A Labor Day Update on the California Economy

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 

    The staggering job growth occurring in the Bay Area appears to statistically overshadow the deteriorating business climate that is seen in the rest of the state’s economy as a result of unrelenting expansion of regulation, fees, and taxes since 2000.  

     

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.

Court Pension Decision Weakens ‘California Rule’

The one thing some pension reformers say is needed to cut the cost of unaffordable public pensions: give current workers a less costly retirement benefit for work done in the future, while protecting pension amounts already earned.

It’s allowed in the remaining private-sector pensions. But California is one of about a dozen states that have what has become known as the “California rule,” which is based on a series of state court decisions, a key one in 1955.

The pension offered at hire becomes a “vested right,” protected by contract law, that cannot be cut, unless offset by a new benefit of comparable value. The pension can be increased, however, even retroactively for past work as happened for state workers under landmark legislation, SB 400 in 1999. 

Last week, an appeals court issued a ruling in a Marin County case that is a “game changer” if upheld by the state Supreme Court, said a news release from former San Jose Mayor Chuck Reed, who wants to put a pension reform initiative on the 2018 ballot.

Mayor Chuck Reed considered it a “game-changer” when a Marin County Court rejected the rigid interpretation of the California Rule of vested rights, ruling that although an employee has a vested right to a pension, their only right is to a ‘reasonable pension,’ one without benefit spiking

 

Justice James Richman of the First District Court of Appeal wrote that “while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension — not an immutable entitlement to the most optimal formula of calculating the pension.

“And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.”

The ruling came in a suit by Marin County employee unions contending their vested rights were violated by a pension reform enacted in 2012 that prevents pension boosts from unused vacation and leave, bonuses, terminal pay and other things.

These “anti-spiking” provisions apply to current workers. The major part of the reform legislation, including lower pension formulas and a cap, only apply to new employees hired after Jan. 1, 2013, who have not yet attained vested rights.

The California Public Employees Retirement System expects the reform pushed through the Legislature by Gov. Brown to save $29 billion to $38 billion over 30 years, not a major impact on a current CalPERS shortfall or “unfunded liability” of $139 billion.

Similarly, legislation two years ago will increase the rate paid to school districts to the California State Teachers Retirement System from 8.25 percent of pay to 19.1 percent, while the rate paid by teachers increases from 8 percent of pay to 10.25 percent.

The limited teacher rate increase followed the California rule. The new benefit offsetting the 2.5 percent rate hike vests a routine annual 2 percent cost-of-living adjustment, which previously could have been suspended, though that rarely if ever happened.

While mayor of San Jose four years ago, Reed got approval from 69 percent of voters for a broad reform to cut retirement costs that were taking 20 percent of the city general fund. A superior court approved a number of the measure’s provisions.

But a plan to cut the cost of pensions current workers earn in the future by giving them an option (contribute up to an additional 16 percent of pay to continue the current pension or switch to a lower pension) was rejected by the court, citing the California rule.

In a settlement of union lawsuits, Reed’s successor locked in some retirement savings but dropped an appeal of the option. Reed, a lawyer, thinks the California rule is ill-founded and likely to be overturned if revisited by the state supreme court.

He has pointed to the work of a legal scholar, Amy Monahan, who argued that by imposing a restrictive rule without finding clear evidence of legislative intent to create a contract, California courts broke with traditional contract analysis and infringed on legislative power.

“California courts have held that even though the state can terminate a worker, lower her salary, or reduce her other benefits, the state cannot decrease the worker’s rate of pension accrual as long as she is employed,” Monahan wrote.

In the ruling last week, Justice Richman describes the setting for the reform legislation: soaring pension debt after the financial crisis in 2008-09 and a Little Hoover Commission report in 2011 urging cuts in pensions current workers earn in the future.

He cites several court rulings in the past that conclude cuts in pensions earned by current workers are allowed to give the pension system the flexibility needed to adjust to changing conditions and preserve “reasonable” pensions in the future.

Some of the court rulings cited allowed changes in retirement ages, reductions of maximum possible pensions, repeals of cost-of-living adjustments, changes in required service years, pensions reduced from two-thirds to one-half of salary, and a reasonable increase in pension contributions.

“Thus,” Richman wrote, “short of actual abolition, a radical reduction of benefits, or a fiscally unjustifiable increase in employee contributions, the guiding principle is still the one identified by Miller in 1977: ‘the governing body may make reasonable modifications and changes before the pension becomes payable and that until that time the employee does not have a right to any fixed or definite benefits but only to a substantial or reasonable pension.’”

Richman’s ruling makes several references to a unanimous state Supreme Court decision in 1977 in Miller v. State of California. He said the foundation of the unions’ constitutional appeal is a “onetime variation” in one word in another ruling.

“To be sustained as reasonable, alterations of employees’ pension rights must bear some material relation to the theory of a pension system and its successful operation, and changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages,” the state Supreme Court said in Allen v. City of Long Beach (1955).

Richman said a 1983 state Supreme Court decision (Allen v. Board of Administration) changed “should” have a comparable new advantage to “must,” citing two other State Supreme Court decisions that said “should” and an appeals court decision that said “must.”

In a decision a month later, he said, the Supreme Court used “should” while referring to a comparable new benefit and has continued to use “should” in all rulings since then.

“It thus appears unlikely that the Supreme Court’s use of ‘must’ in the 1983 Allen decision was intended to herald a fundamental doctrinal shift,” Richman said, citing two rulings that “should” is advisory or a recommendation not compulsory.

The 39-page decision written by Richman and concurred in by Justices J. Anthony Kline and Maria Miller makes other points in its rejection of a rigid view of the California rule and pension vested rights.

“The big question for pension reformers is whether or not the California Supreme Court will agree,” Reed said in a news release from the Retirement Security Initiative. “If it does, the legal door will be open for Californians to begin to take reasonable actions to save pension systems and local governments from fiscal disaster.”

There was no immediate word from the Marin Association of Public Employees and other county employee unions last week about whether the appeals court decision will be appealed to the Supreme Court.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

Average "Full Career" CalPERS Retirement Package Worth $70,000 Per Year

“‘What makes the ‘$100,000 Club’ some magic number denoting abuse other than the claims of anti-pension zealots?’ said Dave Low, chairman of Californians for Retirement Security, a coalition of 1.6 million public workers and retirees.”

This quote from a government union spokesperson, and others, were dutifully collected as part of Orange County Register reporter Teri Sforza’s eminently balanced reporting on the latest pension data, in her August 8th article entitled “The ‘100K Club’ – public retirees with pensions over $100,000 – are a growing group.”

In the article, Sforza’s team evaluated data released by Transparent California on 2015 CalPERS pensions, and reported the number of pensioners receiving $100,000 or more per year was 3.5% of total retirees, up from 2.9% in 2013. That truly does seem like a low percentage, but it ignores two key factors, (1) the total retiree pool includes people who only worked a few years and barely vested a pension, and (2) the total retiree pool includes people who worked many decades, sometimes 30 or 40 years or more, but they only worked part-time during their lengthy careers.

So if you restrict your pool of participants to those who worked a full career, and retired within the last 10 years, what percentage of those retirees would belong to the $100,000 club? As it turns out, there are 75,279 CalPERS retirees who worked more than 25 years and less than 35 years, retiring after 2006. And as it turns out, 9,763 of them, or 13%, are receiving pensions in excess of $100,000 per year.

Moreover, CalPERS doesn’t report the value of retirement health benefits and other retirement benefits, which almost certainly exceed $10,000 per year. If you make this reasonable assumption, you now have 14,901 CalPERS retirees, or 19% of our 75,279 pool of full career retirees, receiving a retirement package worth over $100,000 per year. Worth noting – we didn’t have the data necessary to screen the part-timers out of this pool. If we did, the numbers would be higher.

So if you use the appropriate denominator, the “$100 Club” isn’t 3.5% of the pie, it’s 19%, but so what? It’s still not a very big slice. Here’s where the flip-side of “full career pension” comes into play. Most people don’t work 25-35 years in public service. But most of them do vest their pension benefits, which can be vested in as little as five years. What happens when someone quits after five years, and only goes on to collect, say, a $20,000 per year pension? Someone else is hired, they work five years, and they also qualify to eventually collect a $20,000 per year pension. Then someone else, and then someone else – until you have three or four (or more) people who are all going to receive a $20,000 per year pension – for a job that one person could have performed if they’d stayed with the agency for a full career.

This is a critical point to understand. The significance of “full career” pensions is this: The taxpayer will fund pensions at that level of generosity, even if the benefit is split among multiple partial career participants – people who presumably worked elsewhere (where they also saved for retirement) during the majority of their careers. Should you expect a $100,000 per year pension if you only worked for five years? Of course not. But that’s what taxpayers are funding – whether it goes to one person, or to five people who worked a few years each to collectively fill one person’s full-career position in government.

This is why, when you are considering whether or not pensions are fair and affordable, the full career average pension is the only relevant measure. So what is the full career average?

For CalPERS in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $60,277.  Add to that the value of their retirement health benefits and other retirement benefits and the average was probably closer to $70,000 per year.

Just for comparison, for Orange County (OCERS) retirees in 2015, participants with between 25 and 34 years of work who retired in the last ten years, on average, received a pension of $73,628.  Add to that the value of their retirement health benefits and other retirement benefits – information which OCERS also refuses to provide – and the average was probably over $80,000 per year. As for the OCERS “$100,000 Club”? Within the pool of full career retirees as described, and accounting for retirement health benefits, 31% of them were members. Nearly one in three.

Public sector spokespersons frequently point out that public employees don’t get Social Security. Actually, about half of them do get Social Security, but never mind that detail. Because the maximum Social Security benefit, which one must wait until they are 68 years old to receive, is a whopping $31,668 per year.

Calling critics of this double standard “anti-pension zealots” is lazy rhetoric. The problem with defined benefits is not that they exist. The problem is that we have set up a system where public employees operate under a set of retirement benefit formulas and incentives that are roughly four times better than what private sector workers can expect. Yet these private sector workers pay the taxes to fund these pensions and bail them out when the investment returns falter.

 *   *   *

Ed Ring is the president of the California Policy Center.

Ballot Box Budgeting Wreaks Havoc on California Budget, Beware of Props. 51, 55, and 56

As a professor of public budgeting and someone who has worked their entire career analyzing public budgets, I can say that ballot box budgeting wreaks havoc on the California budget process and taxpayer interests.

Yet it is something that voters are so accustomed to doing that most average voters don’t even know what “ballot box budgeting” is.

In short, ballot box budgeting is the practice of making major budget decisions at the ballot box.  And unlike the normal budget process, these decisions are commonly written into the California Constitution, and not subject to change in any way short of another ballot measure.  

The result is that funds are locked in to being spent for a particular purpose regardless of other budget needs and priorities, and commonly lack the same accountability and oversight that the rest of the California budget is subject to through the legislative process.

There are three measures on the November 2016 ballot that represent ballot box budgeting at its worst, and should be rejected—Proposition 51 School Bonds, Proposition 55 School Funding, and Proposition 56 Tobacco Tax Increase.  There is one other measure, Proposition 64 Marijuana Legalization and Tax, which represents ballot box budgeting, but is less egregious and is worthy of consideration on its policy merits given that marijuana is not currently legal and therefore not taxed at all but should be considered on policy grounds.

The reality is that nearly all initiatives have some type of budget impact, but initiatives that allocate a significant dollar amount of public funds should generally be looked at with great skepticism, particularly those that raise taxes or reallocate existing public funds in some way.

Another common element in ballot box budgeting is a “pay to play” element, characterized by a situation where special interests sponsor a ballot measure that allocates public funds that benefit their private financial interest.   All four initiatives mentioned above have a significant “pay to play” element, that should be considered as well, and viewed with great skepticism.

In generally all such cases, initiatives are sold as being crafted in the “common good” or for the “public interest” but the real motivation is to benefit the private interests that raised the money to quality the measure and run a support campaign.

For example, Prop. 51 authorizes $9 billion in general obligation bonds for construction of K-12 public schools.  The construction of school facilities is done through a process at the local level, with state bond funds providing a state match, but this local process has come under great fire in the media recently, largely due to California Treasurer John Chiang’s efforts.

Treasurer Chiang has stopped short of criticizing Prop. 51 specifically but he has came down hard on the local municipal bond process as being a “pay to play” process that “rips-off taxpayers,” according to Treasurer Chiang’s press release.

Chiang says this “pay to play” process rewards special interests including developers, bondholders, and construction companies who offer to fund local bond campaigns in exchange for lucrative contracts, which are “no bid” contracts in many cases.

 

Treasurer Chiang believes the municipal bond process is designed to “rip off tax-payers”

 

“Not only are these “pay-to-play” arrangements unlawful, they rip off taxpayers and endanger the integrity of school bonds,” Treasurer John Chiang declared, noting that between 2012-15 K-12 school districts issued $43.8 billion in long-term debt.

Without cleaning up this “corrupt” process, Prop. 51 essentially puts $9 billion in public funds at risk for misallocation by school districts and public agencies.  And will subject taxpayers to huge future costs, for spending with questionable public benefits given the process through which these bonds are issued under the current system.

Of course, the same special interests who benefit from this “pay to play” process are the primary proponents of Prop. 51, and are putting up millions of dollars to lock in these lucrative contracts for public bond spending.  A number of local districts are also proposing local bonds on the November 2016 ballot to provide a local match for these highly questionable public projects.

Prop. 55 is the example of another measure which might appear legitimate on its face because it raises money for “schools” and “health programs.”   But should also be rejected on ground of being a terrible case of “ballot box budgeting” and “pay to play” corruption of the state’s initiative process.

Prop. 55 extends the Prop. 30 (2012) income tax increases taxes on individuals and small businesses, which expire at the end of 2017, for another 12 years until 2030.  The effort is being sold as being a legitimate effort to fund schools and health care because Prop. 30 is something that the Governor, Legislature and business community agreed on back in 2012.

But Prop. 55 is not the same as the deal cut back in 2012, and should be rejected.  First, Prop. 55 is much more expensive, nearly twice as expensive as Prop. 30—and represents an $8-11 billion tax increase, as opposed to a $6.5 billion annual hit from Prop. 30.  Secondly, the measure is not “temporary,” and results in a broken promise Governor and Legislature made to voters in 2012—that’s why Governor Brown says he will not endorse Prop. 55.

Lastly, Prop. 55 adds a significant “pay to play” element as well by giving private hospital interests a piece of the action.  Specifically, Prop. 55 locks in another $2 billion in funding for “health programs,” which did not even exist in Prop. 30, and is a pure handout to the hospital interests which have already contributed more than $21 million to the Yes on Prop. 55 Campaign.

Public employee union interests get the bulk of the funds, estimated at $75 billion over 12 years, in salary and benefit spending primarily but the public generally does not view them as being the same type of “special interest” as purely private interests.  Yet, these public employee union interests have put up another $18 million thus far to support Prop. 55, and stand to reap huge rewards for their members and dues increases if Prop. 55 passes.

From a ballot box budgeting perspective, both Prop. 55 and the Prop. 56 $2 per pack tobacco tax increase are terrible budget policy because they lock in significant expenditure of public funds that will be allocated outside of the state’s annual budget process without regard to actual need or other pressing spending priorities.

Prop. 55 locks in $8-11 billion in spending with the bulk going for education, but another $2 billion going to “health care” programs—again not allocated according to need or the accountability standards under the state’s annual budget process which subjects all public spending to annual review.  Prop. 56 locks in another $1-1.4 billion in health care spending that will be allocated outside the state’s budget process.

Voters are encouraged to reject Propositions 51, 55, and 56 on grounds that they are terrible examples of “ballot box budgeting,” in which special interests put up millions of dollars, even tens of millions of dollars, to try to pass “public interest” measures with the expectation of a big payday at taxpayer expense for the years to come.

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 Pension Monster and How Much It’s Costing You to Keep It Fed

Why haven’t Mayor Eric Garcetti and City Council President Herb Wesson followed up on the recommendation by the LA 2020 Commission to “establish a Commission on Retirement Security to review the City’s retirement obligations in order to promote an accurate understanding of the facts” and make “concrete recommendations on how to achieve equilibrium on retirement costs by 2020?”

Why?  Because these two ambitious politicians fear alienating the campaign funding leaders of the City’s unions who do not want a public discussion of the facts surrounding the City’s ever increasing annual contributions to the City’s two massively underfunded pension plans that are forcing the City to scale back on basic services.

Over the last ten years, the City’s contribution to its two pension plans (Los Angeles City Employees Retirement System and the Los Angeles Fire and Police Pension System) has tripled to $1.1 billion, up from $350 million in 2005.  As a result, pension contributions now chew up 20% of the City’s $5.6 billion budget, up from less than 10% in 2005.

 

Are Mayor Eric Garcetti and City Council President Herb Wesson afraid of discussing with union leaders the prospect of LA’s growing unfunded liability?

 

This $750 million increase in pension contributions has forced the City to cut back on basic services such as public safety and the repair and maintenance of our streets, sidewalks, and parks.  The City has even resorted to placing an ill-conceived $1.2 billion bond measure on the November ballot to fund supportive housing for the homeless.

Unfortunately, it is only going to get worse as the City, its pension plans, and their fiscally irresponsible, Garcetti appointed Commissioners are banking on an overly optimistic rate of return of 7½% on the combined investment portfolio of $33 billion.

But the stock and bond markets are not cooperating as demonstrated by this year’s less than 1% return on CalPERS (California Public Employees’ Retirement System) $300 billion investment portfolio.

If the City’s pension funds earned this meager 1% as compared to the targeted 7½%, it would result in an investment shortfall of an estimated $2.7 billion, an amount equal to about half of the City’s annual budget.  This “loss” will increase the unfunded pension liability as of June 30, 2016 to almost $11 billion, representing a funded ratio of an unhealthy 74%.

However, if the investment rate assumption was a more reasonable 6½% as recommended by knowledgeable investors such as Berkshire Hathaway’s Warren Buffett, the unfunded pension liability would jump to over $16 billion, representing a dangerously low funded ratio of 66% and almost three times the City’s annual budget.

Over the next five years, the City’s two pension plans will rack up an additional shortfall of over $5 billion if the rate of return on their investment portfolios is 6½%, a much more likely outcome than the targeted return of 7½%.

But rather than recognizing this combined shortfall of $7.9 billion over the next five years, the City has cooked up a scheme to amortize these losses over a 20 year period, reducing the hit to the City’s budget.

Even with this scheme, the City’s pension contribution is expected to increase by more than 50% over the next five years to $1.7 billion, representing 27% of the City’s projected General Fund budget.

Garcetti and Wesson, along with Budget Committee Chair Paul Krekorian and Personnel Chair Paul Koretz, will tell us they made significant reforms to LAFPP in 2011 and LACERS in 2013 and 2015.  But these cosmetic amendments are nickels and dimes and did not address the overly optimistic investment rate assumption of 7½% and the unsustainable post-retirement medical benefits.

This pension time bomb is a weapon of mass financial destruction where we will burden the next generation of Angelenos with tens of billions of unsustainable debt. This will destroy their standard of living and their environment.

It is time for Garcetti, Wesson, and the members of the City Council to get off their fat asses, put on their big boy pants, and begin to address this problem by establishing an independent, well-funded Committee for Retirement Security.

Only then will we be able to begin the hard task of developing a solution where the City and its future will not be devoured by the pension monster.

Cross-posted at City Watch LA

About the Author: Jack Humphreville is a LA Watchdog writer for CityWatch, President of the DWP Advocacy Committee, Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and Publisher of the Recycler

Teachers Union Hits Taxpayers with ‘Money Club’ Again

The California Teachers Association has just dropped $10 million into its campaign to extend the “temporary” income tax hike voters approved when they passed Proposition 30 in 2012. Proposition 55, which will appear on this November’s ballot, would extend the highest income tax rates in all 50 states for another dozen years.

Four years ago, the muscular union, called by many in Sacramento the “Fourth Branch of Government,” spent over $11 million to convince voters to increase sales and income taxes. The campaign, paid for by government employee unions and led by Gov. Jerry Brown, repeatedly promised voters the higher taxes would last only a few years and then go away.

These ultra-high tax rates are scheduled to end in 2018 and union leaders are panicking. If the tax increase ends, there may be less money to fund increases in member pay and benefits.

Spending big money on politics is not unusual for the deep pocketed CTA which receives its funding from mandatory dues. Those dues, withheld from members’ paychecks whether they like it or not, can total more than $1000 a year for a single teacher. Recall that CTA laid out $58 million in opposing several worthy reform measures in a 2005 special election including one reform that would have capped state spending. Union leaders like a guaranteed cash flow so it should come as no surprise if they put out an additional $10 million, or more, to support the Proposition 55 income tax extension. For backers of Proposition 55, spending millions in return for billions of tax dollars is considered a bargain.

The campaign will, no doubt, target low information voters with messages about how, “it’s for the children.” It is standard operational procedure for tax promoters to use children as human shields when advancing a tax increase tied to education. Not to be mentioned is that the union’s interest is solely in increasing pay and benefits, including generous pensions, for members who are already paid more than $20,000 above the national average. And don’t forget that a national education union leader once famously said “when school children start paying union dues, that’s when I’ll start representing the interests of children.”

The California Teachers Association has spent $10 million dollars into extending the Prop. 30 “temporary tax”

 

Some will argue that ultra-high taxes should be maintained because public employees deserve to be well paid. They are. According the Department of Labor, California is the state with the best paid state and local government employees.

Our state is running a multi-billion-dollar surplus, yet Proposition 55 backers want to continue the ultra-high taxes that are already pushing businesses, and the jobs they provide, to relocate out of state. And it’s not just businesses. The list of high wealth individuals including professional athletes and entertainers who have bailed out of California is a mile long.

But the deleterious impact of high taxes is wholly lost on the union bosses. Their attention is, no doubt, on the latest news from the California State Teachers’ Retirement System. The second-largest U.S. public pension fund earned a paltry 1.4 percent return on investments in the fiscal year just ended, missing its target of 7.5 percent for the second straight year.  This raises questions about the fund’s management and whether or not it will be able to meet its obligation to 896,000 current and retired teachers.

Of course, taxpayers remain the guarantor of all public employee pensions so, in all fairness, the Proposition 55 income tax extension could come to be called the “pension tax.” And the teachers union is prepared to use its massive “money club” on voters to make sure Proposition 55 passes and the taxpayers’ dollars are there.

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

The Consequences of Weak Pension Earnings

Several reporters have asked about the consequences of CalPERS’s weak investment earnings. Although CalPERS has not issued an actuarial report since June 30, 2014, one can draw an inference that its Unfunded Liability has grown about $50 billion since then, to $140 billion. Here is how you get there:

Start from this chart on page 120 of CalPERS’s 2015 annual report:

The “Actuarial Accrued Liability (AAL)” in column three shows pension liabilities as of 6/30/14 were $395 billion, up from $210 billion nine years earlier. That’s a 7.27% annual growth rate, which makes sense since pension liabilities grow at the discount rate (7.5%), less any amortization. Assuming the same 7.27% growth rate, AAL as of 6/30/16 should have climbed to roughly $454 billion.

The “Actuarial Value of Assets” in column one shows assets as of 6/30/14 were $301 billion. CalPERS earned 2.4% in the 2015 fiscal year and 0.61% in the most recent fiscal year ending 6/30/16. (CalPERS also received pension contributions from employers and employees but, as indicated on page 42 of its annual report, in 2015 those were less than benefit payments. Let’s give CalPERS the benefit of the doubt and assume that contributions = benefit payments and therefore the impact on Assets was neutral.) This would mean that Assets as of 6/30/16 should have climbed to roughly $310 billion.

$310 billion in Assets less $454 billion in AAL = $144 billion in Unfunded AAL (UAAL), up $51 billion from $93 billion in UAAL as of 6/30/14 (see column four).

Every $1 of UAAL translates into about $3 of cuts to public services (because UAAL’s accrue interest at 7.5%). Hence, $51 billion of additional UAAL translates into about $150 billion of additional cuts. These numbers are by their nature rough but they should provide a sense of the magnitude. CalPERS should endeavor to report on a timely basis.

 

CalPERS only obtained a 0.61% return on investments for fiscal year 2016 despite establishing pension promiseS based on a 7.5% interest

 

NB: It’s important to note that UAAL can grow significantly even when CalPERS has good years. Look again at the chart. The UAAL in column four more than tripled to $93 billion even though CalPERS earned a very respectable 6.6% annual return on investment during that period. Indeed, during the last five years of that chart CalPERS earned 12.5% per annum and the stock market doubled yet the UAAL grew $44 billion. As explained here, CalPERS must earn much more than its expected rate of return to shrink the UAAL.

PS: If you are looking for someone to blame, don’t point the finger at CalPERS’s investment staff. They are not responsible for markets reverting to the mean and they had plenty of good years before the last two years. And don’t blame government employees and retirees. They did not cause this problem. You should blame your elected officials and pension fund board members. Together they are responsible for hiding the true size of pension promises at the time they are made and failing to properly fund those promises when they are made. They are continuing to do so — and thereby creating new UAAL’s every day.

About the Author: David Crane is a Lecturer in Public Policy at Stanford University, SIEPR Research Scholar and president of Govern For California. From 2004 – 2010 he served as a special advisor to Governor Arnold Schwarzenegger and from 1979-2003 he was a partner at Babcock & Brown, a financial services company. Crane also serves as a director of Building America’s Future, California Common Sense and the University of California’s Investment Advisory Group. Formerly he served on the University of California Board of Regents and as a director of the California State Teachers Retirement System, California High Speed Rail Authority, California Economic Development Commission, Djerassi Resident Artists Program, Environmental Defense Fund, Legal Services for Children, Jewish Community Center of San Francisco, Society of Actuaries Blue Ribbon Panel on the Causes of Public Pension Underfunding, and Volcker-Ravitch Task Force on the State Budget Crisis.

Government Unions Benefit from the Asset Bubble that Harms Workers

Earlier this month the California Policy Center released a study that provided additional evidence that the U.S. stock indexes are overvalued by approximately 50%, along with calculations showing the impact of a major downward correction on the solvency of California’s state and local government pension systems. Stocks are now at unsustainable bubble valuations.

Not covered in this study, but equally overvalued, are bonds, which pension systems misleadingly categorize as “fixed income” investments in their portfolio disclosures. CalPERS even went so far as to trumpet their success in earning a 9.29% return on “fixed income” investments in their most recent press release – a healthy return that offset losses elsewhere and allowed them to earn a marginally positive return of 0.61% last year. But “fixed income” investments usually refers to bonds, and bonds are also at unsustainable bubble valuations.

Here’s why bonds are overvalued today: Whenever new bonds are issued at lower fixed rates of interest than the bonds that were issued before them, then those older bonds that pay higher fixed rates of interest can be sold for more money than their original price. This is because on an open market, buyers will price a resold bond at a value calculated to equalize returns. When rates go down for new bonds, the prices for existing bonds go up. The problem is that back in the 1980’s, bonds were being issued at rates as high as 16%, and today, they’re being issued at rates close to zero. After a thirty year ride, interest rate drops can no longer be used to elevate the value of bond portfolios.

At a macroeconomic level, every possible investment in the world is overvalued today, because central banks have lowered interest rates to zero in a desperate attempt to continue a decades long disease in which they have spent more than they’ve collected. Governments got to borrow money for next to nothing, and assets kept appreciating. But the binge is almost over, and unlike the savvy super-rich, pension funds can’t just take their winnings off the table.

New Bond Issues, Rates by Nation – June 2016 (red = negative)
20160719-UW-NegativeYieldsNegative coupon bonds, a desperate experiment that isn’t going to end well.

This is all tedious drivel, however, if you are a unionized public employee in California. Your retirement security is guaranteed by “contract.” It’s the result of deals cut between union “negotiators” and the politicians they make or break. As a government employee in California, if you’ve worked 30 years, the average annual retirement benefit you can expect if you retire this year is worth over $70,000. To honor that expectation, CalPERS is already mid-way through their latest reassessment, a 50% increase to their collections from participating agencies. And if there is a 50% market correction (“fixed income” and equity), expect them to double or even triple their collections from taxpayers.

If you are a private citizen trying to prepare for retirement today after, say, 45 years of work and saving, good luck. Because there is no safe investment left in the world. And while you are likely to have to cope with, for example, suspended dividend payments on stocks that are down 50%, expect your taxes to go up in every imaginable category – sales, property, income, and hidden taxes embedded in your utility bills and phone bills. It will be “for the children” and “for public safety.” And if there’s a vote required to increase the tax, it will usually pass, because most voters don’t pay property tax, or income tax, or if they do, the taxes are indirectly assessed and invisible to them.

This is the oppressive hoax that government unions have perpetrated on the working families they claim they want to protect. They have exempted their own members, government workers, from the consequences of a corrupt financial system where they are leading partners. When governments spend more than they make and have to borrow money, central banks lower interest rates to make it easier to work the payments into the budget. At the same time, lower interest rates goose the value of stocks and bonds, helping the pension funds claim they can earn 7.5% per year. And when the house of cards collapses, taxpayers bail out the banks and the government pension funds.

The next time a spokesperson for a government union speaks disparagingly about Wall Street corruption, remember this: They are partners with Wall Street. They support overspending for their own compensation and benefits, creating deficits that have to be covered by taxes and borrowing. Their pension funds demand high returns, and the bankers comply, with rates that encourage borrowing and deny ordinary people the ability to save. Now that interest rates have hit zero and are even going negative in an exercise of monetary chicanery that has no rival in history, the end is near.

Public sector union leaders need to start remembering they represent public servants, not public overlords who are exempt from the reality that you can only spend as much as you earn. As it is, these union leaders are the overpaid mercenaries of capitalism at its most corrupt.

 *   *   *

Ed Ring is the president of the California Policy Center.

Pensions and Taxes Increase While Labor Unions go Unchallenged

In January 2015, the Manhattan Institute’s Steve Malanga, writing in the Wall Street Journal about public pension costs gulping down tax raises, quoted me saying that no matter what local politicians tell voters, when you see tax increases, think pensions.

To paraphrase Ronald Reagan: Here I go again!

Recent accounts indicated that the California Public Employees’ Retirement System (CalPERS) unfunded pension liabilities have increased because CalPERS investment revenue has dropped. Yesterday on this site, David Kersten cited the dramatic increase of CalPERS unfunded liabilities rising from $93 billion two years ago to $150 billion today.

More to the point, Sacramento Bee columnist Dan Walters wrote, “CalPERS has been demanding hundreds of millions of dollars in additional contributions from state and local governments – hitting cities particularly hard…”

 

Despite a 42% growth in California’s general fund budget compared to 2011, the state continues to propose new tax increases and extensions.

 

With the obligation for more local taxes going to cover pension costs is it just a coincidence that so many tax increase measures are popping up on local ballots?

I don’t think so.

Sure, there will be specific reasons that local governments say they need more tax revenue. More for police or transportation or the homeless, they will say. The governments would have more revenue for those services if they did not have greater obligations for underfunded pensions.

It’s not like revenues have declined recently in government coffers. The state general fund budget is up 42% since Jerry Brown came into office in 2011. Local governments also are enjoying revenue increases, but the call for more taxes keep coming.

Take San Francisco, which could see 8 different tax increases on the November ballot. We just learned that property tax collections in the City by the Bay dramatically increased 9%. And, the city government still needs all that revenue from 8 new tax increases?

Money in government budgets is fungible to some extent. If you cover specific agency costs with a targeted tax increase, that frees up general fund money for other items, including pensions.

 

Nathan Brostrom, Chief Financial Officer for the University of California, told the Sacramento Bee that tuition hikes could be avoided if the state would assist in funding its retiree costs. He explained that the school believed it was not getting what was promised from the Prop. 30 tax hikes.

 

When the University of California declared a shortage of money a couple of years ago much angst surrounded the need to raise already high tuitions. What was the money needed for? As I wrote at the time, the UC’s chief financial officer told the Sacramento Bee that tuition hikes could be avoided if the state helped with retirement costs.

It wasn’t only the university system that saw money diverted for retirement costs. The aforementioned article by Steve Malanga in the Wall Street Journal was subtitled: Remember that ‘temporary’ tax hike for California schools? Most is now going to public worker retirements.

Ironic that the extension of those temporary taxes, Proposition 55, is on the ballot while the retirement system sputters—or is it?

As David Kersten pointed out in his column, “California Democratic politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.”

That’s consistent with what I heard from one prominent Democrat who wondered with a state budget increase of more than a third over five years why so many state agencies say they don’t have enough money. The politician answered the question by saying it was because of pension and health care costs and that the majority Democrats would not take on the unions over that issue.

Too bad. That means it falls to the taxpayers. Either they pay up or reform the system on their own.

About the Author: Joel Fox is Editor of Fox & Hounds and President of the Small Business Action Committee. This article originally appeared in Fox & Hounds and appears here with permission.

CalPERS Sinks Further into Fiscal Insolvency

Orange County Register reporter Teri Sforza quietly released a story  that blows the whistle on another fiscal bombshell of bad news at the California Public Employees’ Retirement System (CalPERS).

The story states that according to unofficial preliminary numbers from CalPERS the fund lost about 2% of its market value in the 2015-16 fiscal year that just ended–which represents an estimated $28.5 billion increase in the fund’s unfunded liabilities, according to my rough calculations.

The fund assumes a 7.5% per year annual return despite the fact that no investment officer in the country believes that is achievable in the current environment.

Stanford Professor Joe Nation estimates CalPER’s total unfunded liabilities have increased to an estimated $150 billion, compared to $93 billion just two years ago, according to the Orange County Register report.

 

CalPERS investments returned 2.4% for fiscal year 2015, far below its 7.5% target.

 

And if one assumes a more realistic 4% rate of return (a “Treasury” or “risk-free” rate) the funded liability for Calpers alone is now $412 billion, or the equivalent of three state general fund budgets, Nation said.

For anybody who knows the numbers, and I do, CalPERS is speeding down the track toward financial catastrophe but none of the state’s leading Democrats will even acknowledge that there is a major problem here.

And this ignorance of the problem by California Democrat politicians is perhaps what is most upsetting to me and the small community of pension reform advocates that fully understand the magnitude of the problem and what this means for the state’s future.

The lone voice in the legislature for reform continues to be Sen. John Moorlach (R-Costa Mesa) who has a significant background in public finance and accounting.

“What has me baffled is that this is causing me great anxiety, but it does not seem to have the same impact on my colleagues in Sacramento,” Moorlach said.

Inside sources say most if not all California Republican State Legislators in Sacramento understand the magnitude of the problem but there is not much to be gained politically by going out on the issue prior to a critical mass being reached for reform.

The true culprit for this code of silence in the Legislature is the state’s powerful public employee unions, their political threats, failed logic, and propaganda on the issue.

Dave Low, chairman of Californians for Retirement Security, says the pension reformers are a case of “crying like Chicken Little about how the sky is falling,” according to the Orange County Register report.

Low and the state’s public employee union bosses are playing a dangerous game here that will inevitably blow up in their face and result in major financial hardship, lost benefits, and jobs for their public employees at some point in the not so distant future.

Low won’t even acknowledge a problem with the escalating liabilities, and this is the same position taken by the California Democrat Legislature.

This is an unconscionable policy position to anyone who cares about the future of our state and illustrates why the California Democrat Party is no longer fit to lead California.

California Democrat politicians are too tied to their base which is the public employee unions, and are unable to make decisions that will benefit the state’s future and prevent financial catastrophe.

This whole facade is rapidly deteriorating and the problem will soon become so big that nobody will be able to ignore it.

The only question, is whether it will be too late to save the State of California and its local governments from financial disaster at this point, or whether we will first cross a point of no return that permanently saddles our public agencies and state taxpayers with trillions of dollars in debt that we cannot afford to pay.

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.

California Pensions Take Above-Average Tax Bite

California pension funds take a bigger share of tax revenue than the national state average, a research website shows. Why the growing costs are outpacing the norm is not completely clear.

A prime suspect for some would be overly generous pensions, particularly what critics say is an “unsustainable” increase for police and firefighters widely adopted to match a big increase given the Highway Patrol by SB 400 in 1999.

The Public Pension Database does not have information on the formulas that determine pension amounts, like the Highway Patrol’s “3 at 50” or three percent of final pay for each year served at age 50.

One problem is the wide range of pension formulas, made even more complex by a recent national wave of cost-cutting reforms. Under a California reform three years ago, most new hires must pay more toward their pensions and work longer and retire at an older age to earn the same pension as workers hired before the reform.

 

Keith Brainard is the Research Director for the National Association of State Retirement Administrators (NASRA)

 

“Trying to compare plan benefits in one state with another state has become complicated,” said Keith Brainard, research director for the National Association of State Retirement Administrators.

Brainard started the database now operated jointly by NASRA and the Center for Retirement Research at Boston College and the Center for State and Local Government Excellence.

Several web-based seminars have been held to show how the “big data” can be used by researchers, government officials, media, and others. Trends and patterns can be identified, comparisons made, and the findings displayed in charts.

A chart on the database shows the amount of tax revenue taken by California public pensions was slightly below the national average in 2001. Then from 2003 to 2005 the California pension tax bite climbed well above the national average, maintaining a gap that by 2013 was about a third higher.

In rough terms, the public pension share of California tax revenue in fiscal 2013 was 8 percent by fiscal 2013 compared to a national average of 6 percent.

 

Source: Public Plans Database and Census of Governments.

Source: Public Plans Database and Census of Governments.

 

 

In an interview, Brainard mentioned two factors for the above-average share of tax revenue taken by California pensions. Most California government workers, including teachers and many police and firefighters, do not receive Social Security.

Only 40 percent of state and local government employees in California receive Social Security, according to the database. The Social Security coverage in some other large states: New York 99 percent, Florida 95 percent, and Texas 47 percent.

The cost of using the federal Social Security program to provide part of the retirement benefit (6.2 percent of pay each from the employer and the employee) would not show in data about the share of tax revenue taken by state and local pensions.

Another factor: The period covered by the research begins around 2000 when the three big state pension funds were spending a “surplus” from a stock-market boom not only on increased benefits but on lower employer contributions.

The California Public Employees Retirement System, which covers about half of all non-federal government workers in the state, sponsored the retroactive SB 400 rate increase for all state workers and dropped employer rates to near zero in 1999 and 2000.

Then as the stock market dipped, CalPERS had to begin raising employer rates not only to cover pension increases (AB 616 in 2001 authorized a bargaining menu for local government employees) but also to regain funding lost by the big employer rate cuts.

In addition to CalPERS, the California plans in the database include the California State Teachers Retirement System, the University of California Retirement System, the Los Angeles County Employees Retirement Association, and 11 other local systems.

The data covers most of the public pension members in California, but far from all of the pension systems. An annual report from the state controller lists 131 separate California retirement systems, many of them relatively small.

California systems in the database, with two major exceptions, paid their full Annual Required Contribution (ARC) to cover the annual or “normal” cost of pensions earned each year and the large debt from previous years, the “unfunded liability.”

Debt often is created when pension fund investments, expected by big California funds to earn 7.5 percent a year, fall short of the target, which critics contend is overly optimistic. Among other factors that can create debt is longer than expected life spans.

The California State Teachers Retirement System is listed on the database as paying only 50.9 percent of the ARC in 2013. Unlike other systems, CalSTRS could not raise employer rates. Now long-delayed legislation two years ago to pay the full ARC will more than double school rates by 2020, cutting deep into budgets.

CalSTRS spent its small and brief “surplus” around 2000 on several benefit increases and rate cuts. The pension fund was shorted when a quarter of the teacher contribution, 2 percent of pay, was diverted for a decade into a supplemental 401(k)-style individual investment plan for teachers with a guaranteed minimum return.

Three years ago, a Milliman actuarial report said if CalSTRS had kept its 1990 structure without the rate and benefit changes around 2000, pensions would have been 88 percent funded instead of 67 percent. A much smaller rate increase could have closed the funding gap.

The UC Retirement Plan is listed on the database as paying 63.9 percent of the ARC. A large surplus prompted the plan to give employers and employees a remarkable two-decade contribution “holiday.”

Most made no payments to the UC pension fund from 1990 to 2010. The surplus, driven by investment returns and other factors, peaked with a 156 percent funding level in 2000.

As painful rates were set to resume in a time of tight budgets, a UC task force said in 2010 that if normal cost contributions had been made during the two decades, the system would have been 120 percent funded instead of 73 percent.

CalPERS has not calculated how much of its current funding gap results from the pension increases and rate cuts during the surplus years. But a CalPERS chart showed that SB 400 accounted for 18 percent of the state worker employer contribution increase between 1997 and 2014.

Nearly half of the state worker contribution increase, 46 percent, was due to investment gains and losses, demographic and actuarial changes, and higher employee contribution rates. Payroll increases accounted for 31 percent of the change.

Critics say the SB 400 “3 at 50” formula has the most impact in local government, where police and firefighters are a major part of the budget. The big cities (Los Angeles, San Francisco, San Diego, San Jose, and Oakland) have their own pension systems and are not in CalPERS.

Public pensions have not recovered from huge investment losses during the recession. The Center for Retirement Research reported last monththat the 160 plans in the Public Pension Database were 74 percent funded last year, 72 percent under new accounting rules.

The Center’s report showed that from 2001 to 2015 the CalPERS funding level dropped from 111.9 percent to 74.5 percent. During the same period, the CalSTRS funding level fell from 98 to 67 percent and UC funding plunged from 147.7 to 81.7 percent.

About the Author: Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. He is currently a Publisher for CalPensions.com.

New Labor Agreement Projects to Widen Structural Deficit in Los Angeles

In August, the Los Angeles Times awarded Mayor Eric Garcetti a C for his performance during his first two years in office.  While Garcetti received a B+ on his Vision, his overall ranking was dinged by a C- on Leadership and D on Political Courage.

Unfortunately for all Angelenos, the “smooth on the podium” Garcetti has not shown leadership or political courage when addressing our cash strapped City’s budget, its lunar cratered streets, its massive $15 billion in unfunded pension liability, and its antiquated management information systems.

One of the major financial goals of the City over the past decade has been to eliminate its Structural Deficit, where the growth in expenditures (primarily personnel costs – salaries, benefits, and pension contributions) exceeds the increase in tax revenues.  And of course, Garcetti pledged to eliminate the Structural Deficit as part of his Back to Basics program where the City would “live within its financial means.” 

But the political rhetoric is not consistent with reality as the City is now projecting a cumulative four year deficit in the range of $300 million, in large part because of a new labor agreement with the City’s civilian unions. This deal with the campaign funding management of the civilian unions turned a projected surplus of $68 million in 2020 into a deficit of $100 million, a negative swing of $168 million.

This $300 million cumulative deficit does not include any money for the City’s ambitious homeless initiative, the systematic repair of our lunar cratered streets, the proper funding its pension plans and management information systems, the “goal” of hiring of 5,000 new employees, or any new labor contracts for the City’s 32,000 employees.

 

Mayor Eric Garcetti pledged to eliminate LA’s structural deficit, but instead seems to be increasing it.

 

However, these deficits are very difficult to comprehend as projected revenues over Garcetti’s first eight years (July 1, 2013 to June 30, 2021) in office are anticipated to increase by 35%, or $1.6 billion.  This shows that our City has a spending addiction, a problem that the mayor has refused to address.

Garcetti’s lack of leadership and political courage was evident by the fact that he was missing in action when the LA 2020 Commission recommended two finance related reforms.  These reforms included the adoption of a three year budgeting cycle and the establishment of an Office of Transparency and Accountability to oversee our city’s precarious finances.

The LA 2020 Commission also suggested the formation of a Commission on Retirement Security to review, analyze, and make recommendations to stabilize our City’s seriously underfunded pension plans.  As it is, the financial demands of the City’s two pension plans threaten to devour our City’s future and burden the next two generations of Angelenos with tens of billions of obligations. But where was our Back to Basics mayor?

The Mayor has also failed to develop a comprehensive operational and financial plan to repair and maintain our streets, some of the worst in the nation.  At the same time, the City receives a kickback of over $200 million a year from the Metropolitan Transportation Authority to help maintain our streets and transportation systems.  Instead, our mayor is crowing about fixing 2,400 miles of streets a year.  But this pothole filling strategy is just a band aid that does not address our thousands of miles failed streets and neglected alleys.

Garcetti tell us that he wants LA to be the best run big City in America.  But this is not in the cards unless the City is willing to devote the significant resources to update City Hall’s antiquated management information systems with new enterprise software systems that are necessary to run complex organizations in this ever changing world.

Mayor Garcetti has been blessed by an improving economy that has resulted in a huge increase in revenues.  But he has squandered this opportunity to stabilize the City’s finances by failing to address the Structural Deficit, our failing infrastructure, our seriously underfunded pension plans, and our antiquated management information systems.

Mayor Garcetti has failed us and as a result, he has flunked Budget and Finance and deserves the failing grade of D.

About the Author: Jack Humphreville is a LA Watchdog writer for CityWatch, President of the DWP Advocacy Committee, Ratepayer Advocate for the Greater Wilshire Neighborhood Council, and Publisher of the Recycler

How Public Officials Can Reduce the Burden of Unionized Firefighters

What started in Stanton, California as an anomaly is spreading quickly across North Orange County – the push to create local sales taxes in order to pay off the rising pay and benefits of public employees.

Stanton voters passed a one-percent sales tax in 2014, giving residents in one of OC’s poorest cities the county’s highest sales tax. But in the last several days, the enthusiasm for this most regressive of taxes has spread to Westminster, Fountain Valley and La Palma, and always for the same reason: public employee compensation.

Stanton councilmember David Shawver is elated, perhaps because he’s no longer alone. “The 2014 sales-tax increase saved the city of Stanton’s life,” Shawver told the Orange County Register last week. “The tax will be a really big thing for Westminster. They will see a regeneration of their community.”

In those cities, as in Stanton, the same dire warnings are broadcast from City Hall: The end is near. We’ve cut every other city service imaginable, and if you don’t pay more in sales taxes now, you’ll lose vital public-safety services – the police and firefighters who represent the thin line between civilization and Darwinian struggle.

When asked about this problem, many city officials respond that for all their apparent authority, they’re really impotent. They’re trapped by the rising pay and benefits of government workers, especially those who are unionized, and especially those in unions of police and firefighters.

A Stanton official told me there’s no way to change the cost of sheriff’s deputies and firefighters. The county sets the rate – averaging around $236,000 per year for firefighters and $189,000 for deputies. Stanton just pays.

“There’s absolutely nothing we can do about that,” the official said.

That’s absolutely wrong. The City of Stanton and its neighbors have an amazing opportunity in the midst of their crisis. And the U.S. military provides part of the answer.

20160630-CPC-SwaimFirefighters
U.S. Navy Firefighters in action
(Source: U.S. Navy)

For years, the U.S. has run on the assumption that a relatively small number of career professionals can mass-produce the world’s most powerful soldiers, sailors, Marines and airmen. In 16 weeks or less, for example, the Army outfits, trains and deploys men and women around the world. It arms them with life-saving and death-dealing equipment and techniques. It counts on them to carry out their missions in the most dangerous conditions imaginable. Bravery, loyalty and resilience are standard.

In exchange for this exceptional demand, we nevertheless pay our service people very little – about $1500 per month. After four years, most enlistees are discharged and pursue other careers. The military expects that only a few will stay on to rise through the ranks of officers and noncommissioned officers who oversee the recruitment, training, support and management of new trainees. Their leadership is invaluable, but the military may at its discretion decide to reduce benefits – even retroactively – or terminate employment.

The Department of Defense isn’t perfect. The scandal over veterans’ health care, the bloat, the crony-capitalist contracts and the politicians’ ham-fisted use of force are real. But if we can train 18-year-olds to handle lethal force and million-dollar equipment in a combat zone, we can train young people to put out fires – or, as is more likely in Orange County, to respond to medical emergencies.

We could pay these firefighters well, better than their military counterparts. And at the end of four years, we could thank them for their service and let them pursue their bliss – to sign on as firefighters in wealthier cities still wedded to the old model. Or they could move on to work or college. It would be cheaper to spend more – to pay for their health care and offer tuition support for several years, for instance – than to turn them into careerists.

Instead, for decades, we’ve chosen to hire high school graduates who win the firefighting lottery. Thousands apply for just a few openings anywhere. The reason for the long lines: The winners will work a few days per week in exchange for about $236,000 per year, early retirement and annual pensions of about 90 percent of their highest annual pay.

You’d have to be a millionaire to clock that kind of income in retirement. But our cities and counties hand it out as standard procedure.

Our elected officials can rarely see a way out.

That’s why Stanton – and Westminster, La Habra, Fountain Valley, Garden Grove, Placentia and hundreds of other California cities – are so deeply troubled. For decades, police and firefighters have backed (with their time and money) political candidates who deliver on the promise to sign off on higher pay and benefits. The sweetheart deals have driven countless Orange County cities toward insolvency.

Stanton can survive if it innovates. And, sure, it may seem a long-shot to expect that the city councilmembers elected to represent government employees will have the courage to represent the people instead. But there’s an old saying about necessity as the mother of invention – or as they say in bureaucratic circles, urgency functioning as the distaff progenitor of creativity.

 *   *   *

Will Swaim is the VP of Communications at the California Policy Center.

Fresno Cop Deals Blow To SEIU… And Everyone Shakes Hands

I met Eulalio Gomez in Bakersfield earlier this year. The correctional officer from Fresno was part of an MLK Day gathering of public sector union reformers, and I was there to document.

Each California employee present had spent time and resources challenging their unions in one form or another. They came to compare war wounds and most had battle fatigue. Bolstered by the support of their peers, they went back into their respective corners of the state to continue their battles.

Six months later, Gomez is among the first to run a victory lap. An election spearheaded by Gomez has caused Fresno County’s largest union to lose members to the new, 900-member Fresno County Public Safety Association, which just won the right to represent workers formerly of the Service Employees International Union. 

Gomez, the association president, says his group is just focused on members.

“Wages and benefits only,” he says.

“We fought to obtain our independence and self-governance. In a free market, consumers are free to buy a service they like. No one should be forced to pay for a service they no longer want. I determined that they had poor customer service and were not accountable to members.”

According to a website statement from SEIU Local 521 president, Riley Talford, the SEIU is “disappointed (but) ready to stand together as a united coalition of workers to build a better future for all Fresno County employees.”

As a Californian from back in the day, those thoughtful words indicate mud-slinging is so passe.

I caught up with Eulalio, and we had a chat.

 

 

Eulalio Gomez – President of the Fresno County Public Safety Association

 

 

HSC: “What happened?”

EG: “We had a decertification election from SEIU in Fresno. Two elections occurred in eight months, and we won both of them. We are a union that represents members, without social agendas. We don’t want to fund ‘black lives matters’ and immigration reform events.”

HSC: “How do you as a Mexican-American explain to critics that you’re not racist in not supporting social justice agendas?”

EG: “It’s simple: I’m not racist. The fundamental issue is that is has nothing to do with the employees of the County of Fresno. If folks want to be part of it, that’s not a problem for me. But they should fund it out of their own pocket like everyone does extracurricular activities. Our group is largely sheriff correctional officers and the movement has caused a degrading of perception to members of the public against uniformed personnel; it has caused acrimony at law enforcement officials, creating anarchy and often inciting violent acts against the law enforcement community.”

HSC: “How do you explain ‘bad apples’ don’t represent everyone?”

EG: “We do acknowledge there are some issues with our brothers and sisters on the streets, but that does not represent law enforcement as a whole. People should be judged by their individual actions not by the uniforms they wear. So it’s almost like people believe if you’re in a uniform, you’re bad.”

HSC: “To the kid on the street, who says he’s being judged for his color, how do you respond?”

EG: “I believe you’re judged by your actions and not by the color of your skin… We should all follow the same rules.”

HSC: “In Bakersfield, you told me you’re doing this for your children.”

EG: “Yes because I’m doing this to make our community safer… we address local issues only. At the end of the day, all the money generated from the Fresno County Public Safety Association will stay right here locally. It won’t be going to D.C.”

HSC: “What would you like to tell Californians?”

EG: “If you are a public sector employee disenfranchised with your representation, take control of your future and change it and get involved. Either remove it or change it.”

HSC: “How long have you been fighting to create your own union?”

EG: “Five years.”

HSC: “What did you tell your children about your fight?”

EG: “I showed them the flyers that were being dispersed at my job calling me a ‘bad apple,’ ‘liar,’ and I explained to them why. I explained they are willing to use all avenues to stop the loss of dues. They understood the politics. I affiliate as an independent: I don’t want to be labeled, and I don’t want to be forced to support an issue based on my affiliation. We all have our own minds and can determine what’s best for ourselves and our family.”

HSC: “Are people starting to call you the Erin Brokovich of ‘Choose Your Union?’”

EG: “No. That title goes to a DMV clerk named Mariam Noujaim. She’s from Egypt, and I just love her tenacity and her personality and ‘break the door down’ attitude. I respect her for challenging her union on transparency and competition. She works hard and she doesn’t care if the doors are not open, she goes through the door.”

HSC: “Isn’t that the American way?”

EG: “Indeed.”

About the Author: Heidi Siegmund Cuda is a former Investigative Producer for Fox 11 News in Los Angeles and the Creator and Host of the Economic Series, “Saving the California Dream.” She is currently producing and hosting the series, “Ripoff Report Investigates.”

Property Taxes to Increase by 13 Percent in Coming Year

In Chicago, escalating property taxes are headline news.  With the average property tax bill due to go up by 13 percent – and more increases in subsequent years virtually guaranteed – home ownership in the Windy City is in deep peril. No one seems happy except the moving companies.

This drastic tax increase is the result of bad decisions by corrupt officials who have caved to city employee pension demands that are unsustainable without massive borrowing. And that borrowing will be paid for by massive property tax hikes. But if homeowners are considering fleeing exorbitant taxation, they may have to travel a good distance. Illinois residents, even without the Chicago pension tax, are already paying the highest effective property tax rate in the nation at 2.67 percent, according to a recent study by CoreLogic, an Irvine, California-based provider of data to the financial and real estate industries.

Nationally, the study shows the median property tax rate is 1.31 percent of value.

In addition to Illinois, states with median property tax rates of greater than two percent include New York, New Hampshire, New Jersey, Texas (which some may find surprising considering its reputation as a low tax state), Connecticut and Pennsylvania. On the low end is Hawaii at 0.31 percent.

California, at 1.12 percent, ranks 30th compared to other states. Tax seeking politicians and their special interest allies will likely consider this a failure. After all, thanks to them, California has the highest state sales tax, highest marginal income tax rates and, due to carbon charges, the highest gas levies in the nation. “Why shouldn’t we be number one in every tax category?” they are, no doubt, asking themselves.

California property tax rates are reasonable for one reason and one reason only – Proposition 13. Arguably the most famous of all initiatives in the history of the United States, Prop. 13 was the brainchild of the late Howard Jarvis. He led the effort to put the tax limiting measure on the ballot where it was approved by nearly two-thirds of California voters in 1978. By limiting annual property tax hikes to two percent per year, it made tax bills moderate and predictable.

Still, California property taxes are not low. Because of high property values, the median priced home now costs nearly $519,000 according to the California Association of Realtors. Thus, while our effective tax rate ranks 30th of the 50 states, when measuring property tax revenues per capita, we rank 14th. This belies government complaints that California is starved for property tax revenues.

Proposition 13 protections should not be taken for granted. Consider the cities of Stockton, Vallejo and San Bernardino which were driven into bankruptcy by officials who, like Chicago’s aldermen and mayor, agreed to inflated and unsustainable pension benefits for government workers. The difference is that Proposition 13’s tax limiting provisions prevent California cities and counties from arbitrarily increasing property taxes. At least for now.

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.

As Right-to-Work Expands, So Do Union Membership Rolls

Editor’s note: This is an edited version of an article first published in the Washington Examiner on May 4, 2016 under the title, “Right-to-work strengthens workers.”

In March, the United Auto Workers reported that its membership grew 1.3 percent in 2015. This may come as a surprise to some because a substantial number of UAW members work in right-to-work states like Michigan. But the report highlights something worker-freedom supporters — and even some UAW officials — already knew: Right-to-work can be good for unions.

A recent report from the U.S. Bureau of Labor Statistics showed that in 2015, unions in what were then 25 right-to-work states gained more members than in states without the law. Membership increased by 125,000 in right-to-work states and only 91,000 in non-right-to-work-states and Washington D.C.

 

Statistics show that union membership grew more in right-to-work states than in other states.

Statistics show that union membership grew more in right-to-work states than in other states.

 

These gains come despite the fact that non-right-to-work states have over 7 million more workers than right-to-work states, according to the BLS report. The Illinois Policy Institute reports that this may be part of a long-term trend and not a one- or two-year fluke. Between 2005 and 2015, union membership grew in right-to-work states by about 1.3 percent, but fell around 9 percent in non-right-to-work states.

Six of the 10 states with the biggest increases in union membership were right-to-work. Overall, union membership increased in 16 of the nation’s 25 right-to-work states in 2015. In contrast, nine of the 16 states with shrinking membership still permit unions to collect involuntary dues or fees.

Even in states that have most recently enacted right-to-work, figures from the BLS sharply contrast with activists’ earlier warnings that unions would be devastated. For example, Michigan’s right-to-work law went into effect in early 2013 — and unions gained members that year. Membership did decline in 2014, but in 2015 unions in the state added 36,000 members. In nearby Indiana, union membership did fall last year, but there are still 37,000 more union members there than when right-to-work took effect in 2012.

So how does one explain this, especially considering that today’s unions are opposed to right-to-work laws? First, it’s important to remember that right-to-work laws do nothing to diminish a union’s ability to organize a workplace or a worker’s ability to become a union member and pay dues. If employees feel that they can achieve better wages, benefits and working conditions through a union, no right-to-work law will stand in the way of them signing up for one.

It may be that right-to-work actually makes unions stronger, because unions can no longer force all workers to financially support them. To win new members and keep current ones, unions in right-to-work states need to be more attentive and responsive to what workers care about most. In some ways, these unions face similar incentives to meet workers’ needs as any other business in the service industry does.

The UAW Secretary-Treasurer, Gary Casteel, found that Right-to-Work assisted his union recruitment efforts.

 

Some union officers even say right-to-work helps their recruitment efforts. Gary Casteel, now the UAW secretary-treasurer, said in 2014, when he was in charge of organizing Southern auto plants, “This is something I’ve never understood, that people think right-to-work hurts unions.”

“To me,” he continued, “it helps them. You don’t have to belong if you don’t want to. So if I go to an organizing drive, I can tell these workers, ‘If you don’t like this arrangement, you don’t have to belong.’ Versus, ‘If we get 50 percent of you, then all of you have to belong, whether you like to or not.’ I don’t even like the way that sounds, because it’s a voluntary system, and if you don’t think the system’s earning its keep, then you don’t have to pay.”

UAW President Dennis Williams has echoed these sentiments, telling the Detroit News, “I’ve always believed that if you do your job representing people, that people will be there to support you.”

Whether it’s by making the argument to organize new companies easier, as Casteel suggests, or simply because right-to-work states have faster job growth that leads to more opportunities for union jobs, unions are doing better in these states.

All these examples suggest that right-to-work can strengthen unions. It appears to do so by restoring unions’ incentive to earn dues the old fashioned way: by demonstrating their value to potential members, just as any other voluntary membership organization must do.

About The Author: F. Vincent Vernuccio is director of labor policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Michigan. Nathan Lehman, a 2014 research intern with the Center, contributed to this article. This issue originally appeared in the August 2014 issue of Labor Watch and is republished here with permission.

Labor Backed Prop. 30 Extension Represents CA Taxpayer-Funded Bailout

Perhaps the best decision California voters can make at the polls this November is to vote “NO” on the initiative extending the Prop. 30 temporary tax increases that expire in 2018.

Why?  The short answer is that extending the Prop. 30 tax extensions effectively bails out California State Democrat politicians for their inability to take any steps to curb spending and prepare for the expiration of the Prop. 30 tax increases.

On the contrary, the California Democrat Legislature has taken it upon itself to break all the significant promises it made to sell Prop. 30 to voters in 2012, and now most Democrat politicians want voters to approve another 12-year extension to cover huge program expansions and out of control government spending.

Not to mention, the initiative comes with a price tax of nearly $10 billion in increased taxes ($1.5 billion from the ¼ cent sales tax increase, and $6 to $8 billion in income taxes through three new tax brackets).

Governor Jerry Brown (D) has done the right thing so far by refusing to endorse the initiative that would extend the Prop. 30 tax extensions, saying that the tax increases were intended to be “temporary.”  But I have not heard any other Democrat politician come out against the Prop. 30 extensions, far from it, nearly all California State Democrat politicians want the measure to pass, according to inside sources.

In 2012, the whole argument in support of Prop. 30 was based on a “don’t close the Washington monument” strategy by proponents who said that the “temporary” measure was needed to prevent deep budget cuts to schools and public safety.

 

Gov. Jerry Brown openly stated at a Sacramento News Conference, “I said that’s a temporary tax,” when asked if he would push to extend Prop.30.

 

But once the Prop. 30 tax revenues came flooding in California Democrat Legislators have done nothing but spend and expand permanent government programs without regard for the stated “temporary” nature of the tax increases.

A few sets of numbers tell the whole story.  Prop. 98 education spending has jumped from $47.3 billion in 2011-12 to $71.9 billion in 2016-17—a 52% increase in education spending on only five years despite very nominal public school enrollment growth.

In 2011-12, total State of California spending was $129 billion, with $86 billion of that money being General Fund spending.

By 2016-17 total State of California spending had climbed to $173 billion—an increase of 34% since 2011-12—while California General Fund spending increased to $122.1 billion in 2016-17—an increase of 42%, according to the Governor’s proposed May Revise (Note: assumes final 2016-17 budget will spend roughly what the Governor has proposed).

California General Fund reserves have increased from $543 million in 2011-12 to a proposed $6.7 billion in 2016-17 under the Governor’s May Revise.

The Governor’s May Revise attributes the steep spending increases in recent years to a massive expansion of the welfare state, particularly Medi-Cal, and outlines $19.5 billion in increased state spending that has been spent since 2012 to dramatically expand the welfare state.

California State spending has skyrocketed since 2012 by more than 40-50% on education, public safety and other state programs, and now the California Democrat Legislature believes we need to make the tax increase permanent to pay for all the new spending.

Don’t believe this “false narrative,” California has a “spending problem,” not a “revenue problem.”

To recap, in 2011-12 the State Legislature only had $87 billion in General Fund resources available to spend, by 2016-17 that figure had jumped to $125 billion—that’s an increase of $38 billion annually or a 44% increase in money available to spend in just five years.

The Prop. 30 tax extensions only brought in about $8 billion annually—leaving about $30 billion in annual money available in 2016-17, compared to 2011-12, that the California Democrat-controlled Legislature should have managed more responsibly to prepare for the expiration of the Prop. 30 tax increases.

Voting to extend the tax increases only serves to reward California Democrat politicians for “broken promises” and a refusal to properly manage the taxpayer dollars which have flooded into Sacramento since 2012.

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.

Resist the “Pothole Tax”

Last week, Will Kempton, Executive Director of Transportation California and former Director of Caltrans published a response to Jon Coupal, President of the Howard Jarvis Taxpayers Association, in a Fox & Hounds piece stating that, “…in spite of all the recent audits and criticism, the organization [Caltrans] employs competent people who want to serve the public well.”  In the same piece he highlighted the need to address California’s transportation funding crisis and provided one solution: Raise your taxes even higher.

There is no doubt that there are many fine and capable Caltrans employees who simply want to build and maintain our state’s highway system. What Kempton missed was the incredible dysfunction at Caltrans and tries to deflect any criticism of the department.  He of all people knows how bad it really is at Caltrans, and for those who are unaware of the facts, his echo to raise taxes for transportation spending might seem like the only viable option. However, reports concerning a very dilapidated Caltrans are replete with criticisms of its inability to provide details for budget reviews and audits by either the LAO or the State Auditor.

 

Will Kempton, Former Director of the Department of Transportation (Caltrans)

 

We’re told the Governor and the Secretary of Transportation are serious about fixing California’s roads, but can you mention one initiative to actually fix Caltrans?  All I hear is cries for more tax increases.

Allow me to review a few facts revealing the competency level at Caltrans:

Left up to the Governor and the legislature, it will be YOU, the taxpayer, who will be asked to fund a “pothole” tax. I hate to break it to you, but you’re being taken to the cleaners. You are the victim of intentional infrastructure neglect. This literally is “highway robbery.”  The fix is in.  And the answer is you and your wallet.

California’s leadership should be sincere in its pursuit of better roads.  Fix Caltrans. Taxpayers should expect no less.

I’m ready to #FixCaltrans.

Watch & Share this video: ‪bit.ly/FixCaltransVid 

About the Author: As a Certified Public Accountant and Certified Financial Planner, John Moorlach began his career in public service 20 years ago when he warned that then Orange County Treasurer-Tax Collector Robert Citron’s risky investment strategies would lead to bankruptcy.  Moorlach’s warnings proved true when Orange County filed for bankruptcy protection in December of 1994, becoming the largest municipal bankruptcy in U.S. history. John Moorlach was twice re-elected to County Treasurer-Tax Collector. In 2006, voters elected John to serve in his first of two terms on the Board of Supervisors, where he continued his focus on reforming the county’s budget practices and sounding the alarm on the county’s growing unfunded liabilities. He now currently holds office as the State senator for the 37th senate district.

Prop. 13 is California Taxpayers Only “Saving Grace”

Proposition 13 is certain to continue to be a hot topic in 2016 and beyond as “reformers” continue to work on mobilizing a statewide effort to enact a “split-roll” that raises billions of dollars in increased property taxes from California businesses.

I have worked in and around Prop. 13 in one form or another for my entire career and have collected more data and research on its impacts that anybody else I have ever come in contact with.

I have since ended that research for the “reform” side, because I came to appreciate Prop. 13 for what it truly is–the last line of defense that California taxpayers have against elected officials who refuse to control “unsustainable” and “unaffordable” spending at both the state and local levels of government. 

For those new to Prop. 13, it is a California ballot measure passed in 1978 that places a 1% limit on local property tax rates, unless a “change in ownership occurs,” and limits assessment increases to 2% per year.

At the state level, Prop. 13 requires that any measure which would raise revenues to be enacted by a 2/3 vote of the Legislature.  At the local level, Prop. 13 requires taxes raised by local governments for a designated or special purpose to be approved by 2/3 of voters and a majority for general tax increases.

 

Stanford University Economist, Roger Noll, stated that “ever increasing, burdensome taxes and fees is the single largest concern facing California businesses.”

 

Sure, Prop. 13 is not perfect, far from it.   But the reality is that there is perhaps no public policy in California that is more effective at safeguarding taxpayers against the inability of California politicians, particularly those of the Democratic stripe, from overspending and then sticking taxpayers with the bill.

With the State of California $400 billion in the red, and most local governments in the same situation, you don’t hear anyone arguing with the fact that California government has a huge spending and debt problem.

Moody’s Investor Services agrees with this assessment, having prepared a report that finds California to be the least prepared state to weather a financial storm due to its fiscal policies and inability to reform its tax system.

Without Prop. 13, California elected officials would have “carte blanc” to push the state’s $1 trillion and growing pension problem onto state and local taxpayers, serving to further exacerbate the problem.  A whole host of other state and local taxes and fees would inevitably become viable proposals overnight in the absence of Prop. 13’s protections.

The ongoing explosion in fees and tax exactions on businesses at the local level is perhaps the best indicator of what would happen if Prop. 13 did not exist—turning an already steady and increasing flow of new local taxes and fees into the equivalent of an unchecked dam-break flood of new taxes and fees on California taxpayers.

Stanford University economist Roger Noll says that the problem of ever increasing, burdensome local taxes and fees is the single most legitimate concern that California businesses express about the state’s system of state and local finance.

Opponents of Prop. 13 cite tax equity and fairness as reasons to “reform” Proposition 13 by switching away from a “change in ownership” trigger for market reassessment to a “periodic reassessment of commercial property at market value.”

Furthermore, reformers say Prop. 13 is not “fair” because it heavily taxes new investment and rewards  “long-time” landowners—resulting in heavily disparate property tax amounts.

They say that the only fair way is to bring all businesses who receive a “tax break” under Prop. 13 up to market value and then send billions of dollars in increased property tax revenues to Sacramento to spend as they please.

My primary issue with this line of reasoning is that Sacramento has already proven that it cannot manage the existing tax dollars it gets from the state’s property tax responsibly so why on earth would we send them a flood of new tax dollars?

Second, the entire state and local tax system is riddled with similar inequities so why are reformers choosing to single out Prop. 13 for “reform”?  California’s major taxes are all characterized by extremely high rates and a very limited or loophole-ridden base.

The result is that those who pay the tax pay full boat, and those who can take advantage of loopholes get a break.  The reality of the situation is that all tax “reformers” in California want to increase tax revenues by leaving the rates the same, closing the loopholes, and sending billions of dollars in increased revenues to Sacramento to poorly manage.

True tax “reform” would be to close the loopholes and lower the base to make the change revenue neutral—but there is not a single tax “reformer” in California that I know of who is pushing for revenue neutral tax reform.

This is the method that nearly all significant successful attempts at tax reform utilized including President Reagan’s 1986 tax overhaul—widely lauded as one of the most successful tax reform efforts of all-time.

Reagan’s 1986 tax reform was “revenue neutral” but hailed by politicians of all stripes for simplifying the tax code, broadening the base and reducing the rates—a win win for everyone, not just those who want more tax dollars.

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.

$6.2 Billion in New Borrowing on June 7th Primary Ballot

They are overshadowed by one of the most tumultuous Presidential primary campaigns in decades, but California’s June 7th primary ballot has local tax and bond proposals in numbers that, in aggregate, ought to be generating vigorous public debate. Next week voters will be asked to approve 46 local bond measures totaling $6.18 billion in new debt, along with 52 local tax proposals. If history is any indication, more than 80% of them will pass.

Tax activists and politicians who brand themselves as “tax fighters” often point to alarming levels of state government debt, along with state taxes that are among the highest in the nation – but when they do, they are calling attention to a surprisingly small fraction of the big picture. Because most of California’s taxes and borrowing are assessed and spent at the local level. A California Policy Center study from 2013 entitled “How Big Are California’s State and Local Governments Combined?,” using 2011 data, calculated direct state government spending at $54.0 billion. The same study calculated total local government spending at $311.1 billion, nearly six times as much. The numbers have changed over the past five years, but the proportions have remained the same.

Total-CA-Budgets_Table-2r5

California government borrowing follows the same pattern, as shown on the next table. Even if you don’t include the unfunded liabilities for pensions and retirement health coverage – amounts vary by several multiples depending on what return-on-investment assumptions are made – as can be seen, five years ago, the total state government bond debt was $132.6 billion, whereas the total local government bond debt was nearly twice as much at $250.3 billion.

Total-CA-Budgets_Table-1r4

School bond debt just keeps piling up at the local level. Because it only requires a 55% majority for approval, compared to two-thirds for most other forms of proposed government borrowing, it is the most likely to appear on the ballot, and the most likely to pass. As a 2015 California Policy Center study entitled “For the Kids – Comprehensive Review of California School Bonds” uncovered, on average, local voters have approved $10 billion in local school bond borrowing every year from 2001 through 2014. Is all of this necessary?

This year is on track to beat the average. Because these bond and tax proposals are usually concentrated on the November ballot, where they are more likely to be approved by general election voters. It is surprising to find $6.2 billion in proposed new borrowing on the ballot this June.

If you want to learn the details regarding the new taxes and bonds being voted on next week, refer to the document prepared every election by CalTax, “2016 Local Elections.” For example, you will see there are three new taxes proposed on marijuana, 20 new parcel tax proposals, 14 sales tax  proposals, one hotel tax proposal, 4 utility tax proposals, 9 “miscellaneous” tax proposals, and one business tax proposal. Nearly all of these taxes are either extensions of “temporary” taxes that would otherwise be set to repeal, or tax increases, or completely new taxes. In only one case, in the Southern California city of Glendale, is a tax proposal on the ballot to repeal an existing utility tax.

The problem with repeals, or no votes of any type, is that the tax proposal just comes up again on the next election cycle. Eventually, almost all of them pass. In November 2014, as reported in the UnionWatch post “Final Results: 81% of Local Bonds Passed, 68% of Local Taxes Passed,” here’s what happened in that election: “Of the 118 local bonds, 96 were passed, and 22 were defeated. Of the 171 local tax proposals, 117 were passed, and 54 were defeated.”

If at first you don’t succeed, try, try again.

There is an alternative to more taxes and more borrowing. To avoid new taxes, revise pension benefits for existing workers so that – just from now on – the retirement benefits accrue at the lower pre-1999 rates, which are financially sustainable without new taxes. Instead of new borrowing, return control of schools to principals and parents, instead of the teachers unions, a simple step that will yield positive educational outcomes that all the new school buildings in the world cannot hope to replicate.

 *   *   *

Ed Ring is the president of the California Policy Center.

Government Unions and the Financialization of America

Financialization – “a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
–  Greta Krippner, University of Michigan (source Wikipedia)

If you want one word to describe the biggest threat to the American economy, “financialization” would be the prime candidate. This is a threat that has no ideology. The left tends to blame economic challenges on the excessive power of oligarchs. The libertarian right tends to blame economic challenges on excessive regulations emanating from oversized government. But financialization empowered the oligarchs. And financialization is the toxic remedy that has, for a time, enabled oversized government.

Krippner’s analysis of financialization goes beyond its obvious manifestations – the most obvious being the loophole that allows hedge fund managers to avoid paying ordinary income tax on the billions in bonuses they earn when they get lucky placing bets with other people’s money. An excellent in-depth article in Time Magazine published on May 12th, entitled “American Capitalism’s Great Crisis,” quotes Krippner’s deeper explanation of how financialization began:

“The changes were driven by the fact that in the 1970s, the growth that America had enjoyed following World War II began to slow. Rather than make tough decisions about how to bolster it, politicians decided to pass that responsibility to the financial markets. The Carter-era deregulation of interest rates—something that was, in an echo of today’s overlapping left-and right-wing populism, supported by an assortment of odd political bedfellows from Ralph Nader to Walter Wriston, then head of Citibank—opened the door to a spate of financial “innovations” and a shift in bank function from lending to trading. Reaganomics famously led to a number of other economic policies that favored Wall Street. Clinton-era deregulation, which seemed a path out of the economic doldrums of the late 1980s, continued the trend. Loose monetary policy from the Alan Greenspan era onward created an environment in which easy money papered over underlying problems in the economy, so much so that it is now chronically dependent on near-zero interest rates to keep from falling back into recession.”

Carter. Reagan. Clinton. It’s important to document the bipartisan emergence of financialization. It can’t be unwound, or even discussed accurately, simply by referring to conventional ideological schisms. The impact of financialization in America has been to enable private households and government agencies to spend more than they take in, and to make up the difference by borrowing more than they can ever hope to pay back. And through it all, for the past 40+ years, the financial sector has extended the credit, accumulating more power and profit every step of the way. Ideology and partisanship provided the justifications and the means, but they came from the right and the left.

Estimates vary as to how much corporate profit now accrues to the financial sector in the U.S., but range between 25% and 40%. By comparison, in Germany the financial sector earns about 6% of corporate profits. America’s overbuilt financial sector attracts the brightest college graduates. Math majors who might have gone into applied physics, engineering, chemistry, now migrate to Manhattan and work for the hedge funds.

Closer to home, here’s how financialization has harmed ordinary Americans:

  • Created an incentive through low interest rates and tax law for people to borrow instead of save,
  • Rendered housing and college tuition unaffordable, thanks to low interest rates inducing borrowers to bid up prices,
  • Destroyed the ability of thrifty households to save, because only risky investments offer adequate returns,
  • The emphasis on shareholder value above all else has depressed wages and driven jobs overseas,
  • Attracted brilliant innovators to work for financial firms (which produce nothing) instead of actual industries that create jobs and national wealth.

There’s more – and this is the least discussed but perhaps the most significant consequence of financialization. It expands the public sector, and it helps public sector unions. Here’s how:

  • Governments can expand beyond the capacity of their tax revenues by borrowing at low interest rates,
  • Government unions can negotiate over-market pay and benefits, relying on borrowing to cover deficits,
  • Government pension funds can make risky investments with the taxpayers backing them up,
  • As financialization drives middle class citizens into poverty, the government expands its aid programs.

The connection between government unions and the financial oligarchs who currently run both political party establishments may be abstruse, but it isn’t trivial. They have a common interest in a financialized economy; a common interest in seeing what is now the biggest credit bubble – as a percent of GDP – in American history get even bigger. This is explicitly contrary to the interests of ordinary Americans. The awakening grassroots resistance to the financialization of America explains the rise of populism in 2016, and it’s just begun.

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Ed Ring is the President of the California Policy Center.

CalChamber Opposes “Virtually Permanent” Prop 30 Tax

With the California Chamber of Commerce announcing yesterday that it will oppose the Proposition 30, income tax extension, the question arises if a campaign will come together to match the financial firepower that the teachers, medical professionals and other public employee unions bring to the table in support of the measure.

Officially, the word from the Chamber is that it is opposed to the extension but nothing has been announced about a potential campaign … yet.

Proponents of the 12-year income tax extension filed signatures recently to get the measure on the ballot.

CalChamber noted in the release announcing opposition to the initiative that it did not oppose Proposition 30 in 2012. The measure was supposed to be temporary to deal with a financial crisis.
However, CalChamber declared that the extension would make the tax “virtually permanent, even when the state’s budget is balanced.”

The Chamber’s announcement comes on the heels of word from the California Business Roundtable (CBRT) that the decision to organize a campaign in opposition to the Prop 30 extension will depend on actions taken by the legislature on business issues.

 

Rob Lapsley, President of the California Business Roundtable (CBRT)

Rob Lapsley, President of the California Business Roundtable (CBRT)

 

CBRT president, Rob Lapsley, told the Sacramento Business Journal that the Roundtable will watch if the legislature tackles health care and education reforms along with specific bills of interest to the business community such as the requirement to give employees a seven days notice before changing work shifts.
Lapsley emphasized that the Roundtable’s decision would also rest on how the Prop 30 extension may impact the state’s economic health.

One issue the CalChamber raised in opposition to the extension was the problem of revenue volatility tied to higher income taxes. The Chamber feared significant reduced revenue to the state during future recessions.

Keeping the higher income tax rates for income over $250,000 could also hurt small businesses that pay taxes through the business owners’ income. In a recent BizFed poll in Los Angeles County, a key finding was that “personal income taxes have the most impact on small business (of 100 employees or less).”

Will concern from the business community over the Prop 30 extension effort gel into a campaign to stop the initiative that will be backed by millions of dollars in union support?

About the Author: Joel Fox is Editor of Fox & Hounds and President of the Small Business Action Committee. This article originally appeared in Fox & Hounds and appears here with permission.

Public Safety Unions and the Financial Apocalypse

Imagine for a moment that two premises are beyond serious debate: (1) That there will be another financial crisis within the next five years that will equal or exceed the severity of the one experienced in 2009, and (2) That the political power of public safety unions will prevent local governments from enacting pension reforms sufficient to avert a financial disaster when and if the next financial crisis hits.

What will these public safety unions do?

It’s distressingly easy for politicians to dismiss both of these premises, but since for the moment we’re not, imagine the following: Major European banks have declared insolvency because their debtors have all defaulted on payments, the Chinese stock market has collapsed because their export markets are shrinking instead of growing, and the deflationary contagion reaches American shores. Across the nation, speculative buying is replaced by panic selling. Housing prices fall, defaults accumulate, and the pension funds lose half their value overnight. In a cascading cycle reminiscent of 1929, deflation sweeps the global economy.

Meanwhile, pension reform has been limited to incremental adjustments to the pension benefits for new employees. Millions of retirees and active public safety workers still expect pensions that are roughly equivalent to the amount they made at the peak of their careers. But the money won’t be there.

How will public safety unions use their political power to address this challenge?

If the present is any indication, the solutions won’t be pretty. In San Jose and San Diego, public safety unions lead the charge to roll back local pension reforms enacted by voters. In counties across California, public safety unions lead the charge to undermine in court the reforms enacted by the State Legislature in the Public Employee Retirement Act of 2014. That’s all fine while the economic bubble continues to inflate. But what do we do when it pops? What do we do when there’s no money?

When challenging public safety unions to exercise their political power to advocate on issues other than law and order or their own compensation and benefits, a reasonable response is that public safety unions, like any government union, shouldn’t be involved in politics. The problem with that response is that they already are. Government unions, and their partners in the financial community, are a major cause of the economic bubble we’re experiencing. Their insatiable appetite for high returns, 7% or more, compels the financial engineering that creates unsustainable economic growth. When the crash comes, government unions will blame “Wall Street.” But in reality, they will share the blame, because they didn’t want to admit that their pension benefits relied on unsustainable rates of economic growth.

If there is another economic crash, public safety unions will face a choice. They can use their political power to strip away every remaining service that local government performs that isn’t related to public safety, raise taxes, and support “fees” on everything from green lawns to vehicle miles driven. They can support the creation of an authoritarian, oppressive state, raising revenue through rationing and regulating our water, energy, land use, home improvement, etc., at levels that make today’s annoying excesses seem trivial. They can hide behind environmentalism and egalitarianism to tax the last bits of vitality and freedom out of ordinary productive citizens. They can even hide behind faux libertarian ethics to charge exorbitant fees for rescue services, or profit from draconian applications of asset forfeiture laws. If they do this, it may be enough for them. But the price on society will be hideous.

There is an alternative.

Public safety unions can recognize that sustainable economic growth occurs when people have fewer impediments to running their private businesses. They can recognize that large corporations use regulations to eliminate their smaller competitors, and that excessive regulations of land, energy and water are the reasons that California has such a high cost of living. They can recognize that competitive resource development and cost-effective infrastructure development can only be achieved when the environmentalist lobby and their allies – the corporate and financial elites – are confronted and forced to accept less crippling restrictions.

Better yet, public safety unions can begin to recognize these political precepts NOW, before the financial apocalypse. Along with hopefully accepting more pension reforms instead of always fighting them, these unions can also protect their members’ futures by fighting for economic reform and more rational environmentalist restrictions. The sooner these reforms are adopted at the state and local level, the more resilient our economy will be when the economic implosion occurs. If pension benefit cuts are inevitable, because the money isn’t there anymore, with economic and environmentalist reforms the cost-of-living will also be cut.

America’s excessive public employee pension benefits have created a four trillion dollar monster, pension funds ravaging the world in search of high returns during the late stages of a credit expansion that has granted present growth at the expense of future growth. The day of reckoning is coming. Public safety unions can help prepare, for their own sake as well as for the sake of the citizens they are sworn to protect.

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Ed Ring is the president of the California Policy Center.

RELATED POST:
The Coming Public Pension Apocalypse, and What to Do About It

Logic and Evidence is Not a Reason for CA Legislature to Curb Deficit Spending

Governor Jerry Brown put just about everything he could in the May Revise, except for the “kitchen sink,” to try to convince the Democrat-controlled Legislature to “hold the line” on new deficit spending.

The Governor cited economic risks as the most important reason to spend less and build up the state’s reserves. As illustrated by the chart above, the state is projected to experience significant deficits in the immediate years to come.

But the unfortunate reality in today’s politics is that the Democrat leadership and rank-and-file does not respond to evidence, logic and facts. The facts just get in the way of their desire to spend as much as possible, without regard for cost to taxpayers and future liabilities for the state.

20160516-UW-KerstenSource:  California Governor’s revised current fiscal year budget.

Former State Senator Gil Cedillo (D) used to give a speech in which he made total state spending seem minuscule compared to the economy, and even suggested that the state could simply double its total spending without much trouble in terms of tax or economic burden. I believe that many, if not most California Democrat elected officials, still believe in this line of thinking.

This type of thinking on the Democratic side of the aisle is pure fantasy and not grounded in any type of evidence or sound logical reasoning. Doubling spending will double the tax burden on Californians, something that the vast majority of the electorate is opposed to and exacerbate an already hugely inefficient, ineffective, and unaccountable government.

California Democrat elected officials have a long history of spending as much as possible, even if it means big deficits, and financial catastrophe for the state. This is what happened in the late 1990s and early 2000s, and it is exactly what happened since 2012, according to Governor Brown’s May Revise.

The passage of $7 billion in annual Prop. 30 “temporary tax increases” in 2012, where indeed supposed to be temporary. But the Democrat Legislature and its base has already apparently forgot that, and committed nearly all of that money to ongoing programs.

The Governor says that California has dramatically expanded the welfare state since 2012, particularly health care. Prop. 98 spending has also increased dramatically since 2013-14, according to the Governor. The chart below shows that Prop. 98 education spending has increased dramatically since 2013-14–by more than 22%.

“California has an extensive safety net for the state’s neediest residents who live in poverty, and the state maintained these core benefits despite the recession. Compared to other state, California provides broader health care coverage to a greater percentage of the population including in-home care,” wrote the Administration in the May Revise.

Gov. Brown stated that since 2012 the state’s General Fund has incurred new obligations in the effort to counteract the effects of poverty totaling more than $19 billion (these costs are summarized in the table below).

Both the Governor and the Legislative Analyst’s Office (LAO) note that there has been significant spending increases and increases in the “cost of government” due to Legislative actions taken since January 2016.

The passage of the minimum wage will raise State General Fund cost by an estimated $3.4 billion annually in future years.

The recent collective bargaining contracts entered into by the state with a portion of its bargaining units will also dramatically increase state costs. The LAO notes that the Correctional Peach Officers’ Association (CCPOA) contract alone will increase ongoing state costs by more than $500 million annually.

CCPOA is only one of the state’s 21 bargaining units, and another 17 are currently in negotiation. The results of those negotiations will inevitably be the same–a significant increase in the cost of government to the tune of billions of dollars annually.

The Governor’s May Revise and the LAO also note that Obamacare and the state’s decision to expand health care benefits will result in massive cost increases.

Medi-Cal caseload growth will increase from 8 million in 2012-13 to a projected 14.1 million in 2016-17, covering over 1/3 of the state’s population. This expansion is projected to cost the state $16.2 billion, and federal cost sharing will decline over time, leaving California taxpayers with a bigger and bigger Medi-Cal bill.

The State Legislature implemented a tax on Medi-Cal managed care plans and commercial plans which is expected to raise more than $1.7 billion in 2017-18. But this Medi-Cal bill is likely to continue to grow beyond budgeted expectations, and is a target for further expansion by the Democratic Legislature, even though the baseline costs are already huge and increasing.

But you rarely hear any Democrats say wow, we have done a lot to expand the welfare state and broaden health coverage, maybe it is time to focus on programs other than expanding the welfare state, such as infrastructure, roads, water storage, transportation, or at least make existing programs more efficient.

The unfortunate truth is that more spending is never enough for this Democrat Legislature–they believe that state spending, and corresponding taxes should be much higher, exponentially higher, than they currently are, so no amount of new spending will apparently ever be enough to satiate the Democratic Legislative majority. It’s always more, more, more….which means….tax, tax, tax.

The list of reasons why fiscal responsibility is the most reasonable course of action goes on and on–but it’s almost as if nobody listens on the Democrat side of the aisle other than to find out a way to best spin the “need” for more spending.

The Democrat Legislature as proven time and time again that they are not going to let the facts and evidence get in the way of their desire to spend more taxpayer dollars, even if that spending means deficit financing—piling the state’s debt higher and higher into the future.

Surprisingly, Democrat leaders held off repeating their calls for new spending in their immediate response to the Governor’s Revise–choosing to make innocuous statements like we look forward to the debate and negotiation with the Governor.

But the left-wing propaganda machine is already churning with “evidence” that deficit spending is indeed needed.

Chis Hoene, executive director of the labor-backed California Budget Project says “there is more room for progress in this year’s budget” and encourages further “investment” and expansion of the welfare state in a whole host of new costly ways.

It is likely that as we speak, Democrat Leaders and the spending lobby are coming up with ways to spin their desire for more spending, dramatically in excess of the Governor’s “hold the line” level of baseline spending.

That’s all fine. But any new spending needs to be zero sum. If they want to spend more in one area, they should take away from another area because this budget is already maxed out at about $122 billion in General Fund spending, the same amount called for in January, despite declining revenues and a worsening economy.

Let’s not voluntarily chose to further drive the State of California into the ground beyond the huge hole that we are already in, considering the state’s $400 billion plus in mounting debt.

California Republican lawmakers get this issue and the need for fiscal prudence.

But the California Democrat majority is not able to make fiscally responsible decisions based on logical facts and evidence. They only know one course of action to any budget issue–spend.

The reasons for this spending phenomenon are enough for another discussion but relate to the nature of the Democratic base, electoral districts, and electoral incentives, among other considerations.

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.