Posts

Unraveling California’s New “Fiscal Paradox”

California taxpayers are getting taken to the cleaners, but most of them are completely in the dark about how and why.

I will pose a quick question:  Does it seem strange that California has recorded record revenue increases, yet we also see a record number of tax increases and bond issuances on the ballot?

In other words, the state’s tax system is collecting massive amounts of revenues, record amounts, yet politicians are still asking for a record number of new tax increases.  For taxpayer advocates, it just doesn’t seem fair and seems very strange at first glance as to how this can even occur.

The truth of the matter is that California’s system of public finance is a complete train wreck and is set up such that no amount of tax revenues collected will ever be enough to satisfy “spending needs.”   The so-called baseline expenditure increases are on autopilot and deficit projections are generated despite record revenue increases, a trend projected in the Governor’s May Revise. 

In May, Governor Brown’s office said that state tax revenues were surging but projected significant future deficits in the near future, particularly in the event that the Prop. 30 tax extensions are not approved by voters.

A closer look at the state’s independent audit reports note that total state tax revenues have increased from $185.2 billion in 2012 to $250 billion in 2015—a $64.8 billion or 35% increase!  Total state, expenditures have increased from $195.6 billion in 2012 to $248.4 billion in 2015—a $52.8 billion or 27% increase. (Note:  Revenue growth is coming in equally as strong for 2016 if not even stronger, such as in the case of property tax revenues)

Prop. 98 education spending alone has jumped from $47 billion in 2011-12 to $72 billion in 2016-17—a 52% increase in education spending in only five years despite very nominal public school enrollment growth.

 

Prop. 98 spending has increased by 52% since 2011, and yet more tax revenue is needed?

 

Despite this huge windfall of roughly $65 billion in annual state revenue increases for 2015, over 2012—state Democrat politicians and the public employee unions are still telling us that we need a massive tax increase, namely Prop. 55, to avoid education budget cuts.

To put it simply, the state budget has received a $65 billion annual windfall since 2012, so why do the tax and spend interests so badly need to extend an $8 billion a year tax increase?

Don’t be fooled.  Prop. 55 and the “need” for additional taxes is a complete sham set up by California’s unaccountable and automated system of budgeting that ramps up state spending regardless of need and past budget windfalls. (Note: Similar trends are seen at the local level)

The primary culprit is Prop. 98 which requires that 55% of new revenues to be allocated to Prop. 98 education programs regardless of need or other priorities.  And then this spending is locked in, meaning that if revenues drop the following year, you effectively run up a deficit to Prop. 98 programs even though they just received a massive windfall in the preceding year or years.

The result is a ratchet effect on state spending, where it can only go up, never down, and any declines must be paid back in full regardless of any accountability mechanisms or other needs.  The only solutions to mitigate the problem would be to either provide Prop. 98 with nothing more than the minimum guarantee each year, or just suspend it every year into perpetuity, assuming an outright repeal cannot be achieved.

The state’s pension problem, particularly at the local level, is another major factor which has dramatically increased the cost of government, led to the crowding out of government services, and helped bolster the false narrative that somehow government needs more money because service levels are declining dramatically.

Much of the tax windfalls were also committed to other ongoing programs such as a doubling in Medi-Cal enrollment, increases in the cost of government from contract negotiations, and unmitigated pubic employee benefit cost increases, particularly retirement and health care.

Perhaps the most unfortunate thing is that over this same period of extraordinary revenue growth the state has failed to both invest infrastructure and curb the state’s addiction to skyrocketing debt which has recently increased to over $400 billion in 2016 for the State of California alone, according to the San Francisco Chronicle.

To sum up, despite these record revenue increases the state has failed to reduce deficit spending, invest in infrastructure and still supposedly needs billions of dollars in additional taxes from taxpayers, to add to the state’s record tax take in recent years.

To borrow a phrase from the state’s most prominent left-wing economist Robert Reich, this is “baloney” and every taxpayer needs to know it.

The only solution to this out of control spending is to shut off the faucet.  If the Democrat Legislature is irresponsible and cannot control its spending, we must limit the amount of tax dollars sent to Sacramento to a bare minimum.

With the cost of government at all time highs, and the value provided by government at all time lows, it is simply not cost effective to further build and sustain California’s big government.  Furthermore, the services that government does provide are provided at such high cost and low value, that it is simply not worth it to taxpayers to pay for these services.

The California Governor and Democrat Legislature have led the State of California down a dangerous fiscal path, very similar to what happened under Gov. Gray Davis in the early 2000s, but even worse.  All the revenue windfalls have been spent, debt stands at an all-time high and is increasing, and these are supposedly the good times, based on economic growth.

When the economic correction comes, this Democrat house of cards will collapse, leaving California taxpayers holding the bag.  And then the same Democrat and public employee union interests, the ones who are currently “crying wolf” for more tax revenues, will say we need to raise taxes even higher.

Don’t fall for this new “fiscal paradox”–it’s a complete sham.  Vote no on all new tax increases this fall to send Sacramento and Democrat politicians a message a message that you’re tired of being lied to and want irresponsible politicians to clean up their act.

About the Author: David Kersten is an expert in public policy research and analysis, particularly budget, tax, labor, and fiscal issues. He currently serves as the president of the Kersten Institute for Governance and Public Policy – a moderate non-partisan policy think tank and public policy consulting organization. The institute specializes in providing knowledge, evidence, and training to public agencies, elected officials, policy advocates, organization, and citizens who desire to enact public policy change.

UC Berkeley's 'income inequality' critics earn in top 2%

For Immediate Release
June 23, 2016
California Policy Center
Contact: Will Swaim
Will@CalPolicyCenter.org
(714) 573-2231

 

Income inequality at UC Berkeley worse than world’s-worst Haiti

SACRAMENTO, Calif. – Scholars from the University of California at Berkeley have played a pivotal role in making income inequality a major issue in 2016 political campaigns. But while they decry the inequities of the American capitalist system, Berkeley professors are near the top of a very lopsided income distribution prevailing at the nation’s leading public university, according to a new study by the California Policy Center.

You can read the full study here.

Marc Joffe, the study’s author, examined state salary data to determine that inequality among the 35,000 UC Berkeley employees is worse than that of Haiti.

Ironically, income inequality at Cal shows up dramatically in its Center for Equitable Growth (CEG), the university’s home to critics of income inequality.

According to the most recent data:

  • Center Director Emmanuel Saez received total wages of $349,350.
  • Its three advisory board members are also highly compensated Cal professors: David Card (making $336,367 in 2014), Gerard Roland ($304,608) and Alan Auerbach ($291,782).
  • Aside from their high wages, all four professors are eligible for a defined-benefit pension equal to 2.5% times final average salary times number of years employed.

All four are in the top 2% of UC Berkeley’s salary distribution, and that Saez is in the top 1%.

Says Joffe: “It could be that an effective researcher has to know his or her subject: thus to the study the top 1%, we suppose one has to be in the top 1%.”

Among Berkeley’s most prominent critics of income inequality is former Clinton Labor Secretary Robert Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley. Reich receives somewhat lower compensation than the four CEG economists, collecting $263,592 in pay during 2014. But Reich’s salary was likely not his only source of income in 2014. Reich makes himself available to give paid speeches through a number of speaking bureaus, charging a fee estimated at $40,000 per talk.

“If UC Berkeley economists are really opposed to income inequality and are concerned about low-paid workers, they might consider sharing some of their compensation with the teaching assistants, graders, readers and administrative staff at the bottom of Cal’s income distribution,” Joffe concludes.

ABOUT THE AUTHOR
Study author Marc Joffe is the founder of Public Sector Credit Solutions and a policy analyst with the California Policy Center. Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.

UC Berkeley’s ‘income inequality’ critics earn in top 2%

Scholars from the University of California at Berkeley have played a pivotal role in making income inequality a major political issue. But while they decry the inequities of the American capitalist system, Berkeley professors are near the top of a very lopsided income distribution prevailing at the nation’s leading public university.

Among the most prominent of these scholars is Robert Reich, Chancellor’s Professor of Public Policy at the University of California at Berkeley. Reich’s 2013 film, Inequality for All, is an indictment of a rigged U.S. economy that makes a select few richer while consigning the middle class to stagnation. A review of the film and Reich’s other work suggests that the economist and former Clinton-era Labor Secretary provided numerous talking points for Bernie Sanders’ high-profile – though ultimately unsuccessful – presidential campaign.

While Reich helped popularize the income inequality theme, much of the intellectual heavy lifting has been done by UC Berkeley economist Edward Saez and his colleagues at the university’s Center for Equitable Growth (CEG). Saez has been researching income inequality since 2003, when he co-authored a paper on the topic with Thomas Piketty, the French economist whose book Capital in the Twenty-First Century also played a key role in popularizing the income inequality issue. The pair continue to collaborate.

Since these Berkeley academics preaches, we wondered whether the university community also practices greater equality. To answer this question, we examined distributional equity at the university, relying on publicly available data.

Statistical Comparisons of Inequality

Social science researchers often measure income inequality with the Gini Coefficient – a calculated value that can range between zero and one. The higher the Gini Coefficient, the more unequal the country, municipality or community. If everyone in a population has exactly the same income, that group’s Gini Coefficient is zero.  By contrast, if one individual receives all of a community’s income (and everyone else receives nothing), the Gini Coefficient is 1.

According to World Bank statistics, the average country had a Gini Coefficient of around 0.36 in 2012, when data for 68 countries were available. In 2013, the coefficient for the U.S. was 0.4106 – roughly the same as it was under Bill Clinton in 1997. The country with the lowest reported Gini was Ukraine (at 0.2474) and the highest was Haiti (at 0.6079). Scandinavian countries are among the most equal (between 0.26 and 0.29), while Latin American nations dominate the high Gini countries (with several over 0.50).

Within the United States, the Census Bureau reports Gini coefficients for over 500 cities.  The latest data available are for 2014. The city of Berkeley’s Gini score of 0.5356 places it in the top 5% of U.S. cities for income inequality. In California, it ranks third of 133 – behind Davis (another city dominated by a UC campus) and Los Angeles. Internationally, city of Berkeley’s score is virtually identical to that of Colombia.

Public employee compensation data allows us to measure income inequality on campus. The State Controller’s Public Pay database contains salaries for all UC employees, indicating which campus each employee is on. The Gini coefficient for the 35,000 UC Berkeley employees in the data set is 0.6600 – higher than that of Haiti.

Getting Rich from Researching and Critiquing Inequality

Income inequality at Cal extends to the university’s inequality research arm, the Center for Equitable Growth mentioned earlier. According to 2014 data from Transparent California, Center Director Emmanuel Saez received total wages of $349,350. Its three advisory board members are also highly compensated Cal professors: David Card (making $336,367 in 2014), Gerard Roland ($304,608) and Alan Auerbach ($291,782). Aside from their high wages, all four professors are eligible for a defined-benefit pension equal to 2.5% times final average salary times number of years employed. It is also worth noting that all four are in the top 2% of UC Berkeley’s salary distribution, and that Saez is in the top 1%. It could be that an effective researcher has to know his or her subject: thus to the study the top 1%, we suppose one has to be in the top 1%.

Pricey Textbook

BOOK CLUB: Cal economics students are pounded by high-priced textbooks.

Robert Reich receives somewhat lower compensation than the four CEG economists, collecting $263,592 in pay during 2014. But Reich’s salary was likely not his only source of income in 2014. Reich makes himself available to give paid speeches through a number of speaking bureaus, charging a fee estimated at $40,000 per talk. He is also likely to receive some income from his books, movies and pensions from previous employers.

Reich is not the only senior academic who can avail himself of significant income aside from that provided by his university employer. Because teaching and publication demands on tenured professors are relatively modest, there’s time to earn extra income from consulting and writing textbooks. The latter can be surprisingly lucrative, since many college textbooks sell for over $200 per copy. Last September, the Cal bookstore offered an introductory economics textbook for $294. Lucrative opportunities to supplement one’s income with consulting fees and royalties are typically unavailable to a college’s administrative staff.

Highly Paid Coaches and Administrators

Aside from tenured professors, UC Berkeley also provides generous compensation for athletic coaches and administrators. The highest paid UC Berkeley employee in 2014 was Daniel Dykes who received $1,805,400 for coaching the California Golden Bears football team, which went 5-7 that year and did not make a bowl appearance. Dykes was followed closely by Jeff Tedford (at $1,800,000), the Bears’ former coach who was still on the payroll in 2014 despite having been relieved of his coaching responsibilities. The next five highest paid UC Berkeley employees were also coaches.

UC Berkeley Chancellor Nicholas Dirks was paid $532,226 in 2014, but a unique perk substantially boosted his effective compensation.

Dirks House

HE BUILT A WALL AND YOU PAID FOR IT: Chancellor Dirks’ residence with new $700k fence.

Like all UC Chancellors, Dirks is provided with a free residence. According to the San Francisco Chronicle, University House – now occupied by Dirks – contains 15,850 square feet of living and meeting space. Living on campus has not been an unalloyed benefit for Chancellor Dirks, however. The home has been attacked on numerous occasions by student activists. In response, the university recently completed a metal fence around the home at a cost of $699,000 – two and a half times over budget.

Dirks’ cash compensation was slightly lower than that of former UC President Mark Yudof, who co-instructed one class at Cal’s Law School in 2014, receiving $546,057 for his time. According to the Sacramento Bee, “Yudof benefited from a UC policy that allows high-ranking administrators to receive a year of pay if they are preparing to teach again.” After stepping down as president, Yudof took a one-year sabbatical, co-taught one class in Fall 2014 and another in Spring 2015, and then retired.

Tenured faculty and administrators at Cal have also been shielded from harsh discipline, even when they engage in sexual harassment. According to a recent report in the San Jose Mercury News:

Astronomer Geoff Marcy received a warning last year despite the university’s finding that he had serially harassed students over nearly a decade. Former law school dean Sujit Choudhry received a 10 percent pay cut but was initially allowed to keep his position after he was found to have sexually harassed his executive assistant. And former Vice Chancellor Graham Fleming — who stepped down last April amid allegations he had sexually harassed a staff member — quickly landed an administrative job as ambassador for UC Berkeley’s new Global Campus, a satellite campus in Richmond.

The three Cal employees cited received generous compensation in 2014. Marcy collected $217,861; Choudhry made $472,917 and Fleming received $404,625. More recently, Berkeley has taken stronger disciplinary measures in response to media attention and pressure from UC’s system President Janet Napolitano. Fleming was fired and Choudhry resigned in March.

Life for the Other 99%

High compensation for tenured faculty does not necessarily come with a heavy teaching workload. Instead, most of the teaching burden appears to fall on junior faculty and teaching assistants.

Introductory classes at UC Berkeley often have several hundred students. Although a faculty member gives the lectures and designs the syllabus, students functioning as teaching assistants, readers and graders handle most live interaction with course participants, review their homework and score their exams. Students fulfilling these roles may be in a graduate program, but are often juniors or seniors.

In Fall 2013, Cal’s Intro to Computer Science – CS 61A – had 1,098 registered students, exceeding the capacity of the lecture hall. The assistant professor conducting the course, John DeNero, recorded lecture videos for those who could not fit into the room. He told the student newspaper: “Almost all of the learning in computer science courses happens in the lab and when they’re working on projects. So if you don’t fit in the room, you can definitely still participate in all the important parts of the course.” Students taking the class had access to 19 teaching assistants and 15 readers. DeNero was paid $46,643 in 2014 – likely exceeding the amounts paid to the enormous assistant and reading staff who now receive around $14 per hour. Thus, one of the university’s most important services – orienting new students to the fast-growing field of computer science – was delivered by poorly paid staff, without any input from its highly compensated senior faculty.

Although the City of Berkeley has a higher minimum wage than the rest of the state, Cal is exempt from this municipal minimum. In late 2014, The East Bay Express reported that the university was paying hundreds of student workers less than the $10 per hour city minimum.  More recently, the university implemented a UC-wide Fair Wage/Fair Work Plan under which the minimum wage rose to $13 per hour in October 2015 with subsequent increases to $14 per hour in October 2016 and $15 per hour in October 2017. It should be noted that, unlike other minimum wage requirements, UC’s minimums apply only to employees working more than 20 hours per week, so it is possible that some student workers will remain below the City of Berkeley minimum, currently set at $12.53.

It is difficult to assess how little of the teaching burden falls on the shoulders of tenured faculty.  The University of California’s Annual Accountability Report (covering all 10 UC campuses) indicates that most instruction is provided by “full-time permanent faculty.” This designation includes assistant and associate professors who have yet to obtain tenure. Further, the university employs a misleading metric for reporting relative instructional burdens between full-time permanent faculty, lecturers, visitors, adjuncts and others. Teaching loads are shown in “student credit hours (SCH),” which is the number of students enrolled in a given course times the number of credits earned from that course. If a permanent faculty member gives the lectures for a 4-credit course attended by 1000 students, 4000 SCH are added to the full-time permanent faculty total even though most instructional activities in the course are performed by juniors, seniors and graduate students.

Relatively low-paid and heavily worked staff also keep many of Cal’s core functions running. Administrative staff faced a round of layoffs in 2011 and are now undergoing a further workforce reduction despite increasing enrollment numbers. Meanwhile, unrepresented staff (those not unionized) have seen minimal salary growth in recent years. Although administrative tasks – such as managing financial aid applications, administering grants applications and maintaining university software platforms – may seem less glamorous than research, individuals performing these functions often work much harder than tenured faculty while earning far less.

Conclusion

The University of California at Berkeley has a great reputation, and the school continues to earn its high standing with a mixture of world-class scholars, outstanding students and (at least some) great facilities.

To attract excellent academics and administrators, the university must offer competitive compensation packages. In some cases, these packages will draw truly outstanding people who go on to do excellent work for the university. In other instances, these packages amount to sinecures enabling high-status individuals to receive compensation disproportionate to their contributions.

In this respect, Cal is no different from a large, publicly held corporation. Companies offer big salaries to CEOs and other high-level professionals, sometimes getting their money’s worth and other times not. Just as it isn’t reasonable to expect a tenured professor or senior administrator to be paid in line with entry-level employees, we shouldn’t expect senior university administrators and tenured professors to be paid the same as work-study students.

While it is true that the compensation ratios between the highest- and lowest-paid employees are greater at many large corporations than at universities, there is an offsetting consideration. A very large portion of compensation at UC Berkeley and other public universities is paid by federal and state taxpayers through grants and financial aid. This is not the case for private companies – at least those that don’t sell to the government.

The hefty salaries and generous pensions awarded to Berkeley administrators, professors and coaches are funded by taxpayers – most of whom earn far less than these academic luminaries. So if UC Berkeley economists are really opposed to income inequality and are concerned about low-paid workers, they might consider sharing some of their compensation with the teaching assistants, graders, readers and administrative staff at the bottom of Cal’s income distribution.

We’re not saying income inequality is a bad thing; we’re not saying that Reich, Saez and other Berkeley professors should make less than they do, or that student teachers ought to make much, much more. In fact, there are reasonable arguments that income inequality is not only inevitable and even ethical, but that it’s also a generally positive feature of advanced economies.

We are saying there’s something unusual in the Berkeley phenomenon – the high-profile role of high-income earners in criticizing income inequality.

ABOUT THE AUTHOR
Study author Marc Joffe is the founder of Public Sector Credit Solutions and a policy analyst with the California Policy Center. Joffe founded Public Sector Credit Solutions in 2011 to educate policymakers, investors and citizens about government credit risk. PSCS research has been published by the California State Treasurer’s Office, the Mercatus Center and the Macdonald-Laurier Institute among others. Before starting PSCS, Marc was a senior director at Moody’s Analytics. He earned his MBA from New York University and his MPA from San Francisco State University.

ABOUT THE CALIFORNIA POLICY CENTER
The California Policy Center is a non-partisan public policy think tank providing information that elevates the public dialogue on vital issues facing Californians, with the goal of helping to foster constructive progress towards more equitable and sustainable management of California’s public institutions. Learn more at CaliforniaPolicyCenter.org.