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

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

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

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

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

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

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

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

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

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

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

It gets worse.

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

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

The study concludes:

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

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

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

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

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

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

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


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

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

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

Rebuilding California’s Infrastructure, November 23, 2016

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

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

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

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

Double Dipping at the Public Pension Trough

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monterey LED Light

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

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

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

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

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

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

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

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

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

Monterey LED Light

“That isn’t Venus you’re looking it.”

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

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

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

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

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

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

North Korea Is Dark From Space

North Korea Is Dark From Space

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

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

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

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

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

North Korea Is Dark From Space

North Korea Is Dark From Space

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

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

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

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

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

North Korea Is Dark from Space

North Korea Is Dark from Space

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Gov. Brown Appoints Radical Environmentalists to Public Utilities Commission

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

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

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

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

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

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

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

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

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

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

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

Who is Martha Guzman Aceves?


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

They are community organizers and part of ACORN.

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

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

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

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

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

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

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

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

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

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

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

Get it now?

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


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

But Brown had help from Clifford Rechtschaffen.

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

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

Who is Tom Steyer?

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

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

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

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

The Type of Prosperity California Ought to Show the World

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

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

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

Comparisons to the rest of the USA, China, India, and the world

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

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

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

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

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

So what is really going on here?

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

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

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

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

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

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

 *   *   *

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


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

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

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

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

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

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

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

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

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

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

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

The Abundance Choice, December 24, 2014

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

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

California’s Green Bantustans, May 21, 2014

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



World Population Clock:
Directorate-General of the European Commission:
US Census Bureau – California:

Carbon Emissions
U.S. Energy Information Administration:
United Nations Framework Convention on Climate Change:

Total Energy Consumption
BP Statistical Review of World Energy:
California per capita energy consumption:

World Bank:
US Dept of Commerce – Bureau of Economic Analysis:

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

In California, Innovation Ends at the Water Tap


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

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

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

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

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

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

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

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

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

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

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

 *   *   *

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

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

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

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


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

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

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

“IMPACT FEES” ON HOME SALES: Average 2012 CA impact fee for single-family residence was $31,100, 90% higher than next worst state. 265% higher than jurisdictions that levy such fees (many governments east of the Sierras do not). For apartments, fee averaged $18,800, 290% above average outside state. The fee is part of the purchase price, so buyer pays an annual property tax on the fee!

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

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

Based just on GDP, CA ranks as the 6th largest economy in the world. But adjusted for population and cost of living, CA ranks lower than all but 13 U.S. States.

CORPORATE INCOME TAX:  CA 2016 corporate income tax rate (8.84%) is the highest west of Iowa (our economic competitors) except for Alaska.  Ref. Table #15   – we have the 8th highest rate in the nation.

BUSINESS TAX CLIMATE: California’s 2016 “business tax climate” ranks 3rd worst in the nation – behind New York and anchor-clanker New Jersey. In addition, CA has a lock on the worst rank in the 2016 Small Business Tax Index – 7 TIMES worse than the best small business state (South Dakota).

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

FINES AND FEES:  CA driving tickets are incredibly high. Red-light camera ticket $490. Next highest state is $250. Most are around $100.

CA needlessly licenses more occupations than any state – 177. Second worst state is Connecticut at 155.  The average state is 92. But CA is “only” the 2nd worst licensing state for low income occupations.

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

OVERALL TAXES:  Tax Foundation study ranks CA as tied for the 7th worst taxed state in 2016. But the CA taxes are the most progressive of all states, hammering the upper third of the populace. The top 1% pay 50% of all CA state income taxes.

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

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

EDUCATION:  CA public school teachers the 3rd highest paid in the nation.  CA students rank 48th in math achievement, 49th in reading.  (page 36)

California, a destitute state, still gives away community college education at fire sale prices. Our CC tuition and fees are the lowest in the nation.  How low?  Nationwide, the average community college tuition and fees are more than double our California CC’s.

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

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

WELFARE AND POVERTY: California’s real (“supplemental”) 2015 poverty rate (the new census bureau standard adjusted for the COL) is easily the worst in the nation at 20.6%.  We are 43.6% higher than the average for the other 49 states.   Table 4 on page 9

California has 12% of the nation’s population, but 33% of the country’s TANF (“Temporary” Assistance for Needy Families) welfare recipients – more than the next 7 states combined.  Unlike other states, this “temporary” assistance becomes much more permanent in CA.

California ranks 48th worst for credit card debt and 49th worst for percentage of home ownership.

GOVERNMENT INSOLVENCY: California has the 2nd lowest bond rating of any state – Basket case Illinois beat us out for the lowest spot. We didn’t improve our rating – Illinois just got worse.

Average California firefighter paid 60% more than paid firefighters in other 49 states. CA cops paid 56% more. CA 2011 median household income (including gov’t workers) is 13.4% above nat’l avg.

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

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

WATER & ELECTRICITY COSTS: CA residential electricity costs an average of 42.3% more per kWh than the national average. CA commercial rates are 51.8% higher.  For industrial use, CA electricity is an astonishing 93.6% higher than the national average (July, 2016). The difference is growing between CA and the national average. NOTE: SDG&E is considerably higher.

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

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

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

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

OUT-MIGRATION:  California is now ranked as the worst state to retire in. Easily the lowest percentage of people over age 65. We “beat” ’em all – NY, NJ, etc.

The median Texas household income is 13.5% less than CA. But adjusted for COL, TX 2015 median household income is 29.3% more than CA.

Consider California’s net domestic migration (migration between states).  From 1992 through mid-2015, California lost a NET 3.9 million people to other states.  Net departures slowed in 2008 only because people couldn’t sell their homes.  But more people still leave each year — in 2015 we lost 77,219. Again, note that these are NET losses.  Sadly, our policies have split up many California families.

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

*   *   *

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

A King’s Ransom for ‘Public Servants’?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How to Identify a ‘Good’ Bond

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

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

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

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

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

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

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

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

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

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

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

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

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

 *   *   *

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

Dallas Pension System Crisis: Could It Be Repeated in California?

Despite a strong national economy and rallying stock market, the city of Dallas faces a pension funding crisis that has triggered fears of a municipal bankruptcy. Can something similar happen in California?

Dallas’ Police and Fire Pension System (DPFP) was already teetering at the beginning of 2016, when its actuarial valuation report showed a funded ratio of just 45% (which means that DPFP’s pension assets are sufficient to pay less than half of future anticipated benefits). Further, the value of fund assets declined by more than 12% in 2015 because managers invested in such non-traditional vehicles as “Hawaiian villas, Uruguayan timber and undeveloped land in Arizona.”

DPFP was especially vulnerable because it offered employees a Deferred Retirement Option Program (DROP). This program allows veteran police officer and firefighters to take a lump-sum payment equal to the estimated present value of their lifetime benefits. They could then invest the lump-sum payment in a separate account earning 8% interest.

When city officials began to discuss benefit cuts in August, more officers started taking advantage of the DROP alternative, producing a run on Dallas’ retirement bank. By early December, employees had claimed more than $500 million in DROP payments, representing about a quarter of system assets.

Dallas suffered multiple rating agency downgrades as the city considered an emergency cash infusion into the hobbled pension system. On December 8, the city unilaterally suspended DROP withdrawals.

Given Texas’ reputation for economic strength and fiscal conservatism, it may be surprising to see a pension crisis in the Lone Star State.  But it is not the first time: last year, Houston suffered rating downgrades due to pension underfunding.

So if Texas is vulnerable to such emergencies, can California be far behind? One way to answer that question is to scan California pension systems for the presence of DROP options, since it was the lump-sum withdrawals that caused Dallas’ pension problems to reach crisis proportions.

Our state’s two biggest systems, CalPERS and CalSTRS do not offer DROPs. Legislators have made several attempts to add DROPs for CalPERS public safety employees but all of their bills have either died in the legislative process or were vetoed. The most recent bill, proposed by Charles Calderon (D-Pasadena) in 2009, was supposed to be cost neutral. But as Ed Mendell reported at the time, a CalPERS trustee concluded “it’s almost impossible to certify or state from the beginning that such a program is cost neutral. You are guessing at people’s behavior.”

Several single-employer California systems do offer DROPs. According to State Controller reports, the following systems provide at least some employees the lump-sum option (we have included 2015 funded ratios gathered from the system’s actuarial reports or financial statements)::

System Funded Ratio
City of Fresno Employees’ Retirement System 109.2%
City of Fresno Fire and Police Retirement System 119.6%
City of Los Angeles Fire and Police Pension System 91.5%
Los Angeles County Transportation Authority AFSCME Employees’ Retirement Income Plan 79.3%
Los Angeles County Transportation Authority Maintenance Employees’ Retirement System 66.2%
Los Angeles County Transportation Authority Non-Contract Employees’ Retirement System 73.4%
Los Angeles County Transportation Authority Transportation Communication – Union Employees’ Retirement System 69.3%
Los Angeles County Transportation Authority United Transportation Union Employees’ Retirement System 69.4%
San Diego City Employees’ Retirement System 75.6%
San Francisco City and County Employees’ Retirement System 85.6%
San Luis Obispo County Pension Trust 76.7%

A more comprehensive review of individual retirement system web sites would likely turn up others.

None of the systems listed here face challenges as dire as those confronting DPFP. That said, the various LA Metro plans, San Diego City ERS and San Luis Obispo County all permit DROP withdrawals and are less than 80% funded. While all pension systems should be fully funded, these more vulnerable systems warrant special attention.

Aside from its severe underfunding. DPFP was also especially vulnerable to a crisis because of the unique provisions of its DROP plan:  it is unusual for participants to be able to reinvest their lump-sum payments at an interest rate of 8% and then withdraw them at will. If plan managers cannot revoke DROP provisions entirely, they would be wise to review and possibly tighten up the rules under which participants can take these payments.

Urgency of School Improvement Bonds Contradicted by State Dept. of Education’s Own Reports

In 2015, officials of the Brea Olinda Unified School District (BOUSD) told state officials all nine of its school facilities were in “exemplary” condition. Six months later, the same district officials told residents the facilities were “deteriorating” – and that the schools would not survive without a $148 million renovation.

That disparity – a ratings change from exemplary to deteriorating in half a year – was not unusual. In district after district, the California Policy Center found the same phenomenon: school district officials tell state officials their school facilities are good, even exemplary. Then, just months later, those same district officials tell local voters their schools are in such poor shape that only an extraordinary tax hike can save students such health threats as mold and asbestos, leaking roofs and electrical fires.

The warnings may account for the fact voters approved 153 of the 166 proposed school bond measures in the most recent November election. The upbeat self-assessments of nearly every California school appear in what’s called a School Accountability Report Card (SARC), published annually by the California State Dept. of Education.

In SARCs, local school officials rank the condition of each of their facilities’ systems (including HVAC, electrical, restrooms, fire safety, hazardous materials and roofs) and then give the campus an overall rating – exemplary, good, fair or poor. The California Policy Center reviewed SARCs from the largest 25 school district bond measures on the November ballot. Out of the 948 SARCs available in those districts, 935 gave glowing self-assessments, telling the state Department of Education facilities were good or even exemplary.

We published our preliminary findings on two Orange County bond measures, Brea Olinda School District’s Measure K and Capistrano Unified School District’s Measure M. Measure M was the second-largest bond on the state’s ballots – worth $889 million. Among the state’s top 25 largest bonds, Measure M alone failed to win on November 8. At $148 million, Brea Olinda’s Measure K was the second-largest bond measure to fail.

In Long Beach Unified School District (LBUSD), voters were told outdated buildings created health and safety concerns and that Measure E – at $1.5 billion, the largest school bond on the November ballot – would fix “deteriorating bathrooms, plumbing, leaky roofs and old wiring.”

Yet, LBUSD’s SARCs reveal no concern for the 84 school campuses. Six of those schools were rated exemplary, 75 were good. Three schools simply failed to complete their SARCs. Restrooms, roofs and electrical systems were individually inspected and rated good. A few schools noted that interior surfaces were only fair or poor, but the space on the form reserved for administrators’ notes about repairs was always left blank.

Elk Grove Unified School District’s Measure M sold voters on a $476 million bond to “fix deteriorating roofs, plumbing, and HVAC systems.” Just a few months before, on its 2015 SARCs, the district boasted its 63 schools were in exemplary condition. All systems inspected – including roofs, plumbing, heating, ventilation and air conditioning – were, officials said, in good condition and required no maintenance.   

The ominous messaging in support of school bonds effectively appeals to voters’ instincts to vote yes for the kids. From 2001-2014, 80% of school bond measures passed in California. In November, voters beat even that number, approving 91.5% of all school bonds and adding $15.7 billion in new taxes – before interest.

Born in 1988 as a marketing device to sell a statewide spending hike, the SARC requirement is morphing again – from a regulatory compliance hassle to a public relations opportunity. Private-sector firms that once emphasized the importance of complying with state education law now emphasize the chance to boast. One such firm, School Innovations & Achievement (SI&A), located in El Dorado Hills, California, markets its services to complete SARCs on behalf of school districts as “your opportunity to shine.” The company says its function is not much regulatory as marketing – the chance to “build support for upcoming bond legislation and impress your board with a quality report and unique positioning of each of your schools.”

Misreporting the condition of school facilities – or not reporting them at all – would seem to violate state law. If it does, the violation comes with no obvious penalty.

“An active school that doesn’t have a current SARC available for public access is considered out of compliance,” a state Department of Education official told CPC. School districts undergo annual audits, but “statutes do not provide for financial consequences when a school district is late or does not file a SARC.”

It is unclear which assessment of California’s public school facilities is correct. Bond advocates consistently mention the necessity of funds to repair deteriorating schools, while the SARCs rarely mention deteriorating conditions or indicate California’s public schools are dilapidated at all. Rather, the reports rate the quality of the overwhelming majority of school facilities as exemplary or good. Meaningful accountability ensures children are educated in safe facilities, but it should also give taxpayers an honest assessment of school conditions.

Catrin Thorman and Andrew Heritage are California Policy Center fall Journalism Fellows.

Federal Legislation May Improve California’s Water Supplies

Fights over water are the norm but the successful water bill that passed Congress last week with a rider provision for California may upset the old standard that water is for fighting and whiskey is for drinking. The bill will divert runoff water to parched farms and set up storage, desalination and recycling programs in California. The overall measure sailed through the House and Senate despite opposition from California’s junior senator, Barbara Boxer, and now awaits the president’s signature.

Masterminded by Senator Dianne Feinstein and the House of Representative’s Majority Leader Kevin McCarthy, the bill balances the interests of the environment with the concerns for jobs to bring water to California’s rich, but parched, agricultural land. As Tom Nassif, president of Western Growers, which represents local and regional family farmers who grow fresh produce stated, the bill comes at an important time. “California is entering its rainy season and we cannot once again allow flawed policies to prevent reasonable diversions from runoffs to storage.”

Often attributed to Mark Twain but never verified is the empirical truth that whiskey is for drinking and water is for fighting over. There continues to be a fight over water allocation in the state of 39 million people with a strong core of environmental advocates. Yet, the economic aspects of water shortages could not and should not be ignored. Small farmers and businesses in the parched Central Valley will get a boost if the legislation is signed into law.

Senator Boxer’s objection beyond environmental issues is that benefits would go to big agricultural businesses. Others object to the legislation not on merits but that the Trump Administration would be overseeing the bill’s implementation and that the incoming administration cannot be trusted.

Years of frustration with improving the lot of the Central Valley and Southern California farmers and a compromise, bi-partisan bill three years in the making should be turned aside because of suspicions about an administration not yet in power? Hardly a recipe for supporting bi-partisan solutions.

As to the charge that the water bill is about big business, California’s senior senator sees it much differently. Senator Feinstein told the Sacramento Bee, “This water is for the tens of thousands of small farms that have gone bankrupt, like a melon farmer who sat in my office with tears in his eyes.”

Two years ago, by a two-thirds vote, California voters backed a water bond that reflects the same spirit of of the bill that passed in Washington last week. Proposition 1 had a number of provisions including $2.7 billion set aside for water storage projects, dams and reservoirs, almost 40-percent of the total bond.

In supporting that bond, I wrote on this site, that the water bond carried the DNA of major historical efforts to move water, allowing California to grow and thrive. Not only did Governor Pat Brown risk his reputation in supporting the bond that created the State Water Project, but also President John F. Kennedy twice visited the state to dedicate new water storage dams.

While environmental sensitivity has grown since the middle of the last century, the efficient and reasonable use of water is still an important priority for the state’s people and businesses.

Here’s hoping President Obama will sign the recently passed legislation.

And then Senator Feinstein and Congressman McCarthy and many Californians can toast to their success with a shot of whiskey.

Joel Fox is the editor of Fox and Hounds Daily, keeping tabs on California business and politics.

Productive Californians Migrating Overwhelmingly to Red States

Human beings prefer freedom to collectivism and tyranny. Only those in complete denial disregard the negative consequences of policies that suppress liberty. Consider North Korea versus South Korea. And recall that in Berlin during the Cold War era, people weren’t shot trying to go from West to East – not that anyone tried anyway. Finally, in the course of the last 55 years of the Castro regime, very few people jumped on rickety boats in Miami seeking a better life in Havana.

For those who follow what is happening in the United States – both in politics and with the economy – we can be grateful that even in the most oppressive economic environment – think your typical liberal city such as San Francisco or Portland – people remain remarkably free compared to citizens in many other parts of the world.

One of the freedoms that we Americans enjoy is the freedom to travel. A citizen’s ability to travel from state to state has been deemed by the United States Supreme Court to be a fundamental right that can only be restricted in the narrowest of circumstances. Part of this right is more than just going to another state or country and then returning. It means the freedom to leave. Permanently.

In California, we all know people who have bailed out for places where the taxes are low, regulations are light and the cost of living reasonable. But the evidence here is not just anecdotal.

In a recent piece in the Washington Times, economist Stephen Moore presents an amazing statistic: “Of the 10 blue states that Hillary Clinton won by the largest percentage margins — California, Massachusetts, Vermont, Hawaii, Maryland, New York, Illinois, Rhode Island, New Jersey, and Connecticut — every single one of them lost domestic migration (excluding immigration) over the last 10 years (2004-14).”

But here’s the kicker: The exact opposite is true in those states that supported Donald Trump by the largest margin. Those states – including Wyoming, West Virginia, Oklahoma, North Dakota, Kentucky, Tennessee, South Dakota, and Idaho — saw net domestic in-migration.

So what are the characteristics of those Hillary-supporting states that are bleeding productive citizens? Here, Moore doesn’t mince words: “They are the loser states. They are all progressive. High tax rates. High welfare benefits. Heavy regulation. Environmental extremism. Super minimum wages. Most outlaw energy drilling. The whole left-wing playbook is on display in the Hillary states. And people are leaving in droves.”

For those of us who follow these often wonkish statistics, let’s be clear. We’re not gloating – we’re unhappy. California is a great state with virtually unlimited potential. But the demographic trends are not pretty and when one considers the crushing debt load that looms like a fatal disease, it’s hard not to be deeply concerned.

Is there anything that can save the Golden State? In a very weird way, it is Trump himself who might save California by revitalizing the national economy. That would be ironic indeed. But if that doesn’t happen and the great “California Exodus” continues, the economic death spiral will accelerate. And unlike East Berlin, when productive California citizens decide to leave, there is nothing the Progressives can do to stop them.

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.

Trump Energy Agenda Will Further Damage Economic Competitiveness of California

Editor’s note: In two key areas of energy policy, the incoming Trump administration is poised to fundamentally change the rules. The Trump administration is likely to end U.S. participation in the Paris climate accords, and they are likely to strike down the EPA’s “clean power plan.” There is nothing wrong with setting reasonable environmental goals, and maintaining a trajectory towards clean and sustainable energy. For example, the incoming new head of the EPA, Scott Pruitt, comes from Oklahoma, where reinjecting waste water from the fracking process is causing increasingly severe earthquakes. But if Oklahoma may need to invest in water treatment, California has gone to the opposite extreme. If Clinton had won the election, her administration might have tried to drag the entire nation towards emulating the California model. But as it is, the energy priorities that are going to be national policy are going to condemn California to being, more than ever, the most expensive place to live and do business. California’s citizens and policymakers need to consider very carefully where the state is going with respect to energy, water, and land use policies. Do they want to continue to impoverish working families, and drive their hardest working citizens into exile?

Emerging from what it considers the wilderness of the Obama administration, the Competitive Enterprise Institute unveiled Thursday an aggressive agenda for the incoming Congress and Trump administration that would repudiate the Paris climate agreement, strike down the Clean Power Plan and redirect the priorities of the Environmental Protection Agency.

The Paris climate agreement has as its goal a framework to hold the increase in the average global temperature to less than 2-degrees Celsius above pre-industrial age levels. Nearly 200 members of the United Nations Framework Convention on Climate Change have signed the agreement.

CEI argues such a goal cannot be accomplished without massive cuts in developing countries’ consumption of carbon fuels. “Putting an energy-starved planet on an energy diet is bound to be a cure worse than the supposed disease,” the organization writes in its report.

President Barack Obama signed the deal in April while asserting it is not a treaty and therefore not subject to Senate approval. Treaty or not,  CEI argues that adhering to the agreement would suppress domestic energy production and “extort billions of taxpayers dollars in ‘green’ foreign aid.”

Obama calls the accord an “executive agreement.” That tactic avoided a likely defeat in a Senate ratification vote, but also makes it easier for the new administration to repudiate the deal.

Marlo Lewis, senior fellow in energy and environmental policy, told that CEI wants the Senate to clarify that the agreement is a treaty and insist to review it per Article II, Section 2 of the U.S. Constitution. A ratification vote would require two-thirds support from the Republican Senate, making the agreement all but a dead letter.

Lewis said CEI thinks it’s important the U.S. government stand against the Paris climate agreement rather than simply have President-elect Donald Trump repudiate it as administration policy.

“Then it’s just his opinion versus Obama’s opinion,” Lewis said. “It would be better for the Senate to stand up for its constitutional right.”

Another item at the top of the institute’s list is overturning, or at least defunding, the Environmental Protection Agency’s Clean Power Plan.

The CPP is an EPA rule aimed at reducing carbon dioxide emissions from power plants by 32 percent from 2005 levels by 2030.

On Feb. 9, the U.S. Supreme Court ordered the EPA to stop enforcement of the plan until the U.S. Court of Appeals for the District of Columbia Circuit could rule on a case brought by energy companies and 27 states trying to halt implementation of the rule.

Trump has said dispensing with the proposed regulations will be a priority of his administration.

Trump also nominated noted EPA critic Scott Pruitt to head the agency. The Oklahoma attorney general previously sued the EPA over its regulation of power plants and said Thursday he would rein in the EPA’s excesses.

“The American people are tired of seeing billions of dollars drained from our economy due to unnecessary EPA regulations, and I intend to run this agency in a way that fosters both responsible protection of the environment and freedom for American businesses,” Pruitt said.

That could bode well for some of CEI’s other energy and environmental goals, which include:

  • Blocking the EPA from effectively legislating on climate policy.
  • Repealing the EPA’s carbon dioxide standards for new fossil-fuel power plants.
  • Opposing carbon taxes.
  • Prohibiting use of the “social cost of carbon” as a justification for regulating emissions.
  • Freezing and sunsetting the renewable fuel standard.
  • Requiring all agencies to meet rigorous scientific standards.
  • Addressing unaccountable environmental research programs.

“I think the chances of a lot of it happening are pretty good,” Lewis said.

He added that CEI is “not trying to steer energy development one way or the other. We just want the government to get out of the way.”

About the Author:  Johnny Kampis is a content editor and staff writer at Johnny previously worked in the newspaper industry and as a freelance writer, and has been published in The New York Times,, and the Atlanta Journal-Constitution. A former semi-professional poker player, Kampis is writing a book documenting the poker scene at the 2016 World Series of Poker, a decade after the peak of the poker boom. This article originally appeared in and is republished here with permission.

New California Policy Center Study Proposes Pension Funds Invest in Infrastructure

Although Sacramento and Washington DC will be ruled by very different governing philosophies over the next two years, we believe that a centrist approach to infrastructure policy can be a win/win for California Democrats and for Republicans who will control the federal government for the next two years. We analyze promising areas of infrastructure investment, as well as innovative financing mechanisms, in our just released in-depth, six-part study, “Rebuilding California’s Infrastructure for the 21st Century.” One of our core proposals is that California’s pension funds invest some of their hundreds of billions in infrastructure, improving our quality of life and creating hundreds of thousands of new jobs.

Earlier this week we learned that both houses of California’s legislature will have veto-proof Democratic majorities. This compliments Democratic control of all statewide elected office. Meanwhile, Michigan was just declared for Donald Trump, extending the President Elect’s margin of victory in the Electoral College. Darrell Issa’s win in California’s 49th Congressional District lifts Republicans to a comfortable 239-194 House majority (with one race outstanding) in addition to their narrower hold on the Senate.

Initial reaction to the Trump/Republican victory from liberal thought leaders has been dominated by denial and resistance.  Demands for state recounts have practically zero chance of changing the outcome, because Clinton would need to capture three states in which she is trailing by margins of at least 10,000 votes. Others are pushing for California’s secession from the union – an idea rendered virtually impossible by the outcome of the Civil War.

A much better way forward is to identify areas of agreement and then compromise on some of the policy details. One such area is infrastructure. On the campaign trail, Trump promised $1 trillion of new infrastructure spending over the next ten years.

20161129-cpc-sitesreservoirThe Proposed Sites Reservoir is an excellent example of a cost-effective infrastructure project.

But a detailed plan issued by Trump advisors Peter Navarro and Wilbur Ross offers an approach to financing the new infrastructure that is alien to most Democrats. Rather than simply spending an additional one trillion federal dollars – piled onto the nation’s tower of debt – they propose to offer about $137 billion of tax credits to private investors who would then build revenue-generating projects.

Liberal objections to this idea center around the fact that investors may profit from these projects, but the opportunity to profit provides an incentive to ensure that the infrastructure we build is the infrastructure we need. In the absence of consumer willingness to pay, infrastructure projects are too often selected on the basis of political factors, as shown by the infamous bridge to nowhere. That proposed bridge, which would have connected an Alaska island with 50 inhabitants to the mainland, nearly received $223 million in federal funding thanks to the power of Senator Ted Stevens and Representative Don Young – two Alaska Republicans.

Here in California, we, of course, have our train to nowhere, now being built between Fresno and Bakersfield. As we discuss in our study, the high-speed rail project only makes financial sense when planners use grossly inflated ridership assumptions. By letting investors rather than politicians choose transportation projects, Californians are more likely to get where they really want to go. For example, investors might be willing to fund high speed rail along the San Francisco/San Jose corridor, allowing the first part of the HSR system to be built while Peninsula commuters escape traffic jams on US-101.

The Carlsbad desalination plant in San Diego greatly increases water supply security.

Private investment can also create cost-effective water infrastructure. As we enter another season of uncertain rainfall, Californians are being asked to finance projects that simply move scarce supplies of potable water around. What is really needed and what investors are willing to fund, is new urban drinking water through desalination and wastewater reuse. Desalination has rescued the State of Israel from chronic water shortages and it can work the same magic in the State of California – if only regulators would stop taking their marching orders from environmental extremists who don’t want to see anything built next to the Pacific Ocean. Wastewater reuse, an even more cost-effective way to deliver drinking water to urban areas, is already a reality in several coastal areas in California and should be extended throughout the state.

The Trump approach is far from perfect, and, Senate Democrats will have the power to extract changes by threatening a filibuster. But rather than replace the private-led approach with new pork barrel spending, we suggest more incremental changes.  Our main proposal is to create incentives and mechanisms for public employee pension systems to pool some of their resources into professionally managed infrastructure investment funds. These funds would finance projects in California and around the country. By investing in a geographically diverse set of projects, these investment pools will be less subject to political pressure and more likely to realize stable, positive returns.

So for California Democrats the bad news is that they rule a state now facing a potentially hostile administration. But by finding compromise on infrastructure and other shared priorities, they have the chance to defuse the hostility, create high paying construction jobs and fixing the state’s underfunded transportation, energy and water systems.  We hope they take advantage of this opportunity.

Who’s Going to Pay for Trump’s Huge Infrastructure Plans?

A rare point of agreement between President-Elect Trump and Congressional Democrats is that America has an infrastructure deficit: The nation’s transportation, power, water and sewerage facilities are too often outdated and unable to reliably serve a growing population. But while the diagnosis crosses party lines, solutions are more controversial. Democrats may not be too worried about the recent increase in federal deficits, but Republicans who have made an issue of the national debt will be reluctant to produce more red ink. Likewise, tax increases to pay for new federal construction spending are off the table under Trump and a Republican-controlled Congress.

So it may be politically difficult to find federal funds for an ambitious infrastructure initiative. But, outside the federal government, a large pot of money is available to finance new projects. Although most public employee pension plans are underfunded, they have, in aggregate, $3.8 trillion of assets. Most of this money is invested in bonds and stocks, but these asset classes have drawbacks in the current environment. Bond yields are near historical lows, well below the levels needed to provide the 7-plus percent returns projected in pension plan actuarial forecasts. Stocks have been doing well, but after a seven-year bull market that has witnessed a tripling of the Dow Jones Industrial Average, U.S. equities have major downside risk.

Related: Trump Proposes $1 Trillion for Infrastructure Without Raising Taxes

If infrastructure investments could generate reasonable and relatively safe returns for public pension funds, they would provide an intriguing investment alternative. In a new California Policy Center study, my co-authors and I outline infrastructure investment alternatives for pension funds and private investors. We also discuss policy changes needed to encourage these investors to help rebuild America.

Let’s be clear on how this option differs from federal funding. Politicians often call federal spending an investment, but that’s just rhetoric. Real investors expect financial returns, in the form of interest, dividends and/or capital appreciation. If the federal government spends money to subsidize state freeways, it won’t see a financial return on its “investment.” There is no stream of toll revenues to provide dividends, nor does a freeway have any resale value.

While drivers dislike tolls, the ability to collect such revenue transforms highway spending into an investment — one that may be attractive to pension funds. Toll revenues also provide road operators with both the incentive and the resources needed to maintain and improve their highways. If a toll road becomes congested or potholed, drivers may look around for alternatives, shrinking toll income available to investors. To avoid this situation, toll road operators may be expected to resurface their highways more frequently and to add new lanes more quickly.

Related: $1.7 Trillion in Unfunded State Pensions Is Squeezing Vital Public Programs

In Canada, Europe and Australia, it is common for pension funds to invest in highways and other infrastructure. In 2011, for example, an Australian pension fund took over the Queensland Motorway. Since then, it has improved the highway and made a large profit. Earlier this year, an Australian-led consortium bought the Indiana Toll Road (a segment of I-90) out of bankruptcy, with the California Public Employees Retirement System (CalPERS) taking a 10 percent share.

One might wonder why a California pension fund would invest in an Indiana toll road rather than a California project, but there are good reasons. First, California — famous for its freeways — doesn’t have many toll road investment options. More importantly, investing in-state could result in political considerations supplanting proper financial analysis. For example, Gov. Jerry Brown has sought private investments in California’s high-speed rail project. But that initiative has questionable revenue projections and seems likely to suffer delays and cost overruns. If CalPERS were to invest in the high-speed rail project to placate elected officials, it could make a bad deal for the state’s pensioners and taxpayers by taking on a low-quality investment.

One way to keep politics out of pension infrastructure investment decisions, reduce risk and still keep some money local, is to create a nationwide pool of pension assets available for infrastructure projects. Such a pool would professionally manage funds provided by pension systems in multiple states. Pool managers would be insulated from in-state political considerations because their assets would come from geographically diverse sources. Also, because the pool would invest in a diversified portfolio of infrastructure projects, it would be less vulnerable to large losses.

Related: 4 Reasons Trump’s Economic Policies Would Be a Disaster

Other policies may need to change before U.S. pension infrastructure investment pools can become viable. Too many of our bond-funded roads and utilities are free to use or are heavily discounted through tax subsidies. In the case of highways, we should be looking to toll revenues rather than the gas tax, which will become less effective as electric vehicles become more common. In California, which faces an ongoing drought, a reluctance to charge higher water rates limits opportunities to reuse waste water and build desalination plants. Recycling sewer water and removing salt from ocean water are much more expensive than capturing rainwater, but watersheds serving the state’s heavily populated coastal areas no longer receive sufficient supplies of rainwater on a reliable basis.

In some cases, government can encourage pension fund and private investments by offering financial guarantees and other credit enhancements, but these arrangements need to be carefully structured to avoid allegations and appearances of crony capitalism. Another key reform would involve expediting project approvals. In Orange County, south of Los Angeles, we found one desalination project that has been under review for 18 years. It’s hard to imagine investors parking their money for such a long period of time.

America needs to renew its infrastructure. Pension systems have the capital needed to fund these essential investments. With some attitudinal and policy changes, we can channel their resources to the task of rebuilding our country.

This article was originally published by The Fiscal Times and appeared on Yahoo! Finance.

Invest California’s Pension Funds in Water and Energy Infrastructure

“We wanted flying cars, instead we got 140 characters.”
–  Peter Thiel, in his 2011 manifesto “What Happened to the Future.”

Anyone living in California who’s paying attention knows what venture capitalist Thiel meant. While a handful of Silicon Valley social media entrepreneurs have amassed almost indescribable wealth, and fundamentally transformed how humanity communicates, investment in boring things like roads, bridges, tunnels, ports, aqueducts, reservoirs and railroads – the list is endless – has stagnated. Especially in California. Flying cars? Forget about it. Go tweet.


Why? Why the neglect?

(1) For starters, why invest in moving atoms around, which is messy and might incur the wrath of powerful climate change activists, when you can move electrons around in new and exciting ways and make billions? Silicon Valley entrepreneurs are making a rational choice to prefer manipulating characters to manufacturing cars.

(2) And when it comes to innovations that do involve atoms, that is, actual manufactured goods, Silicon Valley entrepreneurs are lobbying for mandates that force people to purchase internet enabled home appliances, connected to smart meters, that punitively bill consumers who, for example, operate their clothes dryer or dishwasher at the “wrong” times.

(3) Public money that might be used to backstop private investment in infrastructure is being used instead to pay over-market compensation to California’s state and local workers, who now receive pay and benefits that on average are twice what California’s private sector workers earn.

To justify this neglect, California’s governor Brown has been the cheerleader for a culture of austerity. But there is an alternative that would lower the cost of living for all Californians, and even make it possible to lower public sector compensation without lowering their living standards. That is a culture of abundance.

The culture of abundance used to be synonymous with the Silicon Valley. “Better, faster, cheaper” used to be the mantra that informed innovation in the Silicon Valley. And throughout history, the human condition has marched fitfully but inexorably upwards because human creativity and innovation made everything we needed better, faster, cheaper. So how can we invest public and private funds to create cheap and abundant water, energy, transportation and housing?

One untapped source of investment are California’s public employee pension funds, which collectively manage nearly $800 billion in assets. Investing just a fraction of these assets in revenue producing civil infrastructure could have a decisive positive impact. Using water as an example, along with a crumbling distribution infrastructure, there are well established water markets in California. Investing in sewage reuse, seawater desalination, and aquifer and reservoir storage for runoff could eliminate water scarcity in California.

There are several interlocking benefits to investing pension funds in California’s infrastructure. For the pension funds, these would be safe investments that over time would yield more than typical fixed income investments and in fact may exceed their target returns of 6.5% or more per year. For California’s workforce, building and operating these assets in water, energy, and transportation would create tens of thousands of high-paying jobs. For California residents, these assets would create abundance instead of scarcity, and lower the cost of living.

With respect to the environment, increasing the diversity and quantity of water and energy supplies would create climate resiliency, and in nearly all cases – since this factor is of great concern to many Californians – these operations would be either “carbon neutral” or very nearly so.

The challenge to rebuilding California’s infrastructure is not primarily financial. Attracting pension fund investment might be the centerpiece of finding the capital for these projects, but there are all the traditional sources of funds, namely bonds and private investment. The bigger challenge is cultural. Joel Kotkin, writing for the Orange County Register, vividly frames the cultural challenge we face:

“California is on the road to a bifurcated, almost feudal, society, divided by geography, race and class. As is clear from the most recent Internal Revenue Service data, it’s not just the poor and ill-educated, as Brown apologists suggest, but, rather, primarily young families and the middle-aged, who are leaving. What will be left is a state dominated by a growing, but relatively small, upper class, many of them boomers; young singles and a massive, growing, increasingly marginalized “precariat” of low wage, often occasional, workers.

This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Californians must be convinced that the “better, faster and cheaper” mantra that used to define the Silicon Valley, and the cost-cutting virtue of innovations that have uplifted humanity throughout history, can again be our cultural guiding principle. They must be convinced that good jobs and affordable abundance are possible without overly compromising our culture that cherishes the environment. They must be convinced that these “green” values have been taken too far; that they are a cover for condescending, statist oligarchs.

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

Firm with School District Contracts is Major Contributor to New Bonds

Officials in Huntington Beach’s Ocean View School District weren’t the only ones hoping for the passage of Measure R on Tuesday. In August, Ledesma & Meyer Construction Company, Inc. of Rancho Cucamonga donated $25,000 to the district’s $319 million tax increase campaign.

“Many contractors will contribute to campaigns in an effort to show that they are interested in being hired,” OVSD board president Gina Clayton-Tarvin wrote on Facebook. “The only legal way to raise money in a bond campaign is to ask for contributions. OVSD wanted to avoid a ‘pay to play’….”

L&M’s business relationship with the district began in November 2014. District officials have extended that agreement four times, and the company now oversees multiple school construction projects. The latest extension runs through the end of 2016. By then, Ledesma & Meyer’s work in the district will have earned the firm almost $3.5 million.

In the most recent campaign cycle, Ledesma appeared among other firms who contributed to school bond measures in more than one location.

There’s no evidence that Ledesma won district contracts because of its political contributions, despite Clayton-Tarvin’s assertion. But noting similar patterns in contracts has the attention of California State Treasurer John Chiang. In July, Chiang issued a press release warning that “municipal finance firms, including bond counsel, underwriters, and financial advisors, are offering to fund or provide campaign services in exchange for contracts to issue the bonds, once approved by voters.”

California State Public Contract Code Section 100 establishes the framework for “a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound fiscal practices” in order to “eliminate favoritism, fraud, and corruption in the awarding of public contracts.”

In May, Ledesma & Meyer made the cut as one of three construction firms under the OVSD board’s consideration for school facility projects under Measure R.

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

Will Taxpayers get Shafted in the Latest Chapter 9 Bankruptcy?

When a government files for bankruptcy, bondholders, employees and vendors typically fight for a share of the agency’s assets. But what about taxpayers? Shouldn’t their interests also be considered by the bankruptcy court judge? This is the question we hope will be answered in California’s newest Chapter 9 bankruptcy, that of the West Contra Costa Healthcare District, which covers Richmond along with some smaller cities and unincorporated areas in a relatively poor part of the Bay Area.

As we previously reported, the district filed for bankruptcy protection after a failed deal to sell its shuttered hospital building and surrounding land. In its Chapter 9 filing, the district reported $57 million in bond debt and $20 million in pension liabilities, both of which it apparently intends to pay in full by continuing to levy a parcel tax on district property owners.

That parcel tax was approved by voters in 2004 before the district filed for the first of its two bankruptcies and while its hospital and emergency room were still open. The ballot language for the 2004 parcel tax measure read as follows:

To prevent the life-threatening shut-down of the West Contra Costa Healthcare District’s only full-service emergency room, which serves all West County residents, and prevent the closure of the community’s local hospital so that victims of heart attacks, strokes, car accidents, burns, toxic chemical releases and other medical emergencies receive rapid response medical care, shall an annual special property tax be authorized with all revenue staying in our community for local emergency and healthcare services and facilities?

But since the hospital closed in 2015, the district has not been providing emergency services, nor much else aside from patient record retention. Instead, tax money has been going to bondholders and to fund administrative expenses.

While bondholders often lose money in Chapter 9 bankruptcy, WCCHD’s bondholders received special protection from the state. Senate Bill 644 (2011), introduced by State Senator Loni Hancock, grants bondholders a lien (basically a first claim) against revenue generated by the parcel tax. The majority of the outstanding bonds, more formally known as Certificates of Participation, carry interest rates of 6% or 6.25%, and are exempt from state and federal tax. High-yielding securities with legal backing from the state are a pretty sweet deal for bondholders, most of whom are likely to be high income earners. It is less wonderful for the property taxpayers who are on the other side of these payments, many of whom have modest incomes.

Meantime, the district has not been funding its retirement plan. Documents obtained by California Policy Center through a Public Records Act request show the plan is just 28% funded. The district has yet to file a “Plan of Adjustment” that will show who the district intends to pay after the bankruptcy. But district trustees at a November 3 board said they intend to pay retirees all benefits.

Money for the pension benefits will come from future tax revenues and from the sale of district’s hospital building and grounds. After a planned sale to a Davis-based boutique hotel chain fell through, the district’s board accepted a $13 million offer from the Lytton Band of Pomo Indians, a Native American tribe that operates the adjacent Casino San Pablo. The tribe intends to demolish the hospital and build a new hotel on the site, ostensibly for the benefit of casino patrons. By accepting the Lytton’s offer, the district’s board passed over two other proposals from medical providers – one that would have converted the hospital to a dementia care facility and another that would have offered psychiatric services. Although these two offers were somewhat lower than that offered by the tribe, they would have at least provided health services in a part of Contra Costa County that has been characterized as a healthcare desert.

Since casino gambling is often associated with smoking and drinking, one might be tempted to characterize the board’s decision as being contrary to the cause of promoting health. Either way, the fact that the board opted for more cash instead of the opportunity to turn the building over to a medical provider throws into question the district’s dedication to healthcare services and should make taxpayers wonder whether their parcel tax money will ever fund the healthcare services they thought they were voting for. We hope that the bankruptcy court judge will consider sunsetting the parcel tax, so that local homeowners do not suffer disproportionately from this bankruptcy.

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

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

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

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

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

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

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

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

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

The Credibility of Public Service

California’s government unions are nothing like private sector unions. Their bosses are selected via elections where these unions are the dominant campaign contributors. They get their money through compulsory taxes and therefore don’t have to run efficient operations. They run the machinery of government which lets them intimidate their opponents and act as gatekeeper to business interests. Their agenda – more government workers and more pay and benefits for government workers – is intrinsically at odds with the public interest, which must focus on achieving an optimal government, not bigger government for its own sake.

For these reasons, government unions are not only drivers of government inefficiencies and financial challenges, they discredit government itself. In three parts – local, state, and federal – here are ways that government unions have taken away much of the credibility once enjoyed by government agencies, and the good people who staff these agencies.

Part One – Local Government Credibility

A friend of mine just got a ticket for making a right turn on a red light. They weren’t pulled over and given the ticket. They had no idea they’d committed a traffic violation. The ticket arrived in the mail – complete with photos and payment instructions. Apparently this driver, who had even come to a complete stop before turning, encountered one of the rare intersections in California where it is illegal to turn right at a red light.

The fine? $546 before the cost of traffic school, which itself represents nearly a full day of what is basically incarceration.

Another California friend just added on to their house. It was a straightforward bit of construction that involved converting a basement to livable space by adding plumbing, electricity, insulation and flooring. Getting permits, however, was anything but straightforward. The rules were almost impossible to understand, and even the clerks and inspectors provided contradictory instructions. Getting the permits took several months, and cost nearly $20,000. Just the permits.

Stories of excessive fines and fees abound. Yet another California friend wanted to build a granny flat, or “Casita” on his property, which occupies several acres in a rural area. Once he realized that acquiring the permits would add as much as $50,000 in costs, literally doubling the price to do the work, he changed his mind.

Wealthy people are indifferent to these inconveniences. It is the law abiding middle class that bears the burden of excessive traffic fines and excessive fees for building permits.

Is any of this in the public interest? Or is some other motive at work?

Just for the sake of argument, let’s suppose we could be just as safe in our homes and neighborhoods, and could deter just as much poor driving, with much lower fees and fines. What’s going on?

The Real Reason Taxes and Fees Are Always Increasing

A few weeks ago, in a post entitled “For Nov. 8th: $32B in Local Borrowing, $2.9B in Local Tax Increases,” we reported on just how much more revenue California’s local cities and counties are asking their residents to approve in this election. In that same article, we presented data that explains the insatiable desire for revenue: Underfunded retirement pensions for government workers. California’s state and local governments are underfunding their pension systems by at least $15 billion each year. Here is the relevant table from that post:

California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI ($=B)


Now if public employee pensions were the “modest” benefits that spokespersons for the government employee unions and the pension systems say they are, then taxpayers ought to willingly pay more to fund them. But they aren’t. In California, the average retirement benefit package for a retiring state or local government worker with 30 years of service is worth over $70,000 per year. The average Social Security benefit for private sector retirees with 45 years in the workforce is under $20,000.

How Generous Pensions Alienate Public Servants from the People They Serve

It is difficult to overstate the ramifications of this disparity. Government workers do not have to save money for retirement. If they’ve worked a full-term career, their pension will be enough for them to even continue to pay a mortgage when they’re retired. If they are at all responsible with their budget, their pension will be enough for them to actually save money during their retirement.

Conversely, private sector workers have to prepare for retirement by saving money in a 401K plan, where if the investment earnings fall short in a market downturn, they can go broke, because Social Security will barely pay enough to cover medicare premiums and property taxes. Meanwhile, public sector pension funds claim they can earn 7.5% per year “risk free,” because whenever the funds earn less than that, they increase taxes and cut public services to make up the difference.

The idea that 7.5% annual investment returns are “risk free” is an insulting travesty to anyone actually trying to build their own retirement fund. A “risk free” treasury bill pays about one-third that rate. For a private sector worker to collect an inflation-hedged income of $70,000 per year they would have to save at least $1.5 million in their 401K – and they would still be subject to the vagaries of the investment markets and the economy.

When public sector agencies and the unions that represent their workers pass laws that elevate fines to punitive levels, when they make the process to engage in home improvement an expensive nightmare, and when they raise taxes, they claim they are acting in the public interest. But they’re not. They are acting to preserve their status as an economically privileged elite, one that has less and less in common with the average citizen they supposedly serve.

And when these facts are obvious – that government workers are granted a degree of retirement security that is out of reach to all but the wealthiest private citizens – the credibility of public service is undermined. Suddenly there is a new filter, a compelling filter, through which all public sector proposals must be evaluated: Is this tax just to pay more money to the pension funds? Because if every state and local tax increase that is on the ballot this November is passed, it will barely, barely cover the annual shortfall of California’s state and local pension funds under the best set of assumptions.

Part Two – State Government Credibility

Oppressive taxes, excessive fines, and punitive fees are all the direct result of unsustainable pension costs. But something much bigger is at work – because these pensions were “negotiated” by government unions who, just in California, collect and spend over $1.0 billion per year. That kind of money buys a lot of politicians, who support not only unsustainable pensions, but bigger government at all levels, because that suits the agenda of government unions.

In this context, consider these policies that are driving middle class families and businesses small and large out of California:

(1) Land use restrictions elevate the price of 1,200 square foot homes to over a million dollars – resulting in more property tax revenue, and more asset inflation to buttress the real estate portfolios of the pension funds.

(2) Electricity rates soar to $.40 per kilowatt-hour or more despite a global energy glut – resulting in higher absolute profits (the percent is fixed by law) for the public utilities, funding the unionized utility worker pensions which are nearly as generous as public sector pensions.

(3) Decrees and ordinances restrict urban water use, causing dying trees, dead lawns, and short showers – so the tax revenue that might have been spent on upgrading water infrastructure can instead be used to over-hire and over-compensate state and local government workers.

(4) Drivers contend with the most pitted, congested roads in the nation, where road improvements are deliberately neglected so people will ride trains that take three times as long to get them places – so the tax revenue that might have been spent on upgrading our roads is instead used to over-hire and over-compensate state and local government workers.

The Environmentalist Twist

To justify all of the above, the union propagandists, abetted by their allies in the Silicon Valley (who push laws to mandate all major appliances are internet enabled and connected to smart meters so users can be punitively billed if they use them at the “wrong” times) and on Wall Street (where the government pension funds are the biggest players), invoke environmentalist values.

So come to California, where the unionized public sector has redefined their jobs to incorporate “global warming mitigation” so they can get their hands on the carbon auction emission proceeds. Transit workers qualify – they take cars off the road. Teachers qualify – they educate students to conserve, etc. Police and firefighters qualify – they contend with more crime and more fires in hot weather. Code inspectors qualify – they enforce new environmentalist inspired mandates. And planning commissions qualify their entire agencies by zoning ultra high density. In California, this cabal of government unions, Silicon Valley “entrepreneurs,” and powerful financial interests have conned an entire population into not only submitting to this nonsense, but militantly opposing anyone who questions it.

And while ordinary Californians dig deep to pay for these supposedly beneficial policies, genuine, tragic, urgent environmentalist challenges across the world are unanswered. Orangutans are incinerated in Borneo to pay for “carbon neutral” biofuel plantations on an immolated landscape. Asian trawlers strip-mine the ocean for protein. Terrorist gangs finance their weapons purchases with elephant and rhino ivory. Women spend their lives stripping the hillsides to burn wood in smoke-filled kitchens because natural gas development is taboo.

Part Three – Federal Government Credibility

At the national level, the big government agenda of government unions aligns perfectly with the interests of monopolistic corporations. The American taxpayer doesn’t just pay for a bloated, overpaid, inefficient and totally self-interested unionized public sector. They pay for global military security, medical and pharmaceutical research and development, and bleeding edge environmental mitigation and clean energy technologies. As a percentage of GDP, no other nation imposes nearly such a burden onto their citizens in these three areas.

If government policies – local, state and federal – are going to ask so much of private citizens, then public servants should have to follow the same rules and work under the same set of incentives. Otherwise public service is an oxymoron, and public servants have no credibility. There are clear solutions, but they aren’t easy. First, abolish government unions, because civil service law already provides them adequate protection as employees. Next, enroll every government employee in Social Security instead of defined benefit pensions. Only then will government employees and private sector workers face the same economic issues, and search for better answers together.

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Ed Ring is the VP of Policy Research for the California Policy Center.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Construction Firms Fund Orange County School Bond Campaigns

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


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

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

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

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

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


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

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

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

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

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

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

Why are the Economy and Incomes Growing So Slowly?

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

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

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

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

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

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

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

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

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

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


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

Where does growth come from anyway?

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


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

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

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

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


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

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

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

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

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

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

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

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

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

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


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

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

Labor force growth:

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

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


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

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

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


Where do jobs come from anyway?

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

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


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

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

So what?

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

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

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

About the Author:

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