Archives for March 2013

Stockton bankruptcy showcases results of union greed

From U-T San Diego:

Few non-locals pay much attention to the goings-on in Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000 in the San Joaquin Valley. But bondholders, taxpayers and government officials throughout the country will be listening to U.S. Bankruptcy Judge Christopher Klein’s expected ruling on Monday as he decides whether the city may remain in bankruptcy and pursue a plan that stiffs its bondholders.

If Klein sides with the city, then municipalities will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course – i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons that they went bankrupt in the first place. Bankruptcy will no longer be a policy of last resort. This should have an impact on bond markets.

(Read Full Article)

Photo courtesy Dougtone, flickr


Easter brings hope, chance for rebirth

From Vacaville Reporter:

On Sunday, thousands of Christians around the globe will celebrate Easter as Resurrection Sunday.

Christians believe that the son of God was crucified and, three days later, rose from the dead and offered a new beginning to all mankind.

(Read Full Article)

Anti-Tax Cut Bill Returns to CA Legislature

It’s alive. Similar to a bill narrowly defeated last year, SCA 6 is by Sen. Mark DeSaulnier, D-Concord. Taxpayer advocates fear the bill could make it difficult, perhaps impossible, to cut or limit taxes through the initiative process.

But SCA 6′s wording specifies it “would prohibit an initiative measure that would result in a net increase in state or local government costs,” except for bonds, from being put before voters as an initiative. Unless “the Legislative Analyst and the Director of Finance jointly determine” the initiative provides enough revenue to pay for higher costs.

The intent of the constitutional amendment, which would need two-thirds approval in the Legislature and majority support on a statewide ballot, is to eliminate so-called “ballot-box budgeting.” That’s the practice of using initiatives to determine how General Fund revenues are spent, rather than leaving those decisions to the Legislature. The most notorious example is Proposition 98, which mandates that about 40 percent of the discretionary budget go to K-12 schools.

SCA 6 would eliminate “the things we’ve had to deal with for the last four or five years, where we’ve gotten stretched,” DeSaulnier told the Senate Elections and Constitutional Amendments Committee on March 19. “Where so much of our budget is by formula as a result of the electorate not fully understanding sometimes the implications of some of the initiatives that they approve.”

Asked Committee Chairman Lou Correa, D-Santa Ana, “Mr. DeSaulnier, can you give me an example of an initiative recently proposed or passed that this would apply to?”

That question stumped DeSaulnier, who said, “I can’t just sitting here right now.”

SCA 6 support

Paul Smith, representing the Regional Council of Rural Counties, came to DeSaulnier’s rescue. Smith cited Proposition 36 in 2000. It moved many persons convicted of drug possession “out of the criminal justice system into other programs,” Smith said. “It had a six-year funding window in the initiative. Once that six years expired, now we’re left to honor the mandate of Prop. 36 without any funding. That’s been reduced in recent years by the Legislature because of our tight fiscal measure.”

Rural counties support DeSaulnier’s bill, Smith said, because “a lot of times ballot measures appear before the voters, they are approved, [and there’s] no funding source. Entities like the state and counties may have to make up the revenue and find a way to pay for the things the voters want. Other programs get squeezed. It puts counties, others in a very difficult position.”

State Sen. Loni Hancock, D-Berkeley, cited two other initiatives that would have been reined in by SCA 6.

“The poster child for this is Proposition 49, where you took millions and millions of dollars from the General Fund for a good cause, after-school programs,” she said. That was the 2002 initiative sponsored by Arnold Schwarzenegger to gain himself statewide political exposure a year before he ran for governor.

“Who could be opposed?” continued Hancock. “Another one would be $3 billion for stem cell research,” Proposition 71 in 2004; with interest, the payback amount is $6 billion. “It could be that the people of California would have said, ‘We don’t care if we have to close schools or if college tuition goes up, we think that stem cell research is the most important thing for us to be doing.’ But I think what tends to happen is that it’s a good cause, why not, we like it, and people vote for it. But they don’t realize that in a zero sum game where it takes a two-thirds vote to get any new sources of revenue, it means that something else that they may care more deeply about is going to have to be cut.”

SCA 6 opposition

But taxpayer advocates are more concerned about SCA 6’s impact on those who seek to use initiatives to cut or limit taxes.

“In theory this is a good idea,” David Wolfe, representing the Howard Jarvis Taxpayers Association, acknowledged to the committee. “As a fiscal Republican, these measures should be able to pay for themselves. I think we all want that. In practice the way it works out, though, I think is entirely different. Let me run through the litany of concerns that we have with this bill.

“SCA 6 states that any measure that results in a ‘net increase in costs’ needs approval by DOF and the legislative analyst. My question would be, first of all, define ‘cost.’ Would tax measures like Proposition 13 be a cost to the state due to the back-filling of ‘lost revenue’? When Prop. 13 was passed in 1978, that resulted in about $6-7 billion of revenue that the state needed to backfill out of the surplus that they had to local government. So would that be a cost? We believe that it would. So … we believe that important measures to us, including Prop. 13, [Proposition] 218 and [Proposition] 26 – all measures which we supported in the past — would no longer be able to qualify for the ballot.”

Wolfe also is concerned that DeSaulnier’s bill doesn’t allow increased costs from an initiative to be offset by spending cuts elsewhere.

“If this is accurate, we would be forced into a position where we would have to oppose important public safety measures such as Three Strikes and Marsy’s Law and Jessica’s Law,” he said. “Things that we would ordinarily not take a position on, but would now have to oppose because they would include a tax increase.”

Wolfe pointed out that SCA 6 would weaken the Legislature’s power of the purse by having special interest groups, rather than legislators, determine which taxes to raise to offset the costs of their initiatives. And he cited a 2010 study by USC professor John Matsusaka that asserts that concerns about ballot box budgeting are overblown.

“Contrary to the claims of many pundits, voter initiatives have not constrained the California budget to the extent that fiscal crises are inevitable,” said Matsusaka’s study. “I reach this conclusion by examining each of the 111 successful initiatives in the state’s history. For the 2009-2010 budget cycle, voter initiatives locked in about 33 percent of spending, most of which probably would have been appropriated even if not required, and placed no significant prohibitions on the two primary sources of state revenue – income and sales taxes.”

Wolfe added, “If you remove Proposition 98, that number drops to 4 percent. I know that it’s not really feasible and practical to suspend Prop. 98, and there’s probably opposition on both sides of the aisle to that decision. But the point is, the Legislature has the ability to untie their hands from this ballot box spending. So there’s plenty of flexibility that legislators have without this measure to control spending.”

Prop. 98 also can be suspended with a two-thirds vote of the Legislature.

The California Taxpayers Association also was concerned about SCA 6. “The measure’s definition of costs would apply to tax reductions, credits, exemptions, exclusions, federal conformity and other tax changes,” the organization wrote on its website. CalTax wrote to the committee, arguing, “Although requiring a mechanism to pay for new programs is appealing, giving power to either a legislative appointee (the legislative analyst) and/or gubernatorial appointee (the director of finance) to remove an initiative from the ballot sets a dangerous precedent. It has the potential to disregard important policy measures for manipulative political purposes.”

It failed last session

SCA 6 is identical to DeSaulnier’s SCA 4, which fell three votes short of the necessary two-thirds support in the Senate on Aug. 21, 2012 after Republicans balked.

Sen. Ted Gaines, R-Rocklin, said before the vote, “I’ve got challenges to the accuracy of the information provided by LAO and the director of finance. We are looking for a non-biased opinion on these initiatives, and I’m not clear that you’re going to get that. For instance, whenever a proposal comes forward on a tax cut and how that can accelerate growth within the economy, there’s no consideration for dynamic analysis by the LAO. So I think you’re going to get a jaded perspective as to what the fiscal impacts are on initiatives.”

DeSaulnier responded, “I do hear the concerns that the analysis won’t be robust enough. But I think that’s as good as we can get. And having the LAO, a well respected group, work with the Department of Finance will put more pressure on the people who submit these initiatives to make sure that there’s a more robust financial consideration.”

In last week’s committee hearing, DeSaulnier was more conciliatory, saying that Wolfe “makes some very good arguments, so I think there’s some room for tweaking.” That tweaking may include changes to the bill’s exemption for an initiative’s costs from the issuance, sale or repayment of bonds.

With the Democrats having gained a supermajority in the Legislature, chances for passage of DeSaulnier’s bill in this legislative session have improved dramatically. It received strong support from the committee last week, passing 3-1. It’s scheduled to be considered by the Senate Appropriations Committee on April 8.

(Dave Roberts writes for CalWatchdog.)

Happy Easter 2013!

The editors at California Political Review wish you a Happy Easter Sunday!

Get Ready for Court Funding Cuts in CA

The Los Angeles County Superior Court recently announced plans to eliminate 511 positions by June in a sweeping cost cutting effort to close an $85 million dollar budget shortfall by the beginning of the next fiscal year.

The Presiding Judge, David Wesley, said all of the cuts are necessary. Including cuts made over the past four years, the court has lost 24 percent of its employees. Meanwhile the workload continues to increase.

Nearly 50 judges and staff spent 5 months coming up with a cost-cutting plan. This involved caseload analysis, study of court facilities and discussions with attorneys and stakeholders. The cuts will result in court closures, higher court fees and longer waits for cases to be heard.

During the State of the Judiciary speech to state legislators this year, Chief Justice Tani Cantil-Sakauye pleaded with lawmakers to restore some of the funding. She stated that our court system, which is the largest in the country, is facing a “crisis in civil rights” because of the cuts.

In the near future, LA Superior Courts plan to close eight regional courthouses and create “trial hubs” for eviction, small claims, personal injury and other cases. The courts will also be eliminating their alternative dispute center, which provides arbitration, mediation and settlement conferences as an option to litigation. While they are at it, they are also going to reduce the use of court-employed court reporters.

These are serious cuts. California is a state with more than 1 million civil cases filed each year – and that does not even count our criminal cases or family law. Statewide, the funding for California’s court system has been cut by $1.2 billion – more than 24 percent – over the past five years. Without judges and courthouses, our civil justice system is unable to apply and interpret all the laws we pass in California. What’s more, with fewer judges and courtrooms, abusive lawsuits can further clog our court system and delay justice for those who deserve it.

These decisions will have impacts that last for decades. Adequate funding to our courts is critical and it behooves all of us to engage in this process.

(Tom Scott is the executive director for California Citizens Against Lawsuit Abuse. Originally posted on Fox and Hounds.)

Comcast tells NJ gun store owner that his ads can no longer show guns

The Sequ-Easter Bunny — Happy Easter!

Jimmy Carter was completely wrong on Korean troop withdrawal

North Korea and its sociopath twenty-something Communist Dictator, Kim Jung Un, the son of former Dictator Kim Jung Il, and the grandson of former Dictator Kim Il Sung, warns it is in a “state of war.”  The rogue country, officially considered the equivalent of a “terrorist” state by the U.S government, now possesses nuclear warheads, has tested a nuclear device, and has also successfully tested inter-continental ballistic missiles that could be capable of reaching American targets and interests in the Pacific Ocean, let alone its other neighbors and its South Korean opponents.

But while the U.S. military and our 28,000 or so troops in South Korea, and our allies are considering both their intelligence reports and what truth there is in the threatening rhetoric of North Korea, and have flown B-2 stealth bombers and steamed U.S. nuclear aircraft carriers to the region in a show of force, and as tensions rise, many of us might remember the repeated failures of the role played by Jimmy Carter on the Korean Peninsula, which have surely contributed mightily to the world’s tensions today, and the lessons to be learned from confronting a warmongering dictator in Korea with cotton candy.

Jimmy Carter, the failed American Democratic President, who in just four short years between 1976 and 1980 gave away the Panama Canal, presided over an inflation crisis, an energy crisis, an unemployment crisis, and the taking of American hostages in Iran and a botched rescue mission, who forced U.S. athletes to boycott the Olympics, who “de-recognized” the Republic of China on Taiwan as the legal democratic government of China and rendered that friendly nation and ally to lower than diplomatic status, and who was thrown out of office after one term by voters in favor of Ronald Reagan, was also wrong about something else: his campaign promise to withdraw all U.S. troops from South Korea.

The Military Intelligence Professional Bulletin, by Fred Hoffman, published in 2002 a newsletter detailing Jimmy Carter’s misguided determination to withdraw all U.S. military forces in South Korea.  Carter’s personal decision to extract the United States from protecting people in South Korea from North Korean tyranny reveals his very poor judgment in matters dealing with real human rights.  According to the Bulletin, (which I am drawing on in this piece) while campaigning for President as early as January 1975, Carter declared that if elected he would order the withdrawal of all U.S. ground forces from the Korean peninsula.  Less than a week after he was elected, in January 1977, Carter indeed issued orders to begin the withdrawal.  For the next two-and-a-half years, Carter fought the protests of Congress, America’s allies in Asia, and military intelligence, and actually withdrew 3,600 U.S. ground forces that had been protecting South Koreans.  Carter took these actions despite the fact that within just a few years, the North’s fellow Communists in nearby North Vietnam had broken the Paris Peace accords and invaded and conquered the Republic of Vietnam (South Vietnam).

Carter took his position on unilateral withdrawal disregarding the fact that military tensions remained high between North Korea and the United States. In 1968, North Korea seized a U.S. naval ship, the Pueblo.  In 1974, tunnels were discovered that were dug under the demilitarized zone between North and South Korea, dug by the North Korean communist government.  Clearly, Carter’s position had little justification from a military standpoint, or from the standpoint of standing up to international Communist aggression.  Unilateral withdrawal gained no corresponding peace gesture from North Korea.  Carter’s  position was to be a nonsensical pacifist; and by withdrawing U.S. forces, Carter was not only abandoning the aspirations for freedom of the Korean people and jeopardizing the stability of Japan, he was also doing North Korean dictator Kim Il Sung’s dirty work for him.  If Carter had his way, South Korea would most surely have been invaded by now without a fight from the United States, and millions more would be living under Kim Jung Un’s nightmarish Communist dictatorship.

During Bill Clinton’s presidency, yet another North Korean crisis developed over that country’s use and enrichment of uranium.  “Hot” diplomacy ensued and Clinton’s choice of a “special Ambassador” to reason with the North Korean Communist Dictator was…..Jimmy Carter, who came out of retirement to negotiate an agreement with the North Koreans that was supposed to limit their uranium use and enrichment to peaceful purposes.  Carter had his way that time, and his effort clearly proved to be yet another foreign policy disaster for our nation.  Because of Carter’s poor perceptions in diplomacy, and given North Korea’s test of a massive underground nuclear explosion on February 12, a wholly contrary result to Carter’s mission, his “special Ambassador” status can be seen as a complete failure.  Rather than stopping nuclear proliferation, Carter played the role of a patsy to a Communist Dictatorship, one that has now joined the “nuclear weapons club” of nations and today gravely threatens the free world.

What American policy needed when Carter was president was more troops, not less in Korea; and a stronger military hand.  Reagan proved that point in his policies, which helped topple communism in Eastern Europe and the former Soviet Union.  But Carter’s policies to the contrary lost four years in Korea.  And what America needed when it negotiated North Korean’s nuclear fission policy was a tough realist as the top negotiator actually dedicated to stopping nuclear proliferation, not a Jimmy Carter.

Carter’s utter failure on Korea is sadly a failure now affecting new generations of Americans, and Asians, born into freedom many years after he was thrown out of office, but who now must bear the brunt of his poor decisions.  It is a terrible legacy for a President.  Obama has much to learn from Carter’s failures on the Korean Peninsula, and may God help us in the days ahead.


LAO: CalSTRS Massively Underfunded

The state’s Legislative Analyst released another stinging report last week showing the California State Teachers’ Retirement System suffers $73 billion of unfunded pension debt. But CalSTRS is using doubtful figures to minimize the billions in debt.

As with most systems managed by the state of California, the pension rate of return practice is at odds with reality, as are the contribution rates by state employees.

CalSTRS is not accounting for expenses it should, instead pushing expenses off into the future. This is what creates the unfunded liability. But this cannot go on indefinitely.

“If the state’s current $1.4 billion annual contribution to CalSTRS were combined with the $4.5 billion additional contribution that may be necessary to achieve full funding in 30 years, the sum would exceed state spending on the University of California and California State University systems combined,” the LAO said. “The additional CalSTRS contribution alone would represent about one-half of state corrections spending.”

Same old story

What is one billion?

The numbers published in the LAO study are not new, and definitely not the result of the 2008 recession, as some say. “A couple of years ago that annual contribution need was $3.5 billion,” said Jack Dean, the publisher of “The 2008 recession only exposed the debt — it made it more dramatic.”

Dean said California’s pension debt is like when a tsunami hits — the winds suck the ocean water way out, exposing everything on the ocean floor. Then a massive wave comes in, crashes, and destroys everything.  ”The oncoming wave of public pension debt is even bigger than it seems,” the Pension Tsunami website says.

But as the California Taxpayers Association reported, “The retirement system’s defined-benefit program was fully funded in 1998. Then, under Governor Gray Davis, the state increased member benefits and reduced state contributions. By 2003, the unfunded liability was $23 billion.” That was well before the recession struck in 2007-08.

Money was promised that was just not in the fund. And the rate of return is suspect.

Pension math is ‘New Math’

“Discount rates, or investment rates of return, have a substantial impact on pension system funded status, defined as the ratio of assets to liabilities,” Stanford Professor Joe Nation found in his 2011 study, “Pension Math.” “Generally, pension systems strive for a funded status of 100 percent over the long term. At a 6.2 percent discount rate, equal to a 100-year rate of return for a hypothetical mix of equities and fixed income investments, the funded status for CalPERS [the California Public Employees’ Retirement System] is 58.3 percent. At the same rate, the funded status for CalSTRS is 60.6 percent; it is 72.0 percent for UCRP [the University of California Retirement Plan]. Even at a 7.75 percent discount rate, the funded status for CalPERS and CalSTRS remains below 80 percent. Private-sector pension plans are labeled ‘at risk’ if their funded status falls below 80 percent.”

Nation correctly identified solutions to the pension crisis that would include revenue increases and reforms to public employee pension systems. But both solutions are highly unlikely to happen any time soon.

“Revenue increases are unlikely to be approved absent pension reforms,” Nation wrote in the study. “Required pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.” This is also quite unlikely because it is politically unfeasible.

The LAO explained just how the CalSTRS pension system works:

For many decades, CalSTRS has administered its main pension program, which (1) receives contributions from members, school and community college districts, and the state; (2) invests those contributions; and (3) uses its assets to provide a specific monthly pension benefit to retirees and their beneficiaries. Retirement programs of this kind are known as Defined Benefit programs.

Estimated $5.7 Billion of Contributions in 2012-13. In 2012-13, school and community college district employees, districts, and the state are expected to contribute a total amount of $5.7 billion to CalSTRS. Contribution rates set in current law are as follows:

  • Employees ($2.1 Billion). Employees contribute 8 percent of their pay to CalSTRS’ DB Program.
  • Districts ($2.2 Billion). Districts contribute 8.25 percent of payroll to the DB Program.
  • State ($1.4 Billion). The state currently pays about 5 percent of teacher payroll (measured on a two-year lag) to the DB Program and a companion program—the Supplemental Benefit Maintenance Account—combined. (This percentage will grow slightly in future years, but not enough to address a substantial part of CalSTRS’ funding problem.)

The worse news

According to the CalSTRS actuary, the fund’s defined-benefit program is estimated to deplete its assets by 2044.

The LAO recommended restoring solvency to the CalSTRS retirement system before repaying some obligations in Gov. Jerry Brown’s “wall of debt,” yet more money the state owes. The LAO urged the Legislature to begin additional funding by 2014-15, and even more interestingly, recommended shifting funding for the CalSTRS program to teachers and local school districts.

Yet if California’s statewide pension systems are any benchmark, the funded ratio for the aggregated 24 statewide systems is 53.6 percent, as of June 2011, according to Nation’s study.

And the unfunded liability for the 24 systems is $135.7 billion.

Just as with CalPERS and CalSTRS, “[T]he 24 systems discount their liabilities at an expected rate of return, typically 7.75 percent,” Nation found. That number since has been dropped a little, to 7.5 percent. “This practice is at odds with that used in the private sector, and it is also at odds with standard practice in economics, which holds that pension liabilities are full-recourse obligations that must be paid without regard to the performance of pension fund investments. As such, each of the systems substantially understates liabilities and overstates funded ratios.”

Private sector funds generally expect only about 4 to 5 percent annual growth, at most. The state’s pension tsunami is rolling in and is just off shore.

(Katy Grimes is a longtime political analyst, writer and journalist, and CalWatchdog’s news reporter. Originally posted on CalWatchdog.)

Increasing Incentives for Americans to Save

A recent Wall Street Journal article, “Workers Saving Too Little to Retire,” reflected growing concern about Americans’ low levels of saving.  For instance, a new survey found 57% of workers have less than $25,000 in savings and investments, excluding their homes.

As is true throughout America’s interventionist policy approach, such concerns have triggered proposals for government to get us to save more.

Unfortunately, calling for government to fix the savings “crisis” misunderstands the problem.  To address low savings rates, a better approach comes from the Hippocratic oath–“First, do no harm.”  The only solution is to stop doing so much that discourages saving and investment.

A major policy-induced savings problem is that people have been led to substitute Social Security’s vastly under-funded promise of retirement benefits for funds they would have saved to finance their “golden years.”  Not only do those Social Security taxes and benefit promises crowd savings out, but because promised benefits are trillions of dollars greater than current rates of taxation can sustain, people anticipate being “richer” in retirement than they will actually be, reducing saving even more.  Those who save enough to provide well for their retirement also face income taxes on up to 85% of their Social Security benefits as well.

Social Security exacerbates the crowding-out problem of government budget deficits, which take funds that would have gone to investment and divert them to government spending. And with Social Security’s unfunded liabilities greater than the federal debt, it is a major problem.

Taxes on capital also reduce saving, by reducing the after-tax return on saving and investment.  These include property taxes that, while relatively small percentages of the capital invested, are sizable fractions of the annual income generated.  Then state and federal (and sometimes local) corporate taxes take further bites from income, reducing the after-tax return still more.  The implicit “tax” imposed by regulatory burdens must also be borne before earnings can go to investors.

Personal income taxes at up to three levels of government reduce saving even more.  Investment income left after other taxes is taxed again if paid out as dividends.  Earnings from saving and investment can also trigger additional tax burdens by triggering phase-outs of income tax deductions and exemptions.

If investment earnings are retained and reinvested, increasing asset values, they are taxed as capital gains upon sale.  And even increases in asset values that only reflect inflation are taxed as if they were real increases in wealth.

Other government policies also reduce saving.

Coverage from Medicare, whose unfunded liabilities are far greater than Social Security’s, reduces incentives to save for future medical costs.  Further, current earners, who must cover three quarters of the cost, are left with less income to save. Medicaid coverage of nursing home costs only after other assets are virtually exhausted undermines another savings motive.

Unemployment benefits, along with food stamps and other poverty programs, also reduce the need for a nest egg, “just in case.”  And as we have seen with any number of disasters, not to mention recent house price and mortgage problems, government steps in to assist those who “need” it, reducing the incentives for financial self-responsibility.

Estate taxes also reduce successful savers’ ability to pass on assets as bequests, eating into another major motive to save.  And these problems are only exacerbated by monetary policy that keeps interest rates, which provide people incentives to save, near zero.

Each of these government policies acts as a disincentive to save.  Together, they punish it heavily, reducing it to the point that many do not have any appreciable savings.  But fixing that saving problem doesn’t require more government programs to help us or force us to save more; it only requires that the government stop undermining our incentives to save in all the ways it does now.

(Gary Galles is a professor of economics at Pepperdine University in Malibu.)