What Californians Could Build Using the $64 Billion Bullet Train Budget

California’s High-Speed Rail project fails to justify itself according to any set of rational criteria. Its ridership projections are absurdly inflated, its environmental benefits are overstated if not actually net detriments, and its cost, its staggering cost, $64 billion by the latest estimate, overwhelms anyone with even a remote sense of financial proportions. To make this final point clear, here is an assortment of California infrastructure projects that could be paid for with a $64 billion budget.

If these projects were built, instead of the bullet train, Californians would have abundant, cheap electricity, abundant fresh water, and upgraded roads and freeways capable of handling all the traffic a surging economy could possibly dish out.

(1) Build 10 natural gas power plants generating 6.2 gigawatts of electrical output for $5.7 billion.

According to the U.S. Energy Information Administration, a modern natural gas power plant generating 620 megawatts can be built at a capital cost of $568 million. Someday, when electricity storage technologies are inexpensive and safe, the solar age can ripen to maturity, but in the meantime, California’s private energy companies can tap abundant in-state natural gas reserves, enabling California’s public utilities to provide cheap electricity to the public.

Since California’s peak demand rarely exceeds 50 gigawatts, increasing capacity by 12% will drive the price for electricity way down, making California competitive again with other states. Cheap electricity will also obviate the need to force consumers to purchase extremely expensive “energy sipping” appliances that are internet enabled, monitor your behavior and penalize you if you run your dryer at the “wrong” time, break down a lot, are unnecessarily complex, and require ongoing warranty and software upgrade payments forever.

Who needs that? Build natural gas power plants and develop natural gas.

(2) Build plants to desalinate 1.0 million acre feet of seawater per year, supplying 1/3 of ALL California’s residential (indoor and outdoor) water requirements for $15 billion.

Desalination plants are being developed all over the world, and California, with only one major desalination plant operating (Carlsbad in San Diego), is way behind. Desalination requires no more energy today than the amount of energy already being used to transport water from California’s northern regions several hundred miles south (and over the Tehachapi mountains) to Southern California’s coastal cities. The California current, second in flow volume only to the legendary Gulf Stream, can easily disperse the brine left over after extracting fresh water. The energy and environmental issues surrounding desalination have been addressed, and nobody would ever build these plants more responsibly than Californians.

While desalinating water from the sea, at a capital cost of $15,000 per acre foot of annual output, is the most expensive means of increasing California’s water supply, it has the unique virtue of being the only way to actually create fresh water, as opposed to reuse or redistribution. It is a technology that has been proven at large scale for decades and is a necessary part of California’s strategy to increase water security as the state alternates between wet and dry multi-year weather cycles.

What Californians Could Build on a $64 Billion Budget

(3) Build plants to reclaim and reuse 2.0 million acre feet of sewage per year, supplying 2/3 of ALL California’s residential (indoor and outdoor) water requirements for $10 billion.

Californians produce about 3.0 million acre feet of sewage per year, and today only a small fraction of that sewage is treated to “potable” (drinkable) standards. In California’s huge coastal urban centers this sewage is treated sufficiently to be released into the environment where it wasted as outfall into the ocean. A recent installation in Orange County, the “Ground Water Replenishment System” (GWRS) plant, reclaims as indirect potable water 70,000 acre feet of sewage per year, at a capital cost of only $350 million (not much when compared to the bullet train budget). This equates to a capital cost of $5,000 per acre foot of annual output, which is one of the most cost-effective ways to increase the supply of fresh water for Californians.

Sewage reuse combined with desalination not only have the potential to fulfill 100% of California’s residential water requirements for a combined price of $25 billion, but the treated water can be injected into coastal aquifers, combating saltwater intrusion. Currently these aquifers are often replenished with water transported from rivers hundreds of miles to the north, at equal or greater cost.

(4) Build the Sites Reservoir for $4.4 billion.

Anyone who has taken a look recently at the San Luis Reservoir in Central California, now 100% full, can appreciate the beauty of off-stream storage. Fed by surplus run-off water that is delivered there by aqueduct, and available for farms and urban use, this reservoir minimizes environmental harm because it doesn’t block the flow of any river. Like San Luis and just as big, the proposed Sites Reservoir, with a planned capacity of 1.8 million acre feet, will be situated in the semi-arid foothills of California’s Central Valley. Unlike San Luis, the Sites Reservoir will require almost no aqueduct, because it will be up in the northern Central Valley, immediately west of the Sacramento River. If the Sites were available today, it would already be filled up with runoff from this year’s many storms, and filling it would have taken pressure off of levees from Sacramento all the way to the delta.

The vast, 100% full San Luis reservoir, 84 square miles, holding 2.0 MAF.

(5) Build the Temperance Flats Reservoir for $3.3 billion.

While this proposed reservoir is in-stream, and would dam the San Joaquin River, it nonetheless has virtues that make a strong argument for its construction. First of all, there are already dams on the San Joaquin River, which would be submerged beneath the larger Temperance Flat dam. With planned storage of 1.3 million acre feet, the Temperance Flat reservoir would guarantee more water to farmers in the dryer reaches of the San Joaquin Valley even during droughts. It would also ensure a reliable flow into the San Joaquin river, to protect its riparian habitats during droughts.

(6) Widen and resurface every major interstate (and then some) in the entire state.

Are you tired of risking your life on Interstate 5 when it’s only two lanes in each direction, and trucks clog the slow lane and speeding tailgaters own the fast lane? Then spend $15.4 billion to add lanes and resurface the entire length of Highway 101 (807 miles), Interstate 5 (796 miles), Route 99 (415 miles), Interstate 15 (294 miles), Interstate 10 (243 miles), Interstate 80 (204 miles), and Interstate 8 (172 miles). According to the American Road and Transportation Builders Association, this will cost $5.25 million per mile, and the freeways just listed total 2,931 miles.

(7) Fix the Potholes.

With everything noted so far, we have only used up $53.8 billion. That is, for only 84% of the bullet train budget, we have delivered to Californians cheap, abundant energy, abundant water, and unclogged our major freeways. But we still have $10.2 billion left. What to do? Why not fix the potholes? For $10.2 billion, we can resurface 8,160 miles of 4-lane roads, or, presumably, an even greater length of 2-lane roads. Isn’t that the first thing that goes when governments go astray, and prioritize pet (and useless) environmentalist mega-projects ahead of serving the public? Potholes?

Apart from the fact that a few farms have been purchased in Fresno County, and a few pylons have been stuck in the ground, and a handful of extremely well-paid bureaucrats are doing everything they can to preserve their jobs, why is high speed rail still being pushed? The reasons are a disappointing example of our dysfunctional democracy here in California. Because you could accuse every project on the above list of being susceptible to cronyism and cost-overruns, and you’d be right. Just as the Bullet Train will never get built for a mere $64 billion, it is likely these projects will also, in aggregate cost more than $64 billion. But we’d have abundant energy, abundant water, and a 21st century network of wide, upgraded freeways. If you’re going to play the innately corrupt game of public works, build things that help people live better, more prosperous lives!

Instead, California contends with an alliance of financial oligarchs whose pecuniary interests depend on Californians paying punitive prices for energy and water. Their green energy and high-tech ventures depend on forcing Californians to completely retool their homes with new, upgraded appliances (all of them – washer, dryer, dishwasher, air-conditioner, furnace, refrigerator) that are efficient to the point of diminishing returns. As mentioned, these appliances now double as surveillance devices that will force us to live our lives according to utility company algorithms. Utility companies, of course, no longer make profits based on the quantities of energy or water they deliver, but rather on fixed percentages over cost, which means to please their shareholders, units of energy and water have to cost more. Much more. And manufacturers are thrilled to design all this frippery into their appliances so they can sell them as a service requiring perpetual payments, instead of a durable good.

Our household has a washer that we bought, already used, for $25 in 1999. It has never broken down. No ongoing warranty payments. No ongoing “software update” payments. Do you think you’ll be able to say any of that about any appliance purchased in the last few years?

For anyone who wants this lucrative, exploitative party for the oligarchs to continue, high speed rail is a good place to put what remains of California’s public financing capacity. The environmentalist lobby, firmly in the pocket of these oligarchs, offers up high speed rail to private construction unions, who lack the clout or the vision to demand something that might actually adhere to their ideals – i.e., the projects listed above, that would help ordinary working families in California.

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

REFERENCES

(1-a) Cost for modern natural gas power plant generating 620 megawatts
Source: U.S. Energy Information Administration
https://www.eia.gov/outlooks/capitalcost/

(1-b)  Peak megawatt demand in California (July 24, 2006) just over 50 gigawatts
Source: California ISO, California Peak Load History 1998 through 2016
https://en.wikipedia.org/wiki/Energy_in_California

(2-a) Cost for desalination plants – global comparisons:
Source: California Policy Center, Rebuilding California’s Infrastructure – Desalination
http://californiapolicycenter.org/rebuilding-californias-infrastructure-desalination-part-4-of-6/

Recently constructed desalination plants in Israel, rest-of-world, and California:

(2-b) Annual water consumption in California (million acre feet):

Source: Public Policy Institute of California – Uses and Value of Water, Table 2.2
http://www.ppic.org/content/pubs/report/R_211EHChapter2R.pdf

(3) Cost for sewage reuse plants:
Orange County GWRS IPR Project (2008) Fountain Valley
Source: California Policy Center, Rebuilding California’s Infrastructure – Water Reuse
http://californiapolicycenter.org/rebuilding-californias-infrastructure-water-reuse-part-2-of-6/

(4) Most recent and highest cost-estimate for Sites Reservoir:
Source: KCRA News
http://www.kcra.com/article/5-things-to-know-about-the-proposed-sites-reservoir/8593792

(5) Highest cost-estimate for Temperance Flat Reservoir (estimates range from $1.2 billion to $3.3 billion):
Source: U.S. Bureau of Reclamation
https://web.archive.org/web/20120316022146/http://www.valleyvoicenewspaper.com/vv/stories/2009/vv_temperanceflat_0164.htm

(6 and 7 – a)  Cost to add lanes and resurface freeways:
Source: America Road & Transportation Builders Association
http://www.artba.org/about/faq/ 

(6 and 7 – b) Length of California’s principal highways and freeways:
Source: CaHighways.org
http://www.cahighways.org/itypes.html

Why We’re Going to Focus on Opposing High-Speed Rail (and Why You Should Too)

Prudence is always a virtue, but it is especially vital for those with large debts and limited means to repay them. Our state, whose public obligations total over half the size of our economy, is in no position to take on more imprudent spending projects. Advocates of California High Speed Rail have not provided convincing evidence that their initiative is a prudent use of public borrowing capacity, and we will thus oppose HSR until they prove otherwise.

 

Why now?

The switch to Republican control in Washington means that federal support for HSR is likely to be withdrawn or greatly restricted. Thus far, all the federal funding directed to HSR was authorized by the Democratically-controlled 111th Congress in 2009 and 2010. The Obama Administration allocated about $3.5 billion in funding to HSR from the 2009 stimulus bill and the 2010 omnibus appropriations bill.

While the Trump Administration has also expressed an interest in funding infrastructure, influential California House Republicans such as Devin Nunes and Kevin McCarthy should be able to block further grants.  They have already persuaded Transportation Secretary Elaine Chao to hold up a federal grant for CalTrain electrification in northern California because they saw the project as being linked to HSR.

HSR was supposed to sit on a four-legged financial stool of state borrowing, federal grants, local funds,  and private capital. The private leg never materialized – given the poor risk/return profile of the HSR project no private company has been willing to step up.  The missing private money could be replaced by cap-and-trade revenues, but recent auctions under the cap-and-trade program have produced very little revenue. Significant local funding may have seemed possible before the 2008 recession, but the downturn and rising pension costs leave counties and cities with little fiscal capacity to participate. If the federal money disappears, the state will be at a major inflection point: will the legislature be willing to tell California taxpayers that they must fund this project entirely on their own?

We agree with State Senator Andy Vidak that voters should be given another opportunity to weigh-in on High Speed Rail on the June 2018 ballot. When voters narrowly authorized $9.95 billion in bonds back in 2008, the ballot materials estimated a total project cost of $45 billion, that the system would serve Sacramento and San Diego as well as San Francisco and Los Angeles, and that travel time between SF and LA would be 2 hours 40 minutes. The last of these representations was actually written into the ballot language. Now that we know that none of these commitments can be fulfilled, we believe that voters should have a chance to reconsider this initiative based on more up-to-date and accurate cost/benefit assessments.

 

What we won’t say

Our opposition to HSR will be evidence-based rather than ideological, and will be subject to change if convincing new evidence comes to our attention. Specifically, our objections will not be based on denying the threat of climate change or on a categorical rejection of publicly funded rail transportation.

With respect to global warming, we have provided evidence that the HSR Authority has overestimated the greenhouse gas emissions savings and underestimated net emission increases associated with construction. So, from an environmentalist standpoint, the project is not a good use of public funds. Other initiatives could produce much greater net greenhouse gas reductions at much lower cost.

Regarding rail transit, our December 2016 infrastructure study offered evidence to support of further investments in BART and CalTrain. We still believe that CalTrain improvements are warranted, but they should be implemented on a standalone basis and not as part of a “blended system” with HSR.

Finally, we will resist the temptation to rely upon fake news. For example, we have noticed social media posts that criticize high speed rail because Diane Feinstein’s husband owns one of the engineering firms building the system. We don’t see credible evidence to support this allegation, and thus reject it. Feinstein’s husband, Richard Blum, appears to have sold his entire interest in the firm now known as Tutor Perini Corporation in 2005. Because Tutor Perini is public it is required to accurately report the names of its largest shareholders. As one can see from the company’s website and from Yahoo Finance, Blum is not listed among the company’s largest shareholders.

 

Some existing resources

In presenting the case against high speed rail, we can stand on the shoulders of several groups that have been working on the issue for several years. Although some of these sites are not receiving frequent updates, they provide a large body of research that we plan to update over the coming months:

Reports and Litigation on Aspects of The California High Speed Rail’s Finances https://www.sites.google.com/site/hsrcaliffr/
Against California Speed Rail (Mark Powell) http://againstcaliforniahsr.com/
Citizens for High Speed Rail Accountability http://cchsra.org/
Reason High Speed Rail Due Diligence Report http://reason.org/studies/show/california-high-speed-rail-report

If you know of others, please send them our way.

 

A call to action

HSR enjoys solid support from Governor Brown and the state legislature. But with the likely disappearance of federal funding, we believe the candidates to replace the governor as well as those running for re-election to the assembly and senate can be swayed by solid research and strong public pressure.

If you want to help, please send us any original research you’d like us to consider for publication, write letters to your local newspapers, contact your legislators and consider donating to CPC’s High Speed Rail project.

By Just Enforcing Existing Law, Feds Can Halt California High-Speed Rail

By failing to require an update to California High Speed Rail’s Environmental Impact Report, state officials are violating a key provision of both the National Environmental Policy Act (NEPA) and the California Environmental Quality Act (CEQA). This failure lends an air of hypocrisy to Sacramento’s criticism of Trump Administration environmental stewardship and it also gives Elaine Chao, Trump’s Secretary of Transportation, an opportunity to derail the HSR project.

The federal government, through its lead agency, the Federal Railroad Administration, approved the High-Speed Train Alternative as described in the Final Program Environmental Impact Report for the Proposed California High-Speed Train System (Program EIR) in its Record of Decision (ROD) issued in November 2005. However, both federal (NEPA)[1] and California (CEQA)[2] environmental law place limits on the continued use of the Program EIR. A February 2014 joint publication[3] of the Federal Government and the State of California concisely summarized these limitations and the need for supplemental program EIRs. Under both NEPA and CEQA supplementation is needed when any of the following occur:

(1) substantial changes to the proposal itself;

(2) a new alternative arises outside the range of those already analyzed; or

(3) any other new information arises that would significantly change the analysis of impacts.

All three of these criteria have been met.

Substantial Changes to Proposal

The federal ROD approved a project to build a 700-mile long fully grade separated statewide high-speed rail system extending from Sacramento and the San Francisco Bay Area through the Central Valley to Los Angeles and San Diego carrying 42 million passengers annually by the year 2020.[4] For the past 12 years the California High-Speed Rail Authority (Authority), unable to even fund Phase 1 from Los Angeles to San Francisco, has not once provided the public with the statutorily required[5] estimated cost and completion date for the statewide system. Worse, the Authority now seeks to build even a smaller section than Phase 1, a 119-mile section connecting Merced to Shafter that will use nearly all currently available funds[6] and still not provide high-speed rail service. The federal ROD allows nothing to be built except the 700-mile statewide system[7] and it is becoming increasingly clear this won’t happen. Other proposal changes include the Authority moving away from performance criteria spelled out in the federal ROD such as building a statewide system (1) with fully grade-separated guideways, (2) capable of maintaining operations at 3-minute headways, (3) with trains capable of traveling from San Francisco to Los Angeles in approximately 2 hours and 30 minutes[8], and (4) having the system in service by the year 2020.

New Alternatives

New alternatives have not merely arisen, they have been proven viable. With the year 2020 rapidly approaching, the No Project Alternative studied in the Program EIR has proven to be adequate for the intercity transportation needs of Californians. Freeways running up the Central Valley between the Los Angeles Basin and the Bay Area have not been expanded. Yet the California Transportation Department shows large sections of Interstate 5 through the Central Valley running at, or below, maximum capacity.[9] Frequent travelers driving up this section of Interstate 5 know full well that a speeding ticket is still their prime concern. Airport expansion has not occurred since 2005 and three airports – Burbank, Ontario, and San Jose – are more underutilized now than they were in the year 2000.[10] Yet these were airports cited in the Program EIR as needing expansions costing $12 billion, out of a total of $16 billion in airport expansions,[11] by 2020 if high-speed rail was not built. A fourth airport, Palmdale Regional, remains closed due to lack of business.

New Information

Development of the Program EIR for the statewide high-speed train system began in the year 2000, a time when the state’s population was expected to grow from 34 million to 46 million by the year 2020.[12] Today the state’s population is about 39 million and not expected to reach 46 million until the year 2036.[13] The case for high-speed rail is further compromised by the fact that overall state highway traffic volume has recently stabilized, rising by only 0.6% in the decade following certification of the Program EIR.[14] This is consistent with an ongoing nationwide phenomenon.

Quoting from the State Smart Transportation Initiative website: “Unlike other past dips in driving, this recent downward shift has had no clear, lasting connection to economic trends or gas prices. Evidence suggests that the decline is likely due to changing demographics, saturated highways, and a rising preference for compact, mixed-use neighborhoods, which reduce the need for driving. Some key factors that pushed VMT upward for decades – including a growing workforce and rising automobile ownership – have also slowed considerably.” In some cases, long distance travel is being replaced by online meetings. The number of public companies holding their shareholder meetings online increased from 27 in 2012 to at least 136 in 2016.[15]

Experts from academia have also weighed in on this phenomenon. Quoting from a paper authored by professors of transportation at the University of Minnesota in July 2015: “Both car and transit (the passenger trains preceding the automobile) follow the classic lifecycle model or S-curve of birth, growth, maturity, and decline.” “History will tell us for sure, but the evidence for “Peak Travel” has been mounting. This does not mean there will never be a year in which per capita car travel again rises. The economy and gas prices still fluctuate, and a boom year with low gas prices following a recession with high gas prices might very well temporarily bump traffic upward, but that is really short-term noise. In the absence of external events (technological shifts, demographic shifts, social shifts), the curve appears to have peaked.”[16]

It has been estimated that the construction of high-speed rail will result in the emission of ten million metric tons of greenhouse gasses (GHG).[17] Ten million metric tons is what would be emitted if six million fifty-foot tall trees[18] were burned, roots and all. The Authority says it will somehow mitigate this environmental damage and then run its trains on 100% renewable power. This seems unlikely given the fact that the Authority is not funding any renewable power plants to propel its electric trains. However, the Authority’s claims go largely unchallenged because GHG emissions were never studied thoroughly in the Program EIR. California’s Global Warming Initiative and a growing worldwide concern over GHG emissions came after the Program EIR was completed. Instead of focusing on GHG emissions, the Program EIR focused on energy savings and making California and America more energy independent. Today America is within reach of becoming energy independent with no high-speed rail while new federal standards require the energy efficiency of cars sold after 2026 to be twice as high as the levels used in the Program EIR.

Secretary Chao would be on firm legal ground were she to rescind the November 2005 Record of Decision approving the High-Speed Train Alternative and demand that a new supplemental program EIR be written clearly spelling out to all Californians and to all Americans exactly what high-speed rail system California can credibly fund and construct. Then compare that system and its environmental costs and benefits to other reasonable transportation alternatives, including doing nothing extraordinary, before spending another dollar on California high-speed rail or condemning one more parcel of private property for its right-of-way.

Notes:

[1] National Environmental Policy Act (NEPA), Section 1502.9. http://www.ecfr.gov/cgi-bin/text-idx?SID=a65243887a107002d9a3fa484df40b09&mc=true&node=se40.37.1502_19&rgn=div8

[2] California Environmental Quality Act (CEQA), Section 21166. http://resources.ca.gov/ceqa/docs/2016_CEQA_Statutes_and_Guidelines.pdf

[3] NEPA and CEQA: Integrating Federal and State Environmental Reviews, page 37.  https://energy.gov/sites/prod/files/2014/03/f9/NEPA_CEQA_FinalHandbook_February2014_0.pdf

[4] U.S. Department of Transportation/Federal Railroad Administration Record of Decision – California High-Speed Train System, page 3.  http://www.hsr.ca.gov/docs/programs/eir-eis/Federal%20Railroad%20Administration%20Record%20of%20Decision%20for%20Final%20Program%20EIR_EIS.pdf

[5] California Public Utilities Code, Section 185033(a).  http://codes.findlaw.com/ca/public-utilities-code/puc-sect-185033.html

[6] CHSRA Central Valley Segment Funding Plan Final – January 1, 2017, page 12, Exhibit B-1. Funding Sources to Complete the Central Valley Segment. http://www.hsr.ca.gov/docs/about/funding_finance/CV_Segment_Funding_Plan.pdf

[7] The Federal ROD approved the statewide HST system alternative spelled out in the Final Program Environmental Impact Report (EIR) for the Proposed California High-Speed Train System.  No system smaller than the entire statewide system (i.e. Phase 1 connecting San Francisco and Los Angeles) was addressed in the EIR.

[8] U.S. Department of Transportation/Federal Railroad Administration Record of Decision – California High-Speed Train System, page 9, Table 1 HST Performance Criteria. http://www.hsr.ca.gov/docs/programs/eir-eis/Federal%20Railroad%20Administration%20Record%20of%20Decision%20for%20Final%20Program%20EIR_EIS.pdf

[9] Caltrans District 6 Transportation Concept Report for I-5, February 2013.
http://www.dot.ca.gov/d6/planning/tcrs/i5tcr/i5tcr.pdf

[10]  FAA Website, Passenger Boarding (Enplanement) and All-Cargo Data for U.S. Airports.  http://www.faa.gov/airports/planning_capacity/passenger_allcargo_stats/passenger/

[11] California High-Speed Train Final Program EIR/EIS, Appendix 4-B Capital Cost: Aviation Component of Modal Alternative, page 4-B-1.  http://www.hsr.ca.gov/docs/programs/eir-eis/statewide_final_EIR_vol3appendix4.pdf

[12] California Department of Finance Demographic Research Unit, June 2000 Report

[13] California Department of Finance Demographic Research Unit, May 2016 Report

[14] 2014 Traffic  Volumes on  California  State Highways reported by Caltrans,  5 Year Traffic Trend, page ii. http://traffic-counts.dot.ca.gov/docs/2014_aadt_volumes.pdf

2009 Traffic  Volumes on  California  State Highways reported by Caltrans,  5 Year Traffic Trend, page ii. http://traffic-counts.dot.ca.gov/docs/2009_aadt_volumes.pdf

Note:   An error was reported on the Traffic Volumes on California State Highways Years 2009, 2010, 2011, and 2012.  Located in the Preface (Page ii), Traffic Trend on Year 2008 over 2007 reads +3.5%.  This Note is found on the Caltrans website linking to the Year Traffic Volumes cited above. Instead, this number should be reported as -3.5%.

[15] Law360. The Pros And Cons Of Virtual-Only Shareholder Meetings. Lisa Fontenot and Linda Dang. https://www.law360.com/articles/866760/the-pros-and-cons-of-virtual-only-shareholder-meetings

[16] Minnesota Journal of Law, Science and Technology, Climbing Mount Next: The Effects of Autonomous Vehicles on Society, Profession David Levinson, Civil Engineering Dept., University of Minnesota. https://conservancy.umn.edu/bitstream/handle/11299/172960/6%20MJLST_v162_Levinson_787-810.pdf?sequence=1&isAllowed=y

[17] Life-cycle assessment of high-speed rail: the case of California. Mikhail Chester and Arpad Horvath, January 2010, page 6.  http://iopscience.iop.org/article/10.1088/1748-9326/5/1/014003/pdf.

[18] 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

On One Day in Two Decisions, Courts Reaffirm Californians’ Right to Know

 

Two California courts on a single day broadened the public’s access to government documents via a California Public Records Act (“CPRA”) request.

In one case (City of San Jose v. Superior Court (Smith)), the California Supreme Court unanimously declared on March 2 that public officials’ e-mails and texts are in fact public documents, even when they are sent over personal devices.

In a related case on that same day, a state appeals court in Los Angeles declared that the public is allowed to seek “discovery” in lawsuits filed by requestors of public documents to enforce their rights in Court under the CPRA statute.

Both cases are widely seen as a victory for transparency, and a reaffirmation of the state’s Watergate-era California Public Records Act.

In the Supreme Court decision, the court relied on public policy favoring disclosure of public records and case law, including a 2007 case (Com. On Peace officer Standards and Training v. Superior Court) to conclude that the content of documents – not their location – determines whether a public record is subject to disclosure under the California Public Records Act.

The court left it to trial court judges in each case to determine what constitutes a public record and what does not. (The court offered a hypothetical text between spouses – “My co-worker is an idiot” – as a record not subject to disclosure.) The court also suggested that public agencies should draft internal rules – such as giving all officials an agency-owned e-mail account and/or cellular telephone – and prohibiting any use of private accounts.

In the second case, City of Los Angeles v. Superior Court (Anderson-Barker), the Second Appellate District Court upheld a lower court’s finding that civil discovery rules apply to CPRA cases just as they do other civil lawsuits in California.

In that case, a plaintiff had sued the City of Los Angeles to enforce a CPRA request seeking records on the Los Angeles Police Department’s use of private companies contracted to tow and store impounded vehicles. As part of the litigation, the requestor’s attorney sent the city’s attorneys written questions (what attorneys call interrogatories) and a request for production of certain documents. The issue before the appeals court is whether a requestor may seek this type of information in lawsuits to enforce their CPRA rights. The answer was a resounding yes.

As an attorney for requestors in CRPA cases, I can attest to the value of the use of civil discovery tools. For example, I often hope to find through questions and responses: Who at the agency handled the CRPA request;
if documents were withheld, which official approved the withholding and whether an attorney was involved in those decisions; if the public agency is claiming some documents are being withheld in their entirety (versus portions of a document being redacted). I want to know the legal basis and reasoning for that decision. I hope to find out, as I have in some cases, that the public entity knew (or should have known) that it was violating the CRPA. I may go so far as to depose agency personnel – that is, interview them under oath – about their reasoning for withholding documents and the manner in which they conducted the search for records when it was originally requested.

Responses to this type of discovery in a CRPA lawsuit may strongly show the lawsuit is meritorious and that officials improperly withheld documents. This can and often does result in a settlement between the parties. When there is a settlement, the agency does not need to expend more taxpayer dollars on a needless hearing process it would likely lose anyway – and then pay out additional attorney’s fees to CPC. Avoiding this also saves the court’s time to allow the Judge to focus on other cases.

In all, March 2, 2017, was a very good day for Californians. The Supreme Court and Appeals Court strongly reaffirmed that citizens have a right to obtain documents that show what their government is doing and where their taxpayer dollars are going.

Craig P. Alexander is General Counsel for California Policy Center, and practices law in the areas of the California Public Records Act, contract negotiation, office leasing, homeowner association (HOA) law and civil litigation. His office is in Dana Point, California, and he can be contacted at cpalexander@cox.net.

How Teachers Union Work Rules Harm Public Education

The state of public education in America is not good.  The Organization of Economic Cooperation reported in 2016 that students in our public schools scored below average in math, tied with five countries for 37th out of 70; average in science, tied with 12 nations for 19th out of 70; and average in reading, tied with 13 nations for 15th out of 70.  For a country that is the unquestioned leader of the free world in wealth and technology, these are deplorable results.

California public schools are even worse.  In a recent survey, WalletHub ranked California’s schools ninth worst among the fifty states, forty-seventh in reading scores, and third worst in safety for students.

Any business with these results would fire everyone at the top.  But who can we fire?  Who is in charge of our public schools anyway?  Who should be accountable for the poor performance of our public schools?

Everyone associated with public schools knows the answer:  the teacher unions run our public schools and have been in charge for a long time.  This is thoroughly documented in the definitive book written by Stanford professor and Hoover Institute fellow, Dr. Terry Moe,  Special Interest: Teachers Unions and America’s Public Schools (Brookings Institution Press 2011).  Professor Moe walks through the history of teacher unions, describing the changes that occurred when teachers were given the legal right to engage in collective bargaining during the 1970s and 1980s.

While wages were important to union leaders, Moe reports, equally important was union success in negotiating work rules that often went unnoticed by the public but became fixtures in union contracts.  These work rules governed everything that took place in the workplace, from hiring and firing teachers to seniority, layoffs, and a uniform pay scale.  While these work rules always increased union power and favored teachers, they often were harmful to student outcomes.

When work rules became comprehensive and detailed during the 1980s, all of the important discretion over teacher behavior had been acquired by the unions, and soon this included policy as well.  For example, work rules often require that principals give notice before looking in on a classroom teacher, removing a supervisory tool that used to be effective; and work rules typically allow a teacher to bump another teacher and take her job based on seniority, removing the principal’s discretion to form a team whom they feel will work well together.

Work rules also required that important questions, usually decided by management, be referred to committees populated by teachers.  Once the unions controlled who taught our kids and how they were taught, the unions had appointed themselves the bosses of public education.

Some of the areas most in need of school reform originated as work rules. Studies show that teacher quality is the most important ingredient to a quality education, yet work rules establish a single pay scale for all teachers regardless of quality, removing a tool, incentive pay, which is used in the private sector to hire the best employees.  Work rules also require school districts to grant tenure within two years, which is too short a time for a thorough evaluation, especially when other work rules make it impossible to fire bad teachers who have tenure.

No matter which reforms have the most merit, no one can deny that someone else should be running our public schools.  Teacher unions have had their chance, and it is time to make someone else the boss.  Professor Moe tells us how:

“If reformers want to stand up for children—and win for children—there is only one way out of the current bind.  The power of the teachers unions must . . . be drastically reduced, so that the interests of the children and effective schooling can take priority among the nation’s policymakers and real reform can go forward.  This is the goal.  Baby steps won’t get us there.”  (Special Interest p. 344.)

Now is the time for change.

Bob Loewen is the chairman of the California Policy Center.

A Modest Proposal for California from a Public Servant

When I see someone attacking the benefits the Fire Department receives or the Police Department receives, my concern is: Why wouldn’t you expect the same for yourself? We should act as a beacon.”
—Mike Mohun, president of the San Ramon Firefighters Union, quoted in the New York Times, March 2, 2017

There are many compelling reasons to examine this statement by Mr. Mohun, since pension benefits for state and local government workers are consuming ever increasing percentages of tax revenue. For starters, using the term “attack” is unfair. More accurate might be “counter-attack,” since the costs for these pensions are what has become extreme, not our reaction. If these pensions were financially sustainable, California’s citizens would not be under attack by continuously escalating taxes, and continuously diminishing public services.

But why shouldn’t we expect the same for ourselves? This doesn’t seem like an unreasonable statement. Perhaps to evaluate the reasonableness of Mohan’s idea, let’s examine the benefits received by retirees in the San Ramon Valley Fire District.

According to Transparent California, there are 97 retirees who used to work for the San Ramon Valley Fire District for whom years of service were disclosed. As can be seen in the table below, 7% of these retirees are collecting a pension in excess of $200K per year, based on an average years of service of 28 years. Three more, 3%, collect a pension over $175K per year, based on average years working of 18 years. Without recapping the entire body of data, note that more than half the retirees collect pensions over $100K per year. The average pension for all retirees is $102,832 based on an average of 20 years of service.

Contra Costa County Pension System – San Ramon Valley Fire District
Retiree Pension Data, 2015

What’s not in these numbers is significant, if we really wish to understand what Mr. Mohun is suggesting we all should expect for our retirements. These averages are skewed lower than the reality because (1) some of the retirees appear to have been administrative or part-time employees, not full-time firefighters, (2) some of them probably bought “air-time” at bargain-basement (probably financed) rates which inaccurately distorts upwards their years of service, and (3) it is likely that all of them are collecting other supplemental retirement benefits such as retiree health care which usually adds at least $10K per year to the cost of their retirement benefit.

So Mr. Mohan is certainly not suggesting that we all retire after 20 years of work with a $100,000 pension, is he? Let’s further explore this.

There are 7.0 million Californian’s over the age of 60, but after all, if we only work for 20 years, that means we’ll be retiring well before we turn 60. To accurately predict how we might quantify the macroeconomic impact of Mr. Mohun’s expectations for us all, we’ll need to consider how many Californians are over the age of 45. That retirement age would be based on the assumption that once we’ve completed an extended period of education and life experience, we begin full-time work at the age of 25, and retire when we’re 45 with a $100K pension for the rest of our life. There are 20 million Californians over the age of 45 in California.

Implementing the Mohan plan, therefore, would cost $2.0 trillion per year. Perfect! That’s still a bit less than California’s entire GDP of 2.5 trillion!

There’s a snag in all of this, however, because if you allocate 80% of California’s GDP to pay retirees, it only leaves a half-trillion to pay the workforce – those Californians between the ages of 25 and 45. There’s 10 million of them (actually 11.3 million but we’re rounding), so they would only be able to make $50,000 per year. And of course, no money would be left over for anyone under the age of 25 who might be trying to work their way through college.

Snags abound. What might it take to finance a pension of this magnitude? Wouldn’t this money have to be set aside? To get an idea, let’s see just how much is being set aside each year for Mr. Mohan and his cohorts in the San Ramon Fire Protection District.

For this we have to refer first to the webpage of the San Ramon Valley Firefighters Local 3516 that reveals their board members. Cross referencing these names with data from Transparent California yields the following information:

San Ramon Firefighters Local 3515 Board Members

As can be seen in the second to last column on the right, “benefits,” taxpayers are setting aside, on average, $151,905 per year to pre-fund retirement benefits for Mohan and his fellow union board members. The payments being made to their pension system are roughly equal to their entire annual pay, including overtime and “other pay.”

In a recent California Policy Center study entitled “California’s Public Sector Compensation Trends,” the average pay and benefits for a private sector worker in California in 2015 was estimated at $54,326. Unlike public safety averages, this $54,326 estimate undoubtedly exceeds the median, and, overall, was arrived at using generous assumptions. The reality is lower, not higher.

It is accurate to say that a San Ramon Valley Firefighter can expect to work half as many years as the average Californian in exchange for twice as much in pay – then retire 20 years earlier and collect a pension roughly four times (or more) than the average retirement income of the average Californian. Granted, firefighters should make more than the average worker. But over a lifetime, six times as much?

One final note: “Attacking” levels of compensation that are financially unsustainable and unfair to taxpayers does NOT translate into an attack on the profession of firefighting or firefighters as individuals. No reasonable person fails to respect firefighters for the work they do and the risks they take. But if and when the market takes another dive, and even before that, Mr. Mohan and his colleagues are invited to think about proposals that are not merely inspirational for everyone, but practical.

They might begin by recognizing how California’s legislature has enacted policies which make this the highest cost-of-living state in the U.S. They might use their considerable political clout do help us do something about that – for everyone’s sake.

Ed Ring is the vice president of the California Policy Center.

California Fire Districts are Morphing into Retirement Plans

The East Contra Costa Fire District (ECCFD) has financial problems because it pays more for retirement benefits than it does in salaries to current employees. With most of its staff eligible to retire on the 3% at 50 formula and at least two current retirees receiving more than $100,000 annually, the district is functioning as more of a retirement plan than as a firefighting unit. Rather than economize on its pension benefits, district leadership has closed fire stations and made repeated attempts to extract more taxpayer funds.

Actuaries for the Contra Costa County Employees’ Retirement Association (CCCERA) have calculated a 130% pension contribution rate for ECCFD firefighters for the upcoming 2017-18 fiscal year. This means for every dollar the ECCFD pays in firefighter salaries, it must pay $1.30 to the pension fund. Of the $12.9 million the district plans to spend in 2017-18, $4.6 million is earmarked for retirement related expenses, which include health insurance as well as pension contributions.

District officials have tried to address ECCFD’s spending problem by trying to raise more revenue.  In 2012, voters rejected the district’s proposed $197 parcel tax by a 56-44 margin. Despite this defeat, the district was able to temporarily reopen a couple of its shuttered fire stations with a $7.8 million federal grant. After exhausting the grant funds in 2014, ECCFD returned with hat in hand to area voters. In March 2015, officials mailed ballots to 38,529 area homeowners asking them to approve a $95 per year assessment. Only about one quarter of the ballots were returned, and 53% of those voting rejected the proposal.

Having failed to acquire new revenue through a tax increase, district officials are pushing to obtain a greater share of the one percent ad valorem tax that property owners currently pay. Any such adjustment would require legislation at the state level. In a September 2016 letter to State Senator Steve Glazer, ECCFD Fire Chief Hugh Henderson argued that the current allocation system was biased against agencies, like his, that were formed after the passage of Prop 13.

As the East Bay Times recently reported, ECCFD have prevailed upon the Oakley City Council to endorse an increase the district’s allocation, which is now 7.5%.  Other area officials are less supportive. Six school superintendents have written their own letter opposing the change. Each dollar of new revenue for ECCFD under a reallocation would reduce the amount of tax revenue available to the school districts, cities and other special districts within ECCFD’s area:  it is truly a zero-sum game.

Taking money away from schools to pay firefighter pensions may seem hard-hearted to the independent observer, but ECCFD couches it as a public safety issue.  In his letter to Senator Glazer, Henderson notes that, with only three stations, the district cannot respond to most fires within the recommended timeframes of four minutes for urban areas and eight minutes for suburban/rural areas. Of course, much of rural California is more than eight minutes away from a fire station – so East Contra Costa is not unique in that respect.

It is also worth noting that suburban and rural fire districts do not respond to that many fires. Although ECCFD does not provide a breakdown of its 6875 service calls in 2016, statistics are available from a neighboring district.  In San Ramon Valley, fires and explosions accounted for just 2.5% of the department’s calls.  False alarms made up 7%.

The overwhelming majority were calls for medical assistance such as transportation to a local hospital. Clearly this is an important function, but it is less obvious that it needs to be carried out by public safety officers eligible to retire in their 50s at up to 100% of final compensation.

While ECCFD has an extraordinarily high pension cost burden, other Contra Costa County fire districts are not far behind as shown in the following table:

District FY 2018 Pension Contribution Rate for Safety Officers Pension Plan Funded Ratio (as of 6/30/16)
Contra Costa County Fire Protection District 77.46% 81.54%
East County Fire Protection District 130.36% 70.89%
Moraga-Orinda Fire Protection District 70.17% 78.77%
Rodeo-Hercules Fire Protection District 86.23% 63.59%
San Ramon Valley Fire Protection District 83.14% 79.70%

Sources: CCERA Retirement Board Agenda Package, October 20, 2016; author’s calculations.

Because all five systems are well below fully funding, there will be further upward pressure on contribution rates in the coming years. It is also worth noting that both the Contra Costa County FPD (CCCFPD) and Moraga-Orinda FPD (MOFPD) districts are also servicing pension obligation bonds. For CCCFPD, debt service on its bonds was $11.9 million in 2015, representing almost 10% of the district’s revenue.

Back at ECCFD, Chief Henderson will no longer have to worry about finding new revenue to offset the district’s unsustainable pension burden.  He retires later this month at the age of 54 – on a pension that will be well over $100,000 annually.

Editor’s Note:  An earlier version of this piece referred to a pension cap of 90% of final salary. While a 90% cap applies to CalPERS pensions, the cap for CCCERA and other county plans is 100%.  If a public safety employee on the 3% at 50 formula works at least 33-1/3 years he or she can retire on full salary.

Marc Joffe is the Director of Policy Research at the California Policy Center.  Marc would like to thank Kris Hunt and Wendy Lack of the Alliance of Contra Costa Taxpayers for their contributions to this analysis.

CalSTRS Creates Santa Barbara School District Deficit; 9 Teachers Laid Off

Facing insolvency, Santa Barbara’s Hope Elementary School district governing board laid off six full-time and three part time teachers, effective next academic year.

After years of deficits, the district’s general fund reserves have been exhausted. According to its 2016 audited financial statements, Hope’s general fund balance was negative $120,000 as of last June 30. The district’s auditor expressed doubt about whether Hope could continue as a “Going Concern”.

During the 2016 school year, general fund expenditures exceeded revenues by $132,000.  Among the district’s expenditures were a $146,000 contribution to CalPERS and a $458,000 contribution to CalSTRS.

According to the Santa Barbara Independent, the red ink reached $400,000 at the beginning of this year. With the annual increase in CalSTRS contributions looming in July, and a required $100,000 payment for special education services provided by Unified Santa Barbara School District, reducing the number of teachers became necessary. It is projected that roughly $700,000 will be saved in salary and benefits.

“I don’t want to lose these teachers — they are phenomenal.” Said Anne Hubbard, the district superintendent. “I don’t want to (cut teachers) — but we don’t have another choice at this point.”

Hope School District is considering a variety of additional measures, such as combo classes with multiple grades of students in one room, no instructional aides, and bigger classrooms. Hubbard even said that the district is considering closing one of its three schools. Administrative staff, including Hubbard, have taken voluntary cuts.

The district’s recovery plan includes implementing a 1% reserve this year, and increasing that to 4% and 5.4% percent reserves in the following two years. Hubbard admits that this is going to be very tough to meet.

The school may be able to right its course if it can cut its budget enough, but the real question is: where does that leave the students in the meantime?

Thanks to the Capitol Political Review for making us aware of this situation.  See their original post at http://www.capoliticalreview.com/capoliticalnewsandviews/another-calstrs-victim-santa-barbara-hope-school-district/

Charter Schools Highlight the Inequity of Traditional Public Education

There have been, and no doubt, are now taking place, many studies of how the results obtained by the nation’s public charter schools differ from those of other public schools with similar student populations. Depending on the study you cite, either charter schools do better than traditional districts in improving student or do no better. But one thing is known: None of these studies compare charter school students with those in traditional public schools who did not attempt the lottery.

The most-recent of these studies, from Stanford University’s Center for Research on Education Outcomes, found in its Urban Charter Schools Report in 2015 that “urban charter schools on average achieve significantly greater student success in math and reading, which amounts to 40 additional days of learning growth in math and 28 days of additional growth in reading.” This isn’t to say charters are doing well everywhere, which CREDO points out throughout its study; these are averages, after all. In fifteen of the 41 regions in math and 18 of the 41 regions in reading there was no difference or the charters did less well then traditional public schools.

A crucial issue that I have not seen explored is that of the possible causal factors in student learning that differentiate charters from traditional public schools.  That is, there seems to be an implicit assumption that the differentiating causal factor is the sheer fact of chartering.

There is something to this. One of the motivations for charters, in the first place, was that the administrations of at least some districts were so incompetent (to be polite), that they interfered with the operations of their schools.  There is also the common American ideology that competition is beneficial, that if a school independent of the district administration did well, then others would imitate its innovations and all boats would be floated with the rising tide.

However, the situation today is increasingly one in which there are charter school operators, or as I call them, systems of charter schools, so that the comparison is not so much that between independent schools with adventurous teachers and teacher leaders and schools chained to district administrations, but between systems of charter schools, on the one hand, and traditional school systems on the other.  This changes what it means for a school to be a charter, as opposed to a traditional public school.  Instead of meaning that decisions will be school-based in the one and system-based, in the other, it means that either is possible for each, or, as likely as not, decisions will be system-based in both.

In our search for those independent variables that might be causal for differences in student outcomes between charter schools and traditional public schools, we might look at one aspect of the situation in New York City.  Among the various systems of charter schools operating in New York, the KIPP group, with six schools in the city, has a good reputation and good results. KIPP has a strong system-wide culture of support and in-service professional development for its teachers and school leaders. In New York City, on average, 45 percent of the students in KIPP schools were judged Proficient on the state’s grades 3-8 English Language Arts tests in 2016, as compared to 24 percent of the students in the four geographical school districts in which they were located.

So far, so good.

Let’s do some poking about in the weeds to see if we can find out what it is about the KIPP charter schools to which we can attribute these results.  First, student factors: In New York City, about one-third of Black and Latino school age children live in poverty.  That figure rises to 50 percent for Hispanic families in which a woman is the householder and there is no husband present.  Thirty-eight percent of Latino residents of the city speak English “less than well” (as do seven percent of Black residents).  Eighteen percent of Black adults and 34 percent of Latino adults have not graduated from high school.

The KIPP schools have racial and ethnic enrollments nearly identical with those of the local traditional public schools, as well as nearly identical percentages of students with disabilities.  They have a higher percentage of English language learners, an identical percentage of students eligible for free lunches (a measure of poverty) and more than twice the percentage of the slightly less impoverished group eligible for reduced price lunches.  Their class sizes are slightly, but not significantly, larger than those in the local traditional schools.

However, there are important differences to be found in the data about teachers. Eighteen of the KIPP teachers have been teaching three years or less, as compared to 14 percent of the teachers in the local traditional schools.  Among teachers with five years or less of experience, the turn-over rate in the KIPP schools was 43 percent and overall it was 42 percent, while in the local traditional schools annual teacher turnover rates were 24 percent and 19 percent respectively.  In other words, every two years each KIPP school had an almost entirely new, younger, teaching staff, as compared to between  every four and five years for the local traditional schools.

The situation in regard to qualifications is even more dramatic. Thirty-seven percent of the KIPP teachers have no valid teaching credential, 37 percent are teaching outside their certification areas, 38 percent of classes are not taught by highly qualified teachers and 37 percent are taught by teachers without appropriate certification.  Just 13 percent have pursued graduate degrees.  The comparisons with the teachers in the local traditional schools are stark: just two percent of those have no valid teaching credential, 17 percent are teaching outside their certification areas, 15 percent of classes are not taught by highly qualified teachers and 16 percent are taught by teachers without appropriate certification. Forty have pursued their own studies to the M.A. level and beyond.  In sum, the local traditional schools are staffed with teachers who are better educated and better credentialed than those in New York City’s KIPP charter schools.

Why then do the KIPP schools have better results than the local traditional schools?

One theory would be that education and credentialing do not make better teachers and staff stability does not matter for the quality of the education students receive.  There is enough data to suggest this – and teacher quality is the most-critical factor in how schools educate children. But it only one factor..

The second theory is that charter schools can sort out children they don’t want to serve through application processes that don’t apply to traditional public schools. The problem with that argument is that charters such as those run by KIPP also must go through a lottery process with various safeguards which ensure that the socioeconomic profiles of the students are nearly identical to that of districts. These lotteries exist because there are far fewer charter schools than there are traditional public schools.

The third theory, one that interests me, is that the determination of parents and legal guardians to get their children into charters is a filter that differentiates kids in charters from those in traditional public schools.  There are, no doubt, many Black and Hispanic New York residents who have not graduated from high school, who do not speak English well, who are living in poverty, who will file a KIPP charter school application for their children.  It is equally likely that there are those, and others more fortunate, who will not.

Few doubt that the concentrated parental attention on education that many middle class children receive is a factor in their educational success.  In places where, as in New York, many traditional public schools fail to educate their students to their potential. For parents looking for a way out, they notice the success of charter systems like KIPP and apply to their lotteries.  We might then guess that this has become a feed-back loop: increasing numbers of students with highly motivating parents yield ever better educational outcomes and attracting ever more students with highly motivating parents.

Of course, the motivated parent argument is an old one and we must be careful in considering it. It is often an excuse for traditional public schools to not properly educate children, especially those Black and Latino, with the fewest personal resources. At the same time, we must keep in mind that in the case of charter schools, the potential of those schools to provide more children with high-quality education can be limited by the lack of support for those with the fewest resources: Thee youth who don’t have parents or permanent legal guardians or whose parents and guardians are struggling too mightily with other issues (including deportation) to go through the charter school application process.

Benevolent social systems are limited in their impact when they cannot adequately help the child with the fewest personal resources. [They are also limited when there aren’t enough of them in the first place — and there aren’t enough high-quality public education systems of any kind.] Choice certainly has value. But so does ensuring that even the neediest children can gain the knowledge they need and deserve so they can survive once they leave schools.

What we have right now are collections of public education systems that fail to achieve the goal of providing all children equal opportunities for a high-quality education, a goal essential to the wellbeing of an increasingly sorely-tried American Republic. These issues aren’t an indictment of charter schools. But their existence, including their success, does highlight our failure to address this persistent inequity.

Problems With California’s “Secure Choice” Pension Plan

Editor’s Note: In this article, author Jon Coupal describes most of the problems with California’s “Secure Choice” pension plan for private sector workers, but he omits a big one: The plan is designed using realistic financial assumptions, i.e., relatively high contribution rates and relatively low rate-of-return assumptions, and a very modest retirement benefit formula. Put another way, “Secure Choice” is everything that government employee pensions are not. Unlike public sector pension funds, the Secure Choice fund will generate perennial surpluses. And where will those surpluses go? Perhaps to bail out the government worker pension funds? Here’s the difference in benefits: (1) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary. (2) Public sector: Public Safety, 30 years work – pension is 90% of final salary. (3) Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary (learn more). Isn’t that special?

California’s “Secure Choice” program sounds harmless enough: A voluntary program — at least for now — that would enroll private sector employees who currently don’t have a retirement plan into a state-run retirement savings account.

When the initial program was announced in 2012 with authorizing legislation, taxpayers were skeptical. Now that the program is even closer to fruition, there is greater reason to be concerned. The good news, however, is that the U.S. Congress is now threatening to pull the plug on this foolish endeavor.

The first question is why is this program even needed? While many public employees don’t pay into Social Security (most receive generous public retirement benefits instead) workers in the private sector do receive Social Security. One might complain that Social Security benefits are inadequate but, because the program is backed by the federal government (which has the power to print money) the benefits promised are almost certain to be forthcoming. Not only that, under federal law, there are many programs to assist private-sector workers whose employers don’t offer 401(k) or other employer-based plans. These include individual retirement accounts, both traditional and Roth IRAs. For workers without an employer retirement plan, there are generous limits on how much can be saved tax deferred.

Given all the existing retirement programs authorized under federal law and managed by the private investment firms, why on earth would California want to adopt a massive new government program? The short answer is that progressives desperately desire to control every aspect of the economy, leaving no room for the private sector. Never mind that investment firms — of which there are thousands to choose from — offer competitive returns and efficient management of retirement accounts. Progressives truly believe that government can do it better.

But better than what? The California Public Employees’ Retirement System, which is carrying an unfunded liability of close to a trillion dollars, has a history of corruption and gross mismanagement.

Progressives also see Secure Choice as a means to crowd out private firms which attempt to maximize returns for their investors while public-sector retirement funds engage in “social engineering,” investing in speculative industries and firms, many of which require government subsidies to survive. At the same time, these public funds eschew well-performing investments such as in the oil industry. This might explain, in part, why the investment returns of California’s public employee retirement funds badly underperform.

Then there is the cost to taxpayers. While the program is ostensibly voluntary, the startup costs of the program exceed $100 million. Taxpayers didn’t have much of a choice in seeing their dollars spent on this questionable program. We suspect that most Californians would prefer that money to go to projects that are truly public in nature such as highway maintenance and fixing dams. Finally, there is the risk to taxpayers in the event Secure Choice goes bankrupt. Defenders claim that this can’t happen but we recall officials in Stockton, Vallejo and San Bernardino saying the same thing.

The good news is that the days of Secure Choice may be numbered because of the political sea change in Washington. It is important to understand that the program would not even be legal were it not for regulations issued by the Obama administration. State programs such as Secure Choice were never authorized by Congress. Rep. Tim Walberg, R-Mich., chairman of the subcommittee on Health, Employment, Labor and Pensions, sponsored a resolution that most believe nullifies the Obama administration’s regulations. Just last week, that resolution passed on a party line vote meaning that Secure Choice and other similar state programs are now on life support.

California has enough problems to deal with. There is no need for it to get into the private retirement plan business.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

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.

Steven Greenhut is senior fellow and Western region director of the R Street Institute, and a contributing editor to the California Policy Center.

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.

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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.