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In December of 2018, the California Supreme Court will hear arguments in what is generally referred to as the Cal Fire pension case. The ruling could potentially overturn what is commonly referred to as the “California Rule.” The current interpretation of the rule is that pension benefits, once increased, cannot be reduced for existing employees even for future years of service without the agency providing a benefit of equal value to the employee.
What reforms would become possible if the Supreme Court rules that changes for future years of service are not protected by the California Rule?
To demonstrate how this ruling could be a game changer and open the door to pension reform for nearly every city and county in California, this article uses the potential savings for various reform options for the County of Sonoma.
It should be noted that any changes to the pension system if there is a favorable ruling by the court would need to be made by the governing body of each agency and if they refuse to act, could also be made by the taxpayers through the voter initiative process.
Current Situation in Sonoma County
The pension system for Sonoma County employees was founded in 1945 and up until 1993 was a sustainable and affordable system that paid career employees 2% per year of service. This would mean, for example, that after a 35 year career a retiree would collect a pension equal to 70% of their final base salary. Sonoma County employees are also eligible to receive Social Security benefits. Over the first 48 years until 1993, the pension system had accrued $355 million in total pension liabilities (money owed to retirees and earned to date by current employees).
But then, due to a series of illegal pension increases back to the date people were hired in 1998, 2003, 2004 and 2006, pensions for employees with only 30 years of employment jumped (including “spiking”) to 96% of their gross pay. After the first increase, the liability had doubled from the 1993 $355 million amount to $793 million in 1999. The liability doubled again in 9 years and hit $1.9 billion in 2009. Last year, in 2017 the pension liability reached $3.34 billion, a staggering 941% growth over 24 years.
The Growth of Sonoma County’s Pension Liability
To pay off the soaring liability, Sonoma County issued pension obligation bonds in 1994, 2003 and 2010 totaling $597 million dollars of principal. Paying off the bonds with interest will cost taxpayers $1.2 billion on top of their normal pension contributions. Currently, the County owes $650 million in principal and interest on the bonds that will cost them an average of $43 million per year until 2030.
In addition, the County’s contribution to the pension system (including debt service on the pension obligation bonds) has grown from $8 million in 1998 to $117 million in 2017. In other words, we have a serious math problem on our hands. While tax revenues have been growing at 3% per year, pension and healthcare costs have grown by 19%. Something has to give. In Sonoma County we have two choices, do nothing and pay higher taxes for fewer services, or, if possible (depending on the outcome of the Supreme Court case), reform our pension system to make it more equitable for taxpayers and more secure for employees and retirees.
So far, money has been taken from our roads and infrastructure maintenance budgets and the County has borrowed $597 million to pay for pensions. Soon, more and more money is going to come from cuts to fire and police protection, and services for those to in need. The retroactive pension increases not properly funded have essentially created a debt generation engine that sticks our children and grandchildren with enormous debt for services received in the past.
The Pension Increases May Have Been Illegal
In 2012 responding to a complaint I filed, the Sonoma County Civil Grand Jury could not find any evidence that the County followed the law when pensions were increased. The California Government Code in Section 7507 requires that the public be notified of the future annual cost of the increase. However, records show that all of the retroactive pension increases were enacted without determining the future annual costs and the public was never notified. This is a serious issue since public notification is the only protection taxpayers have. In addition, documents uncovered by New Sonoma indicate that the agreement was for the General employees to pay 100% of the past and future cost of the increase and Safety employees to pay 50% of the cost. This requirement was never enforced by the Sonoma County Retirement Association as it should have, so the vast majority of the costs for the benefit increases have been illegally borne by the County’s taxpayers.
These same increases were enacted at the state and local level from 1999 to 2008 for almost every public agency throughout the state. Cursory investigations of other cities conducted by the California Policy Center and Civil Grand Jury’s in Marin and Sutter county found similar violations at every agency investigated. A lawsuit is currently under appeal that would void illegal increases back to the date they were enacted which would in Sonoma County’s case save taxpayers $1.2 billion over the years ahead. But even if this case fails, other reform options may be available soon as a result of a favorable supreme court ruling. Here they are:
1. Cap the Employer Contribution
A lot of problems could be fixed at the governance level if employees felt the impact of growing unfunded liabilities. As long as the current situation of the employer/taxpayer covering 100% of the unfunded liability and debt service on the bonds exists, the problem will continue to grow and reforms will be minimal because all actuarial losses fall on the taxpayer.
Capping the employer contribution at 15% of salary (still 5 times what private sector employers contribute to retirement funds for their employees) would cut pension costs in Sonoma County from $117 million to $55.4 million, a savings to the county of $61.6 million per year. And as pension costs increase over the years ahead, the employees will pay all the costs associated with the growth.
2. Split All Pension Costs 50/50 Between the County and Employees
Currently the employer contribution is 19% of payroll. The current pension bond debt service, all paid for by the employer, is 11.3% of payroll. The current employee contribution is 11.6% of payroll. Therefore Sonoma County’s total pension costs in 2017 were 42% of payroll.
Capping employer contributions at 50% of pension costs or 21% of payroll would save the county $50 million per year, a cost that would be borne by employees in additional pension contributions.
3. Provide an Opt Out for Employees to a 401k Plan
Instead of forcing employees to contribute 21% of their take-home pay to their pension, a 401k option could be created.
Existing employees could be provided with the option of moving the present value of their future pension benefit into a 401k account and opting out of the defined benefit pension system. Going forward, the County could provide them with a 10% of base salary 401k contribution which the employee could match for a 20% contribution. Then, if the employee wanted to turn their account balance into a defined benefit for life, they could purchase an annuity upon retirement using their 401k funds.
Studies show young people entering the workforce prefer the portability of a 401k plan because they don’t see themselves in the same career their entire lives. Defined benefit pension funds also punish folks who leave the system early and highly reward those that stay because they are back loaded by design.
A lot of folks might also choose this option because they may be worried about the soundness of their pension plan, which in Sonoma County’s case, they should be.
4. Improve Pension Board Governance
Require a majority of non pension fund members on the Sonoma County Employee Retirement Association (SCERA) board or move the servicing of the fund, if possible to a private entity because of the conflicts of interest that exist when board members are also part of the pension system.
5. Establish Greater Transparency
Establish a COIN Ordinance to require the County Supervisors to hire an outside negotiator during contract negotiations and to provide the public with the cost impact of any changes to the citizens ahead of approval.
6. Mandate Public/Private Pay Equity
Require the County to perform a prevailing wage study and offer new County hires salaries that are similar to what Sonoma County residents earn in the private sector for work requiring comparable education and skills.
7. Return Spending Authority to Voters
Require voter approval of any pension obligation bonds, and require voter approval of any increases to pension formulas or increases to salaries in excess of inflation.
6. Eliminate Conflicts of Interest
Do not allow elected officials to be members of the pension system due to the obvious conflict of interest.
7. Improve Public Oversight
Create a permanent Citizens Advisory Committee on Pensions that would provide an annual study of the pension system and track the success of pension reform efforts and provide recommendations to the Board of Supervisors. All reports prepared by the committee will be posted on the Committee’s webpage on the County’s website. The committee would have the power to perform accounting and regulatory compliance audits of the Sonoma County Retirement Association, investigate any evidence of illegal acts, and recommend appropriate remedies to the Board of Supervisors. A description of any violations and any committee recommendations will be posted on the Committee’s webpage on the County’s website.
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Ken Churchill has over 40 years of business and financial management experience as founder, CEO and CFO of a solar energy company and environmental consulting firm. In 2012 after discovering the county illegally increased pensions without the required public notification of the cost he founded New Sonoma, and organization of financial experts and citizens to investigate the increase and inform the public. Information on New Sonoma and their findings and court case can be found at www.newsonoma.org.
In October 2016, in a coordinated act of terrorism that received fleeting attention from the press, environmentalist activists broke into remote flow stations and turned off the valves on pipelines carrying crude oil from Canada into the United States. Working simultaneously in Washington, Montana, Minnesota, and North Dakota, the eco-terrorists disrupted pipelines that together transport 2.8 million barrels of oil per day, approximately 15 percent of U.S. consumption. The pretext for this action was to protest the alleged “catastrophe” of global warming.
These are the foot soldiers of environmental extremism. These are the minions whose militancy receives nods and winks from opportunistic politicians and “green” investors who make climate alarmism the currency of their political and commercial success.
More recently, and far more tragic, are the latest round of California wildfires that have consumed nearly a quarter million acres, killed at least 87 people, and caused damages estimated in excess of $10 billion.
Opinions vary regarding how much of this disaster could have been avoided, but nobody disputes that more could have been done. Everyone agrees, for example, that overall, aggressive fire suppression has been a mistake. Most everyone agrees that good prevention measures include forest thinning (especially around power lines), selective logging, controlled burns, and power line upgrades. And everyone agrees that residents in fire prone areas need to create defensible space and fire-harden their homes.
Opinions also vary as to whether or not environmentalists stood in the way of these prevention measures. In a blistering critique published earlier this week on the California-focused Flash Report, investigative journalist Katy Grimes cataloged the negligence resulting from environmentalist overreach.
U.S. Representative Tom McClintock, whose Northern California district includes the Yosemite Valley and the Tahoe National Forest, told Grimes that the U.S. Forest Service 40 years ago departed from “well-established and time-tested forest management practices.”
“We replaced these sound management practices with what can only be described as a doctrine of benign neglect,” McClintock explained. “Ponderous, byzantine laws and regulations administered by a growing cadre of ideological zealots in our land management agencies promised to ‘save the environment.’ The advocates of this doctrine have dominated our law, our policies, our courts and our federal agencies ever since.”
All of this lends credence to Interior Secretary Ryan Zinke’s fresh allegations of forest mismanagement. But what really matters is what happens next.
Institutionalized Environmental Extremism
California’s 2018 wildfires have been unusually severe, but they were not historic firsts. This year’s unprecedented level of destruction and deaths are the result of home building in fire prone areas, and not because of wildfires of unprecedented scope. And while the four-year drought that ended in 2016 left a legacy of dead trees and brush, it was forest mismanagement that left those forests overly vulnerable to droughts in the first place.
Based on these facts, smart policy responses would be first to reform forest management regulations to expedite public and privately funded projects to reduce the severity of future wildfires, and second, to streamline the permit process to allow the quick reconstruction of new, fire-hardened homes.
But neither outcome is likely, and the reason should come as no surprise—we are asked to believe that it’s not observable failures in policy and leadership that caused all this destruction and death, it’s “man-made climate change.”
Governor Jerry Brown is a convenient boogeyman for climate realists, since his climate alarmism is as unrelenting as it is hyperbolic. But Brown is just one of the stars in an out-of-control environmental movement that is institutionalized in California’s legislature, courts, mass media, schools, and corporations.
Fighting climate change is the imperative, beyond debate, that justified the Golden State passing laws and regulations such as California Environmental Quality Act, the Global Warming Solutions Act of 2006, the Sustainable Communities and Climate Protection Act of 2008, and numerous others at the state and local level. They make it nearly impossible to build affordable homes, develop energy, or construct reservoirs, aqueducts, desalination plants, nuclear power plants, pipelines, freeways, or any other essential infrastructure that requires so much as a scratch in the ground.
Expect tepid progress on new preventive measures, in a state so mired in regulations and litigation that for every dollar spent paying heavy equipment operators and loggers to do real work, twice that much or more will go to pay consultants, attorneys, and public bureaucrats. Expect “climate change” to be used as a pretext for more “smart growth,” which translates into “stack and pack,” whereby people will be herded out of rural areas through punishing financial disincentives and forced into densely populated urban areas, where they can join the scores of thousands of refugees that California is welcoming from all over the world.
Ruling Class Hypocrisy
Never forget, according to the conventional wisdom as prescribed by California’s elites, if you don’t like it, you are a climate change “denier,” a “xenophobe,” and a “racist.”
California’s elites enjoy their gated communities, while the migrants who cut their grass and clean their floors go home to subsidized accessory dwelling units in the backyards of the so-called middle class whose taxes pay for it all. They are hypocrites.
But it is these elites who are the real deniers.
They pretend that natural disasters are “man-made,” so they can drive up the cost of living and reap the profits when the companies they invest in sell fewer products and services for more money in a rationed, anti-competitive environment.
They pretend this is sustainable; that wind farms and solar batteries can supply adequate power to teeming masses crammed into power-sipping, “smart growth” high rises. But they’re tragically wrong.
Here the militant environmentalists offer a reality check. Cutting through their predictable, authoritarian, psychotically intolerant rants that incorporate every leftist shibboleth imaginable, the “Deep Green Resistance” website offers a remarkably lucid and fact-based debunking of “green technology and renewable energy.” Their solution, is to “create a life-centered resistance movement that will dismantle industrial civilization by any means necessary.”
These deep green militants want to “destroy industrial civilization.” At their core, they are misanthropic nihilists—but at least they’re honest. By contrast, California’s stylish elites are driving humanity in slow motion towards this same dire future, cloaked in denial, veiled coercion, and utopian fantasies.
This is the issue that underlies the California wildfires, what causes them and what to do about them. What is a “sustainable” civilization? One that embraces human settlements, has faith in human ingenuity, and aspires to make all humans prosperous enough to care about the environment, everywhere? Or one that demands Draconian limits on human settlement, with no expectation that innovation can provide solutions we can’t currently imagine, and condemns humans to police-state rationing of everything we produce and consume?
That is the stark choice that underlies the current consensus of California’s elites, backed up by dangerous and growing cadres of fanatical militants.
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In this season of Thanksgiving, taxpayers in California have reason to pause when asked for what they are thankful. Considering the costly plans of the newly elected Legislature and governor, taxpayers may be most grateful for the fact that the state hasn’t yet built a wall encircling the state to keep them from leaving.
After 2017, when lawmakers enacted new taxes including a $5.2 billion annual tax hike on gasoline, diesel and vehicle registration, as well as a new tax on recorded documents, 2018 saw every effort by the Legislature to increase taxes defeated by advocates for taxpayers.
We are grateful that the first-ever tax on drinking water was defeated.
We are grateful that the tax on fireworks was defeated, and that the effort to revive the “snack tax” was not successful.
We are grateful that the proposal to put a sales tax on services was shelved.
We are grateful that nearly a million voters signed petitions to repeal the gas and car tax. Of course, the bad news is that the gas tax repeal was given a new title by Attorney General Xavier Becerra that removed the words “gas tax repeal” from the ballot, deceiving voters.
Further disappointments for taxpayers in November’s election results include progressives winning supermajorities in both the Assembly and the state Senate. California’s one-party government can now pass tax increases without the need of even a single vote from the opposition party. This surely increases the probability that taxpayers will be steamrolled by all the tax increases that were defeated in 2018 being resurrected in 2019.
An even bigger threat may appear in the form of proposed constitutional amendments emanating from the Legislature.
Supermajorities in both houses allow the party in power to place these on the ballot, again without the need of a single Republican vote. Once on the ballot, the measures need only a simple majority to pass.
While Proposition 13 remains very popular, taxpayers advocates could be stretched to the limit if confronted with multiple anti-taxpayer constitutional amendment proposals. In the last decade, these have been stopped before clearing both houses of the Legislature. But now, the following proposals are likely to make an unwelcome encore in the Capitol: Lowering the vote threshold at the local level for passing bonds and parcel taxes from two-thirds, as required by Prop. 13, to 55 percent or even less; imposing higher property taxes on businesses; bringing back the estate and gift tax; restricting the ability of homeowners to transfer their Proposition 13 base-year value to a new residence; and weakening Proposition 218, the Right to Vote on Taxes Act, which limits the extent to which local governments can impose various fees, charges and assessments on property.
Given the list of costly promises made during the election campaign, on top of the massive unfunded pension liability that already burdened the state, higher taxes are a near certainty in the next two years. Californians currently pay some of the highest state and local taxes in the nation, but it isn’t nearly enough to keep up with the spending of the politicians who have been elected to run the government.
Still, California taxpayers can be grateful this Thanksgiving that they still have the power of the initiative and the recall. If they can keep it.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.
It is understandable that many California taxpayers are disappointed with the election results. The defeat of Proposition 6 means that last year’s big increases in both the car tax and the gas tax imposed on us by Sacramento politicians will remain in effect and California’s drivers are stuck having the second-highest gas tax in the nation.
Tax-and-spend progressives are interpreting the defeat of Prop. 6 as a green light to impose even higher taxes. In fact, some now believe that the iconic Proposition 13 itself may be vulnerable. But this thinking is faulty.
There are three major reasons why Proposition 6 failed and none of them are because voters were enamored with the Senate Bill 1 tax hike last year. First, the ballot label – which may have been the only thing low-information voters saw – made no reference to the tax hike passed by the legislature last year. Rather, it ominously stated that the initiative would “eliminate certain transportation funding.” This non-specific description ignores that, had Prop. 6 passed, California would still have the fifth-highest gas tax in the nation. In providing a blatantly misleading ballot title, Attorney General Xavier Becerra did the opponents a huge favor.
Second, the financial power of the “rent seekers” — those interests which secure financial advantage through higher taxes on the general public – was on full display during this campaign. Big business, including large construction companies, teamed with big labor to contribute well over $50 million in campaign funds. A one-time $50 million investment for $5 billion in tax proceeds every year is a heck of a good return on investment. Moreover, this amount of money dwarfed the approximately $5 million raised by the proponents. With that kind of spending disparity, the disinformation spewed out by the opponents could not be challenged effectively, particularly in major media markets.
Third, opponents engaged in repeated acts of questionable and even illegal behavior. Beyond just the over-the-top threats of collapsing bridges if Prop. 6 passed, there was the well-publicized use of Caltrans-supervised work crews to stop traffic and hand out campaign fliers urging a no vote on Proposition 6. And the full integration of Caltrans management with opposition campaign operatives was an example of real, not fake, collusion. While legal actions are pending on this kind of activity, it is of little solace to California drivers who are being punished every time they pull up to the pump or write a check to the DMV.
All of this demonstrates that it is not easy to persuade Californians to pay higher taxes. Proposition 6 may have been confusing to many voters because it was not labeled on the ballot as a tax cut. A vote of no was a ratification of the legislature’s tax increase. Even now it’s confusing.
A more accurate test of voters’ appetite for higher taxes is likely ahead in the next election. A proposal that would directly increase taxes on businesses has already qualified for the 2020 ballot. The measure would create a “split roll” for property taxes, triggering immediate reassessments on business properties and imposing billions of dollars in higher property taxes. This initiative is also a direct assault on Proposition 13 by weakening, for the first time, the core protections of that famous initiative.
Unlike the Proposition 6 campaign, the tax-and-spend forces will be asking for a Yes vote. Opposing them will be all the traditional taxpayer advocacy organizations accompanied by an armada of business interests. Many of those groups were part of the powerful coalition that soundly defeated Proposition 10, which would have unleashed rent control in California.
Proposition 6 was a disappointment and taxpayer advocates may be bloodied but they are not broken. To paraphrase Mark Twain, the news of our death is greatly exaggerated.
Jon Coupal is president of the Howard Jarvis Taxpayers Association.
Back in the days of adding machines and manual ledgers, final election results in California were usually done by midnight on election day. Sometimes there would be a few precincts counting ballots into the wee hours of the morning, and you wouldn’t know a result till the next day. Fast forward to 2018, and the age of global interconnectedness, with instantaneous algorithmic management of everything from power grids to Facebook feeds, yet here in California the complete results of the 2018 midterms won’t be available until December 7th. Go figure.
While California’s ability to count ballots runs contrary to the otherwise dazzling march of progress, by now we have enough information to offer a pretty good look at California’s state legislature for 2019-20. The Democratic supermajority has been reestablished. With 28 confirmed seats in the Senate, and 56 in the Assembly, the Democrats hold 70 percent of the seats in both houses. Even if Republicans achieved the unlikely capture of all four Assembly seats that remain too close to call, nothing would change. Overall, so far there are 84 Democratic legislators, and only 32 Republicans.
How Many State Legislators Have Private Sector Experience?
Three election cycles ago, a California Policy Center analysis compared the biographies of California’s state legislators, asking how Republicans and Democrats differ in terms of what they did before they became politicians. To repeat this exercise, 2018 election results were obtained from the California Secretary of States “District Races” page for the Senate and the Assembly. For incumbents who were reelected, biographies were obtained from the Senate and Assembly websites. For newcomers, a trip to Wikipedia, Ballotpedia, or their campaign websites was sufficient.
When one considers the professional background of California’s politicians, a clear pattern emerges. And while compiling this data requires some degree of subjective interpretation, no reasonable interpretation would fail to reveal dramatic differences in experience between Democrats and Republicans.
California State Legislature, 2019-2020 Membership
Business vs. Government Background
As seen on the above table, in California’s 2019-20 state senate, 79 percent of the Democrats have no private sector experience. On the other hand, 58 percent of the Republicans had no public sector experience prior to running for elected office, although most of them ran for local offices prior to running for state senate. The same story applies with California’s state assembly, where 73 percent of the Democrats have no private sector experience, and 55% of the Republicans have at least some private sector experience.
Before continuing, it’s interesting from this perspective to compare this 2019-20 state legislature to the 2013-2014 state legislature. Back then the proportions were generally the same, but there were almost no Democrats – only five in both houses – compared to 14 of them today. Conversely, back in 2013 there were 25 Republicans who had an exclusively business background prior to holding elected office, compared to only 15 today. Over the same period, the number of Republicans with only public sector experience prior to holding office has more than doubled, from four back in 2013 to 11 today. Overall there are now even fewer Republicans – down from a paltry 36/120 six years ago to a vanishing 32/120 today.
California State Legislature, 2013-2014 Membership
Business vs. Government Background
What might explain this tepid drift to the center, at least in terms of more Republican state legislators with public sector experience, and more Democratic state legislators with private sector experience?
One explanation could be the open primary, which makes it less likely an extreme candidate will survive the general election. Another could be the decision made around 2010 by California’s beleaguered business community to start supporting pro-business Democrats. Finally, as Republicans in California fade further into irrelevance, the alliances and allegiances formed in public sector work offer Republican candidates with that background a better chance of electoral success.
Public Sector Unions Pick Public Sector Careerists to Run for Public Office
Back in the 1950’s and 1960’s there were plenty of pro-business Democrats, so called “Pat Brown” Democrats, who worked with Gov. Brown Sr. to build freeways, bridges, power plants, and the finest system of water storage and conveyance the world had ever seen. Those same Democrats cooperated with Republican Governor Reagan a few years later to build the finest public university system in the world. The opportunities available to California’s middle class were unrivaled. What happened to these Democrats?
The problems began in the 1970’s when public sector unions were allowed to form. Steadily acquiring political power through automatic dues deductions, they used taxpayer’s money to lobby for the interests of government workers instead of the interests of the people they serve. Increasingly, business-backed candidates started losing races to candidates backed by government unions. Almost invariably, unions backed Democratic candidates. The more powerful these union-backed candidates became, the more laws they enacted to further consolidate their power. Today government union rule in California is absolute.
The tragedy of unionized government is not merely that they have taken over California’s state legislature and nearly every city, county and school board in the state in order to pursue their membership’s interest above the public interest. It is that most elected officials no longer understand business. These union anointed elected officials come from government agencies, union bureaucracies, nonprofits, activism, and public education. Most of California’s legislators have never had to balance a budget, make a payroll, or convince a customer to voluntarily purchase a product so they could earn a precarious profit in a competitive market.
California’s lawmakers, to the extent they are elected with the support of public sector unions and to the extent they lack business experience, not only face a conflict of interests every time they have to deal with a reform that threatens the power of the unions. They are also less qualified to understand the financial and operational realities that apply in any efficiently ran, productive organization, large or small. They are in over their heads.
To exemplify this, consider how California’s democrats are crowing over a $6 billion budget surplus. Compare that $6 billion surplus to the nearly half-trillion in bond debt that California’s state and local governments have piled up, including another $23 billion on Nov. 6th. Compare that $6 billion surplus to, by most reasonable estimates, the more than half-trillion in unfunded retirement benefits that are going to blow sky high in the next market downturn.
Hint. A trillion is a thousand billion.
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Although hundreds of election results remain to be decided across California, thanks to millions of vote-by-mail ballots still being counted, we can already project with reasonable accuracy the total amount voters approved in new taxes and borrowing. At the local level, new taxes nearly always are approved by voters. In 2016, out of 224 local tax proposals, voters approved 71 percent, adding $2.9 billion in new taxes. As shown on the table, if a similar percentage of November 6, 2018 local tax measures are approved by voters, California’s taxpayers will be providing local governments with another $1.6 billion per year.
Total Estimated New Annual Taxes Approved by California Voters
November 2018, $=Millions
While these new local taxes add billions – over time, tens of billions – of additional burden on California’s already beleaguered taxpayers, state ballot measures often offer even more significant tax increases. This November, voters turned down an opportunity, via Prop. 6, to eliminate an estimated five billion in new gasoline taxes. In all, California’s voters enabled another $6.1 billion in annual taxes, in a state that already has among the highest overall tax rates in the U.S.
California’s Total New Debt
The impact of new taxes is immediate. Rates go up, revenues increase, and government budgets swell. Compared to taxes, the impact of bonds is greater in the long run, but harder to recognize. In reality, bonds are just deferred taxes. From a financial perspective, it would almost be preferable to use taxes to fund many projects that currently rely on borrowing, because at least taxpayers would only be paying principal, and not interest. For example, if you assume 3 percent inflation, the present value of the payments on a $1.0 billion bond (5% interest, 30 year term) is $1.3 billion. That is, in real dollars, using a typical example, bond financing costs taxpayers 30 percent more than paying for services using operating funds. But the seduction of borrowing is hard to resist: big money today, while mortgaging tomorrow.
Total Estimated New Borrowing (incl. Annual Payments) Approved by California Voters
November 2018, $=Millions
As it is, this November, voters mortgaged a lot of tomorrows. And as always, the big money in the case of new bonds was almost all local. In 2016, of the 193 new local bond measures, voters approved a whopping 94 percent of them. This added $32 billion in new debt, equating to an estimated $2.1 billion in new annual principal and interest payments. As shown on the table, if a similar percentage of November 6, 2018 local bond measures are approved by voters, California’s taxpayers will owe another $15.5 billion. The principal and interest payments on this new debt will cost taxpayers another $1.0 billion per year.
At the statewide level, despite rejecting Prop. 1, the water bond, voters approved three new major state bond measures totaling $6.5 billion. Adding that to the likely $15.5 billion in local bonds, Californians this November will have added $23.0 billion in debt, costing $1.5 billion per year in annual payments of principal and interest.
California’s Total Accumulated Debt
Who was it that said, “a billion here, and a billion there, and pretty soon we’re talking about serious money”? That would describe California’s total state and local government debt. When you look at what constitutes California’s total debt, accumulated over decades, it puts the relentless drive for higher taxes into context. The next table summarizes California’s total debt, as estimated by California Policy Center researchers Marc Joffe and William Fletcher in a 2017 study entitled “California’s Total State and Local Debt Totals $1.3 Trillion.”
Added in column two of this table is the estimated annual payments on this debt. As can be seen, the conventional debt – bonds, loans, and other contractual debt – paid back over 30 years at an interest rate of 5 percent, is costing California’s taxpayers $27.7 billion per year. Add to that, of course, annual payments of another $1.5 billion on new debt approved by voters earlier this week. But it’s in the unfunded liabilities for public employee retirement benefits where truly serious money burdens California’s taxpayers.
California’s Total Estimated State and Local Government Debt
The story of how California’s taxpayers ended up on the hook for unfunded retirement pension liabilities easily in excess of a half-trillion dollars defies glib explanations. Anyone wanting to dig deep into California’s public sector pensions is encouraged to read the California Policy Center primer “Resources for Pension Reformers” and click on the many links for in-depth analyses of this complex topic. Simply put, an unfunded pension liability is the difference between the assets being managed by a pension fund at any time, and the present value of all promised future payments to retirees and active workers that have been earned up to that same point in time.
Over nearly three decades, some critical mistakes were made in California’s public employee pension fund management. Pension benefits were increased, again and again, by politicians eager to curry favor with public employee unions, but didn’t want to blow their current year budgets by granting salary concessions. Instead, they sweetened future pension benefits which did not incur significant immediate costs. Then the required annual costs to fund pensions were underestimated. Rates of return on invested pension fund assets were overestimated. Life expectancies were underestimated. And as the assets of California’s state and local pension systems began to fall well behind the value of their liabilities, creative accounting was employed to understate the amounts needed to reduce that debt.
Because of all these unknowns, there is a wide range of estimates of California’s total public sector pension debt. At the least it totals over a quarter trillion; at most, about triple that amount. This much is reasonably certain: if there is an economic downturn, and if pension benefits aren’t further reduced, it is likely that payments on pension debt will need to be in excess of $50 billion per year. In all, absent reforms and an epic continuation of the bull market, Californians are likely to be paying over $90 billion per year to service their state and local government debt. More than half of that will be to pay down unfunded pension liabilities.
The Public Sector’s Insatiable Desire for More Money
It is impossible to view California’s relentless pattern of tax increases apart from its public sector pension crisis, which is just beginning. Currently, the estimated annual payments on unfunded pension liabilities in California is estimated at $17 billion. Imagine the impact of that amount soaring to over $50 billion. And, of course, the taxpayer cost for pensions isn’t just to pay down the unfunded liability. The “normal cost,” that amount each year that has to be paid to fund the future pension benefits just earned in that year, is also rising. Based on modest adjustments to the assumptions governing projections of pension solvency, and based on official announcements already made by California’s largest pension fund, CalPERS, the normal costs for pension benefits plus the unfunded payments for pensions are estimated to rise from $31 billion in 2017 to $59 billion by 2024. No tax increase, anywhere so far, not even all of them added up, are sufficient to cover this shortfall.
If analysts find California’s looming pension funding crisis alarming, public employees who receive these pensions find it terrifying. That’s why, when a new local tax or bond measure is on the ballot, local governments use taxpayer funds to engage in “information campaigns” aimed at their voters that come very close to being political advocacy. Sometimes they cross that line. After such activities in support of a local sales tax increase in Los Angeles County, the California Fair Political Practices Commission found cause to charge the county, as well as the individual members of the Board of Supervisors, with 15 counts of campaign finance violations.
Californians had a chance to apply vigorous pressure to its elected officials by passing Prop. 6, which would have repealed the gasoline tax. That repeal would have cost state and local governments $5.0 billion per year. Why wouldn’t Californians seize an opportunity to lower what are the highest gas taxes in the U.S.? The answer reveals more about how far California’s public sector is willing to go in its desperate need for more revenue.
Earlier today and in the aftermath of the Nov. 6th election, Carl DeMaio, a former member of the San Diego City Council, who launched the Prop. 6 campaign, described the tactics of the opposition. California’s attorney general is responsible for reviewing ballot initiatives and approving the final wording of these initiatives as they appear on the ballot. According to DeMaio, rather than objectively describing the intent of Prop. 6, which was to repeal the new gasoline tax, the attorney general’s office used focus group research to compile a title and summary for the initiative that was worded in a manner more likely to get people to vote no. But it didn’t end there.
Not only is California’s attorney general alleged to have doctored the language of Prop. 6 to draw down voter support, California’s public sector unions spent millions on an opposition campaign. Overall, the opposition to Prop. 6 spent $50 million on their campaign, compared to only $2.6 million spent by its proponents.
Even in California, $50 million buys a lot of airtime. Lost on California voters, sadly, was the irony of a veteran firefighter who made $324,000 in 2017, serving as the main television spokesperson opposed to Prop. 6 which would have lowered taxes. California’s public sector unions collect and spend at least $800 million per year. They can, quite literally, spend as much as they need to spend to defeat candidates and propositions that do not favor their own interests.
Why don’t California’s voters and policymakers overcome high taxes and an unaffordable cost of living? Partly it’s due to the grip that public sector unions have on politicians, which prevents the state legislature from ever getting spending under control. Partly it’s the lack of any effective opposition, since the supposedly tax averse Republican party in California is a hollow shell, lacking on-the-ground infrastructure, strong candidates, or a shared and compelling political agenda. Saddest of all, it’s because the media in California is entirely unwilling to make the connection between public sector compensation, the power of public sector unions, and the punitive taxes and living costs that are its consequences.
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There are obvious reasons the median home price in California is $544,900, whereas in the United States it is only $220,100. In California, demand exceeds supply. And supply is constrained because of unwarranted environmental laws such as SB 375 that have made it nearly impossible to build housing outside the “urban service boundary.” These laws have made the value of land inside existing urban areas artificially expensive. Very expensive. Other overreaching environmentalist laws such as CEQA have made it nearly impossible to build housing anywhere.
Then there are the government fees attendant to construction, along with the ubiquitous and lengthy permitting delays caused by myriad, indifferent bureaucracies with overlapping and often conflicting requirements. There is a separate fee and a separate permit seemingly for everything: planning, building, impact, schools, parks, transportation, capital improvement, housing, etc. Government fees per home in California often are well over $100,000; in the City of Fremont in 2017, they totaled nearly $160,000 on the $850,000 median value of a single family home.
This is a shakedown. It has caused a politically engineered housing shortage in California that enriches billionaire property developers that have the financial strength to withstand decades of delays and millions in fees, because they reap the extreme profits when they sell these homes at inflated prices. Also enriched are the public servants whose pay and pensions depend on all taxes – definitely including property taxes – and all fees being as stratospheric as humanly possible. Public employee pension funds also benefit from housing scarcity, as their real estate investment valuations soar into bubbleland.
When litigious environmentalists, insatiable public sector unions, and an elitist handful of left-wing oligarchs control a state, artificial scarcity is the consequence. Welcome to California.
REJECTED POLICY – REAL SOLUTIONS TO THE HOUSING CRISIS
To decisively solve California’s housing shortage, some of California’s more than 25,000 square miles of rangeland, currently occupied by cattle, would have to be approved for suburban development. California is only 5 percent urbanized, although if you listen to environmentalists, you might get the impression it only had 5 percent remaining open space. You could fit ten million people onto half acre lots in four person households and you would only use up 2,000 square miles – that’s only 1.1 percent of California’s land area. Why aren’t massive new housing developments spreading out along California’s 101, I-5 and 99 corridors?
Real solutions to California’s housing crisis would also require increasing the capacity of California’s water infrastructure and transportation infrastructure. In both cases, investment would be cheaper if this expansion was done on raw land. Real solutions to California’s housing crisis would mean rescinding the mandatory rooftop solar requirement on new home construction, and instead recommissioning and expanding the nuclear power complexes at Diablo Canyon and San Onofre, and embracing development of additional nuclear power and natural gas power plants. In a less confiscatory regulatory environment, the private sector could fund all of this while lowering costs to consumers.
Reforming environmental restrictions and unleashing private sector development of homes and infrastructure is the fastest, easiest way for home prices in California to return to near the national average. In turn, that would solve nearly every problem associated with a shortage of housing. California’s families would be able to afford to buy homes, or pay affordable rent. California’s employers, most definitely including government agencies, would be able to attract workers at prices that would not break their profits or their budgets, which would benefit the economy. And far fewer people would be rendered homeless.
APPROVED POLICY – COMPLETELY USELESS “SOLUTIONS” TO THE HOUSING CRISIS
As long as environmentalist litigators, public sector unions, and left-wing oligarchs run California, none of these real solutions will ever happen. What are they proposing instead?
To summarize, all politically viable housing solutions in California involve densification, i.e., cramming ten million more people into existing urban areas, and, predictably, more taxes, bonds, fees, subsidies and government programs.
Rent Control, Government Subsidized “Affordable Housing” and Government Funded Homeless Shelters
California is the epicenter of America’s “progressive” power structure. In California, in addition to controlling the public bureaucracy through their unions, progressive ideologues control the press, social media, search media, K-12 public education, academia, most corporations, the entertainment industry, and virtually all serious political campaign spending. As a result, California’s progressives can use ballot initiatives to con a brainwashed populace into approving their latest housing policy agenda. The common thread? Government control; government funding. For example, on the ballot this November are propositions to permit cities and counties to enact rent control, issue state bonds totaling $4 billion to build “affordable housing,” and use state tax revenues to build more government-run homeless shelters. It is possible all three of these measures will pass.
Already in progress is the implementation of California state laws that took effect Jan. 1 – AB 2299 and SB 1069 – which amend existing state laws governing “accessory dwelling units.” These new laws force California’s counties to streamline the process whereby homeowners can construct additional homes in their backyards. Does that sound good? Not so fast.
Doubling Suburban Population Densities ala Government Subsidized “Accessory Dwelling Units”
There’s a reason people work hard for decades to pay off their mortgages so they can own homes in spacious suburbs. It’s because they value the leafy, semi-rural atmosphere of an uncrowded suburban neighborhood. AB 2299 and SB 1069 will effectively double the housing density in these neighborhoods, violating the expectations of everyone living there who relied on the zoning rules that were in effect when they bought their homes.
If zoning laws in existing suburbs were relaxed at the same time as zoning restrictions were lifted on the urban periphery, the impact of these new rules might be mitigated. But every policy California’s elite and enlightened geniuses come up with is designed to maintain “urban containment.” And to add to the disruption these laws will inflict on quiet neighborhoods, California’s cities – starting with Los Angeles – are providing subsidies to homeowners to build these homes, then encouraging them to rent the properties to low income families wherein the government will pay the rent via Section 8 vouchers.
This is an expensive, utopian scheme that oozes with compassion but is fraught with problems. Doubling the density of suburbs is already problematic. But doubling the density of suburbs by subsidizing the settlement of people on government assistance into every backyard, invites social friction. It is forcible integration of people who, for whatever reason, require government assistance to support themselves, into communities of taxpayers, who, by and large, are working extra hard to pay the mortgages on overpriced homes in order to provide their children with safe neighborhoods.
As usual, when it comes to enlightening the public, neither the media, nor the urban planning experts in academia, ever offer much beyond pro-densification propaganda. A glowing New York Times article, entitled “A Novel Solution for the Homeless: House Them in Backyards,” raves about this entire scheme, already being tried in Los Angeles, Portland and Seattle. The article includes a quote from Vinit Mukhija, a professor of urban planning at UCLA, who says: “The value [of subsidized accessory dwelling units] goes beyond that, though, because it is finally somewhat of a departure of the purity of single-family housing in the region. It’s a good step to change what people here really consider a dogma of private housing.”
The “dogma of private housing.” That epitomizes California’s elitist hostility towards ordinary families owning detached homes with spacious yards.
The incentives created by such a project are perverse. California’s elite has made homes unaffordable. Then, to the people who sacrificed so much to buy these homes despite their punitively high prices, the government offers them subsidies and Section 8 payments, if they are willing subdivide their lots and turn over half their property to people supported by the government. Inevitably, many financially struggling homeowners will be forced to accept this cruel bargain if they want to keep their homes.
Finally, just like in 2008, there will eventually be another economic downturn, when many distressed homeowners will be forced to sell their properties. And when that happens, just like in 2008, investment banking speculators will move in and buy homes by the thousands. This next time, however, these institutional investors will be salivating at the prospect of collecting government subsidies so they can operate two rental units on a single piece of property.
Demolishing Homes to Build High Rises Near Transit Stations
Another way California’s elites – many of whom live in gated communities with homeowner covenants prohibiting nasty things like accessory dwelling units in backyards – propose to solve California’s housing crisis is to force demolition of single family dwellings in the vicinity of mass transit stations. They support this mass destruction of vintage neighborhoods in order to make room for high density apartments and condominiums up to five stories in height. While an attempt in 2018 to enact this draconian solution was beaten back, California’s coercive utopian lawmakers will bring it back in 2019. Some form of this law is likely to pass.
There’s nothing wrong with gradually increasing the population density in the core of large cities. That is a natural and organic process. But it is the job of legislators and local officials to moderate that process, protecting established neighborhoods. Instead, again, the policy consensus in California is to cram ten million new residents into existing urban areas.
Government Subsidized Homeless Shelters on some of the Most Expensive Real Estate on Earth
Perhaps the most misguided housing policies coming out of California concern the homeless. Despite years of bloviating by the compassionate elite, almost no good data is available on homeless populations, much less any good policies. Press coverage of the homeless centers on the family unit; small children, parents forced out of their home by high rents. These are gut wrenching stories. But accompanying the legitimate cases of families or individuals coping with undeserved hardship, there are the willfully indigent, along with criminals, drug dealers, sexual predators and perverts. Again, the City of Los Angeles offers a striking example of bad policy.
In Venice Beach, which is within Los Angeles city limits, along one of the most expensive, touristy stretches of coastline in the world, there are now permanent homeless encampments. To address the challenge, Los Angeles city officials are fast-tracking the permit process to build a homeless shelter on 3.2 acres of vacant city-owned property less than 500 feet from the beach. This property, nestled in the heart of Venice’s upscale residential and retail neighborhoods, if commercially developed, would be worth well over $200 million. Imagine what could be done with that much money if the goal was to truly help the homeless. And by the way, the proposed shelter will be a so-called “wet” shelter, meaning that drugs and alcohol will not be permitted inside the shelter, but intoxicated homeless individuals will be allowed inside. Go in, get a bed, go out, shoot up, come back in.
That a solution so scandalously inefficient could even be considered by the do-gooders running City Hall in Los Angeles offers additional insights into the minds of California’s progressive elite. Solving the homeless crisis isn’t their goal here. Rather the intent is to create additional government-owned properties, hire additional government bureaucrats, while preening in front of television cameras and pretending to solve a problem. Should the Venice Beach property be developed as currently proposed, well connected construction contractors will rake in government funds, so eventually “up to 100” homeless people will find shelter. Meanwhile, thousands will remain outdoors.
California’s housing is unaffordable because of restrictive laws such as CEQA, AB 32, SB 375, and countless others at both the state and local level. At the same time, California’s political elites are are inviting in the world’s poor en masse to come and live here. An estimated 2.6 million illegal aliens currently live in California. But the rhetorically unassailable compassion expressed by these sanctuary policies does nothing to alleviate hardship in the nations where these refugees originate, because for every thousand who arrive, millions are left behind.
The result? While California’s visionary rulers engineer a shortage of housing supplies, their welcoming sanctuary policies engineer a burgeoning housing demand. This is the deeply flawed agenda they have implemented in California and are actively exporting to the rest of America.
The biggest lie of all is the compassionate facade that overlays every housing solution California’s elite promote. Because their solutions, however viable they may be politically, will not work. They defy basic economic sense. They create additional drain on public funds while doing nothing to alleviate the high prices that are caused by scarcity. They are sustained by an impossible assumption, that urban densification, and all the destruction that densification will bring, will in itself be sufficient to restore a supply and demand equilibrium for housing. And they reject the obvious solution, suburban expansion to complement higher densities in the urban cores, based on environmentalist objections that are overwrought. In practice, the solutions being implemented to resolve California’s housing crisis are not compassionate. They are cruel.
Eventually, enough Californians are going to realize they’ve been conned. They will recognize that government subsidized densification is financially unsustainable and ruinous to their way of life. They will support politicians who are willing to stand up to environmentalist litigators, government unions, and the left-wing oligarchy that profits from scarcity. Hopefully that will happen before it’s too late.
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Every two years, around this time, political mailers inundate the mailboxes of California’s registered voters. This week, many Sacramento residents received “Vote No on Prop 6″ mailer. Prop 6 is that pesky, subversive citizens ballot initiative that, if approved by voters, will roll back the gas tax.
But Prop. 6 isn’t the topic here. Rather, the topic is all taxes in California. Why is there relentless pressure to increase them? And what special interests are paying for these campaigns to increase (or preserve) taxes across California?
In that context, this No on Prop. 6 mailer is instructive. Because blazoned across the cover of this four page, 8.5″ x 11” glossy full color flyer, is Darrell Roberts, representing the California Professional Firefighters. Roberts is the president of IAFF Local 2180, the Chula Vista Firefighters Union. In addition to his duties as president of Local IAFF Local 2180, Roberts is a Fire Battalion Chief for the Chula Vista Fire Department. In that capacity, he earned $327,491 in 2017, including $99,887 of overtime.
Now let’s back up for just a moment and make something perfectly clear. This isn’t about disrespecting firefighters in general, or Mr. Roberts in particular. Quite the contrary. Firefighters perform dangerous, challenging jobs that require years of intense training. Every year in California, a few of them die in the line of duty. In some years, more than a few. Furthermore, firefighters constantly witness trauma, often horrific, every time they respond not only to fires, but medical emergencies and automobile accidents. Their jobs are tough.
For these reasons, critics of public sector compensation trends should always temper their observations with respect. It is far too easy to observe, accurately, that many other jobs carry higher risk of injury or death, while forgetting that first responders stand between citizens and mayhem not just in normal times, but also in extraordinary times. In a truly cataclysmic event, and 911 is a perfect example, firefighters are obligated to occupy the front lines. They are the ones who must stop whatever destructive storms afflict our society. They are the ones who must go in before safety is restored, and rescue the stranded victims.
With that necessary preamble, and without diminishing it in any way, a difficult conversation remains necessary regarding public sector compensation, and the political power of the public sector unions who push for continuous increases in compensation.
A California Policy Center analysis published nearly two years ago, using 2015 data, calculated the average pay and benefits for a California firefighter at $196,370 for those employed by cites, $198,959 for those working for counties, and $145,938 for those working for the state. Those averages have not fallen in the past three years, and they do not include the additional cost per firefighter, if and when their retirement pensions are adequately funded.
Mr. Robert’s own City of Chula Vista provides an example of these rising pension costs. In 2017 the average pay for a Chula Vista firefighter was $189,715. That included, on average, $41,112 for overtime and $31,381 for employer contributions to their defined benefit pensions. But as they say, you ain’t seen nothin’ yet.
Using CalPERS own projections for the City of Chula Vista, the average normal contribution by the city to fund police and firefighter pensions is expected to grow from 20 percent of payroll in FYE 6/30/2017 to 22 percent of payroll by FYE 6/30/2025. Nothing terribly dramatic there. But, get this, the so-called unfunded contribution – that additional amount necessary to pay down the city’s unfunded liability for police and firefighter pensions – is expected to grow from 13 percent of payroll in FYE 6/30/2017 to 32 percent of payroll in 6/30/2025.
Put another way, the City of Chula Vista’s employer payments for public safety pensions are going to go from 33 percent of payroll to 53 percent of payroll by 2025. And if the stock market decides to end its already record breaking bull run, harming the CalPERS investment portfolio, these payments will go much higher.
It’s also important to recognize the relationship between excess overtime expenses and the cost of pension and health benefits (including retirement health benefits). When public employers pay more than 50 percent above regular salary to fund pensions and benefits, and in the case of public safety, they do, then it makes financial sense to pay time-and-a-half to existing staff, since that will cost less. Lost in that equation is the stress this excessive overtime inflicts on overworked personnel, as well as the lost opportunity to bring benefit overhead back below fifty percent.
Collectively California’s state and local employers, based on projections already released from CalPERS, are going to have to increase their total contributions to public employee pension funds from approximately $31 billion in 2017 to an estimated $59 billion by 2025.
Maybe veteran firefighters truly believe they are entitled to annual pay and benefits packages in excess of $200,000 per year, or in Mr. Roberts case, in excess of $300,000 per year. But with all the political power these unions wield, they ought to be thinking of ways to help lower the cost-of-living in California. That would help everyone.
And perhaps it may disturb even the most respectful and appreciative among us, when a public servant who made $327,491 last year, asks us to support higher taxes.
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2017 Salaries for Chula Vista – Transparent California
California’s Public Sector Compensation Trends – California Policy Center, January 2017
Comprehensive Annual Financial Report, FYE 6/30/2017 – City of Chula Vista
Safety Plan of the City of Chula Vista, Annual Valuation Report as of 6/30/2017 – CalPERS
Miscellaneous Plan of the City of Chula Vista, Annual Valuation Report as of 6/30/2017 – CalPERS
2017 City Data, Government Compensation in California – California State Controller
California Government Pension Contributions Required to Double by 2024 – California Policy Center, January 2018