Are LAUSD Teachers Underpaid, or Does it Cost Too Much to Live in California?

In California, public sector unions pretty much run the state government. Government unions collect and spend over $800 million per year in California. There is no special interest in California both willing and able to mount a sustained challenge to public sector union power. They simply have too much money, too many people on their payroll, too many politicians they can make or break, and too much support from a biased and naive media.

The teachers strike in Los Angeles Unified School District cannot be fully appreciated outside of this overall context: Public sector unions are the most powerful political actor in California, at the state level, in the counties and cities, and on most school boards, certainly including the Los Angeles Unified School District. With all this control and influence, have these unions created the conditions that feed their current grievances?

The grievances leading the United Teachers of Los Angeles to strike center around salary, class sizes, and charter schools. But when the cost of benefits are taken into account, it is hard to argue that LAUSD teachers are underpaid.

According to the Los Angeles County Office of Education, the median salary of a LAUSD teacher is $75,000, but that’s just base pay. A statement by LAUSD in response to a 2014 report on LAUSD salaries challenged the $75,000 figure, claiming it was only around $70,000. They then acknowledged, however, that the district paid $16,432 for each employee’s healthcare in 2013-14, and paid 13.92 percent of each teachers salary to cover pension contributions, workers comp, and Medicare. That came up to $96,176 per year.

The Cost of Benefits is Breaking Education Budgets

This average total pay of nearly $100K per year back in 2013-14 is certainly higher today – even if salaries were not raised, payments for retirement benefits have grown. For their 35,000 employees, LAUSD now carries an unfunded pension liability of $6.8 billion, and their OPEB unfunded liability (OPEB stands for “other post employment benefits,” primarily retirement health insurance) has now reached a staggering $14.9 billion. CalSTRS, the pension system that collects and funds pension benefits for most LAUSD employees, receives funds directly from the state that, in a complete accounting, need to also count towards their total compensation. And CalSTRS, as of June 30, 2017 (the next update, through 6/30/2018, will be available May 2019), was only 62 percent funded. Sixty-two percent!

The reason to belabor these unfunded retirement benefits is to make it very clear: LAUSD paying an amount equivalent to 13.92 percent of each employee’s salary into the pension funds isn’t enough. What LAUSD teachers have been promised in terms of retirement pensions and health insurance benefits requires pre-funding far in excess of 13.92 percent. To accurately estimate how much they really make, you have to add the true amount necessary to pay for these pensions and OPEB. This real total compensation average is well over $100K per year.

To put LAUSD teacher compensation in even more accurate context, consider how many days per year they actually work. This isn’t to dispute or disparage the long hours many (but not all) teachers put in. A conscientious teacher’s work day doesn’t begin when the students arrive in the classroom, or end when they leave. They prepare lesson plans and grade homework, and many stay after regular school hours to assist individual students or coordinate extracurricular activities. But teachers working for LAUSD work just 182 days per year. The average private-sector professional, who also tends to put in long hours, assuming four weeks of either vacation or holidays, works 240 days per year – 32 percent more. The value of all this time off is incalculable, but simply normalizing pay for a 182 day year to a 240 day year yields an average annual pay of not $100K, but $132K. Taking into account the true cost of pensions and retirement healthcare benefits, that’s much more than $132K.

This is what the LAUSD teachers union considers inadequate. If that figure appears concocted, just become an independent contractor. Suddenly the value of employer-paid benefits becomes real, because you have to pay for them yourself.

California’s Ridiculously High Cost-of-Living

If a base salary of over $70,000 per year – plus benefits (far more time off each year, pensions far better than Social Security, and excellent health insurance) worth nearly as much – isn’t enough for someone to financially survive in Los Angeles, maybe the union should examine the role it played, along with other public sector unions, in raising the cost-of-living in California.

Where was the California Teachers Association when restrictive laws such as CEQAAB 32SB 375 were passed, making housing unaffordable by restricting supply? What was the California Teachers Association stance on health coverage for undocumented immigrants, or sanctuary state laws? What did they expect, if laws were passed to make California a magnet for the world’s poor? Don’t they see the connection between 2.6 million undocumented immigrants living in California, and a housing shortage or crowded classrooms? Don’t they see the connection between this migration of largely destitute immigrants who don’t speak English, and the burgeoning costs to LAUSD to provide special instruction and care to these students?

From a moral standpoint, how, exactly, does it make the world a better place when, for every high-needs immigrant student entering LAUSD schools, there are 10,000 high-needs children left behind in the countries they came from, as well as fewer resources for high-needs children whose parents, some of them Latino, may have lived in California for generations?

When you make it nearly impossible to build anything in California, from housing to energy and water infrastructure, and at the same time invite the world to move in, you create an unaffordable state. When California’s state legislature passed laws creating this situation, what was the position of California Teachers Association? Need we ask?

The Union War Against Education Reform

Charter schools, another primary grievance of the UTLA, is one of the few areas where politicians in California’s state legislature – nearly all of them Democrats by now – occasionally stand up to the teachers unions. But why are charter schools so popular? Could it be that the union-controlled traditional public schools are failing students, making charter schools a popular option for parents who want their children to have a better chance at a good education?

Maybe if traditional public schools weren’t held back by union work rules, they would deliver better educational results. The disappointing result in the 2014 Vergara vs. California case provides an example. The plaintiffs sued to modify three work rules, (1) a longer period before granting tenure, (2) changing layoff criteria from seniority to merit, and (3) streamlined dismissal policies for incompetent teachers. These plaintiffs argued the existing work rules had a disproportionately negative impact on minority communities, and proved it – view the closing arguments by the plaintiff’s attorney in this case to see for yourself. But California’s State Supreme Court did not agree, and California’s public schools continue to suffer as a result.

But instead of embracing reforms such as proposed in the Vergara case, which might reduce the demand by parents for charter schools, the teachers union is trying to unionize charter schools. And instead of agreeing to benefits reform – such as contributing more to the costs for their health insurance and retirement pensions – the teachers union has gone on strike.

Financial reality will eventually compel financial reform at LAUSD. But no amount of money will improve the quality of LAUSD’s K-12 education, if union work rules aren’t changed. The saddest thing in this whole imbroglio is the fate of the excellent teacher, who works hard and successfully instructs and inspires their students. Those teachers are not overpaid at all. But the system does not nurture such excellence. How on earth did it come to this, that unions would take over public education, along with virtually every other state and local government agency in California?

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California’s Budget “Surplus” Ignores Crushing Debt Burden

California’s new governor, Gavin Newsom, delivered an inaugural address earlier this week that accurately reflected the mentality of his supporters. Triumphalist, defiant, and filled with grand plans. But are these plans grand, or grandiose? Will Governor Newsom try to deliver everything he promised during his campaign, and if so, can California’s state government really deliver to 40 million residents universal preschool, free community college, and single payer health care for everyone? It’s reasonable to assume that to execute all of these projects would cost hundreds – plural – of billions per year. Where will this money come from?

While California’s budget outlook currently offers a surplus in excess of $10 billion, that is an order of magnitude less than what it will cost to do what Newsom is planning. And this surplus, while genuine, is the result of an extraordinary, unsustainable surge in income tax payments by wealthy people. California’s tax revenues are highly dependent on collections from the top one-percent of earners, and over the past few years, the top one-percent has been doing very, very well. Can this go on?

To illustrate just how unusually swollen California’s current state tax revenues have gotten, compare state tax collections in FYE 6/30/2017 (our most recent available data) to seven years earlier, in 2010. Back in 2010, California was in the grip of the great recession. Total state tax revenue was $94 billion, and $44 billion of that was from personal income taxes. Skip to FYE 6/30/2017, and total state tax revenue was $148 billion, and $86 billion was from personal income taxes. This means that 80 percent of the increase in state tax revenue over the seven years through 6/30/2017 was represented by the increase is collections from individual taxpayers, which doubled.

It isn’t hard to figure out why this happened. Between 2010 and 2017 the tech heavy NASDAQ tripled in value, from 2,092 to 6,153. In that same period, Silicon Valley’s big three tech stocks all quadrupled. Adjusting for splits, Apple shares went from $35 to $144, Facebook opened in May 2012 at $38, and went up to $150, Google moved from $216 to $908.

While California’s tech industry was booming over the past decade, California real estate boomed in parallel. In June 2010 the median home price in California was $335,000; by June 2017 it had jumped to $502,000. Along the California coast, median home prices have gone much higher. Santa Clara County now has a median home price of $1.3 million, double what it was less than a decade ago.

As people sell their overpriced homes to move inland or out-of-state, and as tech workers cash out their burgeoning stock options, hundreds of billions of capital gains generate tens of billions in state tax revenue. But can homes continue to double in value every six or seven years? Can tech stocks continue to quadruple in value every six or seven years? Apparently Gavin Newsom thinks they can. Reality may beg to differ.

Just a Slowdown in Capital Gains Will Cause Tax Revenue to Crash

The problem with Gavin Newsom’s grand plans is that it won’t take a downturn in asset values to sink them. All that has to happen to throw California’s state budget into the red is for these asset values to stop going up. Just a plateauing of their value – which, by the way, we’ve been witnessing over the past six months – will wreak havoc on state and local government budgets in California.

The reasons for this are clear enough. Wealthy people, making a lot of money, pay the lion’s share of state income taxes, and state income taxes constitute the lion’s share of state revenues. Returning to the 2017 fiscal year, of the $86 billion collected in state income taxes, $28 billion was from only 70,437 filers, all of them making over $1.0 million in that year. Another $7.3 billion came from 131,120 filers who made between a half-million and one million in that year. And since making over $200,000 in income in one year is still considered doing very, very well, it’s noteworthy that another 807,000 of those filers ponied up another $15.1 billion in FYE 6/30/2017.

There is an obvious conclusion here: if people are no longer making killings in capital gains on their sales of stock and real estate, California’s tax revenues will instantly decline by $20 billion, if not much more. And it won’t even take a slump in asset prices to cause this, just a leveling off.

Debt, Unfunded Pension Liabilities, Neglected Infrastructure

When considering how weakening tax revenues in California will impact the ability of the state and local governments to cope with existing debt, it’s hard to know where to begin. To get an idea of the scope of this problem, the California Policy Center just released an analysis of California’s total state and local government debt. As shown on the table, California’s total state and local government debt as of 6/30/2017 is over $1.5 trillion. More than half of it, $846 billion, is in the form of unfunded pension liabilities.

Calculating pension liabilities is a complex process, with controversy surrounding what assumptions are valid. In basic terms, a pension liability is the amount of money that must be on hand today, in order for withdrawals on that amount – plus investment earnings on that amount as it declines – to eventually pay all future pensions earned to-date for all active and retired participants in the fund. Put another way, a pension liability is the present value of all pension benefits – earned so far – that must be paid out in the future. The amount by which the total pension liability exceeds the actual amount of assets invested in a fund is referred to as the unfunded liability.

The controversy over what is an accurate estimate of a pension liability arises due to the extreme sensitivity that number has to how much the fund managers think they can earn. Using the official projection which is typically around 7.0 percent per year, the official pension liability for all of California’s government pension funds is “only” $316 billion. But Moody’s, the credit rating agency, discounts pension liabilities with the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. In June 2017, it was 3.87 percent, and using that rate, CPC analysts estimated the unfunded liability for California’s state and local employee pension systems at $846 billion. Using the methodology offered by the prestigious Stanford Institute for Economic Policy Research, California’s unfunded pension debt is even higher, at $1.26 trillion.

Where pension liabilities move from controversial theories to decidedly non-academic real world consequences, however, is in the budget busting realm of how much California’s government agencies have to pay these funds each year. California’s public sector employers contributed an estimated $31 billion to the pension systems in 2018. Extrapolating from officially announced pension rate hikes from CalPERS, California’s largest pension system, by 2024 those payments are projected to increase to $59 billion. And these aggressive increases the pension systems are requiring are a reflection more of their crackdown on the terms of the “catch up” payments employers must make to reduce the unfunded liability than on a reduction to their expected real rate of return.

Huge unfunded pension liabilities are another reason, equally significant, as to why California’s state budget is extraordinarily vulnerable to economic downturns. If assets stop appreciating, not only will income tax revenue plummet. At the same time, expenses will go up, because pension funds will demand far higher annual contributions to make up the shortfall in investment earnings.

A cautionary overview of the economic challenges facing California’s state government would not be complete without mentioning the neglected infrastructure in the state. For decades, this vast state, with nearly 40 million residents, has been falling behind in infrastructure maintenance. The American Society of Civil Engineers assigns poor grades to California’s infrastructure. They rate over 1,300 bridges in California as “structurally deficient,” and 678 of California’s dams are “high hazard.” They estimate $44 billion needs to be spent to bring drinking water infrastructure up to modern standards, and $26 billion on wastewater infrastructure. They estimate over 50 percent of California’s roads are in “poor condition.” In every category – aviation, bridges, dams, drinking water, wastewater, hazardous waste, the energy grid, inland waterways, levees, ports, public parks, roads, rail, transit, and schools, California is behind. The fix? Literally hundreds of additional billions.

What Governor Newsom might consider is refocusing California’s state budget priorities on areas where the state already faces daunting financial challenges, rather than acquiescing to the utopian fever dreams of his constituency and his colleagues.

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California Fair Political Practices Commission Cracks Down on Illegal Political Expenditures

Over the last several years, this column has exposed multiple instances of government entities using taxpayer dollars for political advocacy, a practice that is illegal under both state and federal law.  Because progress in stopping these violations has been difficult, taxpayers will be pleased to hear that on December 20th, California’s campaign watchdog agency, the Fair Political Practices Commission, conducted a hearing on illegal activity by the Bay Area Rapid Transit District (BART).

The FPPC stated that BART used public funds to pay for a campaign of “YouTube videos, social media posts, and text messages to promote Measure RR, which authorized BART to issue $3.5 billion in general obligation bonds.” Under California law, spending money on a political campaign to pass the bond measure caused BART to qualify as an “independent expenditure committee” and required it to file campaign finance reports, but the transit agency ignored the requirement.

“BART failed to timely file two late independent expenditure reports in the 90-day period preceding the November 8, 2016 General Election; failed to timely file a semi-annual campaign statement for the period covering July 1, 2016 through December 31, 2016; and failed to include a proper disclosure statement in its electronic media advertisements,” the FPPC said.

The FPPC imposed a fine of $7,500, which critics of BART, including Senator Steve Glazer, rightfully complained was inadequate and no deterrent to future misconduct with taxpayer funds. In fact, the minimal fines may incentivize illegal activity because the ROI (return on investment) is frequently in the millions, if not billions, of dollars. Not only that, because the fines themselves are paid with taxpayer dollars, there are rarely any real-world consequences imposed on public officials who misappropriate public funds for political advocacy.

But things may be different now.  In addition to imposing the fine on BART, the FPPC also directed its staff to prepare a letter to the California Attorney General and local District Attorneys asking for criminal prosecution of these cases.

It’s about time.

The Free Speech clauses of the federal and state Constitutions prohibit the use of governmentally compelled monetary contributions (including taxes) to support or oppose political campaigns because “Such contributions are a form of speech, and compelled speech offends the First Amendment.”  Smith v. U.C. Regents (1993) 4 Cal.4th 843, 852.

Moreover, “use of the public treasury to mount an election campaign which attempts to influence the resolution of issues which our Constitution leaves to the ‘free election’ of the people (see Const., art. II, § 2) … presents a serious threat to the integrity of the electoral process.” Stanson v. Mott (1976) 17 Cal.3d 206, 218.

While taxpayer organizations have been successful in several lawsuits challenging these illegal expenditures, they haven’t fully deterred lawbreaking by the state or local governments. The recommendation of the FPPC to prosecute these cases under criminal statutes could be just the shock that public officials need to bring them into compliance.

The FPPC letter in the BART case could also prove to be a real headache for Los Angeles County.  In March of 2017, the county placed Measure H, a sales tax hike, on the ballot.  The County’s use of nearly a million dollars of public funds for the political campaign unquestionably crossed the line into political advocacy and the FPPC found probable cause to charge L.A. County, as well as the individual members of the Board of Supervisors, with 15 counts of campaign finance violations.

Taxpayers are hopeful that California’s Attorney General and District Attorneys take the FPPC letter recommending criminal prosecution seriously.  Much lip service is paid to protecting the integrity of California’s election process.  Here’s an opportunity for those charged with enforcing the law to do something meaningful to protect both election integrity as well as taxpayer dollars which should never be spent taking sides in election contests.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

UTLA’s crisis is here

Pension Funds, Meet the “Super Bubble”

Earlier this month, outgoing California Governor Jerry Brown predicted “fiscal oblivion” if California’s state and local agencies are not granted more flexibility to modify pension benefits. As if to help Governor Brown make his point, U.S. stock indexes took an obliging plunge. The Dow Jones average cratered in December, dropping nearly 16 percent in three weeks, from 25,826 on December 3rd to a low of 21,792 on December 24th. And whither hence? Nobody knows.

If history and trends are any indication, however, “up” is unlikely. Depicted on the chart below is the performance of the Dow Jones Index from 1995, when the markets began first showing signs of “irrational exuberance,” to the extremely exuberant present day. Clearly shown are the past two bubbles, the internet bubble of 2000, the housing bubble of 2007, and what we may call the “super bubble” or “everything bubble” of 2018.

Dow Jones Stock Index  –  1995-2018 

It doesn’t take an economist to notice a pattern here. The Dow Jones Index, which tracks closely with all publicly traded equities in the U.S., more than doubled in the four year heady runup to its January 2000 peak, than went into decline for nearly four years, before doubling again between 2004 and 2007. Then when the housing bubble popped, the Dow went off a cliff, dropping to half its 2007 peak in little over a year. In the ten years since 2009, the Dow has exploded again, tripling to a high of 26,743 in September 2018. What now? Visually, at least, another correction is past-due.

There are all kinds of economic reasons why what is visually indicated on the above graph is exactly what’s going to happen. At best, we may hope for stocks to merely stop going up, which is sort of what happened after the internet bubble popped. But what’s different this time?

One key difference is that this time, lowering interest rates is not an option. In January 2000 the Federal Funds rate was 5.5 percent. By June of 2003 it had dropped to 1.0 percent. When interest rates drop, stocks become relatively better investments than fixed rate investments. Lower interest rates also induce more people to borrow, creating liquidity, stimulating consumer spending, which helps corporate earnings which drives up stock prices. The cause and effect is reflected in the stock market history – by 2003, after lowering interest rates by 4.5%, the stock market finally began to recover.

In October 2006 the rate had risen to 5.25 percent. In September 2007, as home sales were starting to drop, it was lowered to 4.75 percent. When the housing bubble popped, and the stock market crashed, the Federal Reserve responded by steady lowering of the Federal Funds Rate. By December 2016 it had dropped to 0.25 percent, the lowest rate possible. What should be of concern, is that the rate today, 2.5 percent, is only half as high as it was during the past peaks. During the previous two bull markets, the Federal Reserve was able to bounce the rate up to around 5 percent before the bears came calling. This time, assuming we’ve hit the peak, only half that increase, to 2.5 percent, was achievable.

A consequence of low interest rates is more borrowing, which is a good thing if that borrowing stimulates economic growth that translates into investments in productivity. But borrowing has not been used to stimulate productive investments. Instead, much of the corporate borrowing over the past decade has been used to finance stock buy-backs. This is a dangerous strategy, causing short-term growth in earnings per share, but loading debt onto corporate balance sheets that will have to be refinanced at interest rates that are increasing, at the same time as investment in research and modernizing plant and equipment has been neglected.

In recent years, borrowing has also been an overused tool of government, starting with the federal government. Federal borrowing accelerated in mid-2008, and hasn’t slowed down since, climbing to over $21 trillion by the 3rd quarter of 2018. As interest rates rise, servicing this debt will become far more difficult. Meanwhile, all U.S. credit market debt – government, corporate, and consumer – has continued to increase. After dipping slightly to $54 trillion in the wake of the burst housing bubble, it was up to a new high of $68 trillion by the end of 2017.

When interest rates fall, not only is the stock market stimulated. Bonds make payments at fixed rates, so when the market rate drops, the price of these bonds increases, since they can be sold for whatever price will give the buyer the same return as the current market rate. Interest rate reductions also cause housing prices to rise, since when interest rates are low, people can afford bigger mortgages since they will be making lower monthly payments. The opposite is also true, which is unfortunate for investors. All else held equal, rising interest rates means lower prices for bonds and housing.

What does this mean for pension funds?

When the super bubble pops this time, all assets will drop in value. Everything pension funds are invested in, equities, bonds, and real estate, will all drop in value. Even if extraordinary measures are taken to stop the decline – such as the fed purchasing corporate bonds – there will be nowhere to run. Public sector pension funds have not prepared for this day of reckoning. CalPERS, for example, in its most recent financial statements was only 71% funded. That would be ok at the end of a bear market, but at the end of a bull market, that is a disaster waiting to happen.

As it is, using CalPERS as an example, government agencies are going to have to nearly double their annual payments. The primary reason for this increase appears to be so the participating agencies will eliminate their unfunded liability on a 20 year repayment schedule. To-date, agencies were making those repayments on a 30 year term, and using creative accounting to minimize the payment amounts in the early years. CalPERS does not appear to have lowered the amount they are expecting their investments to earn, and this is critical. Because while they have lowered their expected rate of return to “only” 7.0 percent, they have also quietly lowered their long-term assumed inflation rate. This means they are still relying on nearly the same real rate of return for their investments.

When the super bubble pops, the challenges facing pension funds will not be the only economic problem facing Americans. Unwinding the debt accumulated during a credit binge lasting decades will impact all sectors of the economy. The last thing the fragile finances of government agencies will need is even higher required contributions to the failing pension funds. Instead those running these pension systems need to try new approaches, including modifying benefit formulas, but also redirecting investments into local infrastructure projects – projects that not only create jobs, but address practical and urgent goals such as building resilient, upgraded backbones for supplying water, energy, and transportation.

In early 2019, the California Supreme Court is about to issue one of its most consequential rulings ever, in the case CalFire Local 2881 vs. CalPERS. It is possible this ruling will grant government agencies (and voters) more flexibility to modify pension benefits. Such an opportunity cannot come too soon, if fiscal oblivion is to be avoided when the super bubble finally pops.

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New study confirms business flight from California accelerating

The evidence is more than anecdotal. According to a recent study, business flight out of California has accelerated to an unprecedented level. In 2016, the year for which the most recent data is available, 1,800 businesses moved out or “disinvested” from California. This is the highest one-year total in the nine-year history of tracking by the study’s author.

The study was released by Spectrum Location Services, a firm specializing in advising businesses about the relative advantages or disadvantages of doing business in various locations. The firm’s principal, Joseph Vranich, is well-versed in California public policy. Not only has he tracked business flight out of the Golden State for nearly a decade, he was the co-author of the study of California’s High Speed Rail Project conducted in 2008, even before voters approved the bond measure. That study was prescient in predicting that the HSR project would meet virtually none of the promises made to voters.

The frequency of business abandonment may have started with a trickle, but it has now become a torrent. A harbinger of the trend occurred in 2005 when Buck Knives, a company founded in 1905 in San Diego, pulled up stakes and moved to Idaho. City leaders attributed the loss to California’s increasingly hostile attitude to the private sector. Since then, a litany of businesses with household names have followed suit, either by abandoning the state entirely or expanding major operations elsewhere. For example, Intel has invested billions in chip manufacturing plants in Oregon, New Mexico and Arizona. Nestle Corp. moved its headquarters from Glendale to Virginia. Others on the list include Waste Connections, Comcast, Campbell’s Soup, Tesla, Apple, Boeing and Farmers Brothers.

One of the more surprising conclusions of the report is that California’s crushing tax burden is no longer the primary motive for disinvestment. Surprising indeed, considering that California has the highest income tax rate in America as well as the highest state sales tax rate. And for businesses, California has the highest corporate tax rate west of the Mississippi. But despite all that tax negativity, it is California’s laughable legal environment that provides the prime incentive to get the heck out of Dodge.

According to Vranich, “California politicians threaten the well-being of businesses with one harsh law or regulation after another. Now, in 2018, the state has reached a new low with an awful law.” California’s new Immigrant Worker Protection Act states that an employer that follows federal immigration law is now violating state immigration law and is committing a crime. However, it remains true that an employer failing to follow federal immigration law is also committing a crime. Vranich correctly notes that this absurd catch-22 puts businesses in a “lose-lose” situation, exposing them to potentially criminal liability.

If the California business community believes that the state has hit rock bottom in its hostility to the free market, it would be mistaken. November’s election gave the state’s Democrats — the vast majority of whom are radical progressives — a supermajority in both houses. This means that state tax increases can be enacted and anti-taxpayer, anti-business constitutional amendments can be placed on the statewide ballot, both without the need of a single Republican vote.

For business owners or corporate executives in California who are reaching the breaking point over the state’s hostility toward them, they would be well advised to obtain a copy of Spectrum Location Services’ full report, available by visiting https://spectrumlocationsolutions.com. For businesses deciding to tough it out in California, good luck.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

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Early Christmas for LAUSD teacher: a refund of his UTLA union dues – and an end to future deductions

Few: “Teachers shouldn’t have to make a federal case out of this.”

This article first appeared on FlashReport.org.

Just in time for Christmas, the Los Angeles teachers union gave Thomas Few some good news: a refund of $433.31 dues he paid and the union’s promise to stop taking $80 per month from his paycheck.

Few said he is “elated by the victory,” but also determined to press forward with his lawsuit against the Los Angeles Unified School District and United Teachers of Los Angeles.

“On June 27, the Supreme Court said government employees – including my fellow teachers in Los Angeles Unified – have the right to fund or to not fund union activities,” Few said. “Teachers shouldn’t have to make a federal case out of this.”

Beginning in June, Few told United Teachers of Los Angeles three times to stop taking cash from his paycheck. The third time, he says he placed a copy of his demand directly into the hands of a teachers union official visiting the San Fernando Valley school where Few teaches special-ed children.

But UTLA refused to stop taking his money. Then, on Nov. 13, the nonprofit California Policy Center and the Liberty Justice Center filed a federal lawsuit on Few’s behalf against UTLA and LAUSD. Two weeks later, UTLA did an about-face and sent Few the refund check.

The check came with a letter from UTLA executive director Jeff Good explaining that even though Good believes UTLA still has the right to take Few’s money, they are going to stop “rather than expend dues money on litigation.”

Gold claimed Few’s federal lawsuit suggested the teacher had a “misimpression that the union had not accepted your resignation.” In fact, Good told Few, the union had accepted his resignation.

But payments to the union were another matter, Good wrote: Few had “signed a separate agreement with the union, apart from your agreement to become a member, committing [Few] to pay an amount equivalent to dues to the union ‘irrespective of your membership status.’”

California Policy Center CEO Mark Bucher, one of the attorneys representing Few, called that a “desperate attempt by UTLA to skirt the Supreme Court’s decision in Janus v. AFSCME.”

In that June 27 decision, the Supreme Court held that forcing government employees to join political organizations like UTLA violates their First Amendment rights.

“Arguing that Mr. Few can leave the UTLA as long as he continues to pay UTLA at the same rate is like a Vegas magician sawing a woman in half,” Bucher said. “It’s sleight-of-hand. In this case, it’s also deceptive and illegal.”

Bucher said the union’s capitulation does not end the federal suit, now scheduled for a February hearing in the U.S. Court in downtown Los Angeles.

“Even though UTLA has stopped taking money out of Mr. Few’s check, he does not intend on dropping the suit,” Bucher said. “Few is asking the court to declare that UTLA does not have the right to take his money, or the money of countless other teachers who are in the same position.”

Until his February hearing, Few said he’s focused on the spirit of the season. That means “spreading the good news to all of California’s government employees: you too qualify today for an end to dues deductions from your union.”

Then striking a lighter note, Few added, “With Christmas around the corner and the usual family expenses,” he says, “my wife and I are stoked to have our money back.”

Will Swaim is president of the California Policy Center. Contact him at Will@CaliforniaPolicyCenter.org.

Stock Market, Housing, Economy Signal State and Local Budget Woes in 2019-20

The typical analysis of state and local government finances is that they are primarily a function of the economy. When the economy is growing well, and especially when it is growing faster than expected, local and state government finances prosper. When the economy grows, more people are employed and employees have larger paychecks. State income and sales tax revenues increase. Property tax receipts go up because the price of housing increases. Irrespective of government policies–whether of the right or the left–a “rising tide lifts all boats,” or at least all government boats. Historically, the state of the economy usually has driven government tax revenues in good times and bad.

The conventional analysis may be changing–and in a way that may lead to unanticipated fiscal shortfalls in many state and local government agencies even in the coming, 2019-20, fiscal year. The first problem is that the stock market is headed lower. Though historically local and state government budgets have been mostly influenced by the economy, now the stock market may play as large, if not a larger, role.

Every public employee pension fund in the United States is actuarially unsound. Within California, CalPERS, CalSTRS, and the many county public employee pension plans all project continuing, year in and year out, returns on investment of approximately 7%. This means that the stock market would have to double every 10 years for already underfunded public employee pension funds to remain able to pay their guaranteed benefits.

There is no way this is going to happen. The current projected actuarial return of 7% means that the stock market would have to be close to 100,000 in 2038 for pension funds to be able to pay their benefits, which is very unlikely. In the short run, the emerging bear market will require state and local pension funds to reduce their anticipated rates of return, and this will cause every government agency in the state to feel pain. A long-term diminishment in the return on investment of even one half of one percent has been estimated to cost state and local governments $5 to 10 billion per year. It is already projected–assuming an actuarial return of 7% per year on investments–that the cost of public employee retirement contributions will close to double for state and local agencies between now and 2024. If the rate of return declines as well, these costs will grow even higher.

But it gets worse. Among the elements of the federal tax reform act of 2017 was to cap the amount of a home mortgage the interest for which can be deducted at $750,000 (the amount previously had been $1 million). This makes home purchases above $750,000 effectively, after taxes, more expensive. Moreover, another aspect of the 2017 tax reform was to cap deduction of state and local taxes at $10,000, which also makes the effective cost of owning property more, since property taxes above this amount can no longer be deducted. Finally, although increasing interest rates affect all sectors of the economy, they may influence housing the most. Moreover, increased interest rates will also have a negative effect on real estate prices, thereby resulting in lower property tax revenues than projected.

There remains, finally, the overall state of the economy, apart from the stock market and real estate prices. Here, too, in large part as a result of increasing interest rates and the trade war and general instability fostered by President Trump, the rate of economic growth appears to be declining to about half of what it recently has been–from about three to three and a half percent annual growth to about one and a half to one and three quarters percent annual growth. This, too, will diminish local and state government income.

The days of fiscal wine and roses for local and state governments are over. Long term trends are finally catching up with state and local government spending and receipts. Reform of public employee pensions is long overdue and general tightening of government expenditures will also be required–starting in the 2019-20 fiscal year. Further increases in state and local taxes are unlikely in a diminishing economy.

Lanny Ebenstein teaches in the Department of Economics at UCSB. He is the author of the first biographies of Milton Friedman and Friedrich Hayek. His most recent book, Chicagonomics: The Evolution of Chicago Free Market Economics (2015), was an “Editors’ Choice Selection” in the New York Times Book Review.

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The Financial Context of the Imminent California Supreme Court Decision on the “California Rule”

Any day now, the California Supreme Court will rule on what may be one of the most significant cases affecting pension reform in California history. The case, CalFire Local 2881 vs. CalPERS, challenges one of the provisions of PEPRA (Public Employee Pension Reform Act) Governor Brown’s 2013 pension reform legislation. The plaintiffs argue that PEPRA’s abolition of purchases of “air-time,” where employees who are about to retire can make a payment in exchange for more years of service applied to their pensions, is illegal. They cite the “California Rule,” an interpretation of California contract law that requires any reduction in pension benefits to be offset by providing some new benefit of equal value.

The stakes couldn’t be higher. Even though pension benefit formulas have been changed for new employees, and are now somewhat more financially sustainable, the California Rule prevents any significant pension reform for existing employees, even for work not yet performed. Changing pension benefit formulas for new employees, while helpful, are not enough. If the California Supreme Court overturns the California Rule, it will not affect the pension benefits that existing employees have earned to-date, but will allow changes going forward. For example, if a public employee has worked 15 years, and earns 3 percent per year towards their pension, if they retired tomorrow their pension would be 15 (years) times 3 percent = 45 percent times their final salary. This would not change. But if they worked another 15 years, and their pension benefit was reduced going forward, they might only earn 2 percent per year for the second half of their career.

The impact of such a change would be dramatic, since less than 20 percent of California’s public sector workforce was hired after the PEPRA reforms took effect for new employees. Reforming the rate of pension benefit accrual for future work for 80 percent of California’s workforce would have a decisive impact on the financial sustainability of the pension systems.

There are many possible ways to further reform California’s public employee pensions, and they cannot come too soon. California’s public sector employers will contribute an estimated $31 billion to the pension systems this year. Extrapolating from officially announced pension rate hikes from CalPERS, California’s largest pension system, by 2024 those payments are projected to increase to $59 billion. According to the State Controller’s office, the unfunded liability for California’s state and local public employee pension systems totaled over $250 billion in 2016. That number could be grossly understated, because one of the biggest variables affecting the amount by which a pension system is unfunded is how much a pension fund’s invested assets will earn. If pension fund earnings don’t meet projections, annual contributions have to rise to make up the difference.

Pension systems have made well publicized reductions to the amount they claim they will earn, touting these reductions as proof of their commitment to cautious, prudent management of their funds. But as reported recently by Andrew Biggs, writing for Forbes, these pension funds have quietly lowered their inflation assumption at the same time, meaning they are still claiming their investments will achieve nearly the same real rate of return. As anyone saving for retirement – or funding a pension – knows without any doubt, the real rate of return is all that matters.

California’s pension systems currently rely on a real rates of return, i.e., the nominal return less the rate of inflation, of approximately 4.5 percent. They have not substantially altered that target, despite the hoopla surrounding the reduction they made in their nominal rate of return projections. The aggressive increases the pension systems are requiring to the contribution rate are a reflection more of their crackdown on the terms of the “catch up” payments employers must make to reduce the unfunded liability than on a genuine reduction to their expected real rate of return. But can pension systems continue to earn real rates of return in excess of 4 percent per year?

For over ten years, pension systems have been the beneficiaries of the longest sustained bull market in U.S. stocks in history. From its nadir in 7,063 in February 2009, to its high of 26,743 in September 2018, the Dow Jones Industrial Average more than tripled. The compounded annual increase was 15.9 percent, while at the same time the rate of inflation averaged 1.8 percent. But trough to peak is a misleading trend. The last peak for the Dow was September 2007, when it had risen to 13,895. This more appropriate peak to peak evaluation has the Dow increasing by 90 percent over 11 years, for an annual average rate of return of 6.1 percent; adjusted for inflation, the return was 4.3 percent. Since September 2018, of course, the Dow has given up 11 percent, and who knows where it’s headed.

Because the Dow Jones Industrial Average generates returns that are nearly always in synch with the other major indexes, these results matter. In the coming years, will inflation adjusted returns on equity investments remain around 4 percent? More important, why is it that after the longest bull run in stock market history, California’s pension systems are underfunded by several hundred billion dollars? Healthy, well managed pension systems should be overfunded at a time like this.

This is the context in which California’s Supreme Court Justices will make a huge decision. The boom in investment returns could well be over, with the pension funds now facing several years of doldrums. The PEPRA reforms weren’t enough to restore financial sustainability in an economic downturn. The required pension contribution rates are already set to double, and California’s cities and counties are unlikely to all be able to handle the stress of pouring additional billions into pension systems. During the last era of pension fund surpluses, pension benefits were increased retroactively. It seems hardly unfair that contract law might also permit them to be reduced, but only from now on.

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State Audit Exposes High Speed Rail’s Epic Waste of Time and Money

Although the midterm election was held on November 6th, the news media was absorbed for several weeks with undecided close races and the strength of the “blue wave,” especially here in California. Perhaps that is why a report from the Auditor of the State of California on the High Speed Rail Project issued the following week did not receive as much attention as it would otherwise warrant.

To understand just how damning the HSR audit was, just consider the subtitle:  “Flawed Decision Making and Poor Contract Management Have Contributed to Billions in Cost Overruns and Delays in the System’s Construction.”  But like many government documents, the audit is couched in bureaucratic language that ordinary citizens may not understand.  For that reason, below are the summary points as provided by the state auditor with accompanying translations.

Auditor: “Although the Authority has secured and identified funding of over $28 billion that it expects will be sufficient to complete initial segments, that funding will not be enough to connect those segments, or finish the rest of the system—estimated to cost over $77 billion.”

Translation: The Authority has succeeded in talking both the federal government and the state of California into providing billions of dollars on a failed project and yet still has no idea where the rest of the money will come from.

Auditor: “It has incrementally modified its plans for a fully dedicated high-speed rail system since 2012 and now intends to share—blend—existing transit infrastructure wherever feasible. Although blending is less costly, it subjects high-speed trains to lower speed limits and may require sharing time on the tracks with other rail operators.”

Translation:  All those promises made to voters about getting from San Francisco to Los Angeles in less than three hours were never serious.

Auditor: “The fact that [the Authority] has now exhausted all feasible options to use existing infrastructure raises concerns about its ability to mitigate future cost increases.”

Translation: The Authority has followed Willie Brown’s advice. The former Assembly Speaker, in a moment of candor, once told the San Francisco Chronicle, “In the world of civic projects, the first budget is really just a down payment. If people knew the real cost from the start, nothing would ever be approved. The idea is to get going. Start digging a hole and make it so big, there’s no alternative to coming up with the money to fill it in.”

Auditor: “The risk of additional cost increases is high. Costs to date have been significantly greater than originally projected because the Authority moved forward before it completed many critical tasks such as purchasing land, planning how to relocate utility systems, or obtaining agreements with external stakeholders.”

Translation: The Authority’s modus operandi can be distilled into three words: “Fire, ready, aim.”

Auditor: “This risk contributed to $600 million in changes to construction contracts.”

Translation: $600 million (over half a billion dollars) in unnecessary expenditures to date is just a preview of the waste we’ll see in future years.

Auditor: “If the Authority does not complete construction by the federal government’s December 2022 deadline, it may need to repay $3.5 billion.”

Translation:  The Authority is going to have to spend tens of millions of dollars on Washington lobbyists to make sure this doesn’t happen.

Auditor: “[The Authority] needs to improve its contract management to control soaring costs—it currently has 56 contract managers throughout its organization, but these individuals generally do not serve in contract management roles full time. Moreover, it has placed portions of its oversight of large contracts into the hands of outside consultants.”

Translation: It’s hard to determine which is worse; the gross mismanagement by managers within the Authority or the fact that it is being ripped off by outside consultants.

For years, transportation experts, taxpayer advocates and fiscal conservatives have watched the horror show known as California’s high-speed rail project unfolding before our very eyes.

While we would hope that a new crop of legislative leaders would take a keen interest in protecting taxpayers as well as ensuring that valuable transportation dollars are spent wisely, the reality is that there are too many vested interests reaping billions of dollars from the project to allow serious oversight.

This virtually guarantees that California will continue to throw good money after bad for years to come.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

Jamming Janus – The Public Union Empire Strikes Back

In June 2018 the U.S. Supreme Court ruled on the Janus vs AFSCME case. The result of the decision is that public employees not only have the right to refuse membership in a union, but also the right to refuse to pay so-called “agency fees” to the union.

Unions had been preparing for years for a ruling like this. The Janus case was the successor to a similar case, Friedrichs vs the CTA, which after taking years to work its way through lower courts, ended up deadlocked after the untimely death of Justice Scalia in early 2016.

To hear the reports over the years, and especially in late 2017 and the first half of 2018, Janus was going to be a catastrophe for public sector unions.  On the website of a California AFSCME Council, a news article late last year was titled “Judging Janus: Will California’s Unions Survive?” When the Janus decision was announced last June, Time Magazine published an article entitled “The Supreme Court’s Union Fees Decision Could Be a Huge Blow for Democrats.

Not so huge, actually. What actually is happening post-Janus, at least so far, might remind one of the Y2K virus. Much ado about nothing. The unions were ready.

How public sector unions prepared for Janus, especially in California, is testament to their incredible power.

In June 2018 the California Policy Center published a list of the laws pushed by public sector unions in the state legislature, all of which were designed to minimize the impact of Janus. Here is an updated list:

1 – Requires public employers to conduct a public employee orientation for new employees within four months of hire, and provide a union representative with at least 30 minutes to make a presentation – AB 2935 (2016, passed).

2 – “Would require government agencies to negotiate the details of when, where and how unions could have access to recruit new employees; and to provide job titles and contact information for all employees at least every 120 days (as reported by EdSource) – AB 119 (2017, passed).

3 – Expands the pool of public employees eligible to join unions – AB 83 (passed), SB 201 (passed), and AB 3034 (vetoed).

4 – Makes it difficult, if not impossible, for employers to discuss the pros and cons of unionization with employees – SB 285 (passed) and AB-2017 (pending).

5 – Requires the time, date and location of new public employee orientations to be held confidential – SB 866 (passed).

6 – Precludes local governments from unilaterally honoring employee requests to stop paying union dues – AB 1937 (pending) and AB-2049 (pending).

7 – Makes employers pay union legal fees if they lose in litigation but does not make unions pay employer costs if the unions lose – SB 550 (passed).

8 – Moves the venue for dispute resolution from the courts to PERB (Public Employee Relations Board), which is stacked with pro-union board members – SB 285 (passed) and AB 2886 (vetoed).

THE CONTRACT TRAP

Take a look at this example of an actual recent agreement between an employee and their government union:

As can be seen, this contract has been modified to read “if I rescind my membership and if existing law changes so that non-members are no longer required by law to contribute, I agree that the contributions authorized above shall continue and this authorization shall automatically renew annually, irrespective of my membership status, unless and until I submit a timely signed revocation of this authorization. To be timely, a revocation must be mailed to OCEA’s office, postmarked between 75 and 45 days before such annual renewal date.”

This is known as “contract trapping.” Adding this type of language to contracts is one of the principal means by which public sector unions are retaining current members, and entrapping new ones. Whether or not cleverly written contract traps override the Janus ruling is the issue in a recently filed lawsuit, Few vs. UTLA.

In this case, the plaintiff, Thomas Few, is a special education teacher in Los Angeles. Few was told he could end his membership in the United Teachers of Los Angeles union. But even as a nonmember, the union told him that he would still have to pay an annual “service fee” equivalent to his union membership dues. Few’s position, which is likely to be upheld, is that he cannot be compelled to pay anything to a union he does not choose to join, regardless of what the payment is called.

UNION MEMBERSHIP POST-JANUS

Assessing union membership is an inexact science. The tax returns filed by the unions, Form 990s, are available online. But these forms don’t report the number of members, only the revenue collected, and they are usually a year or two behind.

For example, 2019 will be the first full year that unions will have been living under Janus, and those tax returns probably won’t be available online until late 2020 or later in 2021. The only other way to learn the direction of union membership trends is to rely on what the unions themselves make public, or – sometimes this is effective – to make public records act requests to the payroll departments of public agencies.

On that score, so far the unions seem to be weathering Janus just fine. Based on the public record act requests they made, the Sacramento Bee reported last month that union membership among California’s state workers (not including higher education or K-12 employees) was up about 300 since June, reporting 131,410 dues paying members in October, vs. 131,102 in June. The same report cited the California Correctional Peace Officers Association gaining more than 1,500 members between June and August 2018, and California’s Professional Engineers union gaining 340 members over the summer.

This evidence suggests union membership post-Janus is holding steady due to the new laws and contract language the unions have working in their favor. But unions continue to adapt to the inevitable loosening of the rules that have made it easy for them to collect dues and fees from public employees. Public sector union leadership understands that people either join or quit public sector unions for two reasons – economic, and ideological.

The economic argument for belonging to a union is nuanced. Clearly union “negotiations” with politicians these unions can make or break in the next election have borne fruit. In California, public employees earn pay and benefits well in excess of what private sector workers earn. On the other hand, union dues often exceed $1,000 per year, and public employees may want to keep that money, particularly if they believe the unions have wrung as much as they’re going to wring out of public budgets that are already stretched thin.

Ideological reasons to choose or reject union membership formed the premise of the Janus case; that all public sector union activity is inherently political, and constitutional freedom of speech protection means that public employees cannot be forced to support political activities they disagree with. How many public employees object enough to the political positions of their unions to quit, or never join? To minimize this, unions are pivoting towards emphasizing the services they provide, and downplaying their political activism.

It remains up to opponents of public sector unions to not only fight to enforce Janus, and help members withdraw from unions, but also to continue to educate public workers and the public at large about how much public sector unions have harmed California.

The public schools in California provide a good example. There is a growing nonpartisan consensus that unionizing public education has been a disaster. As argued in the Vergara case in 2014, union work rules in the areas of dismissal, tenure, and layoffs, have had a disastrous impact on the quality of education in California’s most vulnerable communities. Unions have been the implacable, and very effective opponents of charter schools and school vouchers, which would only help improve education. And unions have promoted left-wing classroom indoctrination, something that should even concern leftists, insofar as it takes time away from teaching fundamentals.

Another compelling example of public sector unions harming California are the status of public sector pensions. California’s pension systems, by and large, remain only around 80 percent funded, even though the stock market is at the tail end of a record breaking ten year bull run. In California, public sector pensions and other retirement benefits average over $70,000 per year for 30 years of work, many times what Social Security offers, and there isn’t enough money set aside to pay them. Payments into California’s state and local pension systems are projected to double, from roughly $30 billion per year today to nearly $60 billion per year by 2024. Government unions negotiated these unsustainable pension benefits, and consistently fight against attempts at reform.

Will public sector employees vote with their feet, and leave their unions? Post-Janus, that is easier than ever, and pending litigation will make it easier still. But it is not clear how many of them will make that choice.

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Looming Decision on “California Rule” Will Dramatically Affect Pension Reform Efforts

On its surface, the case heard last Wednesday by the California Supreme Court in CalFire Local 2881 vs. CalPERS doesn’t seem that important. At issue is the so-called “California Rule,” an obscure legal doctrine relating to public employee pensions. But for California’s beleaguered taxpayers, the case is one of extraordinary importance because its outcome will determine the extent to which the local governments will look to taxpayers to shore up failing pension plans even more than they already do.

Labor interests have argued that under the “California Rule,” no pension benefit provided to public employees by statute can ever be withdrawn without replacement with some “comparable” benefit, even if it’s deferred compensation for services not yet provided, and even if the Legislature determines that citizens who are not public employees are unfairly suffering as a result of prior legislatures’ mistakes.

More than a decade ago, California politicians, seeking to curry favor with public-sector labor, began enacting laws to significantly increase public employee compensation. Among these enhanced benefits were a series of laws which allowed public employees to spike their pensions. For example, a 2004 state law allowed employees with at least five years of service to purchase up to five years of additional credits — commonly labeled “airtime” — before they retire. Under this plan, a 20-year employee could receive a pension based on 25 years of contributions.

When the recession hit and many pension funds were looking at billions in unfunded liability, it was clear that the party was over. To his credit, Governor Jerry Brown presented a 12-point comprehensive pension reform plan which, had it been enacted, would have solved virtually all of California’s public pension problems. Although the California legislature rejected most of the proposals, they did address some of the more egregious abuses including the airtime benefit law which was repealed in 2013.

One has to give credit to the public-sector unions for their tenacity. Once they have secured some perceived advantage, you’d have better luck taking a steak out of the mouth of a lion than have them give it up without a fight, no matter how unjustified that advantage is.

But reasonable people living in the real world can recognize unsustainable levels of benefits when they see them. This includes local government leaders and Democrats, not just fiscal conservatives and reformers. And apparently, if Wednesday’s hearing is any indication, the courts are equally as perceptive. Several justices of the Supreme Court were openly skeptical of the union’s position that the benefit of an airtime option could never be changed, and they further appeared open to other legislatively approved reductions in future retirement benefits.

The Howard Jarvis Taxpayers Association filed an friend-of-the-court brief in the Supreme Court on behalf of itself as well as the Ventura County Taxpayers Association, advocating the interests of those who are ultimately responsible to pay the billions of dollars necessary to maintain the solvency of public pension funds – the taxpayers. Regrettably, due to mismanagement and corruption, the state’s largest pension funds have served neither public employees nor the public at large. Pension obligations at the state and local level are “crowding out” other public spending and, as a result, schools, highways and public-safety needs have been short-changed.

A ruling in support of the legislature’s ability to make modest reductions in future pension benefits would go a long way toward saving California from fiscal disaster. But more than that, it would be an important first step in correcting the imbalance between ordinary California citizens and well-funded a special interests.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

The #WeSue movement

The Varieties and the Potential Impact of Post-Janus Litigation

The landmark ruling by the US Supreme Court in the Janus vs AFSCME case has given government workers the right to not only refuse union membership, but to refuse to pay any dues or fees to that union. In the wake of this ruling, new lawsuits have been filed on behalf of plaintiffs who allege the unions are attempting to circumvent the Janus ruling.

Enforcing Provisions of the Janus Ruling

A notable example of such a case is Few vs UTLA, In this case, the plaintiff, Thomas Few, is a special education teacher in Los Angeles. Few was told that he could end his membership in the United Teachers of Los Angeles union. But even as a nonmember, the union told him that he would still have to pay an annual “service fee” equivalent to his union membership dues. Few’s position, which is likely to be upheld, is that he cannot be compelled to pay anything to a union he does not choose to join, regardless of what the payment is called.

This lawsuit and others are likely to ensure that the Janus ruling is enforced. The practical result will be that government unions lose some of their members, and some of their revenue. But how many? After all, there is a valid economic incentive for public employees to belong to their unions. In California, unionized state and local workers earn pay and benefits that average twice what private sector workers earn.

For this reason, most people refusing union membership will be doing so for ideological reasons. They will find their objections to the political agenda of these unions to be more compelling than the economic reasons to support them. But there are additional ways the unions compel public employees to remain members.

For example, in some cases, within the same bargaining unit, unions will negotiate pay and benefit packages for their members that are more favorable than the pay and benefit packages they negotiate for the non-members. In some cases in academia, only union members are permitted to sit on faculty committees that determine curricula and hiring decisions.

Challenging Exclusive Representation

This right to exclusive representation is the next major target of public sector union reformers. They argue that it is unconstitutional for public sector unions – whose activity the Janus ruling verified is inherently political – to advocate on behalf of non-members, or to represent non-members, or to exclude non-members from participating in votes or discussions on policy, or to deny non-members the same negotiated rates of pay and benefits as members, or, possibly, all of the above.

Just filed this week in the US Supreme Court is the case Uradnik vs IFO, which worked its way through the lower courts in under a year. It is possible it will be heard in the 2019 session. This case calls for an immediate end to laws that force public-sector employees to accept a union’s exclusive representation.

Kathleen Uradnik, a professor of political science at St. Cloud State University in Minnesota, alleges that her union (“IFO” or Inter Faculty Organization) “created a system that discriminates against non-union faculty members by barring them from serving on any faculty search, service, or governance committee, and even bars them from joining the Faculty Senate. This second-class treatment of non-union faculty members impairs the ability of non-members to obtain tenure, to advance in their careers, and to participate in the academic life and governance of their institutions.”

There is a strong possibility that within a few years, if not much sooner, this case will be heard and ruled on by the US Supreme Court in favor of the plaintiff. If so, the future of public sector unions will be altered in ways even more significant than Janus. Unions will be prohibited from discriminating in any way against non-members who are part of their bargaining unit. They also will be powerless to stop public employees from withdrawing completely from their bargaining unit to – gasp – represent themselves in salary and benefit negotiations, something that professionals in the private sector have always done.

The Impact of Non-Exclusive Representation

An impact of a favorable Uradnik vs IFO ruling that would have even greater consequences would be if it enabled the emergence of competing unions. What if two or more unions represented a bargaining group? What if a super-union emerged whose membership welcomed government workers from an entire state, or entire profession, or the entire nation. What if these super-unions embraced a political agenda that ran counter to the left-wing agenda that has dominated public sector unions for decades?

The possibilities are tantalizing.

What if faculty members in America’s colleges and universities had the option to join a conservative union with a national membership that advocated a return to pro-Western college instruction, an end to reverse discrimination, a restoration of academic merit as the sole criteria for admission and graduation, and the abolition of divisive courses of study that offer no useful skills? What if conservative faculty members who have been silent all these years had the power of a national union to protect them from the Left?

What if K-12 teachers across America had a national union to protect them when they objected to curricula designed to turn immigrant children against the people and traditions of their host culture? What if police and firefighters across America had a national union that advocated unequivocally for a merit-based system of immigration? What if civil engineers across America had a national union that was implacably opposed to the environmentalist extremism that has doubled the cost of infrastructure projects and quadrupled the time it takes to complete them?

Enforcing Janus will begin to undermine public sector union power, which is deployed almost exclusively in the service of the Left. Enforcing Uradnik may actually create a balance of power between public sector unions that lean Left vs Right, and that, in turn, would represent a seismic shift in the political landscape of America. At the least, it would neutralize the tremendous boost that public sector unions have given the political Left in America. At most, it might create a hitherto unthinkable consensus in America that public sector unions are indeed inherently political, and have far too much political influence, and must be subject to draconian restrictions including losing the right to collectively bargain, if not complete abolition.

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How Local Governments Can Reform Pensions IF the “California Rule” is Overturned

In December of 2018, the California Supreme Court will hear arguments in what is generally referred to as the Cal Fire pension case. The ruling could potentially overturn what is commonly referred to as the “California Rule.” The current interpretation of the rule is that pension benefits, once increased, cannot be reduced for existing employees even for future years of service without the agency providing a benefit of equal value to the employee.

What reforms would become possible if the Supreme Court rules that changes for future years of service are not protected by the California Rule?

To demonstrate how this ruling could be a game changer and open the door to pension reform for nearly every city and county in California, this article uses the potential savings for various reform options for the County of Sonoma.

It should be noted that any changes to the pension system if there is a favorable ruling by the court would need to be made by the governing body of each agency and if they refuse to act, could also be made by the taxpayers through the voter initiative process.

Current Situation in Sonoma County

The pension system for Sonoma County employees was founded in 1945 and up until 1993 was a sustainable and affordable system that paid career employees 2% per year of service. This would mean, for example, that after a 35 year career a retiree would collect a pension equal to 70% of their final base salary. Sonoma County employees are also eligible to receive Social Security benefits. Over the first 48 years until 1993, the pension system had accrued $355 million in total pension liabilities (money owed to retirees and earned to date by current employees).

But then, due to a series of illegal pension increases back to the date people were hired in 1998, 2003, 2004 and 2006, pensions for employees with only 30 years of employment jumped (including “spiking”) to 96% of their gross pay. After the first increase, the liability had doubled from the 1993 $355 million amount to $793 million in 1999. The liability doubled again in 9 years and hit $1.9 billion in 2009. Last year, in 2017 the pension liability reached $3.34 billion, a staggering 941% growth over 24 years.

The Growth of Sonoma County’s Pension Liability
$=Billions

To pay off the soaring liability, Sonoma County issued pension obligation bonds in 1994, 2003 and 2010 totaling $597 million dollars of principal. Paying off the bonds with interest will cost taxpayers $1.2 billion on top of their normal pension contributions. Currently, the County owes $650 million in principal and interest on the bonds that will cost them an average of $43 million per year until 2030.

In addition, the County’s contribution to the pension system (including debt service on the pension obligation bonds) has grown from $8 million in 1998 to $117 million in 2017. In other words, we have a serious math problem on our hands. While tax revenues have been growing at 3% per year, pension and healthcare costs have grown by 19%. Something has to give. In Sonoma County we have two choices, do nothing and pay higher taxes for fewer services, or, if possible (depending on the outcome of the Supreme Court case), reform our pension system to make it more equitable for taxpayers and more secure for employees and retirees.

So far, money has been taken from our roads and infrastructure maintenance budgets and the County has borrowed $597 million to pay for pensions. Soon, more and more money is going to come from cuts to fire and police protection, and services for those to in need. The retroactive pension increases not properly funded have essentially created a debt generation engine that sticks our children and grandchildren with enormous debt for services received in the past.

The Pension Increases May Have Been Illegal

In 2012 responding to a complaint I filed, the Sonoma County Civil Grand Jury could not find any evidence that the County followed the law when pensions were increased. The California Government Code in Section 7507 requires that the public be notified of the future annual cost of the increase. However, records show that all of the retroactive pension increases were enacted without determining the future annual costs and the public was never notified. This is a serious issue since public notification is the only protection taxpayers have. In addition, documents uncovered by New Sonoma indicate that the agreement was for the General employees to pay 100% of the past and future cost of the increase and Safety employees to pay 50% of the cost. This requirement was never enforced by the Sonoma County Retirement Association as it should have, so the vast majority of the costs for the benefit increases have been illegally borne by the County’s taxpayers.

These same increases were enacted at the state and local level from 1999 to 2008 for almost every public agency throughout the state. Cursory investigations of other cities conducted by the California Policy Center and Civil Grand Jury’s in Marin and Sutter county found similar violations at every agency investigated. A lawsuit is currently under appeal that would void illegal increases back to the date they were enacted which would in Sonoma County’s case save taxpayers $1.2 billion over the years ahead. But even if this case fails, other reform options may be available soon as a result of a favorable supreme court ruling. Here they are:

1. Cap the Employer Contribution

A lot of problems could be fixed at the governance level if employees felt the impact of growing unfunded liabilities. As long as the current situation of the employer/taxpayer covering 100% of the unfunded liability and debt service on the bonds exists, the problem will continue to grow and reforms will be minimal because all actuarial losses fall on the taxpayer.

Capping the employer contribution at 15% of salary (still 5 times what private sector employers contribute to retirement funds for their employees) would cut pension costs in Sonoma County from $117 million to $55.4 million, a savings to the county of $61.6 million per year. And as pension costs increase over the years ahead, the employees will pay all the costs associated with the growth.

2. Split All Pension Costs 50/50 Between the County and Employees

Currently the employer contribution is 19% of payroll. The current pension bond debt service, all paid for by the employer, is 11.3% of payroll. The current employee contribution is 11.6% of payroll. Therefore Sonoma County’s total pension costs in 2017 were 42% of payroll.

Capping employer contributions at 50% of pension costs or 21% of payroll would save the county $50 million per year, a cost that would be borne by employees in additional pension contributions.

3. Provide an Opt Out for Employees to a 401k Plan

Instead of forcing employees to contribute 21% of their take-home pay to their pension, a 401k option could be created.

Existing employees could be provided with the option of moving the present value of their future pension benefit into a 401k account and opting out of the defined benefit pension system. Going forward, the County could provide them with a 10% of base salary 401k contribution which the employee could match for a 20% contribution. Then, if the employee wanted to turn their account balance into a defined benefit for life, they could purchase an annuity upon retirement using their 401k funds.

Studies show young people entering the workforce prefer the portability of a 401k plan because they don’t see themselves in the same career their entire lives. Defined benefit pension funds also punish folks who leave the system early and highly reward those that stay because they are back loaded by design.

A lot of folks might also choose this option because they may be worried about the soundness of their pension plan, which in Sonoma County’s case, they should be.

4. Improve Pension Board Governance

Require a majority of non pension fund members on the Sonoma County Employee Retirement Association (SCERA) board or move the servicing of the fund, if possible to a private entity because of the conflicts of interest that exist when board members are also part of the pension system.

5. Establish Greater Transparency

Establish a COIN Ordinance to require the County Supervisors to hire an outside negotiator during contract negotiations and to provide the public with the cost impact of any changes to the citizens ahead of approval.

6. Mandate Public/Private Pay Equity

Require the County to perform a prevailing wage study and offer new County hires salaries that are similar to what Sonoma County residents earn in the private sector for work requiring comparable education and skills.

7. Return Spending Authority to Voters 

Require voter approval of any pension obligation bonds, and require voter approval of any increases to pension formulas or increases to salaries in excess of inflation.

6. Eliminate Conflicts of Interest

Do not allow elected officials to be members of the pension system due to the obvious conflict of interest.

7. Improve Public Oversight

Create a permanent Citizens Advisory Committee on Pensions that would provide an annual study of the pension system and track the success of pension reform efforts and provide recommendations to the Board of Supervisors. All reports prepared by the committee will be posted on the Committee’s webpage on the County’s website. The committee would have the power to perform accounting and regulatory compliance audits of the Sonoma County Retirement Association, investigate any evidence of illegal acts, and recommend appropriate remedies to the Board of Supervisors. A description of any violations and any committee recommendations will be posted on the Committee’s webpage on the County’s website.

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Ken 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. In 2012 after discovering the county illegally increased pensions without the required public notification of the cost he founded New Sonoma, and organization of financial experts and citizens to investigate the increase and inform the public. Information on New Sonoma and their findings and court case can be found at www.newsonoma.org.

California Burning – How the Greens Turned the Golden State Brown

In October 2016, in a coordinated act of terrorism that received fleeting attention from the press, environmentalist activists broke into remote flow stations and turned off the valves on pipelines carrying crude oil from Canada into the United States. Working simultaneously in Washington, Montana, Minnesota, and North Dakota, the eco-terrorists disrupted pipelines that together transport 2.8 million barrels of oil per day, approximately 15 percent of U.S. consumption. The pretext for this action was to protest the alleged “catastrophe” of global warming.

These are the foot soldiers of environmental extremism. These are the minions whose militancy receives nods and winks from opportunistic politicians and “green” investors who make climate alarmism the currency of their political and commercial success.

More recently, and far more tragic, are the latest round of California wildfires that have consumed nearly a quarter million acres, killed at least 87 people, and caused damages estimated in excess of $10 billion.

Opinions vary regarding how much of this disaster could have been avoided, but nobody disputes that more could have been done. Everyone agrees, for example, that overall, aggressive fire suppression has been a mistake. Most everyone agrees that good prevention measures include forest thinning (especially around power lines), selective logging, controlled burns, and power line upgrades. And everyone agrees that residents in fire prone areas need to create defensible space and fire-harden their homes.

Opinions also vary as to whether or not environmentalists stood in the way of these prevention measures. In a blistering critique published earlier this week on the California-focused Flash Report, investigative journalist Katy Grimes cataloged the negligence resulting from environmentalist overreach.

U.S. Representative Tom McClintock, whose Northern California district includes the Yosemite Valley and the Tahoe National Forest, told Grimes that the U.S. Forest Service 40 years ago departed from “well-established and time-tested forest management practices.”

“We replaced these sound management practices with what can only be described as a doctrine of benign neglect,” McClintock explained. “Ponderous, byzantine laws and regulations administered by a growing cadre of ideological zealots in our land management agencies promised to ‘save the environment.’ The advocates of this doctrine have dominated our law, our policies, our courts and our federal agencies ever since.”

All of this lends credence to Interior Secretary Ryan Zinke’s fresh allegations of forest mismanagement. But what really matters is what happens next.

Institutionalized Environmental Extremism

California’s 2018 wildfires have been unusually severe, but they were not historic firsts. This year’s unprecedented level of destruction and deaths are the result of home building in fire prone areas, and not because of wildfires of unprecedented scope. And while the four-year drought that ended in 2016 left a legacy of dead trees and brush, it was forest mismanagement that left those forests overly vulnerable to droughts in the first place.

Based on these facts, smart policy responses would be first to reform forest management regulations to expedite public and privately funded projects to reduce the severity of future wildfires, and second, to streamline the permit process to allow the quick reconstruction of new, fire-hardened homes.

But neither outcome is likely, and the reason should come as no surprise—we are asked to believe that it’s not observable failures in policy and leadership that caused all this destruction and death, it’s “man-made climate change.”

Governor Jerry Brown is a convenient boogeyman for climate realists, since his climate alarmism is as unrelenting as it is hyperbolic. But Brown is just one of the stars in an out-of-control environmental movement that is institutionalized in California’s legislature, courts, mass media, schools, and corporations.

Fighting climate change is the imperative, beyond debate, that justified the Golden State passing laws and regulations such as California Environmental Quality Actthe Global Warming Solutions Act of 2006the Sustainable Communities and Climate Protection Act of 2008, and numerous others at the state and local level. They make it nearly impossible to build affordable homes, develop energy, or construct reservoirs, aqueducts, desalination plants, nuclear power plants, pipelines, freeways, or any other essential infrastructure that requires so much as a scratch in the ground.

Expect tepid progress on new preventive measures, in a state so mired in regulations and litigation that for every dollar spent paying heavy equipment operators and loggers to do real work, twice that much or more will go to pay consultants, attorneys, and public bureaucrats. Expect “climate change” to be used as a pretext for more “smart growth,” which translates into “stack and pack,” whereby people will be herded out of rural areas through punishing financial disincentives and forced into densely populated urban areas, where they can join the scores of thousands of refugees that California is welcoming from all over the world.

Ruling Class Hypocrisy

Never forget, according to the conventional wisdom as prescribed by California’s elites, if you don’t like it, you are a climate change “denier,” a “xenophobe,” and a “racist.”

California’s elites enjoy their gated communities, while the migrants who cut their grass and clean their floors go home to subsidized accessory dwelling units in the backyards of the so-called middle class whose taxes pay for it all. They are hypocrites.

But it is these elites who are the real deniers.

They pretend that natural disasters are “man-made,” so they can drive up the cost of living and reap the profits when the companies they invest in sell fewer products and services for more money in a rationed, anti-competitive environment.

They pretend this is sustainable; that wind farms and solar batteries can supply adequate power to teeming masses crammed into power-sipping, “smart growth” high rises. But they’re tragically wrong.

Here the militant environmentalists offer a reality check. Cutting through their predictable, authoritarian, psychotically intolerant rants that incorporate every leftist shibboleth imaginable, the “Deep Green Resistance” website offers a remarkably lucid and fact-based debunking of “green technology and renewable energy.” Their solution, is to “create a life-centered resistance movement that will dismantle industrial civilization by any means necessary.”

These deep green militants want to “destroy industrial civilization.” At their core, they are misanthropic nihilists—but at least they’re honest. By contrast, California’s stylish elites are driving humanity in slow motion towards this same dire future, cloaked in denial, veiled coercion, and utopian fantasies.

This is the issue that underlies the California wildfires, what causes them and what to do about them. What is a “sustainable” civilization? One that embraces human settlements, has faith in human ingenuity, and aspires to make all humans prosperous enough to care about the environment, everywhere? Or one that demands Draconian limits on human settlement, with no expectation that innovation can provide solutions we can’t currently imagine, and condemns humans to police-state rationing of everything we produce and consume?

That is the stark choice that underlies the current consensus of California’s elites, backed up by dangerous and growing cadres of fanatical militants.

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Thanksgiving for California Taxpayers – An Uncertain Future

In this season of Thanksgiving, taxpayers in California have reason to pause when asked for what they are thankful. Considering the costly plans of the newly elected Legislature and governor, taxpayers may be most grateful for the fact that the state hasn’t yet built a wall encircling the state to keep them from leaving.

After 2017, when lawmakers enacted new taxes including a $5.2 billion annual tax hike on gasoline, diesel and vehicle registration, as well as a new tax on recorded documents, 2018 saw every effort by the Legislature to increase taxes defeated by advocates for taxpayers.

We are grateful that the first-ever tax on drinking water was defeated.

We are grateful that the tax on fireworks was defeated, and that the effort to revive the “snack tax” was not successful.

We are grateful that the proposal to put a sales tax on services was shelved.

We are grateful that nearly a million voters signed petitions to repeal the gas and car tax. Of course, the bad news is that the gas tax repeal was given a new title by Attorney General Xavier Becerra that removed the words “gas tax repeal” from the ballot, deceiving voters.

Further disappointments for taxpayers in November’s election results include progressives winning supermajorities in both the Assembly and the state Senate. California’s one-party government can now pass tax increases without the need of even a single vote from the opposition party. This surely increases the probability that taxpayers will be steamrolled by all the tax increases that were defeated in 2018 being resurrected in 2019.

An even bigger threat may appear in the form of proposed constitutional amendments emanating from the Legislature.

Supermajorities in both houses allow the party in power to place these on the ballot, again without the need of a single Republican vote. Once on the ballot, the measures need only a simple majority to pass.

While Proposition 13 remains very popular, taxpayers advocates could be stretched to the limit if confronted with multiple anti-taxpayer constitutional amendment proposals. In the last decade, these have been stopped before clearing both houses of the Legislature. But now, the following proposals are likely to make an unwelcome encore in the Capitol: Lowering the vote threshold at the local level for passing bonds and parcel taxes from two-thirds, as required by Prop. 13, to 55 percent or even less; imposing higher property taxes on businesses; bringing back the estate and gift tax; restricting the ability of homeowners to transfer their Proposition 13 base-year value to a new residence; and weakening Proposition 218, the Right to Vote on Taxes Act, which limits the extent to which local governments can impose various fees, charges and assessments on property.

Given the list of costly promises made during the election campaign, on top of the massive unfunded pension liability that already burdened the state, higher taxes are a near certainty in the next two years. Californians currently pay some of the highest state and local taxes in the nation, but it isn’t nearly enough to keep up with the spending of the politicians who have been elected to run the government.

Still, California taxpayers can be grateful this Thanksgiving that they still have the power of the initiative and the recall. If they can keep it.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

Can Public Sector Union Power Ever Be Stopped?

Imagine you’re hoping to support a candidate for local office who will enact reforms that will improve your city, maybe even save it. Someone who will fight tirelessly to eliminate work rules that force agencies to hire more people than are actually necessary. Someone who will insist that incompetent public employees are fired. Someone who will finally do something about compensation and benefit packages that are threatening to bankrupt the city.

What do you say to them, when their response to your suggested reforms is this: “That’s all great, and I’d like to do it all, but who’s going to give me the million dollars for my campaign that I’m not going to get from the public employee unions if I actually try to do any of it?”

That is the sort of conversation that takes place, or would take place if anyone bothered to ask, multiplied by thousands, every election cycle in California.

Public employee unions run California. They exercise nearly absolute power in the state legislature, and in nearly every city, county, school district and special district. Can public sector union power ever be stopped?

Earlier this year, a California Public Policy Center analysis estimated that for 2016, total membership in California’s public sector unions was 1.15 million, and total revenue was $812 million. This equates to a stupefying $1.6 billion that these unions collect and spend every election cycle.

 

California’s Public Sector Unions (including local affiliates)
Estimated Total Membership and Revenues

While the figure of $1.6 billion per election cycle is a credible estimate, attempts to come up with precise information on California’s public sector union dues is nearly impossible. In California there are many hundreds, if not thousands, of individual local public sector union affiliates. All of them file separate 990 forms, often including financial transfers between entities that have to be offset in any thorough analysis.

Determining how much of California’s public sector union revenue is spent on politics is also a nearly impossible task, despite several online “transparency” portals, including OpenSecrets, FollowTheMoney, VoteSmart, and the California Secretary of State’s Campaign Finance “Power Search.” These portals are primarily focused on national races, and in some cases, statewide races, but none of them descend to the thousands of California’s local races, where hundreds of millions of dollars are spent every election.

Moreover, the portals can only display the information they’re given. California’s government unions, like most sophisticated political players, mask their total spending through multiple committees and transfers.

An excellent analysis of how much of teachers union dues end up being spent on political campaigns was written in 2015 by RiShawn Biddle, editor and publisher of Dropout Nation – a leading commentary website on education reform. He writes: “The pro bono consultants who went through the unions’ published national, state, and local tax returns estimated based on their research, interviews, and sampling that roughly one third of the unions’ efforts went toward political advocacy.”

One-third. In California, that is equal to approximately $540 million per election cycle. That is, California’s public sector unions likely spend over a half-billion per election cycle. And this spending does not include other “non-political” spending. For example, not reportable as political spending can include massive public education campaigns that are designed to influence voters but aren’t engaging in explicit advocacy.

Also not considered political spending, but having immense political impact, is litigation. There are countless examples of how government union power is exercised in California’s courts. Pension reforms in San Jose and San Diego, approved by voters, were eviscerated through relentless court challenges. Statewide pension reform pushed by Gov. Brown and partially realized in the PEPRA legislation of 2012 was undermined, and continues to be undermined, beneath an ongoing avalanche of lawsuits. Charter schools are the targets of continuous litigation designed to wear them out. You can do this, when you have hundreds of millions of dollars pouring in every quarter, year after year.

California’s political landscape over the past 20-30 years has been defined by public sector unions. While the recent Janus v AFSCME decision by the U.S. Supreme Court has taken away the ability of government unions to compel payment of fees, the unions are resorting to clever contractual gyrations to make it extremely difficult in practice for anyone to stop paying. That too, will have to sort itself out in court, where union money guarantees tenacious defense and endless appeals.

Even if public employees can easily withdraw from paying government unions, in many cases, why would they? These unions have made California’s public employees some of the highest paid public servants on earth. A California Policy Center study in 2017 concluded “The composite average total compensation (pay and benefits) for a full-time city, county or state worker in California during 2015 was $121,843; for the average full-time private sector worker in California, including benefits, it was 62,475, which is 51% of what the public sector worker earned.” As a result, it is no coincidence that California’s state and local governments confront over $1.0 trillion in debt and unfunded pension liabilities.

The political and financial power of public sector unions has transformed California politics. Their influence is felt everywhere; education, environmental policy, the business climate, important cultural issues. In every area, their primary agenda is to grow their membership and influence. The effect of this agenda is pernicious. If schools fail, spend more public money on schools. If crime increases, hire more police and build more prisons. Wherever society fails, grow unionized government.

Perhaps the next major U.S. Supreme Court case concerning government unions will abolish them due to this inherent conflict between their agenda and the public interest. Perhaps someday they will be outlawed entirely. That would be a happy, happy Thanksgiving indeed.

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