California's Government Union Quandary – Support More Taxes Yet Claim Budget "Surpluses"

Californians know them well. They are the Proposition 13 “blamers.” They blame Proposition 13 for everything they see or even imagine as negative in the state of California.

Some years ago, a newspaper editorial asked if Proposition 13 was responsible for a measles epidemic saying it may have limited the availability of vaccine. A national publication suggested that O.J. Simpson’s acquittal of murder charges was due to the tax limiting measure because prosecuting attorneys may not have been paid enough.

Most recently, a column by a West Coast writer published in the New York Times claimed that one of the reasons that Los Angeles is becoming a “third world” city is reduced funding for education caused by the tax revolt that passed Proposition 13. As is typical, the writer ignores the fact that California now spends 30 percent more per pupil, in inflation adjusted dollars, than the amount spent just prior to the passage of Proposition 13 — a time when both liberals and conservatives agree that California schools were among the best in the nation.

Most Californians know they are overtaxed and that’s bad news for the blamers. And the latest news about California tax revenue is even worse for 13’s detractors. According to a review by the California Taxpayers Association of counties that have so far released their assessment rolls — showing the value of property as of January 1, 2015 — there is dramatic increase in values and that’s driving property tax revenue up rapidly. For example, Santa Clara County has seen an increase of 8.67 percent over the previous year.

Rapidly rising property tax revenue is not only making the Prop 13 blamers look foolish, it is adding compelling evidence to the argument that California should be considering tax reductions, not increases. News reports abound in the Golden State about the California economic recovery and a $6 billion dollar budget surplus. The two big sources for state revenue — sales taxes and income taxes — have preceded property taxes in seeing big increases. The latest news from county assessors simply completes the tax revenue trifecta.

Here’s the rub. Interests groups that want tax hikes — mostly public sector labor organizations — are running out of time to make a decision on which tax hikes to pursue for the November 2016 ballot. (To qualify an initiative takes about a year of lead time). We at HJTA hear that there are disagreements within those interests as to which tax hikes to pursue. Californians will almost certainly see a tobacco tax increase on the ballot as well as a possible tax on oil production. But what about extending the Proposition 30 tax hikes on sales and income? The flush status of the state budget renders those proposals questionable.

More importantly, the significant increase in property tax revenues raises serious questions about the viability of a so-called “split roll” proposal which would deprive business property of Prop 13 protections. Split roll proposals have been defeated before in California and, of all the tax hikes being considered by the tax-and-spend lobby, hitting commercial property with a $9 billion tax hike is going to be next to impossible to justify to California voters.

The next few months will be very revealing as to the tax raisers strategies. But whatever tax or taxes they decide to target, those paying the bill should be prepared to push back with the argument that California does not need any more tax hikes at all. And we should push back very hard.

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.

Successful Charter School Denied Renewal Petition

Albert Einstein Academy for Letters, Arts and Science, Huntington Beach (AEALAS) opened its doors In August, 2014 to 164 K-5 students. [1] The current enrollment is 264. For reasons of expediency, its founding charter was authorized by the Agua Dulce Unified School District, where several other schools are located.

Since its first days, the small elementary school has proven its mettle. The young scholars have already demonstrated impressive academic excellence. The projected enrollment for the 2015/2016 academic year is 375 students with more than 214 students on the wait list. An Honors Program, already in place, will be expanded to include 3rd-6th grade students in the fall.

The original charter was granted for one year. When the school submitted a new petition with local authorization to the Huntington Beach School District, it was denied. The Board felt the petitioners presented an “unsound educational program” and were “demonstrably unlikely to successfully implement the program”.

The AEALAS network operates 4 elementary and secondary schools and 2 learning centers. A seventh campus in Beverly Hills is scheduled to open in August. Each institution has implemented substantively the same program. Each school has a proven track record of success.

The founding campus, AEALAS Santa Clarita is in its fifth year of operation. The school was recently ranked Number 2 by Newsweek among the top high schools in the nation. [2] The school also garnered a Bronze rating from US News and World Report. It has a 908 API and 665 names on its 2015-2016 waiting list.

The AEALAS elementary school in Santa Clarita reported 2013-2014 CST science test scores for the 5th grade that were the highest in the Santa Clarita Valley, among the top scoring school districts in the state. The school’s math team was awarded a Bronze Medal in statewide math competition in its first year of participation.

95% of the students in the Westlake (Ohio) school passed on statewide testing in social studies, math and reading and 90% in science. The school was the first in Ohio to offer Portuguese as a world language course. [3] Apparently, however, reality never matters in politics, and certainly not to unions. Power and control do.

Union influence was undoubtedly a factor in the denial of the petition by the HBCSD. Four of the five Board members are teachers, professors or school administrators. Such a group would be expected to share a certain bias, one that is unfavorable of a petition to operate a charter school in its bailiwick.

The school attempted to address the concerns that the Board raised. This was dismissed without explanation. A revised petition has been prepared and submitted to the Orange County Board of Education, to be considered at their June meeting. We can only hope this more objective Board will give the petition a vote of approval. Stay tuned for the next installment.

*   *   *

About the Author: R. Claire Friend, MD, is the Assistant Professor, Department of Psychiatry and Human Behavior, UC Irvine Medical Center, and the editor of the UC Irvine Quarterly Journal of Psychiatry. She is a retired psychiatrist and frequent commentator on the psychological dimensions of education and social welfare policies.

 

FOOTNOTES

1.  http://ealas.org/ehb/

2.  https://charterschoolcapital.org/albert-einstein-academy-makes-top-10-high-schools-list/

3.  Other languages offered by AEALAS include Spanish, Hebrew, Arabic, Mandarin, American Sign Language and Latin.

A Challenge to Moorlach and Glazer – Build A Radical Center

On March 22, 2015, John Moorlach was officially sworn in as state senator for California’s 37th District. On May 28, 2015, Steve Glazer took the oath of office as state senator for the 7th District. Moorlach is a Republican serving mostly conservative constituents in Orange County. Steve Glazer is a Democrat serving mostly liberal constituents in Contra Costa County.

Different parties. Different constituents. You wouldn’t think these two men had much in common. But you’d be wrong.

John Moorlach and Steve Glazer have both distinguished themselves as politicians and candidates by doing something that transcends their political party identity or conventional ideologies. They challenged the agenda of government unions. As a consequence, both of them faced opponents who were members of their own party who accepted money and endorsements from government unions.

It wasn’t easy to challenge government unions. Using taxpayers money that is automatically deducted from government employee paychecks, government unions in California collect and spend over $1.0 billion per year. These unions spent heavily to attack Moorlach and Glazer, accusing – among other things – Moorlach of being soft on child molesters, and accusing – among other things – Glazer of being a puppet of “big tobacco.”

This time, however, the lavishly funded torrent of union slime didn’t stick. Voters are waking up to the fact that the agenda of government unions is inherently in conflict with the public interest. Can Moorlach and Glazer transform this rising awareness into momentum for reform in California’s state legislature?

Despite sharing in common the courage to confront California’s most powerful and most unchecked special interest, Moorlach and Glazer belong to opposing parties whose mutual enmity is only matched by their fear of these unions. With rare exceptions, California’s Democratic politicians are owned by government unions. Fewer of California’s Republican politicians are under their absolute control, but fewer still wish to stick their necks out and be especially targeted by them.

The good news is that bipartisan, centrist reform is something whose time has come. Democrats and Republicans alike have realized that California’s system of public education cannot improve until they stand up to the teachers unions. Similarly, with the financial demands of California’s government pension systems just one more market downturn away from completely crippling local governments, bipartisan support for dramatic pension reform is inevitable.

There are other issues where voters and politicians alike realize current policy solutions are inadequate at best, but consensus solutions require intense dialog and good faith negotiations. An obvious example of this is water policy, where the current political consensus is to decrease demand through misanthropic, punitive rationing, when multiple solutions make better financial and humanitarian sense. Supply oriented solutions include upgrading sewage treatment plants to reuse wastewater, building desalination plants, building more dams, increasing cloud seeding efforts, and allowing some farmers to sell their allocations to urban areas.

Imagine a centrist coalition of politicians, led by reformers such as Moorlach and Glazer, implementing policies that are decisive departures from the tepid incrementalism and creeping authoritarianism that has defined California’s politics ever since the government unions took control. How radical would that be?

Ultimately, forming a radical center in California requires more than the gathering urgency for reforms in the areas of education, government compensation and pensions, and, hopefully, infrastructure investment. Beyond recognizing the inevitable crises that will result from inaction, and beyond finding the courage to stand up to government unions, Moorlach and Glazer, and those who join them, will have to manifest and pass on to their colleagues an empathy for the beliefs and ideologies of their opponents.

Ideological polarities – environmentalism vs. pro-development, social liberal vs. social conservative, libertarian vs. progressive – generate animosity that emotionalizes and trivializes debate on unrelated topics where action might otherwise be possible. The only solution is empathy. The extremes of libertarian philosophy are as absurd as those of the progressives. The extremes of social liberalism can be as oppressive as an authoritarian theocracy. Economic development without reasonable environmentalist checks is as undesirable as the stagnant plutocracy that is the unwitting consequence of extreme environmentalism. And while government unions should be outlawed, well regulated private sector unions play a vital role in an era of automation, globalization, and financial corruption.

Despite being inundated with a torrent of slime by their opponents, John Moorlach and Steve Glazer took the high road in their campaigns. They are worthy candidates to nurture the guttering remnants of empathy that flicker yet in Sacramento, and turn them into a roaring, radical centrist fire.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Union Offensive Against Prop. 13 Gains Momentum

There’s a joke about public sector union bosses making the rounds in Sacramento lately:  What happens when the California Legislature hands over a blank check to the California Teachers Association (CTA)?  It’s returned the next day marked “insufficient.”

No matter that spending on schools is up 36 percent over the last four years, the state budget has increased 25 percent over the last three and the state is running a surplus of nearly $7 billion, it is never enough.  The government employee unions are continuing to press for higher taxes and more spending from which they benefit both in terms of money and political power.

Since California already imposes the highest taxes in all 50 states in almost every category except taxes on property – where we rank 19th highest – the obvious target is Proposition 13 which limits annual increases in property taxes.  To take on Proposition 13, public unions, including the two major teachers unions and the Service Employees International Union, have joined with some rag-tag groups of Bay Area radicals to create a front group, calling itself “Make It Fair.” The stated goal is to strip Proposition 13 protections away from businesses, including small mom-and-pop stores and residential rentals, thereby creating a “split roll” in order to seize another $9 billion in tax revenue annually.

To undermine support for Proposition 13 — which remains overwhelmingly popular in public opinion polls – Make It Fair attempts to make homeowners feel unjustly burdened. Backers of higher property taxes on business say that Proposition 13 provides commercial property special advantages, but it does not. California has always taxed all real property at the same rate whether residential or business.

The facts are unimportant to the government employee unions. They accuse owners of commercial property of not paying their fair share in property taxes. This ignores studies that show that business property is actually paying a higher percentage of the total property tax than when Proposition 13 passed and that business property is generally assessed at closer to market value than is residential property. This is due to the frequent improvements businesses make to property to remain competitive and these improvements are taxed at current market value.

But if the government employee unions are really only going after owners of commercial property, why should the average homeowner be concerned?

First, those who delude themselves into believing that the appetite of unions for tax dollars will be satiated if we just give in to their demands, should know that California state and local government employees are the highest paid in the nation. They did not become this way because the union leadership were shrinking violets. Once business property is taxed at a higher rate, there is no question that residential property – homeowners – will be the next target. Already union-backed legislation has been introduced in Sacramento to make it easier to increase taxes on homeowners.

Secondly, most homeowners rely on jobs in order to pay their mortgages.  If taxes on commercial property, including those on small businesses and residential rental property, are jacked up,  so prices and rents will go up as well. Business that can’t increase their prices because of competition from firms located in other states and countries are likely to join the exodus of companies that have already left California.  And they will take those jobs with them.

A recent front page story in the Torrance Daily Breeze, “Tractor Firm Kubota Exits Torrance for Texas,” illustrates the point.  The report says the firm, a 43-year resident of the community, will be departing along with 180 jobs, and reminds readers that Toyota made a similar announcement last year.  This hemorrhaging of jobs is a direct consequence of California’s hostile business climate, and this is before any increase in the property tax.

It would be a mistake to underestimate the negative impact that changes to Proposition 13 would have on the California economy. A study from the Pepperdine University School for Public Policy reveals that a “split roll” would result in the loss of nearly 400,000 jobs and $72 billion in economic activity over five years.

If front groups were required to adhere to truth in labeling standards, the group “Make It Fair” would be compelled to call itself either “Take Our Jobs, Please” or “Make Us Poor.”

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.

CalPERS and Unions Win Again – Taxpayers and Bondholders Lose

In bankruptcy, the federal courts have ruled that cities can reduce pension obligations. They can, but they don’t have to. In Detroit, bondholders were sacrificed to maintain police and fire pensions with minimal haircuts.

On Monday, U.S. Bankruptcy Judge Meredith Jury ruled against bondholders in favor of Calpers in the San Bernardino bankruptcy. She acknowledged that her decision is likely to be seen as unfair to the municipal bond market and might even discourage investors from buying pension obligation bonds in the future.

Please consider Calpers’ Pension Hammer Forces ‘Unfair’ Bond Ruling by Judge.

California’s public retirement fund holds so much power over local officials that pension-bond investors can’t expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems “unfair.”

“What I see as unfair, and might seem unfair to the outside world, does not matter under law,” Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn’t honor its contract.

Monday’s ruling sticks with a pattern seen in the bankruptcies of Stockton, California, and Detroit, said Marilyn Cohen, president of Envision Capital Management in El Segundo, California.

Up to Cities

Federal bankruptcy courts have many times ruled that cities can cut pension obligation, but nothing forces them to.

For example, in the Stockton California bankruptcy, a federal judge ruled that Stockton could have tried to reduce its obligation to Calpers. However, Stockton chose not to do so, arguing that fighting Calpers would take too long and could endanger employee pensions.

Conflict of Interest

I believe Stockton’s rationale is nonsense. Instead, I propose Stockton city officials had a conflict of interest.

City officials wanted to preserve their own pensions.

Chicago Connection

So what does this have to do with Chicago and the state of Illinois in general?

Lots, so let’s tie it all together.

As a result Tuesday’s Illinois Supreme Court Ruling that the 2013 Pension Reform Law Is Unconstitutional Moody’s cut Chicago’s bond rating two notches to junk. Moody’s specifically cited Chicago’s pension crisis.

I discussed this yesterday in Chicago Bond Rating Cut to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.

In light of the San Bernardino ruling today, cities that have huge pension issues will see bond yields soar.

The Chicago Board of education is already paying 285 basis points more than other cities because of pensions. If bondholders keep getting hammered, those yields will rise further.

Pass a Bankruptcy Law, Give Taxpayers a Chance

A Chicago Tribune editorial by Henry J. Feinberg, says Pass a Bankruptcy Law, Give Taxpayers a Chance.

Under federal law, state governments can’t file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can’t seek protection under bankruptcy law.

The right way is to amend House Bill 298 so people who hold Illinois bonds have a “secured first lien,” the fancy words needed in the law to make sure bondholders are first in line to get their money back. Passing this amended bill would do three things that the state’s local governments have not been able to accomplish for decades.

Three Reasons to Amend Bill 298

Feinberg cites three reasons to amend the pending bankruptcy bill.

  • First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.
  • Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements.
  • Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit’s. There, some people who had lent money to the city by buying its bonds lost two-thirds of their investment. Meanwhile, members of the politically powerful police and firefighter unions took no cuts to their pensions (their cost-of-living adjustment was reduced). Other workers took a 4.5 percent base cut in pensions and the elimination of an annual cost-of-living increase, The Detroit News reported.

I agree with Feinberg on all three points. Bankruptcy is the only real solution for many of these plans and many cities as well.

Beware the Tax Man

Tax hikes cannot possibly address the shortfall. As discussed on May 4, in Beware, the Tax Man Has Eyes on You, the potential hike for Illinoisans is staggering.

Nuveen estimated 50% property tax hikes would be necessary. Those hikes were just for Chicago. They did not include money to bail out other Illinois pension plans. Nor did it address the $9 billion budget deficit for the state.

Finally, Nuveen’s estimate assumed pension plans would make their plan assumption of 7% returns or higher.

Stock Market Bubble Will Hit Pensions

I believe another serious decline in the stock market is likely. So do some of the biggest fund managers in the world.

Please check out Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Pension promises were not made in good faith.

Rather, pension promises were the direct result of coercion by public unions on legislators, mayors, and other officials willing to accept bribes because they shared in the ill-gotten gains of backroom deals at taxpayer expense.

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education, and a senior fellow with the Illinois Policy Institute.

How California's State and Local Governments Can Save $50 Billion Per Year

Back in the early 2000’s, in the aftermath of the internet bubble’s collapse, California’s state and local governments endured a period of austerity that resulted in “furloughs,” where, typically, employees would take Friday’s off in exchange for a 20% cut in their pay. That is, they worked 20% less, and made 20% less in pay – but their rate of pay was not cut.

This display of “sacrifice” was an eye opener for private sector workers, especially salaried employees of small businesses, who endured cuts to their rates of pay at the same time as their hours of work increased. Most people in the private sector back in the early 2000’s felt lucky to have a job, even if it meant working harder and making less.

There’s a lesson to be learned from the period of state and local government “furloughs” in California:  California’s government functioned just fine with 20% fewer hours spent at the job, overall, and California’s government workers got by, overall, making 20% less money. So since we know these cuts are feasible, it is interesting to estimate just how much money Californians would save, if there were a 20% reduction to California’s state and local government workforce, and then there were a 20% reduction to the pay and benefits collected by those state and local government workers who remained employed.

Getting information on just how much California’s state and local workers make is notoriously difficult. California’s state controller’s Public Pay database collects the data, but presents “averages” that include part-time employees in the denominator, and do not consolidate the data. Transparent California, a public information project jointly produced by the California Policy Center and the Nevada Policy Research Institute, provides very good information on individual pay and benefits, but also does not consolidate the information.

A California Policy Center study, “How Much Do California’s State, City and County Workers Really Make?,” uses 2012 raw data from the state controller that screens out part-time workers to develop averages for city, county and state workers.

California’s State and Local Government Employees
Average Compensation by Entity – 2012

20140131_CA-Gov-Pay_Table2-b

A recent UnionWatch analysis of Los Angeles Unified School District provided a baseline estimate for total teacher compensation – although in variance to the table, please note the same analysis adds an estimated value of $4,033 per teacher to take into account the state’s direct contribution to CalSTRS. As a representative example of total teacher pay, LAUSD is pretty good; the California Dept. of Education reports the Statewide Average Teacher base salary averaged $69,324 during 2014, nearly identical to the LAUSD analysis.

Los Angeles Unified School District
Average Compensation by Job Class – 2013

20150303-UW_Ring-LAUSD-Actual

Armed with this information, and cross-referencing with the U.S. Census Bureau’s estimate of current numbers of full time state and local government employees in California (ref. Government Employment & Payroll, and select “state” and “local,” in each case selecting “California”), we can make a reasonable estimate of how much our full time state/local workforce is currently costing taxpayers. We can also estimate how much a 20% reduction in workforce combined with a 20% reduction in total compensation would save taxpayers each year:

California State and Local Government Employees, Est. Total Cost per Year
Projected Annual Savings via 20% Reduction to Headcount and to Compensation

20150512-UW_20percent-solution

While this thought exercise may seem to be an exercise in futility, the fact is, we’ve tried it once already, and it worked. That is, during the furloughs of the early 2000’s, California’s state and local government workers got by just fine with a 20% reduction in pay, and California’s state and local government services functioned adequately even though 20% of the workforce was absent (i.e., they were all taking Friday’s off).

It is fair to ask why the focus must always be on austerity. Why not pay everyone more in the private sector? That’s a good question and the answer is simple: It’s impossible. The average total compensation in California’s private sector is roughly half what public employees make. There isn’t enough money in the world to pay everyone this much money, and it is grossly unfair to taxpayers and private workers to treat public sector workers as a privileged class, exempt from the economic challenges facing everyone else.

The problem is even deeper than just one of inequity and insolvency. The problem with creating a privileged class of government workers is that they no longer make common cause with the people they serve. This consequence should trouble social liberals at least as much as it troubles fiscal conservatives, because the most powerful bloc of voters in California, unionized, politically active government workers, are putting their personal financial interests ahead of other worthy government projects. Imagine what $52.7 billion could buy.

The solution is to combine cutbacks in government employee compensation with investments in infrastructure and reductions in regulatory hurdles in order to reduce prices for goods and services. Government created artificial scarcity has raised the price of housing, energy, water and transportation to levels that only the elite can easily afford. If government workers were compelled to make common cause with other workers, instead of this elite, maybe they would finally support reforms to lower the cost of living.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Glazer vs. Bonilla 7th Senate District Battle Reflects New Political Split in California

California’s politics remain polarized, but not just via the traditional division of Republicans vs. Democrats. As reported here two months ago in the post “Issue of Government Unions Divide Candidates More Than Party Affiliation,” there were two California State Senate contests that remained unresolved after the November 2014 election. One of them, pitting Republican John Moorlach against Republican Don Wagner for the 37th Senate District, was settled on March 17th. Moorlach, who has fought to restore financial sustainability to public employee pension systems, was opposed by government unions. Wagner, also a conservative, but less outspoken than Moorlach on the issue of pension reform, was endorsed by government unions. Moorlach won.

The other race, originally pitting three Democrats against each other for the 7th Senate District, has narrowed to a contest between two candidates that will be settled on May 19th, Democrat Steve Glazer vs. Democrat Susan Bonilla.

It will be interesting to see how voters in a largely Democratic district respond in a race that is not between candidates from opposing parties. Glazer is a fiscal conservative who is progressive on virtually all of the issues important to Democrats. Bonilla offers up many similar positions, with one important exception: Glazer has stood up to government unions on critical issues, to the point where government unions do not consider him reliable. As a result, Bonilla is receiving cash and endorsements from the unions representing our public servants, all of it, of course, money that originated from taxpayers.

Here’s a list of some of Bonilla’s government union endorsements:

California Association of Highway Patrolmen
California Professional Firefighters
California State Sheriffs’ Association
California State Coalition of Probation Organizations
CALFIRE Local 2881
Peace Officers Research Association of California
Deputy Sheriffs Association of Alameda County
Antioch Police Officer’s Association
Concord Police Officer’s Association
Contra Costa County Deputy Sheriffs Association
Contra Costa County Deputy District Attorney’s Association
Brentwood Police Officers Association
Livermore-Pleasanton Firefighters, Local 1974
Livermore Police Officer’s Association
Pittsburg Police Officers Association
Pleasanton Police Officers Association
Probation Peace Officers Association of Contra Costa County
San Ramon Valley Firefighters Association, Local 3546
United Professional Firefighters of Contra Costa County, Local 1230

One has to ask why so many public safety officials are endorsing Bonilla rather than Glazer, and it is fair to wonder if their endorsement has anything to do with the positions of these candidates on issues and policies relating to public safety. Take a look at this flyer from the Bonilla campaign:

20150417-UW_Bonilla

As can be seen, Contra Costa County District Attorney Mark Peterson and Alameda County Sheriff Greg Ahern, both apparently Republicans, are touting the pro public safety record of Susan Bonilla. But would they have made these statements if Susan Bonilla was challenging their unions on fiscal issues relating to pensions and compensation?

From that perspective, candidate Steven Glazer is a threat to government unions. For ten years starting in 2004, Glazer was a councilmember, then mayor, in Orinda, one of the most fiscally responsible cities in the state. In a California Policy Center study released late last year entitled “California’s Most Financially Stressed Cities and Counties,” every city and county in California was ranked in order of its risk of insolvency. Orinda was ranked 369 out of 491, putting it in the top 25% in terms of financial health. More significantly, in a subsequent California Policy Center study entitled “California City Pension Burdens,” every city in the state was ranked according to how much pension contributions strain their budgets. Orinda wasn’t even on this list, because they are among only nine cities in California who don’t have a defined benefit plan for their employees. They use a defined contribution plan instead.

Hopefully the reader will forgive this prurient dive into personal financial data, but when public employees endorse political candidates, how much they make is relevant. Contra Costa County District Attorney Mark Peterson made $322,180 in 2013, an amount that included $111,897 in employer paid benefits. Alameda County Sheriff Greg Ahern made $556,268 in 2013; an astonishing $266,130 of that in the form of employer paid benefits. The vast majority of these benefit payments were to cover the required employer pension contributions. These men would have to be saints to have an objective perspective on an election that could result in a fiscal conservative holding office who is conversant in pension finance and formerly presided over a town that offers defined contribution plans to their employees instead of defined benefit pensions.

To drive the point home, take a look at the salaries and benefits for Alameda County workers, the pensions for Alameda County retirees, the salaries for Contra Costa County workers, and the pensions for Contra Costa County retirees. No conflict of interest there.

In the race for California’s 7th Senate District, Government unions have already spent over $2.0 million to support Susan Bonilla and oppose Steve Glazer. Download this spreadsheet to view the latest contributions through 4-20-2015, or click on the following four links to follow the money pouring in to make sure a fiscal conservative Senator does not head to Sacramento on May 19th:

Bonilla for Senate 2015, Putting the East Bay First
Bonilla for Senate 2015
Bonilla for Senate 2016
Working Families Opposing Glazer for Senate 2015

California’s Republican leadership, to the extent they tepidly claim to support pension reform while taking money from public sector unions and doing nothing, should understand as clearly as the Democratic leadership who avoid the issue entirely: It doesn’t matter what else you believe, or what you stand for, or what’s in your platform. Government unions support candidates who fight to preserve and increase the pay and benefits of unionized government employees, at the same time as they fight to minimize the accountability of unionized government employees. Across California, their demands, almost invariably fulfilled by politicians they control, have taken money away from other services, including infrastructure investment, and nearly destroyed California’s system of public education.

This is having a polarizing impact in both parties, and rendering the distinction between Democrat and Republican less important than whether or not they are willing to stand up to government unions.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Pension Reform is BAD for Wall Street, and GOOD for California

“His idea [Mayor Chuck Reed’s] of pension reform is, you sign up for one pension system, we’re going to change it now in mid career, and now you’re going to get something different.”
Lou Paulson, President, California Professional Firefighters (ref. CPF Video,  April 1, 2015)

The biggest problem with Mr. Paulson’s comment is the double standard he applies. Changing pension systems “mid-career” are just fine when they improve the benefit to Mr. Paulson’s unionized government workforce, but when it comes time to roll back these financially unsustainable changes, he cries foul.

The most obvious, indeed egregious example of a “mid-career” change to pension systems that improved pension benefits began during the internet bubble year 1999, when SB 400 was passed by the California State Legislature. SB 400 changed the pension benefit formula for California’s Highway Patrol officers from “2% at 50” to “3% at 50,” a 50% increase to their benefit. But that’s not all…

SB 400 made this increase retroactive to the date of hire for all participants. That is, if you had worked for 30 years for the California Highway Patrol and were going to retire in another year or two, instead of calculating your pension benefit based on 2% times the number of years you worked, 30 years, you would calculate your pension benefit based on 3% times the number of years you worked. Suddenly your pension benefit went from 60% of final salary to 90% of final salary – a 50% increase. Retroactively.

Mr. Paulson, does SB 400 qualify as “you sign up for one pension system, we’re going to change it now in mid career, and now you’re going to get something different?”

Once SB 400 enhanced pension benefits for California’s Highway Patrol officers along with workers in some other state agencies, laws and MOUs governing the rest of California’s state/local workforce followed suit. By 2005, most public safety employee in California were on a “3% at 50” pension. And in virtually all cases, these benefits were enhanced, by 50%, retroactively.

Last week, on April 10, the Reason Foundation hosted what has become an annual conference for citizens and policymakers involved in pension reform. As reported in the Sacramento Bee and elsewhere, the conference was disrupted by protesters, many of them off-duty firefighters, who carried signs saying things like “Reed and DeMaio Plan – Good for Wall Street, Bad for Rest of Us.”

20150414-UW_Promises

 

The problem with the notion that pension reform is “good for Wall Street,” of course, is that pension reform is bad for Wall Street. The biggest shareholders in the world are public employee pension funds. This began back in 1984, when the California state legislature placed a citizen’s initiative onto the ballot, Prop. 21, that “deleted constitutional restrictions and limitations on the purchase of corporate stock by public retirement systems.” Scarcely understood and narrowly passed, Prop. 21 turned California’s government pension funds into the biggest gamblers on Wall Street.

Before Prop. 21, just for example, pension funds might have purchased bonds to finance revenue generating projects such as dams, power stations and desalination plants, which yield decent annual returns to investors and greatly benefit ordinary Californians. Now, thanks to Prop. 21, California’s 81 independent state/local government employee pension systems, controlling over $722 billion in assets, invest 90% of it out-of-state, chasing 7.5% returns by gambling on volatile stocks, private equity funds, and even hedge funds. Private financial firms rake in billions every year in commissions and fees, while directly managing tens, if not hundreds of billions on behalf of California’s state/local government employee pension funds.

And when those investment banks and private equity firms and hedge funds make bad bets on behalf of public employee pension systems, the taxpayers bail them out.

In Sacramento Bee columnist Jon Ortiz’s report on the protest outside the April 10th pension reform conference, in what is perhaps the understatement of the century, Manhattan Institute researcher Stephen Eide said “The organizational advantages of the other side are significant.”

You can say that again, Stephen. Firefighters, along with other public employee groups, organized by unions who goad them into thinking they’re the victims of “Wall Street,” and “haters,” pack every city council meeting, every county supervisor meeting, every legislative hearing, and every event they can find where the interests of their unions may be threatened. They stare down council members, county supervisors, and legislators, making sure they know that if their interests aren’t favored, they will destroy them politically. And the taxpayers are paying for every cent of this. No businessperson even slightly dependent on an at least neutral local government is going to cross the government unions, because the government unions run the government.

Take a look at this “call to action” created by the Sacramento Area Firefighters to recruit protesters to show up on April 10th:

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As can be seen, the firefighter union contact for this “action” is Bobby Weist, a firefighter for the City of Davis. According to Transparent California, Mr. Weiss made $162,259 last year. As for the rest of the firefighters in Davis, take a look: City of Davis Firefighter Salaries and Benefits. Of the 13 people listed (searching City of Davis employees with “Fire” in the job title), Bobby Weist was the lowest paid. Twelve other firefighters in this small department made more than him. Their salaries and benefits ranged from Weist’s $162,259 to $235,375. Six of them made over $200,000. For those readers who still think employer paid benefits don’t count as compensation, please join around 50 million other Americans and start working as an independent contractor. Every dime you save for retirement has to come out of whatever it is you get paid. Of course it counts.

A firefighter in an affluent California city like Davis works one 24 hour shift every three days. In practical terms however, taking into account paid vacation and holiday benefits, veteran firefighters actually work two 24 hour shifts every week (ref. Davis firefighter MOU), with anything beyond that paid overtime. If a veteran firefighter works 3.3 24 hour shifts per week, they double their regular pay. And the reason cities pay so much overtime? Because they can’t afford to pay the pension benefits for additional firefighters. A doctor working at Kaiser makes $251,000 per year, which is “46% above the national average.” Get that? California’s veteran firefighters, whose total compensation averages over $200,000 per year, make as much as the average medical doctor in the U.S.

Firefighter unions have managed to con many of their members into thinking that any effort to reform pension benefits is unreasonable. They are wrong. If firefighters, and by extension all public servants, really cared about the people they serve, they would (1) repeal Prop. 21, and start pouring pension assets into financing new California infrastructure projects that would benefit all Californians and still yield a solid 5% annual return, and (2) repeal SB 400 and all of its copycat measures, and accept pension benefit formulas as they were up until 1999 – still generous, but at least within the bounds of financial sustainability.

*   *   *

Ed Ring is the executive director of the California Policy Center.

How Unions and Bankers Hide Chicago's Poor Financial Health

Editor’s Note:  Nearly everything described in this lengthy expose on the perilous financial condition of the City of Chicago, and the ways it has been obscured for so long, also neatly applies in many if not most of California’s large cities. Also directly applicable to California’s cities are the author’s descriptions of how the unions representing local government workers and the bankers who get rich coming up with creative financing schemes are working together. This is counter-intuitive and contrary to the union rhetoric, but it is absolutely true. Unions run most of America’s large cities. Only in recent years, as Democratic politicians face the reality of crippling service cuts so they can fulfill union demands, has this begun to change. Government unions and crony capitalists – in this case bond and pension bankers – work together. The people, especially private sector workers and small business entrepreneurs, are the losers.

Chicago finances are even worse than I thought which is saying quite a bit because I have written about the sorry state of Chicago finances on numerous occasions.

Kristi Culpepper, a bond guru, has gone over Chicago’s annual financial report, bond documents, investor presentations, and CAFRs.  She has uncovered things the City of Chicago does not want anyone to understand.

For example, Culpepper reports Chicago general obligation bond deals have been used by the city as a means to avoid servicing short-term debt. Says Culpepper, “These bonds have received extraordinarily aggressive tax opinions . If the Internal Revenue Service ever gets around to scrutinizing them, your bonds probably won’t be tax exempt for long. Many of these uses of bond proceeds are not eligible for tax-exempt financing under the federal tax code.”

That is just the tip of the iceberg as to what Culpepper has discovered.

Who Is Kristi Culpepper?

Intrigued? You should be.

First let’s go over Culpepper’s background. Kristi Culpepper is a state government official with the Commonwealth of Kentucky. Among other things, she handles the structuring and sale of bonds for schools across the state. Previously, she worked for the Kentucky General Assembly analyzing state and local government bond issues and tracking the state’s capital construction programs. She has also worked at Merrill Lynch.

“Bond Girl”

Culpepper built up a huge following as “Bond Girl”. Bloomberg explains Twitter’s ‘Bond Girl’ Outs Herself as Kentucky Official.

Bond Girl, using the Twitter handle @munilass, had been posting commentary about state and city borrowing and issues beyond public finance since April 2011. Her sometimes-pointed posts attracted the attention of municipal-bond investors, bankers and analysts. Using her nom de Twitter, Culpepper sparred with other users, criticized public officials and vented about her life.

Culpepper “is regarded as an authority on capital projects and debt by the Legislative body,” according to a Kentucky Education Department website posted in November that announced her appointment. “She has worked with legislators, lobbyists, and attorneys to draft legislation and effect policy changes related to the state’s bonded indebtedness.”

Buyers and traders in the $3.7 trillion muni market had puzzled at the true identity of Bond Girl, Hector Negroni, co-founder of New York-based investing firm Fundamental Credit Opportunities, said in a telephone interview.

For any bond geek like myself, she’s fascinating, well-informed and entertaining,” Negroni said.

On Oct. 28, as Bond Girl, she wrote a 1,650-word blog post for the Financial Times’ Alphaville on a proposed debtor-in-possession financing for bankrupt Detroit.

Guest Post

I mention the above to prove Culpepper is highly regarded in the industry. She knows what she is talking about.

The following guest post by Culpepper first appeared on Tumblr as How Chicago has used financial engineering to paper over its massive budget gap.

For those who want to follow Culpepper, her Twitter handle is @munilass.
I dispense with my usual blockquotes for ease in reading. What follows is a guest post by Kristi Culpepper.

Emphasis in Italics is Mine – My Comments and Recommendations follow Culpepper.

How Chicago Used Financial Engineering to Paper Over its Massive Budget Gap

Chicago made headlines at the end of February after Moody’s downgraded the city’s general obligation bond rating to Baa2. Moody’s has cut Chicago’s rating five notches in less than two years. This downgrade, however, placed the city’s credit below the termination triggers on some of its outstanding interest rate swaps. The city has been working to renegotiate the terms of those contracts with its counterparties.

If Chicago’s general obligation rating falls below investment grade, the city’s credit deterioration will become a self-fulfilling prophesy. The city risks nearly $400 million of swap termination payments and the acceleration of its $294 million of outstanding short-term debt.

Unsurprisingly, some of Chicago’s bonds are already trading at junk levels. Chicago CUSIPs are listed here.

That said, the rating agencies and most other market participants still appear to be light years away from understanding the true scope of Chicago’s financial problems. The city has a very — well, let’s just call it unconventional — approach to borrowing money and probably should not be considered investment grade.

Some Budget History

In order for you to follow my discussion of Chicago’s borrowing shenanigans, it is necessary to understand the fiscal machinery behind its bond issues. Please be patient with me here. This story will blow your mind shortly.

Chicago’s budget is divided into seven different fund classifications, but only three funds are relevant to our narrative: the Corporate Fund, Property Tax Fund, and Reserve Funds.

The Corporate Fund is Chicago’s general operating fund. This fund is used to pay for essential government services and activities (e.g. public safety and trash collection). Corporate Fund revenues are derived from a wide variety of sources, including: (1) local tax revenue from utility, transaction, transportation, recreation, and business taxes; (2) intergovernmental tax revenue, which represents the city’s share of the state’s sales and use taxes, income tax, and personal property replacement tax; and (3) non-tax revenue from fees, fines, asset sales, and leases.

Chicago’s property tax revenues do not go into its general operating fund. These revenues go into a Property Tax Fund, which is used to make debt service payments on the city’s general obligation bonds; make required employee pension contributions; and (to a minor extent) fund the library system. The fund also includes tax increment financing revenues that flow to projects in designated TIF districts.

The city used some of the proceeds from long-term leases of city assets to establish Reserve Funds. The Chicago Skyway reserve funds were established in 2005 in the amount of $975 million. The Metered Parking System reserve funds were established in 2009 in the amount of $1.15 billion. Of these funds, $475 million of the Skyway reserves were designated for budgetary uses. What remained was $500 million for the Skyway; $400 million for the Metered Parking System; and $326 million for a budget stabilization fund.

There has been a structural gap in Chicago’s Corporate Fund budget since at least 2003. Although most governments are required to balance their budgets on a cash flow basis each fiscal year, a structural budget gap can arise when recurring expenditures are greater than recurring revenues. Some of the city’s offering documents suggest that this gap is a legacy of the last economic downturn, but in reality the gap pre-dates the economic downturn by several years. The impact of economic downturns on tax collections tends to have a considerable lag anyway.

So, Chicago’s structural budget gap is a political, not economic, creature. Rather than cut expenditures to a level that could be supported by recurring revenues, the city mostly used non-recurring resources to fill the gap from one fiscal year to the next. This is not surprising. Most of Chicago’s Corporate Fund budget goes to salaries and benefits for its employees, and 90% of the city’s employees belong to around 40 different unions. Attempts to adjust expenditures tend to have well organized opposition.

Between fund transfers and drawing down its reserves, the city blew through its financial cushioning quickly. The $326 million budget stabilization fund was exhausted by 2010. From 2009 to 2011, the city used $320 million from the Metered Parking Reserves. The city’s budget gap was at its widest in the wake of the last economic downturn, at over $600 million.

Chicago’s Dysfunctional Debt Program

Now things start to get interesting. Transfers from reserves and other funds have not been the only means Chicago officials (across administrations) have devised to subsidize the city’s Corporate Fund. The city has effectively been using its general obligation bond offerings and interest rate derivatives to accomplish the same thing.

State and local governments typically use the proceeds from their bond offerings to construct or renovate public buildings and infrastructure. These are projects that have long useful lives and will benefit residents for generations.

Dating back to at least 2003, however, Chicago has been issuing long-term tax-exempt and taxable bonds to:

(1) Roll over short-term debt used as working capital;

(2) Pay for maintenance activities that would otherwise be paid from the Corporate Fund;

(3) Pay for judgments and settlements that would otherwise be paid from the Corporate Fund, including wage increases and retroactive pension contributions for its employees; and

(4) Provide discretionary funds to each of the city’s 50 aldermen to pay for activities in their own districts.

The magnitude of tax-exempt bond proceeds used for judgments and settlements over this period is staggering. The Chicago Tribune estimated it at approximately $400 million:

In 2002, for example, the city used tax-exempt bonds to pay an arbitration award involving the Fraternal Order of Police. Rank-and-file officers rejected a city contract offer in 2001, but an arbitrator ruled in favor of the city’s wage proposal a year later.

The deal included raises of 2 to 4 percent a year, to be applied retroactively. In bond documents, city officials deemed the back pay the city owed an extraordinary expense and paid $164 million of it with tax-exempt bonds.

The city ultimately will need to pay bondholders $280 million to cover the loan …

Bonds also ended up covering the $28 million a jury awarded to Joseph Regaldo in 1999. The jury found that, years earlier, a Chicago police officer had beaten him in the back of the head and neck with a blunt object, which ripped apart an artery and cut off the blood supply to his brain. The injuries left Regaldo unable to walk, talk or care for himself.

The judgment won’t be paid off until 2019 at the earliest; by then, the total cost will have grown to $53 million.

City officials eventually switched to paying judgments with taxable bonds, which are even more costly in the long run.

That is, until 2012:

About $54 million from a tax-exempt bond helped cover a legal judgment awarded to African-Americans who were denied a chance to become firefighters by a 1990s entrance exam that favored white applicants. An additional $8 million in tax-exempt bond money went to pay legal fees related to the case, records show.

By using bond money, the city created an irony for many of those awarded damages, as their future property taxes will help pay interest on the debt. In 2033, when the city starts paying down the $54 million, interest will have more than doubled the total cost.

Stop and let that sink in for a moment. That police brutality case? Wage increases negotiated with labor unions? Not just financed, but financed with long-term debt.

So why haven’t the city’s 50 aldermen protested the use of bond proceeds for these purposes? It probably has something to do with the “Aldermen’s Menu,” which allows the aldermen to use a portion of the proceeds from the city’s general obligation bond issues to pay for whatever they want for their district.

It is unclear (to me) whether the city tracks how the funds from the “Aldermen’s Menu” are spent, but in the aggregate they are not a negligible amount. From 2003 to 2012, these projects have ranged from $54.2 million to $102 million.

The use of bond proceeds to provide slush funds for policymakers has a historic analog in the revenue bonds Harrisburg issued for its incineratorproject as the city was on its path to insolvency. Pennsylvania law limits the amount of debt local governments can issue to finance projects that are not self-supporting. Substantially all of the bonds tied to the incinerator project were issued to provide working capital, although city officials were able to locate financial advisory firms that were willing to certify the opposite to state regulators.

In order to win authorization for bond issues that outright defied state law, Harrisburg’s later bond issues included a “Special Projects Fund” for city officials to play with. They bought things like artifacts for a Wild West Museum. In Pennsylvania. Don’t think too hard, there is no why.

See? Reading the Sources and Uses provisions in official statements can be fun. I know, this makes you want to invite me to your next dinner party.

Our story gets even more interesting when you look at how Chicago’s past general obligation bond offerings have been structured.

First, the city has undertaken several large, non-traditional refundings to push the maturities on debt that is coming due out into later years.

A traditional refunding is akin to how a homeowner refinances a mortgage loan. A new loan is used to prepay an old loan to achieve an interest cost savings. A “scoop and toss” refunding, which is what Chicago has done, involves additional interest cost — even in a ridiculously low interest rate environment — because the debt remains outstanding for a longer period of time.

The objective of these deals was to provide budget relief for the city’s general operating fund in the short term, even if the structure means escalating debt service payments in the long term. These restructurings artificially inflated the city’s debt capacity, so the city could continue to use property tax-supported bonds to take out the city’s working capital credit facilities, which allowed the city to avoid balancing its Corporate Fund budget.

Chicago is far from the only government to restructure debt for budget relief. Quite a few state and local governments engaged in similar transactions following the last recession. What makes Chicago unique is, again, the magnitude of this activity. According to the Chicago Tribune, “since 2000, the city has used $3.6 billion in bond money to refund old debt as principal payments came due. Of that amount, half will end up costing taxpayers in the long run.” For the sake of comparison, Chicago has around $7.2 billion of general obligation bonds outstanding.

Second, Chicago’s past few general obligation bond offerings have involved considerable amounts of capitalized interest.

Capitalized interest is typically associated with project finance, not general obligation bond issues. Project finance is a sector where loans finance revenue-producing facilities and infrastructure. The debt is supported by those revenues, not taxes as with general obligation bonds.

With capitalized interest, a bond issuer borrows more money than a project requires for construction in order to pay the interest on the bonds while the project is being built. The idea here is that the project will eventually generate revenues that can support debt service payments and the cost added by capitalizing interest.

From 2010 to 2014, Chicago’s general obligation bond deals included over $235 million of capitalized interest, simply as a means for the city to avoid servicing its debt in the short term.

If you are a bondholder, there are two things you should take away from this segment of our narrative.

First, if you hold the tax-exempt portion of these deals and the Internal Revenue Service ever gets around to scrutinizing them, your bonds probably won’t be tax exempt for long. Many of these uses of bond proceeds are not eligible for tax-exempt financing under the federal tax code. These bonds have received extraordinarily aggressive tax opinions — including, incidentally, from the same law firm that drafted Illinois’s swap legislation, which I will get to momentarily.

Second, Chicago taxpayers are on the hook for billions of dollars of long-term debt and have little of tangible value to show for it. There is a good chance that residents do not understand the nature of their government’s borrowing activities, since these were complex offerings. (Well, unless they read what I have written here…) As debt service payments increasingly compete with other political priorities for funding, this revelation might eventually erode the city’s willingness to pay.

These transactions should never have happened.

Chicago’s Interest Rate Derivatives Portfolio

Perhaps a third thing a bondholder should take away from our narrative is that to the extent Chicago is slapped with future termination payments on its interest rate derivatives, the security for your investment will be diluted. Since Chicago’s property tax revenues are also applied to pension contributions and the debt/derivatives of several other overlapping taxing districts, this is not an insignificant factor.

The State of Illinois authorized local governments to use interest rate derivatives in 2003. Here is a link to the legislation. The bill restricts the notional amount of a municipality’s interest rate derivatives to the outstanding debt the contracts will ostensibly hedge. Since the notional amount of a swap, etc. says nothing about an issuer’s risk exposure, this provision is pretty much worthless. And since the legislation was drafted by the financial industry, that probably wasn’t an accident.

The legislation allows the municipality to make payments due under the swap contract (which would include termination payments) from any source of revenue it has, including property taxes. This probably wasn’t an accident either.

Chicago used interest rate swaps on its 2003, 2005, 2007, and 2009 bond deals, apparently as part of a synthetic fixed rate strategy. (I explain the mechanics of synthetic fixed rate deals in this essay.) The city also recreationally experimented with more exotic contracts — swaptions and the like.

The associated bond offerings were multimodal. Multimodal bonds are bonds that can be converted to any of a number of interest rate modes at the option of the issuer. Bond documents allow the bonds to be remarketed daily, weekly, or monthly as variable rate tender option bonds, or in term or fixed rate modes. Like capitalized interest, this structure is typically used only in project finance. The multimodal structure allows long-term debt to function as both interim and permanent financing to accommodate the life cycle of a revenue-producing project.

Because the underlying debt is multimodal, Chicago never required interest rate derivatives to hedge its interest rate exposure. The city could have virtually any interest rate exposure it wanted as the bonds were remarketed. Why don’t all government issuers use this structure, you ask? Because most governments value predictable payments over trying to handicap interest rate trends and basis risk. That’s a function of being tethered to a budget.

As I noted at the beginning of this essay, Chicago is now almost $400 million out-of-the-money on its outstanding swaps. This only matters to the extent that the city’s credit ratings continue to sink toward termination triggers. Only one rating agency has to break these thresholds — so, even though S&P and Fitch still somehow believe Chicago is an A+/A- credit, Moody’s is the only rating agency that matters. If the city doesn’t get cut to junk and interest rates normalize, Chicago’s interest rate swap situation will eventually repair itself. The tipping point here either way is probably the outcome of the state/city’s pension litigation.

Chicago Public Schools — which already takes more property tax revenues from Cook County than the City of Chicago — has a swap/pension nightmare of its own to muddle through. Between the city and school system, area residents are at risk of making/financing $660 million of termination payments. The payments would compete with $28.3 billion of city and overlapping debt and billions of dollars of escalating pension contributions for funding. Basically, if you are in Chicago, your property is about to become more expensive.

From the outside, it looks like Chicago also used its interest rate swaps as a means of drumming up non-recurring resources to fill its budget gap in 2010 and 2011. If so, this is another example of the city’s willingness to trade long-term costs for avoiding politically inconvenient spending decisions.

The city made amendments to outstanding swap contracts by layering on forward-starting basis swaps. (This is something else Chicago has in common with Harrisburg.) These transactions changed the city’s net interest rate exposure on those deals from fixed to variable and introduced basis risk to the portfolio after they became effective in 2014. There was not an event that prompted these amendments and the city remains underwater on the deals. The city did receive a series of up-front payments, however. Judging from the swap confirmations from Deutsche Bank, PNC, and Wells Fargo, these payments amounted to around $25 million.

Could Chicago File for Chapter 9 Bankruptcy?

No. At least not right now. To be eligible to file for bankruptcy under Chapter 9, there must be a state law that specifically authorizes a municipality to do so. Illinois law does not currently permit municipalities to do so, except under a provision that relates to units of governments with populations under 25,000. Of course, Chicago would also have to meet the other eligibility criteria. The city does have a relatively large tax base.

That said, if state lawmakers wanted to give Chicago the ability to adjust its pension liabilities — its pensions have an aggregate funded ratio of 37% — amending a statute is a lot easier than amending the state constitution. Article 8, Section 5, of the Illinois Constitution says: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Multiple federal bankruptcy judges have ruled that the federal bankruptcy code supersedes state constitutions, which theoretically provides a path for municipalities to adjust their pension commitments. The rulings have not been challenged in an appellate court, however, so there isn’t a bona fide legal precedent yet.

Illinois’s Constitution describes pension commitments as contractual in nature. For an obligation to be considered secured in bankruptcy, there has to be a property interest.

This logic also applies to the city’s general obligation debt though. For most of the city’s outstanding general obligation bonds, the city has pledged a specific property tax levy. Illinois is not one of the handful of states that provides general obligation debt a statutory lien. So it would seem, in my very non-legal opinion, that the bonds would be considered unsecured debt.

As I noted earlier, the city’s general obligation bond offerings have provided little of tangible value to taxpayers. If the city were authorized to file for bankruptcy and actually did so, there could potentially be political pressure to adjust general obligation debt before depriving pension beneficiaries their incomes.

It seems unlikely that the state or federal government would “Lehman” Chicago. It is the third largest city in the United States and a vital transportation hub. It seems reckless, however, to dismiss this possibility in its entirety over the medium term.

When you tally up the ways bond proceeds have been used to offset operating expenses, scoop and toss restructurings, capitalized interest, and swap modifications, the city’s cumulative Corporate Fund budget gap is much, much larger than the city’s disclosures imply. At some point, this manner of doing business will collapse.

A Lot to Digest

There is much above to digest. Anyone investing in Chicago “Tax Exempt” bonds need beware.

Meanwhile, and in regards to Culpepper’s article, Yahoo! Fiance reports “The City of Chicago Mayor’s office did not respond to multiple calls and emails seeking comment on the matter.”

Politically and Financially Bankrupt

I have stated many times, my belief that Chicago is bankrupt; it’s just not officially recognized. Actually, Chicago is both politically and financially bankrupt.

The analysis from Culpepper confirms my belief. Her report provides many more details of what’s really behind Moody’s downgrade.

I wrote about the downgrade in Chicago’s Fiscal Freefall: Moody’s Cuts Chicago Credit Rating to Two Steps Above Junk; Snake Oil and Swaps; It’s All Junk Now.

When will Fitch and the S&P catch up? Perhaps after they see this article.

Chapter 9 Bankruptcy Test

My personal viewpoint on bankruptcy aside, it’s important to point out that Chapter 9 has a different insolvency test than corporate bankruptcy.

It is not a balance sheet test, but a cash flow test. Municipality has to be in a position where it cannot make near-term payments on obligations as they come due (like within six months). This is one of several eligibility criteria. So Chicago is not bankrupt by definition (yet) and has a huge tax base. The biggest risk to residents (now) is that they are in for an absolutely massive property tax hike to pay for debt and pensions,” says Culpepper.

Pension Liabilities

On March 2, I wrote Illinois Pension Plans 39% Funded; Taxpayers On the Hook for $105 Billion in Liabilities; It Will Get Worse!

That was my second article for the Illinois Policy Institute where I am now a senior fellow. Please give it a look as it contains a detailed look at horribly funded Illinois Pension Plans state-wide, not just Chicago.

World of Hurt Coming Up

When the equity and junk bond bubbles break (and they will – big time), Illinois and numerous cities in the state will be in a world of hurt.

It is imperative the Illinois legislature start addressing these issues right now. Of course, California and numerous other states will be affected as well.

Needed Legislation

I mentioned three things Illinois needs to do in my first post for the Illinois Policy Institute: Right-to-Work Sweeps Midwest, Heads for Passage in Wisconsin.

(1)  Eliminate collective bargaining of public unions.

(2)  Pass Right-to-Work legislation.

(3)  Scrap prevailing-wage legislation

Cities, municipalities, and the state itself massively overpay for services because of the influence of public unions and onerous prevailing wages laws.  This needs to stop now.

Raising Taxes Not the Answer

Raising taxes is not the answer. Illinois taxpayer pockets are nowhere deep enough to fix massive budget and pension undefundings.

Unfortunately, the Illinois legislature does not see it that way. Check out the massive Proposed Tax Hikes.

The array of six tax hikes proposed by Illinois lawmakers this legislative session adds up to more than $100 billion over the next five years. That’s more than the state’s total projected general-fund spending in fiscal years 2016, 2017 and 2018 – combined.

20150406-UW_Shedlock-Chicago
And the tax-hike proposals don’t stop there.

Additional tax-hike proposals are being thrown around without any idea of how much they might raise. State Rep. Rita Mayfield, D-Waukegan, proposed a 3.75% tax on guns and gun parts. When asked how much revenue it would raise, she said she didn’t know but thought “if we can get a good million or so, I’ll take it.”

Never-Ending Tax Hikes

The big problem with raising taxes is it will never stop.

Progressives will ask for more and more and more, driving businesses and mobile individuals out of the state. Moreover, tax hikes forestall the ability of municipalities to declare chapter 9.

Bankruptcy Law and Pension Reform

Rather than burden taxpayers (and tax hikes will ultimately not work any better in Illinois than they did in Detroit), Illinois desperately needs legislation to …

(1)  End defined benefit pension plans

(2)  Allow municipalities to set their own benefits (benefits are now set at the state level as if the state knows what’s best for every municipality)

(3)  Allow cities and municipalities to declare bankruptcy

Frank Discussion Needed

As I wrote on March 3, Chicago’s Only Possible Salvation is Bankruptcy – a Name That Cannot be Spoken.

The Illinois legislature and the city of Chicago both need to admit the sorry state of affairs instead of opting for can-kicking exercises that make the inevitable day of reckoning worse.

So, instead of playing shell games with derivatives, general obligation bonds and interest rate swaps, and instead of using long-term financing to fund ongoing needs, how about a frank discussion of everything discussed above?

The legislature and the City of Chicago owe taxpayers an honest assessment. It’s a sad state of affairs that we have to get that assessment from a bond guru in Kentucky.

Unsurprisingly, Chicago city officials would not comment.

*   *   *

About the Author:  Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education, and a senior fellow with the Illinois Policy Institute.

California Democrat Goes Rogue, Incurs Government Union Wrath

It didn’t take long for “the brotherhood” of status quo politics to pile on. Within hours of former Assembly member Joan Buchanan having lost her election bid for Northern California’s 7th Senate District seat in last week’s special election to fill the vacancy, she endorsed labor-embraced and fellow Democratic Assemblywoman Susan Bonilla, D-Concord. Together, they joined the panoply of monied special interests led by public sector unions that are largely funding the Democratic Party, to defeat a third Democrat – independent Steve Glazer.

Glazer describes himself as “fiscally conservative, socially progressive.” He is the mayor of Orinda and former political aide to Gov. Jerry Brown. Glazer brandishes “blue” credentials in California, having worked for decades to support Democratic candidates and causes.

But a funny thing happened on the way to governing California: Glazer ran afoul of the Democratic Party establishment when he started challenging the power of public sector unions on municipal and state government. Glazer supported banning strikes by public transit workers, embraced pension reforms and campaigned to elect more business friendly Democrats.

Millions of dollars were spent to try to bury Glazer on Election Day, prompting questions on whether there is a zero tolerance policy in the Democratic party against independent-minded Democrats.

Yet, on Election Night, Glazer not only survived, but emerged as the top vote-getter. A May runoff is scheduled.

Glazer stands out because it is rare for Democrats to “go rogue” and support labor-opposed changes to teacher tenure or curbing government pensions. Despite the “big tent” image, discourse and dissent is disallowed, despite growing public support for these reforms. Party-supported candidates are reminded that the hand that feeds them comes with a demand of loyalty.

If not, as was done to Glazer, they become labeled with the equivalent of a political red-letter A: abandonment of the Democratic Party for not remaining subservient to the interests of those who fund them. Forget 50 shades – can Democrats even be allowed to display more than one shade of blue? Yet, the dirty laundry of adherence to blind allegiance has erupted into public view in recent election cycles.

Indeed, in 2008, then-candidate Barack Obama lost favor with the National Education Association for his support of holding teachers and schools accountable and linking student outcome data to teacher evaluations. Since then, he and his Education secretary have largely earned the wrath of national teachers unions.

In the most-recent Los Angeles mayoral election, Eric Garcetti defeated a fellow Democrat largely by portraying his opponent as blindly subservient to the city unions that had endorsed her. Today, Democratic Chicago Mayor Rahm Emanuel faces a re-election runoff due to his willingness to battle Chicago’s powerful teachers unions.

Meanwhile, in Orange County’s special election to fill another vacant state Senate seat, two Republicans battled each other. Former county Supervisor John Moorlach – the candidate who refused to accept campaign contributions from labor unions – claimed outright victory in that Republican stronghold district. His opponent, Assemblyman Don Wagner, R-Tustin, was financed by labor unions who perceived him to be more allegiant to the state’s public sector unions.

The outcomes of both elections – one in a Democratic and one in a Republican stronghold district – send strong signals that voters desire to reclaim their party, and not allow candidates to be constricted to only one shade of red or blue. The challenge now is to seek independence in California’s remaining 38 Senate districts, 80 Assembly districts and every statewide and constitutional office.

About the Author:  Gloria Romero, a Los Angeles resident, served in the California Legislature from 1998 to 2008, the last seven years as Senate majority leader. Romero is the director of education reform for the California Policy Center. This article originally appeared in the Orange County Register and is republished here with permission from the author.

Unions Continue Their Long March into the Classroom

Labor union indoctrination is seeping into our schools before our very eyes.

Teacher union intrusion into the lives of children is not new. Via anti-child work rules like tenure and seniority, unions have been making their influence felt for years. Additionally, as labor expert Kevin Dayton points out, they have been angling to promote their cause via the curriculum nationally since 1981. Here in California, union propaganda got a big push in 2002 when California governor Gray Davis signed Assembly Bill 1900 into law. As Dayton wrote at the time,

Sponsored by the California Federation of Teachers, this bill recognized the first week of April as ‘Labor History Week’ and authorized public school districts to ‘commemorate that week with appropriate educational exercises that make pupils aware of the role that the labor movement has played in shaping California and the United States.’

At the end of 2012, labor’s “week” morphed into “Labor History Month” (or as I referred to it at the time, “The Not So Merry Month of May”). I pointed out that the lessons suggested by the unions were not simply a celebration of organized workers but a toxic, one-sided, politicized bundle of indoctrination aimed at your kids. A few examples:

  • California Federation of Teachers – many “children’s stories,” including one which features a mean farmer and the hens that organize against him.
  • California Teachers Association – a bevy of “lessons” which can be readily summed up as “Workers are poor; CEOs are rich.” In other words, Class Warfare 101.
  • University of California Miguel Contreras Labor Program – lots of fun stuff for the little ones including an anthology of stories promoting the IWW, a radical union noted for its ties to socialism and anarchism, and a sanitized biography of singing Stalinist Pete Seeger.

The end of 2014 saw the unions on the move again. Every ten years or so, the California Department of Education tinkers with the state’s curriculum, and in Sept. 2014 the review process was initiated for the history framework. The state solicits suggestions from anyone who wants to weigh in and in November, the California Federation of Teachers sent a proposal to California’s Instructional Quality Commission – an advisory body to the California State Board of Education on matters concerning curriculum, instructional materials, and content standards. The missive, unearthed by Dayton, is a doozie. A few highlights:

  • CFT wonders why the Second Great Awakening earns a prominent place in the framework. This religious revival, which took place in the late 18th Century, moved beyond the educated elite of New England to those who were less wealthy and less educated, hastening in the temperance, abolition, and women’s rights movements. Instead, CFT wants to minimize the importance of Christianity and, at the same time, include teaching about anti-Muslim discrimination after 9–11. (While there was an uptick in anti-Muslim “hate crimes,” immediately following 9-11, it was short-lived. In fact, Jews today are targeted for their faith six times more frequently Muslims.)
  • The union wants the U.S. described as an “empire” not a “world power,” so as to let our kids know that we have regularly has been “dominating other civilizations.” When I read things like this, I can’t help but think about WWII. Germany and Japan – our sworn enemies at the time – were not raped and plundered by us after defeat, but instead assisted by us, rebuilt to become economically sound, independent world powers.)
  • Additionally, there’s a plea for a “Labor Studies” elective and in fact, that’s where we are heading. A proposed part of the revamped standards reads, “Students can participate in a collective bargaining simulation to examine the struggles of workers to be paid for the value of their labor and to work under safe conditions. They can examine legislation that gave workers the right to organize into unions, to improve working conditions, and to prohibit discrimination.”

The massive irony here is that the unions are railing against what they perceive to be a sanitized version of U.S. history, but nothing could be further from the truth. As an American history teacher for much of the aughts, I (and every other history teacher I knew) taught extensively about slavery and other injustices of our collective past. We didn’t browbeat the kids, however, into believing that American history was riddled with treachery and malevolence.

And given the opportunity, will the unions tell the full truth about their own history? Of course not. The CFT labor curriculum would be completely sanitized. The teachers unions alone leave us with a toxic waste dump worth of sludge to clean up. For example:

  • In 2000, the California Teachers Association spent over $26 million to defeat Prop. 38 – a voucher bill that would have enabled some kids to escape their failing schools.
  • Former CFT president Marty Hittleman, referred to the Parent Trigger Law – by which primarily black and Hispanic parents can force a governance change at their children’s defective public school – as a “lynch mob provision.”
  • In 2009, National Education Association president Dennis Van Roekel wrote a threatening letter to every Democratic member of Congress, demanding that they vote against the Washington D.C. Opportunity Scholarship Program (a voucher program that helps poor kids) … or else. (They dutifully complied en masse.)
  • Despite a massive amount of forced dues collected by the teachers unions every year, they (and in fact all unions) don’t pay a penny in tax. As 501(c)(5)’s they have a special exemption from the IRS.
  • Union leaders are always railing against the rich and palavering over CEO and worker pay disparity. However, while the average U.S. public school teacher salary for 2013-14 was $56,610, American Federation of Teachers president Randi Weingarten’s income is $543,679 – almost ten times that of the average teacher, while corporate CEOs average $178,400 yearly, just five times that of the average worker.
  • In 2012, the California Teachers Association’s bought-and-paid-for state legislators robotically fell into line and killed SB 1530, which would have simplified the process of getting rid of pedophile teachers. (This really shouldn’t have come as a surprise. At its 2004 convention the NEA, CTA’s parent organization, gave its prestigious Human Rights Award to Kevin Jennings, founder of the Gay, Lesbian, Straight Education Network. GLSEN is the group that presided over the infamous “Fistgate” conference held at Tufts University in Massachusetts in March 2000, where state employees gave explicit instructions about “fisting” and other forms of gay sexual activity to children as young as 12.)
  • On CFT’s Facebook page it often reminds people that the 5-day 40-hour work week comes to us courtesy of the unions. Wrong. Thinking it was a good business move, noted capitalist Henry Ford instituted that change in the 1920s. (The United Auto Workers, didn’t come into being until 1935.)

Will the unions insist that we include any of the above in their proposed “Labor Studies” elective? Of course not.

The unions have big plans for your children. If parents (and all citizens) don’t get involved and protest, these unions will add a load of America-trashing and distorted history to the curriculum, and at the same time indoctrinate your kids in the glories of collective bargaining. If this does not sound like something you want, please contact Kenneth McDonald (KMcDonal@cde.ca.gov) at the State Board of Education and express your thoughts.

Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.

Beware Ambush Elections

The U.S. Senate HELP Committee recently contacted me about my experience with labor elections and my insight about how this ruling would harm businesses and employees across the country. This week, the points expressed in my original blog and documented in The Devil at Our Doorstep will be debated and voted upon, as reported in recent headlines “Republican-Controlled Congress to Vote to Repeal NLRB Rule.” Additionally, in a show of support the US Chamber Asks Judge To Nix NLRB’s Election Rule. Hopefully, Senate Democrats will stand behind movement, recognize the injustice, and provide enough votes to override an expected Presidential veto.

Employees and employers across the country need to be wary of the forced union ambush being promulgated by President Obama and his big labor “Gasping Dinosaurs” and the radicals the President has appointed at the National Labor Relations Board (NLRB). The President is utilizing Rule by Fiat to fundamentally transform America as he promised when he was first elected, while also paying back his political supporters.

NLRB Flexes Muscles” was definitely the theme this past week as the NLRB published its final rule making on “ambush elections,” and effectively reduced election periods from 41 to 21 days or potentially less (see Ambush,NLRB boosts unions’ organizing leverage, Elections, NLRB Issues its Ambush Election Rule, NLRB Representation Case Procedures Fact Sheet, Quickie Gifts to Big Labor, and NAM CEO Speaks Out ON NLRB Ruling). Even more damaging to both employees’ and employers’ rights and privacy is the fact that, in its rule making, the NLRB stated that employers must provide the names, e-mail addresses, home addresses and phone numbers of its employees to facilitate the “Quickie Elections.“ As described in The Devil at Our Doorstep, the current 41 day pre-election period is necessary, as employees are often coerced, intimidated and lied to by the organizers representing the labor unions. Often they are misled to believe that once they sign a union election card they must vote for the union when they go to the polls! While absolutely false, such conduct has been well established by the NLRB to be completely acceptable.

Unless the employer’s management team is well-versed on labor law and well-prepared to contradict these misrepresentations, their employees would never know the truth. The Quickie Elections rule making makes it virtually impossible for an employer to have the opportunity to refute the union’s misinformation and propaganda, particularly if the employer has not been faced with such organizing efforts in the past. In my own experience, if I would not have had the opportunity to meet and speak with our employees on several occasions — which would not be possible under the new ruling — they would have gone to the polls believing they had to vote for the union, despite the fact they had been intimidated into signing election cards.

As if that wasn’t enough, the NLRB boosts unions’ organizing leverage by allowing employees and union organizers access to employers e-mail systems so they can coerce, misinform, intimidate and misrepresent the truth about what is transpiring, and ignore big labor’s true goal, that It’s All About the Dues Money. In effect, what is happening is a rapid move towards “Card Check,” effectively allowing a union to force unionize an employer’s workforce behind the scenes virtually overnight.

These Quickie Gifts to Big Labor by the NLRB are A Death Penalty for Employees and Employers! They provide labor organizers great leverage to force employers to sign a Neutrality Agreement. This agreement is big labor’s current means of eliminating the secret ballot election by utilizing Death by a Thousand Cuts corporate campaigns to intimidate employers into signing it and achieving Card Check.

These actions are nothing more than political pay back by this Administration to the big labor bosses at the expense of the American people and the American economy.

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David A. Bego is the President and CEO of EMS, an industry leader in the field of environmental workplace maintenance, employing nearly 5000 workers in thirty-three states. Bego is the author of “The Devil at My Doorstep,” as well as the just released sequel, “The Devil at Our Doorstep,” based on his experiences fighting back against one of the most powerful unions in existence today.

Parent Trigger & Open Enrollment – Ways to Cope With Union Controlled Schools

In January 2010 the California’s legislature passed into law, perhaps uncharacteristically, an excellent new law. Entitled “Public schools: Race to the Top,” SB 54 created two mechanisms for parents to exert greater control over the education of their children.

There are two components:

(1) The Open Enrollment Act mandates that the California Department of Education to annually create a list of 1,000 schools ranked by their Academic Performance Index. Parents whose children are enrolled in these schools have the right to transfer them to a better performing school.

(2) The “Parent Trigger” Law, which allows parents to transform their own schools if 50% of parents sign a petition to seek a change at their chronically underperforming school.

Open enrollment has had an immediate benefit to California’s parents in poor schools, both because individually parents have been able to get their children out of poor schools, and also because the mere ability of parents to remove their students from poor schools provides a powerful incentive for school management to try harder to improve. From the California Dept. of Education, pursuant to SB 54, here is the list of the bottom 1,000 schools in California (Excel spreadsheet):  Open Enrollment Schools List 2015–16. To view this list in PDF format, here is the the same list as posted by former state senator (and co-author of SB 54) Gloria Romero’s California Center for Parent Empowerment (PDF file)Open Enrollment Schools List 2015–16.

The parent trigger law has a potentially much greater impact, because it literally empowers parents to take over management of an underperforming school if a majority of them sign a petition. It is important to clarify that the criteria for an “underperforming school” is not the same as the criteria used for the 1,000 K-12 schools with the lowest Academic Performance Index scores. Here is how these lists are compiled:

Open Enrollment List:

Every year the results of standardized academic achievement tests, administered to every K-12 public school student, are compiled by school and by school district. In the most recent academic year, the composite score for these tests for all K-12 students in California was 790. The open enrollment list was supposed to be the 1,000 schools with the lowest scores. For example, on the current list, the lowest score belongs to Oakland International High School with an API of 374. But in the compromises made in order to pass the bill, among other things, the published list of open enrollment schools cannot include more than 10% of the schools in any given school district. This gives the worst school districts in the state a pass, and actually leads to some schools getting onto the list that probably don’t deserve to be there. Nonetheless, at least those parents whose children attend these 1,000 schools have choices, and that is a very good thing.

Parent Trigger Eligible List:

The parent trigger list is compiled according to a more complicated formula. In summary, the criteria is as follows: Any school that has an API lower than 800, AND has failed to improve its API score in each of the last four years, is a parent trigger eligible school. The process of accurately compiling this list is tedious, requiring the analyst to research multiple CA Dept. of Education reports for multiple years while navigating several exclusions that complicate the selection process. But there aren’t carve-outs that prevent, for example, 90% of the schools in an underperforming district from any accountability, such as is the case with the open enrollment list. Here is a list of Parent Trigger Eligible schools in Orange County, compiled by the organization Excellent Educational Solutions (PDF file): Trigger Eligible Schools in Orange County. The entire list is also posted on the table below – note that Palm Lane Elementary is not on this eligibility list because they have already been “triggered.” Also, some schools on the Orange County list have 3 year API averages that exceed 800. This can be because their most recent API has fallen below 800 even though the three year average is still above 800, or due to other complexities in the actual formula.

The parent trigger eligible list is a powerful resource that ought to be prepared and posted online every year by the California State Board of Education. As can be seen, there are 125 schools just in Orange County where the management of these schools can be potentially taken over by parents if 50% or more of them sign a petition. Imagine how many thousands of schools in California must be on a statewide list?

To-date, parent trigger has only been tried three times in California. In Compton, the effort ultimately failed. In Adelanto, the effort was successful (ref. Wikipedia “Parent Trigger” – Compton, Adelanto). Now the battle has moved to Palm Lane Elementary School in Orange County, where on January 14, 2015, petitions representing over 50% of the parents of the enrolled students were turned in.

When one examines the political consensus that was forged in the California Legislature back in 2010 by Democratic senator Gloria Romero and her Republican co-sponsor Bob Huff, what is evident is the astonishing power of bipartisanship on the issue of quality education. When one considers the parents who recently turned in petitions to transform Palm Lane Elementary School, and the broad spectrum of community activists who support them, again what is evident is the astonishing power of bipartisanship on the issue of quality education. SB 54 triggers not only parent empowerment, but alliances that transcend conventional politics. It is something to be watched and nurtured.

 Trigger Eligible Schools in Orange County20150127-UW_OC-Trigger-Schools*   *   *

Ed Ring is the executive director of the California Policy Center.

Sweatshops, Walmart, TFA, Bart Simpson and Hams for Hanukkah

Teachers unions are busier than ever pointing fingers, forming loopy alliances and making embarrassing gaffes.

A couple of weeks ago Massie Ritsch, assistant communications and outreach point man for Education Secretary Arne Duncan, left his job to take a similar position at Teach For America. And not a moment too soon!

As I wrote last week, the American Federation of Teachers has hopped into bed with the United Students Against Sweatshops. In fact, having given the group $58,650 in 2013-1014, AFT is the USAS’ biggest funder. The Harvard cell of the national group made news when it decided to target Teach For America. According to the Harvard Crimson, “The effort is part of a larger national movement started by United Students Against Sweatshops that criticizes Teach For America, a nation-wide program that recruits college graduates to teach in low-income communities for at least two years, for undermining the quality of public education.” (Emphasis added.)

Undermining public education? Funny, I thought that was the job of the teachers union.

USAS  Harvard also demands that TFA sever ties with anti-union corporations such as Walmart, which funds TFA. Reason’s Nick Gillespie clearly gets the gut-busting hubris,

We’ve all heard the stories about how smart, ambitious, and clean-smelling Harvard students are, right? I mean, Harvard is like the Cadillac of college (and I mean back when Cadillac meant high standards and luxury, not whatever it might mean today), the gold standard in a world of fiat currencies. And the students come from money, with over 45 percent hailing from families pulling in $200,000 a year (and 21 percent coming from the above-$500,000 mark).

So you can rest assured that Harvard students know what they’re talking about. And these days, they’re trying to get the university to pull out of Teach For America if it doesn’t start only placing its participants in unionized public schools. (Emphasis added.)

AEI’s Rick Hess weighs in also,

Fashioning themselves the “United Students Against Sweatshops” (it’s okay to laugh at that), these kids have taken TFA to task for being “the man”—and for turning teaching into sweatshop-like work by allowing some selected recruits to enter the classroom without slogging through the entirety of traditional teacher prep. I’m not sure where the “sweatshop” piece really surfaces here, ed schools have a hard time making the case that their grads are better after the training, and research has suggested that TFA’ers are at least as effective as traditionally trained teachers, but whatevs… Somehow, I don’t think the United Students Against Sweatshops (USAS) are all that interested in sweating these details. I’m trying to make allowance for the fact that these complaints are being offered by a bunch of 20-year-olds who don’t know anything and who’ve given every indication that they’re being funded and stage-managed by professional labor organizers who have their own agenda. But still, for reasons that escape me, they’ve been getting a fair bit of attention. (Emphasis added.)

The real problem that AFT-USAS has with TFA is that it places a great number of its teachers in charter schools, which are overwhelmingly union-free. And of course, Walmart has been a long-time punching bag for unionistas and their fellow travelers. The giant chain is not unionized, which has enabled it to keep costs down by not having to wade through the collective bargaining process. If it were up to AFT-USAS, Walmart would be unionized, the result of which would be jacked up wages leading to increased prices, which would mean fewer customers, thus forcing worker lay-offs. Now there’s a great business plan!

The teachers unions’ efforts to defame Walmart know no bounds. AFT president Randi Weingarten thought she was being oh-so-clever when she posted “Really Walmart? Ham for Hanukah” (sic) on Facebook.

Randi ham As EAG’s Kyle Olson points out, this photo is seven years old and was not even taken at Walmart – it was Balducci’s, a gourmet retailer in New York City. (And with all Weingarten’s self-righteous indignation, you’d think she would at least know how to spell Hanukkah!)

Interestingly, after being excoriated for this silly attempt to embarrass Walmart, it took her a week to remove the post. Perhaps though we can cut poor Randi some slack because she is sooooo busy!! In recent months, she has immersed herself in the Middle East (pushing Israel to adopt a “two-state solution”), developed a plan to contain Ebola and traveled to the Ukraine to “promote democratic values.” (Memo to Randi: Maybe consider spending less time play-acting as Secretary of State and tackle the New York City charter school that your union is systematically running into the ground.)

Weingarten has probably been too busy to see a recent episode of The Simpsons, which absolutely skewered the teachers unions.

Jack Lassen, voiced menacingly by Willem Dafoe, was transferred to Bart’s school during what Superintendent Gary Chalmers referred to as the “Dance of the Lemons,” in which school officials practice what little control they have over teacher unions by allowing principals to select their worst teacher to send to another school in the district.

“The union is happy, the parents are placated and only the children suffer,” Chalmers explained.

Lassen — among the group Chalmers refers to as “sociopathic child-haters who are only teachers because they got tenure after two short years” — doesn’t suffer Bart’s foolishness, responding to the mischievous one’s skeleton-in-the-closet prank by buzzing the top of his head with clippers.

When you’ve lost Bart Simpson, you just may have lost the country, as evidenced by the unions’ dismal return on the millions they spent in the November elections.

But back to USAS. Gillespie ended his Reason post with the following:

The Harvard prodigies and the organizers at USAS are about the last people standing who think that unionizing teachers is the last, best hope of improving American education, especially for students from lower-income, higher-risk-for-failure backgrounds. Good luck to them as their reactionary attitudes leave them further and further in the rear-view window as the rest of the country moves into a future of increased options for all, regardless of family income and ability to pay.

All I can add to that, Nick, is a hearty “Amen!!”

Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers and the general public with reliable and balanced information about professional affiliations and positions on educational issues. The views presented here are strictly his own.

The Amazing, Obscure, Complicated and Gigantic Pension Loophole

“The bottom line is that claiming the unfunded liability cost as part of an officer’s compensation is grossly and deliberately misleading.”
– LAPPL Board of Directors on 08/07/2014, in their post “Misuse of statistics behind erroneous LA police officer salary claims.”

This assertion, one that is widely held among representatives of public employees, lies at the heart of the debate over how much public employees really make, and greatly skews the related debate over how much pension funds can legitimately expect to earn on their invested assets.

Pension fund contributions have two components, the “normal contribution” and the “unfunded contribution.” The normal contribution represents the present value of future retirement pension income that is earned in any current year. For example, if an actively working participant in a pension plan earns “3% at 55,” then each year, another 3% is added to the total percentage that is multiplied by their final year of earnings in order to determine their pension benefit. That slice, 3% of their final salary, paid each year of their retirement as a portion of their total pension benefit, has a net present value today – and that is funded in advance through the “normal contribution” to the pension system each year. But if the net present value of a pension fund’s total future pension payments to current and future retirees exceeds the value of their actual invested assets, that “unfunded liability” must be reduced through additional regular annual payments.

Without going further into the obscure and complicated weeds of pension finance, this means that if you claim your pension plan can earn 7.5% per year, then your “normal contribution” is going to be a lot less than if you claim your pension plan can only earn 5.0% per year. By insisting that only the cost for the normal contribution is something that must be shared by employees through paycheck withholding, there is no incentive for pension participants, or the unions who represent them, to accept a realistic, conservative rate of return for these pension funds.

This is an amazing and gigantic loophole, with far reaching implications for the future solvency of pension plans, the growing burden on taxpayers, the publicly represented alleged financial health of public employee pension systems, the impetus for reform, and the overall economic health of America.

Governor Brown’s Public Employee Reform Act (PEPRA) calls for public employees to eventually pay 50% of the costs to fund their pensions, this phases in over the next several years. But this 50% share only applies to the “normal costs.”

In a 2013 California Policy Center analysis of the Orange County Employee Retirement System, it was shown that if they reduced their projected annual rate of return from the officially recognized 7.50% to 4.81%, the normal contribution would increase from $410 million per year to $606 million per year. In a 2014 CPC analysis of CalSTRS, it was shown that if they reduced their projected annual rate of return from the officially recognized 7.50% to 4.81%, the normal contribution would increase from $4.7 billion per year to $7.2 billion per year.

The rate of 4.81% used in these analyses was not selected by accident. It refers to the Citibank Liability Index, which currently stands at 4.19%. This is the rate that represents the “risk free” rate of return for a pension fund. It is the rate that Moody’s Investor Services, joined by the Government Accounting Standards Board, intends to require government agencies to use when calculating their pension liability. As can be seen, going from aggressive return projections of 7.5% down to slightly below 5.0% results in a 50% increase to the normal contribution.

No wonder there is no pressure from participants to lower the projected rate of return of their pension funds. If under PEPRA, a public employee will eventually have to contribute, say, 20% of their pay via withholding in order to cover half of the “normal contribution,” were the pension system to use conservative investment assumptions, they would have to contribute 30% of their pay to the pension fund.

Moreover, these are best case examples, because the formulas provided by Moody’s, used in these studies, make conservative assumptions that understate the financial impact.

In another California Policy Center study, “A Pension Analysis Tool for Everyone,” the normal contribution as a percent of pay is calculated on a per individual basis. One of the baseline cases (Table 2) is for a “3.0% at 55” public safety employee, assuming a 30 year career, retirement at age 55, collecting a pension for 25 years of retirement. At a projected rate of return of 7.75% per year, this employee’s pension fund would require 19.6% of their pay for the normal contribution. Under PEPRA, half of that would be about 10% via withholding from their paychecks. But at a rate of return of 6.0%, that contribution goes up to 31%. Download the spreadsheet and see for yourself – at a rate of return of 5.0%, the contribution goes up to 41%. That is, instead of having to pay 10% via withholding to make the normal contribution at a 7.75% assumed annual return, this employee would have to pay 20% via withholding at a 5.0% assumed annual return. The amount of the normal contribution doubles.

This why not holding public employees accountable for paying a portion of the unfunded contribution creates a perverse incentive for public employees, their unions, the pension systems, and the investment firms that make aggressive investments on behalf of the pension systems. Aggressive rate of return projections guarantee the actual share the employee has to pay is minimized, even as the unfunded liability swells every time returns fall short of projections. But if only the taxpayer is required to pick up the tab, so what?

Adopt misleadingly high return assumptions to minimize the employee’s normal contribution, and let taxpayers cover the inevitable shortfalls. Brilliant.

Public employee pension funds are unique in their ability to get away with this. Private sector pensions were reformed back in 1973 under ERISA rules such that the rate of return is limited to “market rates currently applicable for settling the benefit obligation or rates of return on high quality fixed income securities,” i.e., 5.0% would be considered an aggressive annual rate of return projection. If all public employee pension funds had to do were follow the rules that apply to private sector pension funds, there would not be any public sector pension crisis. And when public employees are liable through withholding for 50% of all contributions, funded and unfunded, that basic reform would become possible.

This is indeed an obscure, complicated, amazing and gigantic loophole. And it is time for more politicians and pundits to get into the weeds and fight this fight. Especially those who want to preserve the defined benefit. Until incentives for public employees and taxpayers are aligned, pension funds will cling to the delusion of high returns forever, until it all comes crashing down.

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Ed Ring is the executive director of the California Policy Center.

Californians Vote for More Taxes and More Borrowing

It has been argued that California’s voters defy their political stereotype when it comes to taxes. California’s property tax revolt in 1978 resulted in the passage of the historic Prop. 13, which limits property tax increases to 2% per year. As recently as 2009, California’s legislature joined with Gov. Schwarzenegger to place Propositions 1A through 1E on the state ballot. All of them would have raised taxes, and all of them were defeated by voters.

That was then.

In 2012 Californians voted to raise sales and income taxes through Proposition 30, which supposedly was designed to collect an additional $6 billion per year to fund public education. And while 2014 did not include major new tax proposals on the state ballot, in cities, counties and school districts throughout California, tax and bond proposals were placed before voters. Most of them passed.

In the June 2014 primary, 47 local bond measures were proposed, with 36 of them passing. Also in June, 44 local tax increases were proposed, and 36 of them passed. That was just a warm-up for the November 2014 election, where 118 local bonds – most of them for public education – were proposed, along with a staggering 171 local tax increases. At last count, 72 of the bond proposals were passed, 15 were defeated, and 31 remain too close to call. Of the 171 local tax proposals, 98 were passed, 45 were defeated, and 28 are still too close to call.

These local tax proposals are necessary to meet runaway employee compensation costs, especially for pensions. These local bond measures are largely to fund deferred maintenance, activities that might have been funded through operations budgets if it weren’t for excessive compensation and benefit costs.

In Stanton, a city where local firefighters average $221,000 per year in pay and benefits, and local sheriffs average $112,000 per year in pay and benefits, a 1% increase to the local sales tax was approved by 54% of the voters. In Palo Alto, where the local firefighters “only” receive pay and benefits that average $181,000 per year, and the local police officers earn pay and benefits averaging $164,000 per year, a 2% increase in their hotel tax was approved by 75% of voters.

In California in 2014, based on returns so far, if a local city or county wants to raise taxes, there is a 72% chance voters will approve them. If a school district wants to borrow money – over $11 billion just this November – there is an 81% chance voters will approve them. And if the proponents of more taxes and borrowing are unlucky, they can always try again the next election. The odds are in their favor.

Local taxes and borrowing matter. California has relatively decentralized governance. Of the roughly $430 billion in estimated state and local spending in California for the fiscal year ending 6-30-2015, only $107 billion of that is state government spending. Estimating total state and local government debt in California is nearly impossible because the largest single borrower, K-12 school districts, have not submitted their financials to the State Controller for consolidation since 2002. But a California Policy Center study from April 2013 estimated total state debt from all sources at $132 billion, whereas the same study estimated total local government debt in California at over $250 billion. That estimate relied on 2011 and 2012 data, grossly underestimated K-12 bond debt, and did not include any unfunded liabilities for pension and retirement healthcare.

When it comes to taxes, borrowing, and overspending, most of the action in California is at the local level. And there should be no question that current spending levels are financially unsustainable. If all California’s state and local pension systems had to do was account for their liabilities according to the same rules that have governed private sector pension plans for years, California’s state and local debt – including unfunded liabilities – would be well over $1.0 trillion. Moreover, such reforms – playing by the same rules as the private sector – would grossly increase the ongoing normal cost to funding pensions for state and local government employees.

Sooner or later California’s taxpayers are going to wake up. Because the Government Accounting Standards Board, Moody’s Investor Services, and eventually the U.S. Congress, are being compelled by financial reality to enact reforms to pension and retirement healthcare accounting, asset management, and funding. Once government entities have to follow the same rules as the private sector, spending will skyrocket or services will be scuttled. What we’ve seen so far, grievous though it may be, is nothing compared to what is to come.

There is an alternative. A bipartisan will to defeat government unions by an awakened populace. It may take a few more years, but it is inevitable – the hidden agenda behind all of these tax increases and new borrowings will be plain for all to see.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Unions in the News – Weekly Highlights

Union bosses investing in Ohio Senate Republicans
By Jason Hart, October 28, 2014, Ohio Watchdog
Labor groups supporting big government and mandatory union dues gave $178,867 to eight Republican incumbents in the Ohio Senate during the most recent campaign finance period. Kevin Bacon, Bill Beagle, Cliff Hite, Shannon Jones, Frank LaRose, Gayle Manning, Scott Oelslager and Bob Peterson each received more than $5,000 in union donations between July 1 and Oct. 15. Kris Jordan is the only incumbent Republican senator seeking re-election Nov. 4 who received no union contributions. Beagle, Manning and Bacon got union money while facing tough Democrat competition, as evidenced by Ohio Republican Party and Republican Senate Campaign Committee spending in their respective races. ORP and RSCC gave Beagle more than $700,000 of in-kind support during the reporting period and more than $600,000 of in-kind support to both Manning and Bacon. RSCC did not respond to a request for comment on increasing Big Labor funding of caucus members. Beagle, Manning, Bacon, LaRose and Oelslager also received union contributions while staving off primary opponents earlier this year. During the pre-general reporting period ending Oct. 15, labor unions donated $39,356 to LaRose, $37,856 to Oelslager, and $36,906 to Manning. All three got money not only from construction unions benefiting from increased infrastructure spending but also from government unions. (read article)

Libertarian gets union cash in Illinois governor’s race
By Kerry Lester, October 28, 2014, Chicago Ledger Inquirer
A Libertarian candidate for Illinois governor is receiving financial help from an unexpected source — one of the unions campaigning against Republican Bruce Rauner because of the Winnetka businessman’s views on organized labor. Chad Grimm is a fiscal conservative who believes in minimal government. But he has received a $30,000 boost from the International Union of Operating Engineers Local 150 even though it endorsed Democratic Gov. Pat Quinn. Most of the state’s other labor unions have spent millions of dollars supporting Quinn. They are seeking to defeat Rauner, who made fighting “government union bosses” a focus of his primary campaign. Grimm could siphon conservative votes away from Rauner. Rauner campaign spokesman Mike Schrimpf says Illinoisans “understand a vote for Grimm is the same as voting for Pat Quinn.” (read article)

Court Declines to Enjoin Unions’ Rat Display; ‘Disruptive Activity’ Ban Only Covered Strikes
By Lawrence E. Dubé, October 28, 2014, Bloomberg
An asbestos abatement contractor could not obtain an injunction to prohibit union agents from stationing an inflatable rat at its job sites despite a union pledge to refrain from “disruptive activity” for the duration of a collective bargaining agreement, a federal district court in New York ruled Oct. 27. Judge Joseph F. Bianco of the U.S. District Court for the Eastern District of New York held the Norris-LaGuardia Act prevented him from granting Microtech Contracting Corp. a preliminary injunction against the Mason Tenders District Council of Greater New York and a Laborers’ International Union of North America local. Microtech alleged the unions were violating the local’s collective bargaining agreement in a protest over the company’s hiring of an individual, but Bianco said he had no jurisdiction to grant injunctive relief. The court said the Norris-LaGuardia Act prohibited his intervention in the labor dispute, but he also found that the disruption rule cited by Microtech was intended only to prohibit strikes, stoppages, and picketing. (read article)

Big Labor’s Servants
By Bill McMorris, October 28, 2014, Washington Free Beacon
A top labor watchdog is telling voters that Democrats in some of the nation’s most competitive Senate races are servants of labor unions. The National Right to Work Foundation (NRWF) doled out its Union Brass awards on Wednesday to Democratic Sens. Mary Landrieu (La.), Mark Pryor (Ark.), Mark Warner (Va.), Kay Hagan (N.C.), and Mark Udall (Colo.), as well as Democratic Senate candidates Bruce Braley (Iowa), Rick Weiland (S.D.), and Alison Lundergan Grimes (Ky.). “Independent” Kansas Senate candidate Greg Orman, who has received donations from Democratic mega-donors, also received the award. The awards are meant to inform voters that these nine candidates are guaranteed union votes on issues, such as coercive unionism and forced dues payments for workers, the organization said in a release. “The incumbents among these candidates have been in Big Labor’s corner for their entire careers. And the newcomers are clearly starting out there,” NRTW vice president Greg Mourad said in a statement. The foundation pointed to Pryor, Landrieu, and Braley’s support for national card check legislation as a sign of their devotion to unions. Card check would eliminate secret ballot union elections by allowing labor groups to use signed cards from workers to unionize, a process open to corruption and intimidation, the group said. (read article)

Nevada lieutenant governor race could have national implications
By Haya El Nasser, October 28, 2014, Al Jazeera
Two weeks before the election, early voting began in Nevada. More than 20 political organizers filed in to a room at the Culinary Workers Union Local 226, one of the state’s most powerful labor groups. The union represents more than 55,000 casino and hotel workers, from housekeepers and cocktail waitresses to cooks and doormen — more than half of them Hispanic. The room is a sea of red. Union members taking political leave from their jobs to get people to the polls are wearing bright red T-shirts emblazoned with bold white letters that leave no mistake about their mission: “Las Vegas vote now!” The union’s focus is on Nevada State Senate District 9, which covers parts of Clark County. The union is backing Democratic incumbent Justin Jones, who is in a dead heat with Republican opponent Becky Harris. If Jones loses, Republicans would likely take control of the Senate by reversing the Democrats’ 11-10 majority. While that state Senate race is the focus locally, Nevada’s lieutenant governor’s race, which rarely draws attention beyond state lines, is garnering all the attention on the national stage. (read article)

Union bosses investing in Ohio Senate Republicans
By Jason Hart, October 28, 2014, Ohio Watchdog
Labor groups supporting big government and mandatory union dues gave $178,867 to eight Republican incumbents in the Ohio Senate during the most recent campaign finance period. Kevin Bacon, Bill Beagle, Cliff Hite, Shannon Jones, Frank LaRose, Gayle Manning, Scott Oelslager and Bob Peterson each received more than $5,000 in union donations between July 1 and Oct. 15. Kris Jordan is the only incumbent Republican senator seeking re-election Nov. 4 who received no union contributions. Beagle, Manning and Bacon got union money while facing tough Democrat competition, as evidenced by Ohio Republican Party and Republican Senate Campaign Committee spending in their respective races. ORP and RSCC gave Beagle more than $700,000 of in-kind support during the reporting period and more than $600,000 of in-kind support to both Manning and Bacon. RSCC did not respond to a request for comment on increasing Big Labor funding of caucus members. Beagle, Manning, Bacon, LaRose and Oelslager also received union contributions while staving off primary opponents earlier this year. During the pre-general reporting period ending Oct. 15, labor unions donated $39,356 to LaRose, $37,856 to Oelslager, and $36,906 to Manning. All three got money not only from construction unions benefiting from increased infrastructure spending but also from government unions. (read article)

Wisconsin Labor unions weren’t about to negotiate over Act 10
By David Fladeboe, October 26, 2015, Milwaukee Journal Sentinel
A recent Journal Sentinel editorial concerning Gov. Scott Walker’s budget-saving Act 10 reforms attempts to take readers to an alternate universe, complete with happily negotiated labor contracts and good governance that didn’t require hard decisions from lawmakers in Madison (“A trip to Scott Walker’s parallel universe where Act 10 never happened,” Our View, Oct. 21). One would indeed need to be in an alternate universe to expect a world free of the dysfunction that has plagued state and federal government. How quickly we can forget: Walker’s labor friendly predecessor Democrat Jim Doyle failed to successfully negotiate new labor contracts with state workers on his way out of office. Instead of working with a governor who was sympathetic to their self-serving, budget-busting concerns, the labor bosses decided to take their chances with a newly elected chief executive and state Legislature. Unfortunately for organized labor, things didn’t go their way in November, and when Scott Walker was elected as Wisconsin’s governor, they got desperate. How desperate, you ask? So desperate, in fact, that in late 2010 during a lame-duck session, the outgoing Democrat majority was so eager to force through lucrative union-friendly contracts that they bailed an outgoing state representative out of jail and rushed another member down to Madison shortly after undergoing surgery in an effort to deliver the booty for their union-boss masters. In fact, it was only principled and prudent leadership by outgoing Democratic Senate Majority Leader Russ Decker, a longtime labor supporter himself, that prevented these sweetheart deals from getting rubber-stamped into law. After witnessing firsthand the depths big labor and their allies in Madison were willing to sink to in order to get their way and stick taxpayers with a massive bill, can Walker or any legislator — or conscientious taxpayer for that matter — be blamed for not expecting a good-faith effort from organized labor in future contract negotiations? (read article)

What’s behind boom in Indiana union assets?
By Jeff Swiatek, October 26, 2014, Indy Star
A lot has gone wrong for Indiana labor unions the past 10 years, from foreign outsourcing of unionized jobs to passage of a right-to-work law by the Indiana legislature. You wouldn’t guess it by looking at union bank accounts. Total assets of the state’s 700 or so labor union locals have nearly doubled since 2004, from $182 million to $335 million, according to union financial reports filed with the Department of Labor. The 83 percent jump in assets happened even as membership at the 700 locals slipped 9.8 percent since 2004, to 420,924. (Most of that decline came from 2004 to 2009. Since the recession’s end in 2009, membership has actually risen 5 percent.) What’s created much of the newfound union wealth is an unlikely combination of crude oil from the tar sands of Canada, a massive road-building plan by former two-term Republican Gov. Mitch Daniels, and a gusher of construction activity in the city of Indianapolis. (read article)

The Emerging Political Divide Between Public and Private Unions
By Steven Malanga, October 24, 2014, Wall Street Journal
Chicago Mayor Rahm Emanuel has earned the ire of government-worker unions by supporting cuts in pension benefits for some city workers and closing failing schools. The head of the American Federation of Teachers, Randi Weingarten, has pledged $1 million of union money to unseat Mr. Emanuel, up for re-election in February. Private unions have a different take. Building trade groups like the Construction and General Laborers’ District Council approve of the mayor’s infrastructure spending and have donated heavily to his campaign. The hotel-workers union Unite Here has endorsed him for his work promoting Chicago tourism. “There’s a lot of support I have from working men and women,” Mr. Emanuel told a reporter earlier this year, when the subject of public-union opposition came up. The labor rift in Chicago politics has emerged elsewhere, too. Government workers are increasingly fighting to defend their pay and benefits, including trying to defeat officials running for re-election who have preached fiscal reform. But private unions have embraced some of these same candidates, arguing that when economic growth is sluggish, politicians should focus on creating jobs. The conflict is roiling Democratic primary campaigns and even pushing some labor groups into the arms of Republican candidates. (read article)

Youth shut down anti-union film in Philadelphia
By Matty Starrdust, October 24, 2014, Workers World
At an Oct. 15 public event, members of the Philadelphia School Reform Commission screened the film “Won’t Back Down” before an audience of students and parents. The film is a notorious union-busting propaganda piece aimed at generating support for pro-privatization “parent trigger” laws, which give parents the “power” to charterize underfunded public schools. Led by the Philadelphia Student Union, some two dozen students in attendance successfully shut down the screening, chanting, “Won’t back down! Philly is a union town!” and “Hey, hey, ho ho! The SRC has got to go!” Videos taken at the demonstration show newly appointed SRC member Sylvia Simms shouting back at the students, “You all must go to failing schools!” and “You belong in jail!” (read article)

L.A. County supervisorial race a money battle between labor, business
By Catherine Saillant, Maloy Moore, and Anthony Pesce, October 24, 2014, Los Angeles Times
e pivotal race to replace retiring Los Angeles County Supervisor Zev Yaroslavsky has become a money battle between labor unions and business interests, with fundraising approaching $8.4 million. Sheila Kuehl and Bobby Shriver have directly collected a combined $5.1 million, according to a Times analysis of thousands of contributions. An additional $3.2 million has been raised by independent committees not controlled by the candidates. The Times found that union-affiliated donors contributed $2.1 million to help elect Kuehl, a former state senator endorsed by major county labor groups. That’s nine times the amount of labor-related donations supporting Shriver’s supervisorial bid. Former Santa Monica Councilman Shriver and committees supporting him have taken in about $1 million from individuals and companies associated with the real estate, financial services and construction industries. That’s more than four times the comparable donations received by Kuehl. The fundraising underscores that although both are liberal-leaning Democrats, Kuehl is viewed as more labor-friendly and Shriver more sympathetic toward business, said Loyola Law School professor Jessica Levinson, who studies elections. (read article)

Unions remain a crucial backer of Gov. Jerry Brown’s campaign
By Chris Megerian, October 23, 2014, Los Angeles Times
e proposal to restrict school districts’ financial reserves seemed to come out of nowhere, slipped into the state budget just days before the spending plan would come up for a vote. At a legislative hearing, Democrats were confused and Republicans were critical. Recession-weary education officials launched an unsuccessful counterattack against the measure, pushed by California’s largest teachers union and inserted by Gov. Jerry Brown. The June episode was a reminder that unions have often found a loyal friend in Brown, who has been allied with the labor movement since his political career began more than four decades ago. The governor has occasionally frustrated union leaders with budget cuts and intransigence at the negotiating table. But he has also delivered on many of their biggest priorities, prompting his Republican opponent, Neel Kashkari, to paint him as a tool of labor benefactors. As Brown seeks a fourth term, unions remain a key element of his political power, providing millions of dollars in donations and deep ranks of campaign foot soldiers. “We agree on a lot of the issues,” said Dean Vogel, president of the California Teachers Assn. “It’s not a big surprise we would be on the same page.” (read article)

I heard it again the other day – this time on the steps of the Wisconsin State Capitol
By Nick Novak, October 23, 2014, Washington Times
“I want! I want! I want my fifteen dollars!” Yes, there was another organized protest to try and raise the minimum wage. Nearly every single state and most major cities across the country have seen some type of demonstration in the last year about increasing the minimum wage. Most of the time, union-backed groups like worker centers and other “non-partisan” organizations planned the protests. These groups range from Working Washington, based in Seattle, to the Texas Organizing Project, which has offices in Dallas, Houston and San Antonio. In the Dairy State, Wisconsin Jobs Now calls Milwaukee its home. These groups all seem to have one thing in common. They are all backed by massive labor unions, most notably the Service Employees International Union — or SEIU. According to a Watchdog.org report, the SEIU funneled nearly $15 million into these “worker centers” in 2013. While each groups claims to be looking out for workers, nothing could be further from the truth. If groups like Working Washington and Wisconsin Jobs Now cared about workers, they would not organize protests urging for a policy that will endanger the jobs of the exact people they claim to be helping. (read article)

Labor Unions Are Supporting Washington State Legal Marijuana Dispensaries that Create “More Workers to Organize”
By Bill Conroy, October 22, 2014, The Narcosphere
What’s going on in the state of Washington and beyond with the movement to legalize marijuana is, only in part, about business, taxes and government oversight — all to be amplified by the billions of dollars annually this new industry promises to throw off. What the movement also represents is an emerging culture, one that promises to create whole new communities of hemp and cannabis farmers and workers all tied to together by thousands of new workplaces and potentially millions of customers — and patients. Organized labor sees this landscape unfolding and is putting its chips on the table, betting unions will be on the right side of the change. With the passage by voters of the state’s Initiative 502 in late 2012, a new legal framework was set up for the sale of recreational marijuana — a process that is still in motion some two years later, with numerous producers, processors and retail storefronts still in the cue awaiting state and local approvals. A 25 percent excise tax is imposed on product sales at each of those three levels, on top of the state’s business-and-occupation tax and local sales taxes. (read article)

L.A. City Council backs union contract for Fresno farmworkers
By Emily Alpert Reyes, October 22, 2014, Los Angeles Times
ndreds of labor activists, farmworkers and their allies marched on Los Angeles City Hall on Wednesday demanding that a Fresno fruit grower recognize a union contract — the latest turn in a long-standing dispute over whether the United Farm Workers should represent the company’s employees. The marchers crowded into a City Council meeting, where lawmakers unanimously approved a resolution that calls on Gerawan Farming to immediately put a union contract in place. The resolution, presented by Councilman Paul Koretz, said that for most workers the contract would have provided roughly $1,480 in added pay over the course of the previous year. “These matters affect all of us as Angelenos,” Koretz said. “These workers may not work within our city limits, but the fruit they pick you buy and eat …. The men and women here with us today have been mistreated.” Wednesday’s L.A. City Council vote has no binding effect on the Fresno grower. But UFW spokesman Marc Grossman said winning support from Los Angeles officials was important and took “a page out of Cesar Chavez’s playbook.” (read article)

Judge won’t stop Minnesota from negotiating with home care workers union
By Randy Furst, October 22, 2014, Minneapolis Star Tribune
The state’s chief federal judge refused Wednesday to stop the state of Minnesota from negotiating a contract with newly unionized home health care workers, saying it was unlikely union opponents will win their case in court. In his 25-page ruling, District Judge Michael Davis denied a request for an expedited injunction sought by the National Right to Work Foundation. The injunction, he said, would delay implementation of a state law that was passed by the Legislature “after full debate” and would constitute “an unwarranted intrusion” by the federal government and judiciary into the state’s affairs. The Service Employees International Union (SEIU) won an election on Aug. 26 to represent the state’s 27,000 home health care workers, the largest successful union campaign in Minnesota since passage of the federal Wagner Act in 1935. Some 5,800 workers voted, and 60 percent opted to join the union. Attorneys for the Right to Work Foundation, an anti-union organization headquartered in Virginia, sought the injunction to prevent the state from negotiating a contract with the SEIU. The foundation maintains that the First Amendment rights of home care workers who oppose the union are being violated. A member of the SEIU’s leadership team applauded Davis’ ruling Wednesday. “I am really excited because he ruled in our favor and that means we can go ahead and bargain,” said Darlene Gray, a 25-year-old home health care worker from Apple Valley. The Right to Work Foundation is exploring its options, which include asking the Eighth U.S. Circuit Court of Appeals to reverse Davis’ decision. (read article)

Law Enforcement Unions Endorse Scott Walker
By Connor D. Wolf, October 22, 2014, Daily Caller
Wisconsin Gov. Scott Walker’s campaign announced several state law enforcement unions have endorsed his reelection, despite the overwhelming opposition of most labor unions. “The Milwaukee Police Association, Milwaukee Police Supervisors’ Organization, and Milwaukee Professional Firefighters Association formally announced their endorsement of Governor Scott Walker’s re-election today. The organizations highlighted the governor’s “strong commitment to public safety in Wisconsin” a press release from the Walker campaign announced. “Our police force and firefighters are critical to the safety of Milwaukee and its citizens,” Gov. Walker said in a statement. “My administration is committed to ensuring these professionals have the resources and information they need to serve and protect our communities. In a second term as Governor, we will continue our commitment to the brave men and women of our public safety community.” (read article)

Labor Secretary Perez talks up unions
By Lydia DePillis, October 21, 2014, Washington Post
For most of President Barack Obama’s tenure, the White House and the nation’s labor movement have been anything but best friends. Unions were disappointed when the administration refused to restructure banks during the financial crisis. They were exasperated by its unwillingness to protect union members’ gold-plated health-care plans in the Affordable Care Act. Labor was angered by Obama’s support for for sweeping free-trade agreements and his delay in deciding whether to approve the Keystone XL pipeline. But on Monday, Secretary of Labor Thomas Perez sounded a much different note. Perez, who has emerged as one of the leading contenders to replace outgoing Attorney General Eric Holder Jr., began remarks at the National Press Club with what seemed to be a boilerplate narrative extolling the White House’s contributions to economic progress. (read article)

Anaheim Teachers Union Intimidates Their Members

Larry Sand, a former classroom teacher and president of California Teachers Empowerment Network, summarized it succinctly: “Ah, the commissar has spoken from on high!”

The “commissar” is none other than the president of the Anaheim Elementary Education Association, Kristen Fisher, who dispatched an email to dues-paying union members on Oct. 6.

It seems that Fisher is more than a bit peeved that members are rejecting the union leader’s endorsements made significantly prior to the close of election filing periods. Some members are taking to the streets to walk precincts for the candidate of their choice, former principal Roberto Baeza, who was not even invited to a screening interview by the union’s Political Action Committee charged with making recommendations for endorsement. Further exacerbating Fisher’s frustration was that these members had the audacity to wear their own union T-shirts while talking to voters about why they believed Baeza would be the better representative for students – as well as teachers.

Apparently, the wearing of T-shirts emblazoned with the union logo was just too much bucking of union status quo interests, causing Fisher to issue her directive – from on high – in a mass email blast to all members.

On Oct. 6 she issued the strident reprimand, writing in part:

“AEEA officially endorse(d) the candidates our high school counterpart (ASTA) endorsed. Please cease and desist engaging in activities that weaken our union – specifically, wearing AEEA T-shirts while walking for nonendorsed candidate(s). This is not about your freedom to support candidates of your choice. This is about our association, our union.”

It didn’t take long for members to challenge the reprimand, favoring the U.S. Constitution and First Amendment rights over Fisher’s order to stand down.

When asked about her reprimand, Fisher responded that she had “no concerns” about violating First Amendment rights. “This is about misrepresenting AEEA,” she argued. However, she admitted that AEEA has no policy on the rights of members to wear T-shirts with a union logo when campaigning for candidates other than those chosen by their own PAC.

Indeed, Frank Wells, California Teachers Association’s communications representative in Southern California also verified that CTA, with whom AEEA is affiliated, has no policy on the matter, even candidly expressing his view that Fisher’s email was a bit “extreme.” Nonetheless, he shared Fisher’s concern over the possibility of “misrepresentation” of the union when members campaign for nonendorsed candidates wearing the union T-shirt.

The leaked email, while pertaining to a local Anaheim school board race, raises implications of the rights of union members who in states like California are mandated by law to pay an annual membership assessment to the union to fund collective bargaining.

First Amendment rights have become a closely watched political and legal issue when funds are used for political candidates and causes which the members do not support. In fact, 10 California teachers, including lead plaintiff Rebecca Friedrichs of Orange County, have sued CTA over this issue. If victorious, Friedrichs will ensure that individual members will have the right to opt in to the union, rather than being forced to find a way to opt out – facing the wrath and recriminations of leaders like Fisher along the way.

Friedrichs’ case is currently before the 9th U.S. Circuit Court of Appeals with expectations that it will be heard by the U.S. Supreme Court next year. Justice Samuel Alito has opined in other cases that “no person in the country may be compelled to subsidize speech by a third party that he or she does not wish to support,” giving hope to the Friedrichs plaintiffs.

Meanwhile, AEEA members continue talking to voters about Baeza and their willingness to fight – as union members – to be respected, T-shirts and all.

About the Author:  Gloria Romero, a Los Angeles resident, served in the California Legislature from 1998 to 2008, the last seven years as Senate majority leader. Romero is the founder of the California Center for Parent Empowerment, established by in order to empower public school parents–especially those with children trapped in chronically underperforming schools–to understand and use the Parent Empowerment Act of 2010. This article originally appeared in the Orange County Register and is republished here with permission from the author.

The Challenge Libertarians Face to Win American Hearts

In California, the root cause of government waste, failed programs, high taxes, debt and deficits, regulatory abuse, civil rights abuse, and even corporate cronyism is public sector unions. Their agenda is intrinsically in conflict with the public at large because any government program, any government regulation, any tax and any new debt, benefits them regardless of the cost or benefit to society.

In California, public sector unions collect and spend over $1.0 billion per year in dues. Their combined political spending and lobbying easily exceeds a half-billion per two-year election cycle. They are by far the most powerful special interest in California. Businesses embrace cronyism because they have no choice. The unions rule. Businesses either make a deal with the unions who run the state and local agencies, so they can get a subsidy or favorable regulation, or they can fight an irresistible machine.

If you accept this premise, powerful allies are hard to find.

When searching for help in the cause of public sector union reform, one staunch and rising group are those individuals and organizations who characterize themselves as “free market.” Nearly all of them embrace libertarian ideology. Libertarian and fiscal conservative political agendas align insofar as they both want government to operate in a financially sustainable mode that is efficient and accountable.

When a liberal examines the libertarian agenda, however, their support typically peaks on the issues of civil liberties and then falls off the cliff on the economic issues. Good government liberals know something is wrong. They know the economy is rigged by cronyism. They know the government is corrupted by government unions. They want answers. Libertarians have an opportunity to provide those answers, but it won’t be easy.

Google any relevant term, “free market,” or “libertarian ideology,” and you’ll find endless discussions of libertarian principles. But if you don’t already believe in these principles, you aren’t likely to be converted. Here is an attempt at posing some questions – small, then larger – that libertarians have to answer with more than high-minded academic platitudes, if they want their movement to gain a wider following:

(1)  People working for large retail operations are not paid enough to survive on part-time work. So they have to take on two or more part-time jobs to support themselves and their families. But it is common now for large employers to use automated scheduling optimization programs that vary a worker’s part-time schedule from week to week. This makes it impossible for them to hold more than one job. Should any policy solution attempt to address this?

(2)  Automation is making it possible to remove increasing numbers of people from the workforce. Within a few decades, retail clerks, professional drivers, farmworkers – and a host of other jobs and professions ranging all the way to local sports and routine financial reporting – will be fully automated. Is the current wave of technology, one that has the potential to literally replace 50% or more of current jobs with machines, any different from past disruptions?

(3)  For the first time in history, the “population pyramid” of humanity is shifting from a population of primarily young people to one where the elderly constitute the largest percentage of individuals. One would think that automation displacing jobs would be good, since so many people will want to be retired. But what sort of market mechanism will enable all these retirees to survive with dignity?

There are endless permutations of these questions. Libertarians and conservatives are getting better at pointing out the difference between crony capitalism and competitive capitalism, or between engaging in casino finance and providing genuine financial services. They’re right that private enterprise almost always does a better job than government to provide cost-effective services. They’ve been explaining that the conventional notions of extreme left and extreme right are actually both authoritarian nightmares, and people are starting to listen. They need to emphasize more fully the win-win that is realized when businesses are permitted to compete to develop resources of land, water and energy, in order to lower the cost of living for everyone. But they don’t have all the answers. At least not yet.

Thrashing into the weeds of reality may not appeal to orthodox libertarians any more than it appeals to die-hard leftists. But that is the challenge that beckons, in order to debunk and defeat the rhetoric of the ruling class – the government unions and their crony capitalist allies – and to nurture the hopes and assuage the anxieties of millions of part-time workers, displaced workers, and aging workers.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Palo Alto's Proposed New Pension Tax – Oops, Hotel Tax

Fungible – definition – “able to replace or be replaced by another identical item; mutually interchangeable.”

On November 4th, Palo Alto voters will be asked to approve Measure B, with only a simple majority required for passage. According to a summary compiled by the California Taxpayers Association, “2014 Local Elections,”Measure B “increases the city hotel/motel tax by 2% and extends the tax to apply to online bookings, to fund general city services.”

According to an article in the Silicon Valley Business Journal entitled “Palo Alto 2% hotel tax hike headed for November ballot,” “About $4.6 million would be generated annually through a combination of the potential tax increase and funds generated by several new hotels slated to open in the city.”

Analysis of raw data downloaded from the California State Controller’s website, and available for review on the spreadsheet produced by the California Policy Center “Palo_Alto_2012_Stats.xlxs,” the total employer pension contribution made by the City of Palo Alto to CalPERS in 2012 was $20.7 million. That includes $1.9 million of pension contributions that are supposed to be made by employees via paycheck withholding, but which the city helpfully pays for them. On the spreadsheet ref. tab “Palo Alto Payroll SCO 2012.” column O, rows 2-12, “Employees Retirement Cost Covered” [by employer].

As documented here, and here, Palo Alto, like all CalPERS participants, will be required to increase their pension contribution by 50% between now and 2017, i.e., by around $9.0 million per year.

The hotel tax, if passed, will cover less than half of Palo Alto’s imminent contribution increases to CalPERS. Expect more tax increases, and fewer city services, or…

Palo Alto, like Watsonville, and nearly every other local entity that is asking voters to increase taxes this November, needs new taxes to help comply with the incessant, irresistible, slavering, escalating, parasitic, insatiable demands of CalPERS. They can say the money is for anything they want. But money is fungible.

As Carl DeMaio, former San Diego councilmember and current congressional candidate, once famously put it, framing policy options as either involving higher taxes or fewer services is a “false choice.” The third rail of California politics, still deadly to any politician, state or local, who moves beyond rhetoric to action, is to lower compensation and pensions. But it is an option. One more market downturn, and it will magically morph from an option to an imperative.

Here’s a summary of Palo Alto’s city worker average compensation:
–  Police – Base pay plus overtime $116,401, benefits incl. pension, $48,075, total $164,476.
–  Fire – Base pay plus overtime $132,011, benefits incl. pension, $49,326, total $181,337.
–  Other – Base pay plus overtime $90,306, benefits incl. pension, $36,140, total $126,446.

From the city website, here are highlights from Palo Alto’s “salaries and benefits:”
–  Fully paid employee and dependent dental and vision plan.
–  Fully paid life and disability insurance equal to annual salary and long term disability plan (not included in State Controller data).
–  Two to five weeks vacation, 12 holidays, and 12 paid sick days.
–  90% paid employee and dependent medical plan.

From data obtained by the California Policy Center’s Transparent California project, here are the average pension benefits for City of Palo Alto retirees since 2000 (i.e., since benefit formulas were enhanced):
–  For 30+ years of service, $91,348 per year.
–  For 25-30 years of service, $75,437 per year.
–  For 20-25 years of service, $53,946 per year.

To put this in perspective, while veteran employees of the City of Palo Alto are paying for 10% of their annual health care premiums, middle aged married couples working as private sector independent contractors with base incomes comparable to the average non-safety Palo Alto city worker are paying household premiums – either to individual health insurers or on the exchanges – including deductibles, of approximately $30,000 per year. Thirty thousand dollars. While their taxes then pay for 90% of these same premiums as they apply to their public servants.

To further put this in perspective, while someone working for the City of Palo Alto may retire after 30 years work with a pension that averages $91,348 per year, an independent contractor with comparable annual earnings will contribute 12.4% of their gross earnings to Social Security – more than virtually anyone in local government contributes to their pensions via withholding – in return for a projected Social Security benefit of around $25,000 per year beginning after 40+ years work. Yet their taxes are being increased to maintain these pensions for their public servants.

In Palo Alto, and in general throughout the Silicon Valley, the wealthy elites condone the public sector union greed that has lead to this abominable inequity. They are so rich they consider it churlish to question levels of compensation that to them, seem such a pittance. In turn, because their excessive compensation effectively exempts them from its consequences, public employees and their unions support the misanthropic policies of this elite – artificial scarcity in the name of environmentalism; causing higher prices for housing, land, energy and water.

The solution to the challenges of social equity is not higher taxes to benefit government workers. The solution is to lower the cost of living for everyone through resource development and capitalist competition. To do this, government workers and their unions will have to make common cause with ordinary private sector workers, instead of with the wealthy elites and their political cronies who reside in an insular and privileged world, filled with utopian visions and plans for everyone.

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Ed Ring is the executive director of the California Policy Center.

California's 2014 Local Tax Proposals – The Costly Alternative to Pension Reform

On November 4th, along everything else on the ballot, California’s voters will be asked to approve local tax measures. A list compiled by the California Taxpayers Association, “2014 Local Elections,” shows that across California’s cities and counties, local tax increases proposed include the following:

–  Tax increases requiring only a majority vote: 5 business taxes, 11 hotel taxes, 9 marijuana taxes, 2 “property transfer” taxes, 1 vehicle tax, 1 property “anti-speculation” tax in San Francisco, at least 10 “utility users taxes,” 38 proposals to either increase sales taxes or extend sales tax increases that were set to expire, and a soda tax.

–  Tax increases requiring a 2/3rd vote: 1 “miscellaneous” tax, 11 sales taxes, and 39 proposals to either increase parcel taxes or extend parcel tax increases that were set to expire, and 1 soda tax.

We don’t know why the soda tax in Alameda only requires a majority vote, while the soda tax in San Francisco requires a 2/3rds majority. There’s a lot of things we don’t know, and neither do the voters. As Jon Coupal, head of the Howard Jarvis Taxpayers Association, recently said, “it is no accident that local ballots are often bereft of opposition arguments.  City councils will authorize the tax to appear on the ballot but then have very short time frames for arguments.  Sometimes, taxpayers have only 3 days to gear up.”

Statewide measures, such as Prop. 30, the tax increase approved by voters in 2012, garner a lot of attention. But in California, most tax revenue is collected at the local level. A study released last year by the California Policy Center “How Big Are California’s State and Local Governments Combined?,” showed that 85% of California’s total state and local government spending is at the local level. Programs directly administered by the state only account for 15% of spending. Local government spending in California now totals well over $300 billion per year.

Adding measures to increase local government taxes at the last possible moment before the filing deadline has the practical effect of preventing a balanced ballot discussion of the merits of these tax increases. And invariably, the proponents of these tax increases are the people who will benefit from them – the public employee unions whose coffers are filled via automatic payroll deductions from taxpayer funded public workers. They are consistent advocates for higher taxes, advocacy backed up by campaign funding that dwarfs any other special interest. Even if they have the means, local merchants and developers rarely dare to challenge the public employee unions who represent the people they have to go to for permits and inspections. You can’t fight unionized city hall.

To appreciate just how effective government unions are at what amounts to perpetual campaigns to raise local taxes, take another look at the “2014 Local Elections” list from the California Taxpayers Association, and review the final results of the local tax proposals that were on the June 3rd ballot. Of the 32 parcel taxes proposed, 25 passed with a 2/3rds majority. Of the 11 sales taxes proposed, 10 passed with a 2/3rds majority. Of the 4 new fire taxes proposed, 3 passed with a 2/3rds majority. Out of 8 proposed “miscellaneous” tax increases, 7 passed, requiring only majority votes. And so on. Almost all of them passed – along with scores of local proposals enabling billions in new bond debt.

And for those handful of measures that fail, there’s always the next election. Once taxes are increased, they are very hard to repeal.

None of this is to suggest that taxes should never be increased. But voters should be aware of where most of the money is going. Another California Policy Center study, “How Much Do California’s State, City and County Workers Really Make?,” released in February 2014, using data from the State Controller’s Office, calculated the average pay plus benefits for California’s state, city and county workers. The findings (ref. Table 2) show that during 2012, in California’s cities, the average total pay plus benefits was $124,058; counties, $102,312; state agencies, $100,668. This in a state where the median household income in 2012 was $58,328.

There’s one more big piece to this story.

As documented in our UnionWatch editorial last week, one of the recently passed local sales tax increases – passed by Watsonville voters on June 3rd – is projected to raise $2.8 million per year to “replace police cars, add another team of paramedics, and hire more police officers.” But the scheduled increase to the annual required pension contribution for Watsonville is estimated at $2.4 million – using up nearly all of the proceeds from this new tax. There’s nothing unique about Watsonville’s situation. CalPERS has announced a 50% increase to their required pension contributions. Other pension funds in California, including CalSTRS, are following suit.

To distill this phenomenon into the most stark and simple terms possible – California voters are currently being asked to pay higher taxes so state and local government workers can continue to collect pensions and retirement health benefits that average well over $60,000 per year for non-safety employees, and around $100,000 per year for safety employees, after only 30 years of full-time work. The average Social Security benefit, after 45 years of work, starting at age 67, is $15,000 per year. Taxpayers may determine for themselves whether or not this is an equitable situation, or something that should be challenged.

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Ed Ring is the executive director of the California Policy Center

REFERENCES

Estimating America’s Total Unfunded State/Local Government Pension Liability (includes downloadable spreadsheet)
September 9, 2014

The Case for Adjustable Defined Benefits
July 31, 2014

Evaluating Total Unfunded Public Employee Retirement Liabilities in 20 California Counties
May 6, 2014

Evaluating Public Safety Pensions in California
April 15, 2014

How Much Do CalSTRS Retirees Really Make? (includes downloadable spreadsheet)
March 12, 2014

Comparing CalSTRS Pensions to Social Security Retirement Benefits
February 28, 2013

How Much Do CalPERS Retirees Really Make? (includes downloadable spreadsheet)
February 13, 2013

How Much Do California’s State, City and County Workers Really Make? (includes downloadable spreadsheets)
February 1, 2013

Are Annual Contributions Into CalSTRS Adequate? (includes downloadable spreadsheet)
November 8, 2013

Are Annual Contributions Into Orange County’s Employee Pension Plan Adequate? (includes downloadable spreadsheet)
August 30, 2013

A Method to Estimate the Pension Contribution and Pension Liability for Your City or County (includes downloadable spreadsheet)
July 24, 2013

How Big Are California’s State and Local Governments Combined?
July 12, 2013

Calculating California’s Total State and Local Government Debt
April 26, 2013

City of Irvine 2012 Compensation Analysis (includes downloadable spreadsheet)
April 8, 2013

How Lower Earnings Impact California’s Total Unfunded Pension Liability (includes downloadable spreadsheet)
February 18, 2013

City of Costa Mesa 2011 Compensation Analysis (includes downloadable spreadsheet)
October 3, 2012

City of Anaheim 2011 Compensation Analysis (includes downloadable spreadsheet)
August 29, 2012

City of San Jose 2011 Compensation Analysis (includes downloadable spreadsheet)
August 10, 2012

Watsonville, California – Another Tax That's Really Just For Pensions

The city of Watsonville lies nestled among some of the most verdant farmland on earth. Just a few miles inland from the Pacific Ocean, the moderate, moist air nurtures endless fields of strawberries, apples, fresh flowers, cauliflower, broccoli and artichoke. Fragrant forests of redwood carpet the Santa Cruz Mountains to the north; some of the most abundant and diverse marine life in the world spawn in the Pajaro estuary to the immediate south. Watsonville is surrounded by agricultural abundance and scenic beauty. But like many other agricultural towns in California, Watsonville’s economy has struggled. The average household income in Watsonville is $47,442 per year, well below the California average of $58,328, and the city’s 17.8% unemployment rate is nearly twice the state’s average.

None of this stopped Watsonville’s civic leaders from putting onto the June 2014 ballot a Public Safety Sales Tax, Measure G, which in an election with 30% turnout, squeaked through with just over the required two-thirds majority. Shoppers in Watsonville will now pay 9% sales tax.

As reported in the Santa Cruz Sentinel, “about $2.8 million is expected to be collected annually for seven years, and the city’s police and fire departments will split the money 60-40, respectively.” The problem with this assertion, however, is that $2.8 million is roughly how much CalPERS intends to increase Watsonville’s annual pension contribution.

According to posts on the respected financial website CalPensions.com, and shockingly unreported elsewhere, is the grim fact that CalPERS, who manages pensions for Watsonville along with hundreds of other California cities and counties, will be increasing its annual required pension contribution by 50% over the next few years. This is documented by CalPensions editor Ed Mendel in a 2013 post entitled “CalPERS rate hike: 50 percent over six years,” and reiterated in a report posted earlier this year entitled “CalPERS plans rate hike, third in last two years.” The key word in the title of Mendel’s 2nd post, by the way, is “plans.” The rate hikes actually imposed onto California’s cities and counties so far by CalPERS are negligible compared with what’s to come.

According to the California State Controller, $4.4 million was spent on pensions in 2012 by the city of Watsonville – not including employee contributions via payroll withholding. That is, the taxpayer’s share was $4.4 million. A 50% increase to this amount of required pension contribution is $2.2 million – leaving $400,000 from Measure G’s proceeds to actually replace police cars, add another team of paramedics, and hire more police officers. That’s not nearly enough to go around. Single moms and unemployed farmworkers, who can’t afford to drive to a city with lower sales taxes are going to be paying for pensions. That’s what Measure G really did.

At this point it’s relevant to expose just how much Watsonville’s police and fire personnel actually make, in a town where the per capital income $16,837 and the household income is $47,442. Using the raw data from the State Controller’s website, which permits eliminating from the calculation part-time or partial-year employees, the average full time police officer in Watsonville during 2012 made, including overtime, $105,817; the average firefighter, an even more impressive $123,287. And that does not include employer paid benefits.

When you include the cost of benefits – bearing in mind that the employer pension contributions are going to increase by at least 50% over the next few years, which is not reflected in these numbers – the average police officer in Watsonville made total compensation of $140,978 during 2012; the average firefighter, $151,156. Put another way, the average firefighter in Watsonville makes nearly ten times the per capita income in that town.

These numbers become even more visceral if you review the payroll information for Watsonville on the TransparentCalifornia.com website. Of the 100 top paying positions in Watsonville in 2012, 71 of them were either police or firefighters. Equally visceral is Watsonville’s pension data, also available on Transparent California, which includes fields denoting years of service and year of retirement. For city employees who worked 30 years or more, and retired since 2000 when benefit formulas were enhanced, the average pension in 2012 was $83,648. And this average pension amount does not include benefits with a value that averages around $10,000 per year, because CalPERS would not provide that information.

The average private sector worker living in Watsonville earns about one-third as much money per year in their active employment as the average retired Watsonville city worker collects in annual pension payments based on a 30 year career. And the average private sector resident in Watsonville can expect to work for at least 45 years, if they are lucky enough to have a job.

So why can’t Watsonville’s city employees take meaningful reductions in pay – along with city workers throughout this financially battered state? Why can’t they accept meaningful reductions to their pension benefits? Wouldn’t that allow sales taxes to be lowered instead of raised? Wouldn’t that permit more money to be spent on replacing worn out equipment and hiring new employees? Is this crass fixation on maintaining financially unsustainable union “negotiated” pay, dramatically in excess of private sector norms, all that public service means anymore?

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Ed Ring is the executive director of the California Policy Center

Governor Brown – The Bailout King

“What a salesman,” he said, mockingly. “I guess that’s what you learned … selling that stock that went south.”
– California Governor Brown, to challenger Kashkari, during televised debate Sept. 4th, 2014 (ref. SF Gate)

If anyone wants to know what the theme of Governor Brown’s attacks on GOP candidate Neel Kashkari is going to be over the coming weeks preceding the November 4th, election, his remarks in their debate last week would probably provide accurate clues. At least a half-dozen times, Governor Brown smeared Kashkari with accusations of being beholden to his banker friends on Wall Street. You know, those guys who shorted the investments of millions of small investors and turned America into a debtors prison? The sharks at Goldman Sachs? The banker bullies who took taxpayer funded bailouts and then collected billions in personal bonus checks? It will play well.

But Governor Brown is the king of taxpayer bailouts. Because pension funds, the biggest players on Wall Street, are getting bailed out by taxpayers. And over the corrupt courts who deny activists their chance to get pension reforms onto the ballot, or deny voters who have passed pension reforms the chance to enforce them, Gov. Brown presides. Over California’s obscure but powerful Public Employee Relations Board, an entity that consistently overrules common sense details of proposed pension reform and compensation reform, Gov. Brown presides. And before the billions in taxpayer sourced public sector union dues that deluge every policy debate, every press briefing, every lobbyist’s bank account, or politician’s war chest, Brown bows down, beholden, and says – “your wish is my command.”

California’s state and local governments owe an estimated $1.0 trillion dollars (ref. CPC Study), about half of it in the form of unfunded retirement healthcare and pension liabilities for government workers, the other half for bonds and short-term borrowing to finance projects whose costs were inflated by unions, or deficits whose root cause is government union greed. Every dime of that debt benefit a public sector union agenda; every dime of it was facilitated by bankers. Unions and the bankers worked together to con voters into approving the myriad measures that lead to this fiasco, or, even more likely, pressured beholden politicians behind closed doors into enacting them without voter approval.

And Governor Brown presides over this entire, gigantic, exploitative joint venture between government unions and financial firms. Who will bail out California’s state and local governments from a trillion dollars of debt?

Taxpayers.

Who does Brown think will pay for the bailout, when government worker pension funds report too many of their investments were comprised of “that stock that went south?”

Taxpayers.

Who does Brown think benefits from obscenely inflated asset prices that make life unaffordable except to the super rich? Pension funds benefit, of course! Without asset bubbles, the pension funds would collapse overnight, just like subprime mortgage derivatives did back in 2008. The same corruption. And the same victims.

Taxpayers.

What a salesman. What a hypocrite. Governor Brown, the taxpayer bailout king.

20140909a_Brown-350pxJerry Brown – the bailout king of California.

Across California this November, voters will decide on local tax measures promoted as necessary to “keep teachers in classrooms,” and to “protect public safety,” when invariably the amounts being raised are roughly equivalent to the amounts by which pension funds are planning to raise contributions. CalPERS intends to increase their required annual contributions by 50% over the next five years. CalSTRS needs an additional $5.0 billion per year, or more. Jerry Brown is no dummy. He can connect the dots, but he’d better make sure the voters don’t.

The pension bankers and their union allies hide behind rhetoric that is transparent in its falsity, with a press that is either too innumerate, too busy, too biased, or too scared to challenge any of it. CalPERS claims their investments help California’s economy, when 90% of their investments are made out of state, and 16% of their retirees live out of state. Union officials claim their pensions are “modest,” citing “averages” of $25,000 or less, but not revealing how those averages include millions of people who only worked a few years for state or local government and barely vested a pension. The truth: For recent retirees who benefit from the “enhancements” of the past few years, the average non-safety pension plus benefits in California is over $60,000 per year; for safety retirees it is about $100,000 per year.

And Brown leads this chorus of deceit with abandon, claiming last week that thanks to his pension reform (AB 340), “government employees will pay 50% of the normal contribution,” conveniently neglecting to explain the “normal contribution” is deliberately underestimated via using hyper-optimistic rates of return when making the calculation, and ignoring the fact that the unfunded liability (caused by years of insufficient “normal” contributions) requires a much larger “unfunded contribution,” for which public employees, their unions, and the politicians like Brown who are controlled by the pension bankers and the unions, expect taxpayers to bear 100% of the cost.

Bond issuers earn billions on fees to enable California’s state and local governments to accumulate unsustainable debt. Pension funds pay billions each year to financial firms to speculate on global markets in a desperate attempt to prolong the nominal solvency of unsustainable government pensions. And when these bills come due, and when the investment returns fail to meet expectations, taxpayers fund the bailout.

Neel Kashkari may or may not have some explaining to do. But Governor Brown, the bailout king, has no business calling anybody, anywhere, a tool of bankers.

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Ed Ring is the executive director of the California Policy Center.

Reinventing America's Unions for the 21st Century

Critics have suggested that leaders of the labor movement suffer from economic illiteracy that has made them the architects of their own demise. The unwillingness of unions to make concessions in the face of global competition starting in the 1960’s was a major factor in Americans losing millions of union jobs. In the present day, unions push for minimum wage hikes well beyond what inflation might justify (about $9.00 to $10.00 per hour), with “fight for fifteen” campaigns which, if successful, will carry the unintended consequences of higher unemployment and accelerated small-business failures. Today only about 7% of America’s private sector workers belong to unions.

One can also make the case that unions are becoming irrelevant because much of what they fought for is now enshrined in law. Labor laws protect workers from wrongful termination. OSHA standards ensure workplace safety. Social Security, Medicare, Medicaid, and a host of other social welfare programs all provide a safety net for the aged, disabled and unemployed. The Affordable Care Act, fraught with flaws that will hopefully either get repealed or replaced, at least guarantees anyone can purchase health insurance. Has the justification for unions in America largely withered away because of their successes?

What role, if any, should unions play in 21st century America?

The most difficult challenge to finding a consensus model for unions in 21st century America is the polarizing rhetoric that passes for discourse. Among pundits who are rewarded by the size of the audiences they can attract, or analysts and academics – of all persuasions – whose funding may hinge on how scrupulously they adhere to an ideological agenda, there are few incentives to search for common ground. But common ground exists.

The so-called left, embracing unions unconditionally, resisting nearly any sort of reform, needs to understand unions can exist, and even thrive, even if most of the proposed reforms were adopted. Right-to-work laws, for example, have actually resulted in rates of union membership increasing in some states. Right-to-work and non-exclusive representation are ways to both make unions more accountable and hence more relevant, at the same time as they fulfill some of the most cherished objectives of reformers.

Recent efforts by labor organizers to embrace new types of labor organizations, such as worker centers and partnerships with like-minded activist organizations, indicate growing recognition of the need for labor to evolve. The worker councils adopted in Germany – and rejected in America because of outdated NLRB restrictions – offer interesting elements of how unions may evolve. For labor leaders to pursue some of these new approaches at the same time as they accept right-to-work laws, and other reforms, might provide a common path forward.

On the other hand, the so-called right wing needs to better understand that the need for a labor movement of some sort remains urgent. The debate is just beginning over what may constitute an optimal political economy for Americans in an era of globalization, an aging population, unprecedented gains in productivity, and a scandalously overbuilt financial sector. Productive and competitive capitalism is good. Casino and crony capitalism is bad. Some level of government sponsored health and retirement security is good – incentive killing, bureaucracy enabling, efficiency destroying, financially bankrupting excessive entitlements are bad. Black and white world views may be comforting to those who hold them, and policies without underlying principals risk becoming rudderless monstrosities, but nonetheless, reality is nuanced.

Both left and right, but especially those on the left, need to recognize the clear distinction between a labor movement as exemplified by private sector unions – or whatever they may evolve into – and public sector unions. The unique problems of government unions are well documented; they elect their own bosses, they negotiate with an entity that is not required to earn a profit but instead compels taxpayers to give them money, they control the government which gives them the ability to intimidate their critics, and their agenda is inherently oriented towards bigger government regardless of whether or not bigger is better for the public at large.

A less understood but even more menacing aspect of public sector unions is their corrupting influence and symbiosis with the most powerful and monopolistic elements of the private sector. Large corporations benefit by working with government unions – their ability to comply with burdensome regulations allows them to eliminate smaller competitors. The financial sector makes hundreds of billions each year investing government union controlled pension fund assets, and by collecting fees to finance government deficits. Government unions and corporate monopolies alike benefit from social upheaval, because the adversity washes away critics and competitors. They are both threatened by disruptive innovation and limited government. To equate the labor movement of private individuals with the alleged labor movement of government employees is a misconception that, if not overcome, gravely threatens America’s prosperity and freedom.

A reformed, evolved labor movement, accountable to its membership, limited to the private sector, would have the ability to help reconstruct a centrist consensus in America – rejecting cronyism and embracing capitalist competition.

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Ed Ring is the executive director of the California Policy Center.

The Looming Bipartisan Backlash Against Unionized Government

Whenever discussing politically viable policy proposals to improve the quality of life in California, the imperative is to come up with ideas that strongly appeal to moderate centrists, since that is how most Californians would describe themselves. And there are two compelling issues that offer that appeal: making California’s system of K-12 education the best in the world, and restoring financial sustainability to California’s state and local governments.

While these two objectives have broad conceptual appeal, there is a clear choice between two very different sets of policies that claim to accomplish them. The first choice, promoted by public sector unions, is to spend more money. And to do that, their solution is to raise taxes, especially on corporations and wealthy individuals. The problem with that option, of course, is that California already has the highest taxes and most inhospitable business climate in the U.S.

The alternative to throwing more money at California’s troubled system of K-12 education and financially precarious cities and counties is to enact fundamental reforms. And these reforms, despite the fact that each of them arouses relentless, heavily funded opposition from government worker unions, are utterly bipartisan in character. They are practical, they are fair, and they are not ideologically driven.

Education Reforms:

  • Faithfully implement the Vergara Ruling – abolish the union work rules that (1) grant teacher tenure well before new teachers can be properly trained and evaluated, (2) protect incompetent teachers from dismissal, and (3) favor seniority over merit when implementing workforce reductions.
  • Streamline permitting for charter schools. These independent enterprises allow far greater flexibility to teachers and principals, creating laboratories where new best practices can rapidly evolve. Poorly performing charter schools can be shut down, successful ones can be emulated.
  • Enable school choice, so parents can move their students out of bad schools. Start by aggressively promoting and supporting California’s 2010 Open Enrollment Act, that empowers any parent whose child attends one of the state’s 1,000 lowest performing schools to move them to the school of their choice.

Financial Sustainability Reforms:

  • Roll back defined benefit pension formulas to restore viable funding and protect taxpayers. Adopting “triggers” that prospectively lower pension benefit accruals for existing workers and suspend COLAs for retirees, will preserve the defined benefit. One more market downturn will make this choice unavoidable – the sooner this reform is accepted, the more moderate its impact.
  • Reform public employee compensation. The average total compensation for California’s state and local government workers (taking into account all employer paid benefits including retirement benefits and annual paid vacations/holidays) is now more than twice the median compensation for private sector workers. Typically, approximately 70% (or more) of local government budgets are for personnel costs. Public sector compensation needs to be frozen – or even reduced – until the private sector can catch up.
  • Modernize and streamline public agencies. Introduce flexibility to job descriptions and eliminate unnecessary positions. Upgrade and automate information systems.
  • Improve financial management and accountability. The public sector needs to adhere to the same accounting standards that govern the private sector. If anything, public sector reporting should be more standardized, and faster, than what is required in private industry – currently the opposite applies.
  • Eliminate exploitative financing mechanisms: Outlaw capital appreciation bonds, revenue anticipation bonds, and pension obligation bonds, for starters. Nearly all of the “creative” financing instruments being foisted onto relatively unsophisticated city councils are short-term solutions that create long-term financial nightmares.

There are many other fundamental reforms that could rescue California’s K-12 educational system and rescue California’s state and local finances. But the ones listed here would be a very good start. And while there is plenty of room for debate over the particulars of each of these proposed reforms, there is only one powerful interest group that vigorously opposes all of them – public sector unions.

The reality of California’s unacceptable educational results and insolvent cities and counties will compel concerned citizens of all political persuasions to examine these issues over the next several years. And in that process, the inherent conflict between public sector unions and the public interest will become increasingly obvious. To survive, public sector unions will have to accept reforms that challenge their agenda. They will have to accept meaningful pension and compensation reform. They will have to accept smaller, more efficient workforces. They will have to embrace individual accountability and reward individual merit in public education and throughout public agencies. They will have to abandon their symbiotic relationship with financial predators that pump cash into bloated, unionized public agencies on terms that are usurious to taxpayers.

To the extent public sector unions are not willing to attenuate their power and adapt their agenda to the public interest, their recalcitrance will invite a bipartisan fury from a betrayed people. Even in California.

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Ed Ring is the executive director of the California Policy Center.