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.

 *   *   *

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.

 *   *   *

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.

Budget Primer for California Citizen Taxpayers

Average taxpayers in California are probably aware that the state budget was in the news again over the weekend. But even folks who follow both Presidential politics and local issues probably couldn’t be blamed if they tune out stories about the California budget. It’s not that they don’t care. It’s just that public finance issues can be horribly confusing and difficult to follow.

In terms of timing, the process itself is easy to grasp. The annual budget year runs from July 1st to June 30th of the following year. That’s why people refer to a single budget using two years. For example, the budget currently being discussed is the 2016-2017 budget. The Constitution requires that the Governor present a budget in January and that the Legislature enact the budget by June 15th. Because state bean counters and analysts don’t have a full grasp of the economy or revenue projections in January, the Governor’s budget goes through an update, or “revision,” in May. It was this May “revise” that the Governor presented on Friday that has been in the latest news cycle.

But perhaps the most confusing aspect of the state budget is the fact that many of the numbers that are bandied about are inconsistent. Thus, an average citizen might hear on the radio that the state budget is $122 billion dollars. And yet, when they get home, they read that spending is actually $173 billion. At this point they are more apt to turn on the Giants v. Dodgers game rather than make sense of the huge disparity.

The inconsistency in these budget numbers usually is attributable to the fact that there is a big difference between “general fund” spending and total state spending which includes “special funds.” General fund revenue comes from the state income tax, sales tax, corporate tax and a handful of other sources. “Special funds” come from the gas tax and fees from regulatory programs like cap and trade funds. For average taxpayers, the worst example of “special fund” revenue consists of the illegal CalFire “fee” which slams property owners with hundreds of dollars of additional property taxes. The legality of the CalFire fee is currently being challenged in court.

When it comes to the state budget, citizen taxpayers are justified in being both confused and angry. Not a day goes by without some scandal surfacing about those who spend our tax dollars. Whether it is the Bay Bridge, which exceeded the original cost estimate by a factor of six, or California’s feckless policies that have driven up state debt so high that, were the state a private company, it would be immediately eligible for bankruptcy.

As should be expected, California has the largest state budget in the United States. But what should not be expected or tolerated is the hostility of our political leaders toward those of us who pay the bills. California has the highest income tax rate in America as well as the highest state sales tax. Our fuel costs are also the highest due to both the current gas tax and environment regulations. The result of these policies has been an accelerated exodus from the state by both businesses and individuals. It should be painfully obvious even to the Governor and left-leaning legislators that you can’t have a vibrant state budget unless you have a vibrant economy.

Finally, Governor Brown, while not officially endorsing a proposal to retain California’s sky-high income tax rates, implicitly endorsed it by noting that the state would be in a deficit situation if the measure didn’t pass in California. But this deficit projection is only attributable to higher state costs due to the foolish policies of elected leaders, not state revenues which are actually increasing faster than population and inflation.

The real cure for California’s budget woes is a combination of policies that would make California competitive in the global economy, not higher taxes and more burdensome regulations.

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.

CA Democrats are Not Standing Up for "Working Families"

It’s election season, so every California Democrat politician is out there on the campaign trail, precinct walking with their “friends” in labor, and speaking to labor organizations and anyone else who will listen.  They are speaking with one voice–that ” we are proud to stand up for working families.”

This may sound like a great tag line, and is surely based on recommendations by campaign consultants, polling and focus groups, and perhaps most importantly resonates strongly with their organized-labor base, who is primarily responsible for funding all California Democrat campaigns.

But the truth is that California Democrat politicians and the California Democratic Party is the “party of organized labor” not of “working families.”  This distinction may not be all together clear, or even relevant, at first glance to someone not familiar with the inner workings of California politics and campaigns.

Senate Pro Tem Kevin De Leon (D) and Governor Jerry Brown (D) are two of the state’s top Democratic leaders who push “pro-labor” agenda items including raising the state’s minimum wage and expanded paid family leave.

There is a big difference between a “pro-labor agenda,” and a “truly progressive” agenda that seeks to bolster the middle-class and truly lift up “working families,” not just those on welfare.  If you look at everything California Democrats politicians are advocating for, and what they consider to be major policy successes, it becomes painfully clear that California Democrat politicians are primarily out to benefit “organized labor,” which comes at the expense of almost everyone else.  Of course there are some exceptions with the moderate and pro-business Democrats, but here we are primarily talking about the California Democratic leadership and solidly “pro-labor” state Democrat politicians.

By and large, California Democrat state politicians are preoccupied with pursuing a narrow, pro-labor agenda that is focused on providing the greatest amount of public subsidies, wage and benefit enhancements, and welfare benefits to a very narrow class of people–the poor, organized labor, and public employees–which represents their “core constituencies.”  Everyone else suffers as a result, including “working families” who are not on welfare, lower and middle-class families above the poverty line, small business, and big business.  California’s biggest policy problems such as pensions, housing costs, taxes, and lack of infrastructure spending do not even appear to be on Sacramento’s radar.

In other words, the California Democrat “pro-labor agenda” is neglecting the state’s middle-class and the state’s business climate, and making it much harder for the “true working families” who do not collect state welfare checks to prosper.  Moreover, this “pro-labor agenda” conflicts with a “truly progressive agenda,” but most Democrats and progressives have no idea exactly how.  Robert Reich, the state’s most prominent left-leaning economist is right–the system and its policies are “rigged” in California–but not in the way that most people think.

 

CA Democrat Agenda Primarily Involves Spending as Much Taxpayer Dollars as Possible, Not Spending Reform

If you look at the priorities of the California Democratic leadership they talk about being proud to stand up for “working families” and a desire to “alleviate poverty,” and improve education.  Many of their stated goals are noble, but their means of achieving them and the policies they utilize to advance these goals only serve to benefit their “core constituencies” listed above, not the rest of us and California as a whole.

Their primary policy instrument is spending as much taxpayer dollars as possible on government programs, primarily welfare, health care, and education.  But the problem is that they do so almost indiscriminately and do not try to spending taxpayer dollars wiser or more effectively.  California Democrat politicians have all but given up on asking California state agencies to spend tax dollars more effectively, and rarely consider any program changes that would upset the state’s hugely inefficient and unwieldy bureaucracy.

Spending taxpayer dollars on welfare programs helps the poor but not anyone else, and does little to actually lift the poor out of poverty over the long-term–welfare spending begets more welfare spending.  Spending more money on education in itself, does not improve education.  As a Dan Walters Sacramento Bee column reported earlier this year, the state is spending billions of dollars more on education now compared to a few years ago, with little or no noticeable improvement in the actual quality of education.

In short, most California Democrat policy priorities boil down to one simple end–indiscriminately increasing the size, cost and scope of California government as much as possible–to the primary benefit of the poor and state’s public sector unions. Their policy toward government spending and public employee compensation is essentially giving them as much money as is available in the government budget, no questions asked.

What is most telling about the “pro-labor agenda” and perhaps its greatest departure from the public interest and a “truly progressive agenda” is what California Democrat politicians are not doing.  California Democrats and the Democratic leadership have all but given up on trying to solve the biggest problems that ail California, particularly working families, the middle-class and California businesses.  But before we get to that, let’s take a quick look at the recent “crowning achievements” of California Democrat politicians.

 

A Brief Look at the “Crowning Achievements” of CA Democrats

The centerpiece of the “pro-labor” agenda is environmental regulation, and the “crown jewel” is AB 32.  California Democrats love to tout their desire to enact never ending layers of increased “environmental protections” and “environmental regulations.”  Environmental policy is extremely important to California voters and does represent a “truly progressive” policy stance–perhaps the last remaining shred of integrity the California Democratic Party and its candidates have left in support of a “truly progressive” policy agenda.  But even here they are taking environmental regulation too far, to the primary detriment of “working families” and the middle classes, who will bear the brunt of the excessive regulatory burden in increased costs of goods and services that are regulated, particularly energy costs.

AB 32 was a legitimate policy victory for the state and should be celebrated as such.  But how much further should the state take environmental regulation before the rest of the state and the world show at least some willingness to follow.  California is responsible for emitting less than 0.5% of the world’s total carbon emissions, yes less than half of a single a percentage point. So even if California totally eliminated its consumption and production of CO2 emissions, that would represent but a blip in the grand scheme of things worldwide.

We do get benefits from improved air quality and health considerations, particularly around stationary pollution sources.  But California alone cannot save the world from “climate change” even if we totally eliminated CO2 emissions within our borders.  So why are California Democrats in a race to enact the strongest and most costly environmental regulations when there is little indication that the rest of the world and nation will follow anytime soon?  My view is that it is because this represents action on their strongest policy position, however, beyond a certain point, further regulation will only serve to undercut our global competitiveness, while providing marginal benefits to California residents.  “Working families” will be hit the hardest because they pay the greatest portion of their discretionary income in energy costs.

The biggest recent success that California Democratic leaders are pointing to this campaign season is their “victory” in increasing the statewide minimum wage in California from $10 to $15 dollars per hour–a 50% increase.  Economists say that increases in the minimum wage do modestly raise the take home pay of low-wage workers, but in return lead to about a 10% reduction in employment, according recent discussions with economists.  So is this really the great policy victory that it is being billed as by Democratic politicians?  Effectively, trading a very modest increase in wages for those who keep their jobs, while putting other workers out of work.  Touting this increase as genuine social progress may work on the campaign trail, where few people question the results, but the reality is that this was not the great policy victory that it is being billed as.  After all, shouldn’t the end goal be to lift workers out of poverty entirely, not have them making more in their existing minimum wage jobs.

Another recent “success” touted by California Democrats as a victory for “working families” is the expansion of the state’s paid family leave program.  Prior to the expansion, California law already allowed workers to take up to six weeks off from work to bond with anew child or care for sick family members and receive 55% of their wages.  The new measure increases the pay to 60% of wages, starting in 2018, and creates a new classification for low-income workers who make about $20,000 or less annually to receive 70% of their regular pay, according to a Wall Street Journal Report.

The program is funded by worker contributions and estimated to cost about $350 million in 2018, and $587 million annually by 2021, according to a legislative analysis obtained by the Wall Street Journal.  This policy does represent an improvement for primarily low-wage workers but its paid for by higher wage workers.  It is a marginal improvement at best, and will surely be followed up with future legislation to increase length of time allowed and percentages claimed by workers.

As one can see, the recent list of true policy victories for “working families” is pretty short.  And as will be seen is clearly outweighed by all the negative aspects of the “pro-labor agenda,” which is perhaps better defined by the policy solutions that it does not include–namely the state’s most pressing policy problems.  Or put another way, the “pro-labor agenda” comes with a great cost to California, and that cost is a long list of policy problems that are off limits and not subject to negotiation, or even substantive discussion.

 

“Pro-Labor” Politicians Silent on Mounting Pension Problem

CalPERS Board President Rob Feckner has been “under fire” from critics whom believe he does not have the experience nor expertise neccessary to manage the country’s largest public pension fund.pension fund. Feckner is known to have close ties with the state’s labor unions, having held top positions with the California School Employees Association and California Federation of Labor.

The best example of one such issue is the refusal of the California Democratic Party and California Democrat politicians to even acknowledge the magnitude and implications of the state’s pension crisis.  The public position of almost every California Democrat lawmaker is to first not even discuss the “problem,” let alone any solutions.  Yet every financial expert I have talked to, including a consensus of top economists and government professors at Stanford University, say this is the biggest public policy problem in the state.

The pension problem is eating state, and particularly local balance sheets alive, and leaving no additional money to pay for other pressing spending priorities such as infrastructure, roads and education.  Total statewide pension and retiree health care debt is estimated to top $1.3 trillion, according to the Stanford Institute for Economic Policy Research (SIEPR).  Would a “truly progressive” politician allow all government revenues to go to pensions, as opposed to policy programs and priorities that truly benefit California and its citizens?

To further illustrate, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) lost a combined $25 billion in 2015, the deficit between what they said they will earn and what they actually earned.  Both funds are on pace to lose another $25 billion in 2016, potentially more according to early return estimates analyzed by the Bond Buyer.  That’s roughly $50 billion of taxpayer dollars lost in just two years, or almost half of total annual California General Fund spending.  To be clear, this is $50 billion debt that will grow at 7.5% annually and need to be funded by future tax revenues.  This represents a growing expenditure of public dollars that is not available to be spent on truly progressive priorities at both the state and local levels of government.  Perhaps worse, California state and local taxpayers, including “working families,” are on the hook for all loses incurred by both funds.  Why even bother running a 6-month budget process at the Capitol if nobody will so much as lift a finger to stop the state’s pension funds from driving state and local governments off a fiscal cliff?

Of course, these same politicians have likely already come up with some internal justification for not doing anything about this issue, such as “o’well” that is what the unions want, their members apparently know more about what is good for the State of California than every other independent expert who has examined the issue.

 

Treasurer John Chiang has been remarkably silent on the state’s pension issues for the state’s top fiscal statewide elected official. In 2010, while serving as State Controller, Chiang’s CEO sent a letter to the Government Accounting Standards Board (GASB) opposing the recognition of net pension liabilities on public agency balance sheets. Despite Chiang’s opposition, the GASB accounting changes took effect in 2015, and continue to be applauded for providing much needed transparency of pension debt. Chiang has recently unveiled a “debt watch” database of local debt obligations that excludes pension related debt, despite it being the fastest growing local government debt category.

 

California Democrats Refuse to Address the True Causes of CA Housing Crisis

Another major departure from a “truly progressive” agenda, is the unwillingness of California Democrat politicians to address the California housing crisis.  This was clearly demonstrated last week when California Assembly leaders, including Assembly Speaker Anthony Rendon, touted a package of $1.3 billion in new government spending that was intended to address the housing crisis–but it all involved new government subsidies and spending on existing programs for California Democrat “core constituencies” that have clearly failed to address the problem to begin with.

Assembly Speaker Anthony Rendon has stated that his top priority as speaker is alleviating poverty in California. As one of his first acts as Speaker, Rendon proposed $1.3 billion in new state spending on low-income housing subsidies and government run housing programs that are intended to address the state's housing crisis.

Assembly Speaker Anthony Rendon has stated that his top priority as speaker is alleviating poverty in California. As one of his first acts as Speaker, Rendon proposed $1.3 billion in new state spending on low-income housing subsidies and government run housing programs that are intended to address the state’s housing crisis.

 

California’s housing crisis holds the greatest potential to further reduce the standard of living of the poor and middle-classes in California–perhaps more than any other policy area except the pension issue.  As has been discussed in a previous column, the state’s housing crisis is market-driven.  It was created over a number of years, decades even, where the state’s heavily regulated and fee-burdened housing market has failed to build new housing units to meet surging demand, particularly in coastal areas, the Bay Area and Los Angeles.

California Democrats are silent on the causes of what is driving the crisis, appear to have no intention of investigating the true causes of the state’s housing problem, and have given no indication that they are willing to consider any policy changes that would actually address the root causes of state’s housing crisis–beyond providing more taxpayer dollars to the poor to pay for “unsustainable” increases in market-based rents.

Government has essentially created the problem, and the private sector is the only force that can generate the 100,000 units that need to be built on an annual basis to build our way out of the problem.  But no California Democrat, or very few, are talking about the need to address onerous government regulation, crushing development fees, and generally about what the building industry needs to “jump start” the California housing market.

 

CA Democrats Don’t Support Enough Infrastructure Spending

Perhaps the only kind of spending a California Democrat politician does not like is infrastructure spending.  This is largely because the state’s public employee unions shun infrastructure spending because the vast majority of these dollars do not end up in their pockets.

Yet infrastructure spending is critical to building and sustaining a thriving economy and business climate.  All business leaders will tell you that infrastructure spending is needed to improve the state’s business climate.  This is why Silicon Valley leaders are backing transportation sales taxes to pay for roads, which business needs to transport goods.  But infrastructure does not stop there, we need state highways, water storage, state parks, schools, universities, waste water plants, and maintenance of existing facilities that state and local governments all but neglect every year.

What most people don’t realize, and even fewer will admit, is that the state’s infrastructure problem is closely related to the state’s pension problem and public employee compensation issues.  Public employee compensation costs  are consuming all new tax dollars and preventing state and local governments from funding infrastructure projects.  And local sales tax measures to increase infrastructure funding hurt “working families,” assuming they can pass with the “albatross” of the pension issue hanging over them.

Governor Jerry Brown’s January budget proposal only allocated $500 million for the most critical infrastructure maintenance costs (less than 0.5% of General Fund spending), noting that the state needs to start funding massive mounting public employee compensation debts.  Sonoma, Marin, and Mendocino counties have some of the worst road conditions in the state, but are all hamstrung by unsustainable increases in public employee compensation costs and mounting debt from these same issues.

Infrastructure benefits all Californians.  It truly is a public good.  Apart from support for some school bonds, why doesn’t increased infrastructure spending fit into the “pro-labor” agenda?  Simple, it does not benefit the state’s public employee unions, as much as salary and benefits which consume 80% of state and local government spending.  And these same governments can’t afford to pay for it, given unsustainable spending in these same budget categories.

 

CA Democrats Fail to Address Tax Reform

Tax reform is perhaps the toughest issue of all, but holds the greatest potential to lift up the California working families and the middle-classes.  California Forward released a series of reports on the issue and Controller Betty Yee’s Council is scheduled to release a report on tax reform soon.  But you don’t see many California Democrats, or the Democratic leadership out there discussing the need to tackle tax reform.  One exception is Sen. Hertzberg, who has introduced a major tax reform bill to expand the state’s sales tax to services, but again this expands the state’s most regressive tax and would be passed onto consumers.

California Democrats are just as guilty as Republicans in proposing a series of new tax expenditures and exemptions every year that help a select special interest (i.e. the movie industry), but are paid for by everyone else.

The state’s tax system holds the greatest potential to transfer wealth from the rich to the lower classes–which is perhaps the single greatest defining policy of what I thought it meant to be a “progressive.”  But nearly all Democrats shy away from this issue because it upsets business, and is not seen as fitting into their long-term career path of climbing up the ladder in state and/or local politics.  It’s too tough of an issue to attract the Democratic mainstream, and holds little potential for a short-term political payoff, beyond very narrow proposals that benefit special interests.

What needs to be done on tax reform?  Simple, you broaden the base and lower the rates, as any expert on tax policy will tell you. California has the highest tax rates in the county on the sales tax and the income tax, up to 9.5% for the sales tax and 13.3% for the income tax.  The sales tax is regressive and hits the poor the hardest, particularly working families who don’t collect any state welfare payments.  The income tax also hits the lower and middle-classes the hardest, as well as small business, in terms of proportion of income and they don’t have the same exemptions and deductions afforded to the rich.

By failing to address the state’s unsustainable spending issues, California Democrats are essentially advocating for future tax increases, that will hit working families and the middle-classes the hardest.  They should be working to ease the tax burden on “working families,” not increase it–that would be “truly progressive.”  Local governments are constantly enacting a series of local fees, mitigations and exactions that negatively impact “working families” and the business community.

To be fair, most California Democrats are hoping for the Prop. 30 extensions to pass which raise $7.5 billion annually, primarily from the wealthy and small business (about $5.5 bil.), but this also includes a 1/4 sales tax increase that will hit the poor and working families (about $1.7 bil.).

This is not tax reform, it’s a general tax increase that lets big business off the hook and hits the average taxpayer and small business the hardest (Note: data from The Economist shows that U.S. corporations are generating the lion’s share of business profits, record profits in fact, higher than any other nation, but not necessarily passing them through to workers).  The reason is that many small businesses (S Corps and sole proprietors) pay taxes through the state’s income tax, while corporations pay through the state’s corporation tax which is so littered with special loopholes and exemptions that some experts say it is “voluntary.”

In short, California’s current tax system contains some progressive elements, namely the income tax, but as a whole the state’s tax system is is not “truly progressive.”  It is loophole-ridden and serves to primarily benefit the rich and big corporations who can take advantage of all its loopholes to the detriment of everyone else (i.e. working families, small business) who pays full boat.  It is largely in conformity with the federal tax code which is even worse as is being discussed at length on the national campaign trail.

 

Significant Policy Change is Difficult But Not Impossible

As one can see, the California Legislature has clearly been marginalized to proposing small, almost insignificant solutions, to address big problems.  And as for the biggest policy problem in California, the state’s unsustainable pension system, California politicians are remarkably silent because any discussion of this issue offends their “friends” in labor.  This is completely ridiculous, and unconscionable to any one who understands the facts of this policy issue, which almost certainly includes Gov. Jerry Brown.

A review of major policy changes enacted over the past 40 years beginning with Prop. 13, shows that significant policy change does happen but it requires bold leadership and a willingness to commit to taking on tough issues over the long-haul, according to a study published by the Kersten Institute.  Most major policy changes do not happen overnight, but the important thing is to at least try.

The critical ingredients of policy changes enacted in the California Legislature are strong leadership from both Legislative leaders and the Governor.  Unfortunately the California Democratic leadership is silent on many of the major policy issues facing California. Gov. Jerry Brown has perhaps the greatest capacity to take on the tough issues, but even he has recently shirked from his initial willingness to think and act big on the tough issues.  Gov. Brown has since decided to just follow the lead of the California Legislature on all but a few pet “legacy issues.”

Gov. Brown did make public employee compensation debt issues the major focus of his January State of the Union Address and is likely to drive a hard bargain in the budget process for increased state payments for retiree health care.  But that’s about it.  The Governor has tried to get CalPER’s to accept some reasonable reforms, but they have refused and he has not made a major issue out of it.

Gov. Brown has been mostly focused on his criminal justice initiative and his two “legacy infrastructure projects,” the delta tunnels and high-speed rail.  The sad reality is that the State of California cannot even pay for its most basic infrastructure needs, particularly in the absence of additional pension and retiree health care reform.  Who needs the delta tunnels and high-speed rail if the infrastructure we have is currently falling into disrepair?

The Governor made road spending a key issue last year, in response to requests by California business leaders and the counties, but has not chosen to connect this to the pension problem, which is the real cause of the “roads crisis.”  The Governor can, and should do more to address these major issues.

So what we really have in California politics is a leadership crisis.  A leadership crisis characterized by the unwillingness of California leaders to address the state’s most pressing policy problems in a substantive way.  Discussion of such issues, if even raised at all, is largely confined to a cursory review, and often followed by proposing a narrow or very piecemeal solution, which may not even represent a step in the right direction.  Other major problems such as pension reform, infrastructure, and tax reform are hardly discussed at all, it’s almost as if they are not even on the radar of Sacramento politicians, even though they loom large in almost every other venue in California, particularly with local governments, the business community and the average citizen.

Another problem is that California has become a “one party state” for all practical purposes which prevents many of their policy positions from being challenged in a competitive election.  The state would benefit by returning to a true two party state as reported by a recent Kersten Institute report.

 

It’s Fine to Be “Progressive,” But Please Be “Truly Progressive”

So the next time you hear a California Democrat politician say “I’m proud to stand with organized labor for working families.” Please question what that actually means, and clarify if that is for the “working families” that are paying California’s taxes, or just those who are partially or fully subsidized from state taxpayers because they are a “core Democrat constituency”?

California has a series of major public policy issues that are going unaddressed and undiscussed in the circles of power in California, all of which have huge implications for “working families” and California’s future as a state.

It is time for California Democrat politicians to start standing up for the “public’s interest,” which includes the lower and middle-classes and what is going to help the state as a whole, not just organized labor.  There is a big difference.  It’s fine to be “progressive,” but please be “truly progressive,” not just “pro-labor.”

And next time you hear a California Democrat politician say they are “fighting organized labor” in Sacramento, take my word for it, “organized labor” already has the keys to the kingdom–so there is really no need to fight for them in Sacramento–it’s really just an exercise of preaching to the choir.

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

 

West Virginia Right-to-Work Battle May Have National Significance

A May 10 election in West Virginia could leave the state’s new right-to-work law in peril. On that day, voters will decide whether to re-elect Republican Justice Brent Benjamin to the West Virginia Supreme Court of Appeals, or replace him, possibly with union-supported Darrell McGraw.

McGraw, who is seen as leading the pack of those challenging the 12-term justice, is endorsed almost entirely by unions. If elected, he would be the fourth Democrat on the five-member court.

Flawed Dane County ruling may show the way to killing RTW in West Virginia and nationally

The main concern of those who favor giving workers the freedom to choose whether or not they have to pay a union to keep their job is that with McGraw on the bench, the West Virginia Supreme Court may have the majority it needs to issue a ruling similar to the one recently made by a Wisconsin judge striking down the state’s right-to-work protections.

As I explained in National Review:

Dane County judge William Foust ruled that under the law, “a free-rider problem is born — the ability of nonmembers to refuse to pay for services unions are compelled to provide by law.” He then sided with the three unions in the case, including the Wisconsin State AFL-CIO, that argued that the right-to-work law took their property without just compensation.

The ruling is incorrect and will almost certainly be overruled.

While Wisconsin’s ruling came from a lower court and will likely be overturned by a higher court, the West Virginia Supreme Court of Appeals would be the final arbiter in a question regarding that state’s new right-to-work law. If that court says it violates federal law, the case could go to the U.S. Supreme Court. If McGraw is elected and assists in overruling worker protections, workers’ only recourse (assuming the case involves a federal issue) is to take the question to the Supreme Court, which has been in limbo since the February death of Justice Antonin Scalia.

 

A leading candidate in the race for the West Virginia Supreme Court, Darrell McGraw, has the endorsement of most of the state's unions.

A leading candidate in the race for the West Virginia Supreme Court, Darrell McGraw, has the endorsement of most of the state’s unions.

 

The current 4-4 split means the U.S. Supreme Court may fail to uphold nearly seven decades of precedent and kill right-to-work in West Virginia. If there is a tie — as was seen in the most recent union case before the court, Friedrichs v. California Teachers Association — the lower, unfavorable West Virginia ruling would stand. Such a ruling would not set a precedent for future cases or impact other states’ right-to-work protections.

If President Obama’s nominee is appointed, there may be a 5-4 majority in favor of forced unionism. As the Washington Times recently wrote, “Garland rulings consistently side with labor unions.”

A court with Garland, or an appointee like him, could conceivably strike down right-to-work for the entire country.

Can McGraw Win?

As a former Supreme Court of Appeals justice and former attorney general, McGraw benefits from better name ID than most of the other candidates on the ballot.

Noted West Virginia political commentator Hoppy Kercheval explained:

The former state Supreme Court justice and former attorney general is among five candidates vying for the single seat on the five-member court. McGraw, because of his long political career, likely enjoys the highest name recognition in the field that includes current Justice Brent Benjamin, Wayne King, Beth Walker and Bill Wooten.

Kercheval also notes that, “Additionally, it is a plurality vote, meaning the winner does not have to have a majority, just more votes than anyone else.” Because there are five candidates “theoretically, just over 20 percent of the vote would be enough to win the election. … Voter turnout in West Virginia in the last presidential primary (2012) was only 24 percent, just over 292,000 votes. If turnout for this year’s primary is similar, 60,000 votes could be enough to win.”

Kercheval shows that:

McGraw can get votes. He received 313,830 in the loss to Morrisey (329,854), though that was a two-person race and a general election, which had a much higher overall voter turnout than the primary (670,000 to 292,000).

However, it’s worth noting that Benjamin has already defeated a McGraw once, in the 2004 Supreme Court race when he unseated Darrell’s younger brother, Warren, 382,036 to 334,301. Also, Walker received 329,395 in the 2008 Supreme Court race, coming in third in the race for two seats behind Democrats Menis Ketchum and Margaret Workman.

Will unions have a majority on the West Virginia Court?

According to a 2015 study from West Virginia Citizens Against Lawsuit Abuse, a nonprofit citizen watchdog group that fights lawsuit abuse, two of the justices, Democrat Robin Davis and Democrat Margaret Workman, joined together 68 percent of the time on non-unanimous decisions.

Still, there is hope. Only Davis dissented on a procedural issue during the right-to-work fight that would have killed the chances of the bill. The question was whether the governor had to appoint a Republican or a Democrat to fill a seat vacated by a Republican who had been elected as a Democrat. Workman wrote the majority opinion stating a Republican had to be appointed.

Workman was joined by Democrat Chief Justice Menis Ketchum and Republican Justice Allen Loughry; Benjamin did not participate in the decision due to a conflict of interest.

If McGraw is elected, it would take only one justice siding with a likely Davis vote against right-to-work, to make worker freedom in West Virginia history.

Worse, if Merrick Garland or someone of similar persuasion is appointed to the U.S. Supreme Court, the outlook for right-to-work across the country could be in jeopardy.

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.

Union Backed Legislative Bills May Kill "Gig Economy" Through Regulation

Sacramento politicians cannot resist the urge to “regulate” the “gig economy” to impose arduous work rules, regulations, and a whole host of bureaucratic red tape on one of the most successful economic enterprises to surface in the past few years.

People here in the Bay Area love Lyft and Uber, not the heavily regulated taxi cab market which never is around when you need it and does not adequately serve the needs of the market in the Bay Area and elsewhere.  Apparently, people everywhere love these companies and others like them because they are cost-effective, responsive to the market, are always available and just a click away on an online “app.”

But not everyone is happy about the emergence of the “gig economy.”  The taxi cab industry has been devastated and the labor unions in Sacramento do not like any segment of the economy that grows faster than them, and is not heavily regulated.  

What’s the solution?  “Regulate” it to death. But for all the wrong reasons.  Two California legislators have introduced bills that bring far-reaching, and onerous state regulatory schemes to the “gig industry.”  Such legislation is essentially a “death knell” for an enterprise that was built on innovation and has been so successful due to a “lack of regulation,” not the market failure that regulation creates in the sector to begin with.

Everything that is good about the “gig economy,” would disappear in the face of government regulation.  And nobody on the union side of the aisle has any problem with that, in fact, that’s its intent.

Former cab driver turned Democratic Sen. Ben Hueso (D) has a bill, SB 1035, that would allow the California Public Utilities Commission (CPUC) to study and regulate the industry, and provide new powers to law enforcement to impound cars and take action against the “gig economy.”  Update:  This bill was held in the Senate Committee on Transportation and Housing on April 19th with many members saying that the state should deregulate the taxi industry as opposed to doubling-down on a failed regulatory approach, according to an LA Times report.

Sen. Hueso is “billing” the legislation as “pro-consumer” and “pro-public safety” but its clear intent is to raise the burden of regulation and cost on the “gig economy” to a level where it is uncompetitive with the state’s heavily regulated taxi cab industry.   The bill is supported by the California Labor Federation.

Democratic Assemblywoman Lorena Gonzalez (D) has introduced a bill, AB 1727, that would allow workers in the “gig economy” to unionize and exact any number of costly concessions (i.e work rules, wage increases, new benefits) under the state’s failed system of collective bargaining.  The bill is supported by the California Teamsters Public Affairs Council, UFCW Western States Council, and lobbyist Richie Ross.   Ironically, some unions oppose the bill because they say it does not go far enough to “regulate” the industry.

 

New Regulations on the “Gig Industry” may potentially disrupt the cost-effectiveness and market competitiveness of fast growing companies like Lyft and Uber.

 

Both pieces of legislation would serve to “kill” the “gig economy” even though they are supposedly meant to help its workers.  Both pieces of legislation would help grow the size of government by creating an untold number of new positions for unionized bureaucrats, and even law enforcement agencies, to make unreasonable demands on both the “gig economy” and its workers.

A new analysis by KQED News and Maplight sheds some new light on the potential motivations behind the two bills–calling into question the intentions of the legislation as well as identifying what political forces are really behind the effort to “regulate” the gig economy.

The KQED News analysis finds that California organized labor organizations hold an unfair advantage in the money game, over their tech company counterparts–by a factor of 10 times.

Moreover, over the past two election cycles unions have given “state legislators nearly $6 million in political contributions–that’s 10 times more than the largest tech firms here,” according to the KQED report.

The report also shows that Assemblymember Gonzalez and Senator Hueso have also reaped significant campaign contributions from organized labor, which are well in excess of what their colleagues have raised on average.

As the images below illustrate, Asm. Gonzalez has raised $122,250 from organized labor since 2013.  Sen. Hueso has raised $89,900 since 2013.  The average amount given to individual legislators from organized labor was $53,506 since 2013–meaning these legislators have gotten more than double what the average state legislator got from organized labor.

 

GigEconomyLarge

 

Of course these lawmakers would undoubtedly say, that the campaign contributions they received have nothing to do with their decisions to carry and champion the legislation.  But any smart political strategist will tell you just the opposite–that’s how the game is played in Sacramento, maximize your war chest to fend off opponents in the next election.

Tech companies, on the other hand, cannot compete with the huge sums donated by labor organizations and gave Asm. Gonzalez only $1,000, and Sen. Hueso $2,100 over the same period.

But if and when these bills come up for a vote in committee or on the floor, and you factor in the 10 time disparity of labor versus tech contributions–it quickly becomes clear that organized labor will have a much bigger say in the future of the “gig economy” than the tech sector will.

New regulations on the “gig economy” would also apply to tech companies such as Intel who hire contractors to run their cafeteria that employ “gig workers.”

The whole reason the “gig economy” makes sense is that it is unregulated, and those jobs would disappear if turned into W-2 positions that increases costs by more than 50-100% for the same work performed.  These jobs only make sense if they are unregulated.

The whole reason those workers have jobs is because the free market is allowed to work, in the absence of the impossible layers and cost-increases imposed by a government regulatory scheme that produced the undesirable results in the taxi cab market and other markets that gave rise to the “gig economy.”  Business knows that, but most Sacramento politicians do not.

Economists say that the biggest losers of over-burdensome and costly government regulation are consumers because most businesses can pass along cost increases to consumers, assuming they are still in business and profitable over the long-term in the wake of regulatory schemes.

The better idea would be to look at why the heavily regulated taxi cab market (and other similar markets) is failing, and deregulate it so that it can better compete with the “gig economy.”

Everyone knows the story of King Midas–everything he touched turned to “gold.” Well the story of Sacramento and state government regulators is the opposite–everything they touch turns to “stone.”

Sacramento—please keep your hands off the “gig economy.”

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 Scandals in Sonoma and Marin Counties

Two Case Studies on How Two Counties Purchased Outside Legal Opinions That Delivered Aggressively Self-Serving Interpretations of the Law in Response to Grand Jury Reports That Found That Substantial Pension Benefits had Been Granted Illegally.

Introduction

In California, public pensions are guided by different divisions of the government code. The largest administrator is CalPERS which administers pensions for most cities, some counties and most political districts pursuant to statutes known as The Public Employee’s Retirement Law (PERL).

The County Employee’s Retirement Law (CERL) governs counties, cities and districts that elected to be governed by CERL. These CERL agencies have an administrative agency for their plan that is local and not governed by CalPERS.

This article deals with pension abuses by two separate CERL agencies, the counties of Sonoma and Marin. Each has its own retirement board. In each county, the civil grand jury found serious procedural violations that were preconditions to the adoption of retirement increases:

Grand Jury Report – Marin County

Grand Jury Report – Sonoma County

Each grand jury report documented the grant of pension increases from 2002 through 2008 without providing the board of supervisors (BOS) and citizens mandated actuarial reports estimating the “annual” cost of each enhancement.

Each county obtained outside legal opinions, which committed direct violations of fiduciary duties owed the client (the County) and failed to provide “material matters” to the client as required by the “Rules of Professional Conduct” applicable to California lawyers.

This is the first expository article, specifying the unusual lengths gone to by law firms to aggressively interpret the law to help government agencies, like a county, to protect hundreds of millions of dollars of illegally adopted pension increases.

The Sonoma pension increases were documented by the civil grand jury in 2012. The Marin civil grand Jury report was issued in 2015. On March 9, 2016 a Marin citizen, David Brown, sued the Marin County board of supervisors for its failure to take action to remedy the illegalities found by the grand jury.

On March 23 and March 28 The Marin Independent Journal, the dominant paper in Marin County, printed an article and an editorial, respectively, on the topic.

Pension critic calls for court review of grand jury’s pension probe,” by Nels Johnson, Marin Independent Journal

Marin IJ Editorial: Pension critic doesn’t deserve county’s rebuke,” Editorial, Marin Independent Journal

This analysis specifies how these pension increases almost certainly violated the law, but more importantly, and for the first time, how outside law firms provided questionable legal opinions to protect the illegally granted benefits.

Legal Background

The California Rules for statutory construction clearly show that Government code 7507, herein “7507,” was and is mandatory. Compliance by the Agency legislative body prior to increasing pensions “shall” and “must” occur,  or the increase is void or voidable. Section 7507, as it read from 2000 to 2009 had three distinct mandates.

Mandate one:  The legislature and local legislative bodies (the board of supervisors for counties) shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits.

Comments on mandate one:

  • Per Government code section 14 “Shall” is mandatory and “May” is “permissive.” Permissive is another way to say “directory.” “Shall” is used three times in the statute, and without qualification or limitation of any kind.
  • It is the “legislative body” (board of supervisors, city council, district board) that must obtain the actuarial report, not the retirement administrator or board, or even the agency.
  • See also Govt. code 31516: “The board of supervisors shall comply with Govt. code 7507 before… etc.” Govt. Code 31516 was added in 1995 to make certain that CERL retirement administrators required board of supervisors’ compliance before agreeing to accept a new retirement increase.
  • According to Govt. code 14, if the legislature had intended permissive and not mandatory, it would have used “may,” but it clearly did not.

Mandate two: The ‘future annual costs’ shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.

Comments on mandate two:

  • Govt. code 7507 deals not with “costs,” but increased “annual costs.” If the cost of 2%@50 was $10M a year and it was increased to 3%@50, and the cost of that increase was $5M a year, then the total cost would be $15M a year. The annual cost estimate of the new benefit was $5M.
  • If the new benefit was retroactive for time served, another annual cost for that determination was required.
  • In order to determine the annual costs, the actuary needed the salary and actuarial data for members of each group receiving the increase. For example, if the increase related to both fire and sheriff, salary and actuarial data was required for both groups.
  • The annual cost increases must be stated in “dollar” sums for “any” pension increase.

Mandate three: The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of “any” increases in public retirement plan benefits.

Comments on mandate three:

  • “Any” is clear. Every separate increase for an affected group of members must comply with 7507.
  • The reason for 7507 is to inform the board of supervisors and the public of the budget dollar cost of a new pension benefit; a transparency issue. But also to assure that the constitutional debt limit is not violated by the increase; and, on a common sense level, to see if the new benefit is sustainable.
  • There are statutory requirements for describing agenda items. California Govt. Code Section 11125(b) requires, “The notice of a meeting of a body that is a state body shall include a specific agenda for the meeting, containing a brief description of the items of business to be transacted or discussed in either open or closed session. A brief general description of an item generally need not exceed 20 words.” See also California Govt. Code Section 54954.2(a)(1)(seventy two hour notice). It is insufficient to refer to an agenda or other report to meet the notice requirements. Whether in an open or closed session, a minimum agenda notice regarding pension enhancements would provide as follows: “Item provides annual dollar increase in costs, as determined by an actuary, for retirement increases for X employee categories.

In 2009, the legislature attempted to close loopholes that agency lawyers had devised to evade the “annual cost” revelations required by Govt. code 7507. It amended it to prohibit the use of consent agendas and henceforth required the chief administrative officer of the agency to certify compliance with Govt. code 7507. Like govt. code 41516 of CERL, CalPERS had always required such certification, but not necessarily by the chief administrative officer. The 2009 amendments are persuasive evidence of the mandatory nature of the statute; otherwise, why would the legislature bother to strengthen it?

In both Sonoma and Marin County’s Code of Ordinances there is a code provision mandating that “shall” means mandatory. Like Govt. code 14, the mandated rule of interpretation was not referenced in county obtained legal opinions. That was a travesty. Outside counsel had a duty to reveal that “shall” as used in interpreting the government code was mandatory

The Sonoma County Pension Scandal

In 2012, in response to citizen’s complaints, the Sonoma county grand jury, investigated massive pension increases initiated in 2002 (by 2013, the Stanford Pension Tracker reported that the Sonoma pension deficit has grown to $2.2 billion, including about $500M in pension bonds). At the conclusion of its investigation, the grand jury report concluded: “The CERL requirements for approving the county pension in 2002 do not appear to have been followed.”

Not very dramatic? Right? Well Sonoma County’s response to the grand jury report was spectacular – arguably it was a total confession: “Documents could not be located to demonstrate that the County made the actuarial cost impacts public at a public meeting at least two weeks prior to the adoption of the enhanced retirement benefits.”

But in spite of that admission, the county response, based on a shameless outside legal opinion stated that while the county did not notice and provide the annual cost in dollar terms at a public meeting two weeks prior to approving the retirement enhancements, it had “substantially complied with 7507. In effect, the lawyers said zero compliance equaled substantial compliance.

The outside legal opinion agreed that a 7507 actuarial report had not been made public, and had not even been obtained by the board of supervisors as required by 7507; it referred to two actuarial reports from the files of the Human Resources department (not the board of supervisors as required by 7507) and made the incredible conclusion that those internal records, never shown to the board of supervisors or the public, equaled “substantial compliance” with 7507.

The history of the Sonoma County 2002 pension increases is critically important to prove the concerted power of county staff, unions and board of supervisors to illegally enrich their group by non-adversarial, precise, agreed upon tactics. This is the usual method of so-called collective bargaining in California government.

At the turn of the century there was an open dispute about what determined “pensionable compensation” in CERL agencies like Sonoma County. The California Supreme court cleared up the issue in “The Ventura Decision.” But the Sonoma county lawyers saw a billion dollar opportunity. A “Ventura Decision” law suit was pending in Sonoma County, but of course all of the issues had been decided by the supreme court in the Ventura case.

Eventually, all of the members of the county pension plan (beneficiaries) were made parties to the suit. Plaintiffs and defendants made a detailed written lawsuit settlement that substantially increased pensions, both going forward and retroactively, for every plaintiff and defendant group, including the board of supervisors.

Here is a link to the Ventura Settlement agreement enacted by the Sonoma County Retirement Association’s Board of Directors who do not have the authority under the law to increase pension formulas. That can only be accomplished with a Board of Supervisors resolution adopting the new formulas. Item 8 in the agreement increased benefit formulas for Safety employees and Item 9 increased benefit formulas for General employees.

The board of supervisors did not obtain an actuarial report as required by 7507; therefore it was impossible to notice a public meeting to make the annual cost known to the public prior to adopting the increases, also as mandated by 7507. There is absolutely no case law suggesting even by hint, that 7507 could possibly be “permissive” (directory). As I will show, there was and is substantial case law confirming that 7507 was/is mandatory.

I have been actively observing governmental pension and compensation history since about 2008. The approach used to design the Sonoma county pension scandal is a precise representation of union bargaining in California governmental agencies. Everyone at the table benefited from unanimous compensation increases. In response to the grand jury finding, the successors of the same beneficiary groups that designed the scheme, stuck to the scheme by ignoring the facts and the law, and engaged law firms to provide them legal interpretations that defended their actions, as exemplified in the responses to grand jury findings of substantive compliance with 7507.

Hopefully, this analysis will spark an interest in pension reform in Sonoma county.

The Marin County Pension Scandal

In April 2015, the County of Marin civil grand jury issued a comprehensive report entitled: “Pension Enhancements: A Case of Government Code Violations and A Lack of Transparency.” The report was a precise factual demonstration of 23 violations of the requirements of 7507 by the county.

In particular, the grand jury report focused on the County’s failure to obtain actuarial reports and the failure to notice public meetings to reveal the annual costs of the increases to the public, as required by section 7507. In addition, I note that the facts indicate that not only the public, but the “legislative body” (board of supervisors) was not provided a 7507 estimate of the future costs of  “any” increase as required by 7507 and government code 31516.

The grand jury report indicated that as of its April 2015 publication the most recently available county unfunded pension deficit was $536.8M. The County also had over $100M in pension obligation bonds outstanding.

Citizens for Sustainable Pension Plans (CSPP), a Marin pension reform group, hired attorney Margaret Thum to provide a legal brief outlining the law related to the facts set forth in the grand jury report. The county hired the law firm of Meyers Nave to advise it about its required response to the grand jury report. The Thum opinion was totally honest and accurate, but the board of supervisors refused to read it or to even make it part of the public record. It is debatable, at best, to assert that the Meyers Nave opinion argued for the interests of the county of Marin, its client. An objective reading of the Meyers Nave opinion might instead find that it misrepresented the law and facts and omitted critical statutes and cases.

A review of the Meyers Nave legal opinion makes it clear that it agreed the county had failed to obtain an actuary report setting forth the “annual costs” of  “any” retirement increase discussed in the grand jury report. It admits that no public meeting was noticed or held, where the “dollar amount” of the annual cost for each new benefit was reported to the public, or even to the board of supervisors as required by 7507 and 31516.

But despite these acknowledgements, Meyers Nave argued that the County had “substantially complied” with the statutory requirement. Its contention on the facts was that in 1999 and 2001, the “Mercer” actuarial firm provided the county Human Resources Department (not the board of supervisors or the public as required per 7507) with actuary reports about the proposed increases. I note that the latter of the reports stated that it relied on calendar year 2000 data in making its estimates.

Here is why that is important. In the fiscal year 2001-2002 there was a tech stock market crash. Both PERL and CERL pension plans lost approximately 7% of the value of their assets and failed to earn their 8% assumed rate of return at the time. Generally CERL plans thereby fell short of their target return by 14%. So the use of 2000 data would have substantially understated the cost of any new benefit after 2001-2002. In addition the rate of retirement, salary increases etc. after 2000 would have increased the annual cost of the new benefit. That is why it was necessary to obtain a current actuary report – one that used the most recent data from the past year to provide a report that that produced an accurate “annual cost” dollar amount.

I am not an actuary, but I have reviewed dozens of 7507 actuarial reports. Every one of them provided that after June 30 of a designated year (e.g.2000) the report was no longer valid because the data from the last year was now finalized and available for a current and accurate analysis. That is what actuarial standards required.

Keep in mind that as the grand jury, as did the Sonoma grand jury, found there were no bona fide 7507 actuary reports; only the Mercer reports (which neither the public nor the board of supervisors saw). The board of supervisors did not obtain a valid actuary report setting forth the annual costs in dollar sums for “any” pension increase, and that information was not revealed to the public at a public meeting, so there was NO compliance with 7507. Yet, a law firm conjectured that there was “substantial compliance” when, arguably, there was NO compliance. Did that firm breach its duty to the client, if the client, ultimately, was the citizens of Marin County? It appears that the firm advocated for the staff, unions, and the board of supervisors, the continuing beneficiaries of the illegally adopted pensions, and contrary to the interests of the client.

Follow the Attorneys:

In pension enhancement cases, the process  to comply with 7507 is as follows:

  • The unions ostensibly negotiate with the county for a pension enhancement,
  • they agree on the increased pension and execute a contract (MOU) setting forth the terms,
  • the board of supervisors adopts the MOU,
  • the county informs the Retirement board of the new benefit,
  • the board of supervisors obtains a Govt. code 7507 report determining the annual dollar cost for each new benefit.
  • the county notices a public meeting by an agenda notice that describes that at the meeting the county will reveal the annual dollar cost of each (any, per 7507) pension increase set forth in the MOU’s,
  • that meeting is held at least two weeks prior to adoption of the new benefits,
  • if approved, the county enters into a new or amended agreement with the Retirement Board for the administration of the new pension enhancements.

In the case of “Voters for Responsible Retirement v. board of supervisors, (1994) 8 Cal. 4Th 765, the California supreme court clarified the moment at which the MOU’s that increased pensions were valid contracts. It said: “..section 7507 provides that the local legislative body, before adopting increases in public retirement benefits for its employees, must obtain actuarial evaluations of future annual costs of the plan, and make that cost information public “at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits.”

In the 1994 ruling, the court made it clear that the county, by its board of supervisors could refuse to pursue the new benefit if the 7507 report indicated that the cost was not acceptable to the board of supervisors. Additionally, the court noted that if the board of supervisors refused to adopt the benefit after receiving the 7507 report, the MOU’s were not final because the condition subsequent to validity had not occurred and it was back to the negotiating table to start anew.

The Alleged Violations of Fiduciary Duty in Both Sonoma and Marin Counties

  • The most outrageous fiduciary breach by lawyers for the county in the Sonoma and Marin pension scandals was the evident by-pass of Govt. code 7507. On a risk reward basis it was apparently decided that it was better to risk non-compliance when compared to the knowledge that a 7507 actuary report would reveal. That is, the enhanced plan would reveal a violation of the constitutional debt limit, which would then require a 2/3 vote of the people;
  • The failure of a single county lawyer to advise that in the Voters case the California supreme court had ruled that MOUs between unions and the county granting pension increases were dependent upon board of supervisors compliance with 7507; otherwise there was no binding contract;
  • The assertion that no case law has found that 7507 was mandatory. Clearly the Voters case proves that it was mandatory.
  • In addition to the omission of “Voters” case, note how outside counsel explained Howard Jarvis Taxpayers’ v. Bd. of Supervisors (1996) 41 Cal. App.4th The law provided that a board of supervisors could withhold the power of its retirement board to define retirement eligible compensation that included “flexible payments.” If a board had not denied a Retirement Board the power to set flexible payments as a part of final compensation, then the Retirement Board had that power. That is what it did in this case. This was permitted because 7507 only applies to the legislature and legislative bodies and not retirement boards.
  • The court held that because the consent of the board of supervisors was unnecessary for the retirement board to set flexible payments, there was not a violation of 7507. If board of supervisors’ approval had been required there would have been a violation of 7507 invalidating the increases that resulted. If 7507 was not mandatory, there was no issue for the court to decide. At page 15 of its legal opinion Meyers Nave cites cases unrelated to the Govt. code where the court in those cases discussed whether “shall” as used in the contracts was mandatory. It omitted reference to Govt. Code 14 of the Govt. Code Rules of interpretation that states clearly that “shall” is mandatory.
  • Here is what Meyers Nave told the board of supervisors and citizens about the Howard Jarvis case to imply that it did not support that 7507 was mandatory. It repeated the facts, as I have above, and then said: ”Under the facts of the case, section 7507 was found inapplicable.” What Meyers Nave failed to tell the board of supervisors was that 7507 was inapplicable because it did not involve the board of supervisors, but that if it had, compliance with 7507 was mandatory. Here, let that court explain it: “However, the record demonstrates the change in the retirement system of which plaintiffs complain was not an ‘increase in public retirement plan benefits’ which the board of supervisors may authorize, AND WHICH WOULD SUBJECT IT TO THE REQUIREMENTS OF SECTION 7507 (emphasis mine), but rather a change in LACERA’S method of calculating “compensation earnable”……” What can I say? The omission of the court’s clear statement that 7507 was mandatory for board of supervisors adopted pension increases had the effect of misleading the public as to whether 7507 was mandatory. That gimmick benefited not the client, but the beneficiaries of the illegal pension: the staff, the unions, the board of supervisors. It financially hung the client and citizens out to dry.
  • The legal opinion also does another magical application to the case of California Statewide Law Enforcement v. Department of Personnel Administration 192 Cal. App. 4Th1 (2011). Again, the issue is whether 7507 was mandatory. In the case, CSLEA, a govt. union that had been classified as “miscellaneous” was granted “safety status” with higher pensions by the 1992 legislature. After it became law, the union claimed it was entitled to the new “safety” status retroactively for time served as miscellaneous employees. Arbitration ensued under the “Dills Act” and a judge then ruled that CSLEA was entitled to retroactive safety benefits. DPA appealed. Keep in mind that 7507 applies to the state legislature. It did obtain a 7507 actuary of “annual costs” of the new benefit going forward, but it did not request and did not receive a 7507 report setting forth the “annual costs” of the new benefit for prior service of the employees. Again, let the court say it: “the materials provided to the legislature regarding the bill did not state that the reclassification would be applied retroactively and did not contain a fiscal analysis of the cost of the retroactive application of safety member status for all employees in the unit….” Earlier in regards to what constituted fiscal analysis, the court said: This requirement necessarily includes the obligation to present the Legislature with a fiscal analysis of the cost of the agreement. (See section 7507, sub.(b) (1) “ before authorizing changes in public retirement benefits.” The legislature shall have a “statement of [their] actuarial impact upon future annual costs,…” In its opinion letter, Meyers Nave said: “The case does not address whether section 7507 is mandatory or directory.” In those precise words, no; but it clearly showed that 7507 was the financial information necessary for such action to be valid. The court held that the prospective benefit was legal because of 7507 compliance. Again, the Meyers Nave opinion misrepresented the court’s opinion to support its claim that 7507 was not mandatory.
  • At page 16 of its opinion, Meyers Nave has the nerve to have a whole section entitled: “2. The Legislature Did Not Make The Sections at Issue Mandatory.” It then listed the four Govt. code sections referenced in the grand jury report. This must have been an oversight by Meyers Nave. Govt. code section 14 specifically provides that as used in the government codes: “Shall” is “Mandatory” and “May” is “permissive.” What makes this claim so galling is that Meyers Nave and all of the appellate courts are aware of the Voters case, the Howard Jarvis case, the CSLEA case and Govt. code section 14 and in each and every case assumed without discussion that 7507 was mandatory. There has never been an appellate case where a California attorney had the guts to argue that 7507 was directory. Why? Because such a baseless claim would properly make the firm liable for sanctions. But out of house lawyers hired by cities and counties routinely advise that 7507 is directive and therefore the staff, unions and board of supervisors can continue receiving pensions that were illegally adopted. Then, when a pension reform group like CSPP obtains an honest opinion, the board of supervisors will not even make it part of the record.

The Future for Reform in Sonoma and Marin Counties

I have not spent as much effort discussing the Sonoma Scandal. That is because the staff, unions and board of supervisors in Sonoma have very little opposition to their enjoyment of the Ventura pension gambit. The county has such great pension and other benefit debt, that another serious market downturn will likely force it into a chapter 9 bankruptcy. Then it may renegotiate its debts, reject its defined benefit plans and initiate a plan in bankruptcy that provides reasonable but affordable pensions. But there will be more suffering before that occurs.

In Marin, the situation is quite different. While it does have a pension and other benefit structure that is unsustainable, it has a vibrant pension group, the CSPP and a will to reform. But more importantly it has a gold plated grand jury report that clearly established that massive pensions were granted illegally.

Marin has a local press that has not sold out to the governing agency and is demanding that the grand jury report be given respect. A citizen has filed a civil complaint in Superior court in an attempt to keep the findings of the grand jury from being kicked down the road. He is in pro per and from that point of view is in over his head. But he does have a case. If a couple of local law firms would band together and represent him in the case I believe they would be richly rewarded under the private attorney general theory which provides for attorney fees for any success in the case.

Meanwhile citizens of Marin should hold accountable the present board of supervisors for its part in what I have argued was a bad faith effort to cheat Marin citizens out of the benefits of the grand jury report. They should be replaced by a new board of supervisors which should then terminate the present county administrator and county counsel and replace them with experts who will be contractually bound to truthfulness, transparency and undivided loyalty to the citizens of Marin by carrying out substantial reforms, such as a freeze on salaries until deficits are eliminated.

Conclusion

In my view, there is a serious flaw in the process by which a county hires outside counsel. The law is clear that the client is the county, not the county agent who interacts with the outside law firm. That means that the law firm has an exclusive duty to diligently apply the laws of the state and the county codes when advising the board of supervisors about legal matters. There is a fiduciary duty to do so. The California Rules of Professional Conduct require counsel to advise the client of all facts and law material to the legal matter. Instead, the out-of-house opinions invariably support the staff, unions and board of supervisors, all of whom, in this case, are beneficiaries of the illegally acquired pension enhancements.

Collective bargaining by public employees for salaries and benefits has ruined a once great way of life in California. For those who take up political space by fooling around with pension reform initiatives, it is time to face the substantive issue: A state wide initiative is necessary to remove so-called bargaining for compensation and benefits from the government arena. As the Sonoma, Marin and Pacific Grove examples show, there is no action that is off the table by the lawyers for the government to pursue, protect and enlarge illegally adopted pensions and other benefits. In the meantime the one clear tool of pension reformers is salary control, but it is rarely used.

The idea that some White Knight is going to come along and solve the pension scandal is preposterous, yet that seems to be what everyone is waiting on.

It is so disappointing that government lawyers and law firms that practice in the government area have been willing to aggressively defend what evidence strongly suggests were substantial violations of due process. It will be telling to watch the county staff and board of supervisors unleash their attorneys on Mr. Brown in his meritorious law suit. With hundreds of millions at stake, the ruling group will throw everything at him. Will the citizens come to his aid? The grand jury clearly documented the illegality of the pension increases.

 *   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Other work by John Moore:

The Mechanics of Pension Reform – State Actions
– Part 1, December 22, 2015

The Mechanics of Pension Reform – Local Actions
– Part 2, January 11, 2016

During 2015 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand

Local Citizen Takes Marin County to Court Over Pensions

Marin County is not the only county in California where pension benefits were increased, retroactively, back when the increased cost was seemed to be easily covered by double-digit returns on pension fund investments. But Marin County is the only county, at least right now, where a private citizen is taking the county Board of Supervisors to court over alleged violations of due process. As reported in the Marin Independent Journal in their editorial of March 28, 2016:

Mill Valley resident David Brown is taking the county to court, asking a judge to decide whether the county Board of Supervisors and other public agencies broke state law in approving workers’ pension enhancements with little or no public involvement in their decision-making process.

The 2014-15 Marin County Civil Grand Jury raised that question in its report, but the most definitive legal finding it made was that the public agencies “appear to have” side-stepped state rules.

The grand jury is not a court of law. On this issue, it raised a valid question, one that deserves a clear ruling.

That’s what Brown is seeking. As a taxpayer, he’s entitled to that and, unfortunately, he has to file a lawsuit to get it. Unfortunately, he got a dose of blowback from the county.

Here is the actual writ that was filed on March 9th, 2016 by David Brown in the CA Superior Court for the County of Marin. Links to all of the exhibits are included at the conclusion of the petition.

SUPERIOR COURT OF THE STATE OF CALIFORNIA

FOR THE COUNTY OF MARIN

NAME OF PLAINTIFF(S)

DAVID C BROWN

vs

MARIN COUNTY BOARD OF SUPERVISORS AS A GROUP

INDIVIDUALLY:  STEVEN KINSEY, JUDY ARNOLD, KATIE RICE, DAMON CONNOLLY, MATTHEW HYMEL, STEVEN WOODSIDE.

DATED:  March 7, 2016

Table of Contents

  1. Why this writ?
  2. Why this court?
  3. List of interested parties.
  4. Body of petition.
  5. List of Exhibits. 
  1. Standing

My name is David C. Brown. I am not an attorney. I live in the County of Marin at 25 Country Club Drive, Mill Valley, California, 94941. I have lived at this address since 2001. During that time I have paid taxes that have been used for, among other things, public employee salaries, pensions and benefits.

As a result of the improperly/unlawfully granted benefit enhancements I have suffered the following harms: 1) Payment of taxes in excess of what I otherwise would have paid and 2) A reduction in the quality of services from the County as money that should have been used for public services was used instead to pay the unlawfully granted retirement benefits.

Further, where “the question is one of public right and the object of the mandamus is to procure the enforcement of a public duty…” the petitioner “need not show that he has any legal or special interest in the result, since it is sufficient that he is interested as a citizen in having the laws executed and the duty in question enforced …” Green v. Obledo, 29 Cal.3d 126, 144 (1981).

  1. Why This Writ?

I am petitioning for this writ under Section 1085 because there is no plain, speedy and adequate remedy at law. Whether it is categorized as an error of law, a denial of a fair trial, a decision not supported by the evidence, findings not supported by evidence or all of the above, the simple fact is that is that members of the Marin County Board of Supervisors 1) should have recused themselves, 2) were negligent in not considering all the evidence and 3) received biased legal analysis and advice prior to making a decision in the matter.

  1. Why This Court?

On first reading this petition may look like a conflict of interest case better suited to the Fair Political Practices Commission (FPPC) than to Superior Court. That is, in fact, where I began. Last year I submitted a short complaint to the FPPC about the failure to recuse by three members of the Marin County Board of Supervisors (BOS). That complaint was closed. It was lacking in facts and documentation. Since then I have become better informed about the law regarding conflicts and more aware of the broad ramifications of the actions taken (or not taken) by the BOS. The issues involved extend far beyond the failure to recuse and deep into the financial wellbeing of the County. The actions I am requesting from the Court are much broader than simply declaring that members of the BOS were subject to conflict. They are beyond the scope of the FPPC. 

  1. List of interested Parties

Board of Supervisors
Marin County
3501 Civic Center Drive, Suite 329
San Rafael, CA 94903
415-473-7331

Individually:

Marin County Supervisor Steven Kinsey
Marin County Supervisor Judy Arnold
Marin County Supervisor Katie Rice
Marin County Supervisor Kate Sears
Marin County Supervisor Damon Connolly
Steven Woodside, Marin County Counsel
Matthew Hymel, Marin County Administrative Officer

All at:

3501 Civic Center Drive
San Rafael, CA 94903
415-473-7331 

  1. Body of Petition

Background and Facts

In April 2015 the Marin County Civil Grand Jury issued a report (Exhibit 1) in which it found 23 violations of section 7507 (Exhibit 2) of the California Government Code by the County of Marin. (The Grand Jury took care to use the version of 7507 in effect at the time (Exhibit 2A). In its report the Grand Jury issued Findings and Recommendations as required by law.

On June 30, 2015 the Marin County Board of Supervisors addressed the Grand Jury Report. Item number seven on the agenda was:

Request from the County Administrator for Board concurrence and adoption of response to 2014-2015 Grand Jury Report: “Pension Enhancements:  A Case of Government Code Violations and A Lack of Transparency” (April 9, 2015).

Recommended actions: Concur in and thereby adopt response and direct the President to submit the response to the Presiding Judge.

This item was also accompanied by:

  1. Staff Report, (Exhibit 3)
  2. Response, (Exhibit 4)
  3. Attachment (a nineteen-page memorandum from outside counsel, Meyers/Nave.), (Exhibit 5)
  4. Grand Jury Report. (Ex. 1)

Before discussion of item seven began I approached the podium to address the BOS. I read CA Government Code section 87100 which says,

“No public official at any level of state or local government shall make, participate in making or in any way attempt to use his official position to influence a governmental decision in which he knows or has reason to know he has a financial interest.”

Also relevant is CA Government Code Section 1090(a):

“Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members. Nor shall state, county, district, judicial district, and city officers or employees be purchasers at any sale or vendors at any purchase made by them in their official capacity.”

I did not read aloud the above section but I reminded the Board that it is the duty of the elected official, not the public, to determine if the official has a conflict.

I stated that Supervisor Kinsey had been a member of the BOS during the period when the benefit enhancements cited by the Grand Jury had occurred. He voted in favor of all of the enhancements.

I further stated that Supervisors Kinsey, Arnold and Rice and County Administrator Matthew Hymel all had a financial interest in the outcome of the Board’s deliberations regarding the Grand Jury report and that they should recuse themselves. I said it was possible that Supervisors Sears and Connolly had conflicts as well, although I was uncertain. I have since learned that Supervisor Connolly had a similar conflict.

Immediately after I spoke, County Counsel Steven Woodside, who had previously recused himself from matters related to the Grand Jury report, addressed the BOS and said,

“There is not a legal conflict that would preclude you, any of you, from participating in a discussion and decision on pension matters, compensation matters etc. even though you may have a personal stake in the matter in-so-far as you may be eligible for a pension, for example. The case that so decided this is a California Supreme Court case. The leading name is Lexin, L-e-x-i-n, makes it very clear that you have a duty to make these decisions. You have a duty to respond to the Grand Jury report. You have a duty to make decisions on compensation, etc. …”

The case to which Mr. Woodside was referring is CATHY LEXIN et al., Petitioners, v. THE SUPERIOR COURT OF SAN DIEGO COUNTY, Respondent; THE PEOPLE, Real Party in Interest. 47 Cal.4th 1050 (2010) 103 Cal.Rptr.3d 767 222 P.3d 214.

(My and Mr. Woodside’s comments can be found beginning at 21:28 of the video of the June 30, 2015 BOS meeting. The link to it can be found at Exhibit 6.)

I had never heard of the Lexin case so I took Mr. Woodside at his word and sat down. None of the supervisors recused themselves nor did Mr. Hymel. The meeting continued.

Legal Issues Presented

Summary of Legal Issues:

  1. Should supervisors Rice, Kinsey, Arnold and Connolly have recused themselves due to conflict of interest?
  2. Should County Administrator Hymel have recused himself due to conflict of interest?
  3. In light of his prior recusal, should County Counsel Woodside have participated in the Board of Supervisors’ discussion, even to the extent of offering an opinion on whether the members of the BOS and Mr. Hymel should have recused themselves?
  4. The memorandum written for the County by Meyers-Nave was to be an “objective legal review” of the Grand Jury report (statement by County Administrator Matthew Hymel at time 25:40 of the June 30 BOS meeting). If it wasn’t, should The County be directed to make available to plaintiff the same amount of funds used for payment to Meyers-Nave to retain an attorney with expertise in the area of statutory processes and procedures involving public sector pensions.
  5. Was the Board of Supervisors negligent in dismissing, and then proceeding to its conclusions, without reading the memorandum from M. Thum, Esq.?

Analysis of Legal Issues

Legal Issue 1: Should supervisors Rice, Kinsey, Arnold and Connolly have recused themselves due to conflict of interest?

As stated above, the controlling code sections in this matter are:

1) CA Government Code Section 87100 and 2) CA Government Code Section 1090.

In responding to the 2015 Grand Jury report, the four supervisors were asked to opine on the Grand Jury’s conclusion that benefit enhancements they themselves are to receive were originally granted unlawfully. The financial interest at stake for each of the four is not trivial. It is in the low hundreds of thousands of dollars.

The membership of the Marin County Employees’ Retirement Association (MCERA) does not consist of a uniform group, all of which does or will receive the same benefits as the supervisors. The membership of MCERA is divided into two mutually exclusive groups. One group (Group A) includes retirees and current employees who do or will benefit from any of the pension enhancements under discussion. Because of the pension tiers in which they participate Supervisors Kinsey, Rice and Arnold are all members of this group. Supervisor Connolly participates in MCERA through a pension tier granted by the City of San Rafael. That tier is also among those cited as questionable by the Grand Jury. An adverse finding in Marin County would have a precedential affect on the grants of pensions in San Rafael, likely affecting Supervisor Connolly’ pension.

The other group (Group Z) includes retirees and current employees who do not and will not benefit from any of the increases under discussion. This group comprises at least a substantial minority of the plan’s members.

Because the pool of funds available for retirement benefits is not infinite, the interests of the two groups are different. A decision to continue to pay unlawfully granted benefits provides advantages to members of Group A while simultaneously causing harm to members of Group Z. Paying out unlawfully granted benefits weakens the financial strength of the retirement plan. This has broad implications.

In his remarks at the BOS meeting County Counsel Woodside stated to the BOS, “You have a duty to make decisions on compensation, etc. …” He then cited the Lexin case, which revolves around Section 1090.

Section 1090 includes section 1091.5(a)(9), the so-called “compensation” exception. It states:

(a) An officer or employee shall not be deemed to be interested in a contract if his or her interest is any of the following:

(9) That of a person receiving salary, per diem, or reimbursement for expenses from a government entity, unless the contract directly involves the department of the government entity that employs the officer or employee, provided that the interest is disclosed to the body or board at the time of consideration of the contract, and provided further that the interest is noted in its official record. 

The decision facing the BOS in responding to the Grand Jury Report was 1) not a decision regarding the making of a contract and 2) not one of compensation. The grant of benefits (i.e., the contract regarding compensation) had been made long ago. Rather, the current BOS was asked to decide whether the BOS in place at the time of the making of the original had followed the required statutes.

The current BOS was responding to a Grand Jury report. The Grand Jury operates pursuant to the penal code. The BOS was asked to make a judicial or quasi-judicial decision about the legality of a previous grant of compensation. The current matter was not itself a compensation matter. County Counsel Woodside’s comment “…having a duty to make decisions about compensation…” was not relevant. The “compensation” exception under Section 1091.5(a)(9) does not apply.

In addition, the supervisors’ interest was not disclosed to the “body or board” at the time of consideration of the “contract” as required by 1091.5(a)(9). Nor was the interest noted in its official record.[1] Nor did the four supervisors disqualify themselves. Nor did the four supervisors refrain from influencing the other members of the Board.

Legal Issue 1 continued:

Had this been a compensation decision, as Mr. Woodside’s statement implied, he would have been correct that the controlling case would be Lexin v. Superior Court (47 Cal.4th 1050 (2010)103 Cal.Rptr.3d 767 222 P.3d 214). Even so, the Lexin case would not have provided an exemption for the officials involved.

Lexin hinges on the so-called “Public Services” exception, not the “compensation” exemption, to Section 1090 as stated in Section 1091.5(a)(3):

(a) An officer or employee shall not be deemed to be interested in a contract if his or her interest is any of the following: (3) That of a recipient of public services generally provided by the public body or board of which he or she is a member, on the same terms and conditions as if he or she were not a member of the body or board.

In its opinion the Supreme Court said,

“… contracts that actually involve unique personal financial interests not shared by the board’s constituency remain prohibited.” (Lexin v. Superior court) (Italics mine.)

In concluding its discussion of the “Public Services” Exception the court in Lexin went on to say:

“Having thus considered the text of the statute, judicial and Attorney General interpretations, and the surrounding statutory scheme, we conclude section 1091.5(a)(3) should be read as establishing the following rule: If the financial interest arises in the context of the affected official’s or employee’s role as a constituent of his or her public agency and recipient of its services, there is no conflict so long as the services are broadly available to all others similarly situated, rather than narrowly tailored to specially favor any official or group of officials, and are provided on substantially the same terms as for any other constituent.” (Italics and bold type mine.) (Lexin et al. page 1092)

In this case, “the service” is the enhanced pension and the conditions specified by the court are not present. The BOS was not making a contract. Even if it had been making a contract, the benefit is not broadly available to all others, or even to almost all others. Tthe constituency divided into “haves” and “have-nots”. Importantly, a benefit to the “haves” is not neutral to the “have-nots”. It causes them harm. The actions by the four Board members cause harm to members of their constituency while benefitting themselves. The public service exception, 1091(a)(3), does not apply in these circumstances.

The four supervisors should have recused themselves. Their failure to do so constitutes a violation of Section 87100 and is not covered by the relevant exemptions to Section 1090.

Legal Issue 1a: Supervisor Kinsey, a special case.

The case for recusal by Supervisor Kinsey is clear but not yet complete. Mr. Kinsey was a member of the BOS that granted every one of the pension enhancements cited by the Grand Jury. He voted for all of them. In addition to the financial conflict highlighted above, by not recusing himself, Mr. Kinsey was acting as judge and jury as to whether he himself had violated the law. This should never occur. Mr. Kinsey should have recused himself on these grounds alone. Petitioner cannot find a case or code section addressing this, perhaps because the idea is so preposterous.

Legal Issue 2: Should County Administrative Officer (CAO) Hymel have recused himself?

Mr. Hymel is a member of MCERA and will benefit directly from the questionable pension enhancements identified by the Grand Jury. Because Mr. Hymel’s compensation is greater than that of the supervisors he stands to receive a commensurately greater incremental benefit. Mr. Hymel, on information and belief, identified counsel to investigate the Grand Jury report and negotiated the terms and compensation for the agreement with counsel. The response to the Grand Jury report was prepared by Mr. Hymel or by an individual under his supervision and with his approval. Mr. Hymel recommended to the BOS the adoption of the draft response to the Grand Jury report. These actions constitute a violation of Section 87100.

Legal Issue 3: Should County Counsel Woodside have participated in the Board of Supervisors’ discussion, even to the extent of offering an opinion on whether the members of the BOS and Mr. Hymel recuse themselves?

Mr. Woodside had previously recused himself from matters related to the Grand Jury report. Mr. Woodside currently receives pensions from both Santa Clara and Sonoma Counties. His Sonoma County pension was found (broadly, as a member of a group; not individually) by the Sonoma County Grand Jury to have been enhanced under the same questionable circumstances as the pension enhancements here in Main County. An adverse finding in Marin County would have a precedential affect on the grants of pensions in Sonoma County, likely affecting Mr. Woodside personally. This is a violation of Section 87100.

Legal Issue 4: The Meyers-Nave (MN) memorandum.

Shortly after the Grand Jury report was released in April of 2015 Citizens for Sustainable Pension Plans (CSPP), a group of which the petitioner is a member, asked the Board of Supervisors to hire outside counsel to review the Grand Jury report. The Board agreed.

Mr. Hymel asked CSPP to provide a list of questions to assist him in selecting counsel. CSPP provided such a list. Some of the questions were answered. Some were not. The single most important question on the list was not answered. The question was this: Who would outside counsel consider as its client? CSPP was trying to determine whether the BOS would be the client or whether the citizens of Marin County would be the client. The two answers had different implications.

The County entered a contract (Exhibit 7) with the firm of Meyers-Nave for up to $40,000. The full amount was spent.

In his comments at the June 30, 2015 BOS meeting Mr. Hymel said, “We used outside counsel because we wanted to have an objective legal review of the Grand Jury report.” (Beginning at 25:40 of exhibit 6). (Italics mine.)

For $40,000 of taxpayer money spent on an objective legal review one would expect to get just that, unbiased work product. One would expect a comparison of both sides of each legal issue followed by a thoughtful analysis of which side had the stronger case. After all, it was taxpayer money that was being spent and it was tens if not hundreds of millions of dollars of taxpayer money that were at stake in the outcome of the analysis.

The MN memo provided nothing of the sort. What the taxpayers got for their money was a one-sided analysis of the issues that in every instance came down on the side of inaction by the BOS and maintenance of the status quo with regard to the unlawfully granted benefits. IN fact, the MN memo never mentioned that there might be another side to any issue. It was, in effect, a brief arguing against the report by the Grand Jury. To highlight just one example, MN’s discussion of whether 7507[2] is mandatory, and its conclusion that it is not, filled almost three single spaced pages. Yet Meyers-Nave did not cite even one of the many cases that could be used to argue that section 7507 is mandatory or that the word “shall” in the statute might actually have its plain English meaning.

If this were an adversarial proceeding, this would have been acceptable. There would have been a comparable brief from the other side. There was not. This was a case of the County using its resources to take one side of an argument when there was no one to take the other side.

The situation was analogous to that of a (conflicted) judge hearing a case but only permitting a brief from one side, the side on which the judge’s interest lies, while at the same time claiming the brief was neutral.

The conflicted position of Mr. Hymel when he hired MN, and the biased nature of the MN memorandum combine to make the MN memo tainted. However, just as a bell cannot be unrung, the memo cannot be unread. A remedy must occur.

Legal Issue 5: Refusal by the Board of Supervisors  to read the memorandum from M. Thum before making its decision.

An attempt was made to present a brief from the other side. The Grand Jury report was released April 16, 2015. The contract with MN is dated June 1, 2015. The MN memo is dated June 24, 2015. As required, it was made available to the public along with the BOS draft response to the Grand Jury report on June 25, 2015, three business days before the June 30, 2015 BOS meeting at which it was discussed. The result was that MN had 23 days to research and draft its memorandum to the BOS.

In anticipation of the MN memo and the BOS draft response to the Grand Jury report, CSPP hired Margaret Thum, Esq. to analyze the two documents and to write a response (Exhibit 8).

The first paragraph of the Thum memo asked the BOS to delay its response to the Grand Jury so that it and interested citizens could “thoughtfully consider and comment upon the current draft of your response to the Grand Jury report.” Extensions to response deadlines are routinely granted by Grand Juries provided there is good cause.

Ms. Jody Morales of CSPP, speaking in open time at the June 30, 2015 BOS meeting, informed the Board of the existence of the Thum memo. She informed the BOS she had a copy of the memo for each of them. She asked the Board to extend her time so she could read the memo to the Board. The Board sat stone-faced. She suggested the BOS take a short break in order to read the memo. The Board again sat stone-faced. In the end, all CSPP could do was submit the memo for the record. This was done. Later in the meeting (1:19:47 of Exhibit 6), during public comment on the item, I said to the Board of Supervisors:

“I want to be very, very clear that if you proceed and make a decision on this report today without reading the seven-page letter that Ms. Morales submitted from our attorney you are choosing, repeat choosing, to ignore a very material piece of evidence.”

The Board proceeded with its public hearing and voted to approve the response to the Grand Jury report as written WITHOUT HAVING READ THE THUM MEMO. Conflicted members of the Board, acting as judge and jury, elected to read only documents arguing for “their” side of the issue. This constitutes negligence on the part of the Board because it ignored evidence it knew was available.

Relief Sought

  1. Order that Supervisors Kinsey, Rice, Arnold and Connolly, County Administrator Hymel and County Counsel Woodside were subject to conflicts of interest and should have recused themselves from participating in the discussion and approval of the response to the Grand Jury report in question.
  2. Order that there was not a quorum for Item 7 at the June 30, 2015 Marin County Board of Supervisors’ meeting.
  3. Order that the Marin County Board of Supervisors’ response to the Grand Jury report is void.
  4. Because of the conflicts demonstrated, the disregard of those conflicts by those involved, the future likely unavailability of a quorum and the willful blindness demonstrated by all five members of the Board of Supervisors in dismissing the Thum memo, order that the Board of Supervisors has forfeited its right to address this matter.
  5. Because the MN memo cannot be unread, order the Board of Supervisors to make available a sum of $40,000, equivalent to that spent on the Meyers-Nave memo (one ten-thousandth of the County’s annual budget), to provide a brief arguing the other side of all relevant issues, along with sufficient time to construct such a brief.
  6. Order that this court will step into the shoes of the BOS and undertake a fare and unbiased analysis of the Grand Jury report. It should rule on all relevant points of law raised by the Grand Jury, Meyers-Nave, M. Thum and other briefs that may be submitted.
  7. If this court concludes that any of the individuals involved were conflicted and should have recused themselves, order that they publicly and individually apologize at a Board of Supervisors meeting as a listed item on the agenda, not as an item on the consent agenda.

Verification:

I, David C Brown, certify that everything I have written in this document is true to the best of my knowledge.

David C. Brown

List of Exhibits

  1.  Grand Jury Report
  2.  Section 7507. 2A Section 7507 then in effect
  3.  Marin County Board of Supervisors Staff Report
  4.  Marin County Board of Supervisors Response to Grand Jury Report
  5.  Meyers Nave memorandum
  6.  Marin County Board of Supervisors meeting June 30, 2015
  7.  Contract with Meyers Nave
  8.  Memo written on behalf of CSPP by Margaret Thum, esq.
  9.  Office of the CA Attorney General, 2010, “Conflict of Interest”

[1] See Exhibit 9, page 67: “An official whose interest falls into one of the “remote interest” categories must do the following: (1) disclose the official’s interest to his agency, board or body, and (2) have the interest noted in the official records of that body. (Section 1091, subd. (a).) Further, the interested official must completely disqualify himself or herself, and must not influence or attempt to influence the other board members. (Section 1091, subd. (c)”

[2] Section 7507: “The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. … The future annual costs as determined by the actuary shall be made public at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits. (Italics mine.)