Increasing Water Supply Must Balance Conservation Measures

In a recent commentary tax fighter Jon Coupal exposed one of the hidden agendas behind recently Senate Constitutional Amendment 4 recently introduced in the California Legislature. Coupal writes: “They wish to charge those water users they perceive as “bad” more per gallon than those users they perceive as “good.” The beauty of “cost of service” rates, however, is that they are fair for everyone: You pay for what you use.”

California’s consumers already endure tiered rates for electricity consumption, where if their electricity consumption goes beyond approved levels, they pay more per kilowatt-hour. At least with electricity, there is some rationale for tiered pricing, because when demand exceeds capacity the utility has to purchase power from the grid at the spot market rate. But in the case of water that’s a much harder case to make. Water prices are negotiated far in advance by water utilities.

The reason utilities want to charge tiered rates is so they can discourage “over-consumption” of water, in order for them to avoid running out of water during times of severe drought. What happened repeatedly over the past few years was that suppliers to many regional water districts could not meet their contracted delivery obligations. Understandably, water districts want to reduce total annual consumption so, if necessary, they can get by with, for example, only 60% of the amount of imported water they would otherwise be contractually entitled to.

Punitive rates for “overuse,” however, will effectively ration water, as only a tiny minority of consumers will be wealthy enough to be indifferent to prohibitively high penalties.

There is a completely different way for water districts to address this challenge. An optimal solution to California’s water supply issues should incorporate not only conservation, but also increasing supply. And to fund new supplies of water, utilities should experiment with tiered pricing that only incorporates moderate price increases. Doing this would mean a large portion of consumers will not be deterred from “overuse,” and the extra revenue they provide the utility could be used for infrastructure investment to increase supplies of water through myriad solutions – including runoff capture and enhanced aquifer storage, sewage treatment to potable standards, seawater desalination, and off-stream reservoir storage.

The following images excerpted from a spreadsheet provide a simplistic but illuminating example of how reasonable tiered pricing could, in aggregate, fund massive investment in additional supplies of water. In the first example, below, with assumptions highlighted in yellow, are water consumption profiles for a regional water utility district that engages in punitive pricing for overuse of water. As can be seen in the large yellow highlighted block to the center left, when unit costs for water are tripled for those consumers who “overuse” water, the number of “over-users” is a small 4% minority of all consumers, and the number of “super-users” is a minute 1% of all consumers. Consequently, the utility only collects $900,000 per month, barely 5% of its revenue from consumers, from households that are deemed to have overused water.

FINANCIAL IMPACT TO UTILITY OF PUNITIVE PRICING FOR “OVERUSE”

The next example, below, shows hypothetical consumption profiles for a regional water utility district that engages in reasonable pricing for overuse of water. Again, as can be seen in the the large yellow highlighted block to the center left, when unit costs for water are increased by 50% (instead of 300%) for those consumers who “overuse” water, the number of “over-users” is a significant 20% minority of all consumers, and the number of “super-users” is a substantial additional 10% of all consumers. Consequently, the utility collects $3,000,000 per month, 14% of its revenue from consumers, from households that are deemed to have overused water.

FINANCIAL IMPACT TO UTILITY OF REASONABLE PRICING FOR “OVERUSE”

This is a simplistic analysis, requiring caveats too numerous to mention. Utilities get much of their revenue from property taxes, not from consumer ratepayers, and fixed service fees still constitute most of the amount that appears on a typical household water bill. The utility’s internal cost for water, pegged here at $.20 per CCF, is actually calculated through a maddeningly complex and somewhat subjective cost-accounting exercise that takes into account the amortization of capital costs for treatment, storage and distribution facilities, operating costs, as well as actual contracted purchases from, for example, the California State Water Project. But there is a deeper debate over principles that these examples are designed to emphasize, one with profound consequences for our quality of life in the coming decades.

By implementing severe financial penalties to utility customers who “overuse” their water, electricity, or anything else, state regulators are effectively imposing rationing on all but extreme high-income households. Complying in the face of punitive rates for overuse requires consumers to submit to undesirable lifestyle adjustments including short duration, low-flow showers, low flow faucets that require long wait times for hot water to arrive through the pipes and long wait times to fill pots, remotely administered, algorithmically managed “affordable” times for washing dishes and laundry, mandated purchases of expensive new internet enabled appliances that are ridiculously difficult to simply turn on and use, require regular warranty payments because they break down so much, with annual fees imposed to update their software.

We don’t have to live this way. California’s residential households consume less than 6% of the water diverted and used in California for environmental, agricultural, and commercial purposes, yet by far they pay the most to maintain and upgrade this infrastructure. Indoor water overuse is a myth, as all indoor water is either being completely recycled by the sewage treatment utility, or should be. Raising rates causes consumers to under-use water, despite most of a utility’s costs being for the operations infrastructure, creating a vicious cycle of rate increases to maintain sustainable revenues. And when consumer water use is crammed down further and further, the overall system of water infrastructure is progressively downsized until there is not enough resiliency and overcapacity in the system to absorb a major disruption such as an earthquake, a dam failure, or acts of terrorism.

The conventional wisdom in California as expressed in policies enforced by an overwhelming majority of Democrats in the State Legislature is that we must live in “an era of limits.” But this motto, originally coined in the 1970’s by Governor Jerry Brown, is in direct conflict with the spirit and culture of Californians, as exemplified by the dreams they offer the world from Hollywood and the miraculous innovations they offer the world from Silicon Valley. The idea that California’s legislators cannot enact policies designed to increase supplies of water and energy enough to make life easier on the citizens they serve is absurd, and must be challenged.

Ed Ring is the vice president of policy research for the California Policy Center.

Community Choice Aggregation Electric Power Agencies in California: Pros and Cons

Local governments in the major metropolitan areas of California are looking at establishing or joining “community choice aggregation” joint powers agencies. These government agencies will generate electricity for ratepayers as a competitor to the state’s three major investor-owned utilities (Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric). A few are fully operational, several more have just recently been established, and at least two dozen are under consideration.

Information available about these community choice power agencies is disproportionately skewed in support of the concept. Here is an attempt to provide a balanced and fair assessment of the pros and cons of community choice aggregation.

An Assessment of Community Choice Power Agencies
Arguments for Community Choice Aggregation
 
1. Worldview: Community Choice Aggregation is more than just a regional government that generates and purchases electricity. It is the implementation of a progressive vision to make your region (and our world) a better place by establishing public ownership and control of one of the most important resources in modern society. It takes electricity generation away from tired, inefficient, and unresponsive investor-owned corporations burdened with outdated infrastructure that harms the planet and harms the public. The tremendous power and potential of electricity generation is instead put into the hands of the people. Electricity is a public resource, and the public should control the generation of it.
 
2. Lower Electricity Rates: Free from the profit motive and the constant need to give shareholders a return on investment, Community Choice Aggregation will be able to keep rates reasonable and probably lower than your investor-owned utility. In addition, excessive executive salaries and perks and other abuses often found in corporate environments will be minimized or absent because of agency transparency and public scrutiny. Publicly-owned utilities throughout the state routinely charge rates that are lower than investor-owned utilities.
 
3. Consumer Choice: Community Choice Aggregation will give consumers a choice in who generates their electricity. By taking no action whatsoever, customers can become part of a Community Choice Aggregation agency. Or, they can “opt-out” and stay with their investor-owned utility. Right now consumers not served by publicly-owned local or regional utilities must obtain electricity generated or purchased by their investor-owned utility. There is no choice.
 
4. Fighting Climate Change: Because it serves the interests of the public rather than investors/shareholders, Community Choice Aggregation will be able to offer customers a choice of more ambitious portfolios that greatly exceed the percentage of renewable energy that investor-owned utilities are using and plan to use in the future. Community Choice Aggregation agencies can adopt electricity generation strategies that will hasten the transition to 100% renewable energy production and thus reflect the urgency to fight global climate change. Community Choice Aggregation agencies can construct and operate utility-scale solar and wind farms, encourage households to install their own rooftop solar panels, and offer incentives for conservation. They can even try innovative methods of energy generation such as tidal power.
 
5. Democracy: Community Choice Aggregation creates a much more “democratic” way to generate electricity for consumers. Instead of obtaining their electricity from a distant and disinterested corporate behemoth, consumers will obtain their electricity from their own publicly-owned Community Choice Aggregation agency. They can attend board meetings open to the public to conduct public business, and every customer will have a representative on the board who works for the interest of the people in their community rather than the interests of investors/shareholders. Board members will reflect the diversity, interests, and values of the community more effectively than a corporate board of directors.
 
6. Social Justice: The hiring and contracting practices of Community Choice Aggregation agencies will be open and transparent to the public. Policies related to agency hiring can ensure that management, non-exempt employees, and even interns represent the diversity of the community. Training and job opportunities can focus on disadvantaged workers. Policies related to contracting can focus on ensuring high-wage jobs for local people working for local companies in which employees have a voice in the workplace through collective bargaining and union representation. Community Choice Aggregation agencies will be focused on community concerns such as public safety rather than the interests of shareholders. Decisions on infrastructure will appropriately consider the negative effects on disadvantaged communities.
 
7. Leadership: Customers served by Community Choice Aggregation will have an exciting opportunity to be visionary and innovative leaders in California, in the United States, and in the world in fighting climate change, protecting the environment, and advancing social justice. The public will play an active role in changing the world, rather than passively relying on a corporation to supply electricity.
 
8. Cooperation and Competition Foster Achievement: Community Choice Aggregation agencies and the consumers who own them may be inspired to adopt strategies or programs adopted by other Community Choice Aggregation agencies. In addition, these agencies will be competing against each other to reach new benchmarks and achieve bragging rights for renewable energy percentages, rates, customer satisfaction, and social justice criteria.
 
9. Better Community Partnerships: Owned and operated by and for the public, Community Choice Aggregation agencies will have insight on how to partner with and assist local organizations that are trying to create a better community through education and service. Decisions about advertising, partnerships, programs, and grants will be made transparently by public officials for the benefit of the public.
 
10. Another Public Voice on the Future of the Community: The existence of a publicly-owned community choice aggregation agency will give the public new powers to influence land use, transportation, and other decisions that affect the quality of life in their communities. Community Choice Aggregation serves the interests of the public and will play an important and influential role on behalf of the public when proposals arise that may increase electricity consumption in the region.

Arguments Against Community Choice Aggregation
 
1. Worldview: Community Choice Aggregation agencies are essentially government control of one of the key segments of our modern society: electricity supply. To be blunt, public power generation is an objective of mainstream advocates of democratic socialism, and it will be difficult to privatize electricity generation once it is controlled by government. In the long-term, it is quite possible that investor-owned utilities will no longer be able to make a profit and stay in business if they lose most of their customers to Community Choice Aggregation agencies. If this happens, opponents of investor-owned utilities may seek public appropriation of electricity transmission and distribution, thus completing the evolution to full government control of regional energy supply.
 
2. Uncertainly About Future Electricity Rates: A board of appointed politicians will make decisions that will ultimately determine electricity rates for Community Choice Aggregation agency customers. A majority on this board may choose agency objectives, policies, and practices that may impose significant fees or significantly rate increases for some customers. Community Choice Aggregation agency board members may be compelled to prioritize climate change and social justice at the expense of maintaining steady rates, especially if investor-owned utilities cease to be a viable alternative choices and competitors. It is probable that local elected officials who desire to be appointed to a Community Choice Aggregation agency board will be the most zealous about fighting climate change and advancing social justice regardless of cost, and their values will affect priorities and policies.
 
3. Income Redistribution: Certain types of customers (major users, for-profit corporations, properties with high square-footage) may be targeted by the Community Choice Aggregation agency board to pay disproportionately high prices so that other customers (low-income households, properties generating their own electricity with photovoltaic solar panels, senior citizens, veterans, students, etc.) pay very little. Advocates for various demographic groups may end up fighting each other over who pays for electricity generation. Certain influential corporations, non-profits, industries, and institutions may lobby the Community Choice Aggregation agency board successfully for exemptions or breaks. In the end, residential and small business customers may bear a disproportionate burden of the cost.
 
4. Consumer Choice May Be Fleeting: A Community Choice Aggregation agency will be the only option if the competing investor-owned utility no longer remains viable – a possible outcome. It is likely that a Community Choice Aggregation agency will strenuously resist applications from any subsequent investor-owned utility to become a competitor.
 
5. Opting Out Gives One Choice a Significant Advantage: While state law requires Community Choice Aggregation agencies to take certain steps to allow electric customers to “opt-out” and stay with their investor-owned utilities, for practical purposes 85%-90% will not opt out and be switched to Community Choice Aggregation. The specific “opt-out” requirement in state law for Community Choice Aggregation is meant to give such agencies the advantage. Informing electric customers about the investor-owned utility as a valid and worthy choice would require a significant marketing and public relations campaign that is unlikely to happen, for the reason listed below.
 
6. One Choice Has Its Speech Restricted: Senate Bill 790, enacted in 2011, prohibits investor-owned utilities from using ratepayer funds to market themselves against Community Choice Aggregation agencies. Investor owners can use their own money to establish marketing operations that are separate from the utility, but these programs have to fulfill strict conditions and be approved by the Public Utilities Commission (PUC). The first marketing program (for Sempra Energy, owner of San Diego Gas & Electric) was approved in 2016, but the PUC has already revoked approval for the program.
 
7. A Prime Motivation for Community Choice Aggregation Is Based on the Claimed Ability of Scientists to Predict the Future: Is it wise to base major public policy decisions about essential services on predictions in 2017 about 2100? One big volcanic eruption, meteorite strike, or variation in solar output can dramatically change the earth’s climate and make the warming effect of greenhouse gas emissions moot. Unanticipated technological developments, changes in mass behavior, nuclear war, pandemic, and other catastrophes can also affect greenhouse gas emissions. In addition, some people assert that the genuine threat of climate change is being exploited by ideologues whose main objective is to have socialism supplant capitalism as a economic and social system.
 
8. Do the People and Politicians Know Better than Investors and Corporate Managers? The belief that government control is inherently better than a regulated capitalist market is often based on questionable presuppositions related to ideology, philosophy, and even theology. As some advocates of Community Choice Aggregation assert, the pressure to show a return on investment can encourage abuse and corruption. But the pressure of the market can also encourage efficiency and fiscal responsibility. And democracy is not purely benevolent and selfless in practice. Politicians routinely feel pressure to cater to special interest groups and favored constituencies at the expense of efficiency and fiscal responsibility. Unions, environmental groups, social justice organizations, theological movements, and advocacy groups for the disadvantaged are all lobbying furiously to establish Community Choice Aggregation agencies and quickly adopt policies. (Unions demanding Project Labor Agreements are one well-documented example.) In addition, private contractors are already entangled in the promotion, planning, and expansion of Community Choice Aggregation and ready to obtain easy contracts from an agency that will likely be difficult to understand and rarely examined by the news media.
 
9. Election Campaigns for Local Office May Be Infiltrated by Special Interest Groups Seeking to Influence Community Choice Aggregation: Electricity supply is big business with a lot of power and money at stake. Powerful special interest groups will be continually positioning themselves to obtain a majority on the Community Choice Aggregation agency board. These groups will scheme to get majorities elected to local governing boards that in turn will appoint favored elected officials to the Community Choice Aggregation agency board.
 
10. Community Choice Aggregation Can Be Exploited as a Tool to Control Land Use and Transportation Decisions: Community Choice Aggregation agencies can get involved in environmental review, lobbying, and public relations to stop any proposed development project or large-scale event that increases electricity consumption. Seawater desalination would be one prominent example.

At UC Berkeley, It Pays Well to Worry About Inequality

This article originally appeared in The American Spectator.

Former Clinton-era Labor Secretary Robert Reich, now a public-policy professor at the University of California at Berkeley, has warned that “we are heading back to levels of inequality not seen since the Gilded Age of the late 19th century,” invoking the term applied to a society festering in poverty but covered by a veneer of gold. “The dysfunctions of our economy and politics are not self-correcting when it comes to inequality,” Reich added, stepping up the sense of doom.

It would be easier to admire Reich’s commitment to equality if the University of California hadn’t paid him $327,000 in total compensation in 2015. Obviously, professors at top universities tend to earn big bucks, but U.C. Berkeley also is home to the Center for Equitable Growth, which produces “research toward achieving economic growth that is widely and fairly distributed.” And as the California Policy Center’s Marc Joffe explains, it really pays to be concerned about inequality.

Transparent California data finds that Center for Equitable Growth Director Emmanuel Saez received a total compensation package of $412,000 in 2015, with its three advisory board members each earning between $365,000 and $525,000 in total compensation as University of California professors. Furthermore, Joffe reports that the City of Berkeley has an international inequality rating approaching that of Haiti. Think of it as Port-au-Prince with more aggressive homeless people.

None of this would really matter if the 10-campus U.C. system and its 198,000 employees weren’t so dependent on California taxpayers for direct subsidies and on federal taxpayers who fund the easy student credit that helps propel the spending train. Sure, around three-quarters of its funds come from medical centers, private donations, government contracts and sales, but the remaining “unrestricted” funding comes from us.

When Reich and Saez complain about income inequality, they don’t seem concerned that general taxpayers and U.C. parents — who typically earn far less than they do, and might not get one of those cushy government pensions — have to pay more to keep them living large. I have yet to hear of an organized effort by, say, the Center for Equitable Growth or the professoriate in general to share in the pain of the latest proposed tuition hike.

Yes, U.C. officials are yet again calling for significantly higher tuition and student-services fees. I’d argue that U.C. doesn’t need the money because it misspends many of the billions of dollars it has and it faces little pressure to control costs. It seems so obvious, but don’t expect that point to even get a hearing during legislative proceedings.

The U.C. system threatens such hikes every few years. The last big push was in 2014, and the Legislature — after complaining that U.C. officials were holding it hostage — gave in to its demands and increased state funding. The regents recently voted yes, with Lt. Gov. Gavin Newsom complaining that the increases take pressure off the Legislature to give the system more dollars. Tails you lose, heads I win.

Immediately after the last time we played this game, the Board of Regents hiked the pay of the system’s highest-paid employees, as the Los Angeles Times reported in October 2015. “The number of those making at least $500,000 annually grew by 14 percent in the last year, to 445, and the system’s administrative ranks have swelled by 60 percent over the last decade,” the article added.

Students need to realize the real cause of the problem is standing right before them in the classroom and behind them in U.C.’s administrative bureaucracies, especially the massive Office of the President. In general, U.C. officials can’t stop spending. The current $29 billion budget is up about $5 billion from the last time the university demanded more cash. State support fell during the 2007 recession, but its budget is up more than 40 percent since then.

What else could we expect?

Former Obama administration Homeland Security Secretary Janet Napolitano was named U.C. president by the system’s Board of Regents in 2013. She’s a “veteran at managing and perpetuating bureaucracies,” wrote Richard Vedder in Bloomberg, and “one well-connected enough to keep the federal flow of support coming and to shake more money from the state’s already overburdened taxpayers.” She’s also a master at political correctness, someone who has launched a campaign against “microaggressions.”

The latter point alludes to another good argument against the latest U.C. tuition hike. Sure, students ought to pay market rates for their tuition. But bolstered by a never-ending and inflationary sea of public subsidies, the university system never has to make tough choices. Its priorities are askew. After it blows the money building luxury dorms and creating departments that dish out PC rubbish, it complains there’s no money left. It then frets in public about the quality of the education it can provide given its level of destitution.

“We’re at the point where if we don’t do this, if we don’t invest, the quality of education is going to suffer,” U.C. spokeswoman Dianne Klein told the Los Angeles Times last month. And so the scare tactics begin, and legislators scurry. The unions representing the universities’ nonfaculty workers know how to play the game, too. At a recent rally at U.C. Santa Barbara, protesters cited work from the Reich-founded Economic Policy Institute, complained that U.C. clerical workers can’t afford to live in Santa Barbara and that 70 percent of them suffer from “food insecurity.”

Well, no one can afford to live in Santa Barbara these days. Its median home price is more than $1 million, thanks to all those growth controls supported by the Democratic politicians these union blowhards routinely help elect. The food-insecurity nonsense is based on responses to a highly subjective online study. It’s hard to believe that U.C. union workers have a Gilded-Age level of hunger given that they earn nearly 50 percent more than the median income for a typical Californian — and don’t get me started on their pensions.

U.C. employees don’t receive the most generous pension formula in the state, but their system has a special provision that lets employees accrue benefits until 40 years of service, per the CPC report. For instance, the absurdly generous “3 percent at 50” benefit common in California public-safety fields lets employees receive 90 percent of their final years’ pay at age 50. But it stops accruing after 30 years. Often, these employees retire and then start double dipping at another agency, but that’s another story.

At U.C., however, the dollars keep accruing. Joffe notes a professor of psychiatry at UCLA who received $354,000 in pension payments in 2014, plus cost-of-living adjustments. Meanwhile, the university contributed $2.52 billion last year in pension contributions, which works out to $9,800 per student. He’s right that this has “proven very expensive for students and taxpayers.”

Well at least that professor — caught on YouTube explaining to his colleagues the university’s retirement benefits — isn’t lecturing the rest of us about income inequality. I promise I won’t complain about paying the extra tuition for my daughter if U.C.’s inequality police agree to slash their compensation in order to help the less fortunate.

Wanted: An Early Warning System for Local Governments

This article originally appeared in The Capitol Weekly.

Back in 2012, then Treasurer Bill Lockyer called for an early warning system that would give state officials time to proactively address local government fiscal emergencies before they wound up in bankruptcy court. We are now five years closer to the next recession and its attendant set of local government financial crises, but the state has made little progress toward implementing Lockyer’s proposed system.

Lockyer offered his suggestion in the wake of bankruptcy filings by Stockton, Mammoth Lakes and San Bernardino. But after the summer of 2012, the parade of high profile Chapter 9 filings ended, and, with it, the political will to monitor local government financial health. That’s a shame because a repeat of the fiscal meltdown we witnessed in the wake of the Great Recession is almost inevitable.

Agencies are coming under increasing pressure from CalPERS rate increases, and revenue growth for many inland cities has been weak. Even during California’s growth spurt, we have witnessed two Chapter 9 filings – by Palm Drive Healthcare District in 2014 and West Contra Costa Healthcare District in 2016.

California can look to other states to find best practices. The New York State Comptroller implemented a fiscal stress monitoring tool in 2013 that uses a combination of 23 factors to score public agencies and identify those needing attention. My own research suggests that a simpler approach can identify troubled governments, allowing California to replicate New York’s success with less complexity. Last fall, Pew Charitable Trusts published a study of state fiscal monitoring practices, giving California leaders a variety of models to emulate.

Since 2012 California state agencies have made some moves in the right direction, with much of the credit belonging to John Chiang, first as state controller and now as state treasurer. At the state controller’s office, Chiang introduced ByTheNumbers, a system that allows analysts to retrieve large volumes of local government fiscal information in spreadsheet form. Unfortunately, the controller’s data does not reconcile to audited financial statements that local governments publish – thus limiting its value.  While the controller’s office collects local government audited financial statements, it does not post them on its web site. Instead, fiscal watchdogs like me must obtain them from the controller through public records act requests.

As treasurer, Chiang launched DebtWatch, which shows all local and state government debt issued over the last 30 years. Thanks to SB 1026 introduced by state Sen. Robert Herzberg and enacted last year, DebtWatch will be enhanced in 2018 to show how much agencies still owe on the bonds they’ve issued.

In 2015, California State Auditor Elaine Howell initiated a Local Government High Risk program and has now audited two cities – Maywood and Hemet. Although the auditor’s program was motivated by a desire to root out local corruption in the wake of the Bell scandal, enabling legislation allows her to select agencies that have “challenges associated with [their] economy, efficiency, or effectiveness.”. While my research on distressed cities concurs with the auditor’s choice of Maywood, I did not find concerns with Hemet.

It appears that the auditor is not using a rigorous, consistently applied algorithm for choosing high risk agencies. The failure to use a fully transparent selection method opens the auditor to suspicions of bias. In that way, her office faces the same criticism leveled against credit-rating agencies: that their ratings are assigned in an opaque, and apparently arbitrary manner.

In my last two surveys, I found Compton to be a highly distressed city. Among its risk factors are a large negative general fund balance, late filing of audited financial statements and a qualified opinion on its most recently published statements. Other distressed cities identified by the California Policy Center’s review of 2015 financial statements were Atwater, Coalinga, Marysville, Maywood, Soledad, Vernon and Victorville.

The state has many of the elements in place needed to implement a local government early warning system. But further legislation or greater initiative from a state agency will be needed to get a best practice program running in time for the next recession. Simply posting all local government financial statements in one place would be a great start.

California Lawmakers Attempting to Impose Tiered Water Rates

What Hertzberg and big government bureaucrats want to do, however, is to use water rates as another opportunity to engage in social engineering. They wish to charge those water users they perceive as “bad” more per gallon than those users they perceive as “good.” The beauty of “cost of service” rates, however, is that they are fair for everyone: You pay for what you use.

It’s no secret that tax-and-spend interests have hated Proposition 13 since its adoption by the voters in 1978. Immediately after passage, Prop. 13 was the target of numerous lawsuits and legislative proposals seeking to create loopholes that would allow government to grab more tax dollars from California citizens.

These constant attacks compelled taxpayer advocates to go back to the voters with multiple initiatives to preserve the letter and spirit of Prop. 13. These included Prop. 62 in 1986 (voter approval for local taxes); Prop. 218 (closing loopholes for local fees and so-called “benefit assessments”); and Prop. 26 (requiring “fees” to have some nexus to the benefits conferred on the fee payers).

However, the latest tax-grabber to treat homeowners as ATMs is state Senator Bob Hertzberg, D-Van Nuys. If he gets his way, Californians will be spending a lot more on water and sewer service. He seeks to do away with the critical “cost of service” requirements for water rates as well as treat “stormwater runoff” (the rain that runs down street gutters) the same as “sewer service,” opening the door to virtually unlimited — and unvoted — sewer rates.

As to the latter proposal, Hertzberg has introduced Senate Bill 231. This proposal would attempt to rewrite Prop. 218 with a statute to allow for stormwater to be included under the definition of “sewer,” meaning that it would no longer be subject to a Prop. 218 election. This is not a minor issue and, in fact, when the city of Salinas attempted to charge residents for “storm water runoff” as part of their sewer bill, the Howard Jarvis Taxpayers Association sued and won. The published decision inHJTA v. City of Salinaswas a significant victory for homeowners as the city was attempting to load up its “sewer” service with all kinds of costs unrelated to sewer service including street sweeping.

Of course, the real problem with SB231 is that it attempts to rewrite part of the California Constitution with a mere statute. This is a big no-no. The city of Salinas decision was an interpretation of Prop. 218 which added Articles XIIIC and XIIID to the California Constitution. Courts are likely to take a dim view of a legislative override of their interpretation of the state constitution.

To add insult to injury, Hertzberg has also introduced Senate Constitutional Amendment 4. While this bill is basically intent language and needs to be refined, the point of this bill will be to undermine Prop. 218’s proportionality and cost of service requirements. Under the state Constitution, rates for property related fees (water/sewer/refuse) need to be equivalent to the cost of providing the service. Taxpayers fear that SCA 4 will ultimately overrule another taxpayer court victory in the city of San Juan Capistrano which upheld the concept of “cost of service.” This decision has been misinterpreted by Gov. Brown and the media as prohibiting the ability of water districts to create tiered water rates. In truth, tiered water rates — charging more for higher levels of water use — can be legal if the municipality can demonstrate that the extra water costs more.

What Hertzberg and big government bureaucrats want to do, however, is to use water rates as another opportunity to engage in social engineering. They wish to charge those water users they perceive as “bad” more per gallon than those users they perceive as “good.” The beauty of “cost of service” rates, however, is that they are fair for everyone: You pay for what you use.

More importantly, when government deviates from “cost of service” requirements, it expands the opportunity for them to do what they do best — extract more money from citizens.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

The Impact of Record Debt on Investments

Editor’s Note: This analysis by economic strategist Michael Lebowitz joins three other articles of his that we published last year, all of them warning of unsustainable growth in investments. For over forty years the United States has been on a debt binge, trading long-term, sustainable growth for growth fueled by debt accumulation. In this article, Lebowitz explains how record levels of debt and historically low interest rates have now made it impossible to raise interest rates without severely disrupting the economy. Moreover, what little room is left to lower interest rates to stimulate additional borrowing offers almost no benefit. This new reality affects almost every aspect of the economy. Government employee pension funds, managing over $4.0 trillion in assets, are particularly vulnerable to lower returns on investment. A severe and sustained market correction could be devastating to these funds. Anyone who advocates or implements policies aimed at ensuring the solvency of pension funds should think very carefully about how debt at record highs and interest rates at record lows are going to impact their returns in the coming months and years.

At a recent investment conference, hedge fund billionaire Stanley Druckenmiller predicted that interest rates would continue rising. Specifically, he suggested that, consistent with the prospects for economic growth, the 10-year U.S. Treasury yield could reach 6.00% over the next couple of years. Druckenmiller’s track record lends credence to his economic perspectives. While we would very much like to share his optimism, we find it difficult given the record levels of public and private debt. Druckenmiller’s comments appear to be based largely on enthusiasm for the new administration’s proposals for increased infrastructure and military spending along with tax cuts and deregulation. This is consistent with the outlook of most investors today.

Although federal spending of this nature has stimulated economic growth in the past, today’s economic environment is dramatically different from prior periods. Investors and the market as a whole are failing to consider the importance of the confluence of the highest debt levels (outright and as a % of GDP) and the lowest interest rates (real and nominal) in the nation’s history. Because of the magnitude and extreme nature of these two factors, the economic sensitivity to interest rates is greater and more asymmetric now than it has ever been. Additionally, due the manner in which debt and interest rates have evolved over time, the amount of interest rate risk held by fixed income and equity investors poses unparalleled risks and remains, for the moment, grossly underappreciated.

Proper assessment of future investment and economic conditions must carefully consider changes in the debt load and the interest rates at which new and existing debt will be serviced.

A 45-year Trend

For more than a generation, there has been a dramatic change in the landscape of interest rates as illustrated in the graph below.

Despite the recent rise in yields (red arrow), interest rates in the United States are still near record-low levels.

Declining interest rates have been a dominant factor driving the U.S. economy since 1981. Since that time, there have been brief periods of higher interest rates, as we see today, but the predictable trend has been one of progressively lower highs and lower lows.

Since the Great Financial Crisis in 2008, interest rates have been further nudged lower in part by the Federal Reserve’s (Fed) engagement in a zero-interest rate policy, quantitative easing and other schemes. Their over-arching objective has been three-fold:

Lower interest rates to encourage more borrowing and thus more consumption (“How do you make poor people feel wealthy? You give them cheap loans.” –The Big Short)

Lower interest rates to allow borrowers to reduce payments on existing debt thus making their balance sheet more manageable and freeing up capacity for even more borrowing

Maintain a prolonged period of low interest rates “forcing” investors out of safe-haven assets likeTreasuries and money market funds and into riskier asset classes like junk bonds and stocks with the aim of manufacturing a durable wealth effect that might eventually lift all boats

In hindsight, lower interest rates were successful in accomplishing some of these objectives and failed on others. What is getting lost in this experiment, however, is that the marginal benefits of decreasing interest rates are significantly contracting while the marginal consequences are growing rapidly.

Interest Rates and Duration

What are the implications of historically low interest rates for a prolonged period of time? What is “seen” and touted by policy makers are the marginal benefits of declining interest rates on housing, auto lending, commercial real estate and corporate funding to name just a few beneficiaries. What is “unseen” are the layers of accumulating risks that are embedded in a system which discourages savings and therefore eschews productivity growth. Companies that should be forced into bankruptcy or reorganization remain viable, and thus drain valuable economic resources from other productive uses of capital. In other words, capital is being misallocated on a vast scale and Ponzi finance is flourishing.

In an eerie parallel to the years leading up to the crisis of 2008, hundreds of billions of dollars of investors’ capital is being jack-hammered into high-risk, fixed-income bonds and dividend-paying stocks in a desperate search for additional yield. The prices paid for these investments are at unprecedented valuations and razor thin yields, resulting in a tiny margin of safety. The combination of high valuations and low coupon payments leave investors highly vulnerable. Because of the many layers of risk across global asset markets that depend upon the valuations observed in the U.S. Treasury markets, deeper analysis is certainly a worthy cause.

At the most basic level, it is important to appreciate how bond prices change as interest rates rise and fall. The technical term for this is duration. Since that price/interest rate relationship is the primary determinant of a bond’s profit and loss, this analysis will begin to reveal the potential risk bond investors face. Duration is defined as the sensitivity of a bond’s price to changes in interest rates. For example, a 10-year U.S. Treasury note priced at par with a 6.50% coupon (the long term average coupon on U.S. Treasury 10-year notes) has a duration of 7.50. In other words, if interest rates rise by 1.00%, the price of that bond would decline approximately 7.50%. An investor who purchased $100,000 of that bond at par and subsequently saw rates rise from 6.50% to 7.50%, would own a bond worth approximately $92,500.

By comparison, the 10-year Treasury note auctioned in August 2016 has a coupon of 1.50% and a duration of 9.30. Due to the lower semi-annual coupon payments compared to the 6.50% Treasury note, its duration, which also is a measure of the timing of a bonds cash flows, is higher. Consequently, a 1.00% rise in interest rates would cause the price of that bond to drop by approximately 9.30%. The investor who bought $100,000 of this bond at par would lose $9,300 as the bond would now have a price of $90.70 and a value of $90,700.

A second matter of importance is that the coupon payments, to varying degrees, mitigate the losses described above. In the first example, the annual coupon payments of $6,500 (6.50% times the $100,000 investment) soften the blow of the $7,500 loss covering 86% of the drop in price. In the second example, the annual coupon payments of $1,500 are a much smaller fraction (16%) of the $9,300 price change caused by the same 1.00% rise in rates and therefore provide much less cushion against price declines.

In the following graph, the changing sensitivity of price to interest rate (duration- blue) is highlighted and compared to the amount of coupon cushion (red), or the amount that yield can change over the course of a year before a bondholder incurs a loss.

The coupon on the 10-year U.S. Treasury note used in our example only allows for a 16 basis point (0.16%) increase in interest rates, over the course of a year, before the bondholder posts a total return loss. In 1981, the bondholder could withstand a 287 basis point (2.87%) increase in interest rates before a loss was incurred.

Debt Outstanding

While the increasing interest rate risk and price sensitivity coupled with a decreasing margin of safety (lower coupon payments) of outstanding debt is alarming, the story is incomplete. To fully appreciate the magnitude of this issue, one must overlay those risks with the amount of debt outstanding. Since 1982, the duration (price risk) of nominal U.S. Treasury securities has risen 70% while the average coupon, or margin of safety, has dropped 85%. Meanwhile, the total amount of U.S. public federal debt has exploded higher by 1,600% and total U.S. credit market debt, as last reported by the Federal Reserve in 2015, has increased over 1,000% standing at $63.4 trillion. When contrasted with nominal GDP ($18.6 trillion) as graphed below, one begins to gain a sense for how radically out of balance the accumulation of debt has been relative to the size of the economy required to support and service that debt. In other words, were it not for the steady long-term decline in interest rates, this arrangement likely would have collapsed under its own weight long ago.

To provide a slightly different perspective, consider the three tables below, which highlight the magnitude of government and personal debt burdens on an absolute basis as well as per household and as a percentage of median household income.

If every U.S. household allocated 100% of their income to paying off the nation’s total personal and governmental debt burden, it would take approximately six years to accomplish the feat (This calculation uses aggregated median household incomes). Keep in mind, this assumes no expenditures on income taxes, rent, mortgages, food, or other necessities. Equally concerning, the trajectory of the growth rate of this debt is parabolic.

As the tables above reflect, for over a generation, households, and the U.S. government have become increasingly dependent upon falling interest rates to fuel consumption, refinance existing debt and pay for expanded social and military obligations. The muscle memory of a growing addiction to debt is powerful, and it has created a false reality that it can go on indefinitely. Although no rational individual, CEO or policy-maker would admit to such a false reality, their behavior argues otherwise.

Investors Take Note

This article was written largely for investors who own securities with embedded interest rate risks such as those described above. Although we use U.S. Treasury Notes to illustrate, duration is a component of all bonds. The heightened sensitivities of price changes coupled with historically low offsetting coupons, in almost all cases, leaves investors in a more precarious position today than at any other time in U.S. history. In other words, investors, whether knowingly or unknowingly, have been encouraged by Fed policies to take these and other risks and are now subject to larger losses than at any time in the past.

This situation was beautifully illustrated by BlackRock’s CIO Rick Rieder in a presentation he gave this fall. In it he compared the asset allocation required for a portfolio to achieve a 7.50% target return in the years 1995, 2005 and 2015. He further contrasts those specific asset allocations against the volatility (risk) that had to be incurred given that allocation in each respective year. His takeaway was that investors must take on four times the risk today to achieve a return similar to that of 1995.

Summary

We generally agree with Stanley Druckenmiller. If enacted correctly, there are economic benefits to deregulation, tax reform and fiscal stimulus policies. However, we struggle to understand how higher interest rates for an economy so dependent upon ever-increasing amounts of leverage is not a major impediment to growth under any scenario. Also, consider that we have not mentioned additional structural forces such as demographics and stagnating productivity that will provide an increasingly brisk headwind to economic growth. Basing an investment thesis on campaign rhetoric without consideration for these structural obstacles is fraught with risk.

The size of the debt overhang and dependency of economic growth on low interest rates means that policy will not work going forward as it has in the past. Although it has been revealed to otherwise intelligent human beings on many historical occasions, we retain a false belief that the future will be like the past. If the Great Recession and post-financial crisis era taught us nothing else, it should be that the cost of too much debt is far higher than we believe. More debt and less discipline is not the solution to a pre-existing condition characterized by the same. The price tag for failing to acknowledge and address that reality rises exponentially over time.

 *   *   *

About The Author: Michael Lebowitz, CFA is the founder of 720 Global, a macroeconomic and strategic investment strategist serving the needs of investment managers. Throughout his career, Michael has been involved in trading, portfolio construction and risk management involving some of the largest and most active portfolios in the world as well as comparatively small individual RIA portfolios. He has proven expertise in trading, risk management, macroeconomic analysis and relative value analysis across many asset classes. Coming soon 720 Global will offer “The Unseen”, a subscription-based publication similar to what has been offered at no cost over the past year and a half. In fact, what the subscription offers is precisely what we have delivered in the past, substance in style and form that provides unique analysis and meaningful value to discerning investors. For more information email info@720global.com

Is California’s Elite Willing to Fight for More Infrastructure? Or Just Bash Trump?

In the wake of unrest on the UC Berkeley campus last week, Robert Reich has managed to get himself some fresh national news coverage. Reich served as Secretary of Labor in the Clinton administration, and is currently a professor at the University of California at Berkeley. Reich made news by suggesting the rioters who forced cancellation of a speech at UC Berkeley by Milo Yiannopoulos were not left-wing rioters at all, but instead were right-wing provocateurs. On his own website, here’s Reich’s latest take on this: “A Yinnopoulos, Bannon, Trump Plot to Control American Universities?

It’s always tough to prove a negative, but Reich is on thin ice here. Were the rioters who nearly shut down Washington DC during Trump’s inauguration last month right-wing provocateurs? Were the rioters who shut down a Yiannopolous appearance at UC Davis a few weeks ago right-wing provocateurs? Are the thousands of marchers, including rioters, who tore through a dozen major cities in the U.S. in the wake of Trump’s unexpected election victory all right-wing provocateurs? Is it right-wing zealots who are waging an ongoing war against every new pipeline in the nation? Or are they establishment reactionaries and their anarchist bedfellows?

Since Robert Reich made himself a household word this week, perhaps it is important to reiterate one of the most important lessons that the American electorate has taken to heart over the past few years, and certainly while observing the Trump phenomenon: The “establishment” in America is an alliance of extremely wealthy individuals, multi-national corporations and the professional class that serves them, big labor unions especially including public sector labor and the government agencies they control, the financial institutions, and the leadership of both major political parties. To describe this establishment as “right-wing” or “left-wing” misleads more than it illuminates.

Robert Reich is an elite member of this establishment.

Back in mid-2016 California Policy Center research Marc Joffe made Robert Reich a poster-child for establishment hypocrisy in his analysis entitled “UC Berkeley’s ‘income inequality’ critics earn in top 2%.” During 2015, Robert Reich earned $327,465, in exchange for teaching one class per week. This is about as perfect an example of elite establishment privilege as you can find. And no wonder college tuition has gotten so expensive.

Robert Reich’s resurgence in the public spotlight is based on him leveraging the name recognition he already had to turn himself into one of the most vocal critics of president Trump. But if Robert Reich, apart from costing taxpayers $327,465 per year to teach one class per week, wants to make an actual contribution to society, he should be thinking harder about what he’s for, and not just expand his fan base by bashing the new president.

Californian infrastructure development, supposedly a critical focus of Reich’s labor movement, would be a good place to start. But even there, Reich is not being helpful.

Here is Reich’s most recent essay on the topic: “Trump’s Infrastructure Scam,” published on January 23rd. In this piece Reich argues that private sector participation in infrastructure development creates extra costs and drives funds into projects such as toll roads and toll bridges that generate high revenue to investors, but neglects other sorely needed amenities such as water treatment plants. There is some validity to some of the claims Reich is making. But he’s not offering a solution.

For decades California’s infrastructure has been neglected because (1) most public money that might have been spent on infrastructure went instead to government employee pension funds and government payroll departments to pay over-market compensation to unionized public employees, (2) projects had to pass muster with the environmentalist lobby, greatly shrinking the range of possible projects, and (3) to avoid conflict with the labor union lobby, approved projects were always needlessly expensive. Now we’re years behind.

Build an offstream reservoir? Why work that hard? Bash Trump and be a hero!

California now has congested, inadequate roads that are embarrassingly, destructively pitted, costing billions in damaged cars and trucks and lost productivity. We have inadequate water storage capacity and cannot capture sufficient storm runoff. We are way behind deploying water treatment technologies that would render it impossible to overuse indoor water because 100% of it would be recycled. We only have one desalination plant of any scale on the California coast. The list goes on. In every area of infrastructure, we are behind most of the rest of the U.S., and we are behind most of the rest of the developed world.

Before Trump, and ever since Trump’s inauguration, what has Robert Reich been saying about infrastructure?

Nothing. If you look through the Robert Reich archives, you can go back to 2012 and not find even one commentary on the subject of infrastructure. Now he attacks Trump’s infrastructure proposals, seeing only the bad and none of the good, but for years he has been silent on this topic.

Overall, when it comes to Trump, where Reich complains, the rest of California’s establishment – the democratic wing of America’s bipartisan establishment – shrieks with indignation. Why figure out complex water ownership issues so we can finally build the Sites Reservoir, when you can stand in solidarity against Trump and earn headline after headline? Why do the hard work to develop a multi-state pool of pension fund assets that can be poured into arms-length infrastructure investment in water recycling, when you can heroically declare California a “sanctuary state?”

Establishment leaders like Robert Reich have a choice. They can acknowledge that we need more infrastructure here in California and figure out how to structure new initiatives that include federal funding, or they can hide behind the media-friendly politics of race, gender, and “climate” – abetted with crowd-pleasing Trump bashing – and do absolutely nothing.

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Ed Ring is the vice president of policy research for the California Policy Center.

California’s Global Warming High-Speed Train

Editor’s Note:  In a previous article, we explained why projected greenhouse gas emission savings from California’s High-Speed Rail project are overstated. The High-Speed Rail Authority’s Environmental Impact Review is based on inflated ridership numbers and does not take into account automotive emission savings that will arise from the transition to electric vehicles. Here, Mark Powell and Mike Brady review the other side of the equation:  emissions generated by HSR during the construction and operation of the system.

The California High-Speed Rail Authority (Authority) promises to “achieve net zero greenhouse gas (GHG) emissions in construction” and is committed to operate the system on “100% renewable energy” by contracting for “400 to 600 megawatts of renewable power”[1].  These talking points may prompt environmentalists to back the high-speed rail project, but they are promises that cannot be kept.

Construction Emissions

The Authority has provided only limited information regarding GHG construction emissions.  Its 2013 Emissions Report estimated 30,107 metric tons in GHG “direct emissions” for the first 29 miles of construction[2].  “Indirect emissions” associated with the manufacture and transport of materials, primarily concrete, steel, and ballast were not reported because the Authority said the precise quantities, sources, and suppliers were not known[3].  A more plausible reason is the Authority’s desire to hide from the public more than 90% of GHG emissions associated with their project.  Regardless, recent testimony by the Authority’s CEO clearly indicates that indirect emissions could now be tallied.

Speaking before the Assembly Budget Committee responsible for High-Speed Rail Oversight on January 27, 2016 the Authority CEO, Jeff Morales, explained how cost estimates are determined.  He described the assemblage of 200,000 individual line items including concrete, steel, dirt, electrical, etc. and said each includes a unit cost which is multiplied by the units required to build the system[4].

Fortunately, Professors Mikhail Chester and Arpad Horvath at UC Berkeley’s Department of Civil and Environmental Engineering have shed some light on the magnitude of construction emissions.  In a 2010 study, they estimated that 9.7 million metric tons of GHG would be emitted during the construction of the statewide system, primarily because of the production of massive amounts of concrete and steel[5].  Moreover, using mid-level occupancy for the three competing modes of travel (high-speed train, auto, and airplane) the authors estimated it would take 71 years of train operation to mitigate the project’s construction emissions[6].  California’s Legislative Analyst Office came to a similar conclusion in a 2012 report critical of using GHG reduction funds to pay for Phase 1 (Los Angeles to San Francisco) of the statewide system. LAO cited an independent study projecting that “if the high-speed rail system met its ridership targets and renewable electricity commitments, construction and operation of the system would emit more GHG emissions than it would reduce for approximately the first 30 years”[7].

However, the Authority promised “net zero greenhouse gas emissions in construction”.  A reduction in California’s GHG emissions due to the trains’ operations were to help reduce the state’s future GHG emissions, not merely mitigate construction releases.  The Authority’s zero construction emissions promise relies heavily on a tree planting program[8].  If so, then how many trees and when?  Using the ARB Protocols cited by the Authority[9], more than 5 million trees, each more than 50 feet tall, would need to be grown and perpetually maintained to offset (recapture) the 9.7 million tons of GHG emitted during construction of the statewide system.  However, one year into construction, the Authority’s CEO admitted on camera that not a single tree had been planted[10].   Making matters even worse, the Authority plans to cut down thousands of trees south of San Francisco to electrify Caltrain. Finally, it is worth noting that the state could plant trees irrespective of whether it moves forward with HSR.

Emissions from Operation

Chester and Horvath generously assumed the trains would run on a power mix relatively high in renewable sources[11].  When Phase 1 is completed the trains would place a new demand on the electric grid that must be met immediately by a power provider.  Some electric generator, idle at that moment, must come on line.  It may be a peaking unit in California powered by natural gas or a coal burning plant in Utah.  The exact source is unknowable.  But it will not be a wind or solar powered electric plant. These plants are always running when wind or sunshine is available because they operate at low cost.  Wind and solar sources will already be generating all the power they can produce when the first trains require power.

The Authority’s business plans have used a variety of assumptions regarding energy consumption and cost.  Here, we’ll use the 2012 Business Plan, which assumed a cost of 15.2 cents/kWh for power, inclusive of a 3 cent premium for renewable power.  Energy consumption was estimated at 63 kWh/mile[12].  Train miles traveled between 2022 and 2030 were projected to be 99 million[13] resulting in an energy use of 6,300 million kWh[14].

To make good on its claim that it will power its trains with 100% renewable energy, the Authority needs to fund the construction of the necessary renewable power plants.  To estimate the capital cost of constructing the required renewable power for HSR we can use the case of California Valley Solar Ranch[15], a 250MW facility producing 650 million kWh/year recently built with the aid of a $1.2 billion federal loan guarantee.  Since the Authority’s trains would be consuming 1,200 million kWh in 2030 and requiring the output of 1.85 Solar Ranches, (460MW of capacity) the imputed capital cost is $2.2 billion.  A premium of 30 cent/kWh[16], ten times the Authority’s offer, would be needed to raise the necessary capital by 2030.  Worse, more than 20% of this capacity, costing half a billion dollars, must be constructed before the first trains run.  Otherwise, those trains will be totally powered by fossil fuels and the GHG emissions per passenger mile for train travelers might be no better than for passengers traveling in an automobile meeting the federal fuel efficiency standards scheduled to be in place in 2022.

The issue of global warming needs to be addressed.  The planting of millions of trees and the spending of billions of dollars on a fossil fuel propelled train is not a practical or cost effective way to address the problem.  The Authority’s project is detrimental because of its massive construction GHG emissions and because it diverts funds that could otherwise help address the serious problem of global warming.

Notes

[1] 2016 Business Plan, May 2016, page 36

http://www.hsr.ca.gov/docs/about/business_plans/2016_BusinessPlan.pdf

[2] Contribution of the High-Speed Rail Program to Reducing California’s Greenhouse Gas Emission Levels, June 2013, page 13

http://www.hsr.ca.gov/docs/programs/green_practices/HSR_Reducing_CA_GHG_Emissions_2013.pdf

[3] Contribution of the High-Speed Rail Program to Reducing California’s Greenhouse Gas Emission Levels, June 2013, page 14

http://www.hsr.ca.gov/docs/programs/green_practices/HSR_Reducing_CA_GHG_Emissions_2013.pdf

[4] Authority CEO Jeff Morales testimony before the Assembly Budget Committee responsible for High-Speed Rail Oversight on January 27, 2016, YouTube Video 25-27 minutes into the video

https://www.youtube.com/watch?v=gg-lRSn-QVg

[5] Life-cycle assessment of high-speed rail: the case of California

Mikhail Chester and Arpad Horvath, January 2010, pages 5 and 6

http://iopscience.iop.org/article/10.1088/1748-9326/5/1/014003/pdf

[6]Life-cycle assessment of high-speed rail: the case of California

Mikhail Chester and Arpad Horvath, January 2010, Table 2, page 7

http://iopscience.iop.org/article/10.1088/1748-9326/5/1/014003/pdf

[7] The 2012-13 Budget: Funding Requests for High-Speed Rail, April 17,2012, page 8

http://www.lao.ca.gov/analysis/2012/transportation/high-speed-rail-041712.pdf

[8] Contribution of the High-Speed Rail Program to Reducing California’s Greenhouse Gas Emission Levels, June 2013, Diagram entitled GHG EMISSIONS SOURCES FOR HIGH-SPEED RAIL SYSTEM, page 9

http://www.hsr.ca.gov/docs/programs/green_practices/HSR_Reducing_CA_GHG_Emissions_2013.pdf

[9] California Air Resources Board -Compliance Offset Protocol Urban Forest Projects,  Adopted:  October 20, 2011

Appendix B Calculating Biomass and Carbon – Quantification Methodology, Example of tall hackberry (Celtis occidentalis) sequestering 477.30 kg (.4773 metric tons of carbon).  Equates to 1.75 metric tons of CO­2/fully grown tree.

https://www.arb.ca.gov/regact/2010/capandtrade10/copurbanforestfin.pdf

[10] KCRA Trees and Trains Youtube video, Dec. 8, 2015

https://www.youtube.com/watch?v=IclcPa9z5_E

[11]  Life-cycle assessment of high-speed rail: the case of California

Mikhail Chester and Arpad Horvath, January 2010, page 2

http://iopscience.iop.org/article/10.1088/1748-9326/5/1/014003/pdf

[12] Estimating High-Speed Train Operating and Maintenance Cost for the CHSRA 2012, pages 7-8

http://www.hsr.ca.gov/docs/about/business_plans/BPlan_2012EIREstimateOperatMaintCost.pdf

[13] Estimating High-Speed Train Operating and Maintenance Cost for the CHSRA 2012, pages 8 and 12, Operations and Maintenance of Equipment Costs for Medium Ridership Case was divided by their variable costs to arrive at Trainset Miles.

http://www.hsr.ca.gov/docs/about/business_plans/BPlan_2012EIREstimateOperatMaintCost.pdf

[14] Estimating High-Speed Train Operating and Maintenance Cost for the CHSRA 2012, 99 million trainset miles are multiplied by 63kWh/mile.

http://www.hsr.ca.gov/docs/about/business_plans/BPlan_2012EIREstimateOperatMaintCost.pdf

[15] Energy.Gov Loan Programs Office, California Valley Solar Ranch

http://energy.gov/lpo/california-valley-solar-ranch

[16] $2,200 million/6,300 million kWh = $.35/kWh.   $.05/kWh is subtracted to allow for the lower operating cost of solar power.  Penn State Engineering Department study.

https://www.e-education.psu.edu/eme801/node/530

 

California: Time for a Major Change in Course

Governor Brown, California Attorney General Becerra, legislative and other government officials are fixated on battling the new administration in Washington with almost total disregard for California’s major problems and unmet needs. Failure to address these pressing problems threatens the viability of a state whose status is rapidly being transformed from “golden” to “tarnished.”

To help the political class refocus on the important, here is a list of the most exigent problems accompanied by modest solutions, as compiled by a couple of veteran taxpayer advocates who speak with, and hear from, thousands of California taxpayers.

  • Roads & Highways – Just about any road trip one drives on in California confirms that we have gone from a world leader in highway capacity and quality to barely a third world contender. Major changes are in order. Our gasoline tax must be dedicated to roads and highways alone, not to other general fund uses like paying off state general obligation bonds, as is now the practice. Also, Senator John Moorlach’s demands to reform CALTRANS should be a top priority. California spends 4.7 times as much per mile of state highway than the national average, according to the Competitive Enterprise Institute, and a 2014 government report concluded the transportation agency was over-staffed by 3,500 positions. Additionally, we should end the practice of requiring “prevailing wages” on public works projects, which are estimated to add up to 20% on every road and other public improvement.

    Interstate 580 into the Silicon Valley – one of the worst road surfaces in the U.S.

  • Energy Costs – Gasoline formulation requirements, “Cap and Trade” and other responses to climate change must be revisited with demonstrable science and hard-headed realism to help low and middle income Californians who struggle with the costs of transportation and household energy. This is not climate change denial, but rather a recognition that it is patently unfair to burden the citizens of one state with the entirety of a global problem.
  • Business Regulations and Lawsuit Abuse – Manufacturing restrictions, wage and salary rules, Worker’s Compensation standards, frivolous lawsuits and “sue and settle” standards have driven the aerospace and most other manufacturing industries out of California. Time for tort and regulatory reform to establish a business-friendly climate that will encourage refugees to return and lure others to relocate here. Note: The Nestle Corporation has just announced it is moving its U.S. headquarters from Glendale to Rosslyn, Virginia taking hundreds of high paying jobs with them.
  • Land Development and Housing Costs – The mid ‘70s pioneering California Environmental Quality Act (SEQA) has created a nightmare for those seeking affordable, conveniently located housing, workplaces and shopping centers. It has been used as a weapon by environmentalists, competitors, “NIMBYs” and labor organizations to limit – and dramatically drive up the cost of homes, apartments and other needed facilities. Fortunately, despite the best efforts of some in Sacramento, Proposition 13 remains on the job protecting homeowners from runaway property taxes that could force them from their homes.
  • Public Transit – Governor Brown’s “Bullet Train to Nowhere” is in a death spiral due to lack of public support, refusal of the federal government and the private sector to provide additional funds, and out of control costs due to mismanagement, malfeasance and insurmountable engineering hurdles. But fixed route/fixed rail transit remains part of the liberal social planners’ mantra. Other than in highly congested urban areas, public transit is unjustifiable in terms of both capital and operating costs. With the advent of Lyft, Uber, self-driving cars and even Elon Musk’s Hyperloop — that, within a few years, could move passengers at a faction of the cost of rail — private companies and entrepreneurs are offering answers to the mobility problem. This justifies placing renewed emphasis on fixing and expanding our highway system.
  • Education Improvements and Cost Control – “School choice” is the answer to improving K-12 student learning results. The political clout of the California Teachers Association and other teacher unions has blocked progress. Properly framed ballot initiatives may be the only realistic avenue to reform as we must stop the automatic and mindless Proposition 98 commitment of nearly half of general fund revenues – regardless of need – to K-12 and community colleges.
  • Public Employee Wages, Benefits and Pension Reforms – Public sector compensation costs for California, at both the state and local levels, are now clearly unsustainable. According to the Department of Labor, California state and local employees are the highest compensated in all 50 states. Pay, benefits and pensions of public employees have become disproportionate to their private sector counterparts who foot the bill. Adding to the approaching calamity is mismanagement – which has included criminal bribery – at CalPERS, the state’s largest public employee pension fund. Politically motivated investment strategies and fanciful predictions of return on those investments have left taxpayers on the hook for hundreds of billions of dollars in unfunded liability for current and future retirees. Consideration must be given to shuttering CalPERS and fairly allocating to each current employee their share of the retirement funds, arranging for the public employer to make up the difference for what has been promised to date, and move from “defined benefit” to “defined contribution” plans for all existing and future employees. Otherwise, this pension burden has the potential to grow so large that California will not be able to fund the most basic services and as residents flee to other states, the last one out will be asked to turn out the lights.

We call on our representatives to stop pursuing discretionary causes and pet projects and come to grips with these real problems facing all Californians.

Uhler is Founder and Chairman of the National Tax Limitation Committee  (NTLC) and National Tax Limitation Foundation (NTLF). He was a contemporary and collaborator with both Ronald Reagan and Milton Friedman in California and across the country. Coupal is the President of the Howard Jarvis Taxpayers Association (HJTA). He is a recognized expert in California fiscal affairs and has argued numerous tax cases before the courts. 

San Francisco’s Legacy of Cronyism

Cronyism is alive and well in San Francisco  Fourteen months have passed since San Francisco voters passed Prop J, the establishment of a Legacy Business Historic Preservation Fund.  This is a government-sponsored grant program devised by then-Supervisor David Campos to help traditional San Francisco businesses keep their doors amidst rising costs.  We recently checked the San Francisco Office of Small Business website, which lists all the companies that have been approved for “Legacy” status, and already 64 businesses qualify for the grant program.  Everything from music and book stores to dance studios are listed in legacy business registry.  Since as many as 300 businesses can be added to the giveaway program each year, this proliferation is likely to continue.

It’s actually rather easy for established companies to qualify for the registry and grant.  The business must have operated in The City for 30 years or more and either was formed or is currently headquartered here.  It has to show that it has “contributed to the neighborhood’s history or identity,” and it must be committed to maintaining the physical features or traditions that define the business.  Here’s where the cronyism kicks in:  it must first be nominated by a member of the Board of Supervisors or the Mayor and then approved by the Small Business Commission.  If the application is submitted and is not rejected within 30 days, then it automatically joins the registry.  So, by default, established businesses automatically qualify for the handout, unless there is outright fraud.  The other part of the giveaway is for landlords of legacy businesses:  if they lease to a legacy business for 10 years or more, they also qualify for an annual grant of up to $4.50/square foot of leased space.

These subsidies are not small change: for the legacy business, it’s $500 per year for each full-time equivalent employee, up to a total of $50,000 per business per year, and for the property owners, it’s up to a limit of $22,500 per business per year.  Due to the number of businesses involved in this scheme, it won’t take long for this program to cost the taxpayers millions.  The City Controller estimated an annual cost of between $51 million and $94 million eventually.  And once a business is granted legacy status, it will get the subsidy each year.  And as we all know by now, once you start these government programs, they are nearly impossible to shut down.  Can you imagine the commotion at City Hall if the Board of Supervisors were to cut funding to this program once thousands of San Francisco businesses (the Controller estimated a total of 7,500 businesses could qualify) have been on the dole for years?  While the City is in boom mode right now and the program is just beginning, it should have been obvious that there would be an inevitable downturn in the future.  What could the voters have been thinking when they approved this bit of high-cost madness?

Of course, the program was touted as a first-in-the-nation way to help small businesses, but actually there’s nothing in the ordinance limiting the size of those receiving the grants, so even big corporations like Levi’s Strauss and Ghirardelli Chocolates could apply.  Furthermore, if our political leaders were really interested in helping small businesses, why don’t they lower taxes and fees and cut regulations and mandates, rather than doing just the opposite?  As for the astronomical rents, indeed they are out of control. While some contributing factors like the Fed’s loose monetary policy and urban growth boundaries around the Bay Area are beyond the control of our local politicians, the constant barrage of local laws making it more and more expensive to operate in The City fuels the fire even more.  Indeed, with the unpredictability of fees, taxes, regulatory costs and compliance, it’s small wonder that commercial landlords currently prefer short-term leases.  In addition, most local politicians support the idea of a split roll for Prop 13, which would greatly increase the property tax of all commercial properties, thereby increasing the rents of many small businesses.  So “help” from the politicians is totally hypocritical.

Missing from the politician’s calls to help small businesses survive in this business-hostile city is any mention of all the small businesses just starting out that are not eligible for subsidies.  They will not get the unfair advantage that the “legacy” businesses get.  They will have to earn all their revenue from their customers—and they better serve them well or they’ll be gone.  A legacy business will not have to work as hard to please its customers because it will be partially subsidized by the taxpayers.  Whether you as a taxpayer like or even utilize the services of a legacy business—you are forced to support them.  Businesses come and go all the time—just like people choose to change jobs or move elsewhere.  Since when is it the responsibility of the government (the taxpayers) to help some businesses “survive” while driving out the competition?  We find a certain irony in this whole legacy scheme that one of the companies now listed on the registry is Luxor Cab Company.  If that isn’t crony capitalism, then we don’t know what is. 

California’s Debt Bubble: How Does It End?

In a January 2017 study we estimated that California state and local governments owe $1.3 trillion as of June 30, 2015. Our analysis was based on a review of federal, state and local financial disclosures. This debt equals about 52% of California’s Gross State Product of $2.5 trillion and does not include the substantial cost of deferred maintenance and needed upgrades to the state’s infrastructure.

This analysis begs the questions:

  • How much debt is too much debt?
  • How and when does it end?

How much debt is too much?  It’s hard to answer with the information available to us. It could take a long time to reach a crisis, perhaps many years or even a decade or more.  Who knows? There isn’t any hard stop or red line limiting California’s indebtedness.

If the economy is growing, debt can increase indefinitely if debt service costs aren’t growing faster than the economy. Government debt need not be paid off.  It is rolled over into new debt when it comes due. Governments don’t retire or go out of business so their debt doesn’t have to be retired.  The main costs are interest on the debt, required pension contributions, and increasing retiree healthcare costs.

On the way up, adding to debt is painless and allows politicians to spend more than current tax revenues can support, knowing that the cost of the debt is someone else’s problem in the future.  It can make sense to borrow to finance cost-effective infrastructure with a long useful public purpose.  But, borrowing can also be used to pay for current expenses or to fund white elephants such as the bullet train.

What is fairly certain:

  1. Some other states such as Illinois could be an early warning sign for California in that they will get into trouble sooner. We can see what happens there and perhaps learn something. The Commonwealth of Puerto Rico which defaulted last year and which is now controlled by a federally appointed oversight board provides an even starker warning of the risks we face.
  1. We are unlikely to have a state-wide crisis. We are more likely to have increasing problems in individual cities, counties, school districts and special districts. The financially weakest agencies will run out of options and get in trouble first. During the last five years, we have seen bankruptcy filings by the cites of San Bernardino and Stockton and by healthcare districts in Contra Costa and Sonoma Counties. Several school districts are operating under state oversight due to poor finances.
  1. Underfunded pension funds will not be bailed out.  The state can’t afford to bail out individual cities, counties, and school districts that can’t pay interest on their debt or make required pension and OPEB payments.  The federal government will not bail out the state.  It would cost too much and would set a precedent that would have to be applied to other states that got into trouble.  Moody’s estimates that total state pension unfunded liabilities are $1.75 trillion at the end of fiscal year 2016. In fiscal year 2016 these pension funds earned a median return of 0.52 percent on investment compared to an average assumed rate of return of 7.5 percent.
  1. It’s unlikely that the governor and legislature will take meaningful action until there is a crisis of some sort that gives the state no choice but to deal with the problem. Short of a crisis, politicians are likely to nibble around the edges to say that the problem is being addressed while avoiding any hard decisions.

How can pensions become a problem?  Aren’t pensions guaranteed by the California constitution?  Yes.  But, what does the constitution say to do if there isn’t enough money?  If a city or county goes bankrupt, federal bankruptcy law overrides the state constitution and allows but does not require pension benefits to be renegotiated in a bankruptcy.

California Pension Fund Summary
2014 2015
Payments to pension funds:
Employee payments 8.9 9.5
Employer payments 21.2 24.7
Total payments 30.1 34.2
Payments by pension funds:
Pension benefits 43.7 44.9
Other payments 2.3 3.6
Total payments 46 48.5
Pension fund members
Employed 1.7 1.8
Beneficiaries 1.2 1.2
Source: U.S. Census Bureau data, https://www.census.gov/govs/retire/

So, how could it end?  Some possibilities are:

  1. A slow death.  Required pension payments, retired public employee health care expenses, and interest on government debt grow faster than tax revenues.  Services are cut, head count is reduced, and maintenance is deferred to make interest, pension, and retiree health care payments. This is already happening.  An increasing number of cities, counties, and special districts would go bankrupt over time.  More school districts would be taken over by the state. A slow death could also involve CalPERS and other California pension funds continuing to earn less than their investment targets.  Pension funding ratios deteriorate and required pension contributions increase until the process spirals out of control.
  1. A precipitating event. A recession or major stock market correction could cause a sudden reduction in tax revenue or significant pension fund losses that sharply increase underfunding.  In 2009, the CalPERS investment portfolio lost about 24 percent of its value.  California pension fund assets are heavily invested in stocks and other volatile assets that would lose value in a recession or stock market correction.  The result could be a forced recognition that future pension payments can’t be met in full.
  1. Government employees get nervous.  California pension funds are paying out in benefits to retired government employees more than they are taking in in new contributions. In fiscal year 2015, they paid out $1.40 in benefits for every dollar they received in contributions.  Think about it!  If you are a working government employee, none of the pension payments made on your behalf go into an account with your name on it. Your pension is totally dependent upon pension fund investment performance and the willingness and ability of future taxpayers to cut expenses and raise taxes to cover any shortfall in fund performance. In the future, will taxpayers and the politicians who represent them be willing to do whatever it takes to pay unfunded pension and retiree health care expenses?  Will they be more interested in finding ways to reduce these expenses?  Will there be enough tax money to go around even if their intent is to honor these unfunded obligations and other debts?

So, how and when does it end?  We can’t be sure.  However, it could end badly.

California’s Government Workers Make TWICE As Much as Private Sector Workers

Earlier today the California Policy Center released a study that provided facts about government compensation. It examined state and local payroll data provided online by the California State Controller and proved that the average pay and benefits for a full-time state/local government employee in 2015 was $121,843.

At the same time, the study found that the average pay and benefits for a full-time private sector worker in California in 2015 was half that much, $62,475.

Moreover, the study found that if the pensions these state/local workers have been promised were being properly funded, their actual pay and benefits in 2015 would have averaged $139,691. And that elevated figure still didn’t take into account the impact of properly pre-funding their supplemental retirement health care, nor did it normalize for their myriad paid days off – typically including 14 paid holidays, 12 “personal days” and 20 or more vacation days as they acquire seniority. And let’s not forget the “9/80” program, common in California government but virtually unheard of in the private sector, where public sector salaried professionals can skip a few lunches and show up a few minutes early or depart a few minutes late each workday, and take 26 additional days a year off with pay because, every two weeks, they worked “nine hour days for nine days, then took the tenth day off.”

If you’re not counting, that adds up to 72 days off per year with pay for a seasoned public sector professional. The study didn’t take that into account.

Similarly, the study had to assume that fully 50% of full time private sector workers in California are getting excellent comprehensive health care coverage 100% paid for by their employer, a 3% employer matching payment to a 401K retirement savings account, along with making employer contributions to Social Security and Medicare (and even that does not occur for the millions of independent contractors working full-time in California). But the study made the 50% assumption just to ensure that the average, $62,475 per year, was not understated.

Finally please note that in the public sector, the study found that the differences between “average” and “median” total compensation are negligible, with the median often actually exceeding the average. Not true in the private sector, where the impact of ultra-wealthy individuals truly skews the average well above the median.

So welcome to Feudal California, where crippling taxes and regulations are destroying the middle class, while a burgeoning dependent class pays no taxes, and hence votes for every tax proposal they see. Welcome to Feudal California, where the super rich support policies designed to create asset bubbles that make them richer, and don’t care about taxes because they’re so rich they can pay them.

It’s not enough to merely point out the fact that government workers make twice as much as ordinary workers in California, and that the gap is widening. The problem is that the unions who represent government workers control policy in California, and those policies are the reason private sector workers can’t get ahead. Every major policy in effect or being contemplated in California is designed to raise the cost-of-living, and while the private sector middle class is crushed, the unionized government workers make twice as much, which is enough to survive.

At the same time, the challenges posed by a high cost-of-living are almost entirely regressive, harming the poor disproportionately. It doesn’t matter to a wealthy person if their gasoline costs $2.50 vs. $4.50 per gallon, or their electricity costs $.04 per KWH vs. $.40 per KWH. It doesn’t matter to them if a home costs $150,000 or $650,000. They’re rich. They can afford it.

So instead of fighting to lower the cost-of-living, California’s wealthy elite makes common cause with government unions, working to create artificial scarcity. This creates asset bubbles that translate into more property tax revenue for governments, more investment returns for the pension funds, and gilds the portfolios of the wealthy. And if anyone objects, they’re “deniers.”

California’s elites – wealthy individuals and their government union allies – have cleverly employed the politics of race, gender, and environmentalism to enthrall millions. California’s citizens, by and large, have become convinced that identity grievances and extreme environmentalism matter more than the fact they are in debt to their eyeballs, living from paycheck to paycheck. In a brilliant inversion of reality, these feudal overlords have actually convinced Californians to attribute the reasons for their poverty to race and gender discrimination, rather than economic policies that have made it nearly impossible for anyone to be upwardly mobile – regardless of their race or gender.

The public sector union leadership that runs California is incorrigible. They have bribed their members, and they have convinced their victims to enthusiastically support a political agenda that itself is the real reason they are victims.

Ed Ring is the vice president of research policy for the California Policy Center.

High Speed Rail Won’t Impact Climate Change

According to the high speed rail authority’s website, the bullet train is expected to reduce CO2 emissions by just over one million metric tons annually by 2040. This reduction is supposed to be achieved by replacing almost 10 million miles of motor vehicle travel each day, and eliminating between 93 and 171 daily flights. But these HSR projections have two fatal flaws: they are based on unrealistically high ridership estimates and they fail to take into account the transition to hybrid and plug-in electric cars. If HSR’s numbers are adjusted to take these factors into account, the project’s emission savings turn out to be much less. Further, they won’t have a meaningful impact on climate change.

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HSR’s Environmental Impact Report used EMFAC2007 to estimate emission savings. EMFAC2007 is an emission model published by the California Air Resources Board ten years ago.  It has since been superseded by new versions released in 2011 and 2014. The EMFAC web page specifically states: “Do not use EMFAC 2007 for new studies.”. Back in 2007, no Teslas, Chevy Volts or Nissan Leafs had shipped, nor had California begun building its large network of vehicle charging stations. An emissions model created back in 2007 could not take into account what is now obvious: we are undergoing the initial phases of a transition away from gasoline-powered vehicles to hybrid and plug-in electric cars. In fact, the state’s goal is for all new cars to be zero emission vehicles by 2050.

Since electric cars use the same power sources as high speed rail their respective contributions to greenhouse gas emissions will be proportional. If electricity is derived from coal, its use will be associated with large volumes of greenhouse gases. If, on the other hand, the electricity comes from wind, solar or nuclear, generating and using it won’t contribute to global warming. How much (or even whether) HSR reduces greenhouse gas emissions will then depend on how clean our electricity is, and (if it is not totally clean) how full the HSR trains are. A train carrying several hundred passengers will likely use less electricity than several hundred cars, but the energy savings won’t materialize if most seats on the train are not occupied.

And that brings us to the ridership issue. CPC’s recent infrastructure study reviewed evidence suggesting that HSR’s ridership estimates are wildly optimistic. For example, we point out that HSR’s 2040 ridership projection of 33.2 million – 56.8 million passengers is far above current ridership of 11.7 million in Amtrak’s northeast corridor linking Boston, New York and Washington. The northeast corridor has more people, is more densely populated and is much more accustomed to rail travel than California – so its ridership levels would appear to provide a ceiling for California HSR utilization. If that’s the case, HSR is overstating ridership – and thus greenhouse gas emissions savings – by a factor of three or more.

Even in the extremely unlike event that HSR’s one million metric ton annual emission savings estimate were to be realized, it wouldn’t have a significant impact on global warming. According to EPA figures, global CO2 emissions total 9449 metric tons in 2011. Assuming this level remains constant and that HSR’s estimates are correct, the project would only reduce global emissions by about 0.01%. And, based on the evidence provided above, it is safe to assume that the real savings will be a small fraction of this figure.

A fair rejoinder is that even though nothing California does by itself will significantly move the dial on global emissions, the example we set for the result of the world is more important. If an affluent economy like ours’ can’t get emissions under control, how can we expect others to do so. But if we want to set an example, shouldn’t we do so in a cost-effective manner? Spending $64 billion to achieve minimal emission savings does not set a good example. Undoubtedly, there are ways to make steeper reductions in emissions at lower cost.

Marc Joffe is the director of policy research for the California Policy Center.

For Tax Raisers, End of Drought Is Bad News

Editor’s Note: Anyone who thinks the drought is NOT over should read this weather blog – more authoritative than ANYTHING coming out of the mainstream press. View the graphics, all of them from official sources, depicting California’s current (1) percentage of normal precipitation, (2) soil moisture, (3) streamflow, (4) Sierra snowpack, (5) “Palmer drought index”, and (6) reservoir storage. In the commentary to follow, Jon Coupal explains the real reason for the reluctance of our state and even federal officials to admit the drought is over. Sadly, the policies that will endure will have more to do with taxpayers funding rebates to to force consumers to purchase expensive and poorly designed “water efficient” appliances, instead of developing resilient new sources for additional water.

As I write this, it is raining in Sacramento. Pouring, actually. And even though I live about 200 yards from the Sacramento River, I have confidence that the levees within the city limits are in good shape. (As well they should be given that Sacramento’s flood control agency collects millions of dollars from local property owners annually to keep them maintained).

In a word, California is wet. Rain totals and snowpack measurements are the highest we’ve seen in about a decade. But despite the fact that flood gates at major dams throughout the state are now open, levies have been breached and there is serious flooding in both Southern California and the Central Valley, the State Water Resources Control Board refuses to declare the drought over.

As taxpayer advocates in a high tax state, we’re accustomed to seeing a political motivation in most statements coming from government. But this time, we’re not alone. Local water officials gave the State Water Resources Control Board an earful last week about the failure to call the drought over. A representative of the California Water Association, an organization comprised of local water districts, noted that the Yolo Bypass (designed to prevent flooding in Sacramento by releasing vast amounts of water into uninhabited farm land where it eventually flows back into the delta) now “looks like Lake Michigan.” But state water officials were not persuaded and decided to keep the draconian drought regulations in place “for a few more months.”

So are state officials being overly prudent? Even if they have the best of intentions, they are losing credibility by claiming that a “drought emergency” still exists. But what if the intentions of some state politicians – including the governor – are not so noble?

Back when the drought was real, there were calls by the governor that certain constitutional protections for taxpayers were preventing the state from dealing with the crisis. Proposition 13’s voter approval requirements as well as Proposition 218’s “cost of service” water rate limitations were the targets of complaints. Indeed, after a Court of Appeal decision over the summer upheld Proposition 218’s commonsense requirement that water rates had to reflect the true cost of providing the water to water users, Governor Brown lashed out claiming that this deprived him of any tools to deal with the water shortage. (This was nonsense, as nothing in Propositions 13 or 218 took away an array of tools available to local governments to incentivize conservation and disincentivize waste).

The real problem for the politicians and bureaucrats is that if the drought is truly over, which common sense tells rain soaked citizens that it is, then this removes one more justification for repealing or weakening those laws designed to prevent governmental overreach.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

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Surprise! The Nation’s Most Fiscally Fit Cities are in California!

California has a reputation for fiscal mismanagement, so I was surprised to see several Golden State cities at the top of a city financial strength ranking I recently compiled for The Fiscal Times. The fact that California has some judicious public agencies does not necessarily negate the fact that, taken as a whole, the state’s public sector has shown poor fiscal stewardship. Last week, we estimated that California government obligations total $1.3 trillion or 52% of Gross State Product. The ability of some cities to maintain strong financials in such a spendthrift environment is worth examining. So, I investigated why Irvine, Fontana and Moreno Valley took first, second and third place for financial strength among US cities with more than 200,000 people as of 2015.

Some readers of the Fiscal Times ranking questioned my ranking criteria. I developed them over five years of studying public sector fiscal performance – and especially fiscal crises – dating back to the Depression. Some of my research was commissioned and published by the State Treasurer’s Office in 2013. In general, I have found that governments get into trouble when they have a heavy debt burden, suffer declining revenue and have an insufficient general fund balance.  My scoring method relies on these three factors.

For the most part, these variables conform to intuition, but some readers may be confused as to why I focus on general fund balance as opposed to overall cash. In statistical analysis, general fund balance proves to be a better predictor of financial distress than total cash. As an example, Vallejo declared bankruptcy in 2008 citing general fund exhaustion as a cause even though it had $100 million in cash (the city adhered to government accounting guidelines prohibiting inter-fund loans that can’t be paid back within one year).

The top three cities are all in the Greater Los Angeles Area, but display some interesting contrasts.

Irvine

Irvine, a rapidly growing city in Orange County, had the strongest fiscal health as measured by my criteria. The city has no bond obligations and a general fund balance equal to 75% of annual expenditures. Pension obligations when measured against overall revenue are modest compared to other major California cities, in part, because the city contributes extra funds to its CalPERS plans each year (over and above the actuarially determined amount).

Irvine was incorporated in 1971, at a time when it had only 11,000 residents. According to City Manager Sean Joyce, the city was able to grow in a sustainable manner because residents and councilmembers largely adhered to a master plan created by the Irvine Company, which originally owned the city’s land. Irvine now has a quarter million residents and enjoys a 3.3% unemployment rate.

Joyce told me that the city recently increased its target for unencumbered general fund reserves from 15% to 20%. While Irvine weathered the Great Recession better than most cities, it did experience a precipitous drop in sales tax revenue, illustrating the need for a robust cash cushion. The city is heavily dependent on sales tax revenue because it receives a relatively small proportion of ad valorem tax revenues collected by Orange County.

New infrastructure that provides citywide benefits is funded with cash reserves assigned to the city’s Asset Management Plan. In recent years, Irvine completed two grade separation projects with these savings, avoiding the need to issue bonds. The two projects – at Jeffrey Road and Sand Canyon – speed traffic and improve pedestrian safety, by replacing railroad crossings with underpasses. (California Policy Center recently recommended that High Speed Rail funds be re-purposed to fund grade separations along the CalTrain line in Silicon Valley).

For developments that benefit residents in specific neighborhoods, the city forms special assessment districts and issues bonds serviced by incremental property taxes charged to property owners in those districts. When I expressed the concern that this practice does not allow the city to minimize financing costs by leveraging what would almost certainly be a AAA bond rating, Director of Financial Services Kristin Griffith advised me that the city’s special assessment districts are borrowing at very low interest rates without using a rating agency. In 2015, an Irvine assessment district floated a series of bonds yielding ranging from 0.85% for a one year maturity to 4.34% for a 27-year maturity, without paying a rating fee to Moody’s or S&P.

Fontana

Fontana is located just 13 miles west of San Bernardino in California’s Inland Empire. While San Bernardino went bankrupt in 2012, Fontana kept its house in order and now ranks second in my national fiscal survey. In a press release announcing its high ranking, Mayor Acquanetta Warren said: “a commitment to living within our means has made us financially strong and able to provide the services and programs our city deserves.”

This outcome shows that socioeconomic factors do not necessarily determine a city’s fiscal fate. Institutions and management also play important roles. Lisa Strong, Fontana’s Director of Management Services told me about one major institutional difference between the two municipalities: Fontana is a general law city, while San Bernardino is a charter city.

While general law cities are governed by state code, California’s 121 charter cities follow governing procedures set forth in their own, voter approved documents. Although it may seem that charter cities are more independent, their charters can often hamper management flexibility by setting pay policies or restricting the ability to reduce employee headcount.

In Fontana, city managers addressed declining revenues by sharply cutting employee headcount. Over four years, the city reduced the number of positions from 636 to 544 through layoffs, elimination of vacant positions and early retirement incentives. In San Bernardino, provisions of the city’s charter made a similar response more difficult.

Economic conditions in the Inland Empire have been challenging for a long time. Fontana has addressed this challenge through careful budgeting. The city maintains a 15% general fund reserve that is only to be used for extreme contingencies like earthquakes. Strong told me that the Great Recession did not rise to the level necessary to tap the reserve, and so the contingency funds were left untouched. Over and above this contingency. Fontana maintains general reserve funds designated for Economic Stability (fair game during the recession) and PERS Rate Stability. This latter pool of cash is used to cushion the impact of increases in CalPERS employer contribution rates. It is replenished in years when CalPERS contribution rates declined (something that hasn’t occurred in a while) or when unexpected revenues become available.

Fontana also has relatively little debt.  In 2015, the city’s lease revenue bonds and loans totaled less than $60 million or just over a quarter of annual city revenue – quite low by national standards. Strong told me that the city had relied on its Redevelopment Agency to fund most new development. When the state abolished RDAs in 2012, Fontana drastically reduced capital spending.

Moreno Valley

Moreno Valley is also located within a short drive of the bankrupt city of San Bernardino. Like its neighbors, the city suffered through a housing crash and a collapse in economic activity, but remained solvent.  City Chief Financial Officer Marshall Eyerman told me that the city established a minimum general fund reserve for emergencies and contingencies equal to 15% of annual spending before the recession, and managed to maintain that reserve despite reduced revenues. With the economy strengthening, the city’s general fund balance grew to 56% of expenditures – most of which is unrestricted and uncommitted.

Because the city contracts fire services to CAL FIRE (a state agency) and policing to Riverside County, it does not have to negotiate with public safety unions.   During the recession, the city realized contract savings by reducing the number of firefighters under contract.

City Manager Michelle Dawson told me that the city has leveraged one time funds to meet long term municipal priorities while minimizing ongoing costs. For example, the city invested in a $2 million city-wide camera system which allows a smaller police force to prevent and solve crimes more efficiently.

In addition to controlling spending, Moreno Valley focuses on attracting employers, thereby increasing revenue. It’s approach to recruiting new businesses is captured by the Economic Development Department’s web site at http://www.morenovalleybusiness.com/. The city provides a variety of incentives to encourage employers to relocate including reduced utility costs and a concierge service that helps firms navigate the regulatory process and obtain fast approvals for their applications. These options appear to be more sustainable than offering businesses outright subsidies or reduced tax rates.

Business recruitment efforts have added 9,000 new jobs in the city, including automotive jobs related to the recent arrival of Karma Automotive, a luxury electric car manufacturer. Moreno Valley’s success in attracting employers mirrors that of Mississippi’s Golden Triangle, profiled on 60 Minutes in December 2016.

City officials have a strong commitment to engaging citizens in the budget process. Moreno Valley implemented Balancing Act, a web-based tool from Engaged Public, which allows users to simulate the budgetary impact of various policy changes. User can share their budget models and comments with government officials. The city also recently began issuing a Popular Annual Financial Report – a shortened version of government financial statements accessible to users without an accounting or financial background.

Conclusion

These profiles show that cities can pursue a variety of policies to promote financial health. Options such as contracting out public safety services, maintaining special reserves for fluctuations in retirement contribution rates or making pension payments above those actuarially required may not be available to all cities. But establishing minimum general fund reserve requirements, and abiding by them even when times are tough, would seem to be a universal requirement for fiscal health. Judicious use of debt is also important.

It was a pleasure speaking to city officials who took obvious pride in their communities and showed such strong dedication to economic and fiscal stewardship. These conversations made me realize that despite the fact that we all live in a profligate state, there are cities that take fiscal sustainability seriously. Even if we don’t live in one of these cities, we can learn from them – or, perhaps more importantly, encourage our elected officials and senior municipal administrators to emulate their best practices.

Marc Joffe is the director of policy research at the California Policy Center.

Can California’s Economy Withstand $1.3 Trillion of Government Debt?

A just released study calculates the total state and local government debt in California as of June 30, 2015, at over $1.3 trillion. Authored by Marc Joffe and Bill Fletcher at the California Policy Center, this updates a similar exercise from three years ago that put the June 30, 2012 total at $1.1 trillion. As a percent of GDP, California’s state and local government debt has held steady at around 54 percent.

For a more detailed analysis of how these debt estimates were calculated, read the studies, but here’s a summary of what California’s governments owe as of 6/30/2015:

(1)  Bonds and loans – state, cities, counties, school districts, community colleges, special districts, agencies and other authorities – $426 billion.

(2)  Unfunded pension obligations (official estimate) – $258 billion.

(3)  Other unfunded post-employment benefits, primarily for retiree health insurance – $148 billion.

This total, $832 billion, ignores the fact that these pension obligations are officially calculated based on a return on investment projection that currently hovers between 7.0% and 7.5%, depending on which pension system you consider. But CalPERS, the largest of California’s roughly 90 major state and local government worker pension funds, has already determined they will have to lower their rate of return projection to 6.5%, an action that when emulated by other pension systems will immediately raise the unfunded calculation from $258 billion to $390 billion.

Our estimate, which is uses the assumptions municipal credit analysts for Moody’s now use when evaluating the credit-worthiness of cities and counties, uses a rate of return projection of 4.4%. That rate is based on the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. This rate is far more “risk free” than 6.5%, much less 7.5%, and when you apply this rate to calculate the present value of the future pension obligations facing California’s state and local governments, the unfunded liability soars to $713 billion, bringing the total of bonds, OPEB and unfunded pensions to $1.29 trillion.

This $1.29 trillion does not include deferred maintenance and upgrades to California’s infrastructure, nor does it include California’s share of federal debt. More on that later.

For the moment, let’s just assume the pension funds manage to earn around 5.5% per year. That’s less than the reduction to 6.5% they’re already acknowledging, but it’s more than the 4.5% that professional credit analysts are already using when reporting credit ratings for government agencies. That 5.5% assumption would put California’s total state and local debt right around a $1.0 trillion. How much would it cost to pay off a cool trillion in 30 years at a rate of interest of 5.5 percent?

Seventy billion dollars. That’s over $5,000 per year for every household in California. Just to make payments on debt. That’s before any payments for ongoing services.

It gets worse.

As noted in the study, if one allocates federal debt according to state GDP, the share affecting Californians adds another $1.8 trillion to their debt burden. Again, using rough numbers, we’re now talking about $15,000 per year, per household, just to make payments on local, state, and federal government debt.

Nobody knows how this will unwind. If interest rates rise, debt service will rise proportionately. To spark inflation to whittle away the impact of debt payments may be the most benign scenario, but only if inflation affects wages and not just assets. Most scenarios aren’t pretty.

The study concludes:

“Combining California’s debt with publicly held federal debt, we estimate a total debt-to-GDP ratio of 125% (or 153% using the broader definition of federal debt). This level places California distressingly close to peripheral Eurozone countries that faced financial crises in 2011 and 2012. Portugal’s 2015 debt-to-GDP ratio was 129% and Italy’s was 133%.”

While recommendations were beyond the scope of this study, here are three:

(1) Reform pensions and compensation for government workers so they experience the same financial challenges and opportunities as the citizens they serve. Cap pension benefits at twice the maximum Social Security benefit (around $62,000 per year). At a minimum, enact these reforms for all future work performed, both by new and existing public sector employees.

(2) Invest a significant percentage of California’s pension fund assets in infrastructure projects here in California. By using a lower rate-of-return projection, pension funds can compete with bond financing. They will earn a risk-free rate of return, California will rebuild its infrastructure, and millions of citizens will be put to work.

(3) Reverse the extreme environmentalist agenda that controls California’s state legislature. Enact reasonable reforms to enable development of land, water, and energy to lower the cost-of-living and encourage business growth. Private sector unions should be aggressively leading the charge on this.

There are a lot of good reasons why California is probably not destined to endure the financial paroxysms that already grip nations such as Italy and Portugal. Our innovative spirit and creative culture still attracts the finest talent from around the world. But California’s political leadership will have to admit there’s a problem, and make some hard choices. Hopefully when they finally do this, they will be thinking about the citizens they serve.

Ed Ring is the vice president of policy research at the California Policy Center.

RELATED ARTICLES

California’s Total State and Local Debt Totals $1.3 Trillion, January 10, 2017 (study)

The Type of Prosperity California Ought to Show the World, December 27, 2016

Californians Approve $5.0 Billion per Year in New Taxes, December 6, 2016

Rebuilding California’s Infrastructure, November 23, 2016

How a Major Market Correction Will Affect Pension Systems, and How to Cope, July 12, 2016

The Coming Public Pension Apocalypse, and What to Do About It, May 16, 2016

Calculating California’s Total State and Local Government Debt, April 26, 2013

How Lower Earnings Will Impact California’s Total Unfunded Pension Liability, February 18, 2013

Double Dipping at the Public Pension Trough

On December 30, the Los Angeles Times reported that James Mussenden, the retired city manager of El Monte, raised his total annual cash pension benefit to $216,000 by using a Supplementary Retirement Plan from Public Agency Retirement Services (PARS). The PARS plan is not unique to El Monte: if the leadership of any public agency concluded that the generous retirement benefits available from CalPERS or CalSTRS was insufficient for their post-retirement lifestyle and they were able to convince their council or board to go along, taxpayers in their city, special district, school district or community college district would find themselves paying into an additional plan.

Unlike CalPERS, CalSTRS and California’s various city and county pension plans, PARS is a private company with limited disclosure obligations and without exposure to the California Public Records Act. As a result, it is more difficult to assess the impact PARS is having on the size of public employee retirement payouts and on the taxpayers who fund them. Fortunately, some PARS data can be obtained through public agencies that use its services or who receive its reports. California Policy Center is collecting data on PARS, and we can start sharing some of that information here.

First, some caveats are in order. PARS offers a variety of retirement plans including several defined contribution options. Since these DC plans do not place taxpayers on the hook for disappointing investment performance, they are less objectionable to pension reformers (but because DC plans may involve employer matching contributions, they could still be questioned from the perspective of whether total public employee compensation is appropriate – but that’s another story). Also, the California Public Employees’ Pension Reform Act (PEPRA) effectively prevented California agencies from starting new PARS defined benefit plans and adding new hires to existing ones. Still, the numerous PARS defined benefit plans around the state entitle many current employees to receive outsize pensions at significant taxpayer expense.

The State Controller’s ByTheNumbers web site reports that PARS defined benefit programs have $355 million in assets and are 49% funded. That data comes from the Public Agency Retirement Systems Trust 2015 Audited Financial Statements, which we obtained through a Public Records Act request and can be seen here. One concern about PARS is how employer contributions are invested. According to the audit, a large portion of the funds have been placed in Highmark Capital Management portfolios. As shown here, HCM invests PARS assets into mutual funds, which means that management fees are being paid both to HCM and each individual fund manager. HCM’s fee alone is 0.58%. High management fees can be expected to depress portfolio returns – keeping them well below the 7.5% actuarial projection.

The audit also lists entities that offer PARS plans. From that list, we identified 114 public agencies that had PARS defined benefit plans as of June 30, 2015 (one of these, the City of San Bernardino, is liquidating its PARS plan as part of its Chapter 9 bankruptcy process.

California Joint Powers Insurance Authority City of Napa El Dorado Union High School District
California VanPool Authority City of National City Etiwanda School District
Capistrano Unified School District City of Newport Beach Expo Metro Line Construction Authority
Carlsbad Unified School District City of Oxnard Fullerton Joint Union High School District
Centinela Valley Union High School District City of Pacifica Golden Hills Community Services District
Central School District City of Pico Rivera Lassen Community College District
Cerritos Community College District City of Pomona Long Beach Unified School District
City of Alameda City of Poway Monterey Peninsula Regional Park District
City of Azusa City of Rancho Cucamonga Natomas Unified School District
City of Barstow City of Redding Newport-Mesa Unified School District
City of Belvedere City of Rosemead Norwalk-La Mirada Unified School District
City of Big Bear Lake City of Roseville Ocean View School District
City of Bishop City of San Bernardino Ontario-Montclair School District
City of Brea City of Santa Ana Orange County Transportation Authority
City of Brisbane City of Seaside Palm Springs Aerial Tramway
City of Cerritos City of Simi Valley Partnership Health Plan of California
City of Concord City of South Gate Pasadena Unified School District
City of Corona City of Stockton Pomona Unified School District
City of Cypress City of Thousand Oaks Riverside Community College District
City of Dixon City of Torrance Saddleback Valley Unified School District
City of El Monte City of Tulare San Bernardino Community College District
City of El Segundo City of Tustin San Diego Trolley, Inc.
City of Emeryville City of Vacaville San Francisco Unified School District
City of Fairfield City of Vallejo San Jose Unified School District
City of Glendale City of Vernon Santa Maria-Bonita School District
City of Hollister City of Visalia Santee Elementary School District
City of Huntington Beach City of West Covina Savanna School District
City of Huntington Park City of West Sacramento Southern California Association of Governments
City of lone City of Westminster Solano County Transit
City of Irwindale Clovis Unified School District Solano Transportation Authority
City of La Mesa County of Humboldt Sweetwater Authority
City of La Mirada County of Santa Cruz Town of Mammoth Lakes
City of La Quinta County of Solano Twin Rivers Unified School District
City of Lakewood County of Sonoma Ventura Regional Sanitation District
City of Lancaster County of Tuolumne Visalia Unified School District
City of Lawndale Cucamonga Valley Water District Vista Unified School District
City of Long Beach Cypress School District Water Replenishment District of SoCal
City of Manteca Eastern Municipal Water District West Basin Municipal Water District

One California city that has been hit hard by PARS obligations is Redding in the far northern part of the state. Like many inland cities, Redding is struggling with weak revenues. According to its most recent financial audit, total city revenues remain well below their pre-recession peak of $308 million – totaling just $288 million in the 2016 fiscal year. Tax revenues peaked at over $60 million in 2008 and were just $48 million in 2016.

Meanwhile the city was required to cough up $5.8 million in PARS contributions on top of the $15.2 million it had to pay CalPERS. So a large proportion of Redding’s tax take is needed just to fund add-on pension payments.

Redding’s net PARS liability is $31 million based on an optimistic discount rate of 7.5%.  Using a more realistic discount rate, its net liability would be in excess of $50 million.

In a forthcoming article we will discuss how Redding’s PARS plan came to be and who has benefited from it (hint:  the story is not too different from that of El Monte).  Also, if readers have stories about PARS at individual agencies, please consider sharing them with us in the comments, by email or via Facebook.

Using the California Environmental Quality Act (CEQA) to Turn Out the Lights

In California, if something saves money for taxpayers and improves life while reducing energy consumption, it’s bad for the environment and must be terminated.

How do we know? Public participation in environmental review under the California Environmental Quality Act (CEQA).

For example, a law firm working on behalf of construction unions has identified numerous environmental calamities that occur when electricity is generated by sunlight, wind, and geothermal steam. A partial collection of the ever-growing documentation about the devastating effects of solar photovoltaic power generation can be found on UnionWatch.org at Unions Extensively Interfere with California Solar Photovoltaic Power Plant Permitting.

Monterey LED Light

“I feel like I’m back in the prison yard.”

We now also know from the CEQA process that light-emitting diodes (LEDs) are harmful. After five years of litigation, a group that calls itself “Turn Down the Lights” has succeeded in the first stage of its mission to rid the City of Monterey of LED fixtures currently on its street lampposts.

The typical informed Californian probably believes LED fixtures are a welcome technological advancement for humanity. Don’t they provide better light at lower cost? Wasn’t the Nobel Prize in Physics awarded in 2014 for “the invention of efficient blue light-emitting diodes which has enabled bright and energy-saving white light sources?”

As well as increasing energy efficiency and saving public money, LED fixtures seem to improve panoramic vistas of the night sky. As people drive south on Highway 1 toward the Monterey Peninsula at night, they see the hillside streets of Monterey as tiny white specks in the darkness over the bay, while a sulfurous hazy yellow glow emits from the older streetlights of neighboring cities and the federally-owned Presidio of Monterey. LED fixtures seem to be a step forward.

“Turn Down the Lights” thinks otherwise. It filed a lawsuit in March 2012 demanding that the City of Monterey go through the process of environmental review under the California Environmental Quality Act (CEQA) for its already-installed LED streetlight fixtures. And on December 20, 2016, a Monterey County Superior Court judge ruled that the city must do it. This is likely to end up requiring a full Environmental Impact Report, which provides more opportunities for Turn Down the Lights to pressure the city to take out the LED fixtures.

The saga of the LED fixtures began in 2009, when the Monterey City Council approved an application for a low-interest loan of up to $1.56 million from the California Energy Commission to adopt energy-efficient measures. In 2011, it used this money to award contracts to construction companies to install the LED fixtures. No one objected at the time.

Just like every other local government in California, the City of Monterey must reduce its share of responsibility for greenhouse gas emissions. It has to fulfill mandates in Assembly Bill 32, the Global Warming Solutions Act of 2006. LED lights seemed like a reasonable way to pursue this goal while maintaining the benefits of modern American life.

As contractors installed the first sets of LED fixtures, some residents began complaining. Their eyes were now hurting. One person compared them to lights used in a prison yard. Another mistook an LED for Venus.

These residents – now organized as “Turn Down the Lights” – eventually declared in their lawsuit that LED lights were dangerous for wildlife (more likely to be attacked by predators), drivers (because of glare and shadows) and residents (because of sleep deprivation and even cancer). They also asserted that “the brightness of the LED lighting introduces a disharmonious element unknown in the 18th and 19th centuries” to the city’s many historic buildings. They even claimed that it was a falsehood that street illumination reduces crime.

Monterey LED Light

“That isn’t Venus you’re looking it.”

In an attempt to address residents’ complaints, the city begun adding light shields, dimming the lights, and changing light angles. The city also filed a Notice of Exemption, which claimed a changing of light fixtures on existing street posts did not require analysis and review under CEQA. That finally spurred the lawsuit to get the lights removed.

After a fight over which documents the judge should consider in addition to the narrow administrative record, a Monterey County Superior Court judge ruled on December 20, 2016 that LED light bulbs are different enough from the old bulbs to require environmental review. In addition, the judge agreed with “Turn Down the Lights” that the City of Monterey had failed to inform the public sufficiently via the city council meeting agenda about the potential environmental impacts of the different light fixtures and had failed to indicate an intent to exempt the installation of the new light fixtures from CEQA.

What does “Turn Down the Lights” want? It is unclear if adding light shields, dimming the lights, and changing light angles will satisfy the plaintiffs.

In their briefs, this organization insinuates that the City of Monterey can adopt, at least in some neighborhoods, an even better way than LED fixtures to reduce costs and conserve electricity: no streetlights. This would end the misery and allow residents and visitors to see the night sky unimpeded. In addition, it would establish a “harmonious element” with the historical nature of the city’s 18th and 19th century structures. The darkness would presumably even discourage crime, as criminals sneaking through the fog would no longer have shadows to lurk in.

Perhaps the California Environmental Quality Act (CEQA) allows “Turn Down the Lights” to serve as visionaries toward an era when “Turn Off the Lights” becomes the American mantra. And there are surely societal benefits to no lights, for aesthetics as well as for the planet. An atlas of artificial night sky brightness published in 2016 contends that 80% of people living in North America cannot see the Milky Way in the night sky. It’s alleged that Los Angeles residents were calling the police to report a strange glow in the night sky after the 1994 Northridge earthquake caused power outages. They were seeing the unfamiliar Milky Way.

There may be a day when Californians all know what the Milky Way looks like, just like the citizens of North Korea.


North Korea Is Dark From Space

North Korea Is Dark From Space

Turn Down the Lights v. City of Monterey – CEQA Lawsuit Against LED Streetlights – Court Documents

Turn Down the Lights v City of Monterey – Petitioner’s Petition for Writ of Mandate and to Enforce CEQA (March 22, 2012)

Turn Down the Lights v City of Monterey – Respondent’s Demurrer to Petition for Writ of Mandate – Memo of Points and Authorities – August 13, 2012

Turn Down the Lights v City of Monterey – Respondent’s Answer to Petition for Writ of Mandate (November 28, 2012)

Turn Down the Lights v City of Monterey – Petitioner’s Notice of Motion and Motion for Order Augmenting the Record with 421 Pages (July 22, 2013)

North Korea Is Dark From Space

North Korea Is Dark From Space

Turn Down the Lights v City of Monterey – Respondent’s Opposition to Petitioner’s Motion for Order Augmenting the Record (August 5, 2013)

Turn Down the Lights v City of Monterey – Petitioner’s Memo of Points and Authorities in Reply on Motion for Order Augmenting Record (August 8, 2013)

Turn Down the Lights v City of Monterey – Monterey County Superior Court Order Granting Petitioner’s Motion to Augment the Record (October 3, 2013)

Turn Down the Lights v City of Monterey – Petitioner’s Opening Brief (November 23, 2015)

Turn Down the Lights v City of Monterey – Respondent’s Motion to Strike Extra-Record Documents (December 23, 2015)

North Korea Is Dark from Space

North Korea Is Dark from Space

Turn Down the Lights v City of Monterey – Respondent’s Opposition Brief (December 23, 2015)

Turn Down the Lights v City of Monterey – Petitioner’s Reply Brief in Support of Petition for Writ of Mandamus (February 16, 2016)

Turn Down the Lights v City of Monterey – Petitioner’s Memorandum of Points and Authorities in Opposition to Motion to Strike (February 26, 2016)

Turn Down the Lights v City of Monterey – Respondent’s Reply to Petitioner’s Opposition to Motion to Strike Extra-Record Documents (April 29, 2016)

Turn Down the Lights v City of Monterey – Monterey County Superior Court Request for Further Briefing – Supplemental Briefing Order (August 1, 2016)

Turn Down the Lights v City of Monterey – Petitioner’s Supplemental Brief in Support of Petition for Writ of Mandate – September 2, 2016

Turn Down the Lights v City of Monterey – Petitioner’s Supplemental Brief in Support for Petition for Writ of Mandamus (September 12, 2016)

Turn Down the Lights v City of Monterey – Respondent Request for Judicial Notice (City of Monterey Documents) – September 12, 2016

Turn Down the Lights v City of Monterey – Respondent’s Supplemental Brief (September 26, 2016)

Turn Down the Lights v City of Monterey – Respondent’s Request for Judicial Notice (City of Monterey Documents) September 26, 2016

Turn Down the Lights v City of Monterey – Petitioner’s Supplemental Reply Brief in Support of Petition for Writ of Mandamus (October 3, 2016)

Turn Down the Lights v City of Monterey – Petitioner’s Opposition to Respondent’s Request for Judicial Notice – City of Monterey Documents – October 3, 2016

Turn Down the Lights v City of Monterey – Monterey County Superior Court Decision (December 20, 2016)


Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and is the author of frequent postings about generally unreported California state and local policy issues at www.laborissuessolutions.com. Follow him on Twitter at @DaytonPubPolicy.

Gov. Brown Appoints Radical Environmentalists to Public Utilities Commission

Governor Jerry Brown has just appointed two radical environmental justice activists to the California Public Utilities Commission, replacing two commissioners whose terms expired January 1, 2017.

Awaiting Senate confirmation are Clifford Rechtschaffen and Martha Guzman Aceves — two Brown insiders with shady records and a history of Environmental Justice.

Don’t let the term “Environmental Justice” fool you. This “justice” is not about protecting poor and low income communities from excess pollutants or toxic materials; it is about environmental extremists’ scheme to spread wealth through government mandates. Remember President Obama’s EPA Region 6 Administrator Al Armendariz on video describing his enforcement of EPA regulations as “crucifying” oil companies?

Environmental Justice became official in 1994 via presidential fiat when then-President Bill Clinton issued Executive Order 12898 to “focus federal attention on the environmental and human health effects of federal actions on minority and low-income populations with the goal of achieving environmental protection for all communities.” The Office of Environmental Justice (OEJ) claims to work “to protect human health and the environment in communities overburdened by environmental pollution by integrating environmental justice into all EPA programs, policies and activities.”

Martha Guzman Aceves, who has worked for the governor in his office as Deputy Legislative Secretary, has upwards of 40 violations of the California Fair Political Practices Act. Guzman-Aceves has served as a public official in the Brown Administration “managing legislation and regulatory matters for the governor,” while her non-profit organization lobbied the legislature and governor’s office on various issues, including AB1081, federal immigration policy enforcement,” I reported in October 2013.

“California Deputy Legislative Secretary Martha Guzman-Aceves intentionally filed false documents with the Fair Political Practices Commission to conceal hundreds of thousands of dollars, filed false tax returns, failed to report receipt of payment from a political committee, and omitted third-party relationships that directly conflict with her position and duties as Deputy Legislative Secretary in the Office of Governor Jerry Brown,” the Hews Media Group reported in 2014.

Brown’s other PUC appointee awaiting Senate confirmation, Clifford Rechtschaffen, has worked as a senior advisor also in Brown’s office on environmental and agricultural issues. Prior to being appointed by Brown, he was a special assistant attorney general for then-Attorney General Jerry Brown, where he helped “coordinate the work of the office’s attorneys on global warming, including special projects and liaison with outside groups,” according to his bio.

Rechtschaffen has also advised the election campaigns of Governor Gray Davis in 1998 and Attorney General Bill Lockyer in 1998 and 2002 on environmental issues, and is called “an informal consultant” to the California Attorney General’s Office Task Force on Environmental Justice, according to his bio. Rechtschaffen was also known as the top enforcer of California’s toxics initiative, Proposition 65.

California’s PUC “has control over energy, rail safety and carriers, telecommunications, and water rates and operating conditions as permitted by state law,” according to the PUC website.

Both of Brown’s newest appointees currently work inside of the Governor’s office. The current PUC President Michael Picker, was also Senior Advisor for Renewable Energy in the Governor’s office, 2009 – 2014. Each of the other PUC commissioners has been a Gov. appointee to some agency: Natural Resources, Dept. of Energy, Fair Political Practice Commission, etc…

What is interesting is Martha Guzman Aceves, one of the new appointees, has more than 40 FPPC violations, and one of the current PUC commissioners was the head of the FPPC 2003-2007.

Who is Martha Guzman Aceves?

20170105-martha-guzman

Prior to working for the Governor, Guzman Aceves was a founding partner of Cultivo Consulting, which claims to engage in lobbying, political campaigning and community organizing in California. It’s a lobbying and outreach firm specializing in social, economic and environmental justice. Guzman Aceves also was listed on 2011 tax returns as president and CEO for Communities for the New California Education Fund, a 501(c)(3) organization which claims to be “committed to achieving environmental, economic, and socially just public policy for working class families in the rural areas of California.”

They are community organizers and part of ACORN.

While Guzman Aceves has a long history of lobbying, political campaigning and community organizing in California, the current abuses began a few years ago. In 2009, the national network of community-organizers, “ACORN,” the Association of Community Organizations for Reform Now, known best for registering hundreds of thousands of low-income voters, was exposed encouraging the poor to sign up for welfare in order to overload the entire system – in addition to numerous other fraud charges. The ACORN strategy was to bring radical change to America “using a tangled mess of interlocking directorates and upward of 100 affiliated tax-exempt groups,” according to Townhall.com journalist Matthew Vadum.

After video footage was released to the media showing ACORN workers giving tax tips to conservative activists posing as a pimp and prostitute, its largest affiliates in New York and California broke away and changed their names, which included the “charitable” organizations linked to several operated by or closely coordinating with Governor Brown’s Deputy Legislative Secretary, Martha Guzman Aceves.

The trail of ‘dark money” into Guzman Aceves’ Communities for a New California and Alliance of Californians for Community Empowerment is convoluted, but telling.

It began with ACORN, which merely changed its name in 2010 to “Alliance of Californians for Community Empowerment.” Then former ACORN group became “Alliance of Californians for Community Empowerment Action,” at the same time Guzman’s Communities for a New California was created.

The Alliance of “Local Leaders for Education, Registration and Turnout,” changed its name to “California Calls Action Fund,” which then created “California Calls Coordinating Committee.”

The “California Calls Coordinating Committee” managed electoral and political activity through the “Educators and Working Families Committee,” “California Calls Action Fund Committee,” and ALLERT PAC, which was terminated in 2008.

“Communities for a New California” created another PAC in 2011 – the “Communities for a New California Fresno Committee 527,” and a 501(c)(3) non-profit charity, the “Communities for a New California Education Fund,” according to GuidestarCommunities for a New California received $71,440 and $44,644 from California Calls Action Fund in October 2012, according to the Secretary of State.

“Alliance of Californians for Community Empowerment Action” created two more groups — “Alliance of Californians for Community Empowerment Institute,” and “Alliance of Californians for Community Empowerment Action PAC,” which received $15, 000 from Alliance of Californians for Community Empowerment Action, and returned $200,000 in contributions from California Calls Action Fund Committee.

“Leading Latino and environmental justice advocates formed Communities for a New California in 2010,” the CNC website says.

Under CNC’s umbrella are the Communities for a New California Education Fund, a 501(c)(3) charity; the Communities for a New California Inc., a 501 (c)(4) charity; and the Communities for a New California Fresno-Tulare Independent Expenditure Committee.

Amy Schur, the original Executive Director of Alliance of Californians for Community Empowerment since its founding in 2010, moved into the role of Campaign Director for the organization. Prior to helping to launch ACCE, Schur was Head Organizer of California ACORN and had worked as a community organizer on the South side of Chicago, in Detroit, and in cities across California.

Get it now?

Who Is Clifford Rechtschaffen, Brown’s other PUC appointee?

20170105-clifford-rechtschaffen

In October 2013, California Gov. Jerry Brown, together with the Governors of Oregon and Washington and the British Columbia Premier, signed the Pacific Coast Action Plan on Climate and Energy, “to align climate change policies and promote clean energy.” The Pacific Coast Collaborative links with the West Coast Infrastructure Exchange (WCX), a compact between California, Oregon, Washington and British Columbia, formed  in 2013 to promote “the type of new thinking necessary to solve the West Coast’s infrastructure crisis.” And the WCX is linked to the Clinton Foundation’s Clinton Global Initiative.

But Brown had help from Clifford Rechtschaffen.

“California isn’t waiting for the rest of the world before it takes action on climate change,” said Gov. Brown said in 2013. “Today, California, Oregon, Washington and British Columbia are all joining together to reduce greenhouse gases.”

Rechtschaffen helped Sam Rickets, a senior aid to Washington Gov. Jay Inslee, develop an agreement, originated by disgraced former Oregon Gov. Kitzhaber, to organize a campaign to promote the green agenda, beginning with the California and Washington governors’ offices, a private environmentalist law firm, and the White House. This scheme was made possible with funding from “major environmental donors,” billionaires Tom Steyer and former New York Mayor Michael Bloomberg, according to E&E Legal attorney Chris Horner. Thanks to attorney Horner, the Kitzhaber scandal was exposed as a scheme involving multiple governors and high-level staff involved in shady green energy deals, with national entanglements.  Attorney Chris Horner discovered ingrained collusion with top level staff in Gov. Brown’s office with Cliff Rechtschaffen and Brown aid Wade Crowfoot, Oregon Gov. John Kitzhaber’s office, and Washington State Washington Gov. Jay Inslee’s office to “spread climate coordination and collaboration to a larger group of governors across the U.S.”

Who is Tom Steyer?

Billionaire climate change activist Tom Steyer made his fortune investing in the energy sector, through his hedge fund company, the Farallon Capital Management fund, which Steyer managed until 2012. Farrallon invested in coal mines in Australia and Indonesia, as well as in tar-sands oil, which is strip mined, processed to extract the oil-rich bitumen, which is then refined into oil. It’s an interesting career change and “moral” about-face. “And then there’s the Brown family’s semi-secret financial ties to the military dictatorship of Indonesia, a book-length saga unto itself,” columnist Dan Walters slipped into a column in 2010. (Learn more about this scandal here)

Tom Steyer founded NextGen Climate, an organization immersed in green cronyism. NextGen is a 501(c)(4) organization, and the NextGen Climate Action Committee is a political action committee which fought the Keystone Pipeline and other oil and gas projects. Steyer said on the NextGen blog that while climate change had not always been on his radar, he came to believe he could no longer invest in fossil fuels – after becoming a billionaire. Steyer uses his coal and energy fortune to try and manipulate the California and national political processes.

The web of corruption is thick, and goes deeply into the Governor’s inner sanctum. Maybe, just maybe, the Senate will consider this before they automatically confirm Martha Guzman Aceves and Clifford Rechtschaffen to the Public Utilities Commission.

About the Author: Katy Grimes is an investigative journalist, Senior Correspondent with the Flash Report, and Senior Media Fellow with Energy and Environmental Institute. A longtime political analyst, she has written for The Sacramento Union, The Washington Examiner, Watchdog.org, The Pacific Research Institute’s CalWatchdog, The San Francisco Examiner, The Business Journal, E&E Legal, The Sacramento Bee, Legal Insurrection, Canada Free Press, and Laura Ingraham’s LifeZette, and can be heard regularly on many talk radio shows each week. This report originally appeared in Frontpage Mag and is republished here with permission from the author.

The Type of Prosperity California Ought to Show the World

As reported earlier this month in the Los Angeles Times, California policymakers are expanding their war on “climate change” at the same time as the rest of the nation appears poised to reevaluate these priorities. In particular, California’s legislature has reaffirmed the commitment originally set forth in the 2006 “Global Warming Solutions Act” (AB 32) to reduce the state’s CO2 emissions to 40% below 1990 levels by 2030.

Just exactly how California policymakers intend to do this merits intense discussion and debate. As the Los Angeles Times reporter put it, “The ambitious new goals will require complex regulations on an unprecedented scale, but were approved in Sacramento without a study of possible economic repercussions.”

At the risk of providing actual quantitative facts that may be extraordinarily challenging for members of California’s legislature, most of whom have little or no formal training in finance or economics (ref. California’s Economically Illiterate Legislature, 4/05/2016), the following chart depicts data that helps explain the futility of what California’s citizens are about to endure:

CALIFORNIA ENERGY CONSUMPTION, POPULATION, GDP, AND CO2 EMISSIONS
Comparisons to the rest of the USA, China, India, and the world

20161227-ca-energy-metrics-vs-world2(For links to all sources for this compilation, scroll down to “FOOTNOTES”)

The first row of data in the above table is “Carbon emissions,” column one shows California’s total annual CO2 emissions including “CO2 equivalents” – bovine flatulence, for example, is included in this number – expressed in millions of metric tons (MMT). As shown, in 2014 (the most recent year with complete data available) California’s CO2 emissions were down to 358 MMT. That’s 73 MMT lower than 1990, when they were 431 MMT. While this is a significant reduction, it is not nearly enough according to California’s state legislature. To hit the 40% reduction from 1990 levels by 2030, CO2 emissions still need to be reduced by another 100 MMT, to 258 MMT. That’s another 28% lower than they’ve already fallen. But California is already way ahead of the rest of the world.

As shown on row 8 of the above table, California’s “carbon intensity” – the amount of CO2 emissions generated per dollar of gross domestic product – is already twice as efficient as the rest of the U.S., twice as efficient as the rest of the world, more than three times as efficient as China, and nearly twice as efficient as India. We’re going to do even more? How?

A few more data observations are necessary. As shown, California’s population is 0.5% of world population. California’s GDP is 2.0% of the world GDP. California’s total energy consumption is 1.4% of world energy consumption, and California’s CO2 emissions are 1.0% of the world’s total CO2 emissions.

These stark facts prove that nothing Californians do will matter. If Californians eliminated 100% of their CO2 emissions, it would not matter. On row 1 above, observe the population of China – 1.4 billion; the population of India – 1.3 billion. Together, just these two developing nations have seventy times as many people as California. The per capita income of a Californian is four times that of someone living in China; nine times that of someone living in India. These nations are going to develop as much energy as they can, as fast as they can, at the lowest possible cost. They have no choice. The same is true for all emerging nations.

So what is really going on here?

If California truly wanted to set an example for the rest of the world, they would be developing clean, safe, exportable technologies for nuclear power and clean fossil fuel. Maybe some of California’s legislators should take a trip to Beijing, where burning coal generated electricity and poorly formulated gasoline creates killer fogs that rival those of London in the 1900’s. Maybe they should go to New Delhi, where diesel generators supplement unreliable central power sources and raise particulate matter to 800 PPM or worse. Maybe they should go to Kuala Lampur, to choke on air filled with smoke from forests being incinerated to grow palm oil diesel (a “carbon neutral” fuel).

According to the BP Statistical Review of Global Energy, in 2015, renewables provided 2.4% of total energy. Hydroelectric power provided 6.8%, and nuclear power provided 4.4%. Everything else, 86% of all energy, came from fossil fuel. In the real world, people living in cities in emerging nations need clean fossil fuel. So they can breathe. Clean fossil fuel technology is very good and getting better all the time. That is where investment is required. Right now.

Instead, purportedly to help the world, California’s policymakers exhort their citizens to accept a future of rationing enforced through punitive rates for energy and water consumption that exceed approved limits. They exhort their citizens to submit to remotely monitored, algorithmic management of their household appliances to “help” them save money on their utility bills. Because supposedly this too averts “climate change,” they restrict land development and exhort their citizens to accept home prices that now routinely exceed $1,000 per square foot anywhere within 50 miles of the Pacific coast, on lots too small to even put a swing set in the yard for the kids. They expect their citizens to avoid watering their lawns, or even grow lawns. And they will enforce all indoor restrictions with internet enabled appliances, all outdoor restrictions with surveillance drones.

This crackdown is a tremendous opportunity for a handful of high-technology billionaires operating in the Silicon Valley, along with an accompanying handful of California’s elites who benefit financially from politically contrived, artificial resource scarcity. For the rest of us, and for the rest of the world, at best, it’s a misanthropic con job.

The alternative is tantalizing. Develop clean fossil fuel and safe nuclear power, desalination plants, sewage recycling and reservoirs to capture storm runoff. Loosen restrictions on land development and invest in road and freeway upgrades. Show the world how to cost-effectively create clean abundance, and export that culture and the associated enabling technologies to the world. Then take credit as emerging nations achieve undreamed of prosperity. With prosperity comes literacy and voluntarily reduced birthrates. With fewer people comes far less pressure on the great wildernesses and wildlife populations that remain, as well as fisheries and farmland. And eventually, perhaps in 25 years or so, renewables we can only imagine today, such as nuclear fusion, shall come to practical fruition.

That is the example California should be showing to the world. That is the dream they should be selling.

 *   *   *

Ed Ring is the vice president of policy research for the California Policy Center.

RELATED ARTICLES

Invest California’s Pension Funds in Water and Energy Infrastructure, November 14, 2016

California Needs Infrastructure, and Unions Should be Helping, September 6, 2016

California’s Misguided Water Conservation Priorities, August 17, 2016

How Gov’t Unions and Crony Capitalists Exploit Global Warming Concerns, June 21, 2016

The Alternative to Crony Capitalism and Phony Shortages, June 15, 2016

Government Unions and the Financialization of America, May 24, 2016

Investing in Infrastructure to Lower the Cost of Living, March 14, 2016

Why Aren’t Unions Fighting California’s Bullet Train Boondoggle?, November 24, 2015

Libertarians, Government Unions, and Infrastructure Development, May 5, 2015

Desalination Plants vs. Bullet Trains and Pensions, April 7, 2015

Raise the Minimum Wage, or Lower the Cost of Living?, March 31, 2015

The Abundance Choice, December 24, 2014

An Economic Win-Win For California – Lower the Cost of Living, December 3, 2014

How to Create Affordable Abundance in California, July 1, 2014

California’s Green Bantustans, May 21, 2014

The Unholy Trinity of Public Sector Unions, Environmentalists, and Wall Street, May 6, 2014

 

FOOTNOTES

Population
World Population Clock:
http://www.worldometers.info/
https://en.wikipedia.org/wiki/List_of_countries_and_dependencies_by_population
Directorate-General of the European Commission:
https://en.wikipedia.org/wiki/Eurostat
https://en.wikipedia.org/wiki/List_of_European_Union_member_states_by_population
US Census Bureau – California:
http://www.census.gov/quickfacts/table/PST045215/06

Carbon Emissions
U.S. Energy Information Administration:
http://www.eia.gov/state/rankings/?sid=CA#series/226
United Nations Framework Convention on Climate Change:
http://unfccc.int/ghg_data/ghg_data_unfccc/items/4146.php
http://edgar.jrc.ec.europa.eu/overview.php?v=CO2ts1990-2014&sort=des9
https://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions

Total Energy Consumption
BP Statistical Review of World Energy:
http://www.bp.com/content/dam/bp/en/corporate/pdf/bp-statistical-review-of-world-energy-2015-full-report.pdf
California per capita energy consumption:
http://www.eia.gov/state/rankings/?sid=CA#series/12

GDP
World Bank:
http://databank.worldbank.org/data/download/GDP_PPP.pdf
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
US Dept of Commerce – Bureau of Economic Analysis:
https://www.bea.gov/newsreleases/regional/gdp_state/gsp_newsrelease.htm
https://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP

Note: There are only minor differences between the nominal US GDP and PPP (purchasing power parity) US GDP:
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal). With other nations, such as China and India, however, the differences are significant. Using purchasing power parity GDP figures for comparisons yields ratios that more accurately reflect energy intensity and carbon intensity among nations. 

In California, Innovation Ends at the Water Tap

hayogev_0635-r-1

Despite being the home to many of the world’s great startups, California’s approach to its water shortage has been anything but entrepreneurial. The triumph of bureaucracy over entrepreneurship is epitomized by the December 22 release of the state’s Bay Delta Conservation Plan Environmental Impact Review (EIR). The document, characterized by the San Francisco Chronicle as a “snooze-inducing tome,” contains 80,000 pages of bureaucratic box-checking intended to justify the Governor’s $15.7 billion WaterFix project. Rather than increase water supplies, WaterFix focuses on more efficiently and reliably allocating California’s insufficient stock of potable water.

In addition to this EIR, the state maintains “The California Water Plan”, described as “a strategic plan for managing and developing water resources statewide for current and future generations”. New versions of the plan are rolled out once every five years or so: the last update appeared in 2013 and a new version is scheduled for 2018. The idea of centrally produced five-year plan has been tried before, in the Soviet Union and other Communist countries, and proved to be a tremendous failure.

The deficiencies of central planning are not necessarily the fault of the planners. Indeed, the California Water Plan appears to have been written by well-meaning and knowledgeable officials. Indeed, it contained so much valuable information that we used it as a major source for our recent infrastructure study.

Central planning usually fails due to knowledge and incentive problems. As Nobel Laureate F. A. Hayek argued, central planners cannot know the preferences of everyone in the economy they are attempting to control. Without that information, they cannot determine the appropriate quantities of goods and services to produce to best satisfy consumer demand given limited resources. Such information is best generated through a market process in which unregulated prices communicate and coordinate the desires of producers and consumers.

State planners also lack the incentive to develop and implement truly innovative solutions to California’s water shortage. In California, entrepreneurs have proven time and again, that given the freedom to innovate and the ability to profit from their innovations, they can overcome complex challenges and transform industries.

Just within the last few years, Uber has become a large company by solving  daunting mobility challenge. For all too many of us, taxicabs were totally unavailable. For others, they were slow to arrive, expensive and/or provided poor service. Now with a few taps on a smartphone, riders can summon a clean vehicle with a polite driver within a few minutes and at a reasonable price. Uber follows in the footsteps of Intel (which gave us personal computing), Google (which revolutionized the way we find information) and Facebook (which transformed the way we communicate with friends and family). Instead of producing ponderous central planning documents, California should unleash its entrepreneurs to solve the challenge of providing the state with sufficient potable water.

Critics of laissez faire might argue that these companies succeeded because government provided the necessary prerequisites for them to operate.  And, it is certainly true that enabling technologies such as microprocessors, the internet and Global Positioning Systems were the product of defense research. But government researchers could not have been expected to adopt these basic technologies to the needs of consumers.

In today’s mixed economy, it is unrealistic to expect major innovations to occur without some government involvement. For this reason, I would hesitate to criticize Tesla, which has done much to advance electric vehicle technology, while benefiting from tax credits and other forms of government support. That said, there is a thin line between leveraging government support to create beneficial innovations and cronyism, under which private companies feast at the public trough without creating consumer value. Scrutiny by the media and other third parties is an admittedly imperfect way to distinguish between socially beneficial public private partnerships and corporate rent-seeking.

When it comes to applying a mixed economy approach to entrepreneurial innovation in water, Israel has proven to be the gold standard. That nation has turned a water shortage into a surplus by leveraging private sector innovation and management. Israel’s water industry include Emefcy, which develops solutions for treating wastewater, IDE Technologies, a global leader in desalination and Water-Gen, which extracts drinking water from the air. These companies have worked with Israel’s central and local governments to radically increase Israel’s water supply, turning the arid country into a net exporter of water.

California also has water innovators. For example, Lawrence Livermore labs has developed a new flow-through electrode capacitive desalination technology that can remove salt from seawater with minimal energy use. Santa Barbara-based Baswood offers technologies to cost-effectively treat agricultural and industrial wastewater.

Rather than micro-manage customer water consumption and borrow more money to transport insufficient water resources, the state’s efforts would be better directed toward working with innovators to commercialize and apply new water supply technologies.

 *   *   *

Marc Joffe is the director of policy research at the California Policy Center.

Unaffordable California – It Doesn’t Have To Be This Way

December 2016 Update: Here’s a documented comparison of California taxes and economic climate with the rest of the states. The news is bad, and getting worse. But it doesn’t have to be this way! The state and local government policies that created an unaffordable California can be reversed.

PERSONAL INCOME TAX: Prior to Prop 30 passing in Nov. 2012, CA already had the 3rd worst state income tax rate in the nation. Our 9.3% tax bracket started at under $50,000 for people filing as individuals. 10.3% started at $1 million. Now our “millionaires’ tax” rate is 13.3% – including capital gains (CA total CG rate now the 2nd highest in the world!).  10+% taxes now start at $250K. CA now has by far the nation’s highest state income tax rate. We are 34% higher than 2nd place Oregon, and a heck of a lot higher than all the rest – including 8 states with zero state income tax – and one state (NH) that taxes only dividends and interest income.
CA is so bad, we also have the nation’s 2nd highest state income tax bracket. AND the 3rd. AND the 4th!
http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2013.pdf   Ref. Table #12
http://tinyurl.com/CA-income-tax-bar-chart
http://tinyurl.com/CA-2nd-CG

IncomeTaxGraph

SALES TAX:  CA has the highest state sales tax rate in the nation.  7.5% (does not include local sales taxes). Two 2015 bills sought a combined $10 billion++ CA state and local sales tax increase (failed to pass that year).
http://taxfoundation.org/article/state-and-local-sales-tax-rates-2011-2013

GAS TAX:  CA has the nation’s 7th highest “gas pump” tax at 56.6 cents/gallon (November, 2016).  But add in the unique 10-12 cent CA “cap and trade” cost per gallon, and CA is in the top 3 states (with PA and WA). National average is 48.9 cents.  Yet CA has the 9th worst highways. NOTE: CA state legislature leaders are discussing a new additional 17 cents/gal gasoline tax.
http://www.api.org/oil-and-natural-gas/consumer-information/motor-fuel-taxes/gasoline-tax   (CA roughly tied w/WA for highest total diesel tax)   and  http://reason.org/files/22nd_annual_highway_report.pdf

PROPERTY TAX: California in 2015 ranked 14th highest in per capita property taxes (including commercial) – the only major tax where we are not in the worst ten states. But the 2014 average CA single-family residence (SFR) property tax is the 8th highest state in the nation. Indeed, the median CA homeowner property tax bill is 93% higher than the average for the other 49 states.
http://tinyurl.com/go89o6u
http://tinyurl.com/hf6phjz
http://linkis.com/blogspot.com/Yq6cx

“IMPACT FEES” ON HOME SALES: Average 2012 CA impact fee for single-family residence was $31,100, 90% higher than next worst state. 265% higher than jurisdictions that levy such fees (many governments east of the Sierras do not). For apartments, fee averaged $18,800, 290% above average outside state. The fee is part of the purchase price, so buyer pays an annual property tax on the fee!
http://www.newgeography.com/content/003882-california-homes-require-real-reach
http://eyeonhousing.org/2014/01/home-building-impact-fees-state-averages/

“CAP AND TRADE” TAX:  CA has now instituted the highest “cap and trade” tax in the nation – indeed, the ONLY such U.S. tax. Even proponents concede that it will have zero impact on global warming.
http://tinyurl.com/WSJ-CA-cap-and-trade

SMALL BUSINESS TAX:  California has a nasty anti-small business $800 minimum corporate income tax, even if no profit is earned, and even for many nonprofits. Next highest state is Rhode Island at $500 (only for “C” corporations). 3rd is Delaware at $175. Most states are at zero.
http://tinyurl.com/CA-800-tax

Based just on GDP, CA ranks as the 6th largest economy in the world. But adjusted for population and cost of living, CA ranks lower than all but 13 U.S. States.
http://riderrants.blogspot.com/2016/07/updated-2015-figures-ca-per-capita-gdp.html

CORPORATE INCOME TAX:  CA 2016 corporate income tax rate (8.84%) is the highest west of Iowa (our economic competitors) except for Alaska.
http://www.taxfoundation.org/sites/taxfoundation.org/files/docs/CITmap.png  Ref. Table #15   – we have the 8th highest rate in the nation.

BUSINESS TAX CLIMATE: California’s 2016 “business tax climate” ranks 3rd worst in the nation – behind New York and anchor-clanker New Jersey. In addition, CA has a lock on the worst rank in the 2016 Small Business Tax Index – 7 TIMES worse than the best small business state (South Dakota).
http://taxfoundation.org/article/2015-state-business-tax-climate-index    http://sbecouncil.org/wp-content/uploads/2016/06/BTI2016.pdf

LEGAL ENVIRONMENT: The American Tort Reform Foundation in 2015 again ranks CA the “worst state judicial hellhole” in U.S. – the most anti-business.  The U.S. Chamber of Commerce ranks CA a bit better – “only” the 4th worst state in 2015 (unfortunately, sliding from 7th worst in 2008).
http://www.judicialhellholes.org/2015-2016/california/
http://www.instituteforlegalreform.com/states/california

FINES AND FEES:  CA driving tickets are incredibly high. Red-light camera ticket $490. Next highest state is $250. Most are around $100.
http://reason.org/blog/show/red-light-cameras-and-the-enigmatic

CA needlessly licenses more occupations than any state – 177. Second worst state is Connecticut at 155.  The average state is 92. But CA is “only” the 2nd worst licensing state for low income occupations.
http://cssrc.us/publications.aspx?id=7707  
http://bit.ly/1ff0OGu

WORKERS COMPENSATION INSURANCE: CA has the highest/worst state workers’ compensation rates in 2014, up from 3rd in 2012. CA rates 21.3% higher than 2nd highest state, 88% higher than median state. Yet we pay low benefits — much goes to lawyers.
http://riderrants.blogspot.com/2014/10/california-has-worst-workers.html

OVERALL TAXES:  Tax Foundation study ranks CA as tied for the 7th worst taxed state in 2016. But the CA taxes are the most progressive of all states, hammering the upper third of the populace. The top 1% pay 50% of all CA state income taxes.
http://taxfoundation.org/article/tax-freedom-day-2016-april-24

UNEMPLOYMENT: CA unemployment rate (Nov., 2016) has been improving. We are tied for ninth worst – 5.3%. National unemployment rate 4.6%.  Nat’l unemployment rate not including CA is 4.5%, making the CA unemployment rate 17.7% higher than the average of the other 49 states.
http://www.bls.gov/web/laus/laumstrk.htm    NOTE:  We were at 4.8% unemployed in Nov, 2006 – vs. national 4.6%.

But using the lagging yet arguably more accurate U-6 measure of unemployment (includes involuntary part-time workers), CA is the 4th worst – 11.6% vs. national 9.8%.  National U-6 not including CA is 9.6%, making CA’s U-6 21.4% higher than the average of the other 49 states.
http://www.bls.gov/lau/stalt.htm

EDUCATION:  CA public school teachers the 3rd highest paid in the nation.  CA students rank 48th in math achievement, 49th in reading.
http://www.lao.ca.gov/reports/2011/calfacts/calfacts_010511.aspx  (page 36) http://www.nea.org/assets/docs/NEA_Rankings_And_Estimates-2015-03-11a.pdf

California, a destitute state, still gives away community college education at fire sale prices. Our CC tuition and fees are the lowest in the nation.  How low?  Nationwide, the average community college tuition and fees are more than double our California CC’s.
http://trends.collegeboard.org/college-pricing/figures-tables/tuition-and-fees-sector-and-state-over-time

This ridiculously low tuition devalues education to students – often resulting in a 25+% drop rate for class completion.  In addition, because of grants and tax credits, up to 2/3 of California CC students pay no net tuition at all!
http://tinyurl.com/ygqz9ls

Complaints about increased UC student fees too often ignore key point — all poor and many middle class CA students don’t pay the UC “fees” (our state’s euphemism for tuition).  There are no fees for most California families with under $80K income. 55% of all undergraduate CA UC students pay zero tuition, and another 14% pay only partial tuition.
http://www.universityofcalifornia.edu/blueandgold/
http://tinyurl.com/UC-zero

WELFARE AND POVERTY: California’s real (“supplemental”) 2015 poverty rate (the new census bureau standard adjusted for the COL) is easily the worst in the nation at 20.6%.  We are 43.6% higher than the average for the other 49 states.
https://www.census.gov/content/dam/Census/library/publications/2016/demo/p60-258.pdf   Table 4 on page 9

California has 12% of the nation’s population, but 33% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 7 states combined.  Unlike other states, this “temporary” assistance becomes much more permanent in CA. http://www.utsandiego.com/news/2012/jul/28/welfare-capital-of-the-us/?print&page=all

California ranks 48th worst for credit card debt and 49th worst for percentage of home ownership.
http://riderrants.blogspot.com/2013/02/more-dismal-california-economic-rankings.html

GOVERNMENT INSOLVENCY: California has the 2nd lowest bond rating of any state – Basket case Illinois beat us out for the lowest spot. We didn’t improve our rating – Illinois just got worse.
http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2014/06/09/sp-ratings-2014

Average California firefighter paid 60% more than paid firefighters in other 49 states. CA cops paid 56% more. CA 2011 median household income (including gov’t workers) is 13.4% above nat’l avg.
www.tinyurl.com/CA-ff-and-cop-pay
www.en.wikipedia.org/wiki/List_of_U.S._states_by_income

HOUSING COSTS:  Of 100 U.S. real estate markets, in 2013 CA contained by far the least affordable middle class housing market (San Francisco). PLUS the 2nd, 3rd, 5th, 6th and 7th. San Diego is #5 (with “middle class” affordable homes averaging 1,056 sq. ft.)
http://riderrants.blogspot.com/2013/10/the-us-least-affordable-housing-market

TRANSPORTATION COSTS: CA has 2nd highest annual cost for owning a car – $4,112. $370 higher than the other 49 states’ average.
http://tinyurl.com/zcame8j

WATER & ELECTRICITY COSTS: CA residential electricity costs an average of 42.3% more per kWh than the national average. CA commercial rates are 51.8% higher.  For industrial use, CA electricity is an astonishing 93.6% higher than the national average (July, 2016). The difference is growing between CA and the national average. NOTE: SDG&E is considerably higher.   https://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_6_a

A 2015 U-T survey of home water bills for the 30 largest U.S. cities found that for 200 gallons a day usage, San Diego has the 3rd highest cost – 73.7% higher than the median city surveyed.  At 600 gal/day, San Diego was again 3rd highest – 81.7% higher than the median city.
http://www.sandiegouniontribune.com/news/2015/jul/27/drought-water-prices-rise/

BUSINESS FLIGHT:  In 2012, our supply of California businesses shrunk 5.2%. In ONE year. NOTE: That’s a NET figure – 5.2% fewer businesses in CA in 2012 than were here in 2011. Indeed, in 2012, CA lost businesses at a 67.7% higher rate than the 2nd worst state!
http://riderrants.blogspot.com/2013/07/in-2012-ca-lost-businesses-at-677.html

The top U.S. CEO’s surveyed rank California “the worst state in which to do business” for the 12th straight year (May, 2016)
http://chiefexecutive.net/california/

From 2007 through 2010, 10,763 manufacturing facilities were built or expanded across the country — but only 176 of those were in CA. So with roughly 12% of the nation’s population, CA got 1.6% of the built or expanded manufacturing facilities. Stated differently, adjusted for population, the other 49 states averaged 8.4 times more manufacturing growth than did California.
http://www.cmta.net/20110303mfgFacilities07to10.pdf — prepared by California Manufacturers and Technology Association

OUT-MIGRATION:  California is now ranked as the worst state to retire in. Easily the lowest percentage of people over age 65. We “beat” ’em all – NY, NJ, etc.
https://www.fidelity.com/insights/retirement/10-worst-states-to-retire-2014
http://riderrants.blogspot.com/2015/12/kiplinger-ranks-california-as-worst.html

The median Texas household income is 13.5% less than CA. But adjusted for COL, TX 2015 median household income is 29.3% more than CA.
https://www.census.gov/content/dam/Census/library/publications/2016/demo/acsbr15-02.pdf
https://www.missourieconomy.org/indicators/cost_of_living/index.st

Consider California’s net domestic migration (migration between states).  From 1992 through mid-2015, California lost a NET 3.9 million people to other states.  Net departures slowed in 2008 only because people couldn’t sell their homes.  But more people still leave each year — in 2015 we lost 77,219. Again, note that these are NET losses.  Sadly, our policies have split up many California families.
https://twitter.com/SenTedCruz/status/464827967747526656/photo/1
http://riderrants.blogspot.com/2015/04/were-california-real-estate-prices.html

It’s likely that it’s not the welfare kings and queens departing.  They are primarily the young, the educated, the productive, the entrepreneurial, the ambitious, the wealthy (such as Tiger Woods) – and retirees seeking to make their nest-eggs provide more bang for the buck.

*   *   *

Richard Rider is the chairman of San Diego Tax Fighters, a grassroots pro-taxpayer group. Rider successfully sued the county of San Diego (Rider vs. County of San Diego) to force a rollback of an illegal 1/2-cent jails sales tax, a precedent that saved California taxpayers over 14 billion dollars, including $3.5 billion for San Diego taxpayers. He has written ballot arguments against dozens of county and state tax increase initiatives and in 2009 was named the Howard Jarvis Taxpayers Association’s “California Tax Fighter of the Year.” Rider updates this compilation of statistics on California every month; they are regularly updated here.

A King’s Ransom for ‘Public Servants’?

Editor’s note: During 2015 the average pay and benefits for a full time state worker in California was $104,867. County workers averaged $108,856, and city workers averaged $121,430. These averages do NOT include members of public safety. The 2015 average pay and benefits for full time state highway patrol and corrections employees was $136,828, for county sheriffs it was 165,630, and for city police officers it was $161,617. Firefighters averaged even more in 2015 – state fire service employees averaged $145,938 in pay and benefits, city firefighters averaged $196,370, and county firefighters averaged a whopping $198,959. These averages are not skewed by a handful of extremely well compensated executives, by the way. In most of these cases, the medians exceeded the averages. In the few cases where they did not, the difference was only one or two percent. How much is too much? How much can we afford? These averages are understated, by the way, because while employer (i.e., taxpayer) pension contributions in 2015 were nothing short of spectacular, they were not nearly enough to financially permit these pension funds to fulfill the promises they’ve made to these public servants when they retire. As Jon Coupal points out in his aptly titled article that follows, the median per capita income in California is just over $30,000 – several times less than California’s public servants.

Once upon a time we called them “public servants.” Today, most taxpayers struggle to keep a straight face when this term is used to describe the well-paid, elite who govern us.

In a state where the median per capita income is just over $30,000, Gov. Brown, legislators and other state elected officials will celebrate the holidays with a four percent pay raise. The California Citizens Compensation Commission, whose members are appointed by the governor, decided the improved economy and healthy state budget justified the raise. California lawmakers, who were already the most generously paid in all 50 states, will now receive $104,115, earning them $14,774 more per year than the next highest. Of course, this does not count the additional $176 per day in “walking around money,” living expenses lawmakers receive for every day the Legislature is in session, amounting to an average of $34,000.

The governor, too, is now the highest paid at $190,100 — Pennsylvania’s governor is actually slated to make $723 more, but Gov. Tom Wolf does not accept the salary.

Do Californians pay their governor, the top executive of a state government responsible to nearly 40 million constituents, enough? The fact that there is never a shortage of candidates for this job is an indication that the pay is sufficient. So, the question arises, why do many government employees receive more than the governor?

At the local level, most cities have as their chief executive, a city manager. Of 479 cities – out a total of 482 – reporting to the state controller, 279 are paid more than the governor. Of these, 24 receive over $300,000 annually.

20161222-cpc-firefighter
The average full-time firefighter in California counties made $198,959 in
pay and benefits in 2015; full-time city firefighters averaged $196,370.

For some cities, paying their top administrator a high salary seems to be a matter of vanity. Councilmembers, who approve generous compensation, will take the position that their city deserves a highly-paid manager, the same way some car buyers justify the purchase of a luxury vehicle. Just as the neighbors may be impressed by the new Mercedes, neighboring cities will be impressed with their city’s ability to overpay the help. This, of course, puts pressure on surrounding cities to keep up with the Joneses.

While some city hall insiders will argue that higher pay is justified by a larger population, there seems to be no actual correlation.

Escondido, California’s most generous city, has been compensating its manager $413,000 annually to serve a population of 151,000. In slightly larger Palmdale, the manager receives $138,000 to look after 160,000 residents. And then there is Garden Grove with a population of 177,000 where the city manager gets $89,000.

A few years ago, the city manager in Bell went to prison for illegally compensating himself $800,000 per year. However, although it may not be illegal, the city of Vernon stands out as a candidate for the most profligate in the state. Its top executive is paid more than $328,000. The city’s population is only 210, which means that each resident is responsible for over $1,560 to compensate the manager. (The rumor that Vernon’s top executive insists on being called “Your Majesty” could not be verified.) Another small city, Gustine in Merced County, with a population of 5,482 gets the award for most frugal. It pays its city manager $909 annually.

While there are other areas of government employee compensation that beg examination, the range of pay for city managers seems to be the most irrational.

Still, none of these local administrators is close to the state’s top salary of $3.35 million. But since the program generates the revenue to pay UCLA football coach Jim Mora, he is more likely to be criticized for his record more than his salary.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Secretary of Education Nominee Betsy Devos – One Reformer’s Perspective

There has been plenty of discussion about U.S. Secretary of Education Nominee Betsy DeVos in the weeks since your editor wrote a series of commentaries about why reformers shouldn’t support her, much less anyone in the incoming Trump Administration. The resulting discussion and sparring among reformers over DeVos exemplifies the splits that have been developing within the movement for some time. Just as importantly, the discussions around DeVos’ efforts to oppose the closing of failing charter schools is another reminder of why the movement must rally around strong accountability for all schools serving our children.

The latest example of the split came yesterday when Leadership Council for Civil and Human Rights, a prominent champion for the kind of strong accountability measures promulgated by the now-abolished No Child Left Behind Act, issued a letter calling out DeVos for her support for anti-gay rights measures and her opposition to holding charters in Detroit and the rest of Michigan accountable for poor performance.[Leadership Council also wrongly chastised DeVos for supporting vouchers. It should rethink its position on that aspect of choice.]

Naturally, Leadership Council was able to get the American Federation of Teachers, National Education Association, and their vassals to sign on to the letter. But Leadership Council also got support from Stand for Children and the NAACP Legal Defense Fund, two of the other key players among civil rights players in advancing systemic reform. That three key players within the civil rights wing of the movement have explicitly declared opposition to DeVos — and joined hands with traditionalists to boot — won’t make conservative and even some centrist Democrat reformers very happy. As it is, your editor’s commentaries, along with a piece cowritten by Democrats for Education Reform President Shavar Jeffries, commentsfrom Catherine Brown of Center for American Progress, and the pronouncement last month by Teach For America has rankled them.

Conservative reformers have come out of the woodwork to back her. This included Jason Crye of the Thomas B. Fordham Institute, who complained that arguments that DeVos’ place in the Trump Administration tarred school choice with bigotry were “simplistic and unfair”; and Philip Stutts, a public relations man who works for outfits such as the DeVos-funded American Federation for Children, who took to Fox News to tout her school reform bona fides. [Among other conservatives, DeVos has already won the endorsement of National Review.]

Former CNN anchor-turned-reformer Campbell Brown, who wrote a valentine to in her news outlet (which is funded by DeVos’ family foundation). After reformers and traditionalists criticized the column, Brown later announced that she wouldn’t write again about DeVos and stay out of coverage of the incoming federal official. Harvard Professor Paul Peterson, the former editor-in-chief of Education Next, wrote approvingly of DeVos in the Wall Street Journal.

Meanwhile Daniel Quisenberry, who runs the Michigan Association of Public School Academies, the lobbying group which DeVos helped cofound, took to the pages of Education Next to defend her and her record on advancing systemic reform in Michigan. Declaring that “DeVos has put kids before adults, parents before institutions, and students’ success before politics”, Quisenberry proclaimed that she would do the same as head of federal education policymaking. Expect even more public support from conservative reformers in the coming days, especially as some (most-notably the American Enterprise Institute) are reminded that the DeVos family is among their most-important donors.

But even more questions from civil rights-oriented and centrist Democrat reformers about DeVos will likely come today after they read Kate Zernike’s New York Times report detailing how the Amway heiress worked zealously this year to oppose efforts by a cadre of reformers (including Gov. Rick Snyder and Detroit Mayor Mike Duggan) to overhaul oversight of Motown’s traditional district and charter schools. The plan, which would have created an oversight board, called the Detroit Education Commission, which would have developed an A-F grading of performance for all Detroit schools, shut down failing charters, and pushed for high-quality options to be opened in sparsely-served parts of the city, was scuttled by Republicans who control the Wolverine State’s legislature after DeVos and her family reminded them who finances their campaigns. [The A-to-F grading eventually made it into final legislation that included other reforms for charters statewide.]

Some conservative reformers have already criticized Zernike’s report. Thomas B. Fordham Institute President Michael Petrilli argues that Zernike failed to mention that DeVos opposed the creation of the school oversight board because of fears that it would end up being captured by the AFT’s local there. [Zernike responds by noting that the local lacked the influence needed to make that fear a reality, though, of course, politics can always change.] Others argue that DEC  was worrisome because the board would be appointed by the mayor instead of elected. This is a strange concern given that many charter school authorizers are neither elected nor even politically appointed. A few even note (reasonably) that Duggan, who supported the legislation, also signed a measure restricting charters from acquiring city-owned property, thus making him unreliable on advancing school choice. You can also expect MAPSA and Jeanne Allen’s Center for Education Reform, both of which have strongly defended Michigan’s charter school sector from criticism, to offer more strongly-worded polemics.

As you can imagine, Zernike’s report is another reminder of a point that folks such as Robin Lake of Center for Reinventing Public Education have been making for some time: That strong accountability is key to expanding school choice throughout the nation.

Certainly over the past three decades, charter schools (along with vouchers and other choice programs) have proven that its schools help kids succeed academically and economically in their adulthoods. As Stanford University’s Center for Research on Educational Outcomes determined in its study of charters in 41 cities, the average child gained more than 28 additional days of learning in reading than peers attending traditional district schools. Other data has shown that charters and other form of choice improve the chances that poor and minority kids will graduate from higher education and attain lifelong success.

But as seen in Michigan, not every charter school does the job. As CREDO notes, the average child in a Michigan charter gained 36 additional days of learning in reading over a traditional district peer. More than likely, that is because of the high-quality operators within the sector; as CREDO reported in a special study on the state, 65 percent of charters in the Wolverine State perform either at the same level or worse than traditional districts, making the sector among the lowest-performing in the nation. That 14 percent of Michigan’s charters are both low-performing and do little to improve student achievement is especially troubling.

DeVos’ allies argue that Michigan has closed more charter schools than the national average. What they fail to note is that few charters close because of academic failure. Just one of the 11 charters shut down in 2015-2016 were closed because of academic failure, according to data from the Wolverine State’s Department of Education. The rest were shut down because of financial problems, low enrollment, lost its contract, or were never opened in the first place. [Meanwhile the state is looking to shut down some of the 100 district-run failure mills in coming years.]

Charters in Detroit perform better on average than counterparts in the rest of the state. On average, children in Detroit’s charter schools gain 50.4 days of additional learning in reading over their peers in the failing traditional district, according to CREDO in its urban charter schools study. But as in the rest of Michigan, the performance is driven by the high-quality schools. Fifty-three percent of charters in Detroit either keep pace or do significantly worse in reading than district schools. Just as importantly, because children in Detroit are struggling academically compared to peers in the rest of the Wolverine State, the need to replace failing charters with higher-quality options becomes ever more necessary.

Meanwhile, as CRPE has noted, Detroit also has a charter distribution problem. Most of the high-quality charters in Motown are located in the city’s downtown core, far away from the neighborhoods where the poorest children and families reside. Because Michigan doesn’t require charters in Detroit or elsewhere to provide transportation — and authorizers don’t make that a condition of approval (something that the mayor of another Midwestern hub, Indianapolis, has done for the past two decades) — poor kids are often kept from the highest quality options. What this means is that the mission of the school reform movement to help all children succeed isn’t being fulfilled for those in the most need.

The key problem lies with charter authorizers — including traditional districts — who have been far too willing to allow shoddy charters to remain in operation long after it is clear that they should be shut down. Traditional districts such as Detroit Public Schools are allowed to be charter authorizers even though they lack the manpower (and, given their awful performance, even the credibility) to do a good job of it. But as Education Trust-Midwest noted in its review of charter authorizers in the Wolverine State, even the independent oversight groups do poorly in keeping tabs on charter school performance. One key reason why: They derive revenue from charters, especially through the provision of services to schools that effectively lead to conflict of interests; it’s hard for an authorizer to provide proper oversight to schools if they also collect money from them for providing services.

Some of these issues could have been dealt with through the creation of the oversight board. In fact, the DEC could have actually made it easier to increase the number of charters serving Detroit children by assuring taxpayers and others that high-quality operators would come in to serve children still bereft of choice. But DeVos and her allies among hardcore school choice activists were far less concerned about addressing legitimate issues facing children in Detroit than with ideological opposition to any accountability (as well as the possibility that some charters would be shut down, reducing revenue for authorizers and operators alike). By successfully opposing the creation of the DEC, many of the problems remain in place.

Certainly there are reasonable concerns about putting in accountability measures for charters that can end up being regulatory strangulation of choice by traditionalists opposed to them. That failure clusters such as Detroit’s district continue to operate partly justifies some of the skepticism about holding failing charter counterparts accountable.

But as your editor noted two years ago, support for choice cannot continue without assuring taxpayers that the programs will be operated effectively and that they will do a better job than traditional districts of improving student achievement. Otherwise all we are doing is creating a second system of public education that fails children as badly as the traditional system already in place. The fact that failing districts continue to operate doesn’t justify keeping equally laggard charters open for business.

It is bad enough that DeVos is undercutting support for expanding choice by an incoming President and administration that engages in race-baiting, religious bigotry, and anti-immigrant sentiment. Even worse is that DeVos has continually remained quiet and not disavowed Trump’s bigotry. But the report on her opposition to reasonable accountability for charters adds another strike against her possible tenure overseeing federal education policy. DeVos doesn’t merit much of a defense.

About the author:  RiShawn Biddle is Editor and Publisher of Dropout Nation — the leading commentary Web site on education reform — a columnist for Rare and The American Spectator, award-winning editorialist, speechwriter, communications consultant and education policy advisor. More importantly, he is a tireless advocate for improving the quality of K-12 education for every child. Biddle combines journalism, research and advocacy to bring insight on the nation’s education crisis and rally families and others to reform American public education.

How to Identify a ‘Good’ Bond

On November 8, Californians approved Prop. 51, authorizing $9.0 billion in new borrowing for construction and upgrades of public schools. Also on November 8, Californians approved 171 local bond measures, authorizing over $22 billion in additional financing for construction and upgrades of public schools.

This new borrowing is only to construct and upgrade K-12 and community college campuses. Total K-12 enrollment in California has been stable at around 6.3 million students for over a decade. Community college enrollment in California is about 2.1 million students. This means that this latest round of borrowing equates to $3,735 per student. And similar sums are thrown at California’s K-12 schools and community colleges for construction and upgrades every two years. What gives?

One of the most obvious problems with voter approved bonds in California is the preference given school bonds. Proposition 39, passed in Nov. 2000, reduced the supermajority needed to pass a bond issue ballot question from 66% to 55%. Meanwhile, all other public construction bonds still need the 66% supermajority. Inevitably, this law has resulted in abundant money flowing into school construction, while neglecting roads and other public infrastructure.

We asked State Senator John Moorlach, the only licensed CPA to hold office in California’s state legislature, and one of the most financially savvy individuals in Sacramento, to comment on what might constitute a “good” bond. Here is his checklist:

(1) Plan: A detailed plan that itemizes what projects will be funded with the bond proceeds is essential. How will bonds be issued and proceeds spent? Most bond measures fall short of providing itemized budgets that clearly explain the use of funds, which magnifies the opportunities for wasteful spending.

(2) Oversight: How will the implementation of the projects funded by a bond be monitored. Who will sit on the oversight board and how will people with conflicts of interest be screened out. What authority will the citizen board have if they uncover misuse of funds? Will they be able to stop work on a project?

(3) Terms: The devil is in the details. A fairly written bond contract will have a ratio of total principal and interest payments to principal of between two-to-one and three-to-one. But bonds still slip through, avoiding informed scrutiny by a financial expert, that can have ratios of total payments to principal amount as high as ten-to-one. Costs of issuance are another area where abuse occurs. A fairly written bond contract will award the underwriters between one and two percent. A small bond, say, under $10 million, may command a fee of around three percent. More than that is unfair to taxpayers.

(4) Reserves: How much cash will be set aside so that district won’t return with more requests for money? Many school districts have new bond measures on the ballot every two years. But the payments on each of these bonds, not subject to any Prop. 13 restrictions, increase property tax assessments for thirty years or more. With school enrollment in California stable for over ten years, where is this money going?

(5) Maintenance: It is common to see the term “deferred maintenance” listed as one of the uses of proceeds for a proposed bond. When new construction is financed with a bond, how much cash will be set aside to maintain these facilities? Equally pertinent, why can’t this maintenance be funded out of operating budgets?

(6) Promotional Funding: Is the campaign supporting a bond paid for by the people who’ll benefit from the bond? There is a clear conflict of interests when the most active participants in the paid political debate over whether or not voters should support a new bond proposal are the underwriters who will collect fees, the construction firms who will do the work, and the teachers unions who will always favor more facilities on their campuses.

(7) Project Labor Agreements: If the bond doesn’t explicitly prohibit cost-boosting Project Labor Agreements, then it is likely they will be incorporated. By excluding non-union shops from the bidding process, project costs are inflated by between 10% and 40%, all of which is borne by taxpayers.

A California Policy Center study released in 2015, “For the Kids” – Comprehensive Review of California School Bonds,” estimated that between 2000 and 2014, California’s voters approved, on average, $10 billion per year on new school bonds. Since then, through November 8, voters have approved at least another $40 billion of new school bonds. Not including the interest on bonds still outstanding that were issued before 2000, the interest and principal payments on this $180 billion in school bond borrowing costs taxpayers at least $11.7 billion per year.

Adopting these seven criteria to evaluate bonds will go a long way towards ensuring that bond debt is approved by informed voters, and that the proceeds serve the people, especially the students, instead of special interests.

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Ed Ring is the vice president of research policy for the California Policy Center.