Why the "War on Poverty," Now Entering its Fifth Decade, Has Failed

“Keep doing what yer doing and you’ll keep getting what you got.” Thus spoke Robert Woodson, explaining why the War on Poverty, now entering its fifth decade, has failed—and miserably so.

As a front-row spectator, Bob should know. He has been an outspoken civil rights activist since the 1960s, directed the National Urban League’s Administration of Justice division back in the 1970s, and in 1981 founded the Center for Neighborhood Enterprises, focusing on finding practical solutions for fighting poverty. He’s since been awarded a MacArthur genius fellowship, the Bradley Foundation Prize, and the President’s Citizens medal. And yet, Al Sharpton is the one with the TV show.

Which leads me to think he knows much that our media elites don’t. In his interview on this week’s RealClear Radio Hour Bob confirmed that suspicion.

The American public is “tired of the gladiatorial combat that masquerades as political discourse” and is “desperate for solutions that transcend the ideological divide,” he said. “The Civil Rights movement has abandoned the high ground on which it was founded. It has morphed into a race grievance industry. It has been hijacked by the Democratic Party. It has sold its soul to the highest bidder.”

Yet, far from being bitter, Bob is ever more committed to his work at the Center for Neighborhood Enterprises, where his focus is on studying, identifying, and amplifying success, not justifying, subsidizing, and profiting from failure. “The only thing you can learn from studying failure is how to create more of it.”

He argues that most government spending on poverty alleviation is misdirected. “Seventy percent of the money spent on poor people goes not to poor people; it goes to those that serve poor people. And so they ask not which problems are solvable but which problems are fundable. We’ve spent $15 trillion to aid the poor with the bulk of it going to middle class providers. We have created a commodity out of poor people and wonder why poverty expands as funding increases.”

Bob is concerned about the class divide this has created among his fellow African Americans. “Two out of 10 whites with a college education works for government. Six out of 10 blacks with a college education works for government. This makes a lot of middle class blacks part of what I call the Poverty Pentagon. The perverse incentives lead to the consequence that many middle class blacks prosper at the expense of their low income counterparts.”

Those perverse incentives promote the perpetuation and growth of the complex of social workers and welfare “rights” activists who measure their success by how many new “clients” they get to sign up for state benefits. And that is precisely why Lyndon Johnson’s War on Poverty, which turns 50 this summer, has been such a failure.

“Billions of dollars in government money has been converted into services for the poor, funding schools of social work, psychologists, drug counselors—all professional providers.  They crafted remedies for the poor that were parachuted into low income communities. If the poor did not respond by improving their conditions, rather than challenging the nature of the intervention, they demanded more money. So the more they undermined the people they were supposed to serve, the more they got rewarded with expanded budgets. We built a system where the more you fail, the more you get paid.”

So how do we break this vicious cycle? “I believe the answer is to seek solutions among what I call the social entrepreneurs that are indigenous to low income communities. We believe that the principles that work in our market economy should also work in our social economy.” And so Bob’s program seeks out families that have persevered and prospered despite the odds against them, to learn from their success and teach their lessons to others.

He also places a high premium on cultivating the personal dignity that can only come through work, describing a program in which impoverished mothers earn volunteer credits they then use to purchase Christmas gifts for their own children, avoiding having the mothers shamed by watching social workers distribute gifts to their kids.

All of this has political implications, particularly as the White House amps up its income inequality hysteria campaign. “I am encouraging the Republican Party to become competitive [among African Americans],” says Bob. “That’s why I’m taking Paul Ryan, once a month, to visit low income leaders that have triumphed over poverty and despair so that perhaps he can instruct others of his party in ways that they can become competitive. It is really hostile to the interests of America for black America to be a sole subsidiary of one political party.” But, I asked Bob directly, “Do you believe there’s an irredeemable taint of racism in the hearts of many conservative Republicans?” “Absolutely not,” he replied. “I do not believe that.”

About the Author:  In the 35 years since Bill Frezza graduated from MIT with degrees in electrical engineering and biology he has been a scientist, an engineer, a product manager, a salesman, a consultant, an entrepreneur, an author, a technology evangelist, and a venture capitalist. His early career on high-tech’s bleeding edge included the development of first generation electronic newspapers, home banking, home shopping, cable modems, multi-user videogames, wireless LANs, and wireless email, all of which became a success – for someone else a decade later. His 15 years as a venture capital investor working with early stage telecom, semiconductor, and biotech startups taught him humbleness, risk aversion, and the ability to identify ten fatal flaws out of five in any startup business plan. Frezza is a frequent guest on CNBC, FOX, and CBN News where he is challenged to reduce complex economic and policy issues into thirty second sound bites. More writing by Frezza can be found at BillFrezza.com. This article originally appeared in Forbes and appears here with permission from the author.

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties

Summary:  Using officially reported figures from the most recent financial statements available, this report calculates the total unfunded employee retirement liabilities for the 20 California counties with their own independent retirement systems. This study is the first of its kind to compile for these counties not only reported pension fund assets and liabilities, but also retirement health care assets, if any, and their corresponding liabilities, as well as the outstanding balances for any pension obligation bonds.

This composite data, reported for each county both as a funding ratio and as a numerical value for the net liability, incorporates all assets and liabilities associated with retirement obligations to public employees. To-date, most reports focus on the unfunded pension liability, ignoring the amount of the unfunded healthcare liability and the outstanding balance owed on pension obligation bonds. But these other liabilities are of comparable value, and are offset with far fewer invested assets, if any. For taxpayers and policymakers to properly understand and cope with the financial challenges facing their counties, this information is vital.

As it is, these 20 counties combined have a population of 29.3 million, constituting 77% of Californians. Their total unfunded pension liability, based on their most recent financials, is $37.2 billion. Their total unfunded retirement liabilities, also based on officially reported amounts in their most recent financial statements, but also including pension obligations bonds and unfunded healthcare liabilities, is $72.3 billion. As a percentage, their total funded ratio just for pensions (assets as a percent of liabilities) is 74%. Their total retirement funding percentage, taking into account pensions, healthcare, and pension obligation bonds, is only 60%.

This total obligation, $7,369 per household vs. $3,932 if you only include pension funds, is a daunting amount. But it is based on official rates of return of 7.5%, which as explained further in this study, if not attained, will result in far higher calculations of underfunding for pensions – at a 5.5% discount rate, for example, the funded ratio for these 20 counties drops to 49%. And, of course, it only represents the costs for county workers – within these counties, taxpayers are also responsible for the unfunded pension and healthcare liabilities – and retirement related bond debt – for those working for the local cities, as well as all workers within their counties who are employed by public schools, local colleges and universities, other public agencies, and the state.

*   *   *

INTRODUCTION

The concept of “total compensation” has become increasingly recognized as the only accurate way to assess whether or not public employee compensation is either affordable or equitable. Instead of just reporting base pay, total compensation calculations look at all types of direct pay including “credential pay,” “specialty pay,” “bilingual pay,” “advanced degree pay,” “tuition reimbursement,” etc., along with overtime pay, and along with the costs for all employer paid benefits including current health insurance coverage. “Total compensation” calculations also include current year contributions made by an employer towards an employee’s retirement benefits – namely, health insurance and pensions.

“Total compensation,” as it turns out, often exceeds “base pay” by a factor of 100% to 200%.

Discussions of unfunded liabilities for retirement benefits must undergo a similar examination. To-date, the primary topic of debates and discussion over the size of unfunded liabilities regards pensions, and on what discount rate to use to calculate the present value of the employer’s future retirement pension obligations.

This debate is ongoing and of critical importance – to use very rough numbers, each 1.0% drop in the projected rate-of-return for a typical pension fund can increase the required annual contribution by roughly 10% of payroll. Similarly, using very rough numbers, as documented in a February 2013 CPC study entitled “How Lower Earnings Will Impact California’s Total Unfunded Pension Liability” – using formulas provided by Moody’s Investors Services for this purpose, and data provided by the California State Controller. Bearing in mind that a relatively small change to the total liability may result in a very large change to the net unfunded liability – here is the impact of changes to the projected rate of return on the total unfunded liability for all of California’s public employee pension systems combined using annual report data from 6-30-2012:

Official total unfunded pension liability at assumed rate-of-return of 7.5% = $128 billion.

Official total unfunded pension liability at assumed rate-of-return of 6.2% = $252 billion.

Official total unfunded pension liability at assumed rate-of-return of 5.5% = $329 billion.

Official total unfunded pension liability at assumed rate-of-return of 4.5% = $450 billion.

*   *   *

TOTAL UNFUNDED PUBLIC EMPLOYEE RETIREMENT LIABILITY

The purpose of this study is not to present the consequences of lower rates of return, but instead to calculate – using the officially recognized composite rate of return of 7.5% – what the total unfunded public employee retirement liability is, using information provided by independent pension systems serving select California counties. There are 20 counties that administer their own independent pension systems under the “County Employee Retirement Law;” this study draws on information provided in the Consolidated Annual Financial Reports for these counties, as well as in the County Employee Retirement Systems annual Actuarial Valuation reports.

Using official numbers has the virtue of being relatively beyond debate – when using the official projections, the only question anyone should be asking is how much higher these numbers may be using lower estimated rates-of-return. But total public unfunded employee retirement liabilities do not just include unfunded pension liabilities, they also include unfunded retirement health insurance liabilities – the so-called “OPEB” (Other Post-Employment Benefits). Total unfunded public employee retirement obligations must also include the outstanding balances on Pension Obligation Bonds – balance sheet debt, usually long-term that was entered into by cities and counties in order to raise cash to make their required employer pension contributions to their pension funds.

By combining all three sources of liability for retirement obligations, a far more accurate picture of just how much taxpayers owe – even at the official rate-of-return projections which may turn out to be far too optimistic. By matching these liabilities against the assets on hand – pension fund assets and in some cases OPEB fund assets – the next table shows the true “unfunded” ratio for the 20 CERL counties.

Table 1 – Total Unfunded Retirement Liability per CERL Counties ($=Millions)

20140506_Churchill-Monnett_1

Showing this number adds a sobering perspective to the discussion of unfunded retirement liabilities. The counties on the above table are ranked with those counties having the worst funded ratios appearing first. As can be seen, there is a wide variation between the worst, Merced, where less than half the necessary amount to fund already earned pension and retirement healthcare benefits has actually been set aside, and Tulare, which is has a healthy 87% funded ratio.

It is important to emphasize that all these numbers reflect officially recognized liabilities. It would be instructive to provide data on just how much these unfunded liabilities will swell if any sort of projection is made based on lower rates of return. Here’s the formula that Moody’s Investor Services provided to revalue the present value of pension liabilities from the common 7.5% rate of return projection based on using a more conservative rate of 5.5%:

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

Here, plugging into the formula the official total pension liability for all 20 CERL counties of $143 billion, is how much it grows at the lower discount rate of 5.5%:

[ 143.2 x ( 1 + 7.5% ) ^ 13 ]  /  ( 1 + 5.5% ) ^ 13  =  182.8

Collectively, for the CERL counties, using this formula to apply the more conservative discount rate of 5.5%, their estimated pension liabilities grow from $143.2 billion to $182.8 billion, which means their estimated funded ratio for pensions (not including pension obligation bonds) drops from 74% to 58%. Put another way, since the unfunded pension liability is equal to the total assets less the estimated pension liabilities, by using the more conservative discount rate of 5.5%, they more than double, from $37.3 billion to $76.8 billion. The 20 CERL pension systems have had similar earnings rate during this period. The potential for surprises like this should not be lightly dismissed. In spite of recently reported good results, note that 5.5% is in fact the cumulative investment rate of return earned by CalPERS during the 13 years from 2001 to 2013.

[Note: This recent CPC study “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” provides a tutorial, including a downloadable spreadsheet, explaining how use Moody’s pension analysis formulas to analyze any typical public sector pension fund.] 

*   *   *

PAYING DOWN THE TOTAL UNFUNDED RETIREMENT LIABILITY

Another way to explain the significance of the total unfunded retirement liability would be to describe what repayments would be based on the goal to achieve 100% funded status in 20 years. The next table shows these payments as a percent of their respective county budgets, using 2012 budget data compiled from publicly available information by the website PublicSectorCredit.org.

The order of the counties on this table are ranked with the worst counties, i.e., those with the highest payments on their unfunded liability as a percent of revenue listed first. Even though Los Angeles County has only the 2nd lowest unfunded liability, at 51%, 2nd to Merced County at 47%, Los Angeles County’s unfunded liability as a percent of their annual budget is actually greater.

As shown in the 3rd column “Liability as Multiple of Revenue,” Los Angeles County’s officially recognized total retirement liability is 2.37 times their entire annual revenue. As a payment calculated to bring the county to 100% funding by 2034, they would have to make an unfunded “catch-up” payment each year equivalent to 23% of their annual revenue.

Table 2 – Unfunded Payment as Percent of Revenue per CERL Counties ($=Millions)

20140506_Churchill-Monnett_2b

As can be seen in the above table, these so-called “unfunded payments,” for which reforms to-date do not require public employees to bear any share of payment on via payroll withholding, will themselves consume a significant portion of the entire budget of many counties – if serious attempts are made to actually achieve 100% funding. And without 100% funding, the pool of invested assets is too small to prevent the unfunded liability from growing further even if rate-of-return projections are fulfilled. Here’s why:

In the projections shown on the above table, a 7.5% rate of interest is used – this rate represents the opportunity cost of not having 100% funding. For example, Ventura County has a funded ratio of nearly 80%, purportedly the threshold for a “healthy” fund. But because they are earning money on invested assets that only amount to 80% of the present value of their estimated retirement liabilities, if all they do is earn 7.5% in a given year, their unfunded liability will grow. Because to 7.5% earnings on a 100% funded plan is equivalent to 9.4% earnings on an 80% funded plan. And so it goes.

While the math behind all of this may only seem obvious to those who understand financial concepts and are proficient at algebra, the point of it all should be obvious to everyone: For the CERL counties to improve their funded ratio for their total retirement obligations, which collectively – using officially reported numbers – is already only 60%, they will have to make annual unfunded payments that will by themselves consume a significant portion of their budgets, in addition to the normal funding contributions for new benefits earned in any given year.

*   *   *

THE IMPACT OF THE TOTAL UNFUNDED RETIREMENT LIABILITY ON INDIVIDUAL TAXPAYERS

The next chart lists the number of households and the population of each of the 20 CERL counties, using estimated 2013 figures provided by the U.S. Census Bureau. The ranking again finds Los Angeles County at the top of the list. The officially recognized unfunded liability per household for Los Angeles County is a whopping $12,123; the payment per household to eliminate this unfunded liability by 2034 is $1,190 – one may reliably surmise that the payment per taxpaying household to be considerably higher. As noted already, this liability refers only to the county workers – every resident and taxpayer also carries the prorated burden of unfunded liabilities for the local and state government employees who work in their cities, their schools, and state agencies.

Table 3 – Unfunded Liability and Payment per Household per CERL Counties ($=Millions)

20140506_Churchill-Monnett_3

Properly calculating the entire unfunded retirement liability for California’s citizens, or performing what-if analysis based on what may happen to that liability if rate-of-return projections are lowered, was not the intention of this study, but bears a final point: As shown on Table 1, the total unfunded liability for all retirement obligations is only 60% funded using official discount rates. If the pension liability is revalued at the lower 5.5% discount rate, the estimated total retirement liability swells from $179 billion to $218 billion, the estimated unfunded liability grows from $72 billion to $112 billion, and the funded ratio drops from 60% to 49%.

The CERL counties, with their independent pension systems, provide an excellent means to distill the nature of the problem to very specific and easily documented numbers and calculations. The concept of total retirement obligations, incorporating not only unfunded pension liabilities, but also debt outstanding on pension obligation bonds, and unfunded retirement healthcare obligations, yields a far more ominous profile of financial ill health than merely focusing on pensions. But it is the only accurate way to assess the cost taxpayers truly face.

*   *   *

About the Authors:

Ken Churchill is the director of New Sonoma, an organization of financial and business experts and concerned citizens dedicated to working together to solve Sonoma County’s serious financial problems. Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. He sold both companies and now grows wine grapes and produces wines under his Churchill Cellars label. For the past three years, Churchill has been actively researching and studying the pension crisis and published a report titled The Sonoma County Pension Crisis – How Soaring Salaries, Retroactive Pension Increases and Poor Management Have Destroyed the County’s Finances. Churchill is currently running for supervisor, 4th district, in Sonoma County.

Bill Monnet is a board member of Citizens for Sustainable Pension Plans in Marin County.   He has an MA in Political Science from UC Davis and an MBA in Finance from UC Berkeley. Monnet was briefly an adjunct Professor of Public Administration and then spent 24 years in Silicon Valley in various management positions at IBM, Siemens and Cisco Systems. His work experience includes positions in finance, service & manufacturing operations, demand forecasting and failure analysis. He says that his varied experiences have proved surprisingly effective in understanding the counterintuitive world of public finance.

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.

*   *   *

FOOTNOTES

(source data for counties listed in alphabetical order)

Alameda County

Pension Assets and Liabilities:
Alameda County CAFR 6-30-2013, Liabilities and Actuarial Value of Assets see page 64.
http://www.acgov.org/auditor/financial/cafr12-13.pdf
Alameda Employee Retirement Association Actuarial Valuation Report for 12-31-2012, Market Value of Assets see page viii.
http://www.acera.org/post/actuarial-reports

Pension Obligation Bonds (balance as of 6-30-2013):
Alameda County CAFR 6-30-2013, Outstanding Long-Term Obligations, pages 17 & 56.
http://www.acgov.org/auditor/financial/cafr12-13.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation  as of 12-31-2012):
Alameda County CAFR 6-30-2013, Outstanding Long-Term Obligations, pages 67, 70.  Alameda County has 2 separate OPEB programs:  retiree medical benefits program and a COLA + death benefit program.  The assets & liabitlies reported here are for both programs.
http://www.acgov.org/auditor/financial/cafr12-13.pdf

Contra Costa County

Pension Assets and Liabilities:
Contra Costa County CAFR 6-30-2013, Actuarial Value of assets & liabilities page 95.
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970
Contra Costa County Employee Retirement Association Actuarial Valuation 12-31-2012, Actuarial & Market value of assets page 5.
http://www.cccera.org/actuarial/Actuarial Val Report 2012.pdf

Pension Obligation Bonds (actuarial valuation as of 6-30-2013):
Contra Costa County CAFR 6-30-2013, 10. Long-Term Obligations, “Pension Bonds Payable,” page 80
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 01-01-2012):
Contra Costa County CAFR 6-30-2013, Schedule of Funding Progress, Other Postemployment benefits “Actuarial Accrued Liability,” pages 98 and 106. Note the CAFR reports the value of OPEB Assets as $114,599 as of 06-30-2013 but does not report the corresponding liability on that date. In order to have a fair matching of assets with liabilities at the same point in time I have reported the 01-01-2012 numbers.
http://www.co.contra-costa.ca.us/DocumentCenter/View/28970 

Fresno County

Pension Assets and Liabilities:
Fresno County Employees Retirement Association Actuarial Valuation 6-30-2013 [actuary = Segal], page vi.
http://www2.co.fresno.ca.us/9200/Attachments/Agendas/2014/011514/Item 27 011514 Actuarial Valuation Report as of June 30 2013.pdf 

Pension Obligation Bonds (balance as of 6-30-2013):
Fresno County CAFR 6-30-2012, POBs outstanding page 117.
http://www2.co.fresno.ca.us/0410/CAFR/CAFR2013.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
No OPEB liabilities, assets or program is reported in the CAFR.

Imperial County

Pension Assets and Liabilities:
Imperial County Employees Retirement System Actuarial Valuation 6-30-2013, page v.

Pension Obligation Bonds (balance as of 6-30-2013):
Imperial County CAFR 6-30-2012, Note 8: Long Term Debt, page 41.
http://www.co.imperial.ca.us/Budget/GeneralPurposeFinancialStatements/2013Financials.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Imperial County CAFR 6-30-2012, Note 11: OPEB, page 46.
http://www.co.imperial.ca.us/Budget/GeneralPurposeFinancialStatements/2013Financials.pdf

Kern County
Pension Assets and Liabilities:
Kern County Employees Retirement Association Actuarial Valuation 6-30-2012, page vi.
http://www.kcera.org/pdf/Actuary/2012_valuation_report.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Kern County CAFR 6-30-2013, page 61.
http://www.co.kern.ca.us/auditor/cafr/13cafr.PDF

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Kern County CAFR 6-30-2013, page 107. This includes the liabilities for both the Retiree Health Premium Supplement Program and the Retiree Health Stipend.
http://www.co.kern.ca.us/auditor/cafr/13cafr.PDF 

Los Angeles County

Pension Assets and Liabilities:
Los Angeles County Employee Retirement Association Actuarial Valuation 6-30-13 [actuary = Milliman], page 11.
http://www.lacera.com/investments/inv_pdf/actuarial_valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Los Angeles County CAFR 6-30-2013. No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (balance as of 7-1-2012):
Los Angeles County CAFR 6-30-2013, Other Postemployment Benefits, Retiree Health Care, page 122
http://file.lacounty.gov/auditor/portal/cms1_208825.pdf  

Marin County

Pension Assets and Liabilities:
Marin County Employees Retirement Association Actuarial Valuation 6-30-13, page 5.
http://egovwebprod.marincounty.org/depts/RT/main/reports/valuations/actuarialvaluationreport2013-06-30.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Marin County CAFR 6-30-2013, Note 8, Long-Term Obligations, Pension Obligation Bonds, page 54
http://www.marincounty.org/depts/df/~/media/Files/Departments/DF/2013_Marin%20CAFR.pdf

Retirement Healthcare Assets and Liabilities (balance as of 7-1-2013):
Marin County CAFR 6-30-2013, Schedule of Funding Progress Postemployment Healthcare, “AVA,” “AAL,” page 64
http://www.marincounty.org/depts/df/~/media/Files/Departments/DF/2013_Marin%20CAFR.pdf

Mendocino County

Pension Assets and Liabilities:
Mendocino County Employees Retirement Association Actuarial Valuation 6-30-2013, page vi.
http://www.co.mendocino.ca.us/retirement/pdf/063013Valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Mendocino County CAFR 6-30-2013, Note 8: Long Term Liabilities, page 41.
http://www.co.mendocino.ca.us/auditor/pdf/2013_Mendocino_afs_-_FINAL.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Mendocino County CAFR 6-30-2013, Note 12: OPEB, page 48.
http://www.co.mendocino.ca.us/auditor/pdf/2013_Mendocino_afs_-_FINAL.pdf

Merced County

Pension Assets and Liabilities:
Merced County Employees Retirement Association Actuarial Valuation 6-30-2013, pages 2 & 5. http://www.co.merced.ca.us/documents/Retirement/Annual Reports/Valuation 2013 6 30.PDF

Pension Obligation Bonds (balance as of 6-30-2013):
Merced County CAFR 6-30-2013, Outstanding Long-Term Debt, Pension Obligation Bonds, page 14

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Merced County CAFR 6-30-2013, page 68.
http://www.co.merced.ca.us/ArchiveCenter/ViewFile/Item/456

Orange County

Pension Assets and Liabilities:
Orange County sponsors a defined benefit pension through OCERS. The OCERS plans are multi-employer plans which include sponsors not related to Orange County (e.g. City of San Juan Capistrano.) Neither the Orange County CAFR nor the OCERS Acturial Valuation separately report pension assets & liabilities by employer. However, Orange County does report that it is the largest employer in OCERS and pays 88% of sponsor payments into the plan. So, Orange County’s pension assets & liabilities are estimated as 88% of total OCERS assets & liabilities.
Orange County CAFR 6-30-2013, pages 145-146.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 
Orange County Employee Retirement Association Actuarial Valuation 12-31-12. Assets & liabilities page viii.
http://www.ocers.org/pdf/finance/actuarial/valuation/2012actuarialvaluation.pdf 

Pension Obligation Bonds (balance as of 6-30-2013):
Orange County CAFR 6-30-2013, short term POBs pages 110-111, long term POBs page 117.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2011):
Orange County CAFR 6-30-2013, OPEB liability pages 155 & 159.
http://ac.ocgov.com/civicax/filebank/blobdload.aspx?BlobID=33067 

Sacramento County

Pension Assets and Liabilities:
Sacramento County CAFR 6-30-2013, Actuarial value of assets & liabilities page 100.
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf 
Sacramento County Employees Retirement Association Actuarial Valuation 6-30-2013, Actuarial & Market value of assets pages viii & 6.
http://www.retirement.saccounty.net/Documents/ActualInfo/Actuarial Valuation 2013.pdf

Pension Obligation Bonds (balance as of 6-30-2013 including accreted interest):
Sacramento County CAFR 6-30-2013, Note 9 – Long-Term Obligations, page 74
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2011):
Sacramento County CAFR 6-30-2013, OPEB assets and unfunded liabilities page 102.
http://www.finance.saccounty.net/AuditorController/Documents/CAFR2013.pdf  

San Bernardino County

Pension Assets and Liabilities:

San Bernardino County Employees Retirement Association Actuarial Valuation 6-30-2013, Market value of assets page 5, Actuarial Value of assets & liabilities page 70.
http://www.sbcera.org/Portals/0/PDFs/Actuarial Valuation and Review/2013/13_Actuarial_Valuation_Review.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
San Bernardino County CAFR 6-30-2013, Direct and Overlapping General Fund Obligation Debt, pages 84 & 192.
http://www.sbcounty.gov/atc/pdf/Documents/0000_00_00_178_2012-2013%20CAFR.pdf

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):

San Diego County

Pension Assets and Liabilities:
San Diego County Employees Retirement Association CAFR 6-30-2013. SDCERA is a multi-employer plan. There are 5 participating employers. Separate pension and OPEB results are not reported for each employer. However, it is reported that San Diego County employees represent 95.5% and the Superior Court employees represent anothyer 4.3% of SDCERA members. So, the County owns practically all of SDCERA assets & liabilities and all are attributed here to the County. Pension liabilities and Actuarial Value of Assets page 48. Market Value of Assets page 77.
http://www.sdcera.org/investments_report.htm 
These numbers are also reported in the SDCERA Actuarial Valuation 6-30-13 on page v.
http://www.sdcera.org/PDF/June_2013_valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
San Diego County CAFR 6-30-2013, Taxable Pension Obligation Bonds, page 82, Table 27
http://www.sdcounty.ca.gov/auditor/annual_report13/pdf/cafr1213.pdf 

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
San Diego County Employees Retirement Association CAFR 6-30-2013, page 49.
http://www.sdcera.org/investments_report.htm 

San Joaquin County

Pension Assets and Liabilities:
San Joaquin County Employees Retirement Association Actuarial Valuation 01-01-2013, pages 3 & 16.
http://www.sjcera.org/Pages/index.htm

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
San Joaquin County CAFR 6-30-2013, pages 73 & 81.
http://www.sjgov.org/uploadedFiles/SJC/Departments/Auditor/Services/2012-13 SJC Financial Statements Final.pdf

San Mateo County

Pension Assets and Liabilities:
San Mateo County CAFR 6-30-2013, Actuarial Value of assets & liabilities pages 69 & 80. Balances as of 6-30-2013.
http://www.co.sanmateo.ca.us/Attachments/controller/Files/CAFR/2013CAFR.pdf
San Mateo County Employee Retirement Association Actuarial Valuation 6-30-2013 [actuary = Milliman], Market Value of assets page 11. Balance as of 6-30-2013.
http://www.samcera.org/pdf/2013valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No outstanding POBs are reported in the San Mateo County CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
San Mateo County CAFR 6-30-2013, Funded Status and Funding Progress, “AAL” and “UAAL.” page 71
http://www.co.sanmateo.ca.us/Attachments/controller/Files/CAFR/2013CAFR.pdf

Santa Barbara County

Pension Assets and Liabilities:
Santa Barbara County Employees Retirement Association Actuarial Valuation 6-30-13, page 5.
http://www.countyofsb.org/uploadedFiles/sbcers/benefits/2013 Valuation.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Santa Barbara County CAFR 6-30-2013, OPEb Schedule of Funding Progress, “Actuarial Value of Assets,” “AAL,” page 106
http://countyofsb.org/uploadedFiles/auditor/Publications/1213%20CAFR.pdf

Sonoma County

Pension Assets and Liabilities:
Sonoma County Employees Retirement Association Actuarial Valuation 12-31-2012, pave viii.
http://scretire.org/uploadedFiles/SCERA/Resource_Center/News_and_Updates/2013/ActuarialValuationAsOf12-31-12.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Sonoma County CAFR 6-30-2013, Long-Term Liabilities, Pension Obligation Bonds, page 20
http://www.sonoma-county.org/auditor/financial_reports.htm
(Click on “2012-2013 Comprehensive Annual Financial Report”)

Retirement Healthcare Assets and Liabilities (balance as of 6-30-2013):
Sonoma County CAFR 6-30-2013, Schedule of Funding Progress, “AVA,” “AAL,” page 111
http://www.sonoma-county.org/auditor/financial_reports.htm
(Click on “2012-2013 Comprehensive Annual Financial Report”)

Stanislaus County

Pension Assets and Liabilities:
Stanislaus County Employees Retirement Association Actuarial Valuation 6-30-2013, page 5.
http://www.stancera.org/sites/default/files/Financials/20130630_Actuarial_Report.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
Stanislaus County CAFR 6-30-2013, Note 11: Summary of Long Term Debt page 74.
http://www.stancounty.com/auditor/pdf/AFR2013.PDF

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 7-1-2012):
Stanislaus County CAFR 6-30-2013, Note 19: OPEB page 91
http://www.stancounty.com/auditor/pdf/AFR2013.PDF

Tulare County

Pension Assets and Liabilities:
Tulare County Employees Retirement Association Actuarial Valuation 6-30-2013, page 1.
http://www.tcera.org/Publications.php

Pension Obligation Bonds (balance as of 6-30-2013):
Tulare County CAFR 6-30-2013. There was no balance due on any POB as of 6-30-2013.
http://tularecounty.ca.gov/auditorcontroller/index.cfm/auditor-controller/financial-reports1/comprehensive-annual-financial-report-cafr/cafr-2012-2013/

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2012):
Tulare County CAFR 6-30-2013, pages 71 & 78.
http://tularecounty.ca.gov/auditorcontroller/index.cfm/auditor-controller/financial-reports1/comprehensive-annual-financial-report-cafr/cafr-2012-2013/ 

Ventura County

Pension Assets and Liabilities:
Ventura County Employees Retirement Association Actuarial Valuation 6-30-13, page vi
http://vcportal.ventura.org/VCERA/docs/publications/Actuarial_Valuation_as_of_June_30_2013.pdf

Pension Obligation Bonds (balance as of 6-30-2013):
No POBs are reported in the CAFR.

Retirement Healthcare Assets and Liabilities (actuarial valuation as of 6-30-2013):
Ventura County CAFR 6-30-2013, page 100
http://www.ventura.org/auditor-controller/comprehensive-annual-financial-report-2013

Why Not Sustainability in a Spending Limit?

Last week, Gov. Jerry Brown delivered the keynote address at a sustainability summit hosted by the Los Angeles Business Council. While the summit focused on California’s environmental, energy and water policy, we have to wonder whether the governor will exert the same effort in support of fiscal sustainability now that he has called a special session to deal with California’s spending limit.

While a rainy day fund measure has been slated for every ballot since 2010, it has been repeatedly moved back by the majority in the Legislature who fear it would prevent them from spending every last nickel when revenue to state government expands. Brown wants to tinker with the language, and to his credit, move forward to allow the voters to have the final say.

Unfortunately, most of those who push for tax and budget reform are big government advocates focused exclusively on the sustainability of government, its workforce and the vast array of special interests that thrive off taxpayers’ dollars. Those on the government team tend to look to reforms that would stabilize and even expand revenue in tough economic times, meaning they would continue to suck vast amounts from the private sector at a time when taxpayers can least afford it. Among their proposals are taxing services — placing new burdens on very small businesses — and eliminating Proposition 13 limits on property tax bills. They see that under Proposition 13, property taxes are the most reliable source of revenue in good times and bad — when values decline, because of residual value, tax payments do not — they illogically assume they can allow taxes to fluctuate with the market, and maintain the same stability in revenue.

What is needed to protect both the ability of government to provide essential services and the wellbeing of taxpayers, is a return to an effective spending limit. During the 1980s California had the Gann Spending Limit but it was weakened to a point of irrelevancy by subsequent initiatives sponsored by powerful education and transportation interests who chafed under the constitutional provisions that limited their freewheeling spending agenda.

Of course, the very notion of a spending limit grates on those who believe they have a presumptive right to the earnings of citizens and the private business sector. And this is exactly why a spending cap is such a necessity.

When talking about spending caps, we must make sure that the cap is the real deal and not just some stand-alone “rainy day” fund riddled with loopholes. A real spending limit must accomplish what the name directs: limit the growth in the rate of government spending. That rate, of course, should be adjusted for population and inflation, but what should be the metrics for each? Should population growth adjustments be dependent on raw census figures or, for school spending, should the population be enrollment? For inflation, is CPI an adequate measure, or is some hybrid warranted?

The short answer is that there is more than one way to establish a growth factor that will be effective. What must be avoided at all costs is a growth factor that ratchets only in an upward direction, effectively nullifying the structural limitation. But if we impose a hard cap, should overrides be allowed with a supermajority vote of the Legislature? In a word, no. Overrides must be temporary and voter approved. If overrides by the Legislature are permitted with a supermajority vote say, for emergencies, they should be required to be paid back.

For California taxpayers, an acceptable spending limit would, among other things, allow a portion of excess revenue to be spent on infrastructure and debt repayment in addition, of course, to rebates to the taxpayers via adjustments in the sales rate.

So let’s focus on “sustainability” for all, including taxpayers, not just those who profit from unrestricted government spending.

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.

Homeschooling and Its Importance for the Survival of a Free Republic

What do George Washington, John Adams, Thomas Jefferson, Abraham Lincoln, Benjamin Franklin, Booker T. Washington, Florence Nightingale, Susan B. Anthony, Thomas Edison, Winston Churchill, Albert Einstein and Sandra Day O’Connor have in common? They were all homeschooled as were countless other famous statesmen, scholars and scientists. [1]

Children traditionally were taught at their parents’ knees. In most cases, it was the mother who served as their instructor, in colonial as well as modern times. It wasn’t until the mid-1800’s that the states assumed the legal role as the educator of the country’s children. Massachusetts was the first to demand compulsory education in 1854; the Southern states, not until the 20th century.

The Bible was the backbone of the early curriculum. Because attendance at church each Sunday was mandatory for most children, they were expected to be literate and able to read the scripture as well as the hymns. Tocqueville, struck by the universal literacy among the colonists, commented on the unusual (to a French aristocrat) phenomenon in his writings.

Most children at that time received basic instruction in history, religion, mathematics and literature. In more affluent families, the children also learned Latin, Greek and French. George Washington was taught drafting and agronomy by his older brother. The younger Washington was a successful surveyor and farmer before becoming the country’s first President.

Each state enacted its own laws for compulsory public education. The first normal school was founded in Concord, Vermont in 1823. By 1873, every state had free elementary schools. Federal guidelines were not enacted until the Elementary and Secondary Education Act was passed in 1965. It was a measure contained in the language of the War on Poverty legislation. National control of the curriculum remained the purview the states.

In 1960, almost 100% of America’s youngsters were enrolled in its public schools. The counter-cultural revolution that swept the country during the sixties brought with it the resurrection of homeschooling. At first limited to hippies living in communes, the concern about radical moral and cultural values being introduced into their children’s schoolrooms gradually persuaded middle-class families to educate their young at home.

By 1990, 800,000+ children were being homeschooled. By 2003, the number had grown to 1.1 million. By 2013, it was 1.5-2.1 million. The actual number may be much higher, given the reluctance of many parents to invite government scrutiny into their homes by officially registering the information.

Home education has become a billion-dollar industry. Thousands of teaching aids and programs are available at fairs held across the county. Homeschooling families are organized into local and state cooperatives. National advocacy groups like the Homeschool Legal Defense Association defend their legal right to home school, most often on the basis of the first and fourteenth amendments.

In 2006, the European Court of Human Rights issued a decision affirming the power of the German government to ban home education. [2]  This has understandably raised very legitimate, troubling concerns about a similar possibility of federal overreach in this country by the Obama administration.

Often criticized as a phenomenon limited to affluent, two-parent, White Christian families, thereby invalidating the impressive data, there has been a dramatic and welcome increase in interest in homeschooling among Black and Hispanic families. These children have demonstrated the same impressive results on SAT and ACT achievement tests as their White peers as Fields-Smith and other scholars have noted. [3]

A number of powerful shifts in public education have influenced parents to homeschool. They include the rise of violence on campus, the sexualization of the content of the academic syllabus, the emphasis on multiculturalism, the incidence of illegitimacy and presence of pregnant females in the classroom throughout their pregnancy, the attack on religion and divinity and the corrosive dumbing down of both curriculum and educators.

As Leonard Sax and Cornelius Riordan have noted, 50% of class time is devoted to social indoctrination; the balance of the day, to watered-down academics. Fundamentals that students mastered by the eighth grade in 1895, most college graduates today have failed to equal. With four hours each day for eight months of every year a near-total waste of time, academic content can be distilled into a four-hour period in home school. That has been its premise, beauty and simplicity in a nutshell.

The public must not misunderstand the goal of public education. It was stated in plain English by the founding fathers, Horace Mann and John Dewey. It is usurpation of parental control over their children by the State.

Articulated in their earliest writings, this malign intent went unnoticed or unappreciated. In his seminal book, The Right Choice, Christopher Klicka quotes both men at length, making their insidious purpose very evident. The reality is sobering.

When Mann became the first secretary of the Massachusetts Board of Education in 1837, he declared all children had a legal right to an education that must be guaranteed by the state. He also said “society in its collective capacity” is the real godfather for all children. Mann’s goal was to establish “a new religion, with the state as its true church and education as its Messiah.” [4]

John Dewey is the second most important figure in the history of public education in America. An avowed statist and secular humanist, he believed that society and education must be planned and controlled by the State.

“Education is the fundamental method of social progress and reform.” Teachers must realize they are guarantors of “the proper social order and the right social growth.” Dewey also declared “there is no God… and no room for fixed natural law or moral absolutes” and thus gave birth to the credo government über alles. [5]

These same concerns echo comments by Professors James Carper and Thomas Hunt who fear our public schools have become the functional equivalent of an established church that is being underwritten by compulsory taxation.

Chester A. Pierce, a psychiatrist and professor of education, put it more bluntly. “Every child in America entering school at the age of five is mentally ill because he comes to school with… allegiances toward our founding fathers, toward our elected officials, toward his parents, toward a belief in a supernatural being, toward the sovereignty of this nation as a separate entity. It’s up to… teachers to make all these sick children well by creating the international children of the future.” [6]

Homeschooling is the antidote to state indoctrination. Parents are free to design the scope and content of the curriculum, choose the texts and workbooks and set the pace of instruction. They serve as the child’s private tutors. Their love, undivided attention and patience guarantee his gradual mastery of the material. They are also the key to the phenomenal success of homeschooling.

Study after study has shown that homeschooled children score an average of 15-30 percentile points higher on achievement tests like the CAT and ITBS, higher on college admissions SAT and ACT tests, maintain a higher GPA in college and a higher rate of success and civic involvement in adulthood. Studies funded by HSLDA have demonstrated a 2-grade difference in the 4th grade and a 4-grade difference in the 8th grade between homeschool and public school students. [7]

Home educated students have proven their bona fides in the Scripps National Spelling Bee, National Siemens Westinghouse Science Competition and Merit Scholar Award program. They placed first in the national spelling bee in 1997 and first, second and third three years later.

These achievements have been repeatedly discounted as not representative of average students. They are criticized as reflective of a population that would succeed in any environment and are, therefore, invalid. The same false arguments about socioeconomic class and privileged family background have been used to try to discount or invalidate the success of graduates of catholic and single sex schools.

The records of The Young Woman’s Leadership Academy in East Harlem or Ivy Preparatory School in Atlanta or of the success of poor Black Caribbean girls who became heads of state are eloquent proof poverty and race do not preclude success. The impressive data have nevertheless failed to silence the critics.

Homeschooling is a threat to the power of government to control education and the public purse and, by the indoctrination of its young future citizens, the direction of the country. Its success is also a threat to teachers’ unions, particularly in light of abysmal scores in math, science and reading on international assessments like PISA and TIMMS of US public school students.

This explains the unending legal challenges to parents who homeschool and forcible intrusions into their homes by various policing authorities. Unions have proposed, and states have attempted to enact, a series of laws to require parents to obtain teacher certification or to accept prescribed monitoring and testing programs. In each and every instance, HSDLA has stepped in to take the matter to court and protected the parents’ legal civil rights.

Where do we go from here? Homeschooling entails a significant commitment by parents and is, for reasons of temperament, finance or circumstance, not feasible for everyone.

It is, however, an important option, whenever indicated and possible. It is also one that traces its roots to our colonial, if not Biblical, origins. We should always be mindful of Hitler’s famous maxim to “give me your children, and in 10 years I’ll change society.” Homeschooling must be protected, nurtured and preserved.

About the Author:  R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

FOOTNOTES

(1)  Partial list of homeschoolers, http://www.homeschoolacademy.com/famoushomeschoolers.htm

John Adams
John Quincy Adams
Grover Cleveland
James Garfield
William Henry Harrison
James Polk
Andrew Jackson
Thomas Jefferson
Abraham Lincoln
James Madison
Franklin Delano Roosevelt
Theodore Roosevelt
John Tyler
George Washington
Woodrow Wilson

William Jennings Bryan
Winston Churchill
Henry Clay
Pierre du Pont
Benjamin Franklin
Alexander Hamilton
Patrick Henry
William Penn
Daniel Webster

Alexander Graham Bell –
John Moses Browning
Peter Cooper – invented skyscraper, built first U.S. commercial locomotive
Thomas Edison
Benjamin Franklin
Elias Howe – invented sewing machine
William Lear
Guglielmo Marconi
Joseph Priestley
Eli Whitney
Sir Frank Whittle – invented turbo jet engine
Frank Lloyd Wright
Orville and Wilbur Wright
Erwin Schrӧdinger

John Jay
John Marshall
John Rutledge
Sandra Day O’Connor

Stonewall Jackson
John Paul Jones
Robert E. Lee
Douglas MacArthur
George Patton
John Pershing

Louis May Alcott
Hans Christian Anderson
Pearl S. Buck
William F. Buckley, Jr.
Willa Cather
Agatha Christie
Samuel Clemens (Mark Twain)
Charles Dickens
Robert Frost
Alex Haley
C.S. Lewis
Amy Lowell
Gabriela Mistral
Beatrix Potter – author of the beloved Peter Rabbit Tales
Carl Sandburg
George Bernard Shaw
Virginia Woolf
Jill Ker Conway – first woman president of Smith College
Timothy Dwight – President of Yale University
William Samuel Johnson – President of Columbia College
Horace Mann – “Father of the American Common School”
Charlotte Mason – Founder of Charlotte Mason College of Education
Fred Terman – President of Stanford University
Frank Vandiver – President of Texas A&M University
Booker T. Washington – Founder of Tuskegee Institute
John Witherspoon – President of Princeton University
George Washington Carver
Pierre Curie
Albert Einstein
Michael Faraday
T.H. Huxley
Blaise Pascal
Booker T. Washington

Abigail Adams
Martha Washington
Florence Nightingale
Susan B. Anthony

Alan Alda
Paul Erdos
Michelle Kwan
Margaret Meade
Yehudi Menuhin
Gloria Steinem
Serena Williams
Venus Williams
Tim Tebow
Taylor Swift

(2)  World Net Daily, “A Constitutional Amendment for Homeschoolers?” http://www.wnd.com/2006/12/39151/#1ild4cQTwUqQ7gL8.99

(3)  Cheryl Fields-Smith & Monica Wells Kisura; Resisting the Status Quo: The
Narratives of Black Homeschoolers in Metro-Atlanta and Metro-DC, Peabody Journal of Education,
2013, 88:3, 265-283, http://dx.doi.org/10.1080/0161956X.2013.796823

(4)  Christopher Klicka, The Right Choice: Home Schooling, Oregon: Noble Publishing Associates, 1995, p.80

(5)  Ibid., p. 82

(6)  Ibid., p.84

(7)  Home School Legal Defense Association, http://www.hslda.org/docs/study/rudner1999/Rudner2.asp

Evaluating Public Safety Pensions in California

Summary: To accurately assess how much pension obligations for current workers are going to cost, it is necessary to calculate average pensions for retirees who retired after 1999 when pension benefits were enhanced.

Because public safety employees represent about 15% of California’s total state and local government workforce [1], but an estimated 25% of the total pension costs [2], this study focuses on the average pensions for public safety employees.

Public safety retirees who retired after 1999 after working for the city of San Jose, Los Angeles, or the many state and local governments participating in CalPERS, if they worked 25 years or longer, collected pensions and retirement benefits in excess of $90,000 in the most recent fiscal year for which records were available.

Among the three pension systems analyzed, San Jose had the most generous pensions; retired police and fire personnel who retired in the last 10 years, and who worked at least 25 years, earned an average base pension of $100,175 in 2012. Added to this was employer paid health insurance of worth about $10,000 per year. 

In Los Angeles, factoring in the value of the employer provided health insurance, the average post-1999 retiree with 30+ years of service collects a pension and benefit package in excess of $100,000.

In addition to pension and health insurance benefits, Los Angeles, San Diego, and other California cities offer their public safety retirees the “DROP” program, which enables qualifying participants to collect a lump sum payout upon retirement that – at least in Los Angeles – is so substantial it increases the average pension amount of all retirees by over $50,000, despite only being received by less than 3% of LAFFP members during the 2013 year.

*   *   * 

INTRODUCTION

The topic of public sector pensions quite rightly emphasizes the issue of financial sustainability, given the inherent long term nature of pension benefits. Typically these discussions center on a pensions system’s “funding ratio,” which represents the percentage of the fund’s liabilities that are offset by the value of their assets. A funding ratio of 100% means that a pension fund’s total assets equal their liabilities, that is, the assets are equal to the present value of the estimated future payment obligations to retirees. Any funding ratio below 80% calls into question the eventual solvency of a pension fund, and according to the American Academy of actuaries, even an 80% funding ratio should not be considered adequate. [3]

Debates over whether or not California’s public sector pension funds are solvent quickly boil down to debates over fundamental assumptions regarding future events, that, depending on how optimistic or pessimistic they are, can have exponential consequences.

Perhaps the most consequential of these projections is the assumed rate of investment return the fund expects to achieve, as most pension funds rely on investment returns to generate a substantial amount of their funding. Another key projection necessary for the fund’s long term fiscal solvency pertains to the expected average amount of time a retiree is eligible to receive their benefits.

Consequently, the fund must correctly forecast the expected age at which participants will retire and how long they will live. Understanding the effects caused by changes in these forecasts is crucial for anyone managing pensions, regulating them, or advocating a set of reforms.

Along with assumptions regarding future events, the solvency of public sector pensions have been affected by so-called “pension holidays” taken in the past, which refers to those years when the participating employers did not make their full contributions. Often these regular contributions were missed because the pension funds themselves waived the requirement during years when the investment markets were delivering excellent returns. [4]

The solvency of pensions is also affected whenever benefit formulas are increased. In California, starting in 1999 with the passage of SB 400, pensions for virtually all public workers were increased by approximately 50%. [5]

This benefit enhancement necessitated higher annual contributions by the employer, but in most cases the amount of additional cost presented to the employers by the pension funds was underestimated, because of optimistic rate-of-return expectations for the funds. So optimistic, in fact, that most all of the benefit enhancements implemented starting around 1999 were awarded retroactively. Needless to say, applying a 50% pension enhancement to an employee’s entire career – even for those employees about to retire – exacerbated whatever unfunded challenges may have existed anyway in the pension funds.

The purpose of this study isn’t to delve further into the causes or potential remedies for the financial challenges facing California’s public sector pension funds. But at a time when virtually every public sector pension system in California is increasing required employer contributions in order to preserve solvency, year after year, with no end in sight, it is relevant to report as comprehensively as possible on just how much current retirees are receiving in retirement pensions and benefits. [6]

To that end, the California Policy Center, in partnership with the Nevada Policy Research Institute, has acquired data directly from dozens of public sector pension funds in California, including CalPERS, CalSTRS, and about 25 other independent California-based pension systems. This information is available to the public at the website TransparentCalifornia.com.

Using this data, it is possible to construct an accurate and detailed look at what pension funds are paying current retirees. In this study, the focus is on public safety pensions, using recent data acquired from the California Public Employee Retirement System (CalPERS), the Los Angeles Fire and Police Pension system, and the City of San Jose Police and Fire Department’s Retirement Plan.

One important observation stand out: Public sector pensions are not applied equally in California. As will be shown, retirees who left state or local government service after 1999 are collecting far larger pensions than those retiring before the late 1999.

Additionally, retirees with less than 20 years of service credit are collecting pensions that are disproportionately smaller than those with 25 years or more.  Also, the so-called “base pension” paid retirees can be quite misleading. As we will show, public safety officers receive benefits and supplemental payments that result in much greater total benefits than the base pension amount indicates. Most pension plans offer health insurance coverage of significant value, supplemental payments, annuities, or payments associated with DROP (deferred retirement option plan) that are not reflected in the base pension amount.

Understanding the real value of the pension benefits a full-career safety officer can expect to receive in retirement is critical to addressing the issue of whether or pension benefits might be equitably reduced as part of a comprehensive plan for pension reform.

If pension fund contributions are becoming such a burden on city and county budgets that they have the potential to throw these public employers into bankruptcy, then either in negotiations to avoid bankruptcy, or through a bankruptcy, one way to restore the solvency and reduce the financial demands of a pension fund is to lower the amount retirees receive as a benefit. The more participants are affected by benefit cuts, the more modest the effect these cuts may have on any specific individual.

*   *   *

METHOD AND ASSUMPTIONS

The focus of this study is public safety pensions, which are typically calculated using a “3% at 50” or “3% at 55” formula. The formula works as follows: “3% is multiplied by the number of years worked, times final salary.” Sometimes the pensionable salary is simply the final salary of the employee at time of retirement. It can also be formulated as an average of the final three years of salary.

In some cases, pensionable salary may still include the value, or a percentage of the value, of, for example, unused sick time that is cashed in at the time of retirement. Many of these so-called “spiking” tactics were deemed abusive of the system and eliminated with the passage of SB 400 in 2012. In any case, public safety retirees, on average, collect the largest pensions of any class of state or local government employees in California. According to the U.S. Census Bureau, active police, firefighters and corrections officers represent about 15% of California’s approximately 1.5 million full-time state and local government employees. [7]

In order to provide information on average public safety pensions that can provide insight into what currently active employees will be collecting, it is important to evaluate how much average pensions and benefits are for retirees who worked full careers and who retired in recent years. It is essential to break this information out separately from more general averages that include retirees who left service decades ago, because the pension formulas currently in effect for nearly all active personnel are the same as the ones used to calculate recent retiree pensions. To-date, pension reforms have only affected the benefit formulas earned by new employees, not existing employees. This means that any savings gained from pension reforms to-date will not be realized for 20 years or more.

Similarly, it is important to show pension benefits for employees who worked full careers, since this, again, is the only way to help foster accurate insight into how much pensions cost. Because these vital positions must be permanently filled, for every retiree who only worked a few years, earning a proportionately smaller pension, there must be additional hires who will also be collecting a partial pension. For this reason, normalizing pensions to “full-career equivalents” is necessary.

In order to highlight the effects of legislative actions such as SB 400 that retroactively enhanced pension benefits, as well as the disproportionally greater benefits of those who have accrued a full-career of service credit, the tables used in this study provide data that breaks out averages accordingly.

These tables, while intricate, follow a uniform format throughout the study:

– The vertical axis is the amount of the annual pension benefit. In all cases, the bars of data refer to average pensions received in their plan’s respective reporting year, including participants who retired decades ago. For CalPERS the data analyzed is the most recent available, calendar year 2012. For San Jose the data is from the 2013 fiscal year. Finally, the data from the LAFPP is for the 2013 calendar year.

– The horizontal axis has six blocks of data. Each block represents a five year range of retirement years, starting with 1984-1988, and proceeding in five year increments to the three columns on the far right, representing participants who retired in the years 2009-2013. Each of these sets of data have three vertical bars, representing participants who worked 20-25 years, 25-30 years, and over 30 years.

Finally, it is necessary to include benefits in addition to pensions in order to get a truly accurate impression of how much retired public safety employees in California receive in retirement benefits each year. Unfortunately, among the three pension systems being analyzed, only the Los Angeles Fire and Police Pension system provided this data. But while not disclosed elsewhere, they are present in virtually all retirement benefit plans for public safety retirees in California.

These benefits primarily include two types of compensation in addition to base pensions – they are payments towards health insurance and “Medigap” coverage or supplemental coverage to Medicare. In addition to health benefits, many safety officer plans offer supplemental pension benefits in the form of quarterly or annual payments in addition to their monthly benefit amount.

The LAFPP and other local safety pension plans such as the San Diego City Employees Retirement System (SDCERS) offer one of the most substantial forms of these additional benefits through a program known as a deferred retirement option plan, also known as DROP. In aggregate these distinctions are not relevant. However, the inclusions of these benefits are vital to any comprehensive analysis that wishes to accurately represent the true value of these benefits.

*   *   *

PUBLIC SAFETY PENSIONS – CalPERS

Of the 483,902 individual retiree records provided by CalPERS, 48,863 were designated as “Public Safety” participants who retired between 1984 and 2013 with 20 years or more of service. Public safety retirees participating in CalPERS include California Highway Patrol, Correctional Officers, as well as police and fire department personnel from throughout the State of California that do not have, or are not members of, a local plan such as the LAFFP or San Jose plan.

The table below only shows base pension as that was the only data made available by CalPERS for the 2012 year. Naturally, any additional supplemental payments as well as health benefits received will increase these values.

There are six blocks of data, corresponding to year of retirement ranging from those who retired in 1984-1988 on the far left, to recent entrants on the right who retired in 2009-2013. In all cases, the amounts reported are the average pension paid last year. As can be seen, the amounts go up every year, that is, the more recently a participant retired, the bigger their pension. This is clearly the result of pension benefit enhancements that rolled through virtually all state and local government agencies – retroactively – starting in 1999.

As can also be seen from the six blocks of data, the longer a participant worked, the higher their pension. For example, participants who retired in 2009-2013 are depicted in three bars. Those who worked 20-25 years are shown in the lightest bar on the left side of the block; their average pension is $55,861 per year. In the medium shaded bar in the middle are those who retired after 25-30 years of service; their average pension is $82,926 per year. In the dark shaded bar on the right are those who retired after 30 years or more of service; their average pension is $99,908 per year.

CalPERS Safety Officers
Average Base Pension by 
Years of Service and Year of Retirement

20140404_Ring-Fellner_CalPERS-by-Svc-and-Ret_1

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 PUBLIC SAFETY PENSIONS – SAN JOSE

The San Jose Police and Fire Retirement Plan reported 1,953 individuals receiving a pension benefit for the 2013 fiscal year; the data analyzed here are for the 1,571 participants who retired between 1984 and 2013 with 20 years or more of service.

The table below only shows base pension because the San Jose Police and Fire Retirement Plan did not release information on health benefits or any other potential supplemental benefits. Again, there are six blocks of data, corresponding to year of retirement ranging from those who retired in 1984-1988 on the far left, to recent entrants on the right who retired in 2009-2013. In all cases, the amounts reported are the average pension paid last year. Also as seen with the CalPERS data, the amounts go up every year, that is, the more recently a participant retired, the bigger their pension, and the longer a participant worked, the higher their pension.

The differences shown between retirees before and after 1999 are striking. Almost all retirees post 1999 who have 25 years of experience or more are collecting pensions in excess of $100,000 per year, with the sole exception of retirees between 1999-2003 with 25-30 years experience who collected, on average, a pension of $90,108 in fiscal year 2013.

City of San Jose Safety Officers
Average Base Pension by 
Years of Service and Year of Retirement

20140404_Ring-Fellner_SJ-by-Svc-and-Ret

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PUBLIC SAFETY PENSIONS – LOS ANGELES

The Los Angeles Fire and Police Employees’ Pension plan reported 10,040 individuals receiving a pension benefit for 2013 [8]; the data analyzed here are for the 8,717 participants who retired between 1984 and 2013 with 20 years or more of service.

The table below only shows base pension, even though the LAFPP has provided benefits and DROP data that will be summarized in the table following this one. Again, there are six blocks of data, corresponding to year of retirement ranging from those who retired in 1984-1988 on the far left, to recent entrants on the right who retired in 2009-2013. In all cases, the amounts reported are the average pension paid last year. Also as already seen, the amounts go up for post-1999 retirees, although the variation isn’t nearly as striking with the LAFPP data compared with the CalSTRS and San Jose data.

City of Los Angeles Safety Officers
Average Base Pension by 
Years of Service and Year of Retirement

20140404_Ring-Fellner_LA-by-Svc-and-Ret

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TOTAL RETIREMENT BENEFITS – LOS ANGELES

The next table provides a more complete picture of public safety retirement benefits because it includes the amount of employer provided health insurance, which adds approximately another $10,000 to the actual retirement compensation received by LA Police and Fire retirees. As can be seen, when including the value of the employer provided health insurance, the average post-1999 retiree with 30 years of service collects a pensions and benefit package in excess of $100,000.

What the complete data from Los Angeles reveals is an additional program of astonishing value, referred to as “DROP,” which stands for “Deferred Retirement Option Plan.” Conceived as a method to retain skilled public safety personnel who would otherwise be eligible to retire, the DROP program permits the participant to “retire” but continue to work. During the time they continue to work, they collect their normal pay, but the amount they would have been collecting as a pension is deposited in an account bearing 5% interest. They no longer accrue pension benefits. The potential savings of this program – similar in rationale to pension obligation bonds – is that the pension fund returns during the same period will exceed 5% earnings guaranteed the pensioner. In practice the DROP program results in very large final year payouts to retirees in their first year of retirement – enough to skew the average annual total retirement payouts per retirees with 25+ years of experience over the past 10 years to over $150,000.

Due to the incomplete data received from many – if not most – of California’s pension systems to-date, it isn’t clear how many agencies offer DROP to their public safety personnel. It is apparently not offered in San Jose, but definitely is offered in San Diego. It isn’t clear whether or not some of the many cities and counties who participate in CalPERS offer DROP to their public safety retirees. But the DROP program is a striking example of how reports that only reference base pensions are not representative of what total retirement benefits often will include. Another example of this, not strictly a retirement benefit, but nonetheless a sum paid upon retirement, is the common practice of cashing out accrued sick and vacation time, something which can and often does add tens, if not hundreds of thousands of dollars to a public employee’s final year of compensation.

City of Los Angeles Safety Officers
Average Total Retirement Benefits by 
Years of Service and Year of Retirement

20140404_Ring-Fellner_LA-w-DROP-by-Svc-and-Ret_RFver3

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CONCLUSION

In recognition of the specialized skills required, and in order to attract and retain a workforce of the highest quality, it is certainly appropriate to pay a premium to active and retired public safety employees. But in the face of ballooning costs to California’s taxpayers to maintain pension solvency, it is also appropriate that anyone involved in discussions regarding reform be aware of just how much public safety officers currently receive in total retirement benefits. Here are some highlights:

  • CalPERS, with the largest and hence probably the most representative dataset, reports base pensions to average $99,908 for public safety officers retiring in the last five years with 30+ years experience; for retirees with 25-30 years experience, the average base pension was $82,926 if they retired in the last five years.
  • CalPERS retirees make far more if they retired after 1999, regardless of years of experience, because of the pension benefit enhancements that were awarded – retroactively – starting in that year. For all public safety participants retiring before 1999 with at least 20 years service, the average base pension is $52,179; for all participants retiring in 1999 or later, with at least 20 years service, the average base pension is $77,878.
  • When including the value of other benefits, primarily employer paid health insurance, the estimated value of the average CalPERS public safety retirement compensation increases by about $10,000 per year.
  • San Jose’s retired police and fire personnel who retired in the last 10 years, and who worked at least 25 years, earned an average base pension of $100,175 in 2012. Add to this at least the average value of employer paid health insurance of about $10,000 per year.
  • While Los Angeles does not report their public safety retiree pension benefits, on average, as generous as CalPERS or San Jose, when including the value of the employer provided health insurance, the average post-1999 retiree with 30+ years of service collects a pension and benefit package in excess of $100,000.
  • Los Angeles, San Diego, and other cities offer the “DROP” program, which in practice enables retirees to leave public service with a lump sum payout that – at least in Los Angeles – is substantial enough to increase the average pension amount by over $50,000 per participant.

To speculate as to whether or not this level of pay and benefits in retirement is appropriate or fair, even for former public safety personnel, is well beyond the scope of this study. But it should be observed that employer pension contributions in San Jose, for example, are on track to consume 25% of that city’s entire general fund within a few years. [9] And yet efforts are currently in progress to repeal portions of San Jose’s pension reform measure. Similarly, in Los Angeles, pension costs jumped to 18% of the budget in 2012-13. [10]

Another question that should be asked is why public safety employees are incentivized to retire after 25 or 30 years. While it is probably not wise to require officers in their 50’s or 60’s to occupy front-line roles in fighting crime or fighting fires, these veteran officers possess a great deal of experience that would be of significant value to their departments. Skilled officers can participate in training, management, administration, intelligence work, investigations, and logistical support – they might even oversee and operate the many automated systems such as micro drones that are inevitably going to become a vital resource for public safety agencies. There is no reason these individuals, with the skills they have acquired and talents they offer, to have to retire any earlier than anyone else.

In any case, the primary aim of this study was to put out accurate data regarding just how much public safety retirees in California receive in retirement pensions and other benefits. We have found that on average, a public safety retiree in California – working at least 25 years and retiring in the last ten years – earns a pension and benefit package in excess of $90,000 per year.

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 FOOTNOTES

(1)  U.S. Census Bureau, California Local Government Payroll 2012California State Government Payroll 2011

(2)  Brown and Whitman duel over public pensions, Marin Independent Journal, October 12, 2010

(3)  The 80% Pension Funding Standard Myth, American Academy of Actuaries, Issue Brief, July 2012

(4)  State pension funds: what went wrong, Cal Pensions, January 10, 2011

(5)  How California’s Public Pension System Broke, Reason Policy Brief, June 2010, page 5 “California Standard Pension Benefit Formulas Before and After SB 400”

(6)  California pension rate hikes loom after Calpers vote, Reuters, February 18, 2014

(7)  U.S. Census Bureau, California Local Government Payroll 2012, California State Government Payroll 2011

(8)  The data provided on the TransparentCalifornia website for LAFPP pensions is for 2012. This study used 2013 data, also received from LAFPP, but not yet posted.

(9)  Can San Jose cut pensions of current workers?, Cal Pensions, August 5, 2013

(10)  Los Angeles City Pension Costs Grew 25% Annually Over Last Decade, Public CEO, March 6, 2013

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About the Authors:

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by George Mason 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 High Speed Rail's Dubious Claims of Environmental Benefits

Editor’s Note: There are dozens of major infrastructure investments that would yield positive economic returns to Californians. Spending over $100 billion on high-speed rail is definitely not one of them. But as Kevin Dayton explains in this article, even the environmental benefits of high speed rail are questionable, if not a complete fabrication. This isn’t Dayton’s first expose of the high speed rail disaster; for more withering details, read “Unions Virtually Alone in Love with California High-Speed Rail,” and “California High-Speed Rail Business Plan Misrepresents Project Labor Agreement.” California’s so-called “bullet train” is a textbook case of crony capitalists and corrupt politicians hiding behind environmentalist rhetoric to justify an epic waste of taxpayers money. And with all the construction projects California really could benefit from, the unions pushing high-speed rail should be ashamed of themselves (ref. “Construction Unions Should Fight for Infrastructure that Helps the Economy.”)

Earth Day 2014 deserves a detailed report on the environmental achievements of California High-Speed Rail, the spine of the mass transit connectivity system that will one day transport you between your own home transit village and another transit village.

And yes, you WILL ride, because artificial government cost barriers will discourage you from driving and flying. A governor and legislators who today are merely students protesting at a University of California campus somewhere will enact such policies between 2028 and 2041.

Trees-for-Shade and Other Schemes for “Net Zero Emissions”

The California High-Speed Rail Authority claims it will achieve “net zero emissions” when it builds its “First Construction Segment” from Madera to Bakersfield by 2017. This program will allegedly allow the Authority to avoid adding to the state’s carbon footprint already imprinted by the lifestyles of Hollywood celebrities and other top Democratic Party campaign contributors.

Net zero emissions means lots of free and discounted stuff to the San Joaquin Valley. The Authority plans to plant 5,000 trees, buy new school buses for school districts, and buy new irrigation pumps and tractors for farmers. (If you’re a farmer in the San Joaquin Valley now forced to buy a pump to extract water from a new deeper well, save your receipts.)

The Authority will also require certain emissions standards for construction equipment, require contractors to recycle 100 percent of concrete and steel from construction and demolition activities, and divert 75 percent of non-hazardous waste from landfills as a way to reduce greenhouse gases. The guy in Pixley with one excavator from the old family business will NOT be working on this project.

Global sea levels are already falling in anticipation of the tree planting program. As required as a condition of 2012 state legislative appropriations, the California High-Speed Rail Authority produced a report in June 2013 entitled “Contribution of the High-Speed Rail Program to Reducing California’s Greenhouse Gas Emission Levels.” Here’s an excerpt:

The Authority is committed to achieving zero net greenhouse gas emissions related to construction activities. While construction activities will generate greenhouse gas emissions, when coupled with the Authority’s strategy, the result is zero net direct construction greenhouse gas emissions. For example, the estimated greenhouse gas emissions associated with construction activities, materials deliveries, and worker travel for Construction Package 1, the first 29-mile construction segment of the high speed-rail system from Madera to Fresno, of 30,107 metric tons of CO2e, from 2013 to 2018, would be offset at the start of construction through a tree planting program that the Authority is developing. This multi-faceted forestry program will introduce enough trees into the region where construction is taking place to honor the Authority’s commitment to offset the direct greenhouse gas emissions associated with construction. The program is planned to include urban forestry and tree planting, through regional tree foundations, which compounds greenhouse gas emissions reductions by providing shade and other amenities with tangible local economic benefits. The program could also include providing shade trees to interested home owners

These will be big leafy trees – not tall skinny palm trees like the ones now shunned in the City of Los Angeles Million Trees LA program because palm trees don’t provide enough shade. Already state and local legislators are angling for trees in their districts. (They don’t seem to be thinking about the public costs of irrigating and maintaining those trees, though.)

Some people think this tree-planting program is farcical. Why not just plant 100,000 trees as an emissions offset and skip building the $68 billion high-speed rail line between San Francisco and Los Angeles? And why borrow money via bond sales, use it to buy trees for interested home owners, and then pay the money back with interest over 35 years? Using borrowed money from bond sales to buy iPads might be a better investment.

As another example of offsetting greenhouse gas emissions, the California High-Speed Rail Authority report also touts “an agreement with the California Department of Conservation (DOC) and the Madera and Merced County Farm Bureaus to assist in obtaining farmland conservation easements from willing sellers located near the high-speed rail alignment between Merced and Bakersfield.” This agreement is the result of a 2013 settlement of an environmental lawsuit against the California High-Speed Rail Authority. Less than a month after the California High-Speed Rail Authority released its report citing this agreement, an article in the Fresno Bee reported that the California High-Speed Rail Authority had failed to make the $5 million payment required in the settlement to establish the program.

Everyone Wants Some Cap-and-Trade Money

Everyone loves a windfall, whether it’s the Peace Dividend, the Tobacco Settlement, Facebook IPO tax revenue, or First 5 California. There’s now a new, exciting one in California: Cap-and-Trade auction proceeds, sometimes called “allowances” but more accurately called “taxes.”

Governor Brown has proposed spending $250 million of planet-saving Cap-and-Trade auction proceeds on California High-Speed Rail in his fiscal year 2014-15 state budget and 33% of proceeds in future years. State Senate pro Tem Darrell Steinberg will reportedly counter with a proposed budget that designates about 20% of proceeds for the high-speed train program. Some environmental groups – in particular the Sierra Club – oppose spending Cap and Trade auction proceeds on California High-Speed Rail at this time. Some Democrats agree and think other programs are more worthy.

Everyone wants this money taken from the polluters. At budget subcommittee hearings about spending Cap-and-Trade funds, lobbyists line up to advocate for their organizations and causes to get money or more money from it. Politics will play a role in how much goes to the train.

For the California High-Speed Rail Authority, Cap-and-Trade revenue may be essential to preserve the program. A court has blocked the state from selling Proposition 1A bonds, thereby also jeopardizing the expenditure of federal matching grants for the program. Governor Brown and the California High-Speed Rail Authority have been forced to seek this funding now to keep the high-speed train program moving into its first construction contract.

Is California High-Speed Rail Authority Justified in Getting Cap-and-Trade Money?

In its February 2014 report “The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan,” the California Legislative Analyst’s Office (LAO) described Governor Brown’s $250 million Cap-and-Trade proposal for California High-Speed Rail. The report was lukewarm about using Cap-and-Trade auction proceeds for High-Speed Rail:

“Some Outcomes Would Depend on Changes in Behavior. In addition, the amount of greenhouse gas reductions for some proposed programs would depend on changes in behavior that are difficult to predict. For example, the administration assumes that the high-speed rail…proposals would result in some individuals shifting their mode of transportation, resulting in a net reduction in vehicle miles traveled in cars. While such changes might very well occur and could result in net greenhouse gas emission reductions, it would be difficult to predict with precision the likely marginal net greenhouse gas reduction due to these efforts. This uncertainty increases the risk that the administration’s plan would not achieve its maximum potential emission reductions.

Some Reductions Would Likely Occur Beyond 2020. We also find that some proposed activities would not contribute significant greenhouse gas reductions before 2020, which as mentioned above, is the statutory target for reaching 1990 emissions levels. For example, plans for the high-speed rail system indicate that the first phase of the project will not be operational until 2022. Moreover, the construction of the project would actually generate greenhouse gas emissions of 30,000 metric tons over the next several years. The High-Speed Rail Authority plans to offset these emissions with an urban forestry program that proposes to plant thousands of trees in the Central Valley. We also note that High-Speed Rail Authority’s greenhouse gas emission estimates for construction do not include emissions associated with the production of construction materials, which suggests that the amount of emissions requiring mitigation could be much higher than currently planned. Therefore, it is possible that the construction of the Initial Operating Segment may result in a net increase in greenhouse gas emissions, even when accounting for proposed offsets.”

The report also listed several implementation problems of the Governor’s proposed plan to spend Cap-and-Trade auction proceeds.

Will California High-Speed Rail Actually Reduce Greenhouse Gas Emissions?

Don’t abandon construction of that giant sea wall yet, City of Santa Cruz. The hype about California High-Speed Rail saving the planet is compromised when one considers boring things, such as cement production for civil construction and the accuracy of ridership prediction models.

In the fall of 2010, two experts in Civil and Environmental Engineering at the University of California, Berkeley published a report entitled “Life-Cycle Environmental Assessment of California High Speed Rail.” This report suggested that claims of major reductions in greenhouse gas emissions because of California High-Speed Rail might be unfounded.

“Taking life-cycle and ridership uncertainty into account can yield drastically different estimates about the energy efficiency of different transportation modes…The life-cycle inventory for high-speed rail shows that accounting for infrastructure construction and electricity production adds 40 percent to the energy consumed by the trains’ operations alone…Greenhouse gas emissions increase by about 15 percent, primarily because of the concrete used in construction – half a kilogram of CO2 is emitted for every kilogram of cement produced. Infrastructure construction will emit roughly 490 million metric tons of greenhouse gases, which are approximately 2 percent of California’s current annual emissions. As was the case with the life-cycle inventory of conventional modes, the majority of emissions are released not from the electricity needed to propel the high-speed trains, but from the indirect and supply-chain components.

We can estimate the energy payback period for high-speed rail by comparing the energy used in its construction with the resulting energy savings in its operation, but only by making assumptions about ridership. The payback period evaluates the upfront energy or emission investment in deploying high-speed rail infrastructure against the potential reductions over time. The California High-Speed Rail Authority provides a ridership estimate, but as we noted above, ridership is uncertain, and for an entirely new mode it is very uncertain. Thus California high-speed rail warrants ridership evaluation for both high- and low-ridership scenarios. We consider high ridership as strong adoption of high-speed rail at the expense of auto and air travel, mid-level ridership as moderate adoption of high-speed rail, and low ridership as poor adoption of high-speed rail where travelers favor auto and air. For high ridership scenarios, the energy payback period on the initial investment is eight years, for mid-level ridership 30 years, and never for low ridership (when under-used high-speed rail is coupled with increased utilization of auto and air travel). For greenhouse gas emissions the payback period for rail is six years for high ridership, 70 years for mid-level ridership, and never for low ridership…Thus the California high-speed rail system can reduce greenhouse gas emissions, but may do so only over a very long period, and will do so in exchange for other air emissions.”

Such thinking was never presented in your 4th grade ecology class. Why do things have to be so complicated?

It Could All Be Moot: Cap-and-Trade May Not Survive Lawsuits Anyway

In April 2013, businesses and organizations filed lawsuits (Morning Star Packing Co., et al. v. California Air Resources Board, et al., Case No. 34-2013-80001464 and California Chamber of Commerce, et al. v. California Air Resources Board, et al., Case No. 34-2012-80001313in Sacramento County Superior Court contending that the revenue-generating auction provisions of the California Air Resources Board Cap and Trade regulations are unconstitutional, not authorized under state law, and illegal taxes under Proposition 13 and Proposition 26.

On August 28, 2013, Sacramento County Superior Court judge Timothy M. Frawley sided with the California Air Resources Board. However, he noted that “On balance, the court agrees that the charges are more like traditional regulatory fees than taxes, but it is a close question. Contrary to what [the California Air Resources Board] argues, the charges have some traditional attributes of a tax.”

He also ruled that “Although AB 32 does not explicitly authorize the sale of allowances, it specifically delegates to [the California Air Resources Board]the discretion to adopt a cap-and-trade program and to “design” a system of distribution of emissions could be freely distributed to covered entities or to non-regulated entities, who could then convert the value of the allowances into cash by selling them in the allowance market.”

The plaintiffs have appealed the decision, and the cases are likely to end up at the California Supreme Court. Don’t pay the bills with Cap-and-Trade just yet.

About the Author:  Kevin Dayton is the President & CEO of Labor Issues Solutions, LLC, and is the author of frequent postings about generally unreported California state and local policy issues at www.laborissuessolutions.com.

Common Core Threatens Charter Schools Ability to Innovate

A battle is raging between those who would challenge our public school monopolies and those who wish to nationalize school curricula. There is much more at stake here than how Jane and Johnny learn to read.

The success of the American experiment has always rested on a balance between opposing forces, between those seeking common purpose and those sustaining healthy diversity. A great nation needs both in proper measure. A common language, a common set of founding principles, a common respect for each other and the rule of law binds us together. A diversity of objectives, a richness of experiences, and a willingness to challenge the status quo challenges us to keep moving forward. Nowhere is this more important than in education.

The Charter School movement, an autonomous mix of initiatives taking place in cities and states across the country, has made spectacular progress. Charters are proving that schools under local control, answerable directly to the parents and children they serve, can outperform monopoly public schools that have been captured by entrenched interests, principally teachers’ unions and the politicians their profuse campaign donations can buy.

Charter schools’ ability to experiment and innovate, guided by parental choice, is often the best hope for urban minority children who would otherwise face bleak life prospects. If current trends continue, charter schools could revolutionize K-12 education, discovering paths to success that no union boss or central planner could divine.

But trends might not continue, because countervailing forces are attempting to drag both Charter Schools and high performing public schools down to least common denominator standards called Common Core. Designed by technocrats in Washington, this “one size fits all” curriculum was dispatched to the states along with financial “incentives” to encourage “voluntary” adoption. Fortunately, attempts to slip Common Core under the radar have failed, as informed opposition swells.

It’s easy to get bogged down in pedagogical debates over the precise content of Common Core, or get distracted by extremists on both sides of the issue spouting as many opinions as there are experts for hire. But there is no doubt that high performing states are uneasy about being dragged down to standards that are at best interim goals for lower performing states.

My state of Massachusetts is a case in point, the nations’ leader in education. While the expansion of Charter Schools continues to be handicapped by onerous requirements that force taxpayers to make financial reparations to public schools that lose students to competing Charters – basically paying failing schools not to teach – even at a modest penetration rate of 18% Charters are forcing public schools to step up their game. Why Massachusetts wants to surrender excellence in search of equality by outsourcing its curriculum development to Washington is a mystery.

I had the pleasure of sitting down with Jim Stergios, Executive Director of the Pioneer Institute, former Chief of Staff and Undersecretary for Policy at the Massachusetts Office of Environmental Affairs, and onetime prep school headmaster, for a RealClear Radio Hour interview that helped me understand what’s at stake. A serious man on a serious mission, Jim has been involved in education reform for decades. And his indictment of Common Core is as compelling as it is damning.

As he noted, the English literary canon would be replaced by selected readings McNuggets. Algebra 2 would be considered a sufficient terminal high school math course. And the whole initiative appears illegal on the face of it—as Jim showed through his encyclopedic knowledge of the federal statutes that explicitly prohibit the federal government from developing curricula.

Whether you have children in school or not, I urge you to pay some attention to this issue. Brick by brick, the edifice of federalism is being dismantled, undermining the diversity and freedom of choice that made our nation unique. Yet, as the fight against Common Core shows, there’s still hope for fighting back.

About the Author:  In the 35 years since Bill Frezza graduated from MIT with degrees in electrical engineering and biology he has been a scientist, an engineer, a product manager, a salesman, a consultant, an entrepreneur, an author, a technology evangelist, and a venture capitalist. His early career on high-tech’s bleeding edge included the development of first generation electronic newspapers, home banking, home shopping, cable modems, multi-user videogames, wireless LANs, and wireless email, all of which became a success – for someone else a decade later. His 15 years as a venture capital investor working with early stage telecom, semiconductor, and biotech startups taught him humbleness, risk aversion, and the ability to identify ten fatal flaws out of five in any startup business plan. Frezza is a frequent guest on CNBC, FOX, and CBN News where he is challenged to reduce complex economic and policy issues into thirty second sound bites. More writing by Frezza can be found at BillFrezza.com. This article originally appeared in Forbes and appears here with permission from the author.

Cap and Trade Revenue to Fund High Speed Rail?

Liberals and good government advocates frequently decry citizens’ mistrust in government, especially in California. Over the last decade and a half, numerous surveys have confirmed that voters distrust government on several levels including waste, corruption and lack of responsiveness to legitimate public needs.

The recent criminal exploits – both actual and alleged – of three California state senators is going to add fuel to the fire of outrage on the part of voters when it comes to their attitudes about government.

But outright corruption certainly isn’t the only cause of voter angst. Even if conduct falls short of criminality, the “pay to play” culture in Sacramento leaves most voters feeling like penniless souls standing outside of the expensive restaurant (Chez Capital) looking in through the window at all the politically connected fat cats being fed scrumptious meals.

And nothing frustrates knowledgeable voters like being fed outright falsehoods by our elected leaders. On this latter count, let’s add the absurd contention by the Brown Administration that the diversion of $250 million of “cap and trade” revenue to the High Speed Rail project will help California advance its climate change agenda.

For the purpose of this article, let’s assume that anthropogenic climate change is real, meaning that activities of man are having a global impact on weather. (Of course, some of us can still actually distinguish between correlation and causation, but that’s beside the point).

As most people know, California’s response to climate change was AB 32, itself subject of ongoing litigation. At the core of AB 32 is the requirement that Greenhouse Gas (GHG) emissions be reduced 80% of 1990 levels by 2050. The agency charged with implementing AB 32, the California Air Resources Board (CARB) has created a “cap and tax” program that sucks hundreds of millions of dollars out of the private sector economy annually.

But CARB’s program has created a “cache of cash” that has politicians salivating like a Pavlov puppy. Brown’s desperate attempt to fund HSR – even for a short period of time – has him gazing longingly at the money that CARB has generated, supposedly to pay for programs that actually reduce GHGs.

And make no mistake, California’s High Speed Rail project is in trouble. After a series of hostile court rulings and the unwillingness of Congress to throw good money after bad, the most famous boondoggle in California history appears to be hanging on by a thread. But for reasons unknown, Governor Brown has doubled down on the “Train to Nowhere.”

Keeping in mind that everything we’ve been told about the HSR project has been exposed as a lie (from total cost, trip times, availability of revenue from the federal government and private investors, ridership projections, etc.) Brown now heaps on another whopper: HSR is a legitimate project for use of cap and tax funds because it will reduce GHG.

But no one, and we mean no one, actually believes this. The Legislature’s own Legislative Analyst stated that “we find that there is significant uncertainty regarding the degree to which each investment proposed for funding would achieve GHG reductions.” And in a report issued just last week, the Reason Foundation blows the doors off the contention that HSR will reduce GHG emissions. Indeed, the very construction of the project will generate a vast amount of GHG: “High-speed rail (HSR) construction will create substantial GHG. HSR, which is forecasted to begin operations in 2022, cannot reduce GHG emissions before AB32’s 2020 horizon and the project’s construction must [itself] purchase credits through the cap and trade program.”

When pundits wonder why Californians don’t trust government, Brown’s plan to divert a potentially illegal source of revenue to a potentially illegal public works project probably qualifies as Exhibit A.

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 City of Villages – Los Angeles

Los Angeles is unique among the big, world-class American cities. Unlike New York, Boston, or Chicago, L.A. lacks a clearly defined core. It is instead a sprawling region made up of numerous poly-ethnic neighborhoods, few exhibiting the style and grace of a Paris arrondissement, Greenwich Village, or southwest London. In the 1920s, the region’s huge dispersion was contemptuously described—in a quotation alternately attributed to Dorothy Parker, Aldous Huxley, or H. L. Mencken—as “72 suburbs in search of a city.” Los Angeles’s lack of urbane charm led William Faulkner to dub it “the plastic asshole of the world.” But to those of us who inhabit this expansive and varied place, the lack of conventional urbanity is exactly what makes Los Angeles so interesting. My adopted hometown is the exemplar of the modern multipolar metropolis: less a conscious city than a series of alternatives created by its climate, its diversity, and a congested but still-functional system of freeways that historian Kevin Starr calls “absolute masterpieces of engineering.”

20140416_Kotkin-1Photographs by Ted Soqui

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Transplants from the East Coast make great sport of belittling Los Angeles as an adolescent New York or a second-rate Chicago. Developers and city boosters, eager to counter that image, placed their hopes on big projects such as the region’s ultraexpensive rail system. Yet billions of investment dollars have done almost nothing to increase the L.A. Metro’s ridership, which remains stuck at 6 percent of city population. By contrast, a majority of New Yorkers and about a quarter of Chicagoans use their cities’ public transportation. Critics also (rightly) depict the downtown residential revival as a misguided attempt to create a mini-Manhattan. That’s not in the cards: downtown L.A.’s 50,000 or so residents—about on par with San Fernando Valley neighborhoods such as Sherman Oaks and suburban areas such as San Bernardino County’s Eastvale—are a drop in the bucket for a region of some 18 million people. And despite billions in direct and indirect public subsidies, downtown boasts barely 3 percent of the region’s jobs. In the minds of most Angelenos, the only reason to go downtown is for jury duty or the occasional sporting or cultural event.

20140416_Kotkin-2626 Night Market, at the Santa Anita track

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The “real” L.A., as experienced by most residents, exists at the neighborhood level. Spread across the region, a multiplicity of neighborhoods offers an unusual variety of housing options in a great global city. Gardener Aurelio Rodriguez and his family choose to live in Sylmar, where he keeps a lush half-acre filled with fruit trees, tropical plants, and aging farm equipment, while remaining within the Los Angeles city limits. It’s the kind of place where pedestrians need to keep an eye out for more than just cars. Like Juan, some residents amble through the narrow streets on horseback.

20140416_Kotkin-3Juan on horseback in Sylmar

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Los Angeles’s myriad little villages are enjoying a new surge of interest. City politics are at a low ebb—with voter turnout in 2013 the tiniest ever for a contested citywide election—yet neighborhood groups proliferate, including some 90 neighborhood councils. People may not be passionate about what goes on at City Hall, but they care deeply about where they live.

I live in Valley Village, a tree-lined corner of Los Angeles made up of single-family houses built on lots that range from 5,000 to 20,000 square feet. Enclosed between four major thoroughfares, my part of Valley Village manages to be both diverse and highly cohesive—a city within a city. Crime tends to be limited to petty thefts from cars. Monthly neighborhood-watch meetings draw middle-class families as well as gay and childless couples. Armenians and orthodox Jews live side by side. The local markets have an ethnic flavor. At the Cambridge Farms supermarket on Burbank Boulevard, signs are posted in English and in Hebrew. Oxnard Boulevard has an Armenian feel, with a functioning lavash bakery and restaurants selling kabobs.

“We fell in love with the neighborhood once we got settled in,” says Grettel Cortes, who lives in a modest house several doors down with her husband, Efraim, and her three young children, Gaea, Eva, and Benjamin. “There’s a great family feeling here. If I need something, I ask Patty across the street. It’s a great place for kids to grow up.” Cortes manages the neighborhood’s heavily trafficked Shutterfly site. A recent article about a coyote devouring a local cat was big news for weeks.

The hot topic in Valley Village these days is the rise of the McMansions. New homes are going up on a scale that feels out of sync with the neighborhood’s low-rise character. One of the larger parcels has sprouted a gigantic, two-and-a-half-story monstrosity that neighbors have christened “the hotel.” During construction, the property’s owner chopped down several trees, some of which may have been protected by city ordinances. Only relentless protests from the locals kept him from further destruction.

“We love the neighborhood but hate the mansionization,” notes Tim Coffey, a 30-year resident whose wife, Chary, led the fight to save the trees. “To us, chopping down trees ruins what this place is all about.”

Despite the McMansions, Valley Village has remained mostly unchanged since I moved here over a decade ago. The area’s appeal lies in the quality of its private spaces—backyards, front yards, gardens—and its neighborliness: people actually say hello to strangers on the street. The many trees also provide an ecosystem for a vast array of birds, from hawks to hummingbirds, as well as various mammals, including raccoons, opossums, and, as we now know, the occasional coyote.

As neighbors, we share a fierce determination to protect and preserve our shaded enclave. Yet the people here are not your stereotypical suburbanites. Chary, for example, sells her own line of lingerie. Grettel is a website developer. Many others work in the entertainment industry. Studios such as Disney, CBS Radford (where Seinfeld was produced), NBC, Universal, and Warner Brothers are all a ten- to 15-minute drive away. Many of my neighbors work from home, including a voice-over artist, a scriptwriter, several actors and musicians, and even a magician. It turns out that Hollywood people want many of the same things from a neighborhood that the rest of us do.

20140416_Kotkin-4Grettel Cortes’s neighbor Patty

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20140416_Kotkin-5Blind Melon guitarist Brad Smith

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Native Mississippian Brad Smith, a successful songwriter and performer with the band Blind Melon, sees Valley Village as a refuge from the insanity of the entertainment business. Brad and his wife, Kim, a Michigan native, like the homey and familiar feel. They have lived here since 2000 and are raising a young daughter, Frankie. They have a dog and a trampoline out back. “In L.A., a lot of places seem like you can live there but never leave the car,” he says as he strums a tune in his backyard. “But here, it’s different. You come home from tour, and you come to a neighborhood with dogs, cats, and kids. It makes living in the big city far more palatable, even for someone from a small town.” This is one of L.A.’s enduring charms: the option to live in a quiet neighborhood in the heart of an important city.

Los Angeles is constantly reinventing itself, combining and recombining people and neighborhoods from the ground up. Out of its crazy quilt of ethnic enclaves, new districts arise all the time, often spontaneously, notes Thomas Tseng, a native of the suburban San Gabriel Valley and a student of urban planning. Take the neighborhood now known as “Little Osaka,” which follows along Sawtelle Boulevard in West Los Angeles. Forty years ago, when I lived there, the area was home mostly to working-class Japanese and Mexican families. The few modest restaurants were far from fashionable, mostly offering ethnic home-style cuisine. But over the past few years, Tseng says, many of the old families—as well as investors from Korea, Taiwan, and China—have opened new restaurants, bars, and clubs in the neighborhood. Far from the downtown hotspots and the Hollywood scene, Little Osaka’s streets bustle with young people, a majority of them Asian. Many live in the area or attend nearby UCLA. “There was nothing planned,” says Tseng, who has been getting his hair cut and belly filled in the area for years. “It just happened.”

20140416_Kotkin-6Little Osaka

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20140416_Kotkin-7Little Osaka

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Even more impressive is the 626 Night Market in the parking lot of the Santa Anita Track. Every month, some 160 food vendors descend on the place. You can get everything from preserved fertilized eggs to sea-urchin rice balls (my favorite), lamb skewers, stinky tofu, and grilled squid. Up to 40,000 people gather in this monthly celebration of L.A.’s entrepreneurial grassroots food scene. After all, Los Angeles invented the food truck—the perfect analogy for a city perpetually on the road and spanning hundreds of neighborhoods.

Los Angeles may lack the kind of dynamic urban core that we associate with traditional great cities. But to most of its residents, the city is an urban feast on a gourmet scale. We wouldn’t trade it for the world.

About the Author:  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 story originally appeared at City Journal and is republished with permission. Photographs are by Ted Soqui.

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

April 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 retroactive (to 1/1/2012) “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, 47.8% 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. CA is so bad, we also have the 2nd highest state income tax bracket. AND the 3rd. Plus the 5th and 7th.
http://taxfoundation.org/sites/taxfoundation.org/files/docs/ff2013.pdf, Ref. Table 12

http://tinyurl.com/CA-2nd-CG

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 highest gas tax at 71.6 cents/gallon (October, 2013). National average is 49.5 cents.
http://www.api.org/statistics/fueltaxes/ 
(CA also has the nation’s 3rd highest diesel tax – 76.2 cents/gallon. National average 54.8 cents)

PROPERTY TAX:  California in 2010 ranked 19th 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 7th highest in the nation in 2009.
http://www.taxfoundation.org/taxdata/show/251.html
http://www.taxfoundation.org/taxdata/show/1913.html (2009 latest year available)

“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 Oregon at $150. A few others under $100, with most 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 2013 “business tax climate” ranks 3rd worst in the nation – behind New Jersey and anchor-clanker New York state.
http://taxfoundation.org/article/2014-state-business-tax-climate-index

LEGAL ENVIRONMENT:  The American Tort Reform Association ranks CA the “worst judicial hellhole” in U.S. for 2nd year in a row – most anti-business. 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/2013/12/17/california-ranks-1-in-20132014-judicial-hellholes-report/
http://www.instituteforlegalreform.com/states/california

FINES AND FEES:  CA 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 for the states 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 3rd highest state workers compensation rates, up from 5th in 2010. CA had a 3.4% rate increase in 2013.
http://www.cbs.state.or.us/external/dir/wc_cost/files/report_summary.pdf
http://tinyurl.com/2013-CA-rate-increase

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://taxfoundation.org/article/annual-state-local-tax-burden-ranking-2010-new-york-citizens-pay-most-alaska-least

UNEMPLOYMENT:  CA is tied for the 4th worst state unemployment rate (February, 2014) – 8.0%.  National unemployment rate 6.7%.  National unemployment rate not including CA is 6.5%, making the CA unemployment rate 22.6% higher than the average of the other 49 states (sadly, one of the better performances we’ve managed in several years).
http://www.bls.gov/web/laus/laumstrk.htm

Using the average 2013 U-6 measure of unemployment (includes involuntary part-time workers), CA is the 2nd worst (after Nevada) at 17.3% vs. national 13.8%.  National U-6 not including CA is 13.3%, making CA’s U-6 29.9% 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 community college tuition is the lowest in the nation. How low? Nationwide, the average community college tuition is more than double our California community colleges.
http://trends.collegeboard.org/college-pricing/figures-tables/state-tuition-and-fees-state-and-sector-2012-13-and-5-year-percentage-change

This ridiculously low tuition devalues education to students – often resulting in a 25+% drop rate for class completion. In addition, 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 one crucial point — all poor and many middle class students don’t pay the “fees” (our state’s euphemism for tuition). There are no fees for most California families with under $80K income.
http://www.universityofcalifornia.edu/blueandgold/

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) is by far the worst in the nation at 23.8%. We are 48.8% higher than the average for the other 49 states. Indeed, the CA poverty rate is 20.2% higher than 2nd place Nevada.
http://www.census.gov/prod/2013pubs/p60-247.pdf, page 13

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://www.calwhine.com/great-news-california-no-longer-has-worst-credit-rating/1554/

Average California firefighter paid 60% more than ff’s in other 49 states. CA cops paid 56% more.
http://tinyurl.com/CA-ff-and-cop-pay

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/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 27.6% more per kWh than the national average. CA commercial rates are 44.4% higher. For industrial use, CA electricity is 74.4% higher than the national average (October, 2013). NOTE: SDG&E is even higher than the CA average! http://www.eia.gov/electricity/monthly/epm_table_grapher.cfm?t=epmt_5_06_a

A 2011 survey of home water bills 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

736 top U.S. CEO’s surveyed rank California “the worst state in which to do business” for the 9th straight year (May, 2013). 24/7 Wall St. ranks CA the “worst run state” for 3rd year.
http://chiefexecutive.net/best-worst-states-for-business-2013
http://www.TinyURL.com/WorstRunState

From 2007 through 2010, 10,763 industrial 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 industrial 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
(California Manufacturers and Technology Association podcast)

OUT-MIGRATION:  California is now ranked as the 2nd worst state to retire in. Only basket-case Illinois is worse. We “beat” NY, RI and NJ.
http://www.topretirements.com/blog/great-towns/our-worst-states-to-retire-list.html/
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 2000 through 2009, California lost a NET 1.5 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. Again, note that this is NET loss.
http://www.newgeography.com/content/002585-new-census-data-reaffirms-dominance-south
http://tinyurl.com/2011-CA-migration

They are primarily the young, the educated, the productive, the ambitious, the wealthy – and retirees seeking to make their nest-eggs provide more bang for the buck.

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

Common Core: A Trojan Horse?

The deceptively innocuous-sounding name belies the crippling effects a centralized K-12 education curriculum will have on the United States once it is allowed to take effect. Ze’ev Wurman, software architect, electrical engineer and longtime math advisory expert, feels Common Core is a federally-enforced “mediocre national benchmark” that “marks the cessation of educational standards improvement” and will consign the country to a non-first rate future.

Incursion by the federal government in matters pertaining to the curriculum or content in public education is prohibited by the Constitution and echoed in the 1965 Elementary and Secondary Education Act, 1970 General Education Provisions Act and 1979 Department of Education Organization Act.

The 2001 reauthorization of ESEA, the No Child Left Behind legislation, marked a shift that squarely involved the government in establishing education standards and student assessments. With Common Core, however, the reach and scope of federal control and the lawlessness are breathtaking. This essay attempts to outline the main issues. The initiative deserves further analysis.

The Common Core States Initiative was part of 2009 stimulus package. Prohibited by law from direct control of public education, it represented an attempt by the federal government to establish a straw horse, a public beard to induce states to adopt the program to compete for gain shares of $4.35 Billion in Race To the Top grant funds.

CCSSI was presented as a state-led effort “coordinated by the National Governors Association Center for Best Practices and the Council of Chief State School Officers. The standards, assessments, curriculum, texts and instructional materials were all developed by two independent private consortia, SMARTER Balanced Assessment Consortium (SBAC) and the Partnership for Assessment of Readiness for College and Careers consortium. They were selected by the Department of Education and awarded more than $300 Million in federal grants.

Although SBAC and PARCC had not yet written the standards for mathematics and English Language Arts, the states had to commit to them sight unseen in order to receive the RTTT funds, the states were in desperate financial straits due to the economic downturn. Forty-five states and Washington, DC all agreed to accept CCI. NY and Florida each got $700 Million.

CCSSI is a national initiative masquerading as a state-sponsored program. States will be required to develop massive databases involving personal information about students and their families. This is an invasion of privacy that is prohibited by the Family Education and Privacy Act. The information will be shared with the Department of Education and the Executive office as well as other federal agencies.

The standards, curriculum and assessments in mathematics and English Language Arts were developed by a 29-member Common Core Standards Development Work Group. The members represented testing experts, professors of education, one mathematician and several teachers and school administrators.

Instead of experts in the much-needed STEM subjects, the work group and the 25-member Validation Committee consisted of employees of testing organizations like ACT, College Board and Achieve. The members of the two three-person committees that wrote the entirety of the national K-12 standards for mathematics as well as ELA were non-education professionals as well.

Sixty individuals who lacked adequate qualifications or credentials were designated by the federal government to undertake the Herculean task. That the product designed to develop critical thinking and to teach 21st century standards for college and career readiness in the global economy without approval of oversight by the public or nation-wide consultation with educators and experts has caused such furor and outrage is both understandable and appropriate.

There was a single college professor of mathematics, James Milgram from Stanford University but not even one college or PhD-level professors of science, technology or engineering. Milgram refused to sign off on the final draft. He warned that by the seventh grade, the CCI math standards would put American students two years behind their peers from Singapore, Shanghai, Japan and the other high-performing countries.

John Goodman, a math professor at New York University, echoed Milgram’s concerns. He felt the CCI math standards imposed “significantly lower expectations with respect to algebra and geometry than the published standards of other (leading) countries.”

The concerns were prompted by the shift from 8th to 9th grade for Algebra I and the reduction in emphasis in basic principles such as addition, subtraction, fractions and division in elementary school in favor of abstract reasoning and problem solving. Panel member Dr. Sandra Stotsky of the University of Arkansas expressed similar misgivings about the math standards.

The ELA standards are equally sub-standard. 50% of classic literature will be replaced by informational texts from kindergarten through 10th grade. In the last two years of high school, 70% of what students read will consist of informational texts, political speeches and magazine article. Gone are Mark Twain, John Milton, Homer, Dostoyevsky, Tolstoy, Shakespeare, F. Scott Fitzgerald and countless other great Western writers.

A significant number of the literary selections chosen reflect the strong emphasis in multiculturalism. An emphasis on Islam is equally striking that is amplified by a $135 Million federal grant to install books on Islam in every public school library with no funds allocated for books on Judaism or Christianity.

Pioneer Institute estimates the costs to implement Common Core to be $17 Billion for the 1st seven years in addition to the funds each state allocates for education in its annual budget. The Congressional Budget Office was not asked to prepare an estimate lest it become obvious CCI is a federal program.

The public is waking up to the specter of national overhaul of public education, lowering of standards and federalization of the system. States are backing out of their commitment and refusing or delaying the implementation of the standards.

Massachusetts, the only state to score in the top three on PISA assessments, dropped significantly in rank after implementing Common Core. In New York, 70% of 8th graders failed the math exam and 74%, the English exam. In one Harlem school, just 7% of students passed in English and 10% in math.

Where do we go from here? There is only one answer. Michelle Malkin is right. She minced no words in her indictment of CCI as “rotten to the core” and her warning that “the corruption of math education is just the beginning.” It must be rejected and rescinded. Our children and our country deserve better.

About the Author:  R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

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20140414_Friend_FB

The Geography of Inequality

Perhaps no issue looms over American politics more than worsening inequality and the stunting of the road to upward mobility. However, inequality varies widely across America.

Scholars of the geography of American inequality have different theses but on certain issues there seems to be broad agreement. An extensive examination by University of Washington geographer Richard Morrill found that the worst economic inequality is largely in the country’s biggest cities, as well as in isolated rural stretches in places like Appalachia, the Rio Grande Valley and parts of the desert Southwest.

Morrill’s findings puncture the mythology espoused by some urban boosters that packing people together makes for a more productive and “creative” economy, as well as a better environment for upward mobility. A much-discussed report on social mobility in 2013 by Harvard researchers was cited by the New York Times, among others, as evidence of the superiority of the densest metropolitan areas, but it actually found the highest rates of upward mobility in more sprawling, transit-oriented metropolitan areas like Salt Lake City, small cities of the Great Plains such as Bismarck, N.D.; Yankton, S.D.; Pecos, Texas; and even Bakersfield, Calif., a place Columbia University urban planning professor David King wryly labeled “a poster child for sprawl.”

Demographer Wendell Cox pointed out that the Harvard research found that commuting zones (similar to metropolitan areas) with less than 100,000 population average have the highest average upward income mobility.

The Luxury City

Most studies agree that large urban centers, which were once meccas of upward mobility, consistently have the highest level of inequality. The modern “back to the city” movement is increasingly less about creating opportunity rather than what former New York Mayor Michael Bloomberg called “a luxury product” focused on tapping the trickle down from the very wealthy. Increasingly our most “successful cities” have become as journalist Simon Kuper puts it, “the vast gated communities where the one percent reproduces itself.”

The most profound level of inequality and bifurcated class structure can be found in the densest and most influential urban environment in North America — Manhattan. In 1980 Manhattan ranked 17th among the nation’s counties in income inequality; it now ranks the worst among the country’s largest counties, something that some urbanists such as Ed Glaeser suggests Gothamites should actually celebrate.

Maybe not. The most commonly used measure of inequality is the Gini index, which ranges between 0, which would be complete equality (everyone in a community has the same income), and 1, which is complete inequality (one person has all the income, all others none). Manhattan’s Gini index stood at 0.596 in 2012, higher than that of South Africa before the Apartheid-ending 1994 election. (The U.S. average is 0.471.) If Manhattan were a country, it would rank sixth highest in income inequality in the world out of more than 130 for which the World Bank reports data. In 2009 New York’s wealthiest one percent earned a third of the entire municipality’s personal income — almost twice the proportion for the rest of the country.

The same patterns can be seen, albeit to a lesser extent, in other major cities. A 2006 analysis by the Brookings Institution showed the percentage of middle income families declined precipitously in the 100 largest metro areas from 1970 to 2000.

The role of costs is critical here. A 2014 Brookings study showed that the big cities with the most pronounced levels of inequality also have the highest costs: San Francisco, Miami, Boston, Washington, D.C., New York, Oakland, Chicago and Los Angeles. The one notable exception to this correlation is Atlanta. The lowest degree of inequality was found generally in smaller, less expensive cities like Ft. Worth, Texas; Oklahoma City; Raleigh, N.C.; and Mesa, Ariz. Income inequality has risen most rapidly in the bastion of luxury progressivism, San Francisco, where the wages of the 20th percentile of all households declined by $4,300 a year to $21,300 from 2007-12. Indeed when average urban incomes are adjusted for the higher rent and costs, the middle classes in metropolitan areas such as New York, Los Angeles, Portland, Miami and San Francisco have among the lowest real earnings of any metropolitan area.

Rural Poverty

But cities are not the only places suffering extreme inequality. Some of the nation’s worst poverty and inequality, notes Morrill, exist in rural areas. This is particularly true in places like Texas’ Rio Grande Valley, Appalachia and large parts of the Southwest.

Perhaps no place is inequality more evident than in the rural reaches of California, the nation’s richest agricultural state. The Golden State is now home to 111 billionaires, by far the most of any state; California billionaires personally hold assets worth $485 billion, more than the entire GDP of all but 24 countries in the world. Yet the state also suffers the highest poverty rate in the country (adjusted for housing costs), above 23%, and a leviathan welfare state. As of 2012, with roughly 12% of the population, California accounted for roughly one-third of the nation’s welfare recipients.

With the farm economy increasingly mechanized and industrial growth stifled largely by regulation, many rural Californians particularly Latinos, are downwardly mobile, and doing worse than their parents; native-born Latinos actually have shorter lifespans than their parents, according to a2011 report. Although unemployment remains high in many of the state’s largest urban counties, the highest unemployment is concentrated in the rural counties of the interior. Fresno was found in one study to have the least well-off Congressional district.

The vast expanse of economic decline in the midst of unprecedented, but very narrow urban luxury has been characterized as “liberal apartheid. ” The well-heeled, largely white and Asian coastal denizens live in an economically inaccessible bubble insulated from the largely poor, working-class, heavily Latino communities in the eastern interior of the state.

Another example of this dichotomy — perhaps best described as the dilemma of being a “red state” economy in a blue state — can be seen in upstate New York, where by virtually all the measurements of upward mobility — job growth, median income, income growth — the region ranked below long-impoverished southern Appalachia as of the mid-2000s. The prospect of developing the area’s considerable natural gas resources was welcomed by many impoverished small landowners, but it has been stymied by a coalition of environmentalists in local university towns and plutocrats and celebrities who have retired to the area or have second homes there, including many New York City-based “progressives.”

Where Inequality Is Least Pronounced

According to the progressive urbanist gospel, suburbs are doomed to be populated by poor families crowding into dilapidated, bargain-priced former McMansions in the new “suburban wastelands.” Suburbs, not inner cities, suggests such urban boosters as Brookings Chris Leinberger, will be the new epicenter of inequality, even though the percentage of poor people, as shown above, remained far higher in the urban core.

Yet , according to geographer Morrill, in comparison with urban cores, suburban areas remain heavily middle class, with a high proportion of homeowners, something rare inside the ranks of core cities.The average poverty rate in the historical core municipalities in the 52 largest U.S. metro areas was 24.1% in 2012, more than double the 11.7% rate in suburban areas. Between 2000 and 2010, more than 80% of the new population.

in America’s urban core communities lived below the poverty line compared with a third of the new population in suburban areas, although the majority of poor people lived there, in large part because they are also the home to the vast majority of metropolitan area residents.

An analysis by demographer Wendell Cox of American Community Survey Data for 2012 indicates that suburban areas suffer considerably less household income inequality than the core cities. Among the 51 metropolitan areas with populations over 1 million, suburban areas were less unequal (measured by the Gini coefficient) than the core cities in 46 cases.

The Racial Dynamic

There is also a very clear correlation between high numbers of certain groups — notably African Americans but also Hispanics — and extreme inequality. Morrill’s analysis shows a huge confluence between states with the largest income gaps, largely in the South and Southwest, with the highest concentrations of these historically disadvantaged ethnic groups.

In contrast, Morrill suggests, areas that are heavily homogeneous, notably the “Nordic belt” that cuts across the northern Great Lakes all the way to the Seattle area, have the least degree of poverty and inequality. Morrill suggests that those areas dominated by certain ethnic backgrounds — German, Scandinavian, Asian — may enjoy far more upward mobility and less poverty than others.

Some, such as UC Davis’ Gregory Clark even suggest that parentage determines success more than anyone suspects — what the Economist has labeled “genetic determinism.” None of this is particularly pleasant but we need to understand the geography of inequality if we want to understand the root causes of why so many Americans remain stuck at the lower ends of the economic order.

About the Author:  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 story originally appeared at Forbes.com and is republished with permission from the author.

The Best State Governors: Two Examples

Suppose you pick up your typical California newspaper and see headlines like, “State Unemployment Far Below the National Average” and “State Running Healthy Surplus; Gov. to Return Money to Taxpayers.” You just might find yourself paraphrasing Dorothy in the Wizard of Oz, “Sutter Brown, I’ve got a feeling were not in California anymore.” (For those not acquainted with Sutter Brown, he is California’s charming First Dog, who sometimes joins Governor Brown at press conferences.)

No, we certainly would not be in California where the unemployment rate is far above the national average and, although we are running a modest surplus, the only plans coming from Sacramento are for more government spending paid for by yet higher taxes.

Californians are telling pollsters they are not feeling either secure or confident. Two surveys taken late last year by the Hoover Golden State Poll found twice as many Californians reported being worse-off financially (33%) than better off (17%) over the last year; 2 out of 3 Californians predicted their state tax rates will increase this year, while 1% predicted a decrease; and only 1 in 7 Californians are “very confident” they can afford both higher taxes and other pocketbook expenses. And the fact that over a million Californians have voted with their feet — by moving to Texas, Nevada, Florida and other states not hostile to economic growth — is well documented.

Governor Jerry Brown has declared for reelection — his fourth term — promising more of the same, while his two declared Republican opponents are struggling to energize broad based voter enthusiasm. (In all fairness, neither is likely to generate the kind of financial support even close to that of Brown’s bankroll given his close ties to public sector unions).

Wisconsin Governor Scott Walker:

But if California had a more level political playing field, what kind of gubernatorial leadership provides the best model? Interestingly, a governor who, not long ago, was viewed as very polarizing, is now garnering favorable attention for bringing fiscal sanity to his state. Even though its weather can’t match California, let’s consider Wisconsin and Governor Scott Walker.

A January Marquette Poll shows 54% of Wisconsin voters see their state headed in the right direction, while 40% disagree. While this may not seem like an overwhelming vote of confidence, it must be considered in light of the ongoing public employee union jihad against Walker, who significantly restricted collective bargaining for government workers. This war on Walker has included an unsuccessful recall election that received tens of millions of dollars in union support from across the nation.

Still, Wisconsin has the advantage over California where we have the highest paid government employees in all 50 states. Walker has shown willingness to stand up to government unions, and is committed to cutting taxes and creating jobs. Contrary to the liberal spin machine, Walker confronted the unions, not out of spite or meanness, but because he realized that the very survival of his beloved Wisconsin was no longer assured given the sure path to bankruptcy it was on.

What is truly “Oz” like in the comparison between California and Wisconsin is the knee-jerk assumption by pundits in the main stream media that the sort of Republican policies advanced by Governor Walker help only the “wealthy.” These policies, we are told, only increase the gap between the “haves” and the “have nots.” But let’s look at where good, middle class jobs are being created. Not surprisingly, it doesn’t include California. Indeed, our hostile tax and regulatory climate has turned the central valley into a combination third world country and dust bowl.

No, real leadership would compel the governor of California — whoever that may be — to pursue those policies that eschew corporate cronyism (e.g., High Speed Fail) and are proven to grow an economy: reasonable taxation and a modest regulatory environment. Wisconsin has it. California doesn’t. And, by the way, we haven’t even talked about Texas yet.

Texas Governor Rick Perry:

To left-leaning politicians in Sacramento, Texas Governor Rick Perry – and the “Move Your Business to Texas” ads his administration sponsors – are about as welcome as Godzilla in Tokyo. The cause of this consternation is Perry’s pro-business record which exposes all the weaknesses of the California approach to governing. While Texas focuses on job creation, California lawmakers give their highest priority to reducing the calories in soft drinks. While Texas cut taxes last year, Sacramento is constantly searching for new ways to burden taxpayers.

For defenders of the California system, where the trivial is exalted and issues about which real people care are ignored, it gets even worse when Perry leaves. This is because so many California businesses are following him back to Texas. After comparing the two states and seeing that Texas’ taxes are lower, regulations are more reasonable and the legal system more fair, over 50 companies have relocated or expanded in Texas in the last year and a half. This business flight has shifted thousands of California jobs to the Lone Star State. And we are not just talking about small or insignificant businesses. Last month, oil giant Occidental Petroleum, a major presence in California for nearly a century, announced its relocation to Houston.

Ironically, apologists for California point to Texas’ unemployment rate of 6% — the national average is 6.7% — as a disadvantage to business. They suggest that California, with its 8.3 unemployment rate, is best for business because the pool of available workers is so much larger. This is like claiming that having only one hand is an advantage because you can make a pair of mittens last twice as long.

According to the Washington, D.C.-based Tax Foundation, the California business climate ranks 47th while Texas comes in at number 11. In every recent survey of CEOs, California rates at or near the bottom as a place to do business

Those who ridicule Perry for successfully poaching Golden State businesses might want to suggest to Jerry Brown that he make a similar effort in Texas. Let’s see, the governor could travel from city to city telling business leaders the advantage of relocating to California. His message: “We have Disneyland.”

Actually, in fairness to Brown, he is right that there is more venture capital in California and, indeed, one could argue that more ideas are incubated here. But for those ideas which take hold, they are more often than not realized in Texas. According to a TechAmerica Foundation report last month, Texas has now surpassed California in technology exports.

In the 19th century, those immigrating to Texas often painted “Gone to Texas” on their abandoned homes. If the California political class does not want to get a similar note from more businesses, they had better take their boot off the neck of our productive sector.

As we look forward to June and November elections, we should be asking those running for governor and the Legislature what they plan to do, not only to keep businesses and jobs in our state, but how they will work to attract new business investment that would improve the economy and put Californians back to work.

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 Benefits and Costs of Oil and Gas Development in California

Summary: California is the nation’s third largest producer of crude oil and has considerable potential to expand production. This report assesses this potential by quantifying scenarios for crude oil and natural gas production both onshore and offshore and the associated economic and environmental impacts.

The oil production possibilities of the Monterey Shale recently have attracted considerable attention. If Monterey shale development remains at currently low levels, additional future production would be at most 50 thousand barrels per day. If producers solve the complex geology and engineering associated with this formation, production levels could reach 500 thousand barrels per day after 15 years. Finally, higher well productivity could boost production to slightly less than 1 million barrels per day by 2035. There are also substantial offshore reserves with considerably less production risk and a larger upside than the Monterey Shale.

The combined development scenarios would generate significant economic benefits that are summarized in Table ES1. The average annual increase in employment ranges from 67 to 557 thousand. Average annual gains in state and local taxes are between $1.1 and $8.2 billion per year as value added or state domestic product increases from $8.5 to $63.8 billion depending upon the production scenario. The environmental impacts include greenhouse gas emissions associated with higher consumption of petroleum products and natural gas, the expected value of oil spill costs, and costs associated other environmental events, such as well blow–outs and breaches of well bores. Using mid-range estimates of carbon emission costs and other environmental damage estimates produced by the federal government and the peer reviewed literature, the average annual economic value of these environmental damages are from $1.4 to $12.8 billion per year (see Table ES1). These impacts are between 12 and 20 percent of value added, roughly on par with many royalty rates, which perhaps is a means to assuage environmental concerns. The net economic benefits defined as value added less the expected environmental impact costs are between $7 and $51 billion per year. Developing California’s oil and gas resources, therefore, provides significant net economic benefits to society.

Table ES1: Economic Contribution of Oil and Gas to California Economy in 2011

20140320_Considine_01_TableES1

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1.  INTRODUCTION

New technologies have transformed the oil and gas sector in the U.S. economy from a sunset to a growth industry. Three-dimensional seismic technology, directional drilling, and multi-stage hydraulic fracturing have dramatically lowered the cost of extracting crude oil, natural gas, and natural gas liquids from previously inaccessible shale rock and other tight geological formations. Crude oil production is up considerably in several states, including North Dakota, Texas, Wyoming, Colorado, Utah, and New Mexico. Moreover, Pennsylvania, West Virginia, and Ohio are emerging as major producers of natural gas and associated liquids, such as propane, ethane, and butane.

The application of these technologies has led to dramatic increases in oil and gas production in the United States and a significant reduction in our nation’s trade deficit. In 2008, the US produced 6.78 million barrels per day of crude oil and natural gas liquids. Four years later, production averaged 8.91 million barrels per day, an increase of over 31 percent. Over this period, North America provided 75% of world oil production growth, which has been pivotal in keeping world oil prices from going any higher than they already are. Depending upon prices, oil and petroleum products comprise roughly half of our nation’s trade deficit. From 2007 through the first quarter of 2013, the trade deficit in crude oil and petroleum products had declined by almost 45 percent, which directly translated to higher gross domestic product here at home.

California is now the third largest oil producing state in the US, behind Texas and North Dakota. In contrast to many other major oil and gas producing states, California’s crude oil production had been declining prior to 2012. A slight uptick in production last year suggests that the technological innovations discussed above are being applied to the significant oil and gas resources remaining in California. Directional drilling offers the possibility of safely accessing a significant portion of the estimated 10 billion barrels of offshore oil and gas from land-based drilling rigs. Another opportunity is to develop the Monterey shale in the Central Valley region, which may hold up to 15 billion barrels of crude oil. At current market prices, these assets are worth $2.5 trillion, which, if monetized, could generate hundreds of billions in tax and royalty revenues to fund pensions, education, health, and other government programs. Developing oil and gas resources, however, involves environmental impacts on air, land, and water resources that impose costs on society. The central question of this study is whether the economic benefits of oil and gas development in California exceed the associated environmental costs.

The next section of this study defines the current state of the oil and gas industry in California and its contribution to the state’s economy. The third section describes future development scenarios for additional oil and gas production in California with a specific focus on state offshore resources and on the Monterey Shale. The fourth section estimates the economic impacts from these development scenarios. While a recent study from the University of Southern California estimates the economic impacts from developing the Monterey Shale, there are a number of problems with this study that require additional analysis. The fifth section of this study identifies the environmental impacts associated with these development scenarios, addressing two questions: 1.) Whether these impacts are manageable in terms of minimization of occurrence and implementation of remediation procedures, and 2.) Whether the remaining unmitigated impacts impose significant costs on the economy. The final section compares these costs and benefits, addressing whether accelerated development of oil and gas reserves is in the best interest of California and discussing how the state could achieve a balance between environmental quality, economic growth, and energy independence.

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2.  OIL AND GAS RESOURCES IN CALIFORNIA

California has a large and diverse economy, generating more than $1.9 trillion in value added, which is also known as gross domestic product. Over 19.5 million people are employed in the state. Since the economic recovery began in 2009, California’s economy has struggled. The unemployment rate is at 8.5 percent, well above the national average of 7.0 percent in December of 2013. Significant tax increases have been enacted to fund state pensions, schools, health care and other public expenditures. State policy makers have begun to look at the oil and gas sector as a potential source of future income to fund these public expenditures.

There are several ways to define the oil and gas sector. Some studies, such as Avalos and Vera (2013) define the oil and gas industry from wells to final consumers, including the refining sector and transportation of petroleum products. This study focuses on the upstream segment of the industry – drilling, support, and extraction – because the possible expansion of production discussed in the next section specifically involves these segments of the industry, not the refining and transportation of products. While expansion of the refining sector is possible from expansion of oil and gas extraction, displacement of imported crude oil without significant expansion of refining sector is the most likely outcome.

The economic contribution of the oil and gas sector is summarized in Table 1. Direct employment was 49,582, which was 0.3 percent of total employment in the state. Gross output, which includes purchases of goods and services from other sectors as well as the net contribution to the economy in terms of value added, came to $23.4 billion in 2011. Value added, which is the best measure of net economic contribution of an industry, was $12.6 billion in 2011, or 0.7 percent of total value added or gross state product. Oil and gas generated $1.9 billion in indirect business taxes, constituting 1.6 percent of total tax collections. While these statistics indicate that the oil and gas sector is a small component of the California economy, there are other ways in which additional oil and gas production can provide significant contributions to the economy.

California spent $104.7 billion on oil and natural gas during 2011. The gross output of oil and gas during 2011 was $23.4 billion (see Table 1). Hence, roughly $81.3 billion or slightly over 4 percent of gross state product flowed out of the California economy to pay for imported oil and natural gas to meet domestic needs. If these expenditures flowed to California oil and gas producers who hired workers and paid taxes within the state, California employment, gross state product, and tax revenues would be higher. Hence, increasing oil and gas production in California can cut the state’s energy trade deficit that would provide a direct stimulus to employment, income, and government revenues.

Table 1: Economic Contribution of Oil and Gas to California Economy in 2011
20140320_Considine_02_Table01a

What are the prospects for increasing oil and gas production in California? The potential future production possibilities are significant. Humphries and Pirog (2012) report that California offshore areas contain 10.13 billion barrels of oil and 11.73 trillion cubic feet of natural gas. While oil and gas production offshore California continues, significant expansion is prevented by federal and state drilling moratoriums. Onshore there is the Monterey shale that may contain upwards of another 15 billion barrels of oil, according to the U.S. Energy Information Administration (2011). The development of this resource is just getting underway and faces significant technical challenges.

So while there is significant potential for expanded output, production of oil and gas has steadily declined as illustrated in Figure 1. Production of crude oil peaked in 1985 at 1.079 million barrels per day. Natural gas production also peaked in the same year at 1.6 trillion cubic feet. Like Texas and many other states, technological innovations could reverse these declines. Accordingly, the analysis in the next section develops some possible scenarios for future onshore and offshore oil and gas development.

Figure 1: Oil and Gas Production in California, 1981-2012
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3.  DEVELOPMENT SCENARIOS

The first stage of oil and gas development involves investment to drill wells and construct gathering lines and oil and gas processing facilities other than refineries. This investment spending increases gross output of the drilling sector and depends upon the number of wells drilled each year. Once production begins, oil and gas revenues are generated and payments are made to investors, landowners, and governments. In this second stage , gross output from the oil and gas extraction sector increases in line with oil and gas production. Drilling support services are tied to each of these two sectors. Accordingly, this study models the economic impacts from oil and gas development in two steps; first by increasing gross output in the drilling sector by the amount of investments in the drilling and completion of wells and second by increasing gross output in the oil and gas extraction sector by the amount of gross revenues generated from oil and gas sales. This approach requires the specification of a drilling plan and estimates for the production of oil and gas resulting from current and past wells both offshore and onshore.

3.1  Offshore Development

The development and production plans for offshore development are built upon a scenario developed by Schniepp (2009) for the production of oil offshore Santa Barbara using slant-drilling techniques from land-based rigs. These rigs would drill wells extending several miles offshore. The oil project envisioned by Schniepp (2009) involves developing roughly 1.5 billion barrels of oil reserves offshore Santa Barbara.

Three scenarios for offshore California oil development are considered in this study. These scenarios are intended to bracket the range of possible future outcomes, reflecting considerable geologic, technological, and economic uncertainties.

The low scenario is the one presented by Schniepp (2009), which involves investment outlays of $10.6 billion over a 16-year period, with annual investment spending peaking at about $1.5 billion (see Figure 2). Under this development plan, production rises by 400,000 barrels per day and tracks down to slightly over 50,000 barrels per day after 20 years (see Figure 3).

The medium scenario involves developing these reserves plus those offshore Los Angles and Long Beach with a three-year lag from the low scenario. The total reserves under this scenario are estimated to be 5 billion barrels. Under this case, total investment outlays are $34.4 billion (Figure 2). Production peaks at nearly 1.3 million barrels per day and remains above 150,000 barrels per day after 20 years (Figure 3).

The high scenario assumes all 10 billion barrels of estimated oil reserves offshore California are developed. Given the infrastructure requirements, production in this scenario begins in 2021. This would require total investment outlays of $68.6 billion reaching nearly $10 billion in the early years (see Figure 2) and resulting in annual production peaking at roughly 2.6 million barrels per day and remaining well above 300,000 barrels per day after 20 years (Figure 3). While these cases may be dismissed as unlikely given the opinion in California of some people that is highly critical of offshore drilling, these scenarios provide a basis for estimating the opportunity costs of these views.

Figure 2: Offshore Oil and Gas Investment Outlay Scenarios, 2015-2035
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Figure 3: Offshore Oil and Gas Production Scenarios, 2015-2035
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3.2  Development of Monterey Shale

Despite its significant potential, oil production offshore amounted to only 36 thousand barrels per day in 2012. Onshore production in 2012 was 504.9 thousand barrels per day. Nearly 80 percent of this output comes from the southern San Joaquin Valley resting above Monterey Shale, which is considered the source rock for conventional oil production in the region. The active area for the Monterey Shale is approximately 1,752 square miles. Assuming 16 wells per square mile and 550 thousand barrels of estimated recoverable reserves (EUR) of oil per well, the US Energy Information Administration (2011) estimates that this shale play contains 15.42 billion barrels of technically recoverable oil.

Currently there is considerable uncertainty about whether this oil can be produced. Some geologists believe most of the oil has already migrated to conventional reservoirs. Hughes (2013) argues that the potential of the Monterey has been overstated, citing historical production statistics that only 145 thousand barrels of oil have been recovered from producing wells. Occidental Petroleum, which holds 78 percent of the net leasehold acreage, however, is optimistic about the future production potential of the Monterey. The reason for their optimism most likely is based upon the promise of applying more advanced oil recovery technology, which was not employed for the wells covered by the data sample that Hughes (2013) collected.

A crucial unknown in projecting possible future production profiles for the Monterey shale is the amount of oil recoverable per well. Since there is little doubt that technology has improved considerably since the samples collected by Hughes (2013), this study assumes that Monterey wells drilled beginning in 2015 will average 250 thousand barrels EUR, less than half the EIA estimate but significantly above the average computed by Hughes (2013). Based upon experience in other shale plays reported by Considine et al (2011), technological innovations and learning by operators likely would increase recoverable reserves.

This study assumes three scenarios for the track of recoverable reserves per well over the forecast period summarized below in Figure 4. Under the low scenario, average EUR increases from 250 thousand barrels to 300 thousand after 20 years in 2035. Under the medium scenario, operators crack the code and average EUR increases to 350 thousand barrels by 2020 and then grows one percent per annum, reaching 400 thousand barrels by 2035. The high scenario envisions an even faster ramp-up in EUR to 450 thousand barrels by 2020 and then a gradual increase to 500 thousand barrels per well. Allowing for technical progress that improves well productivity is a reasonable approach based upon experience from other shale plays around the US, such as the Eagle Ford and Marcellus.

The next critical assumption for building a production forecast involves the production decline curve, which is presented below in Figure 5. The area under this curve is the estimated recoverable reserves, which in the base year 2015 is 250 thousand barrels. During the first three years of production, wells are assumed to average 134, 75, and 52 barrels of crude oil production per day. Production in subsequent years then gradually declines (see Figure 5).

Figure 4: Assumptions for Estimated Recoverable Reserves
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Figure 5: Hypothetical Monterey Shale Oil Production Decline Curve
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Given assumptions on EUR per well and the production decline curve, this study posits three drilling scenarios. The first or low case assumes only 90 wells are drilled per year under the low EUR scenario (see Figure 6). Under this scenario, the number of producing wells reaches 1,890 by 2035, which represents 6.7 percent of the 28,032 wells that EIA estimates could be drilled in the Monterey shale region. The medium scenario assumed 300 wells drilled in 2015, increasing by 85 each year to 2020, increasing by 8 per year between 2021 and 2025, then declining by 25 wells per year as productivity growth reduces the need to drill as many wells (see Figure 6). At the end of the forecast period in 2035, there are 14,575 Monterey wells producing, which is 52 percent of the maximum number possible. The high drilling scenario assumes the high EUR scenario and, therefore, a faster pace of drilling that reaches over a thousand in 2020, a gradual increase to 1,100 wells in 2025 and then a decline to 810 wells drilled in 2035 (see Figure 6). The number of producing wells in this scenario is 19,205, which is 68.5 percent of the maximum possible wells that could be drilled.

Figure 6: Monterey Shale Oil and Gas Drilling Scenarios, 2015-2035
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Since well productivity and the number of wells changes change each year, each class of wells or vintage produces crude oil according to its production decline curve, the number of years since initial production, and the number of wells producing from that vintage. Accordingly, production of crude oil in each year going forward is computed by adding production across all well vintages. Associated natural gas production is assumed to be 0.859 thousand cubic feet per barrel of oil produced, which is the California state average from 2008 to 2012.
The results from these calculations are presented in Figure 7. Under the low scenario production gradually increases from 25 to 50 thousand barrels per day. The medium scenario has production rising to over 50 thousand barrels per day in 2015, 250 thousand barrels per day in 2020, and over 500 thousand barrels per day in 2035. The high scenario has production rising to over 470 thousand barrels per day by 2020 and approaching 1 million barrels per day by 2035.

Figure 7: Monterey Shale Oil Production Scenarios, 2015-2035
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These production scenarios are considerably lower than the projections by Gordon et al (2013) that had production increasing from between 1.7 and 3.3 million barrels per day. Our findings support the contention by Hughes (2013) that the production forecasts by the team at the University of Southern California reported by Gordon et al (2013) are somewhat on the high side. Given that Gordon et al (2013) do not clearly describe their methods of production forecasting, it is difficult to determine the source of the differences between the two projections. In contrast to their analysis, this study makes explicit assumptions concerning EUR, employs a possibly more realistic production decline curve, and computes oil and gas output from a vintage production model. While advocates and opponents of oil and gas development can take exception to some of the assumptions made here, at least there is an explicit statement of the assumptions and a model supporting the analysis that allows a transparent quantification of the range of possible outcomes given technical and economic uncertainties.

3.3  Total Development Potential

The above results suggest that there is considerable potential for additional oil and gas production in California. Under the low scenario, Monterey Shale development shows modest productivity improvements and with development of oil reserves offshore Santa Barbara from onshore slant-drilling rigs, California would increase its oil production by 400 thousand barrels per day by 2020 (see Table 2). So even under modest development, California could increase its oil production by 75 percent over a short period of time.

Table 2: Potential Additional California Oil and Gas Production, 2015-2035
20140320_Considine_10_Table02a

With a technological breakthrough in deciphering the complex geology of the Monterey Shale along with expansion of oil production offshore Southern California, oil production could soar by over 1.6 million barrels per day. Such an increase would rival the production gains witnessed recently in Texas and North Dakota. The high resource scenario would involve developing all of California’s offshore oil resources along with successful and relatively intensive development of the Monterey Shale. Under this scenario, California oil production could increase by over 3.3 million barrels per day. Combined with oil production already in place, California would emerge as one of the largest oil producing regions in the world. Although the resources are in place and the technology is in a position to monetize these resources, the central question is whether the California people and their elected officials would ever allow such development. Cynics would be quick to respond that such development is unlikely for political reasons, but public opinion can change, especially when the economic benefits of additional oil and gas production become apparent and environmental management policies are in place to assure responsible development.

To determine the economic impacts of the production potential of California’s oil and gas sector, forecasts of prices for crude oil and natural gas are required. This study uses forecasts produced from the US Energy Information Administration (2013), which are plotted in Figure 8. Real oil prices rise from slightly under $100 per barrel in 2015 to over $140 per barrel by 2035. Similarly, natural gas prices increase from $3.5 per thousand cubic feet to over $6 per thousand cubic feet over the forecast horizon.

Figure 8: Oil and Natural Gas Prices, 2015-2035
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Given these price forecasts, incremental revenues from the three production scenarios appear in the last three columns of Table 3. The low scenario has incremental oil and gas revenues increasing by over $17 billion and then gradually declining to $6 billion by 2035. The medium scenario has a sharper increase in revenues to over $40 billion in 2020 peaking at over $73 billion three years later and then declining but remaining above $40 billion by 2035. The high scenario has revenues peaking over $150 billion in the early 2020s and then remaining well above $90 billion per year out to the end of the forecast horizon.

Also reported below in Table 3, are capital expenditures by the oil and gas industry to develop the Monterey Shale and offshore resources, if drilling moratoriums are lifted. These projections assume that each well costs $6 million to drill and complete. Capital spending begins at 540 million per year initially under the low scenario and ramps up to over $1 billion per year between 2020 and 2033. In total, oil and gas producers would invest over $21 billion over the entire period under this scenario. Capital expenditures are significantly higher under the medium scenario, amounting to over $120 billion from 2015 to 2035. Under the high scenario, capital spending is over $180 billion.

Since most of these expenditures would come from outside the state, they can be viewed as direct foreign investment in California’s energy production sector. As is well known in macroeconomics, a dollar of investment spending generates considerably more dollars as other business sectors supply the labor, raw materials, fuels, and materials to build these capital assets. Estimating these multiplier effects is the subject of the next section.

Table 3: Capital Spending & Oil & Gas Revenues in millions of 2013 dollars
20140320_Considine_12_Table03

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4.  ECONOMIC IMPACTS

The economic impacts of energy resource development involve two stages. First, there are the impacts on value added, jobs, and tax revenues during the construction of the energy producing facilities. During the second phase, economic impacts arise during the operation of these facilities as the income generated from these facilities is spent.

The spending during the construction and operation of energy production facilities will have several economic impacts. The direct capital expenditures will directly stimulate support industries. For example, capital expenditures for construction of oil and gas wells involve direct purchases from companies that provide capital equipment, engineering and construction services, and other goods and services. These companies in turn acquire equipment and supplies from other companies, stimulating several rounds of indirect spending throughout the supply chain. The direct and indirect outlays generate additional employment and income, which induce households to spend their income on additional goods and services. Together, these direct, indirect, and induced impacts during construction and operation constitute the total economic impacts of the energy investments.

Regional economic impact analysis using input-output (IO) tables and related IO models provides a means for measuring these economic impacts. Input-output analysis provides a quantitative model of the inter-industry transactions between various sectors of the economy. This framework provides a means for estimating how spending in one sector affects other sectors of the economy. This re-spending through the economy initiating from an exogenous increase in investment spending or production generates multiplied impacts on value added, employment, and tax revenues. IO tables are available from Minnesota IMPLAN Group, Inc. (2011) based upon data from the Bureau of Economic Analysis in the U.S. Department of Commerce. This study uses these tables to estimate the direct, indirect, and induced economic impacts from spending for the mineral development and eventual operation, which are summarized for California oil and gas in Table 4.

Table 4: Economic Multipliers for Drilling and Extraction in California
20140320_Considine_13_Table04

The multipliers in table 4 were computed by solving the IMPLAN model for California for a $1 million dollar increase in the gross output of the drilling sector and for a $1 million increase in the gross output of oil and gas extraction sector. Under the former solution, 5.83 jobs are required to support that $1 million increase in drilling activity. Likewise, value added increases by $857,942 and state and local taxes and federal taxes rise by $69,420 and $99,421, respectively. These multiplier impacts arise as industries supplying inputs to oil and gas drilling hire workers, pay taxes, and purchase supplies from other sectors to support this higher level of drilling activity. The multipliers for oil and gas extraction are similar in magnitude (see Table 4).

A more detailed look at the multiplied effects of the oil and gas sector on the economy is presented below in Table 5, which estimates the impact on value added by sector from a $2 million increase in oil and gas drilling and extraction. For the $2 million increase in oil and gas drilling and extraction, value added, which again is a measure of gross domestic product, increases by $960,904 (see Table 5). The next five largest impacts by sector include those affecting real estate, professional scientific and technical services, manufacturing, finance and insurance, and construction. Notice that for four of these top five sectors the total effects in the last column are dominated by the indirect impacts in column 3, reflecting the supply-chain linkages of these sectors with the oil and gas sector. In contrast, induced effects dominate the impacts on health and social services and retail trade as workers employed from the new activity in oil and gas and the related supply-chain industries purchase these services. Overall, the $2 million of additional oil and gas drilling and extraction increases total value added by $1.8 million.

Table 5: Impacts on Value Added by Sector
20140320_Considine_14_Table05

4.1   Economic Impacts of Offshore Development

Applying the multipliers in Table 4 to the capital spending and oil and gas revenues generated under the offshore development scenarios results in the estimated economic impacts presented in Table 6. The low development scenario that involves developing the 1.5 billion barrels of oil offshore Santa Barbara generates a peak of $16.5 billion in value added and slightly over 96 thousand jobs in 2020. This development generates $24 billion in state and local taxes and slightly over $20 billion in federal taxes over the 20-year period. After peak production, these economic benefits decline but remain significant with state and local tax revenue generation above $400 million in 2035.

Table 6: Economic Impacts of Offshore California Oil & Gas Development
20140320_Considine_15_Table06a

The medium development scenario that involves significant additional production offshore southern California generates substantially more value added and employment than the low scenario. Incremental value added exceeds $50 billion in 2025 and job gains are nearly 300,000. Given this higher economic activity, state and local tax collections increase by $80 billion over the twenty-year projection period. Under the high scenario, state and local taxes increase by $158 billion. Employment and value added gains are roughly double the gains achievable under the medium growth scenario.

While there has been focus recently on the potential of the Monterey Shale, the economic gains from developing the offshore resources are significant and probably entail relatively less technological uncertainties. On the other hand, the perceived threat from oil spills remains an ongoing concern but these risks can be substantially mitigated with onshore slant drilling to access these offshore reserves.

4.2  Economic Impacts from Developing the Monterey Shale

While fraught with considerable uncertainties arising from geology and petroleum engineering technology, if developed, the Monterey Shale could generate significant economic gains for the State of California. Even under the low development scenario at slightly increased levels of drilling and production from current activity, developing this resource would generate annual gains in value added of between $1 and $4 billion while supporting between 8 and 22 thousand jobs per year (see Table 7).

Table 7: Economic Impacts of Monterey Shale Oil & Gas Development
20140320_Considine_16_Table07

If producers developed cost effective methods for extracting oil from this particular shale represented under the medium scenario, the annual economic gains in terms of value added would be between $15 and $30 billion after five years (see Table 7). Cumulative state and local tax revenues would increase by $56 billion . Value added and employment also increases significantly under the medium scenario.

Under the high scenario, annual gains in value added exceed $24 billion by 2020 and rise to well over $50 billion in 2035. Also after 2020, employment gains are between 150 and 350 thousand. State and local tax revenues would increase by almost $100 billion over the entire 20-year forecast horizon.

These economic impacts are considerably smaller than those estimated by Park and Gordon (2013). The economic impact analysis in their study is driven by statistical regressions. A simple sensibility check using the data reported on page 55 of their report reveals that the net per capita GDP increase is $259.4 and the assumed per capita GDP increase in the oil and gas industry is $35.32. The total effect is 35.32 plus 259.4, which equals 294.72. This implies that the multiplier is 8.34 (294.72 / 35.32), which is well more than seven times larger than multipliers derived from IMPLAN or the Bureau of Economic Analysis for the oil and gas sector. So not only are the projections for oil and gas production from the study by Gordon et al. (2013) somewhat on the high side, so are the estimated economic impacts.

4.3  Total Potential Economic Impacts

The combined economic impacts from developing both the Monterey Shale and offshore oil and gas resources are summarized in Table 8. Near term, gains in value added, employment and tax revenues are relatively modest as technical uncertainties are resolved and infrastructure is constructed. Once these investments are completed, these projects could generate substantial benefits to the State of California. For example, under the medium development plan, value added or gross state product increases by $75 billion generating more than 440 thousand jobs, again via direct, indirect, and induced multipliers. Accumulated state and local tax revenues are $136 billion.

Table 8: Total Economic Impacts of California Oil & Gas Development
20140320_Considine_17_Table08a

The high resource scenario generates substantially more incremental value added, employment, and tax revenues (see Table 8). Employment peaks at slightly more than 958 thousand in 2025, considerably smaller than the 2.8 million in job gains reported by Gordon et al. (2013) just for the Monterey Shale. State and local tax revenues increase by over $250 million over the entire projection period from 2015 to 2035. While the economic gains reported in this study are smaller than Gordon et al. (2013), they remain significant.

However unlikely this high resource scenario may be, this projection does point to the possibility that America could indeed become completely self-sufficient in oil, perhaps even a net exporter of crude oil in coming years. The high resource scenario in California combined with additional tight oil production from Texas to North Dakota, higher oil output from the Gulf of Mexico, an opening of the eastern seaboard of the US for drilling, and full development of oil reserves on the North slope of Alaska is a path to oil independence for the United States. Political interests, however, have blocked these pathways arguing that potential environmental impacts outweigh the economic benefits. To assess the reality of this proposition, the discussion now shifts to environmental concerns with developing oil resources in California, which provides a microcosm of the national debate surrounding oil and natural gas resource development.

*   *   *

5.  ENVIRONMENTAL IMPACTS

The oil and gas production scenarios developed above will have a range of environmental impacts. The key question is whether the economic costs associated with these impacts are commensurate with the economic benefits estimated above. Producing and consuming oil and natural gas affect the natural environment, including air, land, and water resources. These impacts directly affect society by reducing the flow of services from these natural resources. For example, offshore oil production involves the risk of oil spills, which incurs cleanup costs and degrades water resources that would affect related economic activities, such as fishing and recreation. Likewise, additional oil production and consumption would increase emissions of greenhouse gases that contribute to global climate change.

Indeed one of the more cogent arguments against developing the untapped oil and gas in California is that additional production would add to greenhouse gas emissions when the world is trying to combat the impacts of global climate change. The extent of this increase, however, is somewhat tempered because higher California production would be partially offset by reductions in oil and gas production elsewhere. In other words, not all of the increase in California oil and gas production represents an increase in world consumption of these products. The extent of this offset depends upon how world supply and demand for oil and gas adjust to California production. Higher oil and gas production in California displaces imports and depending upon the size of the production increase reduces market prices, which discourages production outside California and increases world consumption. This study uses estimates for these market adjustments reported in the literature to estimate the net increase in world oil and gas consumption resulting from changes in oil and gas production in California. The methods used for these computations are reported in Appendix A that describes the changes in prices, demand, and production by region.

The associated changes in greenhouse gas emissions are directly proportional to these changes in net oil and gas consumption. In addition to greenhouse gas emissions, offshore crude oil production would incur costs associated with the risks of oil spills. Finally, there are costs associated with other environmental impacts from oil and gas production, such as land and water contamination from onshore spills and well blowouts.

5.1  Greenhouse Gas Emissions

As the analysis above demonstrates, higher oil and gas production in California will increase value added, employment, and tax revenues. These gains, however, will come at the price of additional greenhouse gas emissions. The size of these emissions will depend upon how oil and natural gas markets adjust to higher California production. Given the market responses reported in the literature, roughly 50 percent of the increase in California oil production offsets production elsewhere in the world. Figure 9 summarizes the gross and net increases in world crude oil production for the three scenarios for onshore and offshore California production. Under the high production scenario, the gross increase in world production is 3.3 million barrels per day in 2024 but after accounting for reduced production elsewhere, the net increase in world production and consumption is 1.7 million barrels per day.

Figure 9: Gross and Net Increases in World Oil Consumption, 2015-2035
20140320_Considine_18_Figure09

Corresponding with these increases in net world oil consumption are higher greenhouse gas emissions. Assuming 21.2 pounds of CO2 per gallon of crude oil consumed plus another 20 percent to reflect emissions during the production, refining, and transportation of petroleum products, results in the estimates for greenhouse gas emissions from higher California oil production illustrated in Figure 10.

Under the low production scenario, greenhouse gas emissions peak at over 40 million tons by 2020 and then track downward to roughly 11 million tons by 2035. Under the medium scenario, emissions peak at over 160 million tons by the early 2020s and then track down to 75 million tons by 2035. The high production scenario shows a sharp increase in emissions to over 330 million tons per year that like the other two scenarios declines with production but ends up with over 160 million tons per year. While these increases may seem large in an absolute sense, they are between 3 and 6 percent of the 5.279 million tons of total U.S. carbon dioxide emissions from energy consumption during 2012.

Figure 10: Greenhouse Gas Emissions from Higher Oil Production, 2015-2035
20140320_Considine_19_Figure10

To place an economic value on these emissions and, thereby, compare the environmental impacts with the economic benefits, estimates of the costs of greenhouse gas emissions are required. For this, the Interagency Working Group on the Social Cost of Carbon (2013) provides the latest estimates that are summarized in the Figure 11. Under the low cost scenario, greenhouse gas emission costs slowly rise from $13 to $21 per ton. The medium scenario has emission costs rising from $42 in 2015 to $63 per ton in 2035. Finally, under the high cost scenario in which significant damages occur from global climate change, emission costs are $121 per ton and rise to nearly $200 per ton by 2035.

Figure 11: Prices for Greenhouse Gas Emissions, 2015-2035
20140320_Considine_20_Figure11

These emission costs per ton in Figure 11 and the estimated net emissions reported in Figure 10 allow an estimation of the valuation of the environmental impacts from higher California crude oil production. The low carbon cost or price scenario shows environmental impacts valued between $33 million and $5.178 billion dollars per year. These environmental impacts increase more than three-fold under the medium carbon cost scenario. The high carbon price scenario increases the value of carbon emissions to $23.842 billion in 2025 for the medium production scenario and considerably more than that for the high output scenario.

Table 9: Value of Carbon Emissions from Higher California Oil Production
20140320_Considine_21_Table09a

A similar set of calculations for carbon emissions associated with incremental natural gas production is undertaken. The study by Jaramillo (2007) provides estimates of the life cycle emissions of greenhouse gas emissions in the natural gas industry. Given the widespread concern about methane leaks during natural gas production, this study includes these emissions based upon a recent study by Allen et al. (2013).

The estimated values of these environmental impacts are summarized in Table 10 across the three carbon price and production scenarios. Given the smaller volume of natural gas production relative to oil, the environmental costs are considerably smaller than those estimated for crude oil production. Environmental impacts range from $4 million to $592 million under the low carbon price scenario. The medium output and carbon price scenarios have environmental impacts from natural gas production increasing from $25 million in 2015 to slightly more than $900 million in 2025 before tracking down to $533 million in 2035 (see Table 10). The high carbon price and high production scenario has environmental impacts from higher gas production starting at $72 million in 2015, peaking at over $6 billion in 2025 and then declining with production to $3.6 billion in 2035. Overall, while significant, these environmental impacts are considerably smaller than those associated with crude oil production.

Table 10: Value of Carbon Emissions from Higher California Gas Production
20140320_Considine_22_Table10

5.2  Oil Spills

Another significant concern with expanding oil production in California involves oil spills. In fact, the present-day moratorium on offshore drilling off the eastern and western coasts of the United States originates with the 1968 well blowout off the Santa Barbara coast. This policy has become a fixture of U.S. energy policy despite the likelihood of billions of barrels of recoverable oil under continental coastal waters.

Unlike the environmental impacts from additional oil and natural gas consumption, the environmental impacts of oil spills are inherently probabilistic in nature. In other words, they can occur but with low frequency. The environmental impacts, therefore, should be viewed in a probabilistic context. The best measure of occurrence of oil spills in this situation is the expected value or the most likely outcome given the distribution of possible outcomes.

Using records of actual oil spills Anderson et al. (2012) find that 32,329 barrels of oil are spilled for every billion barrels produced. Harper et al. (1995) find that offshore and onshore costs of cleanup are between $30 thousand and $107 thousand dollars per barrel spilled. Using these values for the three production scenarios provides estimates of the expected value of oil spill costs from higher oil production offshore California.

The results appear in Table 11. Compared with the other environmental impacts, the expected value of the environmental impacts from oil spills is small due to their relatively low frequency and size. For example, in the peak year of production in 2025 across all three offshore scenarios, the expected environmental damages range from $81 million to $3.166 billion (see Table 11). The latter is considerably smaller than the comparable estimates of $53.26 billion and $6.094 billion for environmental impacts from greenhouse gas emissions for oil and gas respectively. Nevertheless, oil spills are serious problems and these estimates provide a basis for establishing a contingency fund to mitigate their impacts if additional offshore production was allowed.

Table 11: Value of Expected Oil Spill Costs from Higher California Oil Production
20140320_Considine_23_Table11

5.3  Impacts on Land and Water

There are additional environmental impacts that would arise primarily from developing the Monterey Shale. Hydraulic fracturing uses large volumes of water to liberate oil and natural gas from tight rock formations, such as the Monterey Shale. Handling these large volumes of water inevitably involves spills on land or in local waterways. In addition, there are environmental impacts that arise from well blowouts, which occur in less than one percent of wells drilled, see Considine (2013). Environmental contamination also occurs when there are defects in the construction of wells that allows methane and flow-back water to enter local aquifers. Like well blowouts, these events occur with low frequency, see Considine (2013). This study uses the findings reported by Considine et al. (2013) to measure the frequency of these events and by Considine et al. (2011) to estimate the value of the associated environmental impacts.

The estimates reported in Table 12 include the value of air, land, and water impacts from diesel use during hydraulic fracturing, impacts from blowouts and other accidents, and the impacts from water contamination from well bore failures. Like the oil spill estimates above, these estimates should be viewed as expected values. As Table 12 illustrates, these values range from $108 to $349 thousand per well. These values use the value of water damages implicit in the Dimock case in Pennsylvania discussed by Considne et al. (2011). Multiplying these values by the number of wells drilled yields the total expected value of these environmental impacts under the three production scenarios for onshore development of the Monterey Shale. As the table illustrates, the expected values range from $10 to $387 million.

Table 12: Expected Value of Other Environmental Impacts
20140320_Considine_24_Table12

5.4  Total Environmental Impacts

The total environmental impacts – greenhouse gas emissions from oil and gas production and consumption, oil spills, and other environmental impacts, such as well blowouts and water contamination – are summarized below in Table 13. With relatively low prices for carbon emissions, oil spill costs, and water damage assessments, the total value of environmental impacts range from $46 million to $6.8 billion. The medium cost scenario in the second panel in Table 13 has vales ranging from $134 million to $21.5 billion. Finally, in the high cost scenario the three production scenarios generate environmental impacts that range in value from $362 million to $62.9 billion.

Table 13: Total Expected Value of Environmental Impacts
20140320_Considine_25_Table13

 

*   *   *

6.  CONCLUSION

The resource and economic impact assessment conducted above finds significant economic benefits from developing California’s oil and natural gas resources. These developments, however, entail environmental impacts, which the previous section estimated. The key question is how the economic benefits compare with the value of the environmental impacts. To address this question, Table 14 presents the value of environmental impacts as a percent of value added from additional oil and gas production in California. With low environmental resource costs, the estimated values for environmental impacts are roughly 4 percent of value added. Under the medium cost scenario, the percentage rises to between 9 and 12 percent. Incidentally, most royalty rates are around 12 percent, suggesting that some form of taxation in that range could be used to endow environmental contingency funds. The high cost scenario has environmental impacts between 23 and 38 percent of value added. Overall, these findings suggest that the economic benefits from developing California’s oil and natural gas resources substantially exceed the value of the associated environmental impacts.

Table 14: Environmental Impacts as a Percent of Value Added
20140320_Considine_26_Table14

The above analysis demonstrates that California citizens pay a rather steep price in terms of foregone opportunities from restricting access to oil and gas development. In other words, the strategy of leaving the resources in the ground passes up billions in value added and tax revenues at the cost of avoiding environmental impacts that are worth far less. Even under the worst-case scenario with high carbon prices and environmental damage cost assessments, the “leave-it-in-the-ground” strategy foregoes $2.5 in economic gains for every dollar of avoided environmental impact. Under the medium environmental cost scenario, the ratio is close to ten-to-one. The implication is that if California is willing to pay for these environmental impacts, the returns would be significant in terms of employment, value added, and tax revenues.

*   *   *

Appendix A: Analysis of Supply and Demand Adjustments

Consider the equilibrium condition for the crude oil or natural gas market:

20140320_Considine_27_Equation1

where Qd is the total demand for crude oil or natural gas, Qo is production of crude oil or natural gas from California, and Qc is crude oil or natural gas supply from other regions.

Recognizing that each quantity in (1) is a function of price, taking the total differential of (1) and re-arranging terms yields:

20140320_Considine_28_Equation2

Factoring equation (2) and transforming to express in terms of elasticities provides:

20140320_Considine_29_Equation3

where is the elasticity of total market demand and is the elasticity of supply from other regions. The change in incremental demand is given by:

20140320_Considine_30_Equation4

The change in production from other regions can be computed as follows:

20140320_Considine_31_Equation5

The elasticities of supply and demand for natural gas and crude oil are determined based upon a review of the literature. The crude oil supply elasticity is 0.58 based upon a survey conducted by Dahl and Dugan (1996). The elasticity of crude oil demand is -0.58, which is an average of long-run price elasticities of demand reported by Hamilton (2009). The natural gas price elasticity of demand is -0.236, which is a sector weighted average of demand elasticities estimated following the model specifications developed by Considine et al. (2011b). The natural gas supply elasticity is 0.345, which is computed based upon a comparison of simulations from the National Energy Modeling System developed by the Energy Information Administration described by Considine (2013).

As an illustration of these calculations, consider the high production scenario for California crude oil. The base world oil consumption forecast is from the Annual Energy Outlook for 2013. Demand for oil outside California is determined by subtracting base California oil production assuming a 3 percent depletion rate plus the incremental change for each scenario from total world consumption projected by EIA. The percentage change in demand is computed using equations (4). Production outside California is computed using equation (5).

An example of the results appear below in Table A1 indicating that the 3.3 million barrels of additional oil production in 2025 under the high production scenario would reduce world prices by 2.79 percent, which would increase world consumption by 1.7 million barrels per day and reduce production outside California by 1.6 million barrels per day.

Table A1: Oil Market Adjustments to California High Production Scenario
20140320_Considine_32_TableA1

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REFERENCES

Allen, David, V.M Torres, J. Thomas, D. Sullican, M. Harrison, A. Hendler, S. Herndon, C. Kolb, M. Fraser, A. Hill, B. Lamb (2013) “Measurements of Methane Emissions at Natural Gas Production Sites in the United States,” Proceedings of the National Academies of Science, 110. 44, 17768-17773, http://www.pnas.org/content/110/44/17768.

Anderson C., M. Mayes, and R. LaBelle (2012) “Update of Occurrence rates for Offshore Oil Spills,” U.S. Department of Interior, Bureau of Ocean Energy Management, http://www.boem.gov/uploadedFiles/BOEM/Environmental_Stewardship/Environmental_Assessment/Oil_Spill_Modeling/AndersonMayesLabelle2012.pdf.

Avalos, A. and D. Vera (2013) “The Petroleum Industry and the Monterey Shale: Current Economic Impact and the Economic Future of the San Joaquin Valley,” California State University, Western State Petroleum Association, http://www.wspa.org/sites/default/files/uploads/The%20Petroleum%20Industry%20and%20the%20Monterey%20Shale%20-%20Fresno%20State%20Study.pdf, 38 pages.

Considine. T.J., R. Watson, N. Considine, and J. Martin  (2013) “Environmental Regulation and Compliance in Marcellus Shale Gas Drilling,” Environmental Geosciences, 20, 1, 1-16.

Considine, T.J. R. Watson, and N. Considine, (2011a) “The Economic Opportunities of Shale Energy Development,” The Manhattan Institute, June 2011, http://www.manhattan-institute.org/pdf/eper_09.pdf, 28 pages.

Considine, T.J., R. Watson, and S. Blumsack (2011b) “The Economic Impacts of the Pennsylvania Marcellus Shale Natural Gas Play: An Update,” Energy and Mineral Engineering, May 2010, 59 pages,

Considine, T.J. (2013) “Powder River Basin Coal: Powering America,” Natural Resources, 4, 8 (2013), 514-533.

Dahl, C. and T. Duggan (1996) “U.S. Energy Product Supply Elasticities: A Survey and Application to the U.S. Oil Market,” Resource and Energy Economics, Vol. 18, No. 3, 243-263.

Humphries, M. and R. Pirog (2012) “U.S. Offshore Oil and Gas Resources: Prospects and Processes,” Congressional Research Service, http://assets.opencrs.com/rpts/R40645_20120210.pdf, 31 pages.

Gordon, P., J. Park, A. Khodabakshnejad, K. Hopkins, D. Wei, and A, Rose (2013) “Economic Modeling Scenarios,” Appendix K, “The Monterey Shale & California’s Economic Future,” University of Southern California, http://gen.usc.edu/assets/001/84955.pdf, pages 62-68.

Hamilton, James (2009) “Understanding Crude Oil Prices,” The Energy Journal, International Association for Energy Economics, vol. 30, No. 2, pages 179-206.

Harper, J. A. Godon, and A. Allen (1995) “Costs Associated with the Cleanup of Marine Oil Spills,” http://ioscproceedings.org/doi/pdf/10.7901/2169-3358-1995-1-27.

Hughes, J. D. (2013) “Drilling California: A Reality Check on the Monterey Shale,” Post Carbon Institute, http://www.postcarbon.org/report/1977481-drilling-california-a-reality-check-on, 49 pages.

Interagency Working Group on Social Cost of Carbon (2013) “United States Government Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis – Under Executive Order 12866,” http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf

Jaramillo, Paulina (2007) “A Life Cycle Comparison of Coal and Natural Gas for Electricity Generation and the Production of Transportation Fuels, “ Ph.D. Dissertation, Carnegie Mellon University.

Minnesota IMPLAN Group (2011) .

Park, J. and P. Gordon (2013) “Macroeconomic Impacts of Developing the Monterey Shale Using Advanced Extraction Technology,” Chapter 3 in, “The Monterey Shale & California’s Economic Future,” University of Southern California, http://gen.usc.edu/assets/001/84955.pdf, pages 25-40.

Schniepp, M. ( 2009) “Economic Benefits of Future Oil and Gas Production in Santa Barbara County,” California Economic Forecast, Santa Barbara Industrial Association Economic Conference, Santa Barbara, California.

U.S. Energy Information Administration (2011) “Review of Emerging Resources: U.S. Shale Gas and Shale Oil Plays,” http://www.eia.gov/analysis/studies/usshalegas/ pdf/usshaleplays.pdf, 82 pages.

U.S. Energy Information Administration (2013) “Annual Energy Outlook for 2013,” http://www.eia.gov/forecasts/aeo/pdf/0383(2013).pdf.

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About the Author:  Dr. Timothy Considine is a School of Energy Resources Professor of Economics in the Department of Economics and Finance at the University of Wyoming. He received his Ph.D. from Cornell University. His research on petroleum market analysis has been published in the top economics journals. Recently, The Cato Institute published his paper exploring management policy issues facing the U.S. Strategic Petroleum Reserve, and the U.S. Department of Energy’s Office of the Strategic Petroleum Reserve currently uses his econometric model of world crude oil markets to estimate the market impacts of various management policies. Dr. Considine also worked as an economist at Bank of America, and as the lead analyst for natural gas deregulation on the U.S. Congressional Budget Office.

Is the Stock Market Over-Stimulated and Overpriced?

At the end of 2013 Wall Street appeared to be convinced that the markets were enjoying the best of all possible worlds. In an interview with CNBC on Dec. 31 famed finance professor Jeremy Siegel stated that stocks would build on the great gains of 2013 with an additional 27% increase this year. So far 2014 hasn’t gone according to script. In contrast to the prevailing optimism I maintain a high degree of skepticism regarding the current rally in U.S. stocks. But opinions are cheap. To back up my gut feeling, here are six very diverse indicators that suggest U.S. stocks are overvalued.

1) U.S. STOCK PRICES VS. LONG-TERM EARNINGS

Currently market bulls will tell you that price to earnings ratios are well within their historic range. But they fail to mention that this statement is based on projected 2014 those earnings that won’t be known exactly until 2015. More sophisticated investors tend to rely on the Shiller S&P 500 P/E Ratio which compares U.S. stock prices to average 10 year inflation-adjusted earnings. This takes a lot of the guess work out of the equation. Today the Shiller S&P 500 PE Ratio is at 26.4. But going back 100+ years, the historic mean of the index is 16.5. This means the current ratio is 61% higher than its long term average.

20140325_Chaudhary-1

Past performance does not guarantee future results.

There are only four occasions in the past 100+ years in which the Shiller S&P 500 PE Ratio was higher than it is now: 1929, 1999, 2002, and 2007. In 3 of these 4 instances, U.S. stock prices saw major declines over the ensuing two years.

But even if we were to agree with the bullish pundits who argue that today’s low interest rates have created a new plateau of valuations, (and therefore can’t be compared fairly to generations-old metrics) today’s short term P/E ratio is still high. Based on the most recent year’s trailing 12-month earnings, the S&P 500 PE Ratio is at 20.14.

At first glance, this does not appear to be extremely high. However, there is an important caveat. Currently, corporate profits as a percentage of GDP are the highest they have ever been since the World War II era.

20140325_Chaudhary-2

Currently profits are coming in at 11% of GDP, a level that is around 60% higher than the average of around 6% that has been seen since 1952. (It is even significantly higher than the average of the past 10 years – a period during which low interest rates pushed up financial ratios past their traditional levels). To return to a more normalized ratio either GDP would have to expand rapidly or profits would have to diminish. Given our view of the current economic prospects, we believe the latter outcome is more likely.

2) U.S. STOCK PRICES VS. CORPORATE ASSETS: TOBIN’S Q RATIO

Maybe earnings just aren’t as important as they used to be. Given all the cash that is on company balance sheets, maybe assets are more detreminative. Tobin’s Q Ratio is a popular measure that compares a company’s market value (which is a function of share price) to the amount it would cost to replace the company’s assets.

So if a company owned a factory, and the market capitalization of the company was $1 million, but the factory would cost $2 million to build today, Tobin’s Q Ratio would be 0.5. The lower the ratio, the less the investor is theoretically paying for the company’s assets.

20140325_Chaudhary-3

At greater than 1, Tobin’s Q Ratio implies that stocks are overvalued. From the chart above, you can see that the Tobin’s Q Ratio for the U.S corporate sector was at 1.05 at the end of last year, which is approaching the level associated with past market declines. The historic mean over more than 100 years for the ratio is just .68 and there are only a few occasions over that time when the ratio passed 1.0. The late 1990’s was the only instance in which the ratio passed 1.1. At that time it shot up to 1.63, before eventually plunging. But should we really hold up the dotcom mania as a benchmark for sound valuations?

3) U.S. STOCK PRICES VS. GDP

The chart below compares the total market capitalization of all publicly traded U.S. companies with U.S. GDP.

20140325_Chaudhary-4

Since 1950 the median figure of this ratio is .65, meaning that all public companies together were worth 65% of that year’s GDP. Currently, the ratio is nearly double that at 1.25. The only times U.S. stocks were valued higher relative to GDP were in 1999 and 2000.You know how that ended.

4) U.S. STOCK PRICES VS. MARGIN DEBT

Just as it’s possible to buy houses with debt (mortgages), people can buy stocks with debt (it’s called margin). As stocks go higher, an increased number of investors may become tempted to use credit to buy appreciating assets. This is particularly true when low interest rates push down the cost of borrowing. Not surprisingly, the chart below from the New York Times shows that stock margin debt as a percentage of GDP is approaching the higher end of its historic range:

20140325_Chaudhary-5

As we have seen in so many of the other metrics, the chart shows large spikes in 1999 and 2007. And while it’s certainly possible that margin debt could go higher from current levels of 2.27% (it reached 2.85% in 1999), it is also possible that margin debt will decrease sharply soon thereafter. When margin equity falls below a certain percentage, many investors are forced to sell stock to repay the loans, which brings downward pressure on share prices. We have seen this movie before, and it’s not a comedy.

5) U.S. STOCK PRICES VS. DIVIDEND YIELD

Of all the ways to measure stock valuations, dividend yield may be the most tangible. Dividends are what investors are paid directly to own stocks. By that metric, U.S. stocks are looking historically expensive.

20140325_Chaudhary-6

As you can see in the chart above, the dividend yield on the S&P 500 at the end of 2013 was the lowest it’s ever been (with the exception of the period around 1999 – there’s that year again).

6) U.S. STOCK PRICES VS. INTEREST RATES

Low interest rates have been the Holy Grail of stock market bulls. By definition, the present value of stocks is higher when interest rates are anticipated to be lower in the future (meaning that investors are willing to pay more for well-established income streams today in anticipation of lower rates).

20140325_Chaudhary-7

As seen in the chart above, yields on the 10-year Treasury bond were cut in half between 1981 and 1989They were halved again by 2002, and again by 2011. From there they decline another 25% before bottoming in May 2013, at 1.5%. These historic declines helped fuel an historic rally in stocks.

Low interest rates also tend to keep corporate costs down and profits up (low rates are one of the main factors in the current profit boom), and make stocks more attractive relative to bonds. The Fed’s current open-ended commitment to zero interest rates has inspired many investors to  adopt a “Don’t Fight the Fed” rallying cry. (A new variant on this may be “As long as it’s Yellen, don’t think of sellin.”)

But here’s the problem…although interest rates remain in historically low territory they have been trending upward slowly for the past year and a half. It’s unreasonable to expect this trend to reverse and interest rates to fall once again into record low territory. If the Fed goes through with its tapering campaign and diminishes the amount of Treasury bonds it buys on a monthly basis (purchases that have helped keep rates low), they are much more likely to rise.

In the first weeks of 2014, yields on 10-year Treasuries flirted with three percent for the first time since July 2011, a time in which the Dow Jones Industrial Average was about 23% below current levels.

IN CONCLUSION

While our analysis at Euro Pacific Capital is in no way exhaustive, I believe that the above metrics make a fairly solid case that U.S. stocks are likely overvalued. I believe that the current optimism is based solely on confidence in monetary policy and the belief that the U.S. has embarked on a period of sustained expansion. However, as Peter Schiff has explained many times, the economy now shows many of the over-leveraged and delusional characteristics that existed before the recessions of 2000 and 2008. Perhaps that helps to explain why today’s markets so closely resemble those periods.

About the Author:  Neeraj Chaudhary is an Investment Consultant in the Los Angeles branch of Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff. This commentary originally appeared in the Winter 2014 EPC Global Investor Newsletter and appears here with permission from the author.

The U.S. Cities Profiting the Most in the Stock Market and Housing Boom

If anything positive can be said for the current tepid economic recovery, it has been very good to those who invest in the stock market or own real estate.

Property owners have been able to reap higher rents and sale prices, and the stock market has soared while the overall economy has registered only modest gains. However, only a precious few have benefited from the bull market on Wall Street. According to Pew Research, only 47% of American households own some stock, down from nearly two-thirds in 2007.

And of those who do own equities, the upper crust control the lion’s share. As of 2010, the wealthiest 20% of U.S. households held 91.7% of all U.S. stock; the top 5%, a shade over two-thirds; and the top 1% controlled 35%.

While incomes for the middle and working class have stagnated in the recovery, the booming stock market helped swell the income of the top 1% by 31.4% through 2012. Overall, the rich now account for 50% of the country’s wealth, more than at any time since 1917, when the income tax was introduced, and well above the level in 1928, at the end of the Roaring Twenties stock boom.

Just as the current asset-driven recovery has had disparate impacts depending on social class, it has affected different regions in divergent ways. To gauge which areas have benefited the most from asset inflation, Mark Schill, head of research at Praxis Strategy Group, looked at the percentage of income derived from rents, dividends and interest in the nation’s 52 largest metropolitan areas and 100 most populous counties.

The Codger Economy

The top of our list is dominated by areas where retirees and aging boomers, particularly the more affluent, are concentrated. Some 57% of Americans aged 50 to 64 own stock, according to Pew, twice as high a percentage as those under 30. People over 55 control well over half the nation’s wealth.

Also as they reach retirement, seniors are less likely to be earning income from wage and salary work, further driving up the share of income from rents, interest and dividends in retirement hot spots. The most well-to-do retirees are the most likely to become migratory snow birds, clustering in the nation’s warmest climes.

This includes the top five metro areas on our list, led by the Miami-Fort Lauderdale-West Palm Beach Metropolitan Statistical Area, where roughly 26.5% percent of income was earned this way in 2012, compared to a national average of 18.2%.

It’s followed by Tampa-St. Petersburg-Clearwater, Fla., and San Diego-Carlsbad, Calif.

These trends are even more evident when we look at the nation’s 100 largest counties. The top of the list is dominated by wealthy retirement counties, led by Palm Beach, Fla., where a remarkable 39.8% of income comes from stocks, rents and interest payments. It’s followed by two other affluent Florida counties: Lee (39.6%), whose largest city is Cape Coral, and Pinellas (29.1%), which is the home county for both St. Petersburg and Clearwater. Other retirement counties at the top of the list include No. 7 Broward (Ft. Lauderdale) and Pima, Ariz., which contains the city of Tucson.

Superstar Cities

The surge of profits for investors also boosts incomes in some of the metro areas whose economies have done the best overall in the asset-driven recovery. This is most marked in the San Francisco Bay area, which added more billionaires  last year than anyplace else in the country.

San Francisco-Oakland-Hayward ranks sixth on our metro area list, with 20.7% of residents’ income coming from rents, dividends and interest, and San Jose-Sunnyvale-Santa Clara comes in seventh (19.3%). This places them well ahead of traditional centers for plutocrats, such as Boston-Cambridge-Newton (16th) and, remarkably, the home of Wall Street, the primary beneficiary of asset inflation, New York-Newark-Jersey City (23rd).

Our counties list offers a more precise map of where asset-driven wealth is, showing that much of it is concentrated in the suburban reaches. Although much of the hype about new billionaires revolves around San Francisco, the real star in the Bay Area is somewhat more prosaic San Mateo County (fifth on our county list), home to tech giants such as Genentech and Oracle , and seven of the 10 largest venture capital firms in the Bay Area. In contrast, San Francisco County ranks 36th.

This diversion in the patterns of where investors and rentiers congregate can also be seen in the sprawling metropolitan area that contains the nation’s financial capital, the 19 million-person New York region. Greater Gotham is home to a remarkable four of the top 15 counties on our list, starting with No. 4 Fairfield County, Conn., a major center for the hedge fund and private equity industries, followed by two affluent suburban counties, Westchester (ninth) and Nassau (13th).

Among the five boroughs only one, No. 14 Manhattan (New York County) ranks in the upper echelon, while three outer boroughs — Queens, Brooklyn (Kings County) and the Bronx — are in the bottom 15 of the 100 largest counties. The heavily minority and poor Bronx ranks last.

Strongest Economies At The Bottom

Not surprisingly, many of the metropolitan areas at the bottom of our ranking are older Rust Belt towns, such as Cleveland-Elyria (44th) and Detroit (46th). These are places where poverty is more concentrated and much of the money has moved away, often to Sun Belt locales such as Florida.

However, the bottom of our list also features many of the nation’s most dynamic economies, including Raleigh, N.C. (43rd); Dallas-Ft. Worth-Arlington, (45th); Charlotte-Concord-Gastonia, N.C. (47th); Columbus, Ohio, (49th); and third to last and second to last among the 52 biggest metro areas, Houston-The Woodlands-Sugar Land, Texas, and Nashville-Davidson–Murfreesboro-Franklin, Tenn.

This appears to be largely a function of age. All these fast-growing areas are also those most attractive to young families  with children. These people are drawn primarily by the good prospects for wage employment — needed to support their families and buy houses — and are less likely to depend on rentier profits. Clipping bond coupons may play a big role in some economies, largely on the East and West Coasts, and notably Florida, but far less in those areas that are growing the old-fashioned way, by working for a paycheck.

Income from Interest, Dividends, and Rent
52 Largest U.S. Metropolitan Areas
20140324_Kotkin-1

Income from Interest, Dividends, and Rent
Top & Bottom 25 Among the 100 Largest U.S. Counties
20140324_Kotkin-2

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About the Author:  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 story originally appeared at Forbes.com and is republished with permission from the author.

American Public Education – At the Bottom of the Class

Prior to the focus on self-esteem rather than academics in the education curriculum, California always ranked highest in the nation on student achievement tests. Today, California ranks close to the bottom. In the words of a wag, so goes California, so goes the nation. His insightful admonition has come to pass.

US 15-year old students significantly underperform their peers from every country in the world, even in reading. Being 32nd is not much better than being dead last, 34th (among OECD nations). Only Mexico and Turkey rank below the United States. The PISA results are mirrored in every international assessment of achievement.

For the world’s only super power, this is a national disgrace. Recent surveys found that 75% of freshmen in 2-yr and 40% in 4-yr colleges require remediation. Our students get a high school diploma at the end of 12th grade, but they don’t get the education that entitles them to the credential. College graduates in 2013 could not pass an exam 8th graders took in 1895 or 1912 to qualify for admission to high school.  [1], [2]

There are many reasons for the failures of the massive education apparatus, starting with its size and its centralization. In the United States, education is controlled by unions, politics and multiculturalism. The Three R’s have been replaced by radical indoctrination and social revisionism.

Text books are deliberately dumbed down to erase differences in intellect and prevent possible injury to students’ self-esteem and narcissism. Teachers lack qualifications. 40% of math teachers lack a minor in mathematics. 51% of chemistry and physics teachers lack a minor in their discipline. Might this be a reason why high school seniors are illiterate and innumerate or why American students scored worst in class on PISA or TIMMS?

Cai Yuanpei, founder of modern education in China, warned his nation’s leaders to keep out. Education must be above politics. They wisely heeded his counsel as did those in Singapore, South Korea, Japan and Hong Kong. Today, their students are the best in the world. In the United States, education is the handmaiden of politics.

Teachers’ unions control education. Education systems in other countries are responsive to failures in practice or policy. Tenure does not protect the unqualified. Administrators are limited to the absolutely essential. Teachers and personnel are hired on merit, not government mandate. The results speak for themselves.

After a six-year study of 270,000 students found a striking difference in performance in students in single-sex schools and those in coeducational schools, a shift toward more all-girls and all-boys schools occurred. When the data were replicated in South Korea and China, similar shifts were made. Those responsive changes are mirrored in the PISA scores.
Title IX legislation in 1972 made coeducation in public schools a national mandate. Single-sex public schools became illegal. Studies demonstrate females in single-sex schools outperform girls in coed schools. Similar to the psychological constraint brothers often have on their sisters, male students inhibit achievement of their female classmates.

Barnard College in NY has graduated more female physicians and chemistry professors than any college in the country. Black and Hispanic girls at The Young Women’s Leadership Academy in East Harlem outperform every student in New York on the State Regents’ Exam. Females account for 51% of the population and 60% of college students. An increase in single-sex public schools and colleges and in charter schools would be of enormous benefit to huge numbers of students and to the country. Every incremental increase in PISA scores translates into a significant increase in our national GDP.
President Obama has advocated a new program to transform public education for the 21st century. Deceptively called the Common Core State Standards Initiative, it represents the attempt by the federal government to nationalize public education, a move it is prohibited from making by the 1965 Elementary and Secondary Education Provisions Act, the 1970 General Education and Provisions Act and the 1979 Department of Education Organization Act.

Developed by two federally-funded private consortia who wrote the curriculum standards and performance assessments in mathematics and English Language Arts, the content lowers the standards of the nation’s highest performing states.
Massachusetts has consistently been the nation’s highest ranking state on annual National Assessment of Education Performance exams since 2005. It has also ranked among the highest on global assessments of academic performance, scoring fourth in reading, seventh in science and tenth in math. Its scores have plummeted since the implementation of the common score-sub standards.

By way of comparison, the United States ranked 24th in reading, 36th in mathematics and 28th in science on the 2012 PISA assessments among the 34 OECD countries and 31 partner countries whose students competed in the exams. [3]
Where do we go from here? There is a critical point in nuclear fission beyond which it is impossible to reverse the process. In failing Liberty, William Damon said the survival of a democracy depends upon an informed citizenry. As the PISA results have demonstrated, we have an un-informed and un-educated citizenry that will become more so with Common Core, a topic we will address at greater length in a separate article.

The United States has reached a critical point. If Common Core is implemented in all US public schools as the national education policy, we risk any hope of having an educated citizenry. It behooves everyone to make certain that does not happen.

About the Author:  R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

FOOTNOTES

1.  http://blogs.smithsonianmag.com/smartnews/2013/07/no-youre-probably-not-smarter-than-a-1912-era-8th-grader/#ixzz2bEdfZHU3

2.  http://www.rootsweb.ancestry.com/~kssvgs/school/8th_exam_exp.html

3.  http://en.wikipedia.org/wiki/Programme_for_International_Student_Assessment

The Partisan War on "Income Inequality"; Law of Bad Ideas

Debate rages over “income inequality”. CEOs makes hundreds or thousands of times more than workers. That is one aspect of income inequality. And it’s easily explained: The Fed’s inflation policies, bank bailouts, Fractional Reserve Lending, and crony capitalism are to blame.

That blame is nonpartisan.

Rather than attack the problem, “progressive” partisans howl over minimum wages.

Democrat-Sponsored Income Inequality

There is one major aspect of “income inequality” that you never hear president Obama or the Democrats mention, precisely because they are to blame.

Democrat [mostly, increasing numbers of Republicans condone this] sponsored “income inequality” is even more insidious because it directly affects middle-class Americans who pay high taxes so public employees can retire in comfort with gold-plated guaranteed-for-life pensions.

Gold-Plated Retirements

In support of my above thesis, please consider this report published February 25, 2014 in the Washington Post, entitled “In San Jose, Generous Pensions for City Workers Come at Expense of Nearly All Else“:

“Here in the wealthy heart of Silicon Valley, the roads are pocked with potholes, the libraries are closed three days a week and a slew of city recreation centers have been handed over to nonprofit groups. Taxes have gone up even as city services are in decline, and Mayor Chuck Reed is worried.

The source of Reed’s troubles: gold-plated pensions that guarantee retired city workers as much as 90 percent of their former salaries. Retirement costs are eating up nearly a quarter of the city’s budget, forcing Reed (D) to skimp on everything else.

20140315_Shedlock

Employee costs are growing nearly five times faster than revenues leading to fewer workers and budget deficits.

“This is one of the dichotomies of California: I am cutting services to my low- and moderate-income people . . . to pay really generous benefits for public employees who make a good living and have an even better retirement,” he said in an interview in his office overlooking downtown.

In San Jose and across the nation, state and local officials are increasingly confronting a vision of startling injustice: Poor and middle-class taxpayers — who often have no retirement savings — are paying higher taxes so public employees can retire in relative comfort.

“I got sick and tired of cutting services to my people — 10 years of services cuts — in order to balance the budget,” Reed said. “We got to the point where we were facing service delivery insolvency.”

In California, cities large and small are struggling to pay the growing public-sector retirement tab. Meanwhile, 55 percent of the state’s private-sector workforce — 6.3 million — have no retirement plan on the job.

Other governments are also struggling. In Chicago, Mayor Rahm Emanuel (D) has been pushing to scale back pensions for city workers, warning that without reform, city services will wither. Rhode Island enacted pension reforms in 2011 that trimmed retirement benefits for new workers and for those already on the payroll.”

Enter the Law of Bad Ideas

Instead of admitting the system is hopelessly broken, Sacramento lawmakers want to create the nation’s first retirement savings plan for private-sector workers in which the state manages the money and guarantees a minimum rate of return.

Both cities and the State of California are struggling to pay pensions, yet the proposed solution by California lawmakers is to have the state guarantee even more pensions.

Worst yet, this guarantee would come when treasury yields are in the gutter and stocks 50% overvalued and poised for losses in any time period shorter than seven years according to John Hussman (and I happen to agree). For details, please see It Is Informed Optimism To Wait For The Rain

Note: John Hussman is one of many great speakers at Wine Country Conference II. If you haven’t yet signed up, please do.

For such ideas to be proposed at the worst time is mind-boggling, yet strictly in accordance with “The Law of Bad Ideas“.

A number of corollaries clearly apply.

Corollary Three: Those in positions of political power not only have the worst ideas, they also have the means to see those ideas are implemented.

Corollary Four: The worse the idea, the more likely it is to be embraced by academia and political opportunists.

Corollary Five: No politically acceptable idea is so bad it cannot be made worse.

The reason CEOs make out like bandits is explained in Monetarism, Abenomics, QE, and Minimum Wage Proposals: One Bad Idea Leads to Another, and Another  

Brief History

  • Monetarists act on the theory falling prices are a bad idea
  • The Fed prints money and holds rates too low
  • Housing bubble builds
  • Medical and education prices soar
  • Student loans soar to “help” the students
  • Because housing is not affordable numerous affordable housing programs appear causing still more unwarranted housing demand. Few see the bubble because housing is not in the CPI
  • Housing crashes
  • The affordable housing advocates are abhorred by falling prices
  • Fed bails out banks and steps in to support housing prices
  • Income inequality soars
  • Students remain stuck with debt

Because of one idiotic notion, that “falling prices are a bad thing”, the Fed has generally managed to keep the CPI rising, with some prices rising much faster than others.

That leads to corollary number six, mentioned in the above link:

Law of Bad Ideas Corollary Six: Bad ideas lead to more bad ideas to fix problems caused by previous bad ideas.

And so here we are. To bail out the absurd idea that public pension promises are supportable, complete with 7.5 to 8.0 percent annual returns, when 10-year treasuries yield 2.67%, California proposes insuring private pensions as well.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.

 

How Much Do CalSTRS Retirees Really Make?

Summary:  The California State Teacher’s Retirement System (CalSTRS) is California’s 2nd largest public employee pension fund, serving roughly 2% of California’s population. At present, its unfunded liability is officially estimated at $71 billion. While much of the discussion over pension reform focuses on projected rates of investment returns, which greatly affects the required annual contributions to the fund, too often the actual amount of the average CalSTRS pension is omitted from these discussions. Even worse, the average pension amounts frequently cited for CalSTRS retirees are often misleading because they fail to take into account years of service, or the impact of pension benefit enhancements in recent years.

In this study, we analyze data from CalSTRS 2012 pension records to assess the true value of the average CalSTRS pension. We do so by factoring in years of service data to extrapolate an average “full career” amount, represented by both 30 and 43 year terms. We find that the average CalSTRS retiree can presently expect to receive a $51,500 pension for having worked a 30 year career, and a $73,817 pension for a 43 year career.

This study also analyzes 2012 pension averages broken out by the retiree’s retirement date and finds a significant disparity between the amount received by those who have retired more recently as compared to those who have retired earlier. For example, if a CalSTRS participant had retired in 2012 after working 30 years, they could expect an initial annual pension of $57,645; after 43 years, $82,625. The average 2012 pension for a CalSTRS participant who retired 20 years ago, in 1992, is much lower; $38,517 if they had worked 30 years; after 43 years, $55,207.

When discussing how much public employees receive in pension benefits, in order to make accurate comparisons and avoid misleading the public, it is vital to adjust the data to reflect averages based on full careers in public service. It is also vital to provide averages that reflect current benefit formulas, since the more generous formulas currently in effect are what inform the scale of pension liabilities in the future. This study addresses these concerns.

INTRODUCTION

The pay and benefits of public employees is a discussion of increasing relevance to taxpayers. As noted in a CPPC study published on February 1st, 2014, “How Much Do California’s State, City and County Workers Really Make?,” in California, personnel costs are estimated to consume 40% of total city budgets, 41% of the state budget for direct operations, and 52% of county budgets. In many cities and counties the percentage is much higher. And these averages don’t include personnel costs for outside contractors, nor do they include payments on debt that is directly related to personnel costs, such as pension obligation bonds.

Meanwhile, even when budgets are balanced, as may be the case this fiscal year at least for the State government, there is an overhang of debt obligations facing California’s state and local governments that are only manageable as long as interest rates remain relatively low. Another CPPC study published in April 2013 entitled “Calculating California’s Total State and Local Government Debt,” estimated California’s total state and local bond debt at $382.9 billion as of June 30, 2012. That same study reported California’s officially recognized state and local unfunded obligations for retirement health insurance and pension obligations at $265.1 billion. Using more conservative assumptions regarding pension fund performance, the study estimated these retirement obligations on the part of California’s state and local governments could increase by an additional $389.8 billion. In all, it is quite likely that California’s taxpayers currently owe over $1.0 trillion in total debt and unfunded retirement obligations incurred by state and local government, and most of that is for retirement benefits for state and local government employees.

In this environment it is important to present factual information relating to public sector compensation. With respect to retirement benefits, it is helpful to present complete and accurate aggregate data, in order for policymakers and taxpayers to determine whether or not current benefit formulas are fair and financially sustainable. This study analyzes data from CalSTRS, using nearly a quarter-million records obtained from CalSTRS for 2012. In particular, this study presents data showing, by year of retirement, what the average pension benefits were in 2012. The study then normalizes these benefits to account for full careers using two benchmarks – the public sector “full career” expectation of 30 years, and the private sector “full career” expectation of 43 years.

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METHODS AND ASSUMPTIONS TO ACQUIRE DATA

This study precisely replicates the methods used in a CPPC study released on February 14th, 2014, “How Much Do CalPERS Retirees Really Make?”  The analysis and charts developed for this study can be evaluated by downloading the following spreadsheet. Please note the file size is 23 MB.

CalSTRS-2012_Analysis_normalized-pensions-by-year-of-retirement.xlxs

The source data was acquired from the website www.TransparentCalifornia.com, an online resource produced through a joint-venture involving the California Policy Center and the Nevada Policy Research Institute. The data on the Transparent California website, in this case, was acquired directly from CalSTRS, and has not been altered. Since the focus in this study involves aggregate data, the names of individual participants have been removed from the downloadable spreadsheet that accompanies this analysis.

Because the information provided by CalSTRS included “year of retirement” and “years of service,” it is possible to normalize the information to produce “full career” equivalent pensions. It is vital to make this analysis, because no statistic representing average pensions can be evaluated apart from knowing how long most participants actually worked. It would be analogous to saying that an active worker only was paid $100 for a day’s work, without knowing how many hours they worked. Did they work ten hours and earn $10 per hour, or did they only work one hour and earn $100 per hour? Without looking at how many years participants worked to earn their pensions, we cannot even begin to have a productive discussion as to whether or these pensions are fair and appropriate or not.

From a standpoint of financial sustainability it is also vital to know how many years of service the average pensioner logged. Using the payroll analogy again, if a person only worked one hour in a day and made $100, and the employer needed someone at that post for ten hours, than the employer cost was actually $1,000 per day, whereas if that person worked a ten hour day and made $100, then the employer cost was only $100. This is precisely what is at stake when evaluating the overall cost to taxpayers of public sector pensions. For example, if the average years of service for a pensioner is only 20 years, and a private sector career is actually 40 years, then the taxpayer is essentially paying for two pensions for each position that would have been filled by one person working 40 years.

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AVERAGE LENGTH OF SERVICE AND AVERAGE PENSION – TOTAL POOL OF PARTICIPANTS

In Table 1 it can be seen that nearly a quarter-million retirees collected pension benefits through CalSTRS during 2012, and that the average pension was $43,821 during that year. Inexplicably, this average is considerably higher than the averages frequently cited by spokespersons for CalSTRS and public sector unions representing CalSTRS participants. But the average CalSTRS retiree worked for 25.53 years. It is not reasonable to suggest that someone who has only worked perhaps two-thirds the duration of a normal career should expect a retirement benefit that might be more appropriate for a full career. And it is impossible to discuss, much less determine, whether or not CalSTRS retirement benefits are appropriate, without taking into account how long a retiree has worked in order to earn their retirement benefit.

Table 1  –  Basic CalSTRS Data, 2012

20140228_CalSTRS_normalized-pensions_Table01

The next table, below, depicts how much these overall average pension amounts would increase if the retiree pool had turned in an average “years of service” of 30 years, which is a typical duration to use when considering public sector careers, as well as 43 years, which is typical for any private sector worker who hopes to receive the full Social Security benefit.

These calculations are made by dividing the average annual pension for a CalSTRS participant in 2012, $43,821, by the average years of service, 25.53. The result, $1,717, is the amount the average CalSTRS retiree accrued in annual pension benefits for each year they worked during their careers. This amount is multiplied by 30 to show what a current CalSTRS retiree could expect, on average, if they had worked 30 years; $51,500.  This amount is multiplied by 43 to show what a current CalSTRS retiree could expect, on average, if they had worked 43 years; $73,817.

Table 2  –  CalSTRS Average Pensions Assuming Full Careers

20140228_CalSTRS_normalized-pensions_Table02

Just as when considering current compensation for public employees, total compensation – direct pay plus employer paid benefits – is the only truly accurate measurement of how much they make, when considering retirement pensions for retired public employees, pensions adjusted to show what they would have been if the recipient had spent their entire career working and paying into the pension system, i.e., “full career equivalent pensions,” are the only accurate measurements of how much they are really getting in retirement. But there is another crucial variable that must be considered to complete this analysis, which is how much full career equivalent pensions are paying to CalSTRS retirees who retired in recent years.

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AVERAGE PENSION ADJUSTED FOR FULL-CAREER – SHOWN BY YEAR OF RETIREMENT

Because the data provided by CalSTRS includes not only years of service for each participant, but also the year they retired, it is possible to calculate average “full-career” pension benefits based on the year they retired. It is important to do this because pension benefits for California’s state and local government workers were steadily enhanced over the past decades, especially after 1999 when SB 400 was passed by the California state legislature. In general, pension formulas have been altered to bestow pension benefits that are approximately 50% better today than they were 20 years ago. At the same time, pension benefits are calculated on rates of pay, which themselves have increased at a rate exceeding inflation for at least the last 20 years.

Table 3 depicts the unambiguous impact of these trends. The last column to the right on the table, “Avg Pension, 43 Years Svc” shows what retirees would be really getting in pension benefits if they had worked 43 years – from age 25 through age 67 (one may substitute age 22 through age 64, or whatever, of course). As seen, the 14,247 retirees in 2012, had they worked 43 years, would have collected average annual pensions of $82,625.

In general, pensions adjusted to reflect a full career in the private sector exceeded $80,000 per year starting with those CalSTRS participants retiring in 2001. They decrease sharply for participants who retired prior to 2001. In 1999 and 2000 they were less than less than $70,000 but more than $60,000. Participants who retired between the years 1986 and 1998 collect pensions today – again, had they worked a full private sector career – greater than $50,000 and less than $60,000. Participants who retired before 1986 collect pensions today that are less than $50,000.

It is hard to find a data set that shows a greater correlation than this one: The earlier you retired, the less you’re going to get in your pension today. That is because pension formulas were enhanced for California’s state and local government workers over the past 10-20 years – especially starting around 1999. Not only were they enhanced, but they were enhanced retroactively, meaning that someone nearing retirement who had been accruing pension benefits at a rate of 2.0% per year, for example, suddenly began accruing pension benefits at a rate of 3.0% per year not only for the years remaining in their career, but for every year they worked.

To speculate as to why it was possible to retroactively enhance pension formulas through legislative action, yet it is purportedly unconstitutional and therefore impossible to merely reduce these formulas for active workers from now on, would go beyond the scope of this modest analysis.

 Table 3  –  CalSTRS Average “Full Career” Pensions By Year of Retirement

20140228_CalSTRS_normalized-pensions_Table01-bar-chart

Table 3 (Data)  –  CalSTRS Average “Full Career” Pensions By Year of Retirement

20140228_CalSTRS_normalized-pensions_Table03

It is probably necessary to reiterate as to why full-career equivalent pensions are the only accurate measurement to use when discussing whether or not today’s public sector pension benefits are appropriate or financially sustainable. The reason is simple and bears repeating:  Defenders of pensions as they are use “averages” that don’t seem terribly alarming. Notwithstanding the fact that a self-employed person in the private sector would have to earn over $100,000 per year and contribute 12.4% of their lifetime earnings in order to collect the maximum Social Security benefit of $31,704 at age 68, which is considerably less than the average CalSTRS pension of $43,821, that average CalSTRS pension is based on an average years of service of 25.53 years. Somebody who has only worked for 25 years should not have an expectation of a pension that exceeds the maximum Social Security benefit that requires 12.4% of a six-figure annual income and 43 years of work. Few, if any participants in CalSTRS are contributing more than 12.4% of their pay into their pension account. The taxpayers make up the difference.

When debating the financial sustainability of CalSTRS and the other pension funds serving California’s state and local government workers, there are many issues. How the unfunded liability is estimated is the topic of intense debate, focusing primarily on what rate-of-return these funds believe they will average over the next few decades. That rate-of-return estimate also is a primary determinant of how the “normal contribution” is calculated. There are myriad aspects to the debate over how to adequately fund public sector pensions. But missing from that debate far too frequently is an honest assessment of just how much, on average, these pensions are really worth to the recipients.

This study has presented a calculation of what CalSTRS’s average pension benefit is based on years worked as well as year of retirement. It has normalized that data to show that a retiree who worked 30 years and retired last year, on average, can expect a pension of over $57,000 per year, and if they worked 43 years and retired last year, on average, can expect a pension of over $82,000 per year.

About the Authors:

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by the George Mason University.

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

Crony Capitalism – California Style

It’s good to be in with the “in” crowd, especially when the “in” crowd is made up of Sacramento politicians capable of doling out millions of dollars in tax credits.

Those currently in with the “in” crowd include any industry or company that can somehow attach “green” to their credentials. This helps explain why the state just provided the successful Tesla electric car company a $35 million tax subsidy. Yes, contrary to Kermit the Frog’s song “It’s Not Easy Being Green,” in California, it is easy being “green” because lawmakers are anxious to lavish benefits, at taxpayer expense, on those who claim a chlorophyll connection.

While the rumors that Kermit has applied for tax credits based on his being green are probably pure fiction, his parent company, Disney, may be about to apply for a handout based on their glamour factor.

That’s right, the glamorous are also part of the Sacramento “in” crowd, and nothing is more glamorous than Hollywood. That’s why Democratic Assembly members Gato and Bocanegra have introduced what they are calling the California Film and Television Job Retention and Promotion Act, legislation to extend and expand a state program that provides tax credits to movie makers who are chosen through a lottery. Until now, these subsidies have been limited to $100 million annually, but we may be about to see this outlay nearly quadruple.

Backers of more money for Hollywood justify this generosity at taxpayer expense by saying that other states are luring away cinema production with tax breaks and we need to keep those industry jobs here in California. However, many of the studios that are now clamoring for a handout are the same ones that have supported higher state and federal taxes on others – studios contributed generously to help pass Proposition 30 in 2012, which was a $6 billion annual tax increase on Californians. And what about the powerful Hollywood Left? Imagine how they would react if, for example, bankers were lining up for tax credits. We’d hear all kinds of shrill accusations that the “one percenters” were trying to rob us blind. But when the wealthy entertainment industry moguls want access to taxpayer cash, the Left is so quiet one can hear the chirping of crickets.

Meanwhile, in the real world, if you own a restaurant, hardware store, barber shop or any one of hundreds of other business not considered green or glamorous, don’t expect to get a tax break from Sacramento any time soon, even if you are non-polluting, employing several employees and providing an important service to the community. Sorry, but like the unattractive people in line to gain entrance to a posh dance club, you lack glamour and will be deemed a mere “commoner.”

So here is a suggestion that will make sense to everyone except those wealthy interests already feeding at the Sacramento trough. Let’s stop taxing most Californians more for the purpose of taxing influential, special interests less. Let’s lower the tax burden on everyone, not just the favored few who are in with the Sacramento “in” crowd. Let’s make our state a destination for new business, a state where existing businesses want to expand and not continue as a place from which businesses, not receiving corporate welfare, are fleeing.

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.

Tesla's Planned "Gigafactory" Will Not Be In California

California loves Tesla, the Los Angeles Times informs us, but the electric car company is ambivalent about the Golden State. In a blow to efforts to stem manufacturing job loss in California, the car company, based in Palo Alto, said it would definitely not build a new $5 billion “gigafactory” employing up to 6,500 workers in its home state. The decision comes at a time when investment in manufacturing jobs measured on a per capita basis is cratering in the Golden State, according to the California Manufacturers & Technology Association.

In a recent survey, California received just one investment in a new or expanded manufacturing facility per 1 million people in 2013, compared to a national average of more than 8 such investments per 1 million people. Nebraska led the way with nearly 30 investments in manufacturing facilities per million people.

20140308_Malanga-1

Much of that new investment is being driven by energy-related manufacturing, food production and agriculture, as this Manhattan Institute report from last year by Joel Kotkin on America’s new growth corridors explains. That growth is increasingly concentrated in the Mountain states and the so-called third coast of states in the Gulf of Mexico region. Not just jobs but wage growth has been robust, there.

California is rich in many of the resources driving job growth, especially oil and gas, but the state has refused to allow fracking to unlock supplies in the giant Monterey Shale, while California’s farmers struggle with a devastating drought in a state that hasn’t built a major dam or reservoir to control water flow since 1983. Meanwhile, the California senate has just proposed a new tax on oil as it is extracted in the Golden State, though Gov. Jerry Brown thinks more California taxes are not the answer.

Beyond taxes and regulations are growing business worries about high debt costs in states and localities. A number of businesses who have left California in recent years have mentioned municipal and state budget woes and pension debts. Ironically, as I wrote here, despite California’s reputation as a green economy, it’s now losing green jobs, too, to other states because of its high costs and regulatory burden. You can add Tesla, looking to build batteries for electric cars, to that list.

About the Author:  Steven Malanga is City Journal’s senior editor and a Manhattan Institute senior fellow. He is author of Shakedown: The Continuing Conspiracy Against the American Taxpayer, about the bankrupting of state and local governments by a new political powerhouse led by public-sector unions. He writes about the intersection of urban economies, business communities, and public policy. He has been cited as one of New Jersey Governor Chris Christie’s intellectual influences (BusinessWeek, August 2010).

Ways To Dodge The Mess Baby Boomers Are Leaving The Millennials

The Greatest Generation bequeathed Baby Boomers a nation on the rise. After saving Western Civilization from fascism, they rebuilt a war-torn world, powered an economic renaissance, sent a man to the Moon, banished Jim Crow, cleaned up the environment, and won the Cold War. Of course, they made their share of mistakes. But every American child born between 1946 and 1964 had a great shot at a better life than his parents.

We Baby Boomers were the main beneficiaries of that legacy. So what are we leaving behind for the next generation? Some sorry numbers tell the tale: About 90 million Americans of working age aren’t working; 47 million are on food stamps; 14 million collect disability; once-thriving cities are bankrupt; public schools aren’t educating. The economy is moribund, but this isn’t just another brief cyclical downturn. It really is different this time.

We’ve empowered incompetent bureaucrats to effectively nationalize the banking and health care industries, encouraging crony capitalists to crowd out market capitalists. Yes, Baby Boomers invented the Digital Age, showering gewgaws on our children that our grandparents would have thought magic. But we allowed Washington to continue on an unsustainable trajectory, captive to a two-party duopoly that mortgaged our future. As a result, Millennials may be the first Americans whose living standards don’t exceed that of their parents.

And how did we prepare them for the challenge? We taught them that everyone deserves a prize regardless of merit, that self-esteem is a birthright that doesn’t have to be earned, and that someone will always be there to protect them from character-building adversity. And then, after loading them up with debt to pay for expensive college degrees few employers value, we invited them to move back home—with health care coverage until age 26.

And now we expect them to pay for the retirement we never saved for? Imagine their surprise when Uncle Sam reaches into their pockets to make good on the trillions in IOUs that Social Security racked up after Congress looted the so-called trust fund.

The Millennials now venturing out into the world and their older Gen X siblings should be scared about their future, and mad as hell at us for screwing it up. So what can they do about it? Well, if I were giving a high school commencement speech with the usual quota of unsolicited advice, it might go something like this:

1) Stop voting for people that are robbing you! You don’t owe it to “society” to indenture yourself to wealthy and middle class retirees.

2) Run away from anyone who tells you the government can pay for its profligate spending by robbing the rich. There just aren’t enough rich people to go around—and they didn’t get rich in the first place by not knowing how to protect their wealth.

3) Hope is not a strategy. No village has your back. We are not all in this together. If you don’t look out for yourself, no one else will. So if you’ve decided to go to college, pick a major that pays well. You’ll have the rest of your life to appreciate art and literature.

4) If you decide not to go to college that’s fine, but learn a trade that’s in demand. Plumbers and electricians make a good living, and their jobs can’t be outsourced to China. Call center operators, not so much.

5) Challenge the status quo, anywhere and everywhere. Growth comes from creative destruction, and without growth you are doomed. Tune out anyone who tells you stagnation is the new normal. Less is less; it will never be more.

6) Take chances while you can – outsized rewards can still be earned taking prudent risks. Failure isn’t fatal in America, and there is no better time to start a business than when you’ve got nothing to lose.

7) Stop obsessing about the planet; it’s mightier than we are. Mother earth has taken care of herself for almost five billion years and will continue to do so long after we’re gone.

8) Start appreciating the power of market economies to deliver the goods, compared to the failure of centrally planned economies. If you study the disasters socialism has visited on the world, you may not be doomed to repeat them.

9) Learn to be critical of the propaganda served up by established cultural and educational institutions, as well as the mainstream media. There is no excuse not to develop a broad set of independent information sources to shape your world view. Seek your own mentors.

10) The world is your stage, and your feet are more powerful than your vote. If you can’t find opportunities in your own backyard don’t just sit there, pull up stakes and go. Our country was built by people who did exactly that.

As bleak as things may look, keep in mind that Rome wasn’t destroyed in a day. It will take yet one more generation to turn America into Greece, so you still have time to avoid that fate.

About the Author:  In the 35 years since Bill Frezza graduated from MIT with degrees in electrical engineering and biology he has been a scientist, an engineer, a product manager, a salesman, a consultant, an entrepreneur, an author, a technology evangelist, and a venture capitalist. His early career on high-tech’s bleeding edge included the development of first generation electronic newspapers, home banking, home shopping, cable modems, multi-user videogames, wireless LANs, and wireless email, all of which became a success – for someone else a decade later. His 15 years as a venture capital investor working with early stage telecom, semiconductor, and biotech startups taught him humbleness, risk aversion, and the ability to identify ten fatal flaws out of five in any startup business plan. Frezza is a frequent guest on CNBC, FOX, and CBN News where he is challenged to reduce complex economic and policy issues into thirty second sound bites. More writing by Frezza can be found at BillFrezza.com. This article originally appeared in Forbes and appears here with permission from the author.

Not All State and Local Cronyism Involves Unions

Editor’s Note:  We add one caveat to this excellent perspective from Hunter Lewis: If you are a crony capitalist in California, and you are lobbying the politicians for government contracts and favorable legislation – then you are also lobbying the public sector unions who control these politicians. At a minimum, most of California’s major corporations are in detente with the public sector unions as a prerequisite for doing business in the state.

Valerie Jarrett, best known as President Obama’s most intimate White House Advisor, turned a job in the Chicago mayor’s office into a personal real estate holding worth as much as $5 million. This is not unusual. Big real estate deals in major American cities are the mother’s milk of politics. Developers get rich from special tax and other deals, politicians get campaign contributions, and former politicians or former aides charge for access.

Here is one way it is done:

Step 1:  Collect property taxes in a “redevelopment” agency.

Step 2:  Use these funds to subsidize favored developers or businesses.

Step 3:  Or use these funds to build major projects which favored developers or businesses can buy at deep discounts.

Step 4:  Waive property taxes.

Step 5:  In some cases, promise payments to a new business coming in equal to whatever their employees pay in state or local taxes.

All this and more has happened in Los Angeles. No wonder local retail developer Jose de Jesus Legaspi says “It’s extremely difficult to do business in Los Angeles. . . . Everyone has to kiss the rings of the [City Hall politicians.]”

Sometimes, like Valerie Jarrett, the political dons do not wait to leave office before enriching themselves personally. And sometimes this is not done with any subtlety. In the town of Bell, CA, the city manager was caught paying himself $1.5 million (salary and benefits) a year, with a $600,000-a-year pension obligation. An assistant manager was paid $845,960, the police chief $700,000 (while laying off police), and city councilmen $100,000 for part-time “work.” After all this came to light, the top three offenders were forced out and the city councilmen cut to $10,000.

To emphasize the point that not all state and local cronyism involves unions, one need only look at union-unfriendly Texas. Here is what Dave Nalle, secretary of the in-state Republican Liberty Caucus, says about Republican Governor Rick Perry:

Perry . . . loves to use taxpayer money to subsidize his business cronies. . . . His supposed belief in limited government and in states’ rights conveniently disappears whenever it conflicts with the demands of the special interests and corporate cronies he serves.

Nalle also recounts how Perry set up the Texas Enterprise Fund and Texas Emerging Growth Fund which enabled him to pour at least $43 million of the $700 million funds into alleged crony businesses.

We have already described in an earlier chapter how Perry mandated a dangerous vaccine for teenage girls while taking money from the vaccine’s manufacturer. When FEMA and other federal disaster funds became available after Hurricane Katrina, Perry allegedly tried to divert them to his allies. The Obama administration objected, but a “deal” was struck on $3.2 billion of allocations. The Governor’s wife, Anita, has worked as a fundraiser for the Texas Association Against Sexual Assault. This group receives donations from state agencies, including the governor’s office, as well as from Perry political donors.

Although much of the cronyism at the state and local level involves unions, developers, or other business interests, nonprofits are often part of the action. The Academy of Nutrition and Dietetics, formerly the American Dietetic Association, has been trying for years to set up state licensing boards that would, in effect, create a nutritional counseling monopoly for its members. The organization already has a monopoly on Medicare reimbursement, achieved by careful cultivation of federal contacts over the years, and monopolies on advising hospitals, prisons, and schools on food programs. The nutritional value, much less the taste of most hospital and school food, run by AND members, speaks for itself. In addition, AND members need only hold a college degree, so that the effect of AND’s restrictive state licensing efforts is often paradoxically to exclude nutritionists with masters and PhD degrees.

The theme of eliminating or trying to eliminate competition through deals with state or local legislators is a familiar one. In New Jersey, when the president of the Liquor Store Alliance was asked why state law does not allow microbrew pubs, he replied that he didn’t mind giving the microbrews a few breaks, but “what we don’t want to do is become competitors with one another.”

In addition, in Louisiana, a state funerals board (eight of whose nine members were from industry) ruled that the monks of St. Joseph Abbey in Covington could not continue to make simple, handmade pine and cypress caskets. In Nashville, Tennessee, taxi companies persuaded the city to require a minimum $45 charge for any limo ride, to regulate the age of any limo used, and to forbid cell phone dispatching, which is what new limo companies or drivers do. In Chicago and Washington, DC, the use of a cell phone app by a new service named Uber set the taxicab commission to fuming and the established companies to suing. The DC City Council proposed an amendment that would have legalized Uber, but only if the minimum charge was five times the average taxi cab fare.

The purpose of all these laws is to limit competition, restrict the number of competitors, bar new entrants, and thus protect established companies with ties to politicians. In Virginia, interior designers are required to get a four-year design degree, intern with a licensed designer for two more years, and pass an exam before applying for the certification needed to work. Hairdressers in most states have to jump through numerous such hoops. Sometimes local authorities have an additional motive: to collect fees or taxes. Philadelphia has sent out notices to local internet bloggers informing them that they owe a $300 city business license fee.

In this atmosphere, the only certain growth industry seems to be political lobbying. Everyone needs a lobbyist. Even governments need lobbyists, since local governments must troll for deals with the state government and both local and state governments must troll for deals with Washington. For the decade ending 2010, local and state governments reportedly spent $1.2 billion on federal lobbying. There were 13,000 registered lobbyists working in Washington, but the total number of people seeking to influence legislation is far greater.

About the Author: Hunter Lewis is co-founder of AgainstCronyCapitalism.org. He is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of eight books on moral philosophy, psychology, and economics, including the widely acclaimed Are the Rich Necessary? (“Highly provocative and highly pleasurable.”—New York Times) He has contributed to the New York Times, the Times of London, the Washing­ton Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com and RealClearMarkets.com.

Comparing CalSTRS Pensions to Social Security Retirement Benefits

Summary:  This study compares Social Security retirement benefits to CalSTRS pension benefits and finds a significant disparity between the plans, despite the employee contributions being relatively similar.

For example, the average CalSTRS participant retires at age 62, which is the current earliest age one may collect Social Security retirement benefits. At age 62, the average CalSTRS retiree collects 56% of their final salary in the form of a pension, whereas, depending on their income, the average Social Security recipient collects between 29% and 36% of their final salary in the form of a retirement benefit. At age 65, the oldest age necessary to collect the full CalSTRS benefit, a CalSTRS retiree with 35 years experience will collect a retirement benefit equal to 84% of their final salary. At age 65 a Social Security recipient will collect a retirement benefit between 30% and 35% of their final salary.

The study then examined how much more a CalSTRS participant might have accumulated based on having 8.0% of their paycheck withheld vs. only 6.2% for a Social Security participant. For a CalSTRS paticipant retiring at age 65 with a final income of $80,000, the study estimated the value of this extra 1.8% in annual contributions to equal $155,814 after 35 years of withholding. This is equal to 3.6 years of the difference in the amount of a typical annual CalSTRS pension and a typical Social Security annual retirement benefit, i.e., it does not come close to closing the gap between the typical Social Security benefit vs the typical CalSTRS benefit. A more in-depth analysis of contribution comparisions between CalSTRS and Social Security will be the topic of a subsequent study.

In general, the study calculated the average annual CalSTRS pension to exceed the average annual Social Security benefit by between 1.5 and 1.9 times for those retiring at age 62, and by between 2.4 and 2.8 times for those retiring at age 65.

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INTRODUCTION

“California’s educators do not participate in Social Security, retire on average around age 62, and earn a retirement income that replaces only about 56 percent of their salary.
CalSTRS Statement on Proposed Pension Reform Act of 2014 Ballot Measure, October 17, 2013

A frequent objection to public sector pension reforms is that pension benefits are received in place of Social Security. While many public employees do earn Social Security benefits along with pensions, in the case of public school teachers they do not. So how does a pension from the California Teachers Retirement System (CalSTRS) compare to a Social Security benefit?

There are various ways to make valid comparisons between a CalSTRS pension and a Social Security retirement benefit, and this article will explore some of them. In order to make these comparisons, we will rely on statements from CalSTRS or information available on their website, along with information available online from the Social Security Administration. All source data will be linked to within the text. For each of the cases to follow, we will summarize the baseline assumptions, then present the comparisons.

*   *   *

(1)  How much will a person retiring at age 62, with a final income of of $80,000, receive via a CalSTRS pension vs. a Social Security retirement benefit?

A 62 year old CalSTRS retiree, based on the average presented in the above-referenced October 2013 press release, will earn an annual pension of $44,800.

A 62 year old private sector retiree working through 2013 with a final income of $80,000 will receive a Social Security retirement benefit of $23, 544 per year. This is based on inputting into the Social Security Administration’s online “Quick Calculator” a birth date o f 1-1-1952, a benefit start date of 2-1-2014, and a final annual pay of $80,000 in 2013.

As can be seen, in this first, admittedly simplistic analysis, the average CalSTRS retiree will collect a pension 90% greater than a Social Security recipient fitting the same profile, nearly twice as much. Put another way, in this example the CalSTRS particpant receives a pension equivalent to 56% of their final $80,000 salary, and the Social Security participant receives a pension equivalent to 29% of their final $80,000 salary.

Social Security, unlike pensions, however, has the characteristic of being progressive, in the sense that lower income participants will collect a greater percentage of their earnings in the form of a Social Security benefit than higher income participants. Since information on the average teacher salary earned by 62 year old retirees is not readily available, here are the same comparisons made with lower final annual earnings:

Case 1:  CalSTRS Pension vs. Social Security
Retirement Age 62, Various Final Year Earnings

20140228_SocSec_vs_CalSTRS_Case1As can be seen from the above chart, there is a considerable improvement on the amount a Social Security beneficiary will earn at lower levels of income. But even at a $40,000 annual salary, which it is reasonable to assume virtually all veteran CalSTRS participants will collect if they are still working into their early sixties, the Social Security benefit is only 36% of final salary, whereas the CalSTRS pension remains at 56% of final salary. Since CalSTRS formulas are applied regardless of income levels, it is accurate to apply this assumption to make this comparison.

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(2) CalSTRS benefits for employees hired after January 1st 2013 have had their benefit formulas reduced. How does this affect the comparison between a CalSTRS retiree and a Social Security retiree?

To answer this question it is necessary to make some assumptions regarding length of service, since the averages used by CalSTRS spokespersons are calculated based on existing retirees. From the “Retirement Benefits” section of their website, CalSTRS retirement benefits are calculated according to the following formula (readers may click on each variable for more detailed information from CalSTRS):

 Service Credit x Age Factor x Final Compensation = Retirement Benefit

Here’s how this works: “Service Credit” refers to years of full time employment (there are ways employees can increase their service credit, such as through converting unused sick time into additional service credits, but we will set that aside). The “Age Factor” is a multiplier which increases the older a beneficiary is when they retire, and the “Final Compensation” is how much they earned in their final year of full-time work. In some cases final compensation is calculated using the average of salary earned during the final three years worked.

In practice, this formula would work as follows: If someone worked 30 years, their service credit is 30. If they are 65 years old, their age factor is determined according to a table; for a 65 year old under the new benefit formula, the age factor is 2.4%. So if their final salary was $80,000, their initial annual pension would be 30 (service credit) x 2.4% (age factor) x $80,000 (final salary) =  $57,600.

Since new employees hired after January 1st 2013 are the only ones affected by the recent reductions to benefit formulas, they won’t have any significant impact on pension averages for decades. But to ensure this analysis avoids any overstatement, all comparisons used will be based on the new formulas, the so-called “2% at 62” employee pool – all of whom are new hires. Here is the statement on the benefit changes from CalSTRS, found on the first page of their 2013 Member Handbook:

“Of special note, the California Public Employees’ Pension Reform Act of 2013 made significant changes to the benefits for members first hired on or after January 1, 2013, to perform CalSTRS creditable activities, and other changes that affect both new and existing members. As a result, CalSTRS now has two benefit structures:

• Members first hired on or before December 31, 2012, are under CalSTRS 2% at 60.

• Members first hired on or after January 1, 2013, are under CalSTRS 2% at 62.”

Under CalSTRS’s new pension benefit formulas, which are marginally less generous than their old pension benefit formulas, if you retire at age 65, you are entitled to an “Age Factor” of 2.4% (ref. column 4 in the table on CalSTRS “Age Factor” information page).

Immediately one may see that earning a pension equivalent to the amount CalSTRS represents as “average,” 56% of final salary, would require a participant to work for 23.3 years, since 23.3 x 2.5% = 56%. Referring to the table depicting Case 1, above, this means that to earn a pension that exceeds the Social Security benefit by the amounts pertaining to various levels of final salary between $40,000 and $80,000 – all quite significant – one would only have to work 23 years.

For the sake of a fair comparison, however, it is necessary to examine the Social Security benefit at age 65, since that is how old a CalSTRS participant now must be before they can earn the maximum multiplier (or “Age Factor”) or 2.4%. This, in turn, requires one to speculate as to how many years a Social Security recipient would have to work in order to get the amount calculated by the “Quick Calculator” benefit estimator provided by the Social Security Administration.

Fortunately, in the “Frequently Asked Questions” section of the Social Security website, this can be found:

“8. How does the Quick Calculator estimate my past covered earnings? Answer: The calculator bases your estimated past earnings on the latest earnings figure you provide, the national average wage indexing series, and a relative growth factor that is initially set to 2 percent.”

Digging deeper, it can be seen from the Social Security website’s page “Benefit Calculation Examples For Workers Retiring In 2014,” that in these “Quick Calculator” estimates, as they put it, “We use the highest 35 years of indexed earnings in a benefit computation.” This is helpful for validating the assumptions necessary for a proper comparison at age 65. The Social Security estimates assume at least 35 years of work.

Here then, are the benefits one may expect from the revised, reformed and diminished CalSTRS benefit formulas, compared to the current Social Security retirement benefit formulas, for a 65 year old retiree who has worked for 35 years. This shows the same final annual income variants as case 1, ranging from $40,000 to $80,000.

Case 2:  CalSTRS Pension vs. Social Security
Retirement Age 65, Various Final Year Earnings

20140228_SocSec_vs_CalSTRS_Case2 As is readily apparent on the above table, working for 35 years creates a major improvement in the pension benefits enjoyed by a CalSTRS participant; instead of collecting the average 56% of final salary at an average age of 62, by age 65 – if they have worked 35 years – they will collect a pension equivalent to 84% of their final salary. For a Social Security participant, waiting an extra three years to retire scarcely makes a difference. Depending on their income, they will collect at retirement benefit equivalent to somewhere between 30% and 35% of their final year of earnings.

*   *   *

(3) But CalSTRS participants contribute 8.0% of their salary into the pension fund, and Social Security participants only contribute 6.2% of their salary into the Social Security fund. What’s that worth?

Before answering this question, it should be intuitively obvious that contributing 1.8% more into a fund will not fund a lifetime retirement annuity that is between 1.5 and 2.8 times greater than if one had retained the 1.8% asZ take-home pay.

The table below shows in detail exactly how much more money someone might be able to save over the course of a 35 year career by putting 1.8% of their paycheck into a fund that yielded 7.5% annual interest.

Case 3:  CalSTRS Pension vs. Social Security
Additional Savings Possible By Contributing 1.8% More Per Year

20140228_SocSec_vs_CalSTRS_Case3-REVISED-a

As shown above, after 35 years, putting an extra 1.8% of earnings per year into an investment fund will only increase the total savings by $155,814 (contributions of $37,438 plus investment earnings of $118,376). At age 65, as shown in Case 2, a CalSTRS participant who worked 35 years and retired at a final salary of $80,000 (also used in this case) will earn an initial annual pension of $67,200. A Social Security participant, using identical assumptions, can expect an initial annual retirement benefit of $23,940, a difference of $43,260 per year. This means the extra withholding made by the CalSTRS participant earns an extra amount, $155,814, that is used up in 3.6 years.

According to the online Life Expectancy Calculator provided by the Social Security Administration, in 2014 a 65 year old American may expect to live, on average, for another 20 years. This means that contributing another 1.8% on the part of CalSTRS participants compared to Social Security participants will still leave, on average, a gap of $709,386 in lower benefits earned by the Social Security recipient (16.4 x $43,260).

Because much has been made of the extra amount CalSTRS participants have withheld, it is important to emphasize that every assumption used in this analysis is conservative. The “growth factor on past earnings” is only 2%, matching the one used by the Social Security Administration in their estimates. This low percentage is unlikely to accurately reflect earnings growth, especially in the public sector, where in general over the past three decades earnings growth has kept pace with inflation. Using a lower than representative growth factor of 2.0%, working backwards from the present into the past, results in early career pay estimates that are higher than what probably was the case. This causes the early career contributions to be overstated, causing compound interest to accrue on larger amounts, resulting in a larger ending fund balance than would have actually been achieved.

Similarly, this example uses a 7.5% earnings estimate throughout. While CalSTRS claims to have achieved this result historically, it is not clear they will be able to achieve it in the future, for a variety of macroeconomic reasons that are the topic of ongoing debate.

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About the Author:

Ed Ring is the executive director for the California Policy Center where he oversees execution of the Center’s strategic plan. He is also the editor of ProsperityCalifornia.org and UnionWatch.org. 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.

 

 

Drone Transport Ships, Automation, and the Bubble Economy

Editor’s Note:  This article by Mike Shedlock leads off with a report on “drone transport ships,” but moves on to explore a provocative and very pertinent question:  Are policies that create the “bubble economy,” i.e., artificially inflated asset values, partly motivated by a desire to counter the deflationary pressures caused by automation? We have explored this issue most recently in “Pension Funds and the Asset Economy,” and also in a post from 2013 entitled “Exponential Technology and the Role of Unions.” Shedlock may not have all the answers here – who does – but he is asking a question that must challenge anyone serious about promoting effective policies to stimulate sustainable economic growth. And Shedlock’s basic point – intervention to counter “good deflation” is futile, if not counterproductive – is consistent with the lessons of history. Every innovation ever conceived of was deflationary; only by deflating the value of existing services can you free up capital to invest in the next wave of innovation.

Here is the question of the day: Are drone, workerless ocean freight transport ships coming?

If shippers can pull it off, the cost saving would be immense. But what about the job losses? Insurance? Inflation?

Let’s explore the questions with a look at the Bloomberg article Rolls-Royce Drone Ships Challenge $375 Billion Industry.

“In an age of aerial drones and driver-less cars, Rolls-Royce (RR/) Holdings Plc is designing unmanned cargo ships.

Rolls-Royce’s Blue Ocean development team has set up a virtual-reality prototype at its office in Alesund, Norway, that simulates 360-degree views from a vessel’s bridge. Eventually, the London-based manufacturer of engines and turbines says, captains on dry land will use similar control centers to command hundreds of crewless ships.

Drone ships would be safer, cheaper and less polluting for the $375 billion shipping industry that carries 90 percent of world trade, Rolls-Royce says.

The European Union is funding a 3.5 million-euro ($4.8 million) study called the Maritime Unmanned Navigation through Intelligence in Networks project. The researchers are preparing the prototype for simulated sea trials to assess the costs and benefits, which will finish next year, said Hans-Christoph Burmeister at the Fraunhofer Center for Maritime Logistics and Services CML in Hamburg.

Even so, maritime companies, insurers, engineers, labor unions and regulators doubt unmanned ships could be safe and cost-effective any time soon.

Crew costs of $3,299 a day account for about 44 percent of total operating expenses for a large container ship, according to Moore Stephens LLP, an industry accountant and consultant.

The potential savings don’t justify the investments that would be needed to make unmanned ships safe, said Tor Svensen, chief executive officer of maritime for DNV GL, the largest company certifying vessels for safety standards.

While each company can develop its own standards, the 12-member International Association of Classification Societies in London hasn’t developed unified guidelines for unmanned ships, Secretary Derek Hodgson said.

“Can you imagine what it would be like with an unmanned vessel with cargo on board trading on the open seas? You get in enough trouble with crew on board,” Hodgson said by phone Jan. 7. ‘There are an enormous number of hoops for it to go through before it even got onto the drawing board.'”

100% Guaranteed to Happen

Anyone who does not think drone, workerless ships will happen, cannot think clearly.

Skeptics did not think the auto would replace horses or trains. Skeptics thought flight was impossible. Even simple constructs we now take for granted such as coffee on airplanes was once considered ridiculous.

So yes, driverless cars and workerless ocean ships are 100% guaranteed. The only question is “what timeframe?”

I do not have an answer to that question, but let’s not bury our heads in the sand over what is inevitable.

Furthermore, it’s likely workerless ships arrive before driverless trucks hit mainstream.

After all, the ocean is a vast place and there are no road or other constraints except in docking. If landing is a major concern, how difficult would it be to helicopter in crews specifically for the final landing?

What About Jobs?

Let’s get a grip on the problem of jobs. Yes, many will vanish. But others will appear. I cannot name one technological advancement in history that did not ultimately create more jobs than it destroyed.

Examples 

  • Lightbulbs replaced candles
  • Cars replaced horses
  • Trains replaced the Pony Express
  • Personal computers
  • Internet replacing libraries

Can someone tell me why it’s supposed to be different this time?

What About Inflation?

Therein lay the problem. Driverless cars, the internet, and other price-deflationary advances have outstripped central banks ability to inflate prices and wages.

Try as they might, central banks have only managed to foster asset bubbles (they don’t even see) not the 2% price inflation they want.

Yet they keep trying. Prices went up but not as much as central banks want. Wages rose less than prices, especially for those on the bottom end. Home prices soared so Congress initiated countless affordable home programs. Then home prices crashed and Congress and the Fed acted to prop up home prices.

No one really wanted affordable homes, they just wanted ill-advised affordable home programs. Now people scream about income inequality and for higher minimum wages.

This all stems from one bad idea – central banks fostering inflation.

One Bad Idea Leads to Another, and Another

In the effort to produce 2% inflation, One Bad Idea Leads to Another, and Another

That construct is corollary number six of the greater “Law of Bad Ideas“.

Can the Fed Prevent Boom-Bust Cycles? 

Heck no, the Fed causes them! For details, see Bubblicious Questions: What Causes Economic Bubbles? When Do Bubbles Burst? Can the Fed Prevent Bubbles?

Also consider Deflation Theory Reality Check.

Losing Battle

Such are the challenges the Fed faces, and they are losing the battle because the advancement of technology is inherently price-deflationary. Technollogy has overtaken the Fed’s (central bankers in general) ability to inflate consumer prices.

Here’s the irony: Ridiculous efforts to prevent price-deflation cause asset bubbles that inevitably collapse, which in turn bring the very conditions central banks wish to prevent.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.