At last week’s budget press conference, Governor Jerry Brown warned of the threat of a recession and the risk to California’s budget from federal health care legislation, but the details of his 2017-18 budget plans failed to mirror his cautionary rhetoric.
The Brown administration decided to (kind of, sort of) tackle the state’s massive and growing level of unfunded liabilities – i.e., the hundreds of billions of dollars in taxpayer-backed debt to fund retirement promises made to the state’s government employees. It’s best to curb our enthusiasm, however. The governor didn’t have much of a choice.
For the last few years, using data provided by the watchdog organization CalTax, we have summarized the results of local bond and tax proposals appearing on the California ballot. Nearly all of them are approved by voters, and this past November was no exception.
With only a couple of measures still too close to call, as can be seen, 94 percent of the 193 proposed local bonds passed, and 71 percent of the proposed local taxes passed. Two years ago, 81 percent of the local bond proposals passed, and 68 percent of the local tax proposals passed. No encouraging trend there.
California’s Local Tax and Bond Proposals – Voting Results, November 2016
A simple extrapolation will provide the following estimate: Californians just increased their local tax burden by roughly $4 billion, in the form of $1.9 billion more in annual interest payments on new bond debt, and $2.1 billion more in annual interest on new local taxes. But that’s not even half the story.
California’s voters also supported state ballot initiatives to issue new bond debt and impose new taxes. Prop. 51 was approved, authorizing the issuance of $9 billion in new bonds for school construction. Prop. 55 extended until 2030 the “temporary” tax increase on personal incomes over $250,000 per year, and Prop. 56 increased the cigarette tax by $2 per pack. The cost to taxpayers to service the annual payments on $9 billion in new bond debt? Another $585 million per year. Even leaving “rich people” and smokers out of the equation, California voters saddled themselves with nearly $5 billion in new annual taxes.
But as they say on the late-night infomercials, there’s more, much more, because California’s state legislators don’t have to ask us anymore if they want to raise taxes. November 2016 will be remembered as the election when a precarious 1/3 minority held by GOP lawmakers was broken. California’s democratic lawmakers, nearly all of them controlled by public sector unions, now hold a two-thirds majority in both the state Assembly and the state Senate. This means they can raise taxes without asking for consent from the voters. If necessary, they can even override a gubernatorial veto.
And they will. Here’s why:
There are three unsustainable policies that are considered sacrosanct by California’s state lawmakers and the government unions who benefit from them. (1) They are proud to have California serve as a magnet for undocumented immigrants and welfare recipients. (2) They are determined to continue to overcompensate state and local government workers, especially with pensions that pay several times what private workers can expect from Social Security. (3) They have adopted an uncritical and extreme approach to resolving environmental challenges that has created artificial scarcity of land, energy and water, an asset bubble, and a neglected infrastructure that lacks the resiliency to withstand large scale natural disasters or civil emergencies.
All three of these policies are extremely expensive. “Urban geographer” Joel Kotkin, writing in the Orange County Register shortly after the Nov. 8 election, had this to say about these financially unsustainable policies:
“This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”
Despite the increase in consumer confidence since the surprising victory of Donald Trump in the U.S. presidential election, the stock and asset bubble that has been engineered through thirty years of expanding credit and lowering rates of interest is going to pop. The following graphic, using data from Bloomberg, explains just how differently our economy is structured today compared to 1980 when this credit expansion began.
Stock P/E Ratios and Interest Rates – 1980 vs 2016
As can be easily seen from their price/earnings ratios today, publicly traded stocks are grossly overvalued. Equally obvious is that interest rates have fallen as low as they can go. For more discussion on how this is going to affect the economy, refer to recent California Policy Center studies “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” and “The Coming Public Pension Apocalypse, and What to Do About It.” Despite healthy new national optimism since Nov. 8th, the economic fundamentals have not changed.
California’s democratic supermajority legislators, and the government unions who control them, are going to have a lot of explaining to do when the bubble bursts. For decades they have successfully fed their unsustainable world view to the media and academia and the entertainment industry. For over a generation they have brainwashed California’s K-12 and college students into militantly endorsing their unsustainable world view. This year they conned California’s taxpayers into approving another $5 billion in new annual taxes. But the entire edifice exists on borrowed time.
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Ed Ring is the vice president of research policy at the California Policy Center.
Los Angeles County boasts the world’s largest professional lifeguard association. But most of the association’s 850 guards work seasonally. The incomes of the 150 year-round lifeguards can seem surprisingly rich to anyone raised on the hit 1990s TV show, Baywatch – or anyone who worked as a summer lifeguard at the local pool.
Getting the exact number of Los Angeles County lifeguards was a bit of a challenge. We called up the Los Angeles County Fire Department. They transferred us to the Lifeguard Division in Manhattan Beach. That’s where we learned there are about 850 lifeguards but just 150 full-time lifeguards. The state controller’s website shows about 750 seasonal workers and about 120 full-timers. Transparent California shows over a thousand total lifeguards in 2015.
Here’s the list of the 10 highest paid lifeguards in LA County, which includes total pay and benefits. This list was pulled from the State Controller’s Office and Transparent California:
|Name||Job Title||Total Pay and Benefits|
|Fernando Boiteuz||Assistant Chief||$287,064.96|
|Terry Yamamoto||Section Chief||$265,972.43|
|Erik Albertson||Section Chief||$223,103.25|
There are 93 “Lifeguard Specialists” who earn an average total compensation of $148,000. At least 86 lifeguards earn salaries in excess of $100,000. Add in other benefits, and 128 lifeguards earn total compensation above $100,000. While we don’t know the details about lump pay and “other pay”, some individuals make excessive amounts in those categories. You can see each lifeguard’s pay here.
The cost between the full-time and seasonal lifeguards is massive. The average total wages for a full-time lifeguard is $115,995, while a seasonal lifeguard is $14,092. The average full-time lifeguard has a benefit package of $47,281. A seasonal lifeguard has a benefits package of $2,046.
Though there is not much accumulated overtime in the group, one captain earned base pay of $114,204 – and clocked $125,864 in overtime.
Dropout Nation recently reported on the American Federation of Teachers’ 2015-2016 financial disclosure to the U.S. Department of Labor. As you would expect, the nation’s second-largest teachers’ union spent big on influencing Democratic presidential nominee Hillary Clinton and her apparatchiks, as well as pouring heavily into what should be like-minded advocacy and nonprofit groups.
But AFT’s big spending doesn’t just end with political campaigns and co-opting minority as well as hardcore progressive groups. The union even spends big on its own staff and operations.
Start with AFT President Rhonda (Randi) Weingarten, whose paychecks put her in the top five percent of the nation’s income earners even as she engages in class warfare rhetoric. The union paid Weingarten $497,311 in 2015-2016, just a couple hundred dollars more than she pulled down in the previous year.
Also well-paid by the union is Loretta Johnson, who serves as its secretary-treasurer; her $358,225 in 2015-2016 was a grand or so higher than in the previous year. Meanwhile Mary Catherine Ricker, the former Saint Paul Federation of Teachers boss who now serves as the union’s number two (and in the process, serving as an obstacle to United Federation of Teachers boss Michael Mulgrew’s ambitions to succeed Weingarten as head of the national union), was paid $311,311, a 5.4 percent increase over her pay in 2014-2015.
Altogether, the AFT’s top three leaders collected $1.2 million last fiscal year, a slight increase over the $1.1 million paid to them by the union in 2014-2015.
Also making bank are AFT’s staffers, though there are slightly fewer of them this time around. Two hundred twenty-two staffers earned more than $100,000 in 2015-2016, seven fewer than the 229 in the previous year. Three out of every five staffers at AFT national headquarters earn six-figure sums. Among the union’s high-paid mandarins: Michelle Ringuette, the former Service Employees International Union staffer who is now Weingarten’s top assistant, made $230,736, while Michael Powell, who serves as Weingarten’s mouthpiece, earned $240,647. Kristor Cowan, the AFT’s chief lobbyist, earned $186,293, while Kombiz Lavasany, another operative who oversees Weingarten’s money manager enemies’ list, earned $184,158.
Supporting these high salaries is an ever-declining rank-and-file base. AFT counts 675,902 full-time rank-and-filers on its roster in 2015-2016, a 3.4 percent decline over the 699,739 members on the roster in the previous fiscal year. [Dropout Nation does not call them members because in nearly every case, AFT and its affiliates use state laws to force teachers to join.] This marks the third straight year of declines and the fifth year of decline within the past six.
The union also experienced a 1.5 percent decrease in the number of half-time rank-and-filers (or school employees making less than $18,000 a year); a seven percent decline in one-quarter rank-and-filers (nurses and state government employees whose unions are affiliated with AFT); and a 2.7 percent decline in the number of one-eighth rank-and-filers. Seems like the union’s once-successful effort to strike affiliation deals with nursing and other government employee unions, an effort that put it in competition with the much-larger Service Employees International Union, has fallen to seed.
Even worse for AFT: Its effort to increase the number of so-called associate members who pay directly into national’s coffers, continues to be in free-fall. AFT counts just 49,984 such members on its rolls in 2015-2016, a 14.5 percent decline over the previous year. This shouldn’t be shocking. After all, AFT cannot provide associate members any real assistance in terms of negotiating teachers’ contracts or addressing work rules. Besides, the associate members can’t even vote in union elections.
As a result of these declines, AFT’s counts just 1.5 million rank-and-filers and voluntary members, a 4.3 percent decrease over the previous year.
The good news for AFT is that the death of U.S. Supreme Court Associate Justice Antonin Scalia earlier this year assured that there was a tie vote on Friedrichs vs. California Teachers Association; his vote would have likely led to the overturn of Abood v. Detroit Board of Education, the five-decade-old ruling that gives AFT the ability to compel teachers pay dues regardless of their desire for membership. As your editor noted two years ago, the end of compulsory dues laws could cost AFT 25 percent of its membership and $36 million in revenue (based on 2012-2013 numbers), a hit for which the union isn’t likely ready to address.
The other good news for AFT is that it hasn’t affected revenue. The $192 million in dues and other agency fees (in the form of a so-called per-capita tax collected from locals and affiliates) generated by the union in 2015-2016 is 21 percent higher than in the previous fiscal year. AFT’s overall revenue of $328 million (including loan proceeds) is unchanged from 2014-2015.
This time around, the union didn’t have to borrow as heavily as it has in previous years to keep operations afloat; it borrowed just $55 million in 2015-2016, half the level of borrowing in the previous year. Overall, the union has borrowed $477 million over the past five years. The union did sell more of its investments in order to make due; the union sold $29 million of its portfolio in 2015-2016, more than double the investment sales in the previous year. Without the loans and investment sales, AFT’s revenues were just $244 million, a 15 percent increase over levels in 2014-2015.
But the bad news is that AFT may still lose revenue. One reason: The abolishing of collective bargaining and forced dues collections in Wisconsin, Tennessee, and Michigan. This has resulted in AFT losing teachers who realize that they don’t have to pay into unions that don’t represent their interests.
Another problem for the union: More of its affiliates and locals are either merging with those of the National Education Association or striking affiliation agreements with it. Membership declines forcing such mergers is one reason. But as seen in California, where the AFT’s United Teachers Los Angeles has struck a joint affiliation deal with NEA, the AFT’s larger locals are realizing that such triangulation gives them stronger influence over education policy at state and local levels.
But the gains for the big locals (who honestly don’t need AFT affiliation anyway) means both lost revenue for AFT as well as the ability to keep locals from straying away from the party line. [There’s also that pesky matter of being forced into a merger with NEA, a matter long-discussed among hard-core traditionalists.] Given the rancor from AFT rank-and-filers over strong-arm moves by national to remove wayward leaders in locals such as Detroit, expect more large locals to strike joint affiliation agreements or even break away from the national union in the near-future.
The consequences of efforts to abolish collective bargaining and joint affiliations by locals don’t just hurt AFT’s ability to use money to preserve influence. It also harms its ability to pay for the high costs of employing so many six-figure staffers.
While benefit costs have barely budged (remaining at $17 million), AFT’s general overhead costs increased by 4.8 percent within the past year. The good news for AFT is that it was able to offset some of those expenses with a 10.8 percent decrease in so-called union administration expenses. Meanwhile AFT’s post-retirement obligations increased by six percent (to $38 million) in the past year.
Luckily for the AFT, its staffers and leaders pay into defined–contribution retirement plans used by the rest of the private and nonprofit sectors. A funny thing given its opposition to efforts by school reformers and others to move away from the virtually-insolvent defined-benefit pensions championed by Weingarten and the union. Hypocrisy is like that sometimes.
About the Author: RiShawn Biddle is Editor and Publisher of Dropout Nation — the leading commentary Web site on education reform — a columnist for Rare and The American Spectator, award-winning editorialist, speechwriter, communications consultant and education policy advisor. More importantly, he is a tireless advocate for improving the quality of K-12 education for every child. The co-author of A Byte at the Apple: Rethinking Education Data for the Post-NCLB Era, Biddle combines journalism, research and advocacy to bring insight on the nation’s education crisis and rally families and others to reform American public education. This article originally appeared in Dropout Nation and is republished here with permission from the author.
“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title.” – California State Senator Kevin De Leon, August 7, 2016, Sacramento Bee
This quote from Senator De Leon, one of the main proponents of California’s new “Secure Choice” retirement program for private sector workers, says it all. Because De Leon’s comment reveals the breathtaking hypocrisy and stupefying innumeracy of California’s legislature.
Let’s start with hypocrisy.
De Leon is careful to protect private sector taxpayers from having to bail out their new state administered “secure choice” retirement plan, but no such safeguard has ever been seriously contemplated for the state administered pension plans for state and local government workers. These plans, using official numbers, are underfunded by about $250 billion. If you don’t assume California’s 92 state and local government worker pension systems can earn 7.5% per year, they are underfunded by much more – at least a half trillion.
Underfunded government worker pensions are the real reason why Prop. 55 is offered to voters to extend the “temporary” “millionaires tax” till 2030. That will raise about $6 billion per year. Underfunded local government worker pensions are also the reason for 224 local tax increases proposed on this November’s ballot, which if passed will collect another $3.0 billion per year. And it isn’t nearly enough.
The following table, excerpted from a recent California Policy Center study, shows how much California’s state and local government pensions systems have to collect per year based on various rates of return. At the time of the study, the most recent consolidated data available was for 2014. As can be seen – at a rate of return of 7.5% per year, state and local agencies have to put $38.1 billion into the pension funds. And at a rate of return of 6.5% per year, which CalPERS has already announced as their new “risk free” target rate, they have to turn over $52.3 billion per year. How much was actually paid in 2014? Only $30.1 billion.
To summarize, in 2014 the pension funds collected $8.0 billion less than they needed if they think they can earn 7.5% per year. But following CalPERS lead, they’re lowering their projected rate of earnings to 6.5%, which means they were $22.2 billion short. There are 12.8 million households in California. That equates to at least $1,734 in additional taxes per household per year just to keep state and local pensions solvent.
And it gets worse. Because in order to ensure this new “Secure Choice” program doesn’t get into the same financial predicament that California’s government pension systems confront, the “risk free” rate of return they intend to project is not 7.5%, or 6.5%, or even 5.5%. No, they intend to initially invest the funds in Treasury Bills, which currently pay at most 2.5%. In an analysis of Secure Choice’s proposed costs and benefits performed last April, we express what using a truly “risk free” rate of return portends for California’s private sector workers vs. public sector workers. These estimates are based on all participants, public and private, contributing 10% to the fund via withholding.
Public sector: Teachers/Bureaucrats, 30 years work – pension is 75% of final salary.
Public sector: Public Safety, 30 years work – pension is 90% of final salary.
Private sector: “Secure Choice,” 30 years work – pension is 27.6% of final salary.
There are two reasons for this gigantic disparity. First, public pension funds collect far more than 10% of salary. While the employee rarely pays more than 10% via withholding, the employer – that’s YOU, the taxpayer – typically kicks in another 20% to 40% or more, that is, a two-to-one up to a four-to-one employer matching contribution. Second, to justify the optimistic projections that make such generous pensions appear feasible, public pension funds have assumed a “risk free” rate of return of 7.5% per year.
Which brings us to innumeracy.
During the fiscal year ended 6/30/2015, CalPERS earned a whopping 2.4%. That stellar performance was followed in fiscal year ended 6/30/2016 by a return of 0.6%. It doesn’t take a Ph.D economist to know that California’s pension funds are going to need to greatly increase their annual collections. It only takes horse sense. But even horse sense eludes California’s innumerate lawmakers.
So here’s a modest proposal. Why not freeze the employer contributions into California’s state and local employee pension funds at 20% of salary (that’s a two-to-one match on a 10% contribution via withholding), and then, constrained by those fixed percentages, lower all benefits, for all participants, on a pro-rata basis to restore solvency. Better yet, why not enroll every state and local government employee in the Secure Choice program? Either way, “the state shall not have any liability for the payment of the retirement savings benefit earned by program participants.”
Along with this modest step towards dismantling the excessive privileges of these unionized Nomenklatura who masquerade as California’s public “servants,” why not enroll all state and local government employees in Social Security? Because California’s public servants make far more, on average, than private sector workers, and because Social Security benefits are calibrated to pay relatively less to high income participants, this step will financially stabilize the program.
Senator De Leon, are you listening? When it comes to state administered programs, all of California’s workers, public and private, should get the same deal.
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Ed Ring is the president of the California Policy Center.
Vernon, California is so famous for its history of corruption that it was the municipal star of season two of HBO’s “True Detective” series. Now the tiny L.A. County city can claim another achievement: Vernon is the only California city with more public employees than residents.
Vernon’s 210 residents are served by 271 city employees, according to data on the California state controller’s website.
No. 2 Irwindale is a distant second – though just a 30-minute drive (could be hours – depends on traffic in L.A.’s tortuous downtown) from Vernon. In that East Los Angeles County city, there’s one government employee for every one of Irwindale’s 1,415 residents. San Francisco is the only major city on the Top 10, with one government employee for every 22.7 residents.
Here’s the Top 10:
Public employees in Vernon earn an average of $107,848 (plus benefits of $37,571). That’s much higher than nearby hegemon, Los Angeles, where public employees average $83,356 (plus benefits of $12,620).
Several top Vernon officials earn salaries in excess of $300,000:
Mark Whitworth (City Administrator): $402,335
Daniel Calleros (Police Chief): $361,644
Michael Wilson (Fire Chief): $361,359
Carlos Fandino Jr. (Director of Gas and Electric): $324,354
Andrew Guth (Fire Battalion Chief): $304,243
While many of Vernon’s city employees continue earn six-figure salaries, the average city resident earns far less. Per capita income in 2010 was $19,973. Median household income in 2010 was $38,500 – down dramatically from 2000, when it was over $60,000. According to the 2010 U.S. Census, 5% of the population lived below the federal poverty line. In 2000, it was 0%.
How does the city fund that dramatic gap in income? By taxing utilities for industry in the city. But because Vernon’s utility rates are among the highest in California, many businesses are moving out. That’s going to put pressure on city officials to trim public services – or to capitulate to the logic of history and become part of a neighboring city. How about Bell?
Conor McGarry is a fall Journalism Fellow at California Policy Center. Andrew Heritage contributed data analysis. Source: California state Controller’s Office.
It’s been 19 months since the U.S. Department of Justice released its scathing report on the Ferguson Police Department. Chief among the DOJ’s findings: Ferguson’s law enforcement practices were “shaped by the city’s focus on revenue rather than public safety needs.” Nearly every policing activity – including tickets, misdemeanor fines and court fees – was seen as an income opportunity.
That model led to tension between police and citizens, disrupting families and the community. When a white police officer shot and killed Michael Brown, a black 18-year-old, on August 9, 2014, a city balancing on a knife’s edge toppled quickly into chaos.
Now what might be called Ferguson’s worst practices have been brought to Huntington Beach.
Last month, as the Orange County Register reported, the City Council approved a plan to hire a city prosecutor to handle misdemeanors.
“A significant number of misdemeanors go unprosecuted,” City Attorney Michael Gates told the Register, adding that the prosecutor will “add a lot of teeth to our laws.”
“There will be a whole class of crimes that will now be prosecuted where the DA may not have gotten to them,” Gates said. “We will prosecute every one of them until conviction.”
This comes on the heels of a proposal pushed through the council last year to substantially raise city fees and fines. Confronting a rising price tag for compensation for police and firefighters, then councilman, now mayor, Jim Katapodis put forward the plan as a means to cover the cost, and additional police officers.
Parking in front of a handicapped ramp will now cost you $356, an incredible jump from its former cost of $55. A glass container on the beach? Skateboarding? They’ll cost you $175 each, up from $125. There are others.
It’s not entirely surprising that Katapodis’ main public policy objective has been to increase the number of law enforcement officers to pre-recession numbers. He has spent his professional career in and around law enforcement. Police and fire unions have been staunch supporters, first backing Katapodis in 2010, when he ran for City Council while still an LAPD sergeant. According to Katapodis, adding more sworn officers is essential to ensure a safe city and should come at whatever cost necessary.
But over the last few years violent crime has been falling. And suspending basic accounting – adding more officers at higher pay – has driven Huntington Beach’s finances into the red.
City Council member Erik Peterson, who voted against the fee increases, said he didn’t understand how the city can start paying salaries without knowing how much they’ll receive from the increased fees.
In fact, H.B. owes $300 million on pensions for its retired city workers. That number was high enough to warrant a 2013 Moody’s investigative review. That review didn’t lead to a downgrade, but it’s a red flag.
In H.B., the Police Department is being expanded literally at the expense of the public, setting police against residents in a struggle not for public safety but for revenue. Critics say the mayor and City Council majority don’t even know how much revenue that parasitic system will generate. It’s equally clear they haven’t considered its costs. It cost Ferguson almost everything.
Matt Smith is a graduate student at Princeton Seminary, and a Journalism Fellow at the California Policy Center in Tustin.
I have studied U.S. and California politics in particular since the mid-1990s, and believe the case for limited government is stronger now, than at any other time in history.
A series of emerging trends have coalesced to produce a political environment that makes it very unwise to try to enact sweeping policy change in today’s political environment (with the exception of an outright repeal of failed government programs).
A major treatise could be written on the subject, but here are some of the key considerations that led me to this conclusion.
First, there has been a noticeable decline in the quality of our elected leaders. To put it bluntly, many politicians are just in it for themselves and purport to pursue the public’s interest only as a means to their own ends.
The ramifications of this trend are huge and have served to give public interests more power over the political process and make it impossible in many cases to enact legislation that is within the public’s interest.
Second, the country’s political economy has gotten increasingly complex which makes it more difficult than ever to craft responsible public policy that is capable of addressing a policy problem not only today, but over a significant time period.
Third, the increasing polarization in the electorate, and reflected in U.S. governing bodies, make it extremely difficult, and more commonly impossible, to substantially revise a public policy once it has been approved.
Many examples could be provided to prove the validity of these assertions, but let’s look at a few case studies.
At the federal level, there is no better recent example than Obamacare. The policy was sold as being the best of all worlds expanding coverage, reducing costs, and improving the business climate in the process.
The only thing Obamacare has done well is expand coverage, but this has come at a great cost in the form of double digit annual cost increases on individuals, business, and government itself.
Without question, the program needs some major fixes to restore at least short-term viability and there are no signs that the political consensus needed to bring such change could be achieved. The result is a government program that is completely unsustainable, but has nonetheless provided health coverage to tens of millions more Americans which makes it impossible for anyone to advocate an outright repeal without a replacement.
Obamacare is looking like another example of a major government program that was enacted with very good intentions, but cannot be made sustainable over the long-run due to the huge complexity of the issue and the inability of the U.S. Congress to come anywhere close to the consensus needed to reform it. Two other examples: Social Security and Medicare, both unsustainable, yet almost politically untouchable.
At the state level, the pension crisis is an excellent example which holds ramifications for the long-term health of state government that equal or exceed Obamacare, Social Security, and Medicare combined.
In California, the level of retirement benefits provided to public employees is unaffordable to most public agencies in California, and is not currently being covered through contributions raised from public employers, and to a far less extent public employees.
The result is a massive run up is debt for nearly all state and local public agencies in California. In 2013, the total debt for unfunded pension liabilities was estimated at $950 billion, according to Stanford University. But more recent calculations for 2016, peg the debt at $1.5 trillion 50% higher due to major investment losses and soaring benefit costs.
Public pension debt alone in California is currently estimated to equal $77,000 per household in 2013, according to Stanford University’s pension tracker.
Despite the magnitude of the current pension crisis, there are only a handful of California Legislators who will even publicly admit that the pension crisis is a major issue in California. This is due to the fact that the state’s public employee unions control the California Democratic Party, and the Democrats run the California State Legislature.
The state’s pension crisis has the potential to bankrupt the State of California and nearly all of its public agencies, but there is not the faintest sign of a political consensus that will even admit that there is a major problem here, let alone consider a solution.
Furthermore, absent changes to the state’s pension system it makes no sense to further increase state and local tax revenues (i.e. tax and fee increases) since these increased revenues will simply go to fund overly generous and unsustainable public employee benefit costs which are increasing at 10-25% per year on average.
Private conversations with Republican legislators, who are the minority, indicate that they understand the issue and the need for reform but there is nothing to be gained by them going out on the issue short of a critical mass for reform.
Democrat legislators, on the other hand, support the status quo because the public employee unions bankroll their campaigns and the Democratic Party, and most if not all have already signed pledges to the state’s public employee unions to only increase public employee compensation, regardless of the consequences for the state.
The state’s unsustainable public pension system is another example of a large government program gone bad, but nothing can be done to fix it given the circumstances of the state’s current political environment.
One last case study regarding the need for limited government is the state’s regulatory climate, which has an obvious parallel at the federal level but I will confine my discussion to the State of California.
The State of California’s regulatory climate is credited with being a key factor, along with high taxes, for encouraging more than 10,000 businesses to relocate out of state in recent years.
In a recent Inside Source interview with Stanford University Economics Professor Roger G. Noll, Noll states that California’s regulatory policies and practices are deeply flawed, but not necessarily enough to “drag Silicon Valley to Texas.”
Noll said most California legislators lack the capacity and inclination to craft responsible regulatory policy and that most regulation considered by the California Legislature is deeply flawed.
“We have pretty much a bankrupt system, it is rare to have a bill that is well crafted,” Noll stated.
Yet this does not stop the Democrat Legislature from developing bill after bill that seeks to regulate the California economy in almost every way imaginable. The sad truth is that the vast majority of this legislation is deeply flawed and will do more harm to the state’s business climate while providing little if any public benefit other than a political sound byte.
Moreover, most Democrats develop and pass regulatory legislation as a means to advance their careers and the policy agendas of their supporters, as opposed to advancing the public interest.
Thus, we have a Democrat majority whose primarily occupation is advancing their own agenda, as opposed to the public’s interest, without regard for the long-term consequences for the state’s business climate and economy.
If the Legislature cannot craft legislation in such as way that is beneficial and cost-effective it should just leave the issue alone, which brings us full circle to the need for limited government.
The increased complexity of the economy has dramatically increased the number of issues that can be regulated as well as the potential for harmful effects from poorly crafted legislation, which has become the rule in California, not the exception.
In other words, the best thing the California Legislature can do on most regulatory issues is do nothing. But political motivations necessitate the opposite due to a decline in the quality of our public leaders, primarily if not exclusively California Democrat politicians.
Then California Treasurer Bill Lockyer (D) saw this trend in 2010, noting that most of the legislation considered and passed in the California State Assembly is “junk” but lawmakers “move it along” to keep the special interests happy.
Lockyer also chastised the Democrat Legislature for its inability to address the state’s pension crisis because of who elected them (i.e. public employee unions) stating that it will “bankrupt the state” if nothing is done.
In short, government has reached a point in California, as well as at the federal level, where politicians cannot address the most important issues (i.e. failing government programs) due to political realities, but commonly do the wrong things in the areas where they can act.
The only solution is limited government. First, we must prevent more government programs from going on the books that will inevitably become unsustainable or unworkable, but impossible to fix. And second, we must limit politicians from advancing their own private agendas through legislation that actually does more harm than good.
About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.
The Legislature is in adjournment, and with lawmakers at home campaigning for reelection, they are unable to engage in their favorite pastime of undermining Proposition 13 and its protections for California taxpayers.
However, this time out is only a brief respite from the Sacramento politicians’ inexorable pursuit of taxpayers’ wallets, the ferocity of which matches the dedication and intensity of a bear going after honey.
This December, after the election, lawmakers will reconvene to kick off the next two-year legislative session. During the just completed session, with great effort, taxpayer advocates were able to blunt a number of major efforts to modify or undermine Proposition 13, and, as surely as Angelina and Brad will be appearing on the covers of the supermarket tabloids, these attacks on taxpayers will begin anew when the Legislature is back in session.
Bills will be introduced to make it easier to raise taxes on property owners as well as to cut the Proposition 13 protections for commercial property, including small businesses. There may even be an effort to place a surcharge on all categories of property, an idea that was put forward by authors of an initiative that nearly collected enough signatures for placement on this year’s November ballot.
Accompanying the legislative fusillade will come the usual arguments that local government, or schools, or infrastructure, or the homeless, or the elderly, or (fill in the blank with the program or cause of your choice), or all of the preceding, need more money.
Government at all levels has become a militant special interest and its Prime Directive is to increase revenue – to take in more taxpayer dollars that is – and more is never enough.
The dirty little secret behind why government has changed from a service entity, dedicated to meeting the needs of its constituents, to a rapacious overlord, is that since being granted virtually unfettered collective bargaining rights in 1977, California’s state and local government workers have become the highest compensated public employees in all 50 states. With the high pay comes high union dues, collected by the employing entity and turned over to the government employee union leadership. These millions of dollars can then be used as a massive war chest to elect a pro-union majority in the Legislature and on the governing bodies of most local governments. And since these elected officials’ political futures are dependent on the goodwill of their union sponsors, there are almost no limits on what they will be willing to do to extract more money from taxpayers to be shoveled into ever increasing pay, benefits and pensions for government workers. (Government employee pension debt is several hundred billion dollars).
Literally, the only protections that average folks have from a total mugging by state and local governments are Proposition 13 and Proposition 218, the Right to Vote on Taxes Act. These popular propositions put limits on how much can be extracted from taxpayers by capping annual increases in property taxes, requiring a two-thirds vote of the Legislature to raise state taxes and guaranteeing the right of voters to have the final say on local tax increases.
It is easy to see why these taxpayer protections are despised by the grasping political class and their government employee union allies. This is also why taxpayers will have to work hard to preserve them.
Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization, dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.
Does that fact have your attention? Because media consultants insist we preface anything of substance with a hook like this. It even has the virtue of being true! And now, for those with the stomach for it, let’s descend into the weeds.
According to payroll and benefit data reported by the City of Costa Mesa to the California State Controller, during 2015 the average full-time firefighter made $240,886. During the same period, the average full-time police officer in Costa Mesa made $201,330. In both cases, that includes the cost, on average, for their regular pay, overtime, “other pay,” the city’s payment to CalPERS for the city’s share, the city’s payment to CalPERS of a portion of the employee’s share, and the city’s payments for the employee’s health and dental insurance benefits.
And if you think that’s a lot, just wait. Because the payments CalPERS is demanding from Costa Mesa – and presumably every other agency that participates in their pension system – are about to go way up.
We have obtained two innocuous documents recently delivered to the City of Costa Mesa from CalPERS. They are entitled “SAFETY FIRE PLAN OF THE CITY OF COSTA MESA (CalPERS ID: 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download) and a similar document “SAFETY POLICE PLAN OF THE CITY OF COSTA MESA (CalPERS ID 5937664258), Annual Valuation Report as of June 30, 2015,” (click to download). Buried in the bureaucratic jargon are notices of significant increases to how much Costa Mesa is going to have to pay CalPERS each year. In particular, behold the following two tables that appear on page five of each letter:
Projected Employer Contributions to CalPERS – Costa Mesa Police
Projected Employer Contributions to CalPERS – Costa Mesa Firefighters
In the rarefied air of pension arcana, pension systems can get away with a lot. If you’re a glutton for punishment, read these notices from CalPERS in their entirety and see if, anywhere, they bother to explain the big picture. They don’t. The big picture is this: For years CalPERS has underestimated how much they are going to pay in pensions and they have overestimated how much their investments will earn, and as a result they are continuously increasing how much cities have to pay them. This notice is just the latest in a predictable cascade of bad news from pension systems to cities and other agencies.
Coming down to earth just a bit, consider the two terms on the above charts, “Normal Cost %” and “UAL $.” It would be proper to wonder why they represent one with a percentage and one with actual dollars, but rather than indulge in futile speculation, here are some definitions. “Normal Cost” is how much the city pays (never mind that the city also pays a portion of the employee shares – we’ll get to that) into the pension system if it is fully funded. The reason pension systems are NOT fully funded is because, again, year after year, CalPERS underestimated how much they would pay out in pensions to retirees and overestimated how much they would earn. Read this disclaimer that appears on page five of the letters: “The table below shows projected employer contributions…assuming CalPERS earns 7.5 percent every fiscal year thereafter, and assuming that all other actuarial assumptions will be realized….”
And when the “Normal Cost” payments aren’t enough, and the system is underfunded, voila, along comes the “UAL $,” that bigger catch-up payment that is necessary to restore financial health to the fund. “UAL” refers to “unfunded actuarial liability,” the present value of all eventual payments to retirees, and “UAL $” refers to the payments necessary to reduce it to a healthy level. Notice that for firefighters this catch-up payment is set to increase from $4.2M in 2017 to $6.8M in 2022, and for police it is set to increase from $5.8M in 2017 to $10.1M in 2022. This is in a small city that in 2015 employed an estimated 125 full-time police officers and 75 full-time firefighters.
As always, it must be emphasized that the point of all this is not to disparage police or firefighters. No reasonable person fails to appreciate the work they do, or the fact that they stand between us and violence, mayhem, catastrophe and chaos. And it is particularly difficult for those of us who are part of the overwhelming majority of citizens who appreciate and respect members of public safety to have to disclose and publicize the facts of their unaffordable pensions.
The following charts, using data downloaded from the CA State Controller, put these costs into perspective:
Average and Median Employee Compensation by Department
Costa Mesa – Full time employees – 2015
In the above chart, before sorting by department and calculating averages and medians, we eliminated employees who worked as temps or only worked for part of the year. This provides a more accurate estimate of how much full-time workers really make in Costa Mesa. Bear in mind that most part-time employees still receive pension benefits, as will be shown on a subsequent chart. As it is, during 2015 the average full-time police officer in Costa Mesa was paid total wages of $121,636, about 15% of that in overtime. But they then collected another $79,694 in city paid benefits, including $59,337 paid by the city towards their pension, AND another $11,562 that the city paid towards their pension that the State Controller vaguely describes as “Defined Benefit Paid by Employer.” Total 2015 police pay: $201,330.
Also on the above chart, one can see that during 2015 the average full-time firefighter in Costa Mesa was paid total wages of $150,227, about 32% of that in overtime. They then collected another $90,659 in city paid benefits, including $72,202 paid by the city toward their pension, and as already noted, another $10,440 that the city paid toward the employee’s share of their pension. Total 2015 firefighter pay: $240,886.
To distill this further, the following chart shows, per full-time employee, just how much pensions cost Costa Mesa in 2015 as a percent of regular pay.
Average Employer Pension Payment as % of Regular Pay
Costa Mesa – Full-time employees – 2015
As the above chart demonstrates, employer payments for full-time employee pensions during 2015 already consumed a staggering amount of budget. For police, every dollar of regular pay was matched by 80.5 cents of payments by the city to CalPERS. For firefighters, every dollar of regular pay was matched by a staggering 94.4 cents of payments by the city to CalPERS.
The next chart shows the impact this has on the City of Costa Mesa budget. Depicting total payroll amounts by department, it compares the same variables, total employer pension payments as a percent of total regular pay. As can be seen, the percentages are nearly the same, despite this being for the entire workforce including temporary and part-time employees, some who may not have pension benefits (most do), and many who do not receive top tier pension formulas which the overwhelming majority of full-time public safety employees still receive. As can be seen, for every dollar of regular police pay, CalPERS gets 75 cents from the city, and for every dollar of firefighter pay, CalPERS gets 92 cents from the city.
Total Employer Pension Payment as % of Regular Pay
Costa Mesa – All active employees; full, part-time and temp – 2015
At this point, the impact of CalPERS stated rate increases can be fully appreciated. And because this article, already at nearly 1,000 words, has violated every rule of 21st century social media engagement protocols – keep it short, shallow, simple, and sensational – perhaps the next paragraph should be entirely written in bold so it is less likely to be lost in the haze of verbosity. Perhaps a meme is in here somewhere. Perhaps an inflammatory graphic that shall animate the populace. Meanwhile, here goes:
Once CalPERS’s announced increases to the “unfunded payment” are fully implemented, instead of paying $10.9M per year for police pensions, Costa Mesa will pay $15.2M per year, i.e., for every dollar in regular police pay, they will pay $1.04 toward police pensions. Similarly, instead of paying CalPERS $6.4M per year for firefighter pensions, Costa Mesa will pay $9.1M per year, i.e., for every dollar in regular firefighter pay, they will pay $1.30 towards firefighter pensions.
So just how much do Costa Mesa’s retired police and firefighters collect in pensions? Repeatedly characterized by government union officials as “modest,” shall we report and you decide? The following table, using data originally sourced from CalPERS and downloaded from Transparent California, are the pensions earned by Costa Mesa retirees in 2015. Excluded from this list in order to present a more representative profile are all pre-2000 retirees, since retirement pensions were greatly enhanced after the turn of the century, and it is those more recent pensions, not the earlier ones, that are causing the financial havoc. Also excluded because the benefit amounts are not representative and the retirement years are not disclosed, are all “beneficiary” pensions, which survivors receive.
Average Pensions by Years of Service
Costa Mesa retirees – 2015
While these averages are impressive – work 30 years and you get a six-figure pension – they grossly understate what Costa Mesa public safety retirees actually get. There are at least four reasons for this: (1) The data provided doesn’t screen for part-time workers. Many retirees may have put in decades of service with the city, but only worked, for example, 20-hour weeks. They would still accrue a pension, but it would not be nearly as much as it would be if they’d worked full time. (2) Nearly all full-time employees are also granted “other post-employment benefits,” primarily health insurance. It is reasonable to assume that for public safety retirees, the value of these other post employment benefits is at least $10,000 per year. (3) Because CalPERS did not disclose what department retirees worked in during their active careers, this data set is for all of Costa Mesa’s retirees. That means it includes miscellaneous employees who receive pensions that are, while very generous, are not nearly as good as the pensions that public safety retirees receive. (4) While recent reforms have begun to curb this practice, it has been common at least through 2014 for retirees to purchase “air time,” wherein for a ridiculously low sum they are permitted to claim more years of service than they actually worked. It is common for retirees, for example, to purchase five years of air time, so when their pension benefit is initially calculated, instead of multiplying, for example, 20 years of service times a 3.0% multiplier times their final salary, they are permitted to claim 25 years of service.
All of this, of course, is dense gobbledygook to the average millennial Facebook denizen, or, for that matter, to the average politician. To be fair, it’s hard even for the financial professionals hired by the public employee unions to acknowledge that maybe 7.5% (or even 6.5%) annual investment returns will not continue for funds as big as CalPERS, or that history is no indicator of future performance. And even if they know this, they’re under tremendous pressure to keep silent. So the normal contribution remains too low, and the catch-up payments mushroom.
Finally, to be eminently fair, we must acknowledge that since modest bungalows on lots so small you have to choose between a swing set or a trampoline for the kids are now going for about a million bucks each in most of Orange County, making a quarter million per year ain’t what it used to be. But there’s the rub. Because until the people who work for the government are subject to the same economic challenges as the citizens they serve, it is very unlikely we’ll see any pressure to lower the cost of living. Everything – land, energy, transportation, water, materials, etc. – costs far more than it should, thanks to deliberate political policies and financial mismanagement that creates artificial scarcity. But hey – artificial scarcity inflates asset bubbles, which helps keep those pension funds marginally solvent.
Cost-of-living reform, if such a thing can be characterized, must accompany pension reform. What virulent meme might encapsulate all of this complexity?
* * *
Ed Ring is the president of the California Policy Center.
California business leaders are unanimous in their desire for the California Legislature to proactively improve the state’s business climate, as opposed to only enacting policies that will further hinder economic growth.
But it is far less understood how to actually get to a place where the Legislature both acknowledges that there are major issues with the state’s business climate and works with business leaders to advance solutions.
I have thought long and hard about this issue and believe that public sector collective bargaining reform should be among the top priorities, if not the top priority for the business community to improve the state’s business climate.
The short answer about why reform is needed is that the state’s current system of collective bargaining locks in high-cost government and prevents meaningful government reforms that will both increase efficiencies and make the state more hospitable to business.
On the surface, the major issues with the state’s business climate are policy-related, namely high-taxation and onerous government regulation.
But the root causes of the state’s poor business climate are really political in nature, and therefore need political solutions.
Most business leaders in California continue to be astonished at how out of touch the California Legislature is with business community and business climate issues. And again, the root cause of this aloofness is a political problem—the California Legislature is controlled by Democrats who are closely tied to their pro-labor base, namely the state’s public employee unions.
So to move the needle on business climate issues in the California Legislature, political pressure must be applied to the state’s public employee unions. Ideally, the business community needs to level the political playing field between business and labor and perhaps the best way to do this is through public sector collective bargaining reform.
Governor Arnold Schwarzenegger saw the nexus between union issues and the California economy in the mid-2000s, but his political approach largely failed because he tried addressing the policies without first addressing the political power of the state’s public employee unions.
Pro-business policy change is not possible in the current political environment because the state’s public employee unions are too powerful and can almost always unilaterally defeat all attempts to make the state more business friendly.
Thus, the road to improving the state’s business climate must start with political reform, and I believe public sector collective bargaining reform is the best way to get there.
After all, the establishment of collective bargaining rights for public employees in California is what created the state’s public employee unions to begin with, and gave rise to their ascent to become the most powerful political interest in California.
In 1968, the California Legislature passed the Meyer-Milias-Brown Act, which established collective bargaining for California’s municipal and county employees. Collective bargaining rights were extended to school districts in 1976, state government employees in 1978, and higher education employees in 1979.
I have served as an expert witness and participant in dozens of major sets of public sector labor negotiations around California over the last six years, including the 2013 labor standoff for the Bay Area Rapid Transit District (BART) and the lead expert witness in labor arbitration for the City of San Francisco over the last two rounds of negotiations.
Based on my experience, I believe that the state’s collective bargaining system is “broken” and serves to lock in unaccountable, unsustainable and high-cost government.
Collective bargaining also serves to empower the state’s public employee unions as the preeminent political force in California by allowing them to not only control government operations at the bargaining table, but also control government through the political process at both the state and local, primarily by giving large sums of political contributions.
The state’s collective bargaining rights were put into place to provide a “reasonable method of resolving disputes regarding wages, hours, and other terms of conditions of employment between public employers and public employee organizations,” according to the Meyers-Milias-Brown Act.
But the actual effect has been to give public sector unions almost unilateral control over both state and local government operations, as well as the state’s political system.
Since every major change to government organization and operation must either be made in the California Legislature, at the ballot box or in collective bargaining—public sector unions are effectively able to even prevent the most common sense reforms such as teacher tenure, merit pay, right to work, and civil service reform.
The state’s collective bargaining process is also deeply flawed and essentially “corrupt” due to unchecked conflicts of interest in the process. It is standard practice for local elected officials to recuse themselves from votes on legislation that impacts businesses or groups that are contributors to their campaigns, but this standard does not apply to public sector unions.
Public sector unions are legally allowed to make large campaign contributions to the elected officials who are in charge of the collective bargaining process and who ultimately decide what pay and benefit increases public employees are awarded. The result is a continuous increase in the salaries, benefits and perks of public employees that far exceed their private sector counterparts and any reasonable standards of just public compensation.
Real public sector collective bargaining reform would serve to both control the cost of government, which is essential to limiting the state’s tax burden, as well as limit the ever increasing war chest of campaign contributions afforded to the public sector unions by curbing union dues, which are based on the continuous upward spiral in public employee wage and benefit costs.
The current process is also hugely expensive and inefficient and represents a huge transfer of wealth from the state’s public agencies to law firms and labor attorneys who are key participants in the collective bargaining process.
Thus, collective bargaining reform holds the key to improving the state’s business climate both by controlling the cost of government, and helping level the political playing field between the business community and public sector unions in the state’s political process, which will serve to produce a more business-friendly political environment.
About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.
Labor Day 2016 continues to show improving conditions within California’s economy. The Legislature has just concluded a session that is being described as one of the most progressive ever for environmental and labor union policies. And Governor Brown is looking at over 700 new laws on his desk. His signature or veto will directly impact the fate of our job growth for years to come.
California Economy Continues Transformation
The revised June job numbers show that since the recovery began in February 2010, our state has regained 2.3 million nonfarm jobs. Our seasonally adjusted unemployment rate of 5.4% while higher marginally from prior months, put us at levels not seen since before the recession in the summer of 2007. We see the benefits of this every day. New cars are on the road. New housing and home renovations are underway. The malls and restaurants are busy. It should and does feel good.
But the Governor and policymakers are entrusted with the responsibility to look deeper at the numbers to prepare for the future. This shows that the pace of the recovery in California remains low by historical patterns, reflecting conditions in the country as a whole. Real GDP has grown at an average annual rate of 2.7% since the recovery began, below the 4% growth seen during 1987-2000 and higher levels experienced in years before. Nonfarm jobs which had been expanding at an annual rate of 3.0% in 2014 and 2015, have slowed to an annualized rate of 2.2% in the first half of 2016.
To put our low current growth rates into historic perspective, California in February 1975 was also in an economic recovery period, again under Governor Jerry Brown. In the following 76 months, the state created 2.4 million jobs, representing a 32% increase. The 2.3 million jobs—virtually the same number—created in the 76 months since February 2010 are at only 16%.
In their latest projections, both Department of Finance and Legislative Analyst expect jobs growth to slow further in the coming years, with Finance showing 1.0% by 2018 and 2019 and LAO around 1.5%. These differences are small but important. For the state budget, they translate into a projected deficit by 2019-20 in the case of the Finance numbers, or an $11 billion surplus in the case of LAO’s.
For many Californians, these are more than just mere numbers. They mean the difference between having the opportunity at a job that will help their household afford the growing cost of living in our state, or continued reliance on state programs for their basic needs. The types of jobs being created are equally important—whether they offer the paths to upward mobility and whether future generations will continue to experience a California better than those in the past.
Middle Class Wage Jobs Impacted the Most
The key to California’s past promise as a land of upward economic opportunity lay in the diversity of our workforce and our jobs. No matter their background, the wide range of jobs at differing wage levels gave workers especially Latinos and African-Americans the opportunities to move up in life, gain skills, and compete for jobs producing income sufficient to own a home, educate their children, and save for retirement. The state budget focused on these aspirations through investments in roads and other infrastructure and in affordable education and skills training regardless of an individual’s educational level. State policies served to promote housing supply rather than escalating housing costs. Affordable energy was seen as a competitive edge for middle class jobs, not as a public policy priority to be phased out as quickly as possible.
The upward path has narrowed for many as the recovery has restructured the economy to jobs creation primarily in the higher and lower wage industries. Middle class jobs in manufacturing remain 183,000 below the pre-recession high in 2007; construction jobs are off 140,000. In contrast, lower-paying Individual & Family Services jobs—primarily state supported, minimum wage In-Home Supportive Services jobs—are up nearly 200,000.
Population Still Growing Faster than Jobs . . . Contributing to Poverty
The good news on our 2.3 million jobs gained since 2010 still mostly serve to rebuild those lost during the recession. Comparing to the pre-recession highs, real growth in the economy shows a net gain of 950,000 nonfarm jobs and 1.1 million additional persons employed. Population in this period grew much faster—total population by 2.7 million and as the state aged, working age population by 3.4 million.
One of the most immediate consequences of this slower jobs growth has been a steep drop in the labor force participation rate. While this rate now appears to be stabilizing at around 62% of the working age population, it is doing so near the historic lows previously seen in 1976. The California rate also remains below the national average, in spite of the state having a relatively younger population and higher pressures to continue working into retirement age due to the state’s significantly higher costs of living.
On a numbers level, California is still short about 1 million jobs and 1 million persons employed to achieve the same population based levels that existed prior to the recession.
On an individual level, this slower jobs growth translates into relatively fewer persons per household being employed than prior to the recession, a factor that directly translates into lower household income, consequent higher poverty levels, and a lower household ability to afford the state’s high housing costs and other high costs of living.
Our Economic Growth Engine is the Bay Area
Economic growth within California remains highly focused within the Bay Area. With just under 20% of the state’s population, the Bay Area alone contains:
- 45% of net nonfarm job gains since the pre-recession high
- 52% of net job gains since the pre-recession high in Professional & Business Services, the primary growth industry for higher wage jobs
- 45% of net employment gains since the pre-recession high
- 27% of total personal income, and 32% of the net increase in total personal income 2007-2014
- 40% of state personal income tax paid, and 52% of the net increase in tax paid 2007-2014
A California economy without the Bay Area would look considerably different:
- Instead of 2.3 million, created only 1.6 million nonfarm jobs since February 2010, or less than the 1.8 million jobs created in this period by Texas — a state with a population 13% smaller than California outside the Bay Area.
- Instead of 5.9%, a June unemployment rate of 6.3% (seasonally unadjusted) — tied for the 6th highest rate in the nation.
- Instead of 16.4%, a 2014 poverty rate of 17.9% vs. the US average of 15.5% — California outside the Bay Area is home to 91% of the net increase in persons living in poverty 2007-2014.
- Instead of $49,985, a 2014 per capita income of $45,292 — below the US average of $46,030.
Even within the portions of California outside the Bay Area, significant differences exist between the interior and coastal regions. Among the nation’s 387 top metropolitan areas (MSAs), 8 California MSAs ranked in the areas with 10 highest unemployment rates in June. Ten California MSAs were in the highest 20.
Challenge for Labor Day 2017: Broaden Economic Growth for All Californians
The Governor, the Legislature and all Californians are rightfully proud of our return to being the 6th largest economy in the world as measured by GDP. This is a testament to the economic resilience of Californians and the enormous ingenuity, determination and drive coming from California employers large, medium and small.
Distribution of this growth remains heavily uneven as the state continues to splinter into a two-tier economy and risks evolving into a two-tier society. The economic divide growing between the Bay Area and the rest of the state should be no surprise. The Bay Area industries leading this growth are the least regulated in the state, and challenges to their continued growth comes less from market forces and technological barriers, and more from governments and competitors that want to rein them in with the same 19th Century regulatory models applied to the rest of the economy.
The remainder of the state’s economy, instead, has been subjected to an unrelenting expansion of regulation, fees, and taxes since 2000. The low level of jobs growth is in large part a reflection of the increasing costs of doing business in this state and the increasing costs and restrictions associated with providing jobs. As businesses have had to shift spending and investments to regulatory compliance rather than efficiency and capacity, the jobs creation rate along with the business creation rate itself have declined.
California has never depended on a single industry to meet the economic aspirations of its people. We cannot. We are too diverse. We have some of the highest rates of educational attainment in the country, but also the nation’s highest percentage—17.9%–of adults with less than a high school education. The hollowing out of middle class wage jobs—in particular middle class wage jobs that have been the hardest hit by the state’s growing regulations—limits the upward mobility options for much of our population. The high cost of housing and the increased barriers to commuting caused by the condition of our roads has also reduced the mobility of labor and restricted the ability of many to access jobs even where they are being created.
The 2016 legislative session just completed with major new laws focused on the transformation of our energy sector and our whole economy through new climate change policies. The foundation of these policies is based on the argument that “green jobs” creation will replace and surpass the hundreds and hundreds of thousands of good paying middle class jobs that will be phased out in our energy and manufacturing sectors. Currently, after 4 decades of compounding regulations, green jobs in California still comprise at most 2% of our jobs under the most generous of estimates. It is now up to the oversight of the Legislature to determine how much and how fast we are willing to impact the other 98% on which our workers and our households depend.
These are the challenges that are now in front of our state policymakers. Will we see policies that accept the current growth trends and simply attempt to make the current failures more tolerable? Will we see policies that instead of reforming housing policies to reduce the costs for all, will at best alleviate costs for a very few? Will we see policies that assume unemployment and underemployment are now a permanent feature of our state rather than reforms to create growth engines in other parts of the state?
We hope 2017 will bring a broader discussion on the economy we can offer to future generations.
About the Author: Rob Lapsley is president of the California Business Roundtable, a nonpartisan organization comprised of the senior executive leadership of the state’s major companies employing over half a million Californians. Before he was named president in 2011, he was vice president and state political director for CalChamber. He served in the US State Department as special assistant to the US ambassador to Spain during the Iraq War. He was chief of staff to California secretary of state Bill Jones and served as undersecretary of state from 1995 to 2001. He has served on the PPIC Statewide Survey Advisory Committee since 2011.