to 7 years, this would add more than 1.0 million people to the civilian labor force each year and double the growth of the labor force from 0.5 percent/year to 1.1 percent/year and increase GDP growth by the same amount.

The Federal Reserve says that we have achieved full employment, meeting their target of 5.0%.  Is this true? If we account for those who have dropped out of the workforce and those who are working part-time but want full-time work, the unemployment rate would be 9.7%.  There are a lot of people who are working in low paying jobs or working part-time even though they want to work full-time.

The percent of the male working age population who are in the workforce has been declining for a long time from 86% in the 1950s to 75% in 2000, and down to 69% today.  There are a lot of discouraged men who are no longer looking for work.

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Where do jobs come from anyway?

Government tax policies and regulations can encourage or discourage investment, business expansion, and job creation.  But the government can’t create jobs no matter what politicians say.  Jobs are created when someone in the private sector expands an existing business or starts a new business.  Each job created requires a substantial investment plus other startup expenses and a lot of hard work by someone. This investment varies from $25,000/job or more for a fast food restaurant employing minimum wage “burger flippers” to $ millions/job for a high-tech factory to manufacture jet engines or microprocessors.  Policies that discourage investment and business growth are job killers.

Ominously, there has been a marked slowdown in the number of job producing startups.  In addition, since about 2008, the number of firms that have gone out of business has exceeded the number of startups.

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If we improve productivity it will mean fewer jobs in today’s businesses that can produce more with less labor.  That is an issue and always has been.  However, we have been able to count on the private sector to create new jobs and new businesses to replace jobs that have been lost due to changes in technology and other causes.  For this to happen in the future, we need to be sure that investors and entrepreneurs have strong incentives to invest in new businesses and the expansion of existing businesses to provide enough jobs in the future.

We also need to figure out what needs to be done to offset some of the wage differential between the U.S. and lower wage countries if we want U.S. and foreign companies to choose to locate or expand facilities here.

So what?

If Professor Taylor and others are right, there is a lot of untapped potential in today’s economy.  If it is possible to increase productivity and get more people into the labor force, then it is possible to boost GDP growth from the recent 2.0%/year to 3.0%/year or higher with the right government policy changes.  However, do we have the political will needed to make these changes?

The next article in this series will look at the government’s 10 year forecast and its implications.

A later article will look in more detail at possible ways we might be able to increase GDP growth by improving the labor participation rate and raising productivity growth.

About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

In a Political Campaign, City Officials Can Spend Your Money Against You. They Call it 'Education'

This commentary appeared first in the Orange County Register.

Californians going to the polls on Nov. 8 will find more than 300 measures to raise taxes. And despite multiple legal decisions limiting the practice, municipal officials in California may be paying outside consultants to run the campaign to sell you on your local tax measure.

In short, government officials use the public’s money to persuade the public to give government officials more money.

If you think that’s strange, you have good company. In the 1976 case Stanson v. Mott, the California Supreme Court established the principle that would seem to govern the space where government reaches out like the muscular and fully clothed God in Michelangelo’s “The Creation of Adam” and encounters a single naked, relatively powerless American voter. The judges put it plainly: “A fundamental precept of this nation’s democratic electoral process is that the government may not ‘take sides’ in a election contests or bestow an unfair advantage on one of several factions.”

The justices allowed that providing information and opinion – educating the public – is a legitimate function of government officials.

But how do we decide what’s political and what’s merely educational?

In the 2009 landmark case Vargas v. City of Salinas, the court returned to the distinction between information and campaigning, and the “style, tenor or timing” standard, says Thomas Brown, city attorney for St. Helena, California, and a partner in the Oakland offices of Burke Williams & Sorensen.

“The potential danger to the democratic electoral process is not presented when a public entity simply informs the public of its opinion on the merits of a pending ballot measure or of the impact on the entity that passage or defeat of the measure is likely to have,” says Brown. “The threat to the fairness of the electoral process arises when a public entity devotes funds to campaign activities favoring or opposing such a measure.”

But throughout the state, public officials increasingly turn to campaign consultants. Wave a magic wand and you can declare that politicking “educational.”

Take the city of Stanton. In the run-up to a controversial 2014 local sales tax measure, city officials in Stanton made 16 payments totaling $85,970 to Lew Edwards Group, an Oakland-based political consulting firm.

The consultant’s Stanton proposal indicates the relationship was always about winning a campaign. Sent to city officials on March 18 of that year, that document declares Lew Edwards Group “the California leader in Local Government Revenue Measures.”

“Lew Edwards Group has successfully enacted more than $30 billion in California tax and revenue measures with a 95 percent success rate, including $2.34 billion in successful tax and bond measures in Orange County alone,” the proposal says. In a separate PowerPoint document prepared for the city, company officials said they achieved political success in Orange County despite “the opposition of the OC Register in all cases.”

The company’s 2011 presentation to the California Society of Municipal Finance Officials is equally political. Titled “New Taxes: How to Get to Yes,” the presentation features a section on transforming informational studies into what sounds remarkably like campaign material. That section is called “Turning Theory into Reality: How to Convert Your City Studies and Polling Results into a Winning Campaign.”

The consultants’ website warns, “A Public Agency cannot, at any time, engage in a partisan campaign.” But the site goes on to offer advice about turning over campaign responsibilities to an outside group.

In the months leading up to Election Day 2014, Stanton residents were invited to community meetings where local elected officials, city staff and county firefighters and sheriff’s deputies warned them about Stanton’s crippled finances. When they returned to their homes, residents were hammered by official mailers predicting a public-safety catastrophe if the sales-tax measure failed. Invoices show the city (i.e., the taxpayers themselves) paid Lew Edwards for at least three mailers in the last six weeks of the campaign.

Supporters of such spending – generally public officials themselves – say government has a responsibility to educate. And now it’s possible for government officials to argue further, that they have a First Amendment right to support ballot measures. In the Vargas v. City of Salinas case, Salinas officials ultimately filed an anti-SLAPP suit against the plaintiffs, two local citizen watchdogs who had filed suit to stop the city from spending public dollars on a campaign. Revealing how far we’ve drifted from a fear of government power, a court ultimately sided with Salinas, and ordered the watchdogs to pay the city’s $200,000 legal bill. The plaintiffs have since declared bankruptcy.

There may yet be a new ending in Stanton. There, critics of the 2014 sales tax rallied, and late last year qualified a repeal measure for the November ballot.

But once again, those citizens will be fighting more than City Hall. Records obtained by the California Policy Center show Stanton officials signed a new contract with Lew Edwards Group. This time, officials say they’ll spend no more than $25,000. But like the last big contract, this one ends just days before Election Day.

Will Swaim is vice president of communications at the Tustin-based California Policy Center, and was founding editor of OC Weekly.

Contra Costa needs more road capacity, but we don’t need new sales taxes to build it

Along with the grandeur of Yosemite and the beauty of the California coast, there’s our state’s epic rush hours. But sales taxes on the Nov. 8 ballot, like Contra Costa’s Measure X, aren’t the way to solve them.

Measure X would add 0.5% to local sales tax rates to fund a variety of transportation projects around the county. But it would raise something other than revenue — like concerns about equity and efficiency.

Measure X would hike the overall tax rate in El Cerrito to 10.50% and in Richmond to 10.00%. Working class people in these neighborhoods – many of whom do not have cars – will be expected to pay more for clothing and school supplies to subsidize the commutes of affluent Tesla drivers living in Blackhawk and other wealthy communities.

Because Tesla’s and other Battery Electric Vehicles (BEVs) don’t use gas, their owners don’t pay the gasoline taxes that traditionally fund road construction and maintenance. The increased popularity of BEVs has contributed to the sharp decline in gas tax revenues collected by the state and distributed to counties. This reduction in gas tax funding is one reason county officials are asking voters to double the transportation sales tax from its current 0.5% level.

But by funding transportation improvements from general tax revenue, we are subsidizing drivers who most often travel the highways in single-occupancy vehicles. A better option is to fund highway improvements through toll revenues. Although we are starting to see toll lanes in Contra Costa County, much more can be done.

In Orange County, public agencies operate four toll roads as well as four express lanes in the median of SR-91. Agencies maintain these arteries with toll revenues; no taxpayer funding is required. The SR-91 express lanes, opened 20 years ago, have been a model for express lane projects elsewhere around the nation. The nearest example to us is a stretch of I-680 in Alameda County that includes a High Occupancy Toll (HOT) lane – one that can be used by carpools for free and by solo drivers for a fee that varies with the level of congestion. In California, express lane tolls are paid with FasTrak, just like bridge tolls.

The Metropolitan Transportation Commission is converting a carpool lane on I-680 between Walnut Creek and San Ramon to an HOT lane. But beyond conversions, drivers also need new lanes on portions of I-80, I-680, SR-24 and SR-4. Under Assembly Bill 194, these new lanes can be financed by bonds backed by toll revenues – reducing or eliminating the need for tax subsidies.

Budgeted costs and the risks of cost overruns (like the one experienced by the Bay Bridge replacement project) can be limited by contracting with private firms to design and build new express lanes. This is the approach the Orange County Transportation Authority is taking for new toll lanes it is adding to I-405, a project now out for bid.

Other states are leveraging the private sector even more. In the Miami suburbs, the Florida Department of Transportation has recently added three tolled, reversible express lanes to I-595. The successful project was not only designed and built privately, but the concessionaire is also operating and maintaining the new lanes.

In the Washington, D.C. suburbs, an Australian company owns and operates express lanes in the Capital Beltway, I-495. The same company also owns 13 tollways in Australia.

By correctly pricing our highways, we can attract private capital and the toll revenues needed to maintain and expand them. By asking drivers to fund the highways they use, we can relieve the burden on the county’s often disadvantaged sales taxpayers.

Will the BART Bond Fund Pensions?

This fall, voters in San Francisco, Alameda and Contra Costa counties will consider a $3.5 billion BART bond measure. Proponents argue that the measure is required to ensure the system’s safety and reliability. Critics are concerned that bond proceeds will be used to support excessive employee salaries and benefits.

BART management denies that claim. In an August 12 press release, BART management stated, “Not one penny, under any circumstance, can or will be used to pay for operating expenses, salaries, or benefits.” Indeed, using bond proceeds for such purposes would be illegal.

But there is an indirect way of using the bond to increase employee compensation. As Daniel Borenstein reports in The East Bay Times, BART currently devotes about 16% of its operating revenue to capital improvements. Once the bond measure passes, BART could reduce the amount of operating revenue it devotes to capital purposes, backfilling the shortfall with bond proceeds. BART management insists that it will not perform this sleight of hand, stating in its release:

To suggest we would use the money for salaries and benefits directly or “indirectly” is flat out wrong.  Cutting spending from the Capital Investment Plan in order to increase salaries would undo decades of financial projections and do immense damage to BART’s capacity to improve in the future.

Borenstein is unconvinced, noting that BART directors and staff have refused to make a commitment to continue the 16% annual operating revenue transfers. And the Times editorial board shares their columnist’s concern:  they have now advocated a no vote on the BART bond.

No one can be certain whether BART management or its critics will be correct, but it is useful to review the data on BART’s operating cost pressures. If BART management can’t restrain the growth in operating costs and are unwilling to offset these costs at the farebox, they will be obliged to skimp on capital investments.

As Chart 1 shows, BART labor expenses have risen sharply over the last five years. Budgeted labor costs have increased from $364.3 million to $499.6 million between FY 2012 and FY 2017, representing a constant annual growth rate of 6.52%. The amounts shown come from annual budget resolutions posted on BART’s web site.

Chart 1

Chart 1

Pension benefits are major sources of cost pressure. The system’s safety plan, administered by CalPERS, is only 63.3% funded. The employer contribution rate rose from 47.9% in Fiscal 2015 to 56.5% in the current fiscal year, and will rise again to 57.4% in Fiscal 2018. Most BART employees are in the system’s Miscellaneous employee plan. Contribution rates for this plan are lower but also escalating.

Chart 2 shows total BART employer pension contributions for the fiscal years ending June 30, 2014 through June 30, 2023 as projected in the most recent CalPERS actuarial reports. The projections beyond 2018 rely on optimist assumptions that CalPERS assets will return 7.5% and that BART’s covered payroll will rise by 3% annually. Still we see BART’s contributions rising from $35.7 million in Fiscal 2014 to $99 million in Fiscal 2023.

Chart 2

Chart 2

BART’s employer contributions are so high because benefits are generous and the retirement plan is carrying a lot of beneficiaries. BART police hired before December 30, 2014 are able to retire at age 50 with pensions of up to 90% of final salary. Newly hired PEPRA members must wait until age 57 and can only get up to 81% of final salary. PEPRA’s implementation for BART employees was delayed by the U.S. Department of Labor (DOL) because PEPRA interfered with collective bargaining. Citing Section 13c of the Urban Mass Transit Act, DOL refused to certify federal grants to BART if PEPRA was implemented. A Federal District Court overruled DOL, but the federal agency is continuing to challenge PEPRA on other grounds. (For more on this, see page 16 of BART’s 2017 Resource Manual).

As of June 30, 2015, the BART Safety plan had 275 beneficiaries – almost half again the number of active members. Many of the beneficiaries are under age 50, having earned retirement benefits due to disability.

Many retired safety and management employees draw very generous pensions. According to Transparent California data, 112 BART beneficiaries received $100,000 or more in 2015. Like many public employees, BART staff members are not eligible for social security, but unlike most agencies, BART provides an offsetting benefit. Employees can contribute to a 401(a) Money Purchase Pension Plan and receive an employer match. BART employees thus have a plan similar to a 401(k) on top of their generous defined benefit pension.

In addition to pensions, BART offers Other Post-Employment Benefits (OPEBs) including medical benefits to retirees and surviving spouses, retiree life insurance and survivor dental and vision benefits.  According to its most recent audited financial statements, these benefits cost BART $26 million in Fiscal Year 2015. On the plus side, BART has pre-funded a large portion of its OPEB obligation. Further, BART’s actuary has found that an increasing proportion of eligible retirees and spouses are not participating in the OPEB plan, reducing the rate of cost growth. In fact, BART expects to pay less for OPEBs in Fiscal 2017 than it did in in Fiscal 2016. (For more on this, see page 19 of BART’s 2017 Resource Manual). But if medical cost inflation picks up in the years ahead and more beneficiaries take advantage of BART’s OPEB benefits, the system could experience rapid increases in its OPEB expenditures.

In summary, it is impossible to know whether BART will fulfill its stated intention of maintaining the current flow of operating revenues to capital needs, thereby avoiding a scenario under which bond proceeds are effectively diverted. We do know, however, that the system faces high and rising labor costs. Looking into the future, it is all but certain that pension costs will rise rapidly given current underfunding and the generosity of benefits. These escalating pension expenditures will be a source of pressure on the BART board to scale back much-needed maintenance expenditures.

Just in Time for Halloween, City Manager Uses Official Letter to Scare Voters

Faced with the potential repeal of a controversial one-percent local sales tax, Stanton City Manager James Box mailed voters two weeks ago to warn that passage of a sales tax repeal will “terminate funding approved by Stanton voters” and result “in cuts to essential city services.”

The timing of Box’s letter, just weeks ahead of November 8, could be a problem for the city. Box justified his voter contact as a response to “many questions about Measure QQ.”

State Attorney General Kamala Harris stated in a legal opinion that “it is illegal to use public funds to influence the outcome of an election.” Government officials can inform the public, but cannot directly engage in campaigning. But there is a razor-thin margin between information and campaign activities.

Measure QQ, on this November’s ballot, would eliminate the sales tax increase approved by voters in 2014, and return the sales tax in Stanton to a combined state and Orange County base rate of 8%.

In his letter, Box claims the tax increase has allowed the city to “enhance existing programs” and “rebuild the city’s financial reserves.” He did not refer to the city’s decision in 2012 to issue bonds to build Central Park, a project that ballooned from $6 million to $24 million, and annual interest payments on debt totalling some $42 million over 30 years.

In 2014, Stanton claimed the city’s budget shortfall would lead to cuts in public safety spending. In order to convince voters to raise their own taxes, the city issued a series of mailings and a feedback survey – all of it, officials said, aimed at collecting residents’ priorities. In practice, the communications functioned as a push-poll – a campaigning tool used to manipulate public opinion.

Days before the 2014 election, Stanton city manager James Box mailed voters under a similar claim of the “number of phone calls from Stanton residents” he had received. He used the opportunity to hold up the feedback survey as proof that voters wanted to raise their own taxes when, in fact, the survey was biased toward a predetermined pro-public safety response.

City officials claimed that failure to approve the sales tax would lead to deep cuts in public safety. Yet, they chose not to create a “specific tax” that would have legally limited the tax revenue to public safety spending. Instead, they chose a general one-percent sales tax increase that would fill the coffers of the city’s general fund. In the two years since the measure’s passage, the city has spent millions on new park construction, expanded city services and raised public employee compensation.

Andrew Heritage is a California Policy Center fall Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

Is $288 Million the Right Price for Orange Unified High School Upgrades?

Given declining enrollment, Orange Unified School District’s $288 million bond measure may fund more school upgrades than students need.  There is also a risk that the taxpayer cost of debt service for the bond issue will exceed the district’s forecast rate of $29 per $100,000 of assessed valuation.

According to statistics from Ed Data, enrollment across the four OUSD high schools fell from 9,311 in the 2010-2011 school year to 8,936 in 2014-2015, the latest school year for which figures are available. The district projects continued enrollment declines through 2018-2019, but does not provide a breakout by school. Total OUSD enrollment – excluding charters – fell from 27,344 in 2014-2015 to 26,685 in 2015-2016, and is expected to reach 26,135 in 2018-2019.

Using the current enrollment of 8,936 students, proposed renovations to the four high schools would cost over $32,000 per pupil (excluding interest). By contrast, Orange Lutheran High School completed its own upgrade in 2014 at a cost of less than $12,000 per pupil.

CAFETERIA PLANNING: The cafeteria at private Orange Lutheran, part of a recent $12,000 per pupil upgrade. In the same city, union-controlled Orange Unified wants to spend $32,000 per pupil to renovate four high schools.

CAFETERIA PLANNING: The student cafeteria at private Orange Lutheran High School, part of a recent $12,000 per pupil upgrade. In the same community, union-controlled Orange Unified wants to spend $32,000 per pupil (plus interest) to renovate four high schools.

Nationally, the median cost of building a new high school was $45 million in 2014 according to School Planning and Management (although the median high school housed 1,000 students, about half the number in OUSD schools). This suggests that the cost of renovating OUSD’s four high schools, at an average cost of $72 million each, may not represent a savings over building new facilities.

Further, the district may spend more than $288 million on the renovations if it is able to obtain Proposition 51 matching funds.  If Prop 51 passes in November ,the state’s Office of School Construction will have $9 billion in state general bond proceeds that can be allocated to school districts renovating and building schools.

With a shrinking student population and the potential availability of state matching funds, it appears that the district could borrow much less than $288 million to ensure that high school students have an appropriate learning environment. This raises the question of how the board decided to ask for $288 million in borrowing authority.

The district hired an opinion research firm to poll voters on a possible bond measure. In one survey, the research firm asked voters whether they would approve bond measures at four different tax levels – $25, $29, $34 and $39 per $100,000 of assessed valuation. They found than less than 55% of the electorate would support a bond measure that added $34 or $39 of taxes per $100,000 of assessed value, but that 59% favored a $29 measure and 62% supported a $25 measure. Thus, it would appear that the bond measure was sized on the basis of voter appetite – not on an objective assessment of actual renovation needs and costs.

On October 4, the district’s financial advisor presented a financing plan consistent with the proposed $29 tax increase per $100,000 of assessed value. The plan assumes that $79 million of bonds would be sold shortly after the election and the remaining $209 million would be sold in 2021. Projected debt service rises from $9.5 million in 2017 to $28.8 million in 2046 – representing a 4% annual rate of increase. For the tax rate to stay at $29 per $100,000, assessed valuations will have to also rise by 4% annually. According to the financial advisor’s data, OUSD has experienced annual assessed value increases of 4.26% over the past 15 years. If this trend continues, the tax rate for the new bonds would actually decline slightly – as the tax base expands slightly faster than the debt service costs. If, however, the valuation increase does not materialize, perhaps because of depressed economic conditions or an earthquake, the tax rate would have to increase.

$288 Million Orange USD Bond Measure Would Add to Large Pile of Existing Debt

If Orange Unified voters approve Measure S this November, newly authorized bonds will be added to an already large district debt. A California Policy Center review of OUSD financial reports finds that the district owed $120 million to bond investors as of June 30, 2016.

The largest portion of OUSD’s bond obligations takes the form of an unusual OPEB bond. While many California public agencies have issued bonds to cover their pension obligations, few have borrowed to cover Other Post Employment Benefit obligations. OUSD is a pioneer in this area, but it is not clear whether innovation in OPEB funding is desirable.

In April 2008, OUSD’s board approved the issuance of a variable-rate bond to cover the district’s estimated $93.8 million OPEB obligation. The plan was to invest the proceeds into an actively managed portfolio of bonds and stocks. The bond proceeds and investment gains would be used to pay retiree healthcare expense, freeing the district’s general fund to cover educational expenses.

In May 2008, the district issued $94.8 million of “Index Rate Taxable Retirement Health Benefits Funding Bonds, Series A.” One million dollars of the bond proceeds went to various service providers including California Financial Services, who acted as the financial advisor on the deal for a fee of just over $450,000.

The remaining proceeds were invested in a vehicle called Futuris Public Entity Investment Trust, which is managed by Keenan & Associates. The investment got off to rocky start due to the Great Recession. In the fiscal year ending June 30, 2008, the trust lost $3.3 million; it shed another $7.3 million in the year ending June 30, 2009.

The investment losses exacerbated a fiscal crisis confronting OUSD at the time. The board engaged the state’s Fiscal Crisis and Management Assistance Team to assess district finances. In its report, FCMAT recommended that the board “seek advice from an independent investment advisor regarding strategies to address the decline in OPEB bond program asset values.”

It is not clear from board minutes whether this recommendation was followed, but the stock market rebound that started in 2009 raised the value of OUSD’s investments and relieved its fiscal distress. Last year, Standard and Poor’s upgraded the OPEB bonds from A+ to AA- citing the district’s “very strong available general fund reserves.” The district also benefited from its choice to issue variable rate bonds, with interest rates periodically reset based on changes in the London Interbank Offer Rate (LIBOR). Although banks attempted to manipulate LIBOR, it fell during the Recession and has remained low ever since. Consequently, debt service costs for the OPEB bonds have been lower than expected.

That said, it does not appear the bonds have provided the general fund relief originally intended. Each year the district pays about $2.9 million in debt service on the OPEB bonds, and it remains unclear whether the invested bond proceeds can shoulder the district’s mounting retiree healthcare costs.  In some recent years, the district has transferred additional money into its Retiree Benefits Fund to support OPEB payments.

In addition to the $83 million still outstanding on the district’s OPEB bond, OUSD also owes $28 million on Certificates of Participation and $9 million on Capital Lease obligations. OUSD also has two Mello-Roos districts that have issued bonds. The $12 million in outstanding principal on these Mello-Roos bonds (issued by Community Facilities Districts 2005-1 and 2005-2) is technically not an obligation of the school district, but debt service payments are funded by taxes on certain homes within OUSD.

Officials Ditch Claim About ‘Benefits’ of High Property Taxes

Flyers distributed in Capistrano Unified School District schools and the main office promote the district’s upcoming $889 million property tax increase as a benefit to homeowners.

That claim would appear to be a political response to criticism of Measure M, the controversial bond on the South Orange County district’s November 8 ballot. Critics have said Measure M, which will be paid off by increased property taxes, will dampen home values.

Under the headline “Community Benefits,” the flyer distributed in schools and offices asserts that higher taxes will actually be good for home sales. “We believe that improving neighborhood schools will ultimately increase local property values and add to the real estate market value of homes in our community,” the flyer reads.

The district’s claim that higher property taxes will boost home values is not included in the version posted on the CUSD website.

The headline in the online version is also different – just the word “Community,” not “Community Benefits.”

The flyer was produced for the district by a political consulting firm.

In a legal opinion, California Attorney General Kamala Harris said, “State law prohibits school districts from campaigning in support of a bond measure.” Numerous state courts, including the California Supreme Court, have said government bodies may provide information.

District officials did not respond to several requests for comment on the change. But critics say the change is consistent with the district’s practice of promoting Measure M in ways that come close to breaching the legal standard.

“I believe school district officials have been routinely engaging in illegal express advocacy,” said Rancho Santa Margarita Mayor Tony Beall.

Even that statement is likely to elicit a response from district HQ. Beall and his counterpart, Mission Viejo Mayor Frank Ury, made a similar claim in an August 9 letter to Capistrano Unified officials. The district responded to the letter by voting 6-1 to sue Beall, Ury, and their cities.

Beall said no complaint has been filed.

The South Orange County Economic Coalition, an association of business and other institutions, including the Orange County Association of Realtors and Saddleback College, opposes Measure M. Last month, they announced Measure M “will make prospective home buyers think twice before buying in this District.”

Catrin Thorman is a California Policy Center fall Journalism Fellow. She is a graduate of Azusa Pacific University, and a former Teach for America corps member. 

UPDATE: This article was updated on October 24 to reflect a request for clarification from the South Orange County Economic Coalition. Though that organization opposes Measure M, a spokesperson said some of its members (in this instance, Saddleback Community College and the Orange County Association of Realtors) may not necessarily oppose the measure. —Editors

San Francisco Parcel Tax Opponents Censored by Supervisor, Bureaucrats

 

californiafacultyassociation

Editor’s Note: Members of the Libertarian Party of San Francisco (LPSF) tried and failed to include an opposing argument to an extension and increase of a Community College parcel tax in the Voters Handbook. Here Party Chair Aubrey Freedman describes the process by which the San Francisco Department of Elections silenced not only the LPSF, but anyone opposed to the measure. CPC does not support political parties, but we believe this is an important story about how the deck is often stacked against groups opposing dubious new tax measures.

For the last year or so, CCSF (Community College of San Francisco) bureaucrats have been talking about extending the “temporary” parcel tax the voters approved in 2012.  We were the official opponent of the measure back then, but we were overpowered by the “Save CCSF” movement.  At least we warned the voters.  Now 4 years later, not much has changed at the community college, except enrollment is about 25% lower, but they’re still in need of more “funding”.  Hence the birth of Prop B, a 12-year extension of the tax to 2032 and an increase of $20 from $79 to $99 per parcel per year.

In a recent meeting of ours, one of our members offered to write an opposing argument to Prop B for submission to the DOE (Department of Elections) for the “free” lottery on August 18.  About a week prior to the deadline, we called the DOE for clarification on the pre-empting process, whereby members of the Board of Supervisors get first dibs at being the official opponents of ballot measures.  With all the free publicity and media attention they get just from being on the Board of Supervisors, which they can use for their political agendas, this pre-empting business is a travesty in itself since bona fide organizations and individuals only get the leftovers (paid arguments).  The manager at the DOE told us all official “pre-empters” are listed on the DOE website under “Local Ballot Measure Status”.  With limited resources (ballot measure argument writers), it didn’t make sense to waste time on writing arguments that would be rejected by the DOE on August 18.  Much to our surprise, we noted that Supervisor Aaron Peskin (a left-leaning supervisor) had pre-empted the opposing argument to Prop B.  One of our members joked that perhaps Peskin opposed the tax because it wasn’t high enough.  At any rate, we decided not to submit our member’s solid argument (listed above) on August 18, and we would decide after the lottery what to submit as paid arguments the following Monday.

To our utter shock, when the DOE ran the lottery, DOE Director John Arntz announced that no argument was submitted against Prop B and moved on to the next one.  What happened to Peskin’s opposing argument?  We checked with the DOE the next day, and they confirmed that Peskin was the official opponent but had in fact submitted nothing.

The LPSF reassessed its position, and decided to pay the $764 necessary to submit a paid 282-word argument (which appears at the end of this article).  We waited in line for three hours on August 22 with all the other individuals and groups submitting paid arguments (stations had been set up to streamline the process and handle the expected deluge of paid arguments for 25 local ballot measures, but in typical government fashion, the whole process was hopelessly bottlenecked due to the lack of checkers at the final step, despite an army of government workers sitting around on the taxpayers’ dime), submitted our paperwork, and paid our fee.

Afterwards we paid a visit to the SF Ethics Commission to lodge a formal complaint against Supervisor Peskin.  We were hopeful that an agency with the word “Ethics” in its name might actually be interested in dealing with what looked like abuse of a privilege granted to a public official to silence the opposition.  We were wrong.  Though the bureaucrat we tried to file our complaint with was pleasant and seemed sympathetic, she informed us that the commission has no jurisdiction in a case like this.  She recommended that we go back to the DOE and press them on the issue.  There you have it:  another useless club of bureaucrats on the taxpayers’ backs.  When you really need them for something legitimate, they’ve already checked out.

The plot thickened.  Three days later we received a call from the DOE.  In reviewing all the documents received for the paid arguments, they discovered that Prop B is actually a “district” measure, not a regular ballot measure, and as such no paid argument can be accepted.  They sent us a form to sign to request a refund of the $764 paid for the argument.  Needless to say, we will not be signing any such form any time soon—if at all—as it would signify our agreement with the DOE that all is well, the matter is closed, and the voters will never get to hear the other side of the issue.  The emails between the LPSF and John Arntz flew furiously back and forth for a week or two about the legality of no paid arguments being accepted for “district” measures.  We checked both the state and county election codes regarding this issue and could find nothing forbidding the SF DOE from accepting our paid argument.  In fact, Arntz confirmed, “There is no explicit statement in the state election code stating that paid arguments cannot be submitted”.  Unfortunately, he still insists that they cannot accept our paid argument because the code doesn’t specifically mention paid arguments.

Yet another bombshell dropped about a week ago.  We contacted the newspapers, a law firm, and various individuals in and out of government who might be able to help out.  Only one individual (whose name will remain confidential because that person stepped out on a limb for us) persisted in getting to the bottom of things.  The person found out that actually Peskin had wanted to submit an opposing argument, but he was not allowed to because CCSF is considered a state institution and the Board of Supervisors is not allowed to submit any arguments on state issues.

If that’s the case, why did the DOE list Peskin’s name on their website as the official opponent when he was not allowed to submit such an argument?  Don’t they know their own rules?  These rules are so vague that even the folks who pass one ordinance after another without blinking an eye seemed to have no clue at all as to when they can and can’t pre-empt a ballot measure, so how can the average citizen be expected to know the rules?  This was a monumental blunder on the part of the DOE to have put Peskin’s name up as the opponent when they should have known better—and that blunder ended up discouraging us (and possibly others) from submitting an opposing argument for the lottery.  We went back to Arntz with this latest bit of information; we would imagine this is an embarrassment to the DOE, so we suggested that this could be rectified by printing our paid argument so the voters hear the other side on this issue and making the rules clearer in the future to avoid such hassles.    Not a word back from him.

The voters have a right to hear both sides of this and every ballot measure.  As it appears right now, when the voters take a look at Prop B in the Voters Handbook—if indeed they do take a look in a year with 42 ballot measures—they will see the usual background information, the Controller’s statement, a ¾ page argument by the San Francisco Community College Board of Trustees touting all the wonderful things that CCSF does that warrant an extension and increase of the parcel tax, no rebuttal underneath, and then an almost blank adjoining page stating that no opposing arguments were submitted against this ballot measure.  Even a diligent voter would be inclined to vote YES since no one bothered to speak up against the measure.  If only they really knew!

Our blood is boiling over this issue, and we’re not throwing in the towel yet!  We did submit an official letter to City Attorney Dennis Herrera this week requesting a ruling on this whole issue.  We noted at the end of our letter that the City Attorney’s office protects tenant and consumer rights—and we hope that they will also protect voters’ rights.  We’re not holding our breath.

District has Paid Consultants Over $400k to Promote Bond

State law prohibits government officials from using taxpayer dollars in political campaigns. But on June 8, Keith Weaver of Government Financial Strategies stood before the Capistrano Unified school board, coaching trustees on how to pass an $889 bond measure on the November 8 ballot.

“November elections do better,” said Weaver, whose Sacramento-based firm has been paid at least $400,000 to manage what the district calls an outreach campaign. Weaver went on, telling the board that November is “when we have a lot of turnout. I would encourage us to focus on voter registration and focus on getting people to the polls because turnout helps bond measures.”

Under California law, government officials are allowed to provide information to the public for the purposes of voter education. They are prohibited from engaging in direct campaign efforts for tax increases.

But throughout the state, public officials are blurring the line between information and advocacy – often paying firms like GFS to run point on political campaigns, and especially campaigns involving tax hikes like Capistrano’s Measure M.

Capistrano Unified contracted with GFS for the purpose of “community engagement,” according to district documents. On its website, the company says it operates to assist the public sector in generating revenue – what most people call taxation. GFS’s website provides information on how to organize efforts to pass bond measures such as: “centrally organizing publicity efforts, involving students in volunteer activities, and reaching out to the senior citizen population.”

Capistrano USD has also contracted with another public affairs organization, Los Angeles-based Cerrell. That company’s website boasts Cerrell has “financed billions of dollars of public projects” through its “public communication” efforts. The website highlights Cerrells’ April 2015 role in passing Glendale’s Measure O, a two-percent increase of Glendale’s hotel tax: “strategic guidance, messaging, materials development and multilingual communications successfully educated Glendale voters… While voters rejected the other three measures on the city’s municipal ballot by wide margins, Measure O passed with nearly 60% support.” Cerrell credits the victory to its “comprehensive and compelling public education program.”

Since September, the district has paid Edelman some $24,000. At a September 28 meeting of Capistrano trustees, the district claimed Edelman would not be working on Measure M though documents indicate they’re being paid for “community engagement” efforts from October 1 through December 31. One of the nation’s oldest public relations companies, Edelman has managed marketing for such corporate giants as Hewlett-Packard, Microsoft, Johnson & Johnson, and Starbucks. 

Andrew Heritage is a California Policy Center fall Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

Top 10: Vernon Leads California Cities with More Public Employees Than Residents

For Immediate Release
October 11, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

Vernon, California is so famous for its history of corruption that it was the municipal star of season 2 of HBO’s “True Detective” series. Now the diminutive L.A. County town can claim another achievement: Vernon is the only California city with more public employees than residents.

Vernon’s 210 residents are served by 271 city employees, according to data on the California state controller’s website. 

No. 2 Irwindale is a distant second – though just a 30-minute drive (could be hours – depends on traffic in L.A.’s tortuous downtown) from Vernon. In that East Los Angeles County city, there’s one government employee for every one of Irwindale’s 1,415 residents. San Francisco is the only major city on the Top 10, with one government employee for every 22.7 residents. 

Here’s the Top 10:

top10cities Most Public Employees

Public employees in Vernon earn an average of $107,848 (plus benefits of $37,571). That’s much higher than nearby hegemon, Los Angeles, where public employees average $83,356 (plus benefits of $12,620).

Several top Vernon officials earn salaries in excess of $300,000:

Mark Whitworth (City Administrator): $402,335
Daniel Calleros (Police Chief): $361,644
Michael Wilson (Fire Chief): $361,359
Carlos Fandino Jr. (Director of Gas and Electric): $324,354
Andrew Guth (Fire Battalion Chief): $304,243

While many of Vernon’s city employees continue earn six-figure salaries, the average city resident earns far less. Per capita income in 2010 was $19,973. Median household income in 2010 was $38,500 – down dramatically from 2000, when it was over $60,000. According to the 2010 U.S. Census, 5% of the population lived below the federal poverty line. In 2000, it was 0%.

How does the city fund that dramatic gap in income? By taxing utilities for industry in the city. But because Vernon’s utility rates are among the highest in California, many businesses are moving out. That’s going to put pressure on city officials to trim public services – or to capitulate to the logic of history and become part of a neighboring city. How about Bell?

Conor McGarry is a fall Journalism Fellow at California Policy Center. Andrew Heritage contributed data analysis. Source: California state Controller’s Office.

ABOUT THE CALIFORNIA POLICY
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

Survey Says! How One City Used a 'Poll' to Raise Taxes

On Halloween 2014, Stanton, California, city manager James Box wrote to the city’s residents. City officials were at the end of a year-long campaign to stampede residents toward acceptance of Measure GG, creating a one-cent city sales tax, the first of its kind in Orange County. They had warned residents that failure to approve the new tax would lead to something like the apocalypse.

Just days before the Nov. 4 election, Box spoke to them one last time.

“I’ve received a number of phone calls from Stanton residents about the city’s budget, employees, service challenges, and Measure GG which is on Stanton’s November 4, 2014 ballot,” he wrote.

In the face of obvious public concern, Box said, he was ready to meet residents immediately – or, rather, not immediately, but in three months, long after the election, in a public park clubhouse, on a Friday morning at 9 o’clock.

Box’s nonchalant response to the “number of phone calls” is evidence that the real purpose of the communication was what political consultants call “Get Out the Vote.” That Box invoked his determination to provide “helpful information on issues of interest and concern” and “accountability and transparency” reveal how upside-down City Hall had become: he used the language of open government to obscure his real interests and to shape public concern.

Look for a similar October surprise this year. Residents this year qualified a measure to repeal the 2014 sales tax, and that measure will appear on the city’s Nov. 8 ballot.

City officials paid Lew Edwards Group throughout the first campaign, and it’s likely they drafted the letter that came over Box’s signature. They’re still on contract with the city, running a campaign for which Stanton officials have now paid them well over $100,000.

Papers, please: Spanish-language version of Stanton survey.

Papers, please: Spanish-language version of Stanton survey featuring scary cop.

 

California law allows public officials to provide nonpartisan information to the public in the course of government business. In several high-profile cases, state courts have ruled that public education campaigns like Stanton’s must not be intended to influence the outcome of a political campaign.

The landmark 1976 case Stanson v. Mott established the standard: “A fundamental precept of this nation’s democratic electoral process is that the government may not ‘take sides’ in election contests or bestow an unfair advantage on one of several competing factions. A principal danger feared by our country’s founders lay in the possibility that the holders of governmental authority would use official power improperly to perpetuate themselves.”

Despite that and other court decisions, Stanton officials have run a three-year campaign to persuade its citizens to raise their own taxes – and keep them raised. They’ve paid for that campaign with the public’s money.

The 2014 campaign featured a number of official-looking letters as well as a push-poll in disguise as a community survey. Like Box’s Halloween letter, a push-poll pretends to be one thing while being another. It’s a method of communicating (or pushing) a political message under the guise of a scientific effort to collect public feedback.

The science behind surveys is complex. That’s why it’s fairly easy to determine that the city’s survey wasn’t a survey at all.

The Stanton “Community Feedback Survey,” released to CPC following a Public Records Act request, was mailed to voters in June 2014. It featured photos of children posing alongside firefighters and police. Inside the brochure, city officials warned residents that budget shortfalls would likely lead to cuts in budgets for police and firefighters.

City officials sent a more disturbing version of the push-poll to their Spanish-language residents. That official-looking document features a severe-looking clip-art policeman at the top, and a request for compliance in responding to the survey.

The one-sided push-poll is designed not to solicit meaningful feedback, but rather to lead citizens to answers that support the council’s conclusion: the proposed sales tax is essential to maintaining public-safety. By limiting responses to nine pre-packaged “priorities,” five of which were public-safety related, unsuspecting respondents would easily come to the conclusion that public-safety spending is important and balancing the city budget (which is a constitutional requirement) is good. If framing the response they sought was not enough, Stanton went a step further by selectively placing those photos of children playing around police and firefighters — hardly appropriate for a mere a purely informational campaign.

Despite that framing, some respondents thought outside the box. Nearly one in five told the city other issues were important to them. These respondents were not primarily concerned about public safety spending, but about attracting business, homelessness, code enforcement of noise complaints, and graffiti removal. One respondent suggested encouraging marijuana clinics to relocate to the city; another said, “I wish I were a genius with ideas that could help. Maybe a lot of prayer.”

The result of the survey was not a meaningful assessment of resident’s priorities – not a dispassionate interest in public sentiment – but rather a pseudo-scientific “study” that local politicians then held up as a justification for more public spending along with tax increases.

A month after the June mailer, the city council placed Measure GG, a 1-percent sales tax, on the ballot claiming it would raise $3 million annually to avoid public-safety cuts. As part of its contract with the city, the consultant actually helped draft the measure’s ballot description. Two months after that, in September, city officials mailed residents again – this time to tell them the survey results had been tabulated and showed that huge majorities of residents agreed that public-safety spending critical and so was balancing the city budget.

The city has responded to this coming November’s repeal measure on the ballot with neighborhood meetings called “Talks with the Block” to attack the repeal effort. Once again, the 2014 feedback survey has played a prominent role in that campaign, with city officials insisting that residents asked and voted for the controversial sales tax. And once again, the Lew Edwards Group’s contract with the city ends just days before the election.

Andrew Heritage is a California Policy Center Journalism Fellow. He is a doctoral student in political science at the Claremont Graduate University.

Keep Breaking the Law: Your Government Needs the Money

My colleague Matt Smith recently observed that Huntington Beach is following the model of Ferguson, Missouri: raising fines on misdemeanors in order to generate more revenue for a cash-strapped city. The Department of Justice found that strategy was a contributing factor to rioting that followed the police shooting of Michael Brown in Ferguson on August 9, 2014.

But more punishing than the fines themselves is the schedule of fees associated with each fine. In Amador County, in the Sierra Nevada just east of Sacramento, the superior court notes that its practice is to hit the guilty with a “penalty assessment” – $26 “for every $10 of the base fine amount or portion thereof as set forth by the California State Legislature.” The court helpfully directs unbelievers to Penal Code 1464 and Government Codes 76000, 70372, 76104.6, 76104.7 and 76000.5.

That means the penalties associated with misdemeanor fines are far more expensive than the fines themselves. It gets worse: Counties can even – and do – add additional penalties.

The penalties imposed by state legislators are remarkable for their randomness. There’s money for the DNA Identification Fund and the State General Fund. The state gets more money from the penalties – for its “Penalty Fund,” its “State Court Facilities Fund” and money for “Building/Maintenance for Courts.” Some of the money pays for court security and a big chunk goes to court automation and city funds. There’s even money for the Department of Motor Vehicles. The Amador court shows you how, through the magic of the state legislature, your $25 jaywalking ticket becomes a $193 fine.

The Orange County Superior Court follows the same formula, but adds bonus penalties for lawbreakers. In addition to the state menu, OC adds fees to fund Emergency Medical Air Transport, Emergency Medical Services, and a fee “to fund Night Court operations.” That, Orange County says, is how a $35 speeding ticket becomes a $238 fine.

The bottom line: Keep breaking the law, your government needs the money.

Matt guessed the Ferguson model will do nothing to lubricate relations between police and Huntington Beach residents. In fact, it places cops between cash-hungry government officials and residents. Last month, as the Orange County Register reported, the City Council approved a plan to hire a city prosecutor to handle all those tickets.

“A significant number of misdemeanors go unprosecuted,” City Attorney Michael Gates told the Register, adding that the prosecutor will “add a lot of teeth to our laws.”

“There will be a whole class of crimes that will now be prosecuted where the DA may not have gotten to them,” Gates said. “We will prosecute every one of them until conviction.”

Huntington Beach isn’t alone, of course. All across California, pressed by the rising costs associated with government employees, cities are following Ferguson – increasing government regulation of human activity and then monetizing infractions, turning citizens into a crop harvested for its cash. When the citizens can’t pay up, they are torn from their homes and workplaces to serve time – a process that sounds more like Victor Hugo’s Les Miserables than Alexis de Toqueville’s Democracy in America. The guilty often lose their jobs and families. In the end, their communities lose productive individuals.

“It’s a vicious cycle that hits people with limited income especially hard,” says Hieu Vu, a criminal defense attorney in Orange County. “If you can’t pay your traffic ticket, the court suspends your license. But you have to work so you end up driving with a suspended license. Eventually you get pulled over by the police and have your car taken away for 30 days and end up having to pay the impound fee of over a thousand dollars – and you now face the new criminal charge of driving on a suspended license.”

If you can’t afford to pay, you can agree to alternative of community service, like picking up trash on freeway shoulders for Caltrans. Even that has its perils. Paul William Nguyen, an Orange County criminal defense attorney with Shield Litigation, recalls a single mother “sentenced to 10 days of Caltrans, in lieu of 10 days of jail for a minor driving offense.

“This poor woman and her toddler came to court on the deadline date and asked the judge for a short extension – she had completed eight out of the 10 days of Caltrans and indicated that she was a single mother and the sole breadwinner in her family.

“The judge was not moved,” Nguyen says. The woman had made a contract, the judge said, and he expected her to honor it. He sentenced her to “the whole 10-day jail sentence and remanded her immediately. Her toddler was ripped out of her arms and she was handcuffed and transported to jail.”

“While she was ‘honoring’ her agreement,” Nguyen says, “her child was handed over to Social Services.”

Straitjacketed by constantly rising public employee compensation, local officials are raising taxes, fees and fines. In Ferguson, it took only one substantial conflict – the shooting of Michael Brown – to set off the chaos that followed. No right-thinking person supports the rioters; no right-thinking person can ignore the political context in which that riot took place.

Will Swaim is the VP of Communications at the California Policy Center.

School District's Bond Controversy Reveals Rising Concern About 'Pay-to-Play'

Vital force.

CUSD’s Kirsten Vital 

In the space of just a few months, state officials have suddenly turned their attention to a problem in the public-educational shadows: insider dealing among California school district officials and outside vendors.

In a January opinion, state Attorney General Kamala Harris concluded that school officials had become too cozy with companies that stand to benefit from passage of high-ticket school bonds.

“A school or community college district violates California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign if the pre-election services may be fairly characterized as campaign activity,” Harris wrote.

In July, California Treasurer John Chiang warned districts about the same problem. And in August, Gov. Jerry Brown signed into law AB 2116, creating financial oversight committees for the spending of bond revenue.

Despite the scrutiny, companies looking to do business with the Capistrano Unified School District are major contributors to the district’s massive $889 million bond, Measure M on the November ballot.

Contributors include construction, engineering and architecture firms. Documents first published by Dawn Urbanek, a South County activist, show Tilden-Coil Constructors gave $25,000; $15,000 came from WLC Architects; computer giant Dell gave $4,000 to the effort.

Some of the contributors have already worked for the district. WLC Architects designed the Capistrano Valley High School Performing Arts Center. School officials approved five payments to WCL Architects (total: $43,781.03) during a September 14 meeting.  

At the center of the controversy: CUSD’s top administrator, Superintendent Kirsten Vital.

Vital ran into similar trouble at her job in the Alameda Unified School District. Her highest-profile collision in Alameda involved an Oakland-based political consulting firm with multiple ties to the district. That firm worked for Vital to promote the district’s Measure H Bond in 2008. The next year, the school board appointed the firm’s two partners to a Master Plan Advisory Group that year. That same year, Vital paid the firm $14,000 for “design and programming of AUSD website redesign.” In the same year, Vital created a webmaster position and hired AUSD Board Trustee Mike McMahon’s daughter Rebecca McMahon to fill the position. Her salary, depending on tenure, ranged from $41,000 to $51,000 per year.

At the same time, Vital faced a series of pay cuts in Alameda. She earned $273,908 in 2012; dropped to $262,823 in 2013, and to $214,031 in 2014. In three years her pay dropped 22%.

Interestingly, Joseph M. Farley, her predecessor at CUSD, rode a more dramatic financial downhill. Documents provided by Transparent California show Farley earning $287,073 in 2013. In 2014, he made just $203,773, a one-year drop of 29%.

 

vitalsalary-2

 

Vital’s original CUSD 2014-2018 contract gave her an annual salary of $305,000 – a huge bump over her Alameda salary (and Farley’s in CUSD). She also received a $15,000 relocation assistance stipend. That four-year deal was amended after just two years, in 2016. The new contract, extended through 2020, gave her an annual salary of $319,244 and another bonus, this one a $14,244 “discretionary payment.”

Conor McGarry is a graduate of California State University–Dominguez Hills, and a Journalism Fellow at California Policy Center.

 

Controversial ‘Education Center’ Schools Parents in Bond Pitfalls

Capistrano Unified HQ: District staff staff labored in something that looked more like a Four Seasons resort.

Capistrano Unified HQ: More like a Four Seasons resort.

Anyone looking down the barrel of an $889 million school bond should consider what the Capistrano Unified School District did with its last bond, in 2002.

After issuing the bond – called a certificate of participation (COP) – the district began constructing a $35 million administration building in San Juan Capistrano, east of I-5. Opened in 2006, Capistrano USD called it the Education Center.

Critics called it the Taj Mahal. In a recall notice some of them delivered to trustees, they sounded as if they were attended by men in short pants, tri-corner hats and a fife-and-drum corps. “You are are recklessly spending $52,000,000 on an administration building … while our schools are in dire need of repairs and students are crammed into substandard portable classrooms with non-functioning restrooms,” they wrote.

Meanwhile, Superintendent James Fleming’s staff labored in something that looked more like a Four Seasons resort. Controversy was probably inevitable. Fleming didn’t make things better when he went on the offensive, tracking his critics on what some called an enemies list, and either blaming others for the overbuilt Education Center or suggesting it was actually an entrepreneurial marvel – a revenue-generator operated by a government agency.

“In terms of the design of the building, it was put together by a committee of people and built to accommodate tenants that would pay rent,” Fleming told the Orange County Register.

That last piece – that Fleming and other district officials planned to pay off the bond in part through leases paid by non-district tenants – became yet another point of criticism.

But the lease revenue isn’t going toward the debt. In 2008, two years after the ribbon-cutting at the Education Center, the Great Recession hit, and government agencies began their feverish search for new revenue. In 2012, Capistrano Unified determined that revenue from tenants leasing space in the Education Center would better serve the district in the general fund – where it could be used to support the salaries of teachers who had gone on strike following a 10% pay cut in 2010.

A bond intended to improve buildings had, in short, become a way to generate income for operating expenses.

Controversy surrounding the Education Center ignited two recalls of school board trustees, in 2005 and 2010. The first recall failed but exposed the enemies list.

Fleming insists the enemies list was a myth created by his enemies.

“There is not now and never was an ‘enemies’ list,” Fleming told the Orange County Register in 2011.

In December 2010, a California appellate court acknowledged the existence of Fleming’s list, but dismissed the charges against him. The logic: it was within Fleming’s purview as superintendent “to research the nature of the discontent and unrest in the district at the time.”

By then, Fleming had already been retired for four years. He sued Capistrano Unified for severance pay, lost future earnings, and legal expenses. An appellate court ruled against him.

The district Fleming fled is asking voters to approve an $889 million bond on the November ballot. Fleming? He’s retired and living in Florida, collecting a $155,540 annual pension from his time at Capistrano Unified.

Catrin Thorman and Andrew Heritage are California Policy Center Journalism Fellows. She is a graduate of Azusa Pacific University, and a former Teach for America corps member. He is a doctoral student in political science at the Claremont Graduate University.

OC's Measure M Treats Some Homeowners More Equally Than Others

Orange County voters are being asked to approve over $2.4 billion in new school bonds. The largest bond: Capistrano Unified School District (CUSD)’s $889-million Measure M.

The new CUSD bond would be serviced by property owners in most of the school district, but not quite all of it. One community, Rancho Mission Viejo, won’t be voting on Measure M and won’t be paying the new taxes if it passes. CUSD’s Measure M web page says the new community is being excluded on the grounds that it won’t have a school until Fall 2018, when Escenia Elementary will begin serving Rancho Mission Viejo residents. But this ignores the fact that community members can send their children to Tesoro High School, which will receive upgrades from Measure M proceeds.

In reality, district officials removed Rancho Mission Viejo from the Measure M bond district to avoid a political showdown with powerful, sophisticated real estate developers there.

In a June 22 meeting of the district board, Trustee Jim Reardon, a bond opponent, noted that “there are areas of the school district that are large and undeveloped, and privately owned, and we are going to face opposition from the landowners in those areas.”

“Then carve them out,” responded Trustee John Alpay, a Measure M supporter.

Alpay had earlier argued for using a “Swiss-cheese model” to design a district in which well-organized opposition might torpedo the district.

“You need to go through, you need to start with the whole district, and then you need to start cutting out those areas that you know that we could live without in terms of finance,” Alpay said, according to transcripts of that meeting. “They’re not gonna support it. Any rational political person is gonna do that … Get rid of them. Carve them out. There is no reason to have them in there. And I could make the same argument of other parts of the district, and that’s what we should do. I’m not saying it should be, or should be Mello-Roos districts, but this idea of one unitary is wrong. The idea of six is also wrong. It has to be something in between.”

But to exclude Rancho Mission Viejo and other potential opponents, the CUSD board needed to create a special district for the purpose of enacting the bond. In July, with a Rancho Mission Viejo Co. official in the audience, officials approved the bond district – minus the Rancho Mission Viejo Co.

Known as Capistrano Unified School District School Facilities Improvement District No. 2 (SFID No. 2), the new district will be layered atop a hodgepodge of existing special taxing districts within CUSD. The school district already has an SFID – SFID No. 1 – and it also has 10 Community Facilities Districts (CFDs) – also known as Mello-Roos districts.

Creating and administering special districts imposes extra costs. Also, special district bonds may attract lower ratings and be harder to sell to investors than more easily understood and better diversified district-wide general obligations. This should be a concern for CUSD, most of whose SFID No. 1 bonds carry a surprisingly low A+ rating from S&P – four notches below the agency’s maximum AAA rating.

CUSD is unusual in that some homes can be in multiple districts – the existing SFID, the proposed new SFID and a Mello-Roos district. Such is the case for homeowners in Whispering Hills Estates. As the 2015-16 tax bill for one lucky owner shows, total taxes are almost $16,000 on an assessed value of $837,000. About $7250 of the taxes go to servicing two SFID bonds (listed as CAP USD ID1) and the Mello-Roos obligation (CFD 2005-1).

More expensive properties draw even higher tax bills. This second tax statement, for a property assessed at $1,080,000, shows a total of $19,000 in taxes.

And these taxpayers will be paying more in the years ahead – with or without Measure M. The Whispering Hills Mello-Roos district just issued a new bond that will further increase the Mello-Roos tax there. In 2016-2017, the CFD tax alone will range from $6820 on the smallest homes to $9500 on the largest (see page 21 of the bond document).

According to CUSD, Measure M will add $41.81 of new taxes per $100,000 of assessed valuation in the first year after enactment, climbing to $42.99 per $100,000 in fiscal 2032-33. By law it can rise no higher than $60 per $100,000. This may not sound like much – until you consider the impact on a property over the 30-year typical life of a bond program. At $42 per year for 30 years, total taxes are $1260 per $100,000 of assessed value. If your house is worth $1 million – not atypical for the area – the lifetime tax is $12,600. And this is on top of the hefty tax bills CUSD residents already pay.

Finally, it is worth noting that the district is issuing the bond after years of flat to declining enrollment. In the 2011-12 school year, 50,538 students were enrolled in CUSD. In 2015-16, the figure had fallen to 49,120 (as shown on page A-2 of the bond document mentioned above). While new construction may stall this trend, it seems unlikely that the area will be hit by a wave of new students, making one wonder whether it would be possible to get by on something less than $889 million in new construction.

Marc Joffe, a policy analyst with the California Policy Center, was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

 

Reporter's Notebook: CPC Offers Expert Help with Local School Bond Reporting

For Immediate Release
September 23, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

SACRAMENTO, Calif. — Well down the November ballot, obscured by the high-profile battle for the White House, Californians will find more than 100 local school bond measures representing hundreds of millions of dollars of new public debt.

“The bond process is like a rigged game of high-stakes poker,” says CPC president Ed Ring. “Taxpayers may have a seat at the table, but for years haven’t stood a chance against politicians, government union leaders, construction companies and investors colluding for political and financial gain.”

The California Policy Center’s government finance experts can help you show readers why these bond measures matter.

ED RING is president of the California Policy Center. He directs the organization’s research projects and is also the editor of the email newsletters Prosperity Digest and UnionWatch Digest. His work has been cited in the Los Angeles Times, Sacramento Bee, Wall Street Journal, Forbes, and other national and regional publications.

MARC JOFFE is a California Policy Center financial analyst. His research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

KEVIN DAYTON authored the landmark study “For the Kids: California voters must become wary of borrowing billions from wealthy investors for educational construction.” That study tracked passage over 14 years of more than 900 California school bonds worth $146.1 billion, and inspired new law (AB 2116, signed this summer by Gov. Jerry Brown) that imposes limits and oversight of local bonds. He is a 1992 graduate of Yale University.

ABOUT THE CALIFORNIA POLICY
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

 

The Highest-Paid Public Employee in the Poorest County in California

Raymond J. Cordova, county executive officer of Imperial County, earns $282,093 with total pay and benefits. That’s 17 times the median per capita income of Imperial County residents, who earned just $16,409. By comparison, San Francisco’s highest paid public official, Chief Investment Officer William J. Coaker Jr., made $633,723 – about 13 times SF’s median income. San Francisco got the better deal: divide salary by population, and we find that San Francisco residents paid just 76 cents each for Coaker; Imperial County residents paid $1.60 each for Cordova.

Cordova is a low-profile guy in a low-profile community. With just 156,000 residents, Mexico-adjacent Imperial County is almost a postscript to the state. Cordova himself is nearly anonymous. The one photo of him on the internet – in which the sartorially splendid CEO is largely blocked from view by Supervisor Raymond Castillo – is the only one we could find; the county did not respond to requests for comment and a photo.

That made it hard for us to personally congratulate Ralph Cordova Jr., who, as Harry Bailey says of his brother George in the classic It’s a Wonderful Life, may be “the richest man in town.”

Imperial County runners-up: Director of Child Support Services Gustavo Roman ($241,717) and Public Defender Timothy J. Reilly ($224,138).

By Conor McGarry. Sources include State Controller’s Office.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

What's Wrong With the Economy?

Why are so many people unhappy and angry? Why is the electorate turning to populist candidates like Bernie Sanders and Donald Trump? Why are they so mad at the Washington D.C. establishment? What’s the problem?

Perhaps the biggest problem is the low growth of the economy leading to fewer job opportunities and little or no growth in family incomes coupled with the rising cost of two family essentials: health care and education. Housing costs have also risen faster than family incomes.

In this first of a series of articles, we will discuss the rapidly rising cost of health care and education. Subsequent articles will discuss the reasons for the low growth of the economy and family incomes.

Attached is a graph from a Foundation for Economic Education article “Why luxury TVs are affordable and health care is not.” It provides some of the answer.

Price Changes 1996 to 2016:  Selected Consumer Goods and Services

20160915-cpc-fletcher

The chart shows that over the past 20 years inflation has averaged about 2.2% per year so that something, on average, that cost $1.00 in 1996 would cost about $1.55 today.

Is inflation of 2.2% per year a problem? It’s very close to the inflation target the Federal Reserve is trying to maintain via monetary policy, 2.0% per year.

There’s more to the story and inflation is a big problem for a lot of people.

First, the inflation rate is based upon consumer purchases of a standard basket of goods and services. This doesn’t measure inflation in financial assets such as stocks, bonds, and commercial real estate. Inflation in housing is measured indirectly looking at a rental equivalent for owner occupied homes. When these financial assets go up, it’s considered a good thing, investors are making money, and is not thought of as inflation by most people. To the extent that the prices of stocks, bonds, and commercial real estate are increasing due to fundamentals such as increases in company earnings, market driven interest rate changes (not manipulated by the Fed), or increases in rental rates for commercial properties this is not inflation but a real increase in value. However, we don’t separate out real versus inflationary increases in financial assets.

Inflation of financial assets increases wealth differentials since it’s high income people who already own most financial assets and gain the most from asset price inflation.

Second, all consumer goods and services are not increasing at the same rate as shown on the chart. Thanks to improving technology, advanced manufacturing methods, low cost labor from China and Mexico, and other factors, most products and services are getting cheaper and better such as flat screen TVs. There are often significant improvements in quality, performance, and features that aren’t even captured by measures of inflation. For example, car prices haven’t increased much in the past 20 years but there have been major improvements in performance, features (mainly electronics), safety, reliability, and durability.

It was only one generation ago that a long distance phone call was very expensive and we counted the minutes we were on the phone. Now, we have portable cell phones and the cost of communications, data as well as voice, is low and decreasing.

Thanks to technology, innovation, and other factors, most of the things we need or want are getting more affordable. However, some things are getting much more expensive in spite of new technologies and other factors that should dramatically reduce their cost. The biggest are education and health care.

Why doesn’t the cost of health care and education exhibit the same trends as most other things we buy? Compare the experience of buying something where companies compete for your business (automobiles, clothes, consumer electronics, entertainment, etc.) to your purchases of health care and education.

A major problem in sectors where there are rising costs is a lack of choice and real competition in the marketplace. Users of health care, for example, are not in a position to act as customers and make intelligent choices based on price, quality, and other measures, choosing from suppliers who have to compete for their business. Health care is increasingly being delivered by large, bureaucratic, highly regulated, near-monopolies.

For health care and education, there are substantial barriers to real competition, innovation, new technologies, and potential new competitors. Is it even possible to have an Uber, Amazon, or Google equivalent for education or health care?

Why can’t a patient communicate with their doctor via e-mail or talk to them by phone? Because in most cases, they aren’t paid for answering an e-mail or talking on the phone. They have to see the patient to get paid.

Why did we even need the Affordable Care Act anyway? If we wanted to cover an additional 30 million uninsured, why not expand Medicaid? Medicaid already covered millions and an estimated 9.0 million of the uninsured were already eligible for Medicaid but hadn’t signed up. Most of the coverage expansion under the ACA is from adding more people to Medicaid anyway. Did we really have to overhaul the health care industry to accomplish this?

Also, health insurance is not health care. Under the ACA, insurance premiums for low income people are subsidized to reduce their cost. Taxpayers pay the difference and hide the true cost of the program. Even then, the low-income insured have to pay often unaffordable co-pays and deductibles. Some services are excluded and there are often narrow provider networks that limit access to many physicians and hospitals.

Similarly, student loans did little or nothing to improve education or even give many additional people access to a college education or other training. We now have about $1.3 trillion in outstanding student debt, more than total credit card debt. All this money has allowed educational institutions to increase their prices without improving their product (inflation) or to substitute student debt for taxpayer support in the case of state universities. In addition, the national statistic is that it now takes six years on average for someone to earn a four-year BA or BS degree. Even then, less than 50% graduate. This is a major loss of productivity when it comes to a getting a college education.

The cost of K-12 education probably has a trend similar to higher education. The cost per student hasn’t gone up as much but more of the money available is being spent outside the classroom such as for higher teachers’ pensions and health care expenses, more administration and reporting, etc. Programs such as music and sports have been cut to divert funds to other purposes.

In our high-tech world, why don’t students have tablet computers with state-of-the-art, interactive educational software? Most have cell phones. Why don’t we teach computer programming in primary school?

We can see why there is a lot of voter dissatisfaction. In addition to rapid inflation of health care and education costs, average family income hasn’t been growing very fast since about 2000. The cost of educating children or paying for health care is growing much faster than it should be and is rapidly becoming unaffordable to more families.

Raising the minimum wage or providing “free college” isn’t the solution. All this does is shift costs, someone else pays. We need to address fundamental problems that prevent education and health care from benefiting from technology and innovations that would significantly reduce costs, improve quality and convenience, lead to better health care and education outcomes, and make basic, affordable health care and education available to everyone.

What needs to be done? Slowing the growth of health care and education costs isn’t enough. We need major changes that will fundamentally reduce the cost of health care and education. If we don’t solve the cost problem, we can’t afford to give everyone the access to health care and education that most of us would support as policy objectives. Why not try for a 50% decrease? We need creative thinking and some very bold initiatives.

Health care in the U.S. already consumes 18 percent of our GDP compared to 10 to 12% for other developed countries who manage to have universal coverage in spite of spending less. At 18% of GDP, the U.S. spends about $10,000/person on health care, $40,000 for a family of four. Where does all this money go?

For college, why can’t someone get a BA degree in three years attending school full-time, twelve months/year? That should be enough time to take the credits required. What about practical, cost effective job training and apprenticeship programs for careers that don’t require a college degree? Do students need to attend class when most course content can be delivered online? Why can’t they get together for workshops, labs, and discussion groups but get their lectures over the Internet on a schedule of their choosing?

We can’t achieve the goals of universal health care and quality education for all unless we are open to revolutionary improvement in how these services are delivered. Uber anyone?

About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.

LAUSD Spends More Even as Enrollment Drops

Editors Note: By almost every objective standard, the educational outcomes delivered by the Los Angeles School District are among the worst in the nation. The following article documents how LAUSD has spent millions, hundreds of millions, on budget items that have little impact on the quality of classroom education, all the while attempting to blame charter schools for their budget challenges. We’ve dug into this issue in other articles published this month: “LA Story: The Poorer You Are, the More Likely You Are to Support Charters” documents how, ironically, it is the wealthy enclaves of Los Angeles where voters support union backed school board candidates, and how voters in underprivileged communities are more likely to support reform candidates and charter schools. In “ACLU Turns its Back on LA’s Poorest Students in Attack on Charter Schools” we describe recent efforts by the ACLU, surprisingly, to discredit charter school performance using biased statistics. In “Anti-Charter-School Rhetoric Isn’t Helping L.A.’s Kids,” a board director of the nonprofit Alliance College Ready Public Schools debunks the unfounded anti-charter school claims that are relentlessly pushed by the teachers union. There is a war in Los Angeles for the future of the next generation of citizens. The war is not between unions who care about students and “millionaires and billionaires trying to hijack education for profit.” The war is between innovative charter school operators, nearly all of them nonprofits, who are logging impressive successes against a teachers union that is bent on their destruction.

The Los Angeles Unified School District is hemorrhaging cash, and the teachers union wants you to believe the problem is charter schools. The real problem is closer to home: district officials and teachers union leaders who systematically raid the coffers with no regard for the consequences.

LAUSD’s new $7.6 billion budget, issued in June for the coming fiscal year, adds $700 million in new spending. Most of that new spending will fund expenses outside the classroom as the district struggles to pay for increased benefits. This new budget comes just after state officials ordered the district to stop misallocating funds intended for high-­needs students. Local advocates say the new LAUSD budget continues to violate the state order.

LAUSD continues to spend more even as the district has lost over 100,000 students since 2006 – a drop of more than 20%. Despite the exodus, union leaders have pressed the district to add teachers and administrators. The district has seen a 22% increase in administrative staff over the last five years. Those teachers and administrators earn relatively generous salaries and benefits despite the abysmal performance of LAUSD schools overall. That generosity has produced unfunded pension liabilities of roughly $13 billion – about 1.5 times the district’s annual operating budget. Its operating budget runs a deficit of $333 million and rising, projected to exceed half a billion annually by 2019-­2020.

Then there are the district’s laughable, myriad budgeting failures. LAUSD has spent $73 million for a new ethnic studies program that was supposed to cost $4 million. The district will have spent more than $200 million for a new computer system by 2018 – for which they originally budgeted $27 million. That miscalculation was so severe that it required a temporary district­wide hiring freeze.

The truth, then, is that charters are not the problem.
The problem is that LAUSD schools are consistently
among the worst in the United States – and that residents
pay a premium for those miserable results.

Last year, the district clocked several financial disasters. In April 2015 alone, Superintendent Ramon Cortines asked the school board to set aside $1 billion in additional funds for a union health care agreement – and wanted the board’s approval before they’d even been presented with the district’s annual budget. This being the LAUSD, the school board agreed, even refusing board member Monica Ratliff’s request for a 10­ year analysis of the district’s future obligations.

At the same time, the LAUSD school board unanimously approved a teachers contract that included a 10.36% pay raise and added $278.6 million a year to the district’s budget deficit. Board president Richard Vladovic, endorsed by the teachers union, claimed the contract was “the right thing to do” because teachers “are worth every penny, and more.” A good idea, but can the district afford it? Vladovic said the superintendent would figure out the math. In the same agreement, the school board agreed to hire 139 additional teachers and allowed teachers to collect 14.3% of their annual salary in back pay over the next two years.

Despite this assortment of imprudent financial decisions by the union ­controlled school board, United Teachers Los Angeles, the LAUSD teachers union, blames charter schools for the district’s problems. As part of their propaganda effort, the union funded a study claiming charter schools have cost LAUSD $591 million in lost revenue due to declining enrollment. Many district officials and charter school leaders disagree, pointing to numbers that suggest charter schools actually bring LAUSD money.

The truth, then, is that charters are not the problem. The problem is that LAUSD schools are consistently among the worst in the United States – and that residents pay a premium for those miserable results. Instead of solving its financial problems, Los Angeles Unified makes them worse with every new budget. LAUSD requires serious financial reforms to maintain fiscal solvency, and these reforms must start with reining in unions, not attacking charters, the only part of Los Angeles Unified that is successful.

David Schwartzman is a junior studying economics and applied mathematics at Hillsdale College. He is a Journalism Fellow at the California Policy Center in Tustin.