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

December 2014 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 $48,942 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 21% higher than 2nd place Hawaii, 34% higher than Oregon, 48% higher than the next 2 states, and a heck of a lot higher than all the rest – including 7 states with zero state income tax – and 2 more that tax only dividends and interest income.
CA is so bad, we also have the 2nd highest state income tax bracket.  AND the 3rd.  AND the 5th and 7th.
http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2013.pdf, Ref. Table #12
http://tinyurl.com/CA-2nd-CG

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SALES TAX:  CA has the highest state sales tax rate in the nation.  7.5% (does not include local sales taxes).
http://taxfoundation.org/article/state-and-local-sales-tax-rates-january-1-2012

GAS TAX:  CA has the nation’s 2nd highest gas tax at 66.9 cents/gallon (Oct., 2014).  National average is 49.3 cents.  Yet CA has the 6th worst highways.
http://www.api.org/statistics/fueltaxes/
http://reason.org/news/show/21st-annual-highway-report
(CA has nation’s 4th highest diesel tax – 73.5 cents/gallon)

PROPERTY TAX:  California in 2014 ranked 17th highest in per capita property taxes (including commercial) – the only major tax where we are not in the worst ten states.  But the median CA property tax per owner-occupied home was the 10th highest in the nation in 2009 (latest year available).
http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_2015_SBTCI.pdf, Ref. page 73.
http://www.taxfoundation.org/taxdata/show/1913.html

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

“CAP AND TRADE” TAX:  CA has now instituted the highest “cap and trade” tax in the nation – indeed, the ONLY such U.S. tax. One study estimates the annual cost at $3,857 per household by 2020. Even proponents concede that it will have zero impact on global warming.
http://tinyurl.com/WSJ-CA-cap-and-trade

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

California small businesses failed in 2011 at a rate 69% higher than the national average — the worst state in the nation.
http://money.cnn.com/2011/05/19/smallbusiness/small_business_state_failure_rates/index.htm   (based on Dunn & Bradstreet study)

CORPORATE INCOME TAX:  CA corporate income tax rate (8.84%) is the highest west of the Mississippi (our economic competitors) except for Alaska.
http://taxfoundation.org/article/2013-state-business-tax-climate-index
Ref. Table #1   – we are 5th highest in nation in per capita corporate tax collections

BUSINESS TAX CLIMATE:  California’s 2015 “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 Small Business Tax Index – a whopping 8.3% worse than 2nd worst state.
http://taxfoundation.org/article/2015-state-business-tax-climate-index    and    http://www.sbecouncil.org/wp-content/uploads/2014/04/BTI2014Final.pdf

LEGAL ENVIRONMENT:  The American Tort Reform Foundation ranks CA the “2nd worst judicial hellhole” in U.S. – most anti-business – which is “better” than the last 2 years #1 ranking.  The U.S. Chamber of Commerce ranks CA higher – “only” the 4th worst state (unfortunately, sliding from 7th worst in 2008).
http://www.judicialhellholes.org/wp-content/uploads/2014/12/JudicialHellholes-2014.pdf
http://www.instituteforlegalreform.com/states/california

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

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

CA has the highest/worst state workers’ compensation rates in 2013, up from 3rd in 2012. CA rates 21.3% higher than 2nd highest state, 88% higher than median state. Yet we pay low benefits — much goes to lawyers.
http://riderrants.blogspot.com/2014/10/california-has-worst-workers.html

OVERALL TAXES:  Tax Foundation study ranks CA as the 4th worst taxed state. But if counting ONLY in-state and local taxes, we are arguably the 2nd highest.
http://tinyurl.com/Tax-Foundation-CA-rank

UNEMPLOYMENT:  CA is tied for the 2nd worst state unemployment rate (November, 2014) – 7.2%.  National unemployment rate 5.8%.  National unemployment rate not including CA is 5.6%, making the CA unemployment rate 28.4% higher than the average of the other 49 states.    We were at 4.8% in Nov, 2006 – vs. national 4.6%.
http://www.bls.gov/web/laus/laumstrk.htm

Using the 3rd quarter 2014 U-6 measure of unemployment (includes involuntary part-time workers), CA is just behind Nevada at 15.8% vs. national 12.5%.  National U-6 not including CA is 12.1%, making CA’s U-6 31.1% higher than the average of the other 49 states.  http://www.bls.gov/lau/stalt.htm

EDUCATION:  CA public school teachers the 4th highest paid in the nation.  CA students rank 48th in math achievement, 49th in reading.
http://www.lao.ca.gov/reports/2011/calfacts/calfacts_010511.aspx (page 36)
http://www.cde.ca.gov/fg/fr/sa/cefavgsalaries.asp

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

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

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

WELFARE AND POVERTY:  1 in 5 in Los Angeles County receiving public aid.
http://www.latimes.com/news/local/la-me-welfare22-2009feb22,0,4377048.story

California’s real poverty rate (the new census bureau standard adjusted for COL) is easily the worst in the nation at 23.4%.  We are 57.3% higher than the average for the other 49 states (up from 48.8% higher last year).  Indeed, the CA poverty rate is 17.0% higher than 2nd place Nevada.
http://www.census.gov/content/dam/Census/library/publications/2014/demo/p60-251.pdf (page 9)

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

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

GOVERNMENT INSOLVENCY:  California now has the 2nd lowest bond rating of any state – Basket case Illinois recently beat us out for the lowest spot.  We didn’t improve our rating – Illinois just got worse.
http://taxfoundation.org/blog/monday-map-state-credit-ratings-0

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

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

TRANSPORTATION COSTS:  CA has 2nd highest annual cost for owning a car – $3,966. $765 higher than the national average.   http://tinyurl.com/lmxnucs

WATER & ELECTRICITY COSTS:  California residential electricity costs an average of 35.4% more per kWh than the national average. CA commercial rates are 60.3% higher.  For industrial use, CA electricity is 85.4% higher than the national average (July, 2014). NOTE: SDG&E is even higher.   http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_06_a 

A 2011 survey of home water bills ranking for the 20 largest U.S. cities found that for 200 gallons a day usage, San Diego was the highest cost.  At 400 gal/day, San Diego was third highest.
http://www.circleofblue.org/waternews/wp-content/uploads/2011/05/allstats590.jpg

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

The top U.S. CEO’s surveyed rank California “the worst state in which to do business” for the 10th straight year (May, 2014).
http://chiefexecutive.net/best-worst-states-for-business-2014#ranking

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

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

The median Texas household income is 18.1% less than CA. But adjusted for COL, CA median household income is 16.1% less than TX.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Median_income

Consider California’s net domestic migration (migration between states).  From 2003 through 2012, California lost a NET 1.43 million people.  Net departures slowed in 2008 only because people couldn’t sell their homes.  But more people still leave each year — in 2011 and again in 2012, we lost about 100,000 net people to domestic out-migration.  In 2013, 49,000. Again, note that these are NET losses.
https://twitter.com/SenTedCruz/status/464827967747526656/photo/1
http://www.governing.com/gov-data/census/census-state-population-estimates-births-deaths-migration-totals-2013.html

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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 updated here quarterly.

The Abundance Choice

The prevailing challenge facing humanity when confronted with resource constraints is not that we are running out of resources, but how we will adapt and create new and better solutions to meet the needs that currently are being met by what are arguably scarce or finite resources. If one accepts this premise, that we are not threatened by diminishing resources, but rather by the possibility that we won’t successfully adapt and innovate to create new resources, a completely different perspective on resource scarcity and resource policies may emerge.

Across every fundamental area of human needs, history demonstrates that as technology and freedom is advanced, new solutions evolve to meet them. Despite tragic setbacks of war or famine that provide examples to contradict this optimistic claim, overall the lifestyle of the average human being has inexorably improved across the centuries. While it is easy to examine specific consumption patterns today and suggest we now face a tipping point wherein shortages of key resources will overwhelm us, if one examines key resources one at a time, there is a strong argument that such a catastrophe, if it does occur, will be the result of war, corruption, or misguided adherence to counterproductive ideologies, and not because there were not solutions readily available through human creativity and advancing technology.

Energy, water and land are, broadly speaking, the three resources one certainly might argue are finite and must be scrupulously managed. But in each case, a careful examination provides ample evidence to contradict this claim. Known reserves of fossil fuel could provide enough energy to serve 100% of the energy requirements of civilization at a total annual rate of consumption twice what is currently consumed worldwide; there is enough fossil fuel on the planet to provide 1.0 quintillion BTUs of energy per year for the next 300 years. In addition to fossil fuel there are proven sources of energy such as nuclear power, and new sources of energy such as solar, geothermal, and biomass, that have the potential to scale up to provide comparable levels of power production. With these many energy alternatives, combined with relentless improvements in energy efficiency, it is difficult to imagine human civilization ever running out of energy.

Water is a resource that appears finite, and indeed in many regions of the world the challenge of meeting projected water needs appears more daunting than the challenge of producing adequate energy. But water is not necessarily finite. There are countless areas throughout the world where desalination technology can provide water in large quantities – already nearly 2% of the world’s fresh water is obtained through desalination, and for large urban users, desalination is affordable and requires a surprisingly small energy input. Another way to provide abundant water is to redirect large quantities of river water via inter-basin transfers from water rich areas to water poor areas. Finally, water is never truly used up, it is continuously recycled, and by treating and reusing water, particularly in urban areas, there should never be water scarcity.

The question of finding adequate land for humans is clearly different from that of finding energy or water, since unlike energy or water, land is truly finite. But even here, key trends indicate land is now becoming more abundant, not less abundant. In 2007 the population of humans became more than 50% concentrated in cities, and within the next 25 years this concentration is expected to grow to 75%. Humans, in general, prefer living in urban environments, and this massive voluntary migration to cities from rural areas is depopulating landscapes faster than what remains of human population growth will fill them. This seismic shift in population patterns, combined with high yield crops, aquaculture, and urban high-rise agriculture, promises a decisive and very positive shift from land scarcity to land abundance in the next 25-50 years.

Human population growth, along with increasing per capita standards of living, taken at face value, obviously could suggest we are racing towards disaster. But as noted, resources to accommodate greater rates of overall human consumption are more resilient than is commonly accepted. And, crucially, most of human population growth has already occurred. The welcome reality of female emancipation, female literacy, and increasing general prosperity is causing human cultures all over the world, one by one, to shift from rapid population growth to negative population growth. The demographic challenge we must prepare for is not too many people, but too many old people. Our long-term challenge is not resource scarcity, but how to nurture sustainable and robust economic growth on a planet where humans have an ever-increasing average age, and a population in slow numeric decline.

If one accepts the possibility that humanity is not on a collision course with resource scarcity, entirely new ways of looking at policy options are revealed. Rather than attempting to manage demand, based on the premise that supplies are finite, we might also manage supply by increasing production. While, for example, utility pricing might still be somewhat progressive, if we assume resources will not run out, it doesn’t have to be punitive. If someone wishes to use more energy or water than their neighbor, if their pricing isn’t so punitive as to effectively ration their consumption, but instead is only moderately progressive, then over consumption leads to higher profit margins at the utility, which in-turn finances more investment in supplies.

Another consequence of rejecting the Malthusian conventional wisdom is a new understanding of what may truly motivate many powerful backers of the doomsday lobby. By limiting consumption through claiming resources are perilously scarce and by extracting them we may destroy the earth, the vested interests who control the means of production will tighten their grip on those means. Instead of pluralistically investing in this last great leap forward to build mega cities and infrastructure for the future – in the process extracting raw materials that can be either recycled or are renewable – the public entities and powerful corporations who benefit from scarcity will raise prices and defer investment. It is the interests of the emergent classes, whether they are entrepreneurs in prosperous, advanced economies, or the aspiring masses in developing nations, who are harmed the most by the Malthusian notion of inevitable scarcity.

Abundance is a choice, and it is a choice the privileged elite must make – in order for humanity to achieve abundance, the elites must accept the competition of disruptive technologies, the competition of emerging nations, and a vision of environmentalism that embraces resource development and rejects self-serving anti-growth alarmist extremism. The irony of our time is that the policies of socialism and extreme environmentalism do more harm than good to both ordinary people and the environment, while enabling wealthy elites to perpetuate their position of privilege at the same time as they embrace the comforting but false ideology of scarcity.

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Ed Ring is the executive director of the California Policy Center.

RELATED POSTS

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

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

Bipartisan Solutions for California, October 27, 2013

Economic Bubbles #2 – The Cruel Injustice of the Fed's Bubbles in Housing

As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: the Federal Reserve.

Federal Reserve chair Janet Yellen recently treated the nation to an astonishing lecture on the solution to rising wealth inequality–according to Yellen, low-income households should save capital and buy assets such as stocks and housing.

It’s difficult to know which is more insulting: her oily sanctimony or her callous disregard for facts. What Yellen and the rest of the Fed Mafia have done is inflate bubbles in credit and assets that have made housing unaffordable to all but the wealthiest households.

Fed policy has been especially destructive to young households: not only is it difficult to save capital when your income is declining in real terms, housing has soared out of reach as the direct consequence of Fed policies.

Two charts reflect this reality. The first is of median household income, the second is the Case-Shiller Index of housing prices for the San Francisco Bay Area.

I have marked the wage chart with the actual price of a modest 900 square foot suburban house in the S.F. Bay Area whose price history mirrors the Case-Shiller Index, with one difference: this house (and many others) are actually worth more now than they were at the top of the national bubble in 2006-7.

But that is a mere quibble. The main point is that housing exploded from 3 times median income to 12 times median income as a direct result of Fed policies. Lowering interest rates doesn’t make assets any more affordable–it pushes them higher.

The only winners in the housing bubble are those who bought in 1998 or earlier. The extraordinary gains reaped since the late 1990s have not been available to younger households. The popping of the housing bubble did lower prices from nosebleed heights, but in most locales price did not return to 1996 levels.

As a multiple of real (inflation-adjusted) income, in many areas housing is more expensive than it was at the top of the 2006 bubble.

While Yellen and the rest of the Fed Mafia have been enormously successful in blowing bubbles that crash with devastating consequences, they failed to move the needle on household income. Median income has actually declined since 2000.

20141222_Smith-1

Inflating asset bubbles shovels unearned gains into the pockets of those who own assets prior to the bubble, but it inflates those assets out of reach of those who don’t own assets–for example, people who were too young to buy assets at pre-bubble prices.

20141222_Smith-2

Inflating housing out of reach of young households as a matter of Fed policy isn’t simply unjust–it’s cruel. Fed policies designed to goose asset valuations as a theater-of-the-absurd measure of “prosperity” overlooked that it is only the older generations who bought all these assets at pre-bubble prices who have gained.

In the good old days, a 20% down payment was standard. How long will it take a young family to save $130,000 for a $650,000 house? How much of their income will be squandered in interest and property taxes for the privilege of owning a bubblicious-priced house?

If we scrape away the toxic sludge of sanctimony and misrepresentation from Yellen’s absurd lecture, we divine her true message: if you want a house, make sure you’re born to rich parents who bought at pre-bubble prices.

As the generational war heats up, we should all remember the source of all the bubbles and all the policies that could only result in generational poverty: the Federal Reserve.

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About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

Economic Bubbles #1 – Why Living in a Post-Bubble World Is No Fun

What do we do when the bubble economy cannot be reflated?

It is generally conceded that we are living in an era of Peak Everything: peak central bank omnipotence, peak powerless of the non-elites, peak wealth inequality, peak media-induced delusion, peak market-rigging, peak bogus official statistics, peak propaganda, peak bread and circuses, peak deception, peak distraction, peak sociopathology, peak central statism, peak debt, peak leverage, peak derealization–need I go on?

Bubbles reach extremes and then they pop. There is nothing mysterious about this causal chain: peaks generate extremes that manifest as bubbles, which eventually implode as extremes revert to the mean and mass delusions are shattered by the unwelcome reality that extremes are not sustainable.

The status quo solution to the devastation of a popped bubble is to inflate another even bigger bubble. If debt reached extremes that imploded, the solution is to expand debt far beyond the levels that caused the implosion.

If fudging the numbers triggered a loss of confidence, the solution is to fudge the numbers even more, so they no longer reflect reality at all.

If gaming the system crashed the system, the solution is to game the system even harder.

If the masses protest their powerlessness, the solution is to push them further from the centers of power.

And so on.

This blowing new bubbles to replace the ones that popped works for a while, but at the expense of systemic stability. Each new bubble requires pushing the system to new extremes that increase the risk of instability and collapse.

In other words, the stability of the new bubble is temporary and thus illusory.

The processes used to inflate the new bubble suffer from diminishing returns. The nature of stimulus-response is that overuse of the stimulus leads to diminishing responses. This is a structural feature that cannot be massaged away.

Goosing public confidence in the status quo with phony statistics and rigged markets works splendidly the first time, less so the second time, and barely at all the third time. Why is this so? The distance between reality and the bubble construct is now so great that the disconnection from reality is self-evident to anyone not marveling at the finery of the Emperor’s non-existent clothing.

The system habituates to the higher stimulus. If the drug/debt has lost its effectiveness, a higher dose is needed. This is the progression of serial bubbles. Then the system habituates to the higher dose/debt, and the next expansion of debt must be even greater.

This dynamic can be visualized as The Rising Wedge Model of Breakdown, which builds on the well-known Ratchet Effect: the system enables easy expansion of debt, leverage, employees, etc., but it has no mechanism to allow contraction. Any contraction triggers systemic collapse.

20141212_Smith

When the system’s ability to inflate another bubble breaks down, it’s no longer fun.It’s no longer fun to be a consumer when credit is no longer free, it’s no longer fun to be a politco when the money spigot is no longer wide open, it’s no longer fun to be a market rigger when the markets have imploded, and so on.

It is generally conceded that the global economy is currently experiencing a third bubble. The first expanded in the 1990s and popped in 2000, the second one expanded in 2002 and burst in 2008, and the third one inflated in 2009 and has yet to implode.

We can anticipate the popping of this third bubble, and this opens a line of inquiry few have taken: what if the popping of this third bubble breaks the bubble inflation machinery? In other words, what if there can be no fourth bubble to bail out the status quo, due to the systemic limitations of bubble-blowing as a solution to previous bubbles popping?

Given that we’re still in Peak Central Bank Omnipotence, it is widely believed central banks can continue inflating bubbles of confidence, assets, debt and consumption at will, essentially forever.

But what if the fourth bubble can’t reach the heights of the third bubble? What if the debt and leverage required to inflate the fourth bubble breaks down before the fourth bubble can even reach the heights needed to make everyone who bet the farm on the status quo whole?

Few dare ask these questions as they raise a terrifying follow-on question: what do we do when the bubble economy cannot be reflated?

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About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

Liberals and Libertarians

Editor’s Note:  Earlier this year, inspired by media reports – accurate ones – of a guarded and growing rapprochement between Ralph Nader and Patrick Buchanan on issues where they share common values, we published an editorial entitled “A Left-Right Alliance Against Public Sector Unions?” Drawing from Nader and Buchanan’s recently published missives, we identified five areas of left/right convergence: (1) controlling security state overreach, (2) eliminating corporate welfare, (3) fighting military overspending and waste, (4) cracking down on Wall Street financial fraud, and (5) revisiting international agreements that undermine American sovereignty. This piece by noted libertarian Randal O’Toole keeps alive this new dialog, citing more reasons why liberals and libertarians have a very compelling list of policy issues to discuss and hopefully find common ground.

Brutality on the part of overly militarized police forces. Too many people in prison due mainly to a war on victimless crimes. Routine torture. The national surveillance state. A president who believes he can remotely kill anyone he wants without trial or due process.

Asset forfeiture. States and cities that routinely take away people’s property rights without compensation or take people’s property with compensation to give to private developers on the pretext that, because the new owners will pay more taxes than existing owners, it is in the public interest.

These are a few of my least-favorite things about America today. This list heavily overlaps eleven reasons why liberal Dave Lindorff is ashamed to be an American. On most of these issues (except, perhaps, regulatory takings), liberals and libertarians are in full agreement.

Yet on so many other issues, liberals regard libertarians as kooks who are in the thrall of the evil Koch Brothers and their scheme to make everyone dependent on the petroleum industry. The Antiplanner has personally been attacked many times by people who used to call me their friend.

All of the above policies, along with all or nearly all of the policies on Lindorff’s list that aren’t on mine, involved government action. The difference between liberals and libertarians is that the former see these policies as aberrations from the norm that can fixed by putting the right people in charge, while libertarians see them as predictable consequences of giving government power. As P. J. O’Rourke says, “giving government money and power is like giving teenage boys whiskey and car keys.”

Many if not most libertarians today are former liberals who realized that the problems they saw were not unusual but merely examples of all the problems with government. This is hardly a new idea, as it goes back through Henry David Thoreau to Thomas Jefferson and Thomas Paine. Despite its ancient lineage, proof of the pervasive failings of government managed to win James Buchanan a Nobel Memorial Prize in economics.

What will it take to convince more liberals to become libertarians? When will Naomi Klein realize that her support for light rail will do more to enrich a lot of corporations than it will to fix climate change? When will supporters of subsidies to wind power realize that they are really just supporting the natural gas industry? When will endangered species advocates realize that the best way to save many species may be to privatize them?

I don’t know the specific answers to these questions. But I do know that progressives need to seriously question whether their proposals to give government more power over people’s lives and property are compatible with their rejection of the NSA, CIA, the war on marijuana, and other big government programs.

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About the Author:  Randal O’Toole is an American public policy analyst. The majority of O’Toole’s work has focused on private land rights, particularly against public land use regulations and light rail. Since 1995, he has been associated with the Cato Institute as an adjunct scholar and frequent anti-light rail campaigner. O’Toole was the McCluskey Visiting Fellowship for Conservation at Yale University in 1998, and has served as a visiting scholar at the University of California, Berkeley and Utah State University. O’Toole studied economics at the University of Oregon. This post was originally published on O’Toole’s blog, The Antiplanner, and appears here with permission.

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RELATED POSTS

California’s Emerging Good Government Coalition, November 4, 2014

The Challenge Libertarians Face to Win American Hearts, October 14, 2014

The Looming Bipartisan Backlash Against Unionized Government, August 26, 2014

A “Left-Right Alliance” Against Public Sector Unions?, May 20, 2014

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Forming a Bipartisan Consensus for Public Sector Union Reform, January 28, 2014

Bright Current Economic Signals Are Spurious

The market rejoiced on Dec. 5 when the Bureau of Labor Statistics reported that 321,000 new U.S. jobs had been created. The general consensus is that the 3.9% third-quarter Gross Domestic Product (GDP) growth is the harbinger of a brighter trend. The Economist’s team of forecasters has U.S. growth at 3% in 2015, up from 2.3% in 2014, while the International Monetary Fund (IMF) forecasts global growth up from 3.3% to 3.8%. Happy Days Are Here Again—except that they’re not. The benefits of the $40 per barrel fall in global oil prices are emerging ahead of the costs.

The oil price decline will lead to a consumer resurgence, especially in Japan and the EU, where few jobs depend on the energy-extraction sector. In the U.S., gasoline at $2.50 a gallon should free up consumer purchasing power quickly. Fifteen or $20 saved on a tank of gas can be spent on other things, especially around Christmas when spending demands are high and controls lax. That is not immediately offset by loss of purchasing power in the oil sector. Companies have cash reserves, and existing drilling and production programs mostly continue as planned in the hope of an early recovery in oil prices.

In Europe and Japan there is little or no offsetting loss from lower oil prices, so consumption increases and the lethargic economies of the eurozone and Japan flicker once more into a pallid semblance of life. Part of their problems in 2009-11 were caused by the rapid run-up in oil prices to more than $100, so that loss is regained, and those countries’ GDP figures show a couple of quarters of above-trend growth. In China, the wind-down of the immense property bubble continues, but the loss of purchasing power, which a decade of malinvestment is beginning to cause, will at least be postponed for a quarter or two.

Overall, therefore, the first couple of quarters of lower oil prices will look pretty satisfactory worldwide. Because it’s unlikely the Fed or other stimulus-obsessed monetary authorities will begin to raise interest rates (for them, there is always some excuse not to do so), we will hear six months of annoying Keynesian rejoicing as “stimulus” spending addicts and monetary quacks proclaim their remedies to have succeeded, finally producing the faster growth which Keynesians had predicted half a decade ago.

This column has been anticipating the collapse of markets buoyed to infinity by misguided “stimulus” for several years now; the only uncertainty was how long the collapse would be delayed. The latest developments suggest a timeframe for the financial Armageddon. Once the positive effects of the oil price decline have worked their way through the system, the negative effects will arrive, and they will be powerful enough to reverse the upward trend in the markets and the global economy.

As discussed in detail last week’s column, the principal negative effect of the sharp drop in oil prices is the value destruction of billions of dollars of energy-sector investment and the consequent damage to banks and bond markets. This does not happen immediately, which is why the effect of the oil price decline is initially asymmetric. However, the payment cycle in the sector is not longer than a couple of months, many of the highly leveraged companies carry limited amounts of cash and projects in mid-construction suffer especially high cash outflows (though some of the latter’s costs may be reduced by the elimination of the sector’s overheating).

Then there are the oil-exporting countries. Venezuela is already a basket case, desperately trying to figure out a way to raise enough dollars to provide its people with basic necessities, almost all of which have to be imported in that benighted economy. Russia is almost in the same boat, although with $419 billion of foreign exchange reserves (if that figure is not fictitious), it has a certain amount of wriggle room. Even Saudi Arabia, the largest oil exporter, has allowed its welfare budget to explode with the rise in oil prices and will start to struggle pretty quickly with oil prices in the $60-65 range, even though its oil production costs are well below that level.

The timing for the adverse effects of the price drop is fairly clear: it will take about six to nine months, enough for the more leveraged, high-cost oil producers to run out of money and their banks to run out of patience. We will then see a flow of bankruptcies, affecting not only the oil sector itself but also the banking system and the junk-bond market. At the same time, the redundancies that the energy sector has produced will begin to show up in the unemployment figures, and the production destroyed will show up in the GDP figures. These effects can be very substantial and long-lasting.
The similar downturn in gold prices since 2011 has now caused Anglo American to announce it will suffer 60,000 redundancies by 2017. Needless to say, the oil sector is much larger than the gold sector, and prices had previously been on a plateau rather than rising continuously as had gold before 2011. Consequently, the redundancies will appear more quickly and be more severe.

Autumn is the traditional time for market crashes and economic upsets, and it seems likely that this timing will recur on this occasion, with the autumn of 2015 being a very difficult period indeed for the market. Doubtless the market, lulled by the euphoria of the initial favorable economic data, will see a further rise in the first half of 2015, maybe with the S&P 500 reaching 2,500. Adverse statistics and the first bankruptcies will begin to appear about July, but the downward slide will not gather momentum until after Labor Day.

If we are very lucky, the Fed may have increased its federal funds target interest rate by a quarter of a percent or so by the time the crisis hits. That will enable the Fed to fight the crisis by reducing the rate again, while the Obama administration will use the crisis as an excuse to attempt to pump yet more worthless “stimulus” spending into the economy. With a Republican Congress, it is to be hoped that the waste can be stopped, as it was not in 2001, 2008 and 2009.

The U.S. budget deficit will be only $600 billion or so in the year to September 2015, after current negotiations have added a chunk of extra spending, while the good economy of the first half of 2015 will cause the fiscal position to outperform expectations. However, once the downturn hits, after the usual lag the budget deficit will widen inexorably from its bloated (by former standards) base. Its projection for the year to September 2017 will be well above $1 trillion by the time the President’s 2017 Budget is announced in February 2016. In reality the deficit for that year will probably reach $2 trillion by the time that fiscal year is finally tallied in October 2017, with the usual election-year slippage, but with no extraordinary spending “stimulus” since the Republican Congress will prevent it.

If this trajectory is correct, the 2016 election looks very good for the Republicans (provided they can avoid their usual election-year pastime of nominating an idiot as Presidential candidate). For the U.S. economy, the trajectory after the downturn hits is less clear. If monetary policy remains under the control of Janet Yellen and her acolytes, we may have to go through yet another cycle of monetary “stimulus” even though the painful recession and the wreckage of the past half-decade’s malinvestment will be massive evidence of the failure of over-stimulative monetary policies.

Since Yellen cannot be replaced until January 2018 it unfortunately seems that at least the beginning of the next cycle will be conducted with the same monetary policy as the present one, suppressing savings for yet more years and de-capitalizing the U.S. economy still further. Only a massive burst of inflation, causing the Fed to panic and raise rates, can save us from this fate. At present no such burst appears to be in the offing, and indeed the decline in oil prices will initially work against the appearance of such a phenomenon. Conventional monetary theory says we should already be in substantial inflation, as M2 money supply has increased substantially more rapidly than nominal GDP for the last five years. Conventional monetary theory is thus pretty obviously wrong, and it’s not clear with what we should replace it.

Globally, it seems likely that a market crash will hit at the same time as the U.S. crash next September/October, and that this will lead to another recession, as it did in 2008-09. Global malinvestment is roughly as prevalent as in the U.S., although it is concentrated in a few areas, such as London and Chinese property. However, the most likely non-U.S. trigger of crash is Japanese government bonds. Even though Japan is a major beneficiary of the oil price decline, the budget deficit in Japan is so large, the debt level so high and the current policies so misguided that a crash seems unavoidable. That crash might naturally occur in 2016 or 2017 rather than 2015, but a global stock market and economic downturn ought to be sufficient to trigger it a year or so early, giving the 2015-16 recession/crash a very nasty second downward leg.

Overall, the economic prognostication is little changed from a few weeks ago, but the timing is perhaps now clearer.

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About the Author:  Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) which examines the British governments of 1783-1830. He was formerly Business and Economics Editor at United Press International. Martin’s weekly column, The Bear’s Lair, is based on the rationale that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. This article originally appeared on the economics website “The Prudent Bear” and is republished here with permission.

An Economic Win-Win For California – Lower the Cost of Living

A frequent and entirely valid point made by representatives of public sector unions is that their membership, government workers, need to be able to afford to live in the cities and communities they serve. The problem with that argument, however, is that nobody can afford to live in these cities and communities, especially in California.

There are a lot of reasons for California’s high cost of living, but the most crippling by far is the price of housing. Historically, and still today in markets where land development is relatively unconstrained, the median home price is about four times the median household income. In Northern California’s Santa Clara County, the median home price in October 2014 was $699,750, eight times the median household income of $88,215. Even people earning twice the median household income in Santa Clara County will have a very hard time ever paying off a home that costs this much. And if they lose their job, they lose their home. But is land scarce in California?

The answer to this question, despite rhetoric to the contrary, is almost indisputably no. As documented in an earlier post, “California’s Green Bantustans,” “According to the American Farmland Trust, of California’s 163,000 square miles, there are 25,000 square miles of grazing land and 42,000 square miles of agricultural land; of that, 14,000 square miles are prime agricultural land. Think about this. You could put 10 million new residents into homes, four per household, on half-acre lots, and you would only consume 1,953 square miles. If you built those homes on the best prime agricultural land California’s got, you would only use up 14% of it. If you scattered those homes among all of California’s farmland and grazing land – which is far more likely – you would only use up 3% of it. Three percent loss of agricultural land, to allow ten million people to live on half-acre lots.”

So why is it nearly impossible to develop land in California? The answer to this is found in the nexus between financial special interests, who benefit from asset bubbles, and powerful environmentalist organizations who apparently view human settlements as undesirable blights that should be minimized. In the San Francisco Bay Area, to offer a particularly vivid example, the Santa Cruz mountains are being targeted to be cleansed of human habitation. Instead of creating wildlife corridors, they are eliminating human corridors. Is this really necessary?

Human Cleansing – The Evacuation Plan for the Santa Cruz Mountains

20141203_RingDo you want to live in the mountains?
Forget it. Only billionaires and non-humans allowed.

If you are familiar with the San Francisco peninsula, you will see that the area proposed for the “Great Park of the Santa Cruz Mountains” encompasses nearly the entire mountain range. A coalition of environmentalist organizations and government agencies are proposing to create a park of 138,000 acres, that’s 215 square miles, in an area that ought to make room for weekend cabins, mountain dwellers, and vacation communities. Why, in a region where homes cost so much, is so much land being barred to human settlement? The pristine stands of redwoods in Big Basin and Henry Cowell State Park were preserved a century ago. There is nothing wrong with preserving more land around these parks. But do they have to take it all?

This is far from an isolated example. Urban areas in California, primarily Los Angeles and the San Francisco Bay Area, have been surrounded by “open space preserves” where future development is prohibited and current residents are harassed. Ask the embattled residents of Stevens Canyon in the hills west of the Silicon Valley, if there are any of them left. Once you’re in a “planning area,” watch out. Backed by bonds sold to naive voters, endowments bestowed by billionaires, and the power of state and federal laws that make living on any property at all increasingly difficult, the relentless land acquisition machine continues to gather momentum. Anyone who thinks there isn’t a connection between setting aside thousands of square miles in California for “habitat” and the price of a home on a lot big enough to accommodate a swing set for the kids needs to have their head examined.

It doesn’t end with open space that is actually purchased, cleansed of humanity, and turned into government ran preserves for plants and wildlife, however. Acquiring permits to build on any land is nearly impossible in California. Land developers who fight year round to try to build housing for people shake their heads in disbelief at the myriad requirements from countless state, federal and local agencies that make the permit process take not months or years, but decades. And it isn’t just farmland, or wetland, or special riparian habitats where development is blocked. It’s everywhere. Even semi-arid rangeland is off limits for housing unless you are prepared to spend millions, fight for decades, and have the staying power to pursue multiple expensive projects simultaneously since many will never, ever get approved.

What is the result? Here is an aerial photo of a subdivision in the Sacramento area, one that every hedge fund billionaire turned environmentalist in California – especially one who runs cattle on his own special 1,800 acre fiefdom in the Santa Cruz mountains on a property that just happens to be in a “non-targeted area” – might consider living in for the rest of his life in order to understand the human consequences of his ideals – cramped homes on 40’x80′ lots, at a going price in October 2014 of $250,000. Notwithstanding being condemned to a claustrophobic existence at a level of congestion that would drive rats in a cage to madness, $250,000 is a pittance for a billionaire. But for an ordinary worker, $250,000 is a life sentence of mortgage servitude. And even this, the single family dwelling, is under attack by “smart growth” environmentalists and public bureaucrats who prefer density to having to divert payroll and benefits to finance infrastructure. The excess! The waste! Stack them and pack them and let them ride trains!

Priced to Sell at $250,000 – Housing for Humans on 40’x80′ Lots

201402_Sacramento-500pxNo mountain air, ocean breezes, or open space for the little people.
Buy a permit, get in line, visit for a day, but then come home to this.

When public employee union leadership talk about the importance of paying their members a “middle class” package of pay and benefits, they’re right. Government workers should enjoy a middle class lifestyle. But they need to understand that the asset bubbles caused by high prices for housing are not only making it necessary to pay them more, but are also creating the inflated property tax revenue that they rely on for much of their compensation. They need to understand that the phony economic growth caused by everyone borrowing against their inflated home equity is what creates the stock market appreciation that their pension funds rely on to remain solvent. And they need to understand that all of this is a bubble, kept intact by crippling, misanthropic land use restrictions that hurt all working people.

There is another path. That is for public employee union leadership to recognize that everyone deserves a chance at a middle class lifestyle. And the way to do that is not to advocate higher pay and benefits to public employees, but to advocate a lower cost of living, starting with housing. One may argue endlessly about how to regulate or deregulate water and energy production, essentials of life that also have artificially inflated costs. But as long as suburban homes consume less water than Walnut orchards – and they do, much less – build more homes to drive their prices way, way down. There’s plenty of land.

Ed Ring is the executive director of the California Policy Center.

RELATED POSTS

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

California’s Green Bantustans, May 21, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Construction Unions Should Fight for Infrastructure that Helps the Economy, April 1, 2014

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

Pension Funds and the “Asset” Economy, February 18, 2014

Exclusive Interview with Joel Kotkin, January 4, 2014

Bipartisan Solutions for California, October 27, 2013

How Should Technological Advances Affect the Role of Government?, September 16, 2013

Preserving America’s Middle Class, June 24, 2013

Latest November 2014 Election Results – 113 Bonds for 108 California Educational Districts

The California Policy Center has now posted updated November 4, 2014 election results for the state’s 113 bond measures for K-12 and community college districts. These revised results incorporate almost a month of ballots counted and reviewed by county elections offices.

The most significant change is that the largest of the 113 bond measures considered by voters – the $574 million Measure J for the North Orange County Community College District – now appears to be winning by a mere 15 votes. On election night and for a couple of weeks afterwards, this bond measure was not quite at the threshold for passage of 55% voter approval.

Out of 113 bond measures totaling $11,775,300,000 ($11.8 billion) for 108 educational districts, 90 bond measures passed totaling $9,769,950,000 for 85 educational districts.

This means voters authorized California local educational districts to borrow $9.8 billion for construction by selling bonds to investors. With interest, these bond measures may end up costing $20 billion over the next 40-50 years.

A chart of the election results is below, or you can access a PDF version of the election results at https://californiapolicycenter.org/wp-content/uploads/sites/2/2014/12/2014-11-04-Bond-Measure-Election-Results-FINAL.pdf.

2014-11-04 Bond Measure Election Results FINAL

Local Government Fiscal Early Warning Systems: A Good Idea Whose Time Has Come

Two years ago, Treasurer Bill Lockyer called for an early warning system to detect signs of financial trouble in California local governments before they faced bankruptcy. By proactively identifying at-risk cities, the system could create an opening for local experts and external advisors to intervene before any given situation spun out of control. As the California Policy Center (CPC) showed last month, such a system is possible, and it can be built from components already available to the State Controller’s Office (SCO). So, while the state does not yet have an early warning system, incoming Controller Betty Yee will have the raw materials to implement one.

For the CPC study, we gathered audited financial statements from over 490 California cities and counties. All but the very smallest local governments are required to produce financial statements for bond investors and/or the federal government. The statements follow Governmental Accounting Standards and include an opinion from an independent accounting firm. These audits are also filed with SCO, which provides lists of current and delinquent filers on its single audit status web page.

Once we obtained the documents, we extracted key fiscal variables and ran them through a scoring model that I previously created as part of a study for the California Debt and Investment Advisory Commission (CDIAC). In the CPC project, we identified the thirteen cities facing the highest risk of bankruptcy and provided brief summaries of their recent financial history.

Our findings were picked up in the Los Angeles Times and a couple of other local media outlets. Managers in two of the cities we listed – Compton and San Fernando – wrote rejoinders to our findings which are being posted on CPC’s web site. The fact that they took the time to consider and question our findings is great, since the purpose of a system like this is to stimulate discussion about local government fiscal sustainability.

Meanwhile, SCO has taken an initial step in the same direction. In an October 2013, Fox & Hounds post, Dr. Max Neiman and I proposed some enhancement to SCO’s century-old process of gathering local government financial information. Each year, SCO sends a data collection form to local agencies and compiles the results in the Cities and Counties Annual Reports. Unfortunately, these data sets arrive well after fiscal year end, are not consistent with audited financials and have not been delivered in a user-friendly form.

Earlier this fall, SCO introduced a new web site which provides better ways to interact with the data in an intuitive and visually pleasing manner. SCO now also offers its entire local government fiscal data set in Excel form. Finally, the new site provided 2013 fiscal data somewhat faster than in years past.

But the SCO data continues to differ from that contained in audits. For example, San Bernardino’s 2012 general fund balance was -$12.209 million according to the city’s audited financials but +$206 million on the SCO’s website (which refers to the balance as “fund equity”). King City’s 2013 general fund balance is shown as -$3.78 million on its audit, but only -$1.89 million on the SCO site – a big difference for a town of 12,000 people. In my CDIAC study, I found that very low or negative general fund balances are a harbinger of bankruptcy. I may not have made this finding if I had had to rely upon the SCO data.

As Dr. Neiman and I discussed last year, SCO data cannot reconcile to audited financials for two reasons. First, cities and counties must submit collection forms before the local governments have a chance to complete their annual financial audits. Second, the financial statement items in SCO’s collection instrument do not correspond to items that appear in statements meeting standards set by the Governmental Accounting Standards Board (GASB).

To eliminate the discrepancies and make its data useful for an early warning system, SCO should replace the existing collection process with the submission of audited statements. This is especially convenient for cities and counties because they already send their audits to SCO. The Controller could save work for local government finance officers and produce more accurate data by extracting financial statement information from the audited financials it already receives rather than obtaining a second set of incompatible, unaudited data from cities and counties, as it does now.

The main barrier to implementing this idea is that financial audits typically take the form of Adobe PDFs, so financial statement items must be re-entered or extracted from the reports. Numerous open source and licensed tools are available for PDF data extraction: many are listed here. For the recent CPC study, we worked with a data collection firm named Civic Partner that applies such tools to local government financial statements. Longer term, local governments should be encouraged to file their financial audits in a “machine readable” form such as eXtensible Business Reporting Language (XBRL), as Dr. Neiman and I suggested in our previous post.

Once the data is cleaned up, SCO can use it in a fiscal stress scoring model. While I like the one I have built, there are a number of alternatives from which to choose. A good example of an effective, high profile scoring system is the one used in New York State. Comptroller Thomas D. Napoli assigns fiscal stress scores to over 2,000 counties, cities and school districts. In 2013, the system classified 26 local governments in its “Significant Stress” category.

More than two years have passed since the last California city filed a Chapter IX bankruptcy. While it may be tempting to think that this problem has gone away, it is more likely that municipal fiscal crises are simply in a state of temporary abeyance due to the overall health of California’s economy. It is now – in this benign period – that we have best opportunity to create a robust early warning system. When the next recession hits, it will already too late. Like the rainy day fund created by Proposition 2, early warning systems need to be built during flush times, so that they are there for us when the next wave of problems strikes.

Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

It's The Economy, and They're Not Stupid

The sharp rebuke to the Obama administration delivered by the mid-term elections should not be construed as an endorsement of the GOP, which remains as unpopular as ever. Rather, as has been the case in the last few election cycles, voter revolts have hinged on continued dissatisfaction with the strength of the economy and the diminishing financial prospects of ordinary citizens. Given the apparent improvements in the economy, this fact continues to baffle the media which have concluded that Democrats simply failed to effectively communicate the successes that the Administration has achieved. Fortune Magazine offered a more complex conclusion that we have a good economy, but it’s just not the kind that benefits the middle class. I believe the truth is far simpler: Voters are dissatisfied with the economy because it is bad and getting worse. Although this unpleasant reality can be masked by economic doublespeak and government accounting gimmicks, the truth comes out in the ballot box.

According to voter exit polls conducted by CNN, 78% said they are worried about the economy, with 69% saying that, in their view, economic conditions are not good. 65% responded that the country is on the wrong track vs. only 31% who believed that it is headed in the right direction. Why should this be so if, as we have been told repeatedly, the economy is accelerating after five straight years of economic growth? After all, during the post war years, we have experienced recession on average, every seven years, and it has been almost that much time since our last recession. Unemployment has fallen all the way back down to pre-recession levels, the stock market is soaring to record heights regularly, the dollar is surging, the deficit is down by more than half in the last four years (to just a half a trillion) energy prices are falling, and the real estate market has had a great run over the last four years. So what’s with the doom and gloom? Shouldn’t we be satisfied?

I have been saying for years that the “recovery” is largely an illusion created by the effects of zero percent interest rates, quantitative easing, and deficit spending. The asset bubbles that have been created as a result of these policies have primarily benefited the owners of stocks, bonds, and real estate (the rich), while simultaneously deterring the savings and capital investment that is needed to actually create good paying jobs and increased purchasing power for Johnny and Sally Sixpack. So as the Dow churns higher, and the cheerleaders on CNBC try to outshine one another on their economic enthusiasm, the mood on Main Street continues to sour.

So which is it? Are the rank and file too stubborn, or too ill-informed, to understand that the economy is actually improving, or are they right, and it actually isn’t. Very few people are making the latter determination. Instead they have held up other fears, in the form of border security, Ebola, or Obamacare, to explain the drubbing of Democrats in this election as merely a referendum on the President. But the exit polls make clear that those dogs won’t hunt.

As the effects of quantitative easing begin to wane, the economy will slow down, as it already clearly has over the last few months, and stock and real estate prices will flatten out, and ultimately fall (see the article in my latest newsletter on the dependency of stock prices on stock prices). At that point, the call to do something big will return, and few should doubt that the historically dovish Fed and Federal Government (no matter who is in charge) will deliver fresh doses of fiscal and monetary stimulus. But we must be aware that these cures have not helped in the past, and they will not help in the future. In fact, they are the primary reason why the economy has not become healthy enough to increase voter satisfaction. The stimulus acts more like a sedative that has preserved an unhealthy debt-fueled, asset-bubble economic model and has prevented a healthier, more self-sustaining economy from rising in its place.

Instead of recognizing this phony economy for what it is, economists have instead conjectured that we have passed into an age of “secular stagnation.” They have produced models that say we simply are incapable of growing at levels that we have in the past, and that citizens have to come to grips with lowered expectations. They cite a variety of ridiculous reasons why this is so: The impact of technology, the rise of the emerging markets, the glut of savings, persistent deflationary forces, etc. But there is nothing new under the sun. Human beings haven’t changed, and neither have the laws of economics. There is no natural reason why our society has lost the capacity to grow. Instead, we have simply chosen to perpetuate a broken system because we refuse to suffer through the withdrawal symptoms that will surely accompany a change in course.

In a recent Investment Outlook piece that was heavy on philosophy, Bill Gross, the “bond guru” formerly of Pimco and now of Janus, made a similar conclusion. Although he acknowledges the inherent weaknesses and flaws in the stimulus-based economy, he concludes that there are simply no alternatives because we are addicted, and we will not be able to find the political will to suffer through a change. He may be right. But the first step in fixing a problem is acknowledging that one exists. The voters are trying to tell us that. Too bad no one is listening.

And while Republicans may now be basking in their good fortune, they would be wise to keep the celebrations in check. The same problems that angered voters today will still be in place two years from now, only by then, they will likely be worse. Republican majority in both houses will firmly affix targets on their backs, and will invite the kind of backlash that was recently directed at Democrats.

About the Author:  Peter Schiff is president and chief global strategist of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut. Schiff frequently appears as a guest on CNBC, Fox News, and Bloomberg Television and is often quoted in major financial publications and is a frequent guest on internet radio as well as host of the podcast Wall Street Unspun. This article originally appeared in the Euro Pacific Weekly Digest and is republished here with permission.

City of San Fernando Responds to CPC Study

Editor’s Note:  As stated in our recently released study “California’s Most Financially Stressed Cities and Counties, we used the most recent information that was readily available. It was beyond the scope of this study to contact every city individually – there are nearly 500 cities in California. We have confidence in the accuracy of our report and the methods used to develop the rankings. On the other hand, the goal of our studies is to provide information that will elevate and enlighten the public dialogue on vital issues facing Californians. Our goal is to help foster constructive progress towards more equitable and sustainable management of California’s public institutions. In that spirit we are happy to provide officials representing cities highlighted in the study an opportunity to respond. Needless to say, we also stand ready to retract any of our findings that are demonstrated to be factually incorrect. One problem which could not be avoided is that we had to use financial data from financial statements through the fiscal year ended 6-30-2013. In a few cases we actually had to rely on financials dated 6-30-2012. But this was the most recent readily available data we could find. Perhaps when GASB requires public entities to publish their financials within 45 days after their fiscal years end – the time allotted public companies by FASB – this problem will be avoided. Meanwhile, here is a response from the Mayor of the City of San Fernando, where progress has indeed been made over the past year to address their financial challenges. 

The City of San Fernando has had a chance to review the report issued by the California Policy Center, titled California’s Most Financially Stressed Cities, which ranked San Fernando as number 11 on their list of “Unlucky 13.”

The City has a number of concerns with regard to the conclusions drawn in the report. Most notably, the authors’ reliance on 18 month old financial data to make inferences about the current state of the City’s finances. Based on the somewhat arbitrary metrics developed by the authors to calculate their measure of “Default Probability”, the only conclusion that can be responsibly drawn from the report is that the City of San Fernando had a 1 in 134 chance of filing bankruptcy on June 30, 2013. Beyond that, no other conclusions or inferences are valid. A more thorough, unbiased evaluation would have looked at the City’s finances over a number of years, including both historical and forward looking data, rather than a brief snapshot in time before making a very serious statement about the City’s actual “Default Probability.”

It is well documented that the City of San Fernando was experiencing extreme financial trouble in fiscal year 2012-2013. The authors cite the large operating deficit in the aquatics center, loss of revenue from Rydell Motors and JC Penny’s, a local unemployment rate of 12%, and political turmoil to support their assertion that San Fernando has a relatively high Default Probability.

Unfortunately, the authors did not contact the City to get more up to date data or a comment on the City’s current financial situation prior to publishing their results. If the authors had contacted the City, they would have found out that many of the items cited to support the report’s findings have since been addressed. These include the following actions:

  • The City transferred financial and operational responsibility of the aquatics center to Los Angeles County;
  • A re-branded Rydell Motors re-opened in October 2013, and has performed remarkably well since its opening;
  • Locally, unemployment has decreased to 8%;
  • In 2013, voters approved a ½ cent sales tax measure to address the City’s fund balance issues and establish fund reserves; and
  • In 2013, voters conducted a recall election that has given rise to new City leadership.

It is clear that the authors were aware of many of these developments as the Measure A: ½ Cent Transaction & Use Tax report presented to City Council in September 2014 and an article on the City’s plan to lease the Aquatic Center to Los Angeles County in October 2014 were both cited as sources in the report. However, for reasons unbeknownst to the City, no mention of those positive financial developments was included in the narrative.

Ultimately, the report relies on outdated financial and qualitative data to its support findings and does not recognize the positive actions taken by the City in recent months. Although it is unfortunate San Fernando is branded as one of the “Unlucky 13” in this particular report, the fact that the City has addressed almost every item cited in support of the findings should serve as reinforcement to the community that the City is moving in the right direction.

Sincerely,

Sylvia Ballin
Mayor, City of San Fernando

California's 113 Educational Bond Measures – Preliminary Election Results

Based on preliminary reports from county elections offices as of November 5, 2014, this list of the 113 proposed bond measures on the November 4 ballot is ranked based on the percentage of voters (in the yellow column) who approved borrowing the indicated amount of money for school construction (in the green column) through bond sales. To pass, these bond measures need 55% approval.

2014-11 Results - Educational Bond Measures on November 4, 2014 California Ballot - RANKED BY PASSAGE

California's Most Financially Stressed Cities and Counties

Introduction:  Due to the healthy response generated by this study, and justifiable expressions of concern by many whose cities we found to be financially stressed, we would like to state that the rankings developed herein are based on information contained in 2013 financial statements, that is, financial statements for the fiscal year ended June 30, 2013. Therefore the data we used is nearly 18 months old. In a few cases, we couldn’t find 6-30-2013 financial statements and had to rely on 6-30-2012 financial statements. Therefore it is important to emphasize the rankings we have produced are based on the financial condition of California cities then, not now. It is possible that many of these cities have improved their financial condition. If we were able to assess the financial health of California’s cities as of 6-30-2014, these rankings would inevitably have changed.

It is also important to acknowledge that any attempt to rank the financial health of a city, or any financial entity, will rely on criteria and formulas that are debatable. How much emphasis to place on historical performance, debt, unfunded liabilities, cash flow, general fund balance, budget deficits vs surpluses, interest and pension expense, and a host of other relevant data will cause differing results. Nonetheless we believe the rankings we have come up with, based on the information we had to work with, would not have been substantially different if we had used alternative but credible systems of analyses.

If there is anything factually inaccurate in this study, pending review by our lead authors, we will insert a corrective note into the text of this study where the inaccuracy appears. If an official representing any of the cities that have come up high on the list of financially distressed cities wishes to post a rebuttal to our findings, even if it refers to activities that occurred after the period we analyzed, they are welcome to post them in the comments section of this study. It was impossible for us to contact every city in California when preparing this study, for obvious reasons. But our goal is not to issue these findings and stifle any subsequent dialogue, quite the contrary. 
Ed Ring  –  November 11, 2014

*   *   *

Over two years have passed since the cities of Mammoth Lakes, San Bernardino and Stockton filed for municipal bankruptcy. While this quiet period reminds us that municipal insolvency is a rare event, some cities and counties are more vulnerable than others. If the economy enters another recession, some of these at-risk municipalities could be compelled to enter bankruptcy.  And even without an economic downturn, these distressed municipalities will be challenged to provide adequate services, avoid tax increases, pay vendors on time and continue operating without imposing unpaid furloughs on their workers.

Working with Civic Partner, a firm that collects and analyzes municipal finance data, the California Policy Center has ranked over 490 California cities and counties with respect to their bankruptcy risk. This report contains the complete list as well as brief reports on the most vulnerable local governments.

To compile the ranking, we collected and analyzed audited financial statements published by approximately most cities and counties in California. Local governments typically produce audited financial statements if they issue municipal bonds or if they receive more than $500,000 in federal grants annually.

Governments are usually required to produce audited financial statements within six to nine months after their fiscal year end, which, in California, is generally June 30. Many governments miss the filing deadline. For our study, we used 2013 financial statements where available, but, in some cases used 2012 statements when we could not obtain a more recent filing.

Our data is distinct from that published by the State Controller’s Office (SCO) in its Cities Annual Report and Counties Annual Report documents. The controller reports contain unaudited data and do not conform to US Governmental Accounting Standards. We have found multiple large discrepancies and omissions in this data set, and believe that the state would be better served if SCO relied on the financial audits we have used.  More recently, SCO has started to publish local government financial statistics in a more user-friendly form at https://bythenumbers.sco.ca.gov/. The source of the data for the new SCO web site is the same unaudited information used in the annual reports mentioned above.

Once we located the audited reports, we extracted general fund revenue, expense and balance data, along with pension and interest expenses and total revenue for all governmental funds.  We entered this data into a scoring model created last year by Public Sector Credit Solutions in a research project funded by the California Debt and Investment Advisory Commission (CDIAC) – a unit of the State Treasurer’s Office. Although the research was supported by a state entity, the model itself and the findings reported here are not endorsed by any official entity. They are a product of the California Policy Center, Civic Partner and Public Sector Credit Solutions.

The scoring model uses a composite of four financial metrics derived from the information we collected.  These metrics are:

  • General Fund Balance / General Fund Expenditures – This is a measure of the cushion present in the government’s key fund – essentially its checking account.  General fund balance depletion was associated with the Vallejo, Stockton and San Bernardino bankruptcies – as well as those of Detroit and Harrisburg.
  • General Fund Surplus or Deficit / General Fund Revenues – This ratio indicates whether the general fund balance is improving or deteriorating – and at what rate.
  • Change in Annual Revenues (Total Governmental Funds) – Declining revenues were strongly associated with the Vallejo and Stockton bankruptcies, as both cities faced falling real estate values. We broaden the scope to include funds other than the general fund since many cities and counties divert large proportions of their revenue to special funds.
  • Interest and Pension Expenses / Total Governmental Fund Revenues – This is a measure of “uncontrollable” costs which cannot be avoided even if the city or county implements layoffs. During the Depression, cities with high interest burdens defaulted on their municipal bonds at much higher rates than those with more moderate debt burdens. A high interest burden was also associated with Desert Hot Springs insolvency at the turn of the millennium.

We then calculate a default probability score based on a weighted average of these four metrics. The scores are calibrated to reflect the estimated probability that a local government will either declare bankruptcy or default on its general obligation bond issues within one year. The calibration reflects the low historic incidence of bankruptcy and default by US cities and counties. In an average year, about one in 1000 of these entities declares bankruptcies and/or defaults on general obligation bond issues. This historic default rate of 1/1000 = 0.10% is close to the median default probability in our universe.

Cities and counties with default probability scores much higher than 0.1% have substantially elevated risk. The highest default probability among the California local governments we evaluated is 4.01% for the City of Compton – reflecting forty times the bankruptcy risk of a typical US city or county.

*   *   *

LOCAL GOVERNMENTS MOST AT RISK – THE UNLUCKY 13

This section includes brief descriptions of the most vulnerable cities and counties as measured by our model. We excluded Stockton and San Bernardino both of which continue to operate under bankruptcy protection.  Mammoth Lakes emerged from bankruptcy without having to adjust its debts and is not among the most distressed municipalities according to our model.

(1)  COMPTON  –  Default Probability, 4.01%

In July of 2012, Standard and Poor’s downgraded Compton’s bond rating after an independent auditor refused to express an opinion on the city’s 2011 financial statements amid allegations of corruption and fraud. At the time, the city’s bank account was $2 million short of the $5 million in notes it had due, and officials were unable to secure short-term financing. Bankruptcy seemed inevitable for the city of 93,000 with high poverty and an unemployment rate of 20 percent. City council faced scrutiny for recklessly overspending revenues by $10 million for four consecutive years and draining a $22 million surplus. General fund shortages were routinely covered with cash from restricted funds resulting in a $43 million deficit. After hiring more than 100 new employees between 2007 and 2011, the city was forced to make deep cuts, laying off 15 percent of its workforce and dramatically reducing services – bad news for a city where the unemployment rate has grown to 13 percent and the median income hovers at $21,832.

At the height of the crisis, council members abandoned plans to establish a $19.5 million police force. Instead the city continues to contract its police services with Los Angeles County Sheriff’s Department for $17.5 million annually. Through 2011, the city fell behind on its monthly payments to the county and accumulated $369,000 in late fees. Additional cuts and layoffs followed. Despite the fiscal emergency, Compton has continued to issue bonds through efforts by the county to divert city tax revenues to a bank-controlled reserve fund. Officials have worked hard to bring the city back from the brink of bankruptcy, and Compton has begun to rebuild reserves. But the city’s recovery is progressing at a painfully slow pace. City council has implemented a long-term, 15-year repayment plan to address past debt, and the 2014-2015 balanced budget passed without furloughs or layoffs. However, the city maintains a negative general fund balance in excess of $40 million, and services remain at a minimum.

View press release from City of Compton in response to study, posted Nov. 12th: “City of Compton’s Rebuttal…
View City of Compton’s Financial Transparency Page.

Sources:

Compton Financial Crisis Worsens, More Cuts Loom, Nov. 1, 2011, myfoxla.com
http://www.myfoxla.com/story/18391615/compton-financial-crisis-worsens-more-cuts-loom

City of Compton Annual Financial Report for the Year Ended June 30, 2012
http://www.comptoncity.org/images/stories/dept/cm/72538461823648162385483457.pdf

Compton on Brink of Bankruptcy, July 18, 2012, Los Angeles Times
http://articles.latimes.com/2012/jul/18/local/la-me-0719-compton-bankruptcy-20120719

Ten California Cities in Distress, May 15, 2013, USA Today
http://www.usatoday.com/story/news/nation/2013/05/15/ten-california-cities-in-distress/207621http://www.usacityfacts.com/ca/los-angeles/compton/economy/

Compton, CA Income and Economy, USA City Facts
http://www.usacityfacts.com/ca/los-angeles/compton/economy/

FY 2014-2015 City of Compton Budget Review, June 3, 2014
http://www.comptoncity.org/images/stories/dept/cm/376458234689579834652436774.pdf

(2)  KING CITY  –  Default Probability, 3.38%

King City’s efforts to contain the flow of cash started back in 2011, when a $150,000 hole opened in the budget as a result of dwindling property and sales tax revenues. Budget cuts and layoffs followed. To complicate matters, the city became embroiled in scandal when six city police officers, including two high-ranking officials, were charged with bribery and embezzlement early in 2014. With one-third of the police force on leave, the sheriff’s department has been contracted to patrol the city. Further jeopardizing the city’s finances is its participation in a joint powers worker’s compensation fund, MBASIA, which, according to the latest city audit, has $10 million in liabilities and a negative net position. All of this has come at a time when the city, where citizens earn a median salary of $18,885, is most in need of strong leadership to stabilize its finances. Current officials are working hard to get the city back on track. Looking forward, King City’s finances may benefit from a one-half cent tax increase scheduled to go into effect in April 2015. Funds from the tax increase will be used to rebuild the city’s reserves and police force.

Sources:
City Prepares to Make Budget Cuts, Considers Layoffs, Jan 26, 2011, King City Rustler
http://www.kingcityrustler.com/v2_news_articles.php?heading=0&story_id=600&page=72

City Continues to Work Toward Closing $150,000 Budget Gap, March 30, 2011, King City Rustler
http://www.kingcityrustler.com/v2_news_articles.php?heading=0&page=72&story_id=673

King City Police Officers Arrested in corruption scandal, Feb. 25, 2014
http://www.montereyherald.com/news/ci_25223763/king-city-police-officers-arrested-corruption-scandal

City of King 2013 Comprehensive Audited Statement, June 30, 2014
http://rpt.civicpartner.com:90/cafr/490DC870-C2FF-4BAC-8A81-DED72E264E31.pdf

City of King, CA Income an Economics, USA City Facts, 2013
http://www.usacityfacts.com/ca/monterey/king-city/

King City Makes Most Financially Distressed City List, The Salinas Californian, Nov. 6, 2014
http://www.thecalifornian.com/story/news/local/2014/11/06/king-city-makes-financially-distressed-city-list/18595461/

(3)  SUTTER CREEK  –  Default Probability, 2.79%

Once a bustling mining boomtown, Sutter Creek has settled into a quaint, historic town where citizens make ends meet on a modest median income of $25,510. When the city’s general fund deficit ballooned from $150,000 in 2008 to more than $1 million in 2010 and 2011, auditors raised doubts about its ability to continue as a going concern. They also made note of the city’s incomplete financial records, as well as weaknesses in financial reporting procedures. Council members took corrective action to simplify the budgeting process and trim down costs for Fiscal Year 2012-2013. Cost-cutting strategies included steep program and expense reductions, and outsourcing functions when possible. Unfortunately, these actions may not be enough to keep the general fund afloat as the city faces a calPERS increase from 28 percent to 33 percent, and an increase in health benefit costs of $200 monthly per SEIU 1021 member. These increases, coupled with the city’s $100,000 general fund repayment obligation leave Sutter Creek’s fund balance in a vulnerable financial position for the foreseeable future.

Sources:

Sutter Creek City Council, Aug. 5, 2009, tspntv.com
http://webcache.googleusercontent.com/search?q=cache:12LDPkg7MFcJ:www.tspntv.com/item/7143-sutter-creek-city-council+&cd=1&hl=en&ct=clnk&gl=us

City of Sutter Creek 2010 Audit
http://www.cityofsuttercreek.org/docs/063010-COSC-AuditedFinancialStatement.pdf

City of Sutter Creek 2011 Audit
http://cityofsuttercreek.org/agendasminnutes2013.html

City of Sutter Creek 2012 Audit
http://www.cityofsuttercreek.org/docs/2012%20Audited%20Financials.pdf

City of Sutter Creek 2013-2014 Final Budget, June 17, 2013
http://www.cityofsuttercreek.org/docs/031814-FinalBudget-2013-2014.pdf

City of Sutter Creek, CA Income and Economy, USA City Facts, 2013
http://www.usacityfacts.com/ca/amador/sutter-creek/

(4)  IONE  –  Default Probability, 2.17%

Officials in historic Ione have struggled to get a firm grip on the city’s finances for years, depleting reserves and making cuts to balance the budget. On numerous occasions, auditors have commented on the city’s inconsistent accounting methods and habitual inter-fund borrowing. In 2011, miscalculations and erroneous revenue projections left a $500,000 hole in the city’s budget. A 2011-2012 Amador County Grand Jury Report revealed multiple instances of mismanagement and questionable fiscal practices. The city has since made efforts to rectify its past issues. However, citizens of Ione, who enjoy a relatively high median income of $34,514, remain apprehensive about the future of their close-knit community.

According to recent public records, Ione’s current budget priorities include building a reserve fund and paying down principal and interest on inter-fund loans, but both will present an ongoing challenge as the city struggles to keep pace with rising pension liabilities. While the city expects to see a modest five percent increase in tax revenues over the current fiscal year, grant funds are expected to decrease. Under the circumstances reducing the city’s structural deficit will be a long-term undertaking.

Sources:

Lone Faces Massive Budget Shortfall, Oct. 12, 2011, CBS Sacramento
http://sacramento.cbslocal.com/2011/10/12/ione-faces-massive-budget-shortfall/

2011-12 Amador County Grand Jury Report: City Administration City of Ione, Sept. 4, 2012
http://www.voiceinione.com/Documents/GrandJuryReports/2011-2012/2011-2012GJR-Response.pdf

City of Ione Finance Workshop FY 2012-2013 Mid-Year Review, Jan. 31, 2013
http://ione-ca.com/home/ione/MyMedia/audits/20120131%20Finance%20Workshop_MY%20Budget%20Review.pdf

City of Ione 2012 Audit Report, June 30, 2013
http://ione-ca.com/home/ione/financials.htm

City of Ione, CA Income and Economy, 2013, USA City Facts
http://www.usacityfacts.com/ca/amador/ione/

Ione Continues to Wrestle with Budget Issues, April 16, 2014, kvgcradio.com
http://www.kvgcradio.com/local-daily-headlines/2997-ione-continues-to-wrestle-with-budget-issues

Ione Council Sees 2014-15 Budget – Enjoys Surplus from Last Year, June 5, 2014, Amador Ledger Dispatch
http://www.ledger-dispatch.com/news/ione-council-sees-2014-15-budget-enjoys-surplus-from-last-year

(5) MAYWOOD  –  Default Probability, 1.46%

By the time the 2008 recession hit Maywood, the city had already been operating with a deficit for several years and had been dipping into reserves to balance the general fund.  A significant part of the problem has been traced back to an underpriced 2003 police contract that cost the city millions annually. By 2010, the Maywood’s financial situation had spiraled into chaos, and the city lost its worker’s compensation insurance coverage and was quickly running out of cash. Following a unanimous vote by city council, the police department was dismantled and replaced by the Los Angeles County Sheriff’s Department, all 100 city workers were laid off and municipal services were outsourced to the neighboring city of Bell for a monthly fee of $50,833. At first, becoming a 100 percent contracted city (the first in the country) appeared to be a brilliant solution to Maywood’s financial problems, but the plan fell apart when evidence of payroll corruption were uncovered in Bell. In the wake of the scandal and resulting criminal investigations, Bell canceled its management agreement. Maywood was left to operate without an official budget for nine months while a brand new mayor tried to pick up the pieces.

Maywood’s 2011 financial statements show that an auditor expressed doubts about the city’s ability to continue as a going concern. At the close of 2013, the city had accumulated a $500,000 deficit. Moderate revenue increases and surpluses are projected for Fiscal Years 2015 and 2016. Nevertheless, the city’s ability to remain solvent remains in jeopardy.

Sources:

City of Maywood 2008-2009 Budget Report
http://www.cityofmaywood.com/index.php?option=com_content&view=article&id=144&Itemid=145

Maywood to Lay off all City Employees, Dismantle Police Department, June 22, 2010, Los Angeles Times
http://latimesblogs.latimes.com/lanow/2010/06/sheriffs-dept-to-patrol-maywood-while-city-employees-now-face-lay-offs.html

Maywood, CA Plans to Disband ALL City Services, June 23, 2010, Huffington Post
http://articles.latimes.com/2011/may/14/local/la-me-05-14-maywood-20110514

California City That Outsourced Everyone is Snarled by Pay Scandal in Bell, Aug. 3, 2010, Bloomberg
http://www.bloomberg.com/news/2010-08-03/california-city-that-outsourced-everyone-is-snared-by-pay-scandal-in-bell.html

Maywood Strives to Bring Order to Financial Chaos, May 14, 2011, Los Angeles Times
http://articles.latimes.com/2011/may/14/local/la-me-05-14-maywood-20110514

Maywood passes Budget for 2014-15, Oct. 17, 2014, Los Angeles Wave

Maywood, CA Income and Economics, USA City Facts, 2013
http://www.usacityfacts.com/ca/los-angeles/maywood/economy/

(6)  ATWATER  –  Default Probability, 1.22%

Atwater city council declared a fiscal emergency in October of 2012. The city cited ongoing structural deficits and negative fiscal impacts from the state’s elimination of redevelopment agencies for its financial hardships. Since the beginning of the recession the city’s revenues failed to keep pace with expenses, leading to mounting debts and a negative general fund balance in 2011. Reserve funds were depleted to help finance an $85 million waste water treatment plant. By 2013, the city faced structural deficits of more than $4 million in the general fund and enterprise funds. During the months following the emergency declaration, the city responded to these economic challenges by dramatically reducing its workforce, cutting employee wages by five-percent and passing the Measure H half-cent sales tax increase to fund public safety.

With a relatively high unemployment rate of 14.7-percent and a median income of $23,083, Atwater citizens are in no position to shoulder the city’s financial problems. Unfortunately, city officials had to balance the current budget through a combination of utility rate increases and continued reductions in operating expenses. City services remain at a minimum, and staffing levels are down from 134 positions in 2008 to just 78 in 2014, a total reduction of 42-percent. Though workers have continued to absorb a significant part of the burden through mandatory 10-percent furloughs and increased health costs, the city’s financial condition remains weak. Significant increases to calPERS retirement costs loom on the horizon, and the city continues to operate without the cushion of reserve funds. The local economy suffered another setback when Mi Pueblo Foods, which served as the anchor store of the Bellevue Road Shopping Center, closed its doors in August 2014 and laid off 91 employees. With no additional revenue increases projected over the next five years and little left to cut from the budget, the city’s solvency remains doubtful.

Sources:

Ten California Cities in Distress, May 15, 2013, USA Today
http://www.usatoday.com/story/news/nation/2013/05/15/ten-california-cities-in-distress/2076217/

City of Atwater Comprehensive Audited Financial Report, June 30, 2013
http://www.atwater.org/doc_files/Atwater%20Fin%20Stmts%206-30-13.pdf

Atwater Hires a New Finance Chief, Sept. 9, 2014, Merced Sun Star
http://www.mercedsunstar.com/2014/09/09/3839325/atwater-hires-a-new-finance-chief.html

Atwater Adopts Barely Balanced Budget, May 6, 2014, Merced Sun Star
http://www.mercedsunstar.com/2014/06/24/3716140/atwater-adopts-barely-balanced.html

Mi Pueblo Foods Closing in Atwater, June 16, 2014, Modesto Bee
http://www.modbee.com/incoming/article3166434.html

Atwater, CA Income and Economy, USA City Facts
http://www.usacityfacts.com/ca/merced/atwater/economy/

(7)  HURON  –  Default Probability, 1.08%

 When the majority of cities started feeling the impacts of the recession in 2008, the farming economy of Huron had already reached a low point. Miles of fields that produced Huron’s agribusiness economy dried up as increasing federal restrictions reduced water allocations to a trickle. Huron’s “cash driven” migrant economy also dried up as workers left in droves for employment in neighboring cities, taking their money with them. The city’s annual budget provides for only the most basic services; there is no fire department, no hospital and no high school. In a city where the median household income is $21,041 and nearly half of the citizens live below the poverty line, crime is a persistent issue. On Nov. 5, 2013, voters passed Measure P, a one-cent sales tax increase to fund additional police services. Nevertheless, the city’s budget remains inadequate to meet the basic needs of the community. Auditors expressed a negative opinion of the city’s 2013 financial statements, citing a general fund deficit of $494,911 and a cash balance of $0. Despite a significant decrease in expenditures over a three-year period, the city has also been cited for using restricted funds to subsidize the general fund. With unresolved deficits and no reserves, the Huron’s financial situation truly appears to be on the verge of collapse.

Sources:

California’s Disappearing Towns – Huron May Not Be Here a Year from Now, July 13, 2009, New American Media
http://news.newamericamedia.org/news/view_article.html?article_id=fe824636288f2231f5e75d0e0b6d7ca3

City of Huron Police Services Sales Tax Increase, Measure P (November 2013), Ballotopedia
http://ballotpedia.org/City_of_Huron_Police_Services_Sales_Tax_Increase,_Measure_P_(November_2013)

City of Huron 2013 Comprehensive Audited financial Report
Huron city_CAFR_2013.pdf

City of Huron Fast Facts, 2014, Fresno Council of Governments
City of Huron – Fast Facts | Fresno Council of Governments

(8)  CHICO  –  Default Probability, 0.88%

In 2013, questions raised by concerned city officials and third-party auditors exposed a $15 million deficit that had accumulated between 2007 and 2012. During those years, negligent auditors allowed the city’s eroding fiscal condition to slide while city council made empty promises to enforce stricter budgetary controls. As Chico’s revenues dwindled, the council reduced personnel costs through attrition, early retirements and layoffs, eventually cutting 70 positions including 19.5 positions in public safety. When workforce cuts failed to produce the savings needed to balance the budget, officials depleted reserves and relied heavily on inter-fund transfers to subsidize yearly general fund shortfalls, accumulating debts of $13.5 million in the capital and enterprise funds. By the end of 2013, officials were pressed to enact an aggressive debt repayment plan to prevent auditors from stating a negative opinion of the city’s 2012 financial statements. The 10-year deficit reduction plan, passed by city council in December of 2013, prioritized reducing existing deficits and restricted the use of new revenue sources. Fiscal Year 2013-2014 budget balancing measures included a five-percent reduction in wages and benefits, an additional workforce reduction of 50 positions (13%), $5 million in general fund cuts, and $13.1 million in debt reimbursements to restore the city’s depleted funds.

As Chico recovers, new development projects have been downsized to reflect the city’s long-term financial reality. It has been estimated that it will take the city 15 years to pay off current debts and restore reserve funds. The city’s struggle to catch up despite flat revenues reflects the hardship felt by Chico citizens who face an unemployment rate of 10.9 percent and scrape by with a median income of $17,847. The city experienced another setback with the 2012 defeat of Measure J, a tax on electronic communications, which leaves a $900,000 hole in the yearly general fund budget. Covering the loss will be a challenge as the city begins to make debt payments in Fiscal Year 2015-2016. The initial payment of $800,000 is scheduled to increase to $1.5 million, and yearly payments will continue until 2030 when the city’s debts are paid and $13.4 million is restored to its reserve funds.

Sources:

City of Chico 2012-2013 Annual Proposed Budget
http://www.chico.ca.us/finance/documents/2012-13CityAnnualPROPOSEDBudget.pdf

City of Chico Utility Users Tax, Measure J, Nov, 12, 2012, Ballotopedia
http://ballotpedia.org/City_of_Chico_Utility_Users_Tax,_Measure_J_(November_2012)

City of Chico 2013 Comprehensive Annual Report, June 30, 2013
http://www.chico.ca.us/finance/documents/CAFRFinal_000.pdf

Debt Catches up to Chico City Government, March 20, 2014, Chico ER News
http://www.chicoer.com/news/ci_25382327/debt-catches-up-chico-city-government

Chico Council Adopts $42.6 Million General Fund Budget, June 17, 2014, Chico ER News
http://www.chicoer.com/news/ci_25984458/chico-council-adopts-42-6-million-general-fund

Chico City Councilors React to Grand Jury Report, June 26, 2014, Chico ER News
http://www.chicoer.com/news/ci_26042532/chico-city-councilors-react-grand-jury-report

Chico, CA Income and Economy, 2013, USA City Facts
http://www.usacityfacts.com/ca/butte/chico/economy/

(9)  CALIPATRIA  –  Default Probability, 0.84%

The city of Calipatria has been running a deficit, with no reserves, since 2009. As revenues tanked, the council increasingly relied on inter-fund loans to supplement the general fund. By 2012, the city enacted across-the-board furloughs and eliminated council members’ monthly stipend to close the growing $112,000 gap. When the deficit grew to more than $400,000 in 2013, with nothing left to trim from the budget, city council considered the option of consolidation but could not reach a reasonable compromise on the issue. Citizens of Calipatria have maintained a median income of roughly $24,000, but without political consensus or a reserve fund, Calipatria’s future prosperity is in doubt.

Sources:

Calipatria Staff Looking Where to Make Cuts, July 1, 2011, Imperial Valley Press
http://articles.ivpressonline.com/2011-07-01/mayor-raul-navarro_29728998

Furlough Approval in Calipatria, June 26, 2012, Imperial Valley Press
http://articles.ivpressonline.com/2012-06-26/furlough_32445379

Calipatria Reviews Consolidation Options, May 30, 2013, Imperial Valley Press
http://articles.ivpressonline.com/2013-05-30/mayor-raul-navarro_39636628

Calpatria, CA Income and Economy, 2013 USA City Facts
http://www.usacityfacts.com/ca/imperial/calipatria/economy/

(10)  RIDGECREST  –  Default Probability, 0.76%

The state’s dissolution of redevelopment agencies in February 2012 created a ripple effect that forced Ridgecrest to declare a fiscal emergency on Jan. 11, 2012. For Ridgecrest, the loss of its redevelopment agency meant the city also lost money on investments, funding for key staff positions and additional property tax revenue. And it came at a time when the city could not afford to sustain any more losses. The general fund was already $4.25 million in debt to the wastewater fund for a cash flow advance city council approved in September of 2011. Measures implemented to address the city’s declining financial condition, including furloughs, layoffs, deferred maintenance and severe cuts to non-essential services, were insufficient to compensate for ongoing losses. At the close of 2012, the general fund had only $7,600 in cash.

Following the declaration of a fiscal emergency, Ridgecrest citizens passed Measure L, a 75 percent sales tax increase to fund public safety and essential services for five years, effective Oct. 1, 2012. Original Measure L revenue estimates of $1.8 million were adjusted down to $1.5 million – then down again to $1.3 million. After passing a shoestring budget for Fiscal Year 2013-2014, the city ran out of money mid-year and had to approve budget increases in December to pay for services rendered as it struggles to restore services and rebuild its workforce after a cumulative reduction of 22.5 percent.

Sources:

City of Ridgecrest Resolution Declaring a Fiscal Emergency, Jan. 11, 2012
http://ridgecrest-ca.gov/uploadedfiles/Government/RESO%2012-04%20-%20FISCAL%20EMERGENCY.pdf

City of Ridgecrest Sales Tax, Measure L, June 2012
http://ballotpedia.org/City_of_Ridgecrest_Sales_Tax,_Measure_L_(June_2012)

City of Ridgecrest 2012-2013 Approved Budget
http://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Budget_2012-13_with_Reso_attached.pdf

City Presents Draft Budget, July 4, 2012, News Review
http://www.newsreviewiwv.com/zarchives/2012-05-23/2012-05-23-story-01.html

Audit Presents Sobering Financial Outlook, Feb. 8, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20130208/NEWS/130209805?refresh=true

City of Ridgecrest 2012 Comprehensive Audited Financial Report, June 30, 2013
https://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Ridgecrest_CAFR2012FINAL_LetterheadSecured.pdf

City’s Obligations Mainly Lie in Wastewater Fund, March 27, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20130327/News/130329790

Council to Hear Budget Increase Requests, Dec. 3, 2013, Ridgecrest Daily Independent
http://www.ridgecrestca.com/article/20131203/News/131209920

City of Ridgecrest 2013 Comprehensive Audited Financial Report, June 30, 2014
https://ridgecrest-ca.gov/uploadedfiles/Departments/Finance/Ridgecrest_CAFR_2013_-_Final.pdf

(11)  SAN FERNANDO  –  Default Probability, 0.75%

San Fernando’s budget reflects the city’s history of extreme highs and lows. During high times in 2008, the city opened a $14.5 million aquatics center with an Olympic-sized pool, paid in part by property taxes. Shortly thereafter, the City’s economy began a steady decline, and by 2009 it was clear that aquatics center revenues could not keep pace with the cost of running the facility. In 2009 city council closed the center to the public for nine months out of the year to reduce costs. As the economy slumped, San Fernando’s median income dipped to $22,838 and unemployment grew to 12 percent. The city’s financial condition continued to slide as council members found themselves mired in scandal. In 2012 citizens pushed back in an election to recall corrupt council members, and under new leadership the city has begun the process of stabilizing its finances. Drastic cost-saving cuts, including layoffs and furloughs, have been made to address the city’s deficits. While unemployment has dropped to eight percent and the local retail outlook has improved, revenues remain relatively flat.

In 2013, auditors expressed doubts about the city’s fund’s ability to continue as a going concern, citing lack of liquidity in the general fund and the grants special revenue fund. Facing $4.2 million in obligations to the enterprise funds and no general fund reserves, city council declared a fiscal emergency, followed by passage of the Measure A one-half cent tax increase in June of 2013. Revenues from the tax increase will be used to pay off existing debt and build reserves. Despite higher than projected Measure A revenues, the general fund ended 2013 with a negative balance and a growing unfunded pension liability. In an effort to alleviate some of the hardship, city council recently reached an agreement transferring financial and operational responsibility of the Aquatic Center to Los Angeles County. A modest general fund surplus is projected for 2014 and will be used to reduce deficits in the general fund and self-insurance fund, but ongoing annual surpluses will be required to eliminate structural deficits, build reserves and meet growing expenses.

View rebuttal, posted Nov. 11th: “City of San Fernando Responds to CPC Study

Sources:

San Fernando Voters Recall Mayor Brenda Esqueda, Councilwoman Maribel De La Torre, November 6, 2012, Daily News
http://www.dailynews.com/government-and-politics/20121107/san-fernando-voters-recall-mayor-brenda-esqueda-councilwoman-maribel-de-la-torre

City of San Fernando City Council Agenda, March 4, 2013
http://www.ci.san-fernando.ca.us/city_government/city_council/agendas_minutes/2013/3-4-13%20CC%20Packet.pdf

City of San Fernando 2013 Comprehensive Annual Financial Report, June 30, 2013
http://www.ci.san-fernando.ca.us/city_government/departments/finance/divisions/cafr.shtml

San Fernando, CA Income and Economy, USA City Facts, 2013
http://www.usacityfacts.com/ca/los-angeles/san-fernando/economy/

San Fernando Annual Report – Measure A: ½ Cent Transaction & Use Tax, September 15, 2014
http://www.ci.san-fernando.ca.us/city_government/departments/finance/forms_docs/Measure%20A%20Annual%20Report%202014.pdf

City Council Appears Ready to Hand Over Aquatic Center to Los Angeles County, October 4, 2014, San Fernando Sun
http://www.sanfernandosun.com/news/article_618dfbfa-4a4e-11e4-a7f1-332869db1ff8.html

(12)  BLYTHE  –  Default Probability, 0.74%

When city council attempted to declare a fiscal emergency on March 2, 2009, the general fund had been operating with structural deficits for 10 consecutive years – by 2008 the negative balance was close to $3.4 million. The city’s golf course and airport funds were also running deficits in excess of $1 million. The measure failed to pass by one vote. Auditors raised doubts about the city’s ability to continue as a going concern. City council narrowly reduced the deficit, shaving off $1 million through efforts including layoffs, drastic cuts to expenditures and essential services, and the sale of unneeded city assets. However, an end to the city’s financial instability was nowhere in sight. In 2012, the council rejected the proposed budget due to disputes about future funding of the Joe Wine Rec Center, and a continuing resolution was passed to allow the city to continue to operate for 45 days while the council drafted a new budget. Despite conflicts, council members reluctantly passed a “bare bones, keep the lights on budget” by the end of July.

The 2014-2015 budget has a balanced spending plan, but negative fund balances persist. The city’s workforce remains staggeringly low – down from 135 full-time positions in 2008 to just 69 in 2014. City infrastructure suffers from years of deferred maintenance, and the fire department is overdue for new protective gear. On July 29, 2014, city council passed a resolution declaring a fiscal emergency through June 30, 2015, and the Nov. 4, 2014 ballot will include measures to increase the sales tax by one-half cent and TOT by 3%. Citizens, who face an unemployment rate of 9% and struggle to pay their own bills on a median income of $16,877, remain skeptical of the city council’s ability to manage a successful financial recovery.

Sources:

Blythe City Council Continuing Meeting Agenda, March 2, 2009

City Deficit Nears $3.4 Million, June 12, 2009, Palo Verde Valley Times
http://paloverdevalleytimes.com/main.asp?TypeID=1&ArticleID=11146&SectionID=167&SubSectionID=468&Page=2

Blythe City Council Rejects Proposed Budget, June 28, 2012, Palo Verde Valley Times
http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=17343

Council Approves Fiscal Year Budget after Contentious Debate, July 26, 2012
http://paloverdevalleytimes.com/main.asp?SectionID=1&SubSectionID=1&ArticleID=17441

Blythe City Council Special Meeting Agenda, June 29, 2014
http://www.cityofblythe.ca.gov/ArchiveCenter/ViewFile/Item/620

City of Blythe Demographics
http://www.cityofblythe.ca.gov/ArchiveCenter/ViewFile/Item/620

(13)  FIREBAUGH  –  Default Probability, 0.74%

The farming community of Firebaugh in Fresno County has been hit hard by the economic impacts of regional droughts. Since 2007, the agricultural industry that propped up Firebaugh’s economy has felt the squeeze of increasingly reduced federal water allocations from the Central Valley Project. Firebaugh’s hardships were compounded by the recession, and the city began enforcing mandatory furlough days for all employees when tax revenues bottomed out in 2009. Things went from bad to worse as local businesses closed or downsized operations – in 2010 Gargluilo Inc., one of the city’s top employers, cut its workforce by 33%, laying off 262 workers. The city’s unemployment rate spiked to 28%, and per capita incomes dwindled to $10,133. As revenues sagged, local businesses called in overdue bills for years of unpaid utility tax refunds, pushing the city into a $1 million deficit. With no relief in sight, officials began balancing general fund deficits with money transferred from water, sewer and airport funds. Of the $815,000 in debts incurred by the city’s funds through 2012, an estimated $230,000 remains unpaid as of June 2013 – the total amount is expected to be repaid by 2016.

City council declared a fiscal emergency on February 4, 2013, citing a negative cash balance of $834,695.00 and $0 cash reserves. In July of 2013, the city held a stand-alone election to reduce utility user tax rates and eliminate the $500 service cap that allowed businesses to receive yearly refunds. The tax reforms will provide an estimated $240,000 in annual revenue. Unfortunately that revenue increase was undercut by the closure of Westside Ford in July 2013. According to the city manager, the closure of the dealership – one of the city’s top revenue sources – equates to a loss of $77,000 in general fund revenue. Crippling economic challenges continue to hinder a full recovery as Firebaugh officials work to restore reserve funds, end mandatory furloughs, and reinstate two police positions that were cut from previous budgets.

Sources:

With Little Water Coming, Small Town Faces Extinction, May 14, 2009, Contra Costa Times
http://www.contracostatimes.com/bay-area-drought/ci_12302104

Major Employer in Firebaugh Announces Layoffs, May 23, 2010, ksby6 News

Firebaugh Ford Dealership Prepares to Close, Jan. 30, 2013, abc30 News
http://abc30.com/archive/8971769/

The City Council/Successor Agency of the City of Firebaugh Meeting Minutes, Feb. 4, 2013
http://www.ci.firebaugh.ca.us/pdf/Minutes13-02-04.pdf

Firebaugh Hopes Utility Tax Tweak Will Lead to Better Budget, Aug. 5, 2013, TMC News
http://www.tmcnet.com/usubmit/2013/08/05/7327837.htm

City of Firebaugh 2014-2015 Budget
http://www.ci.firebaugh.ca.us/pdf/budget_fy14-15.pdf

City of Firebaugh Demographics
http://firebaugh.org/demographics/

*   *   *

COMPLETE CITY AND COUNTY RANKINGS

The following table shows all the cities and counties we analyzed in order from most to least vulnerable. We also show the estimated default probability calculated by the model.  This is our measure of the probability that the local government will file for bankruptcy within one year.  Because municipal bankruptcy is a rare event, all the probabilities are quite low.  Readers focusing on any given city may be more interested in the ranking and the distance between its default probability score and those of others.

The table also shows the latest year for which audited financials were available when we finished data collection earlier this month.  The unavailability of financial statements fifteen months after the end of the fiscal year is, in itself, a cause for concern.  The State Controller’s Office publishes the filing status of local agency financial audits every two weeks. The latest version of this report, including a complete list of delinquent filers, is available at http://www.sco.ca.gov/Files-AUD/SingleAud/sa_10_15_2014.pdf.

Details behind the default probability scores shown in the table below are available at Civic Partner’s web site:  http://www.publicsectorcredit.org/ca. This web site is currently in a testing phase – we welcome reader feedback on this tool.

*   *   *

20141029-2_Joffe

*   *   *

CONCLUSION

Elected officials, financial managers and concerned citizens are generally aware of their municipality’s financial condition. But due to the unavailability of good data, they are less aware of how their city or county compares with its peers.

By systematically collecting and analyzing audited financial statements from California local governments, CPC and Civic Partner have provided this missing context. We look forward to analyzing these reports each year and sharing our findings with policymakers and the general public.

For the cities on our distressed list, we hope this report serves as a wake-up call.  While officials in these cities were generally aware that they were facing fiscal challenges, they now know that their issues are particularly acute compared with peer municipalities. Also for cities and counties just below our “top ten”, we hope the report serves as a warning to take corrective action before they take their place at the top of future ranking.

*   *   *

About the Authors:

Julie Lark is an AmeriCorps VISA alumni who has spent several years working with non-profits to build stronger, more prosperous communities. Her most recent projects include working on a research study for Public Sector Credit Solutions. She has a BA in English/Communications from Shippensburg University and is pursuing her MPA. In her spare time, Julie enjoys traveling and spending time with family.

Marc Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Prior to starting PSCS, Marc was a Senior Director at Moody’s Analytics. He has an MBA from New York University and an MPA from San Francisco State University.

Ed Ring is the executive director for the California Policy Center. Previously, as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.

California Voters Asked for Approval to Borrow $156 Billion for School Construction Since 2002

California voters are generally unaware of how much money K-12 school districts and community college districts have borrowed in recent years to fund construction projects.

Nor are they aware of the amount of principal and interest (debt service) these districts now owe to municipal bond investors.

But a compilation of all local educational construction bond measures considered in California since the passage of Proposition 39 in November 2000 (and the resulting reduction of the voter threshold for approval of a bond measure from 2/3 to 55%) shows a relentless government quest to borrow money for school construction and pay it back later.

California Voters Asked to Borrow $156 Billion for K-12 School and Community College District Construction Since Proposition 39

Record Number of California School Districts Want to Borrow Up to $11.8 Billion

A record number of K-12 school and community college districts in California want voters to approve bond measures for construction in the November 4, 2014 election (see chart below). Here are some preliminary findings from an ongoing California Policy Center study on construction bonds for educational districts in California. The complete study will be released later this year.

On November 4, California voters could potentially authorize new debt that over the next 30 or more years will cost taxpayers over $20 billion in repayment of principal and paying interest on bonds. The California Policy Center seeks to increase voter awareness of how bond measures increase public debt by highlighting a simple but often overlooked fact:

When voters approve bond measures for educational districts, they authorize the district to borrow money from investors and then pay that money back over time, with interest.

Voting on a bond measure requires more than a quick response based on emotional appeals. Voters need to look at the debt already accumulated by the school or college district and consider whether it is wise for the district to take on additional debt.

One example is the San Mateo Community College District, which is asking voters to authorize borrowing $388 million for construction to add to the $1.2 billion it now owes to investors as debt service from two earlier bond measures. (See document below.)

Another example is the Pittsburg Unified School District, which is asking voters to authorize borrowing $85 million for construction to add to the $478 million it now owes to investors as debt service from three earlier bond measures. (See document below.)

A third example is Napa Valley College, which is asking voters to authorize borrowing $198 million for construction. In 2002 voters authorized this district to borrow $133.8 million, but today it has $229 million in debt service – in part because of Capital Appreciation Bonds. (See document below.)

Not only are the amount of these bonds and their interest costs over time of critical importance, but the structure of bond sales often mislead voters. Some of California’s 108 educational districts asking voters to approve bond measures in November are likely to backload taxpayer repayments many years into the future through the scheme of capital appreciation bonds. Lightly regulated in California as a result of a new law (Assembly Bill 182) enacted in 2013, capital appreciation bonds are similar to the types of subprime loans that lured buyers into borrowing more than they could afford by putting balloon payments years in the future.

If a school district does not expressly prohibit capital appreciation bonds with its bond resolution, voters should consider the possibility that the district may use this unorthodox financing practice and burden future generations of Californians with excessive debt.

It’s important for local news media to make voters aware of the definition of a bond, the amount of existing bond debt for a school district, the true cost over time of a bond measure when interest is included, and the likelihood that a school district will sell capital appreciation bonds.


On the November 4, 2014 ballot in California are a record 113 individual bond measures for 108 local educational districts. Voters are being asked to authorize these districts to borrow a total of $11.8 billion. (See below.)

Previous amounts requested from California voters in November general elections:

2012 – 106 bond measures for 105 educational districts totaling $14.4 billion

2010 – 63 bond measures for 63 educational districts totaling $4.2 billion

2008 – 96 bond measures for 92 educational districts totaling $22.5 billion (includes $7 billion for Los Angeles Unified School District)


113 Bond Measures for 108 Educational Districts: Borrowing $11.8 Billion

California Educational District

Measure

County/Counties

Amount

1

North Orange County Community College District

Measure J

Los Angeles/Orange

$574,000,000

2

Santa Clara Unified School District

Measure H

Santa Clara

$419,000,000

3

Sonoma County Junior College District

Measure H

Marin/Mendocino/Sonoma

$410,000,000

4

Moreno Valley Unified School District

Measure M

Riverside

$398,000,000

5

Corona-Norco Unified School District

Measure GG

Riverside

$396,000,000

6

San Mateo County Community College District

Measure H

San Mateo

$388,000,000

7

Norwalk-La Mirada Unified School District

Measure G

Los Angeles

$375,000,000

8

Orange Unified School District

Measure K

Orange

$296,000,000

9

Fremont Union High School District

Measure K

Santa Clara

$295,000,000

10

Mt. San Jacinto Community College District

Measure AA

Riverside

$295,000,000

11

Santa Barbara Community College District

Measure S

Santa Barbara

$288,000,000

12

San Luis Obispo County Community College District

Measure L-14

Monterey/San Luis Obispo

$275,000,000

13

Anaheim Union High School District

Measure H

Orange

$249,000,000

14

Downey Unified School District

Measure O

Los Angeles

$248,000,000

15

Vallejo City Unified School District

Measure E

Solano

$239,000,000

16

Hayward Unified School District

Measure L

Alameda

$229,000,000

17

Desert Sands Unified School District

Measure KK

Riverside

$225,000,000

18

Hesperia Unified School District

Measure M

San Bernardino

$207,000,000

19

Napa Valley Community College District

Measuer E

Napa/Sonoma

$198,000,000

20

Conejo Valley Unified School District

Measure I

Ventura

$197,000,000

21

ABC Unified School District

Measure AA

Los Angeles

$195,200,000

22

Folsom Cordova Unified School District

Measure G

Sacramento

$195,000,000

23

Vacaville Unified School District

Measure A

Solano

$194,000,000

24

Escondido Union School District

Measure E

San Diego

$182,100,000

25

Alameda Unified School District

Measure I

Alameda

$179,500,000

26

San Luis Coastal Unified School District

Measure D-14

San Luis Obispo

$177,000,000

27

Fullerton Joint Union High School District

Measure I

Los Angeles/Orange

$175,000,000

28

Santa Rosa High School District

Measure I

Sonoma

$175,000,000

29

Manteca Unified School District

Measure G

San Joaquin

$159,000,000

30

Los Altos School District

Measure N

Santa Clara

$150,000,000

31

Saugus Union School District

Measure EE

Los Angeles

$148,000,000

32

Torrance Unified School District

Meaasure T

Los Angeles

$144,300,000

33

Jurupa Unified School District

Measure EE

Riverside

$144,000,000

34

Jefferson Union High School District

Measure J

San Mateo

$133,000,000

35

Natomas Unified School District

Measure J

Sacramento

$129,000,000

36

Salinas Union High School District

Measure B

Monterey

$128,000,000

37

New Haven Unified School District

Measure M

Alameda

$125,000,000

38

Stockton Unified School District

Measure E

San Joaquin

$114,000,000

39

Tahoe-Truckee Unified School District

Measure U

Nevada/Placer

$114,000,000

40

East Side Union High School District

Measure I

Santa Clara

$113,200,000

41

Compton Community College District

Measure C

Los Angeles

$100,000,000

42

Evergreen School District

Measure M

Santa Clara

$100,000,000

43

Murietta Valley Unified School District

Measure BB

Riverside

$98,000,000

44

Azusa Unified School District

Measure K

Los Angeles

$92,000,000

45

Carpinteria Unified School District

Measure U

Santa Barbara

$90,000,000

46

Oak Grove School District

Measure P

Santa Clara

$89,800,000

47

Pittsburg Unified School District

Measure N

Contra Costa

$85,000,000

48

El Monte City School District

Measure M

Los Angeles

$78,000,000

49

Woodland Joint Unified School District

Measure S

Sutter/Yolo

$78,000,000

50

Berryessa Union School District

Measure L

Santa Clara

$77,000,000

51

Madera Unified School District

Measure G

Madera

$70,000,000

52

Porterville Unified School District

Measure B

Tulare

$67,000,000

53

Tahoe-Truckee Unified School District

Measure E

El Dorado/Placer

$62,000,000

54

Snowline Joint Unified School District

Measure L

Los Angeles

$60,000,000

55

Western Placer Unified School District

Measure A

Placer

$60,000,000

56

Atascadero Unified School District

Measure B-14

San Luis Obispo

$58,000,000

57

Lake Tahoe Community College District

Measure F

El Dorado

$55,000,000

58

Hermosa Beach City School District

Measure Q

Los Angeles

$54,000,000

59

Santa Rosa Elementary School District

Measure L

Sonoma

$54,000,000

60

John Swett Unified School District

Measure M

Contra Costa

$52,000,000

61

Torrance Unified School District

Measure U

Los Angeles

$50,000,000

62

Washington Unified School District

Measure V

Yolo

$49,800,000

63

Eureka City School Districct

Measure S

Humboldt

$49,750,000

64

Belmont-Redwood Shores School District

Measure  I

San Mateo

$48,000,000

65

Santa Maria-Bonita School District

Measure T-14

San Luis Obispo/Santa Barbara

$45,000,000

66

Ramona Unified School District

Measure Q

San Diego

$40,000,000

67

Rio School District

Measure G

Ventura

$38,500,000

68

Central School District

Measure N

San Bernardino

$35,000,000

69

Ojai Unified School District

Measure J

Ventura

$35,000,000

70

Lakeside Union School District

Measure L

San Diego

$31,000,000

71

Bassett Unified School District

Measure V

Los Angeles

$30,000,000

72

Dixie School District

Measure C

Marin

$30,000,000

73

Kentfield School District

Measure D

Marin

$30,000,000

74

Rosemead School District

Measure RS

Los Angeles

$30,000,000

75

Robla School District

Measure K

Sacramento

$29,800,000

76

Hollister School District

Measure M

San Benito

$28,500,000

77

Southern Kern Unified School District

Measure D

Kern

$28,400,000

78

Montecito Union School District

Measure Q

Santa Barbara

$27,150,000

79

National School District

Measure N

San Diego

$26,100,000

80

Cajon Valley Union School District

Measure C

San Diego

$20,000,000

81

West Hills Community College District

Measure T

Kings/ Monterey/San Benito

$20,000,000

82

Woodland Joint Unified School District

Measure T

Sutter/Yolo

$19,000,000

83

Pacific Grove Unified School District

Measure A

Monterey

$18,000,000

84

Lakeport Unified School District

Measure T

Lake

$17,000,000

85

Arvin Union School District

Measure E

Kern

$15,000,000

86

Los Nietos School District

Measure E

Los Angeles

$15,000,000

87

Mendota Unified School District

Measure M

Fresno

$15,000,000

88

Gustine Unified School District

Measure P

Merced

$14,000,000

89

Golden Plains Unified School District

Measure G

Fresno

$13,000,000

90

Los Nietos School District

Measure N

Los Angeles

$13,000,000

91

Palo Verde Community College District

Measure P

Riverside

$12,500,000

92

College School District

Measure Y

Santa Barbara

$12,000,000

93

Greenfield Union Elementary School District

Measure C

Monterey

$10,000,000

94

Greenfield Union Elementary School District

Measure D

Monterey

$10,000,000

95

Lemon Grove School District

Measure R

San Diego

$10,000,000

96

Southern Humboldt Unified School District

Measure X

Humboldt/Mendocino

$10,000,000

97

Bolinas-Stinson Union School District

Measure B

Marin

$9,000,000

98

Fortuna Elementary School District

Measure W

Humboldt

$9,000,000

99

Columbia Elementary School District

Measure E

Shasta

$8,600,000

100

Mojave Unified School District

Measure C

Kern

$8,100,000

101

Yreka Union High School District

Measure H

Siskiyou

$8,000,000

102

McCabe Union Elementary School District

Measure H

Imperial

$7,000,000

103

Oak Grove Union School District

Measure K

Sonoma

$6,000,000

104

Colusa Unified School District

Measure A

Colusa

$5,900,000

105

Laytonville Unified School District

Measure Q

Mendocino

$5,500,000

106

Famersville Unified School District

Measure A

Tulare

$4,800,000

107

Briggs Elementary School District

Measure K

Ventura

$4,500,000

108

East Nicolaus Unified School District

Measure W

Sutter

$4,000,000

109

Pine Ridge ESD

Measure G

Fresno

$4,000,000

110

Tipton Elementary School District

Measure C

Tulare

$3,300,000

111

Cinnabar Elementary School District

Measure J

Sonoma

$2,500,000

112

Jacoby Creek Charter School District

Measure Y

Humboldt

$2,500,000

113

Vallecitos School District

Measure O

San Diego

$2,000,000

TOTAL

$11,775,300,000


San Mateo Community College District Debt Service, obtained from Official Statement dated September 12, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

San Mateo Community College District Debt Service, obtained from Official Statement dated September 12, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Pittsburg Unified School District Debt Service, obtained from Official Statement dated April 17, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Pittsburg Unified School District Debt Service, obtained from Official Statement dated April 17, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Napa Valley College District Debt Service, obtained from Official Statement dated June 3, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

Napa Valley College District Debt Service, obtained from Official Statement dated June 3, 2014 and posted on Electronic Municipal Market Access website of Municipal Securities Rulemaking Board.

The Critical Difference Between Rentier Wealth and Wealth Creation

If you want to understand why our economy is stagnating and wealth inequality is rising, look at the rise of rentier skims and the resulting decline in wealth creation.

To understand why the real economy is stagnating, we have to understand the critical difference between rentier wealth and wealth creation. Rentier wealth is skimmed by fees that provide little to no value to the to the person paying the fee.

The classic example is a fee collected to pass from one fiefdom’s border to the next: no value is provided to the person paying the border fee; it is a rentier skim that transfers wealth from serfs to the fiefdom’s landowning nobility.

In the modern economy, rentier skims take a variety of forms. The government is adept at levying rentier skims. Harsh penalty fees piled on top of minor traffic violations are one example; another is extra fees to “expedite” services government is supposed to provide in a timely manner.

A California architect recently recounted the new fee structure in a Northern California municipality: the fee to have the city planning department review your building permit application leaped to $6,000. Since the department warned applicants it will take at least six months for the agency to process the application, they kindly offer an alternative: for a mere $4,000 more (an “expedited fee”), the applicant can get his application reviewed in a mere four months rather than six months.

This is pure rentier skim.

Planned obsolescence provides many other examples of rentier skims. Microsoft’s operating systems and hardware makers both operate a form of rentier skim, in that each new OS and device offers marginal benefits (if any) in terms of productivity. The rare printer that doesn’t break down in a few years is obsoleted as software drivers are no longer available on the new OS.

Cartels and quasi-monopolies offer a wealth (ahem) of rentier skims. Monopolies can raise prices and degrade services at will. Cartels maintain price controls while denying they do any such thing.

Compare the monthly healthcare insurance fees offered by the handful of providers in your area–the differences are either cosmetic or result from differences in benefits.

Finance offers the richest opportunities for rentier skim. Load up college students with tens of thousands of dollars in high-interest student loans for marginal educations that could be provided at a fraction of the cost (see The Nearly Free University and The Emerging Economy: The Revolution in Higher Education) and what do you get? A nearly lifelong rentier skim off the student debt-serfs.

Higher Education’s Aristocrats: Over five years, administrators enjoyed pay increases of between 40 percent and 135 percent, and as a result each received $450,000 to $3.3 million from cumulative increases by the end of 2012-2013, the most recent year for which tax data is available.

Higher education is basically a multilayered rentier skim.

The net result of an economy of endless rentier skims is stagnation and rising wealth inequality. Money that could be saved and invested in productive enterprises and infrastructure is skimmed off by financial and political Elites.

Simply put, the rich get richer and the poor get poorer. This is the teleology of every rentier economy: the built-in consequence of rentier skims is increasing wealth inequality and economic stagnation.

This reality is easily visible in the data. Note how the wealth of the bottom 90% declined since 2003, while the wealth of the top 5% rebounded smartly.

U.S. Household Wealth before/after Great Recession

20141010_Smith-1

Real median income declined from 2000 to 2014, while net worth (wealth) skyrocketed in the same time frame:

Real Median Income and Household Net Worth in the U.S., 1980-2012

20141010_Smith-2

Rentier skims are naturally owned by the wealthy, so their wealth increases as the earned income of the bottom 90% declines due to the ever-rising costs of multiple rentier skims.

Wealth Distribution in the U.S.

20141010_Smith-3

But this rising tide of wealth is concentrated in the accounts of those who own the rentier skims and the Upper Caste (Clerisy class) that serves them (for example, college administrators, ref. Protecting Elites and the Clerisy Class That Serves Them).

The resulting wealth disparity is made visible in this inverted pyramid of wealth:

The U.S. Wealth-Income Pyramid

 

20141010_Smith-4_450px

If you want to understand why our economy is stagnating and wealth inequality is rising, look at the rise of rentier skims and the resulting decline in wealth creation from productive investment.

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About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

Why Has Classical Capitalism Devolved to Crony-Capitalism?

Here is the quote that perfectly captures our era: “People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.” (John Kenneth Galbraith) The trick, of course, is to mask the unspoken second half of of that statement: everybody else gets destroyed along with the Elites when the system implodes.

Union pension funds: toast. Government employees’ pension funds: toast. 401Ks: toast. IRAs: toast. The echo-bubble in housing: toast. The Fed’s favorite PR cover to cloak the enrichment of their financier cronies, the wealth effect:toast.

The primary tool the Elites use to mask the risk of complete destruction is magical thinking–specifically, that “given enough time, the system will heal itself.”

That’s rich, considering that the Elites’ primary tool of avoiding destruction is crippling the market’s self-healing immune system: price discovery. Thanks to ceaseless interventions by central banks, the price discovery mechanism has been shattered: want to know the price of risk? It’s near-zero. Yield on sovereign bonds? Near-zero. And so on.

Prices have been so distorted (the ultimate goal of Central Planning everywhere, from China to the EU to Japan to the U.S.) that the illusion of stability is impossible without more intervention.

This leads to two self-liquidating dynamics: diminishing returns (every intervention yields less of the desired result) and the Darwinian selection of only those money managers who believe risk has been vanquished.

Everyone who pursues prudent risk management has either been fired or saw the writing on the wall and exited stage right. So the only people left at the gaming tables of the big institutional players are those individuals who are genetically incapable of responding appropriately to rising risk. Those who did have long been fired for “underperformance.”

So how did classical free-market capitalism become state-cartel crony-capitalism, a Ponzi scheme of epic proportions that is entirely dependent on ceaseless central bankperception management and interventions on a scale never before seen?

We can start with these six factors:

1. Those who control most of the wealth are willing to risk systemic collapse to retain their privileges and wealth. Due to humanity’s virtuosity with rationalization, those at the top always find ways to justify policies that maintain their dominance and downplay the distortions the policies generate. This as true in China as it is in the U.S.

2. Short-term thinking: if we fudge the numbers, lower interest rates, etc. today, we (politicians, policy-makers, money managers, etc.) will avoid being sacked tomorrow. The longer term consequences of these politically expedient policies are ignored.

3. Legitimate capital accumulation has become more difficult and risky than buying political favors. Global competition and the exhaustion of developed-world consumers has made it difficult to reap outsized profits from legitimate enterprise. In terms of return-on-investment (ROI), buying political favors is far lower risk and generates much higher returns than expanding production or risking investment in R&D.

4. The centralization of state/central bank power has increased the leverage of political contributions/lobbying. The greater the concentration of power, the more attractive it is to sociopaths and those seeking to buy state subsidies, sweetheart contracts, protection from competition, etc.

5. Any legitimate reform will require dismantling crony-capitalist/state-cartel arrangements. Since that would hurt those at the top of the wealth/power pyramid, reform is politically impossible.

6. Understood in this light, it’s clear that central bank monetary policy—zero-interest rates, asset purchases, cheap credit to banks and financiers, QE, etc.—is designed to paper over the structural problems that require real reform.

Japan is a case in point: the Powers That Be in Japan have put off real reforms of the Japanese economy and political system for 25 years, and they’ve enabled this avoidance by pursuing extremes of fiscal and monetary policy that have eroded the real economy and created long-term structural imbalances.

In this 24 minute video Gordon T. Long and Charles Hugh Smith discuss through the aid of 17 slides the rapid advancement of Crony Capitalism in America. The facts are undeniable, but why is it becoming so obvious and undeniable? Why is it accelerating without any apparent ‘checks and balances’? Where have the safeguards against this happening gone?

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About the Author: Charles Hugh Smith as a writer and financial commentator living in Hawaii. His blog, Of Two Minds.com, is ranked #7 in CNBC’s top alternative financial sites, and is republished on numerous popular sites such as Zero Hedge, Financial Sense, and David Stockman’s Contra Corner. Smith is frequently interviewed by alternative media personalities such as Max Keiser, and is a contributing writer on PeakProsperity.com. This article originally appeared on Smith’s blog, and is republished here with permission.

Where's Genuine Economic Growth Going to Come From?

“We wanted flying cars, and they gave us 140 characters,” said venture capitalist Peter Thiel in 2011. He put his finger on a central dilemma of the New Economy: its innovations can make money (usually through redirecting advertising sales), but they add little or nothing to the overall stock of human knowledge or long-term happiness. Professor Robert Gordon postulated last year that we may have come to the end of the era of perpetual growth. His theory looked foolishly pessimistic, but as the current sluggish expansion limps on, it begins to look more plausible.

Innovation can be closely correlated with the destination of the smartest graduates. The natural optimism of the young leads them to congregate where the intellectual boundaries are being pushed fastest. Over the past 40 years, by and large the brightest graduates have tended to congregate around consulting and finance, a dispiriting observation. Both of those professions, to the extent they have innovated, have produced innovations that have added cost and overhead to the global economy rather than useful output.

In the early days of strategy consulting, in the 1960s and 1970s, the profession appeared truly innovative, producing analytical frameworks such as the Boston Consulting Group’s growth-share matrix that helped managers cope with disparate portfolios of businesses. However, the poor results produced by the 1960s conglomerates showed that disparate businesses should, by and large, be managed separately. The result, as we all learned in exhaustive detail during Mitt Romney’s presidential campaign, was the rise of private equity investing, in which portfolios of disparate businesses were assembled by an equity investor rather than within a conglomerate. The “funny money” era since 1995 has provided spectacular results to private equity investors, but the level of innovation or economic benefit from their activities must be seriously doubted.

The other area of consulting that has metastasized since the 1970s is that of software management: assisting companies to get their computer systems to work with each other, or indeed to work at all. In some cases, such as a medium sized company I came across in the 1990s which lost two years of operations and profit from trying to install an over-complex software system, these consultants also subtract value rather than adding it. Indeed, the consultants employed by Britain’s National Health System, or by the Obamacare designers, seem to have been completely incapable of getting the system to work properly. This is a very lucrative business; it can be made even more lucrative by designing the system to be as complex and time-consuming as possible. In a way, this is innovation; it is certainly not productive.

Financial services doubled their share of economic activity in the 30 years to 2008 as the derivatives revolution took hold and trading desks became automated and massively faster. However, while the ability to hedge income and liabilities was highly valuable in a few cases, in general hedging was a silly game played by corporate finance departments that had themselves been converted into profit centers. Just as it is questionable whether the gambling activities in Las Vegas truly add anything to the economy, but merely redistribute income from unfortunate punters to the gangsters and low-lifes controlling the casinos, so the true economic value of the vast derivatives sector must be doubtful at best. Like consultants, financial services have increasingly become rent seeking activities, in which a small number of people make extravagant incomes, but add nothing to the real output of the economy as a whole.

While consulting continues to act like “The Fish that Ate Pittsburgh” in terms of its absorption of national resources, financial services at least have begun to retreat since 2008. No longer is Wall Street the destination of choice for the best and the brightest. Instead, after a brief period when the advent of President Obama sent some of them into government (big mistake, guys!), the eyes of the talented are now firmly set on Silicon Valley and its various offshoots across the country. The only problem is that rapid progress in the tech sector requires engineering skills quite beyond the majority of elite job-seekers, who are much more suited to a life of designing consultancy flip-charts or selling dodgy derivatives to the dozier European and Asian banks.

At first sight, a rush by the talented into the tech sector ought to be good news. PCs, cellphones and the Internet may not have enabled our cars to fly, but over the last 40 years they have revolutionized our lives in ways we never dreamed of in 1970. If the Internet did not exist, I would either have to file this column by mail (and expect a team of unionized typesetters to put it into print) or would have to commute every day two hours into New York, my nearest major city. In practice, of course, I would have compromised, and bought a house within a half-hour train ride of midtown, but I would then have subjected myself to outrageous property taxes and probably relatively high crime in the sketchy neighborhood which would be all I could afford. So yes, tech sector, thanks for the Internet.

However, the tech sector’s true boons to mankind were achieved before the best and brightest headed into that sector—not only before the recent influx, but before the first medium-sized influx which followed the unexpectedly bountiful Netscape IPO in 1995. The PC was invented by a couple of college dropouts at Apple, the Internet was invented by a government department and cellphones were developed within a large company that had specialized in car radios. Even the previous paradigm of “best and brightest” achievement in the tech sector, AT&T’s Bell Laboratories, was beaten to the cellphone by Motorola. (Although, admittedly, Motorola’s Martin Cooper had actually managed to graduate college, from Illinois Institute of Technology, a fine institution but currently ranked 109th nationwide).

In 1995-2000 (and even more since 2009) the crème de la crème flocked to the tech sector, as has an unimaginable tsunami of investor cash for any remotely plausible idea. The results so far have been distinctly unimpressive. Admittedly, the first wave of tech innovation produced Google and Paypal, two companies that have genuinely changed the way we operate, although arguably Wikipedia, founded around the same time on a completely uncommercial basis, has been even more pivotal. However this time round, the principal innovations have been in “social media,” a business enabling the less intellectually endowed to spend a high portion of their waking hours communicating the banal.

Most recently, $10 billion-plus valuations have been attached to social media companies, all of which hope to profit by accepting a portion of the finite pool of advertising dollars. Indeed, in today’s markets, profits and even revenues have tended to depress valuations. That’s because they allow investors to calculate a rational-appearing valuation, whereas “revenue-light” applications, which have as of yet penetrated only the free-user market, can triumph though the application of infinite hopes among investors and excellent marketing by the sponsors.

WhatsApp, sold to Facebook for $350 million per employee, appears only a precursor of a host of imitators that outshine among investors the solider, better-grounded companies that may actually be achieving something useful. Meanwhile, Apple and Microsoft, the daddies of tech innovation, content themselves with unveiling products largely identical to their predecessors with only a few extra features such as simply a different size.

The economic reality is that two decades of funny money, ending in six years of money that is positively hilarious, have funneled resources into hyped sectors and asset-growth scams, bypassing the sectors in which true innovation may be happening. A genuinely innovative development, such as the self-driving car, will take at least a decade to hit the road even if the regulators can be prevented from slamming the brakes on it. That’s far too long a timetable to interest private equity investors or the IPO market. Fortunately Google, like AT&T in the 1950s, is prepared to devote a portion of its profits to bringing this vision into reality.

Meanwhile, productivity grows more slowly than in any previous postwar recovery. This isn’t because Robert Gordon’s vision of a world without innovation has crept over us. Instead, sub-zero real interest rates have created an orgy of speculation through hedge funds, leveraged private equity funds and the Silicon Valley IPO industry. Such epic misallocation of capital inevitably makes the economy less efficient and starves legitimate innovation of funding and people. The mortgage securitizers of 2002-07 and the social media entrepreneurs of 2009-14 should be doing something useful. But participating in a wild, speculative bubble is much more likely to make them rich.

Innovation isn’t dead. It’s the force that will cause the U.S. economy to recover from the deep slump to which we are now heading. But for that to happen, fiscal, monetary and regulatory policies will have to be reversed 180 degrees from their current orientations.

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About the Author:  Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) which examines the British governments of 1783-1830. He was formerly Business and Economics Editor at United Press International. Martin’s weekly column, The Bear’s Lair, is based on the rationale that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. This article originally appeared on the economics website “The Prudent Bear” and is republished here with permission.

Affordable Housing Is a Symptom of Sound Urban Policy

Editor’s Note: These few paragraphs by “anti-planner” Randal O’Toole say everything that needs to be said about how flawed policies artificially inflate the price of housing, making it unaffordable to any middle class family. California provides perhaps the most egregious example of this misanthropic bias towards “smart growth,” and “urban service boundaries,” the practical effect of which is to destroy the ambiance of existing suburbs through absurdly high-density “infill,” create gridlock on boulevards and freeways, and artificially elevate housing prices into the stratosphere. The irony, if you can call something so cruel mere irony, is that wealthy elites who can afford to live in unsullied, low-density enclaves reap fantastic returns on investment as these asset bubbles are relentlessly inflated, simultaneously patting themselves on the back for “saving the planet.” But as prime, and very abundant, lands for new towns and cities lie fallow – such as the east slopes of the Mount Hamilton range, thousands of square miles of open space within a short drive of Silicon Valley – young working families are one paycheck away from defaulting on mortgages they cannot possibly hope to ever pay off.

Paul Krugman argues that housing costs, not taxes, are what is drawing people to Georgia and Texas and away from California and New York. He’s partly right, but he’s mostly wrong.

What he fails to see is that the same impulse that attempts to control land uses in California, making housing expensive, also makes unduly regulates California businesses and boosts taxes to make California undesirable. The same impulse the attempts to control rents in New York City also leads to nanny-state rules and excessive bureaucracy that makes that city undesirable to many businesses.

Contrary to what Krugman says, housing prices in California and New York are high not because they’ve run out of land. California especially has plenty of land available while a good share of the New York and Connecticut counties bordering New York City are rural open space. Nor are prices high because cities won’t allow higher densities: if California cities didn’t have urban-growth boundaries, few people would want to live in higher densities.

The real problem is a government-knows-best mentality that puts the desires of a few above the needs of the many. That same mentality leads California to impose the most restrictive rules on greenhouse gas emissions and leads New York to spend more than $2 billion a mile on subway tunnels. Until regulations like this and the taxes needed to support them change, California and New York will remain undesirable places to expand businesses, which is why they grow so slow.

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About the Author:  Randal O’Toole is an American public policy analyst. The majority of O’Toole’s work has focused on private land rights, particularly against public land use regulations and light rail. Since 1995, he has been associated with the Cato Institute as an adjunct scholar and frequent anti-light rail campaigner. O’Toole was the McCluskey Visiting Fellowship for Conservation at Yale University in 1998, and has served as a visiting scholar at the University of California, Berkeley and Utah State University. O’Toole studied economics at the University of Oregon. This post was originally published on O’Toole’s blog, The Antiplanner, and appears here with permission.

Estimating America's Total Unfunded State and Local Government Pension Liability

Summary:  The total state and local government pensions in the United States at the end of 2013 had an estimated $3.6 trillion in assets. They were 74% funded, with liabilities totaling an estimated $4.86 trillion, and an unfunded liability of $1.26 trillion. These funds, in aggregate, project annual returns of 7.75%. If you apply a 6.2% average annual return to recalculate the liability, using formulas provided by Moody’s Investor Services, the liability increases to $5.87 trillion and the unfunded liability increases to $2.27 trillion. Using the 4.33% discount rate recommended by Moody’s for valuing pension liabilities, the Citibank Pension Liability Index for July 2014, increases the estimated liability to $7.39 trillion and the unfunded liability to $3.79 trillion. That is, if America’s state and local pension funds were to no longer make aggressive market investments but were to return to relatively risk free investments, the payment required just to return these funds to solvency would be more than $12,000 per American.

This study concludes with four recommendations to ensure the ongoing solvency of public sector pensions. Based on the principals governing Social Security benefits, they are (1) Increase employee contributions, (2) Lower benefit formulas, (3) Increase the age of eligibility, (4) Calculate the benefit based on lifetime average earnings instead of the final few years, and (5) Structure progressive formulas so the more participants make, the lower their actual return on investment is in the form of a pension benefit. Finally, the study recommends all active public employees immediately be enrolled in Social Security, which would not only improve the financial health of the Social Security System, but would begin to realign public and private workers so they share the same sets of incentives and formulas when earning government administered retirement benefits.

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Introduction and Methodology:

This study relies on the most recent data compiled by the U.S. Census Bureau, combined with recent analysis performed by Wilshire Associates, an investment advisory firm, to estimate America’s total state and local government pension fund assets, liabilities, earnings, contributions and payments to retirees. This study then applies formulas provided by Moody’s Investor Services to estimate how much the unfunded liability deviates from the Census Bureau’s estimate, based on using lower rate of return projections. This study is limited to state and local government pension funds and does not include analysis of the federal retirement pension systems. In most cases, instead of footnotes, citations and links to sources are included within the text. This report concludes with some recommendations intended to stimulate discussion and debate.

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Total Assets – All U.S. State and Local Government Pension Systems:

The most recent compilation of total assets, contributions and payments for America’s state and local government pension funds is the “Summary of the Quarterly Survey of Public Pensions for 2014: Q1,” released on June 26, 2014 by the U.S. Census Bureau. It provides data for the quarter ended March 31, 2014.

In the introduction, the report states “total holdings and investments of major public pension systems increased to over $3.2 trillion, reaching the highest level since the survey began in 1968.” In the footnotes, the report provides clarification that they are only referring to state and local pension systems. They also estimate these “major public pension systems” to only represent 89.4% of all state/local pension system assets, which allows the means to reasonably extrapolate an estimate representing 100% of the total state/local pension system assets, contributions, and payments. They write:

“This summary is based on the Quarterly Survey of Public Pensions, which consists of a panel of the 100 largest state and local government pension systems, as determined by their total cash and security holdings reported in the 2007 Census of Governments. These 100 systems comprised 89.4% of financial activity among such entities, based on the 2007 Census of Governments.”

In table 1, below, the total pension assets are determined by taking the Census Bureau’s reported $3.218 trillion representing the 100 largest state/local pension funds, and dividing by 89.4%, yielding an estimated total assets for all state/local pension systems in the United States of $3.6 trillion.

Similarly, in table 1, using Census Bureau data, the most recent reported quarterly total employer and employee contributions for the 100 largest state/local pension funds are multiplied by four, with the product then divided by 89.4%. The resulting estimates are that during the 12 month period through March 31, 2014, $163.8 billion was contributed into these funds by employers and employees, and $251.6 billion was paid out to state and local government retirees. Presumably the cash flow deficit, $87.8 billion, was covered by investment returns.

Table 1 – State/Local Pension Systems as of 3-31-2014
Estimated Assets, Contributions, and Payments ($=B)
20140910_Ring_Pensions-T1b

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Official Funding Status  – All U.S. State and Local Government Pension Systems:

At face value, it would appear that the funding status of these pension systems is quite healthy, since the deficit implied by payments to retirees exceeding contributions by employers and employees, $87.8 billion, represents only 2.4% of the estimated $3.6 trillion in assets. It isn’t nearly so simple, however.

The funding status of a pension system is determined by comparing the value of the invested assets to the present value of the estimated future payments to retirees. These future payments include estimates for people who have not yet retired. Since most state and local government employee participants in their pension systems are still working, the fact that current investment returns easily cover the deficit between contributions and payments to retirees is irrelevant. For a pension system to be 100% funded, payments into the fund, combined with investment returns earned by the fund, need to ensure that the total assets invested by the fund are equal to the present value of the liability. More on this later.

Wilshire Associates, a global investment advisory firm, performs in-depth analysis of America’s public employee pension systems through research papers that are updated annually. Their most recent reports are a “2014 Report on State Retirement Systems,” which primarily discusses data for the fiscal year ended 6-30-2013, and a “2013 Report on City and County Retirement Systems,” which primarily discusses data for the fiscal year ended 6-30-2012. Taking into account the improvement in the investment markets between June 2012 and June 2013, the weighted average funding ratio of the state and city/county pension systems combined, in accordance with the estimates provided by Wilshire Associates, at the end of June 2013 was 74%.

As previously discussed, the estimated total assets for all state/local pension systems in the United States is $3.6 trillion. Assuming that $3.6 trillion in assets represents 74% of the total pension liability carried by these same pension systems, then the estimated total liabilities for all state/local pension systems in the United States is $4.86 trillion. This means the total unfunded liability for these systems is estimated to be $1.26 trillion.

Table 2 – State/Local Pension Systems as of 3-31-2014
Estimated Assets, Liabilities, and Unfunded Liability ($=B)
20140910_Ring_Pensions-T2b

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Funding Status Scenarios – All U.S. State and Local Government Pension Systems:

As part of their analysis of America’s state/local pension systems, Wilshire Associates compiles a “median actuarial interest rate assumption,” representing both the average annual rate of return these systems expect to earn over the next 20-30 years, as well as the discount rate they use to derive a present value for the estimated stream of payments they expect to make to current and future retirees. For both state and local systems, in their “Summary of Findings” in both of their reports, Wilshire Associates estimates this median interest rate assumption to be 7.75%.

As alluded to earlier, to be 100% funded, a pension plan must have invested assets equal to the present value of all future pension payments. For every participating employee, whether they are active or retired, actuaries estimate their salary growth, their year of retirement, their initial pension, their subsequent pension payouts based on COLAs, and their life expectancy. The present value of all these future payments is how much a fully funded pension plan’s assets must be worth.

The rate at which these future payments are discounted per year must be equivalent to whatever rate the pension fund managers believe they will earn interest, on average, over the life of the fund. The theory is that if no future work were performed, and therefore no additional future pension benefits were earned and no additional money was contributed to the fund, the assets currently invested in a fully funded plan would earn enough interest to support every future pension payment until the last participant died of old age.

Since the amount of assets in a pension plan is a known, objective quantity, the debate over how much unfunded liability a plan may have centers on what assumptions are used to estimate the present value of the future payments, i.e., the “Actuarial accrued liability (AAL),” which, as discussed and noted on table 2, is estimated as of 6-30-2013 at $4.86 trillion. In order to assess whether or not that amount is overstated or understated, we can use a short-cut formulated by Moody’s Investor Services in their July 2012 proposal, “Moody’s Adjustments to US State and Local Government Reported Pension Data.”

In order to revalue a pension fund’s liabilities without having access to every actuarial calculation from every fund, what Moody’s does is estimate the midpoint of the future payments stream. They select 13 years into the future, which is quite conservative. Using a longer duration than 13 years will greatly increase the sensitivity of the liability to changes in the projected rate-of-return. As discussed in their July 2012 proposal, here is their rationale:

“To implement the discount rate adjustment, we propose using a common 13-year duration estimate for all plans. This is a measure of the time-weighted average life of benefit payments. Each plan’s reported actuarial accrued liability (“AAL”) is projected forward for 13 years at the plan’s reported discount rate, and then discounted back at 5.5%. This calculation results in an increase in AAL of roughly 13% for each one percentage point difference between 5.5% and the plan’s discount rate. For example, a plan with a $10 billion reported AAL based on a discount rate of 8% would have an adjusted AAL of $13.56 billion, or 35.6% greater than reported.

We recognize this duration estimate may be higher than warranted for some plans and lower than warranted for others. Each pension plan has a unique benefit structure and demographic profile that affects the time-weighted profile (duration) of future benefit payment liabilities. However, plan durations are not reported, and calculating duration individually for each plan is not feasible. Our proposed 13-year duration is the median calculated from a sample of pension plans whose durations ranged from about 10 to 17 years. Plans with shorter durations usually are closed or have a preponderance of older or retired members.”

Here is the formula that governs this recalculation of the present value of the liability (“PV”):

Adj PV = [ PV x ( 1 + official %i ) ^ years ] / ( 1 + adjusted %i ) ^ years

As made explicit in the above formula, along with duration (years), the other key variable in order to use Moody’s formula to evaluate funding status scenarios, of course, is the “%i,” the discount rate, which is also the rate of return projection. It is worth noting that the discount rate and the rate of return projection don’t have to be the same number. In private sector pension plans, the discount rate is required to differ from the rate of return projection. Private sector pension plans are required to use a lower, more conservative discount rate in order to calculate the present value of their future liabilities in order to avoid understating the present value of the liability. Public sector pension plans have not yet been subjected to this reform regulation, and the rate used to project interest is invariably the same as the rate used to discount future liabilities. This puts enormous pressure on these funds to adopt an aggressively high rate of return projection.

Here are explanations for the various alternative rate of return projections applied in Table 3.

Case 1, 6.2%  –  here is the rationale for this rate-of-return, excerpted from the report “Pension Math: How California’s Retirement Spending is Squeezing The State Budget” authored by Joe Nation, a Ph.D., Stanford Institute for Economic Policy Research, and former California Democratic assemblyman: “This 6.0 to 6.5 percent figure is based on the performance of a hypothetical fund containing 80 percent equity and 20 percent income instruments between 1900 and 1999. It assumes an equity rate based on the 20th-century Dow Jones industrial annual average of 5.3 percent, plus 2 percent in dividends, less 0.5 percent in fees. Combined with income instruments with a net rate of return of 4.5 percent, this hypothetical fund would have earned an average annual rate of 6.2 percent.”

Case 2, 4.33%  –  the rationale for this rate-of-return comes from Moody’s Investor Services “Moody’s Revised New Approach to Adjusting Reported State and Local Government Pension Data,” released in April 2013: “For adjustments to pension data, Moody’s will use the Citibank Pension Liability Index (Index) posted on the date of the valuation instead of its original proposal to apply a single rate for all plans each year.” Citigroup Pension Discount rate as posted by the Society of Actuaries in July 2014 was 4.33%.

Table 3, below, shows how much the unfunded liability for all of America’s state/local pension systems will increase based on various alternative rate-of-return projections, all of which are lower than the official composite rate of 7.75% currently used by America’s state/local pension funds. As can be seen, if a rate of 6.20% is used, reflecting the historical performance of U.S. equities, the total liability for America’s state/local pension systems rises from $4.86 trillion to $5.87 trillion; the unfunded liability rises from $1.26 trillion to $2.27 trillion; the funding status declines from 74% to 61%.

If the relatively risk-free rate of 4.33% is used, reflecting Moody’s recommendation to adhere to the Citibank pension liability index rate, the total liability for America’s state/local pension systems rises from $4.86 trillion to $7.39 trillion; the unfunded liability rises from $1.26 trillion to $3.79 trillion; the funding status declines from 74% to 49%.

Table 3 – State/Local Pension Systems as of 3-31-2014
Estimated Unfunded Liability Using Various Discount Rate Projections ($=T)
20140910_Ring_Pensions-T3c

Please note the above table can be downloaded here [1]. It is a useful tool for quickly estimating how much the unfunded liability may increase for any pension fund if the projected rate of return is lowered from the official rate. In this table, and on the spreadsheet, the yellow highlighted cells represent assumptions, and require input from the user. The green highlighted cells depict key results from the calculations.

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Observations and Recommendations

The data gathered for this study, combined with reasonable assumptions, allows one to estimate the pension fund assets for the total state and local government pension systems, combined, to equal $3.6 trillion, with an attendant liability of $4.86 trillion. In turn this means the total unfunded liability for these pension systems is estimated at $1.26 trillion. Using formulas provided by Moody’s investor services, one may apply lower rate-of-return assumptions to the official total liability estimate, and calculate how much the liability – and unfunded liability – will increase based on lower projected returns. While none of these various estimates can be considered precise and indisputable, the credibility of the source data and formulas strongly suggest they are reasonably accurate.

Not beyond serious debate, however, are financial questions and policy issues relating to pensions that are of critical importance to the solvency of America’s state and local governments. For example, even if the 74% funded ratio is accurate, it is a best case scenario that still raises troubling questions. Because the $183 billion in reported annual contributions must include not only the “normal contribution,” representing the present value of future pensions earned by workers in the most recent fiscal year, but also the “unfunded contribution,” the catch-up payment designed to pay down the unfunded liability. Even if the total unfunded liability for all of America’s state/local government pension systems is only $1.26 trillion, to eliminate the underfunding over 20 years at 7.75% interest would require annual payments of $126 billion per year. That would leave only $63 billion to cover the normal payment.

Although consolidated contribution data that breaks out the normal and unfunded contributions separately is not readily available for America’s state/local government pension systems, it is possible to impute the normal contribution – an exercise that leaves wide latitude for interpretation. Nonetheless, in a 2013 study, “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” the California Policy Center did just that. The worksheet showing the assumptions and formulas can be downloaded here, ref. the tab “normal contribution (imputed).” As it is, assuming 16 million full-time equivalent active state/local government workers, accruing pension benefits at an aggregate rate of 2.0% of final payroll per year worked – keeping the rate-of-return assumption at 20 years, the imputed normal contribution is $120 billion per year. [2] By this logic, the total contribution of $183 billion is inadequate. The normal contribution of $120 billion plus the unfunded contribution of $126 billion suggests an adequate contribution should be $246 billion per year.

To summarize the immediately preceding paragraphs, if one continues to assume these funds will earn 7.75% per year, annual contributions were $67 billion short of the $246 billion total necessary to pay not only the normal contribution, but enough of a catch-up “unfunded contribution” to restore 100% funded status within 20 years. Aspiring to at least do this much is crucial, because the 7.75% rate-of-return projection may not be achieved. As already shown, the amount of a pension system’s liability is highly sensitive to the assumed rate of return. So are the normal and unfunded contributions. Here is the impact of lower rates of return on those payment estimates:

On Table 3, above, the impact of a 6.2% rate-of-return projection is shown to increase the unfunded liability from $1.26 trillion to $2.27 trillion, and lower the funded ratio from 74% to 61%. Using the tools and assumptions summarized in the preceding paragraphs, the impact of a 6.2% rate of return – representing the historical performance of U.S. equities over the past 60 years – on the unfunded contribution is to increase it from $126 billion to $201 billion; the normal contribution increases from $120 billion to $176 billion. Put another way, if realistic repayment terms are adopted for the unfunded liability, at a rate-of-return of 6.2% the total required contribution for America’s state/local government pension systems could rise from the current $183 billion to $377 billion.

Similarly, at a hopefully risk-free rate-of-return of 4.33% (the July 2014 Citibank Pension Liability Index Rate recommended by Moody’s), the normal contribution estimate rises to $281 billion and the unfunded contribution estimate rises to $287 billion – a total of $586 billion vs. $183 billion being actually contributed today.

These figures are not outlandishly inflated. They merely indicate how extraordinarily sensitive pension fund solvency is to rate-of-return projections, and how perilously dependent pension funds are on investment returns.

This, again, brings up the most salient question of all: What rate of return is truly achievable over the next 2-3 decades?

To at least recap this economic debate is necessary because this one assumption is central to policy decisions of extraordinary significance. If the optimists are right, rates-of-return will rise into the high single-digits and stay there, rendering pensions financially sustainable. The states and locales who offer them can therefore keep their contributions flat and allow a few more good years in the market to wipe out their unfunded liabilities. If the pessimists are correct, rates-of-return are going to shrink into the low single digits and stay there, making aggressive paydowns of a swollen unfunded liability a mandatory proposition. Required contributions will rise to untenable levels, crowding out other government services, causing taxpayer revolts, union lawsuits, and a string of bankruptcies.

The case for pessimism – or realism – is strong. Economic growth over the past 30 years has been fueled by debt accumulation; economic growth creates profits, profits create stock appreciation. Debt accumulation stimulates consumption, low interest rates stimulate purchases of real estate and durable goods, driving prices up. Debt accumulation and easy credit causes an asset bubble, and asset bubbles create collateral for additional debt. Total market debt in the U.S. is now higher than it was in 1929, immediately before the great depression. We are at the point now where there is no precedent in economic history that enables us to assume we can continue to use debt to stimulate economic growth.

The other economic headwind facing investments is the aging population. In 1980, 11% of the U.S. population was over 65. By 2030, over 22% of the U.S. population will be over 65. This means that compared to 1980, when America’s current era of of debt accumulation began, by 2030 there will be twice as many people, as a percentage of the U.S. population, selling assets to finance their retirements. The impact of so many sellers in the markets, combined with interest rates having now fallen to near zero – meaning a primary method to stimulate debt formation has been exhausted – will at the very least take the growth out of asset bubbles, if not cause their collapse. The state/local pension funds, based on current data as presented here, are already net sellers in the markets. All of this augers poorly for returns-on-investment. And while, as noted in the next paragraph, America’s economy remains extraordinarily resilient, especially compared to the rest of the world, a collapse of collateral values would trigger a global financial meltdown, and that would take America down with it.

The case for optimism is not unfounded. To stave off recession, or worse, the U.S. has pursued a policy in recent years of injecting trillions of dollars of new money into the system through massive Federal Reserve Bank intervention. But the only way this impetuous gambit can backfire is via a global loss of confidence in the U.S. currency. Despite wails of panic from predictable quarters, that isn’t likely, since every other central bank in the world is playing the same game, with less success. The largest currency group apart from the U.S. dollar is the Euro, and the Eurozone, unlike the U.S., faces a demographic crisis that is genuinely alarming, and their debt burden combined with their level of structural entitlements is much worse than in the U.S. China’s economy is far more dependent on trade, they face a demographic crisis similar to Europe’s, their society is the most likely among the major economies to experience social upheaval in the future, their real estate bubble is worse than in the U.S., and despite the opacity of their banking system, their debt burden is quite likely more severe than in the U.S. Japan is still reeling from a generation of deflation and crippling debt. No other currencies are supported by economies that are big enough to matter. Especially since the energy boom began in the U.S., no other country has anywhere near America’s capacity to domestically source raw materials and manufactured goods for export. The U.S. is basically daring the world to depreciate the dollar, because currency depreciation might actually help the U.S. economy more than it would hurt.

And so the debate over realistic rates of return rages on.

There is another question, however, which considers not the economic issues, but the issue of equity and fairness. A recently published book “Capital in the Twenty-First Century,” by Thomas Piketty, has become a favorite among leftist intellectuals who provide thought leadership for, among others, the public sector unions who control most public sector pension fund boards and who advocate tenaciously for keeping pension benefits as they are. Piketty makes the following claim:

“The rate of capital return in developed countries is persistently greater than the rate of economic growth, and that this will cause wealth inequality to increase in the future.”

Piketty is certainly correct that the rate of capital return exceeds the rate of economic growth. But his moral arguments fail when it comes to public sector pensions. Because public sector pensions have provided the means whereby public sector employees are granted immunity from the very forces that Piketty is arguing have empowered the oligarchy at the expense of ordinary workers. Public sector pensions have essentially creating a common cause between government workers and the oligarchy they allege is exploiting ordinary workers. This point cannot be emphasized enough. Government workers, through their pension funds, benefit from all policies designed to elevate asset values, including bubble levels of asset appreciation, because that is essential to the solvency of their funds. Their interests are aligned with those of central bankers, international corporations, and individual billionaires, whose self-interests impel them to support policies to keep interest rates artificially low, heap additional levels of debt onto the economy despite diminishing returns, and push asset values to even higher, more unsustainable levels. Because to stop doing that will crash these pension funds.

Is it equitable for government sponsored investment entities to control over $3.6 trillion in market investments, investments made in an economic environment which, if successful, perpetuates the gains of productivity flowing disproportionately to the wealthy elite, yet which, when unsuccessful, hits up taxpayers to cover the losses?

When considering solutions to both the financial challenges and issues of equity and fairness surrounding public sector pensions, it is important to understand that even if these systems are able to recover fully funded status based on surprisingly good and sustained market performance, it does not follow that their performance is something that can be extended to the entire population, because if so, instead of 20% of the retired population funding their retirement income through selling assets on the markets, 100% of the retirement population would be doing so, exerting far more downward pressure on asset values.

A relevant question to ask is therefore whether or not pension systems that are funded by taxpayers and bailed out by taxpayers should be investing in the market at all – why aren’t government employee pensions funded through a combination of low risk investments such as T-Bills and contributions from current workers?

The example of Social Security provides several instructive points which should be considered in any discussions of pension reform, or the larger question of what the government’s role should be in providing financially sustainable retirement security to Americans. Social Security, unlike state/local government worker pensions, has a positive cash flow. As seen here from this table on their website “Fiscal Year Trust Fund Operations,” during 2013 Social Security collected $851 billion from active workers and paid out $813 billion, primarily to retirees. The so-called Social Security “Trust Fund” had a balance at the end of 2013 of $2.76 billion.

If public sector pensions are indeed facing serious, potentially fatal financial challenges, they should consider adopting five elements from Social Security:

(1) Make it possible to increase employee contributions – Social Security withholding can be increased or decreased at the option of the federal government. If collections into public employee pension funds are inadequate, increase the withholding from employee paychecks – not only for the normal contribution, but also to help pay the unfunded contribution.

(2) Make it possible to decrease benefits – nothing in Social Security is guaranteed. Benefits can be cut at any time to preserve solvency. Decreasing benefits may be the only way to preserve defined benefit pensions. Equitable ways to do this must be spread over as many participant classes as possible. For example, the reform passed by voters in San Jose (tied up in court by the unions) called for suspending cost-of-living increases for retirees, and prospectively lowering the annual rates of benefit accruals for existing workers.

(3) Increase the retirement age. This has already been done several times with Social Security. Pension reforms to-date have also increased the age of eligibility for benefits.

(4) Calculate benefits based on lifetime earnings. Social Security calculates a participant’s benefit based on the 35 years during which they made the most. Public sector pensions, inexplicably, apply benefit formulas to the final year of earnings, or the final few years. These pension benefits should be calculated based on lifetime earnings.

(5) Make the benefit progressive. The more you make and contribute into Social Security, the less you get back. At the least, applying a ceiling to pension benefits should be considered. But it would serve both the goals of solvency and social justice to implement a comprehensive system of tiers whereby highly compensated public servants, who make enough to save themselves for retirement, get progressively less back in the form of a pension depending on how much they make.

These suggested reforms are meant to be taken to evolve defined benefit pensions into a plan that provides a minimal level of retirement security. The government should not be in the business of providing retirement benefits to anyone, private or within government, that go beyond providing a minimal safety net. The government certainly shouldn’t be in the business of providing pensions to government employees that are many times better than what they provide to private citizens in the form of Social Security. And the government, or government employees through their union controlled pension funds, should not be playing the market with $3.6 trillion of taxpayer sourced dollars, then forcing taxpayers to bail out these funds when they don’t meet projections.

A unique and elegant way to provide equitable, minimal, government administered and financially sustainable retirement security to all American’s would be to immediately require all active government workers to join Social Security. These workers, and retirees, would keep whatever pension benefits they’d qualified for so far, subject to reductions per the five options just noted in order to preserve solvency for the fund. They would begin to pay into the Social Security system, with the employer contribution into their pension funds proportionally reduced to make it an expense-neutral proposition. Since government workers are relatively highly compensated compared to private sector workers, the participation, for example, of 16 million active state/local government workers would immediately improve the solvency of the Social Security Fund. The five options available to preserve Social Security, as noted above, would be far less onerous in their implementation over the coming decades if tens of millions of highly compensated government workers were to participate. And since their unions purportedly speak for the common man, they should have no objection to the highly compensated among them getting less back in retirement than those less fortunate.

Who knows, maybe the much vaunted, potentially real Social Security “Trust Fund” assets could be used to purchase Treasury Bills. Such a policy would have the twin virtues of taking pressure off the federal reserve, and augmenting Social Security collections with modest investment returns.

Ed Ring is the executive director of the California Policy Center.

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FOOTNOTES

(1) The tables in this study are all found on this spreadsheet, State-and-Local-Pension-Liability.xlsx. The spreadsheet also contains additional notes on the assumptions used, as well as links to the source data.

(2)  To estimate a fund’s required normal pension contribution using the Impact-of-Returns-and-Amortization-Assumptions-on-Pension-Contributions.xlsx spreadsheet, “normal contribution (imputed)” spreadsheet, the assumptions used and referenced above were as follows:
–  Average Salary = $70,000
–  % cola growth/yr = 2.0%
–  % merit growth/yr = 1.0%
–  avg years till retire = 17
–  proj % discount (fund’s assumed annual rate of return) = 7.75%
–  base year 2000+ = 11
–  avg years retired = 20
–  pension formula/yr = 2.00%
–  pension cola % = 2.0%
–  elig # workers = 16,000,000
Please note this spreadsheet does not default to these values. They have to be entered in the yellow highlighted input cells. The spreadsheet is designed to calculate results for whatever set of assumptions the user wishes to enter. This spreadsheet also contains tabs, similarly highlighted with yellow to denote cells to input user assumptions, to recalculate estimates for the unfunded liability and the unfunded contribution. On this spreadsheet, as noted above, there are tools to recalculate the normal contribution based on having that information, or imputing it if that information is not available.

America’s Opportunity City

David Wolff and David Hightower are driving down the partially completed Grand Parkway around Houston. The vast road, when completed, will add a third freeway loop around this booming, 600-square-mile Texas metropolis. Urban aesthetes on the ocean coasts tend to have a low opinion of the flat Texas landscape—and of Houston, in particular, which they see as a little slice of Hades: a hot, humid, and featureless expanse of flood-prone grassland, punctuated only by drab office towers and suburban tract houses. But Wolff and Hightower, major land developers on Houston’s outskirts for four decades, have a different outlook. “We may not have all the scenery of a place like California,” notes the 73-year-old Wolff, who is also part owner of the San Francisco Giants. “But growth makes up for a lot of imperfections.”

A host of newcomers—immigrants and transplants from around the United States—agree with that assessment. Its low cost of living and high rate of job growth have made Houston and its surrounding metro region attractive to young families. According to Pitney Bowes, Houston will enjoy the highest growth in new households of any major city between 2014 and 2017. A recent U.S. Council of Mayors study predicted that the American urban order will become increasingly Texan, with Houston and Dallas–Fort Worth both growing larger than Chicago by 2050.

The Grand Parkway, Wolff points out, continues Houston’s pattern of outward development. The vast ExxonMobil campus being built in the far northern suburbs—and surrounded by its own master-planned community, Springwoods Village—will eventually be the nation’s second-largest office development, after Manhattan’s Freedom Tower. Houston is already home to numerous planned communities with bucolic-sounding names: Cinco Ranch, Bridgeland, Sienna Plantation, the Woodlands, and Sugar Land. “Open space is the most precious amenity,” says Wolff, a primary developer of the Energy Corridor, a Houston neighborhood boasting 22 million square feet of office space and housing the headquarters of such key energy firms as BP America, ConocoPhillips, and CITGO. “What we are creating here is a place where business can grow and people can afford to live. This is the key to Houston.” Indeed, the Houston model of development might be described as “opportunity urbanism.”

20140909_Houston_satelliteHouston from Space – America’s Opportunity City

Houston’s economic success over the past 20 years—and, more remarkably, since the Great Recession and the weak national recovery—rivals the performance of any large metropolitan region in the United States. For nearly a decade and a half, the city has been adding jobs at a furious pace—more than 600,000 since early 2000, and 263,000 since early 2008. The greater New York City area, by contrast, has added just 103,000 jobs since 2008, and Los Angeles, Chicago, Phoenix, Atlanta, and Philadelphia remain well below their 2008 levels in total jobs. In fact, Los Angeles and Chicago, like Detroit, have fewer jobs today than they did at the turn of the millennium.

And many of Houston’s jobs pay well. Using Praxis Strategy Group calculations that factor in the cost of living as well as salaries, Houston now has the highest standard of living of any large city in the U.S. and among the highest in the world. Indeed, the average cost-of-living-adjusted salary in Houston is about $75,000, compared with around $50,000 in New York and $46,000 in Los Angeles. Personal household income has risen 20 percent since 2005 in Houston, compared with 14 percent in New York, 11 percent in Los Angeles, and less than 9 percent in Chicago. Former Federal Reserve economist Bill Gilmer notes that, except during the energy bust of the mid-1980s, Houston’s per-capita income growth has outpaced the nation’s since the late 1960s.

Not surprisingly, given Houston’s reputation as an oil town, much of the job growth in its metro region (known as Greater Houston) is tied to energy—particularly, to the technological revolution now reshaping that industry. Once widely derided as a “colony” of California- and New York–based companies, Houston has increasingly become the location of choice for American energy firms. In 1960, for example, Houston was home to only one of the nation’s top energy firms; by 2013, it was home to 22 from the Fortune 500, more than all other cities combined—and that doesn’t include major non-headquarter locations for ExxonMobil, Shell, Chevron, and BP. This past spring, Occidental Petroleum, Los Angeles’s last major energy firm, announced plans to move to Houston’s Uptown district, near the famed Galleria.

Since 2001, the energy industry has been directly responsible for an increase of 67,000 jobs in Houston, and it now employs more than 240,000 people in the area. These jobs include many technical positions, one reason that the region now boasts the highest concentration of engineers outside Silicon Valley. Since 2001, Houston has seen a 24.1 percent growth in STEM (science, technology, engineering, and mathematics) employment, compared with less than 5 percent growth in New York and San Francisco. The jobs should keep coming: Gilmer estimates that $25 billion to $40 billion in new petrochemical facilities is on its way to Greater Houston.

“Oil and gas used to feel old, but that’s changing,” suggests Samina Farid, cofounder of Merrick Systems, a 25-year-old oil-services firm with 45 employees. “Younger people are coming into the business because they see opportunities to use new technologies that can really make a difference.” Farid’s firm is one of the thousands of smaller companies—including a group of new, tech-savvy start-ups—that serve the energy industry. Allison Lami Sawyer, the 29-year-old president of Rebellion Photonics, is part of a movement of younger professionals clustering in the area, many of them in the city’s inner ring. “I came here kicking and screaming,” said the British-educated Alabama native, whose nine-person company, mostly engineers and scientists, provides image-sensing equipment to firms such as Exxon. “But this was the place to be—it works well to be in the oil and gas capital of the world if that’s who you are selling to.”

Houston has embraced not only the energy industry’s white-collar professional jobs but also its well-paying blue-collar industrial positions. The city has seen a surge in mid-skills jobs (usually requiring a certificate or a two-year degree) in fields such as manufacturing, logistics, and construction, as well as energy. Many of these jobs pay more than $100,000 a year, and since 2007, according to calculations derived from the Bureau of Labor Statistics by the Praxis Strategy Group’s Mark Schill, Houston led the 52 major metropolitan areas in creating them, at a rate of 6.6 percent annually. In contrast, these jobs have declined by more than 10 percent in New York, Los Angeles, Chicago, and San Francisco, which have not been friendly to such industries.

Trade is robust. The Port of Houston, connected with the Gulf of Mexico by the 50-mile Houston Ship Channel, is now the nation’s Number One export hub, feeding off the energy revolution and expanding economic exchange with Latin America. Mexico and Brazil are by far the port’s largest trading partners. Houston’s port business has grown almost fourfold since 2000—far faster than either New York’s or Los Angeles’s. Port officials estimate that the trade sector contributes $500 billion in economic activity and more than 1 million jobs to the state of Texas annually.

20140909_Houston_harborThe Port of Houston – The Number One Export Hub for the United States

Houston is also home to the Texas Medical Center, the largest concentration of hospitals and research institutions in the world and, by itself, the metro region’s third-largest source of jobs—employing 106,000 people, including 20,000 physicians, scientists, and other professionals. Fifty-two separate medical institutions are located on the campus, equal in size to Chicago’s Loop. It currently has over 28.3 million square feet of office space, more than the downtowns of both Houston and Los Angeles. By the end of 2014, TMC top officials predict, the area will be the nation’s seventh-largest business district.

Houston is neither the libertarian paradise imagined by many conservatives nor the antigovernment Wild West town conjured by liberals. The city is better understood as relentlessly pragmatic and pro-growth. Bob Lanier, the legendary three-time Democratic mayor who steered the city’s recovery from the 1980s oil bust, when the metro region bled more than 220,000 jobs in just five years, epitomized this can-do spirit. Lanier was more interested in building infrastructure and promoting growth than in regulation and redistribution. That focus remains strong today. “Houston is getting very comfortable with itself and what it is,” says retired Harris County judge Robert Eckels. “We are a place that has a big idea—supporting and growing through private industry, and that’s something everyone pretty much accepts.”

Low taxes are part of that idea. Texas has no income tax, as Governor Rick Perry frequently points out to businesses in other states, and its average state and local tax burden is 11th-lowest in the nation. New York, New Jersey, and California, by contrast, impose the three highest state tax burdens in the nation. The friendly tax environment is one reason that Houston ranked as the most affordable city to do business in a recent survey of global metropolitan areas by PricewaterhouseCoopers and the Partnership for New York City. It means a lot more money in their employees’ pockets, too. A family of three making $150,000 moving from New York City to Houston would save upward of $8,000 in taxes, an analysis conducted by the District of Columbia found.

An even bigger component of Houston’s growth, however, may be its planning regime, which allows development to follow the market instead of top-down government directives. The city and its unincorporated areas have no formal zoning, so land use is flexible and can readily meet demand. Getting building permits is simple and quick, with no arbitrary approval boards making development an interminable process. Neighborhoods can protect themselves with voluntary, opt-in deed restrictions or minimum lot sizes. Architect and developer Tim Cisneros credits the flexible planning system for the city’s burgeoning apartment and town-home development. “There are a lot of people who come here for jobs but don’t want to live, at least not yet, in the Woodlands,” he notes. “We can respond to this demand fast because there’s no zoning, and approvals don’t take forever. You could not do this so fast in virtually any city in America. The lack of zoning allows us not only to do neat things—but do them quickly and for less money.”

The flexible planning regime is also partly responsible for keeping Houston’s housing prices low compared with those of other major cities. On a square-foot basis, according to Knight Frank, a London-based real-estate consultancy, the same amount of money buys you almost seven times as much space in Houston as it does in San Francisco and more than four times as much as in New York. (See “Houston, New York Has a Problem,” Summer 2008.) Houston has built a new kind of “self-organizing” urban model, notes architect and author Lars Lerup, one that he calls “a creature of the market.”

Some cities—such as Los Angeles—grow as a progression of larger communities around a relatively small core. Others—such as New York and Chicago—form dependent communities surrounding a dynamic central core. Houston is different: it revolves around a patchwork of centers, such as the aforementioned Woodlands, home to some 40,000 residences and more than 50,000 jobs. Other centers exist within the city limits, but Houston also retains a strong core that never imploded, as did those of so many American cities. The city turns the whole debate that dominates urban thinking today—whether to grow the suburbs or downtown—on its head. Rather than advocate one kind of housing, Houston prides itself on providing choices. In fact, as the city’s outer suburban ring has grown—last year attracting roughly 80 percent of all new home buyers—the downtown has also boomed. The city’s vibrant inner ring, notes demographer Wendell Cox, grew 3 percent during the last decade—four times the average in the top 15 metropolitan areas and more than Chicago, Los Angeles, New York, and Philadelphia. “Most cities would die for our in-fill,” says Jeff Taebel, director of Community and Environmental Planning at the Houston-Galveston Area Council (HGAC). No one would mistake downtown Houston for midtown Manhattan, true; but it represents 6 percent of the region’s jobs—a proportion 2.5 to 4.5 times greater than one finds, say, in downtown Los Angeles or Phoenix. Houston’s experience refutes the popular notion that urban density and central city development require heavy regulation.

Houston’s housing-market flexibility has also benefited some of the city’s historically neglected areas. The once-depopulating Fifth Ward has seen a surge of new housing—much of it for middle-income African-Americans, attracted by the area’s long-standing black cultural vibe and close access to downtown as well as the Texas Medical Center. Rather than worry about gentrification, many locals support the change in fortunes. “In Houston, we don’t like the idea of keeping an image of poverty for our neighborhood,” explained Rev. Harvey Clemons, chairman of the Fifth Ward Community Redevelopment Corporation. “We welcome renewal.”

By allowing and encouraging development in the inner ring and on the fringe, the city increases its attractiveness to younger people, who want to live close to the urban core, while also providing affordable suburban housing. “Houston thrives because it has someplace for young people to stay inside the city but also offers an alternative when they get older. Just because you grow up doesn’t mean you have to leave the region,” notes Gilmer, now head of the Institute for Regional Forecasting at the University of Houston.

Houston’s explosive economic growth has engendered another kind of boom: a human one. Between 2000 and 2013, Greater Houston’s population expanded by 35 percent. In contrast, New York, Los Angeles, Boston, Philadelphia, and Chicago grew by 4 percent to 7 percent. These figures reflect emerging migration patterns. Texas once sent large numbers of people to California and the East Coast, but now, considerable numbers of New Yorkers, San Franciscans, and Los Angelenos are picking up stakes and heading for Houston, Dallas, Austin, and San Antonio.

As it grows, Houston’s ethnic demography is shifting. Two decades ago, Houston struggled to attract foreign-born immigrants, as did Texas generally. But since the 1990s, Texas’s immigration rates have surpassed the national average. Over the past decade, Houston added 440,000 foreign-born residents, the second-most in the country, while New York, with more than three times the population, added 660,000. In a dramatic sign of changing trends, Houston attracted more than three times as many foreign-born immigrants as did Los Angeles, which is more than double its size. “This is the big deal for immigrants,” suggests HGAC’s Taebel. “We are a very attractive place for working-class people to settle.” The immigrant surge has turned what was once a conventional Southern city into a multiracial melting pot. Indeed, a 2012 Rice University study claimed that Greater Houston is now the most ethnically diverse metro region in America, as measured by the balance between four major groups: African-American, white, Asian, and Hispanic. Hispanics alone constitute nearly half the core city’s population, while the Asian population has surged almost fourfold; whites constitute barely a quarter of the total. The entire Greater Houston metro region—roughly 6.3 million people—is now 60 percent nonwhite, up from 42 percent in 1990.

Houston’s new diversity is not confined to one neighborhood or district. Suburban Sugarland is over 35 percent Asian and home to one of the nation’s largest and most elaborate Hindu temples. “This place is as diverse as California,” notes David Yi, a Korean-American energy trader who moved to the city from Los Angeles in 2013 and lives in the suburb of Katy, west of the central core. “But it is affordable, with good schools. Our kids, who are learning Spanish, can afford to stay and have a house, which is not the case in California.” Pearland, located 17 miles south of downtown, has also become a draw for upwardly mobile minorities and immigrants. “This is very different from Dallas, where I grew up, which was very segregated,” notes African-American entrepreneur Carla Lane, president of Lane Staffing, which works with energy, construction, and other local firms. “My daughter has a totally different experience—many of her friends are white, Hispanic, or Asian. Living out in Pearland, you can have that experience, and then you cross Highway 6 and you see people with big hats, boots, and straw in the mouth. That’s Houston to a tee.”

Immigration is driving growth but also creating new challenges. Though skilled immigrants are beginning to flock to Houston, observes former state demographer Steven Murdock, Texas’s immigrants also include many lower-skilled workers, primarily because of the state’s proximity to Mexico. Leaders in the petrochemical and construction industries complain about looming shortages in the skilled trades. A dearth of plumbers and electricians is already affecting construction of new housing, offices, and industrial facilities, impinging on developers’ ability to expand, despite a thriving housing market. “We have all these jobs but not the people in the pipelines,” says Marshall Schott, associate vice chancellor at Lone Star community college. “Sure, we have need for more geologists and engineers; but by an order of magnitude, we need skilled workers such as welders and machinists. These jobs pay $80,000 a year, a lot better than being a barista at Starbucks.”

To address these shortfalls, many companies have invested in workforce training programs, some in collaboration with local high schools as part of “cooperative education,” where students go to school part-time and work part-time. “This is a typically Houston solution—very pragmatic,” Mike Temple, director of the Gulf Coast Workforce Board, points out. “We are trying to tell kids that it’s not only what you know but also what you can do.” Enrollment at Houston’s largest community college, Lone Star, has exploded 58 percent, to 78,000 students, in just the past five years, and the college expects it to reach 100,000 students by 2018.

Often attacked for under-investing in education, Houston has actually shown encouraging educational progress. Many of the schools in the outer rings, often predominantly white and Asian, perform well in state performance rankings. Houston Independent School District, the largest district in Texas and seventh-largest in the country, has won the Broad Prize for urban education twice. Houston has also been called “the Silicon Valley of education reform,” with several highly successful charter school networks such as KIPP, Harmony, and YES Prep setting up shop in the city.

These schools and others within the Houston Independent School District will have much to do with Houston’s future success, which, in Murdock’s view, will come down to “how well minorities are going to do.” Murdock is optimistic, in part, because Houston’s minorities share the city’s basic culture of faith in hard work as a means of upward mobility. According to Rice University’s Houston Area Survey, 85 percent of Houstonians—including 79 percent of blacks and 89 percent of Hispanics—agreed with the statement “if you work hard in this city, eventually you will succeed.” Nationwide, this sentiment is shared by only 60 percent of those surveyed.
LYNN JOHNSON/NATIONAL GEOGRAPHIC
Encompassing scientific and technical jobs as well as blue-collar work, Houston’s energy industry is booming.
Not everyone is impressed by Houston’s growth and prospects. Critics dismiss the city’s development model as a disaster for the environment, quality of life, and civic culture. For the most part, they regard Houston as a cultural desert—a throwback to the sprawling postwar model of many American cities. “When one asks to see the social center of Houston,” scoffs architect Andrés Duany, “one is taken to the mall.”

But such statements don’t reflect a city where opportunity urbanism is shaping an impressively vibrant cultural landscape. A 2012 survey by Economic Modeling Specialists International (EMSI) of the city’s creative economy found 146,000 jobs, generating an annual economic impact of $9.1 billion. Houston is projected to have the largest gain in arts-related jobs by 2016 of any city in the study. Arts and culture expenditures totaled almost $1 billion per year in 2010, with total event attendance topping 16 million—numbers sure to grow, with almost 150,000 people per year moving into Greater Houston. The city boasts permanent professional resident companies in all of the major performing arts, including opera, ballet, symphony, and theater, and its theater district has more seats than any rival in the country, except for New York’s. Houston’s 18 museums attract 8.7 million visitors a year. This is no cultural backwater.

With their higher real incomes and lower taxes, Houstonians dine out substantially more than residents of any other major American city—and they’ve got lots of options. “You used to go to New Orleans for food and music,” notes Chris Williams of Lucille’s, a cutting-edge Houston restaurant that serves sophisticated Southern food. “Now you go down the block.” Taylor Francis, a 24-year-old advertising executive who moved recently from the Bay Area, points to restaurants like Underbelly, a popular Beard Prize–winning restaurant in the fashionable Montrose district. “My friends in the Bay Area rarely go out because it’s too expensive,” he said. “All their money goes to rent—but here, I can live in a roomy place and go out. There’s something attractive about that.” Houston’s leaders hope to lure more young people like Francis away from coastal cities such as Portland, Boston, New York, and Los Angeles. The city is building one of the nation’s most extensive bike systems and constructing a $215 million park system along its long-disdained bayous.

Marcus Davis, who grew up in the hardscrabble Fifth Ward, says that growth is simply part of the Houstonian ethos. “This place is pure opportunity, including for African-Americans,” he said at his successful and usually crowded restaurant, the Breakfast Klub, just outside downtown. Davis’s customer base includes young professionals and middle-class families. “This is a place where everyone wants to figure out how to do business. And since Houstonians like to do things over food, having a restaurant can be very lucrative.” The growth-friendly attitude is what holds everything together in Houston, and it will be crucial whenever the next slowdown comes—when oil prices could drop, say, to below $100 a barrel. It remains to be seen whether a large influx of newcomers to Greater Houston from the ocean coasts will clamor, as they have elsewhere—notably, in Colorado—for a more controlled, high-regulation urban environment.

For now, though, most Houstonians see the city as a place that works—for minorities and immigrants, for suburbanites and city dwellers—and few want to fix what isn’t broken. “The key to Houston’s future is to keep thinking about how to be a greater city,” notes David Wolff as he passes a new set of towers off the Grand Parkway. “This road, it wouldn’t be built in many places. People might talk about these things, but in most places, they don’t get done. In Houston, we don’t just talk about the future—we’re building it.”

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA. This article first appeared  in City Journal and is republished here with permission.

Let Them Drive Teslas

Once again, Senate Leader Darrell Steinberg has thumbed his nose at the working class and other Californians of modest means by blocking legislation that would have slightly delayed implementation of carbon emission fees charged to oil companies. The fees are part of the state’s “cap-and-trade” program, California’s one-of-a-kind effort to reduce wordwide carbon emissions. These fees are really taxes that will be passed on to consumers.

California drivers need to brace themselves. We already have the highest gas tax in the nation and this silly scheme will add between 15 and 40 cents a gallon after the first of the year. Bigger increases are a near certainty after that.

The effort to postpone the harm to citizen taxpayers was no right wing conspiracy. Indeed, its champion was Democratic Assemblyman Henry Perea. He introduced AB 69 to spread the implementation of the new fees over a three-year period to allow those who must buy gasoline more time to adjust to the higher costs. The measure was supported by other moderate Democrats and Republicans but, in a letter to Perea, Steinberg made it clear that he would not allow its consideration by the Senate.

In his letter to Perea, Steinberg paid lip service to the cost of combating carbon emissions, but added “the cost of doing nothing is much greater.” That opinion, however, is not shared by the rest of the civilized world. Virtually all other nations have backed off their aggressive “global warming” policies. Australia is but the most recent country to abandon carbon taxes because of the “costs to households.”

Steinberg’s refusal to recognize the needs and problems of average state residents is typical of majority thinking around Sacramento. Steinberg and his colleagues would do well to emulate gubernatorial candidate Neil Kashkari who spent a week in Fresno living on the streets while looking for work. If the Senator and other disconnected legislators would spend a little time in the real world they might learn something.

While the unemployment rate has declined — California still ranks seventh highest in unemployment — areas like the Inland Empire are still suffering with nearly 10 percent out of work. And our state, at 23.8 percent, has the highest poverty rate in all 50 states.

Excepting the moderate Democrats and Republicans who understand the severity of working class problems, the detached political left is mistaken to overlook the millions of low income Californians — many of whom are working, but only part time — who are not happy relying on entitlement programs to get by. Most of these need a car to look for work and, if they’re lucky enough to land a job, a way to get there.

The cost of gasoline is already sky high and the dirty little secret is that 71.29 cents of what the consumer pays per gallon is state and federal tax. The “evil” oil companies’ profits on a gallon are about 7 cents. So, we have to ask – who’s ripping off whom? Having to pay another 40 cents a gallon in additional government imposed taxes is the last thing that those of low and moderate income need right now.

Assemblyman Perea has pleaded for consideration for these folks, only to be rebuffed. Steinberg’s response reminds one of Marie Antoinette’s who, when told that the people were starving because they had no bread, infamously said, “Let them eat cake.” In the case of those fervently devoted to the rigid implementation of California’s cap and trade program, it is as if when told that a low income citizen can no longer afford gasoline for their 1991 Toyota Corolla, they respond with “Let them drive Teslas.” The Tesla, of course, is a taxpayer subsidized electric car that will set the buyer back north of $100,000, which is well beyond the means of those who will be most hurt by this new gas tax.

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.

The Dead Billionaire’s Club That Runs the Environmental Movement

new report from the minority staff of the Senate Committee on Environment and Public Works shows just how a handful of left-leaning foundations have taken control of the once-grassroots environmental movement. These foundations both shape the environmental agenda and help put people in power in the Environmental Protection Agency and other bureaucracies.

20140829_OTooleClick image to download the 2.3-MB report.

The report uses the unfortunate term “Billionaire’s Club” to describe the funders who give groups like the Environmental Defense Fund, Natural Resources Defense Council, and Sierra Club Foundation millions of dollars a year. In fact, in most cases it would be more accurate to describe it as the “Dead Billionaire’s Club,” as most of the money comes from foundations set up by wealthy people who were often fairly conservative, but their foundations are now run by their liberal children and/or left-wing staffs.

One curious exception is a funder called the Sea Change Foundation. This foundation, which has remarkably little to say for itself on its web page, is run by Nathaniel Simons, a hedge-fund manager and son of a billionaire, and it gives more than $40 million per year to environmental groups, mostly for climate change issues. For some reason, he funnels much of his money through a phony Bermuda company that then donates it to the Sea Change Foundation. Whether this is because he is motivated by environmental idealism or because he is also an investor in companies that will benefit from restrictions on fossil fuel production is difficult to say.

Aside from the unfortunate Billionaire’s Club name, the new report is very believable to anyone familiar with the environmental movement today. The Antiplanner worked as a consultant to the nation’s leading environmental groups from 1974 to about 1993. For most of those years, a Republican was in the White House, and environmental groups funded themselves by sending out direct mailings saying, “Send us money and we’ll save the environment from James Watt” or whoever was the Republican demon of the year.

One benefit of this system was that the wide variety of environmental groups had a wide variety of funding sources, and this diversity led them to use a wide variety of tactics and take often conflicting positions on various issues. For example, the Antiplanner’s book, Reforming the Forest Service, which recommended that federal land management be turned over to market forces, was controversial within the movement but was generally well received by many national forest activists.

Everything changed when Bill Clinton was elected president. With a self-proclaimed environmentalist in the White House, donations to major environmental groups dropped dramatically. Meanwhile, a variety of foundations that had previously ignored environmental issues began taking an interest in funding environmental groups. Moreover, the foundations let it be known that they would only give to groups that had mutually agreed-upon goals and strategies, leading the movement to lose the diversity that made it strong and the tolerance for new ideas that led to better solutions to environmental problems.

I left the movement at that time and for those reasons, and it appears that it has only gotten even more dependent on foundations since then. It also gets lots of government money. The new report documents how environmental staffers get themselves appointed to positions in the Environmental Protection Agency and then use those positions to give government grants to the environmental groups they once worked for.

The report also detailed one case where a Dead Billionaire’s Foundation paid someone to work in the White House in order to lobby for more EPA regulations. Ironically, the foundation in this case was originally funded by the Rockefellers, yet the oil industry that earned their millions is now the chief target of the groups funded by their foundation.

When I hear that there is a “scientific consensus” on some issue or that there is strong grassroots support for some regulation, it now appears more likely that the consensus and support are found only among a narrow group of foundations and the environmental groups they fund. I know there are real environmental problems, but the problems they identify are often imaginary and the solutions they promote will almost always do more harm than good.

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About the Author:  Randal O’Toole is an American public policy analyst. The majority of O’Toole’s work has focused on private land rights, particularly against public land use regulations and light rail. Since 1995, he has been associated with the Cato Institute as an adjunct scholar and frequent anti-light rail campaigner. O’Toole was the McCluskey Visiting Fellowship for Conservation at Yale University in 1998, and has served as a visiting scholar at the University of California, Berkeley and Utah State University. O’Toole studied economics at the University of Oregon. This post was originally published on O’Toole’s blog, The Antiplanner, and appears here with permission.

How America's Business Lobby Often Opposes Free Markets

Traditionally, business was the most important political backer of free markets, which made sense because business needs markets in order to exist at all. However, in the last generation, the views of business, as expressed by the U.S. Chamber of Commerce and other outlets, have increasingly diverged from the free-market ideal. As crony capitalist ideas have come to dominate business thinking, so crony capitalism itself has come to dominate the U.S. economy, with dire results for productivity growth and the living standards of Americans.

In some respects, the Chamber of Commerce and domestic business generally remain committed to the remnants of free-market principle in an environment where they have been beleaguered. The Chamber vehemently opposes the efforts of trial lawyers to divert shareholder funds to their own pockets. It generally supports free trade; indeed it is especially adamant in supporting the freedom to offshore operations from the U.S. to emerging markets where costs are lower. It supports the Keystone pipeline.

As might be expected, the Chamber also opposes a number of Obama administration initiatives that directly increase business costs. It opposes Obamacare in general and is especially vehement against the Consumer Financial Protection Bureau’s lack of accountability and surplus of regulations. It also, as might be expected, opposes restrictions on atmospheric carbon and retains its historic opposition to the trade union movement.

The Chamber would naturally oppose legislation that imposed costs on business; in the same way, it naturally favors provisions that reward business with tax breaks not available to the public as a whole. However, in general its anti-market positions bear only modest relation to the economic interests of business, and instead reflect a corporatist agenda that is thoroughly detrimental both to the interest of ordinary people and to the overall U.S. economy.

The most egregious anti-market attitude of modern business, at least the largest businesses, is on immigration. Here it favors essentially the abolition of all restrictions. Thus, it wants to import high-skill immigrants in tech sectors to compete with U.S. STEM graduates for the limited number of jobs available (we learned this week that Microsoft, one of the advocates of increased immigration, is to lay off 15,000 U.S. workers.) This is a very shortsighted policy indeed; by driving down the wages paid to STEM graduates, so that computer scientists earn less now than they did in 1999, business lobbyists are ensuring that the best and brightest U.S. students head for careers in areas such as law where they are better protected from foreign competition.

At the low-skill end of immigration, business generally favors both legalization of the 11 million illegal immigrants already in the country (thus encouraging a further flow, as we are seeing currently) and the establishment of not one but two guest-worker programs, under which further low-skill workers can be imported to drive low-skill wages down to subsistence levels. Needless to say, this is not in the interest of the U.S. people as a whole, who are impoverished thereby. It is not even in the long-term interest of business. Very high low-skill immigration and declining U.S. living standards degrade the gigantic domestic market so that it is no longer the template against which international competition must measure itself. Without the world’s richest and most sophisticated consumers, U.S. business will be at a growing disadvantage against competitors from richer and better-ordered countries such as Japan, Germany, Scandinavia and eventually South Korea, Taiwan and others in South-East Asia.

The free-market approach to immigration recognizes that people are not goods and that the arguments for free trade in goods break down when the item moving from country to country is an immigrant. Barbers are paid more in Boston than they are in Bangalore because of the greater wealth surrounding them, and an extra barber imported to Boston competes directly with the local workforce and plays far more havoc with domestic living standards than an imported car, machine tool or item of software. Hence, to prevent Boston barbers’ living standards from being driven down to those of the Congo, we must restrict imports of people. The cheap labor lobby, whether in the tech sector, in agriculture or in low-wage service sectors, is attempting to enrich itself by immiserating its fellow citizens.

Business in general and the Chamber of Commerce in particular are further violating free-market principles by their approach to education, for which they favor a “Common Core” standard imposed by a remote bureaucracy in Washington. Raising educational attainment is desirable, but in most respects the Common Core standards are dumbed down and politicized compared to the state standards that preceded them. The problem becomes worse if education funding is made dependent on standardized test results. At that point, all effort goes to satisfying the test results rather than getting the best out of the academically gifted, and study beyond the core syllabus more or less disappears.

The free-market approach to education is precisely the opposite of that favored by the U.S. Chamber of Commerce: to decentralize it as far as possible, introducing competition between schools and localities and allowing parents to choose both where they live and where within that area their children go to school. Of course, top-up payments should be made to ensure that schools in poor or educationally deprived communities are capable of raising the standards of their pupils, but this is best achieved by a voucher system, with additional vouchers for poor or disadvantaged families. While parents lack the knowledge to choose optimally between different educational approaches, so do educational bureaucrats, and the parents are much more likely to choose approaches that fit the needs and aspirations of their children.

A third policy area in which business opposes the free market is in infrastructure spending, typically funded by the state. Here costs have escalated far in excess of general inflation, by a factor of five or 10 times in real terms in the last 50 years, yet business still pushes for high spending, expecting it to be funded by the taxpayer, and does little or nothing to dynamite the union rules, environmental constraints and sheer mindless regulation that makes it so impossibly expensive. The free-market response to the infrastructure problem is a moratorium, refusing to fund any new projects until costs have been returned to their historic level in real terms (ample documentation is available to show where cost savings must be made.) Only when a bonfire of regulation and litigation has occurred should infrastructure spending again be resumed, this time at reasonable cost to the tax-paying public.

Business is also anti-free-market in the patent and copyright area, where it favors excessive and costly patent grants and copyrights extending far beyond a reasonable return for the creation concerned, so that 1923 seems destined to survive forever as a fixed date after which copyright will be eternal. It plays games with pension funding, hoping to pass off much of the cost of eventual defaults on taxpayers through the Pension Benefit Guaranty Corporation. It favors the US Eximbank, even though that crony capitalist institution supports a tiny minority of businesses, lands taxpayers with credit losses and provides subsidized competition to other businesses such as Delta Airlines.

Finally, the most damaging betrayal of free markets by U.S. business is its support for the Fed’s current extreme monetary policies. Here there is a disconnect between the needs of business itself, which wants at all costs to avoid another destructive meltdown like that of 2008, and those of corporate management, who want a continual bubble-led inflation of stock prices to maximize the value of their options. The Chamber view even extends to decrying the 2008 Fed as having been too tight – something that can have been true for at most a week or so, given the persistent negative real interest rates of that year.

Business in general and the U.S. Chamber of Commerce in particular retain a theoretical support for the free-market system. But that support is increasingly counterbalanced by practical opposition to it on issue after issue. It’s not very surprising; as the economy gets pulled further and further away from a true free market, with larger and larger government, more and more regulation and an increasingly destructive monetary policy, the interests of business increasingly become locked into the statist status quo. The beneficiaries of crony capitalism are rich and thriving in a crony capitalist world; those of a true free market are increasingly beleaguered, as they represent businesses that never came into existence or were stifled early on by monstrous regulation.

If a full free market, with Volckerite or gold-standard monetary policy and regulation sharply cut back were ever re-established, much of today’s business would bitterly oppose it, as no doubt would the Chamber. We even saw a simulacrum of this process in the run-up to the 1980 election and the early Reagan years, when much of the business establishment was dragged kicking and screaming into the new world. The effect today would be much stronger as the deviation from a free-market economy has gone much further since 1988.

We are at present in the gloomy world of Ayn Rand’s “Atlas Shrugged,” in which an alliance between the crony capitalist James Taggart and the regulator Wesley Mouch is driving the innovators into bankruptcy—or in that case, into a secret hideout in the Colorado mountains that was, alas, pure fantasy. There is still hope for a reversal into something better, but the business lobby will initially oppose bitterly any such move.

About the Author:  Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) which examines the British governments of 1783-1830. He was formerly Business and Economics Editor at United Press International. Martin’s weekly column, The Bear’s Lair, is based on the rationale that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. This article originally appeared on the economics website “The Prudent Bear” and is republished here with permission.