Budget Deception: Weird Accounting Diminishes Accountability

BudgetThis week, after reaching agreement with Gov. Brown, the California Legislature will pass the state budget for the 2016-17 fiscal year. In so doing, it will meet its Constitutional deadline of June 15th.

A few weeks ago, this column attempted to provide some clarity to ordinary citizen taxpayers on basic state budget issues. This included an explanation of the difference between “general fund” expenditures and “special fund” expenditures. The column also reviewed California’s higher than average level of taxation and its legendary wasteful practices.

Those budget issues are confusing enough but there is something else going on that confounds even those of us who have at least some familiarity with government finance. Specifically, California has manipulated accounting rules that are, at best, confusing and, at worse, intended to conceal the true condition of state finances.

For most folks, figuring out the family finances isn’t all that difficult. Most people have a relatively stable and predictable amount of income they can spend and, on the flip side, they have a pretty good grasp of their expenses. Of course, even the best laid plans can be thrown off with the layoff of a breadwinner or, on the positive side, an unexpected bonus or inheritance.

But with government, predicting revenue can be tricky. Given this unpredictability, one would think that the state would want to base its accounting decisions on best practices. But that isn’t the case at all. Without going into all the wonkish details, the Department of Finance uses various “accrual” techniques to attribute revenue, not to the year in which it was received, but rather to a previous or future fiscal year depending on what political ends the administration seeks to achieve. Venerable Sacramento Bee columnist Dan Walters calls this “hide the pea” accounting and even the Legislature’s own Legislative Analyst has criticized the practice.

For all the funky accounting on the revenue side, it is much worse on the spending side. Here, under proper “accrual” rules, California should be counting the massive amount of debt we’re racking up differently. But with manipulative accounting, the state can actually spend more money than it receives in a given year and still report a budget surplus. This debt, as it relates to public employee pension obligations, is nothing more than spending tomorrow’s money today. But if it is spending money today, it should be counted as such.

David Crane is a Lecturer in Public Policy at Stanford University and president of Govern For California who has written extensively on California’s deceptive accounting practices. He points out that proper accounting could have stopped the largest non-voter-approved debt issuance in California history. That 1999 debt was not a bond. Rather, it was retroactive pension increase for state employees. Had that cost been “booked” the way businesses account for future liabilities, the legislature may very well have thought twice about undertaking such a huge financial burden.

The good news is that the days of deceptive government accounting may be numbered. The Governmental Accounting Standards Board has, for the last several years, been forcing government entities to finally begin reporting pension obligations and “Other Post-Employment Benefits” in a way that is both more honest and transparent. Also, the California Legislature now has as a member Senator John Moorlach, a no-nonsense accountant who predicted the Orange County bankruptcy several years ago. He, like Crane, is shining a light on California’s budgetary shenanigans. With a looming downturn in the economy, this enhanced transparency will be critical.

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.

Excessive State Budget Pushed Forward by Dems

BudgetThursday, Sacramento Democrats all voted in support of a budget that has an unknown cost, but is estimated to easily exceed the governor’s record-level budget spending that he proposed just two weeks ago. The Assembly’s current budget proposal is essentially a blank check committed to using record levels of taxes collected for a laundry list of bloated bureaucracies and wasteful projects.

This new budget proposal hides unilateral government plans to increase fees on every car owner and taxes on every cellphone user in California. Wasteful projects like the high speed rail are rewarded with $145 million of additional largesse. Furthermore, mismanaged bureaucracies such as Caltrans receive increased funding with zero oversight while California drivers experience worst in the nation traffic conditions.

On top of the $10 yearly vehicle registration fee hike and nearly 400 percent cellphone tax increase, some of the other highlights from the Democrats’ “Blank Check” Budget include a $145.2 million appropriation for high-speed rail, $2.1 billion for an “optional” Obamacare expansion, and an additional $3.2 billion for the recently raised minimum wage.
Undoubtedly, the constant flow of high profile businesses leaving California will only accelerate with the Legislative Democrat’s budget proposals. Costly new mandates like the $15/hr minimum wage and highest in the nation taxes have prompted CEO magazine to once again name California as the worst state in which to do business, a distinction it has held every year the survey has been conducted.

Simply put, California voters need to clearly understand that the Democrat agenda of higher taxes, unending regulations, and “blank check” government spending has led California off the cliff and resulted in massive debt, job scarcity, and the nation’s highest poverty rate. June and November elections are coming, and it’s time for Californians to stand up and just say no to Democrats and their free spending ways.

This piece was originally published by the Flash Report

What CA Taxpayers Need to Know About Gov. Brown’s New Budget

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

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

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

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

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

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

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

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

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

CA budget: Gov. Brown to shrink spending plan

As reported by the San Jose Mercury News:

SACRAMENTO — Repeating calls for fiscal restraint and seeking to lower expectations about how much more the state can afford, Gov. Jerry Brown on Friday released an updated $122.2 billion state budget that’s slightly smaller than the blueprint he pitched in January.

Tax collections outpaced the governor’s conservative estimates and forced him to increase the size of the general fund spending plan each of the last few years. This time, the $454 million revision came as Brown acknowledged that revenue growth had stalled.

The governor blamed the slump on an unexpected dip in the notoriously volatile capital-gains taxes collected by the state on the sale of stocks and bonds and said managing the state budget is “like riding a tiger.”

“The surging tide of revenue has begun to turn,” Brown said. “Quoting Aesop’s fable of the ant and the grasshopper: ‘It is best to prepare for the days of necessity.’ “

Blockbuster deals Brown struck with the …

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A Continuing Dependence On High Income Taxpayers

In releasing his proposed budget last week, Governor Brown warned of over reliance on the “volatile personal income tax which, as history shows us, drops precipitously in time of recession.” He further cautioned that changes in the income of a relatively small group of taxpayers can have a significant impact on state revenues.”

He’s not exaggerating. As California’s economy has recovered, it’s gotten more crowded at the top. The share of taxes being paid on ever higher income tax collections is concentrating even more the share of taxes on upper income taxpayers. This trend has accelerated since 2012’s Proposition 30 tax increase.

According to recently-released, but still dated, statistics from Franchise Tax Board, state income tax filers with more than $200,000 adjusted gross income increased their share of overall tax payments in 2012 to 67%, up from 59% in 2010. (This share is slightly lower than record 71% in 2013, due to unusual shifting of capital gains income to the 2012 tax year because of federal tax rate changes.)

The economy has only improved since 2012, so the steeply progressive income tax doubtlessly has pushed this tax burden even higher. With capital gains receipts at record levels, it is likely that upper-income taxpayers will again pay north of 70 percent of the state’s income tax this year.

At the same time, the income tax has become the overwhelming source for the state’s General Fund. This year income taxes account for 67.6 percent of all general revenues – a record high dependence on this revenue source. Translation: little more than 800,000 taxpayers (out of 39 million residents) will account directly for 47% of all General Fund revenues.

Tying state finances to such a small number of upper income earners is very risky. As the Governor warned, what goes up inevitably will come back down. This trend underscores the wisdom of California voters in adopting the Proposition 2 rainy day reserve in 2012, to hedge against further downturns. Lawmakers should do their part by keeping a tight rein on spending and improving the state’s investment climate.

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This piece was originally published by Fox and Hounds Daily

resident of the California Foundation for Commerce and Education.

CA Budget About HOW We Spend … Not Just How Much

Jerry Brown Legislature BudgetGov. Brown’s opening general fund budget gambit of $122.6 billion – total spending including bond and special funds is $170.7 billion – sets a new record for state government spending.  That the big increases are coming from the man many regard as one of the more sane of Sacramento’s top politicians does not bode well for taxpayers. After all, this is just a starting point.  Now the real fun begins with those less well grounded in economic reality starting the annual ritual of “making it rain” for their favorite projects and special interest employers.

To the governor’s credit, he is paying attention to paying down debt and strengthening the state’s rainy day reserve, a wise move considering that state revenue is highly dependent on top earners and is thus very vulnerable to an economic contraction.

Still, leading Democratic lawmakers want more – a lot more.  They are already complaining that that the budget does not spend enough on early childcare programs, grants to families on welfare, or provide more money for affordable housing.

Let’s concede at the outset that Californians have widely divergent views about how much money should go to all the various things government does. For example, there is a legitimate debate about how much money we, the taxpayers, should be paying to deal with the water crisis. Or how much for K-12 education? Prisons?  The list is fairly extensive.

But too often we neglect a very important topic when it comes to spending. That is, are we actually getting value for our tax dollars?  Per pupil education spending is important, but a poor indicator of educational outcomes. Total spending on prisons is irrelevant if we are releasing dangerous criminals back out on the street. Californians are angry at traffic congestion, but what good is more transportation spending if it doesn’t actually help people get to where they want to go? Californians are sympathetic to the needs of the poor, but are justifiably outraged when needed assistance fails to get to the truly needed and, instead, is used to buy luxury goods or pay for expensive vacations.

We know that Governor Brown is capable of recognizing waste, fraud and abuse. Just a few years ago he put forth a very credible 12 point pension reform plan that would have corrected most of the pension abuses in California. Regrettably, except for dealing with the most obvious of abuses, the reforms were shelved due to intense pushback from public sector unions. This means that the ever increasing percentage of the general fund budget going to address pension obligations is more than it needs to be.

Taxpayer advocates are constantly told that the amount of tax dollars lost to waste, fraud and abuse is but a tiny fraction of government spending. To be blunt, we don’t believe it – and mounds of evidence supports our disbelief. Even the Los Angeles Times several years ago pegged Medi-Cal fraud in the hundreds of millions of dollars.

To understand why more focus in the budget process should be on oversight, the observations of Nobel Prize winning economist Milton Friedman are instructive. He noted that there are four ways people can spend money:

  1. You can spend your own money for yourself. (Being careful both about how much you spend and on what you buy);
  2. You can spend your own money for somebody else. (Being careful about how much you spend but less careful about what you buy);
  3. You can spend somebody else’s money for yourself. (Being careful about what you buy but less careful about how much you spend); and
  4. You can spend somebody else’s money for somebody else. (Where you care less both about how much you spend and what you buy).

Friedman’s thesis is that what government does is spend money in the fourth way. And that is why any discussion about the California state budget needs to include the question of whether taxpayers are getting value for the hard-earned dollars they send to Sacramento.

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.

Originally published by at HTJA.org

Brown Cautious in 2016/17 Budget Proposal

brown prop 30 california budgetChanneling philosopher George Santayana (“Those who cannot remember the past are condemned to repeat it”), Gov. Jerry Brown presented his budget yesterday looking to the future by considering the past. Warning that budget writers “put out of their minds” thoughts of recessions that could cripple state budgets, he vowed not to repeat past mistakes of building budgets that cannot be sustained in difficult economic times.

Brown offered a chart that showed the rollercoaster budgets over the last decade-and-a-half with big budget hits from the dot-com bust and the mortgage crisis. Brown said using the budget history as a template, his team predicted the effects of another budget shortfall, which could happen soon. The average economic recovery period is five years, the governor said, and California is well beyond that point now.

Presenting a chart that showed recent deficits in the red, to prevent future large deficits Brown said, “If you do what I want” there would be less red on a chart during the next recession.

Warning legislators against creating new programs that will continually require state funding—even if the ideas behind the programs are noble — Brown said, “Too many goods, too quickly, become bad.”

Will Brown’s warnings be heard by legislators?

Maybe. With the change in the term limit law, legislators will have more time to serve in the capitol. Actions they take now they would have to live with in the coming years (as long as they are re-elected).

Still, majority Democrats and interest groups plan to test the governor over budget priorities. Brown seemed prepared to confront new demands. “This is not a candy store that you can pick out what you want.”

Some groups would not bother with debating issues in the legislature but are planning to take their proposals to the voters via the initiative process.

Governor Brown was asked about a number of proposed initiatives. While he said he did not want to comment on initiatives, he did, dropping boulder-sized hints of what he was thinking on some prominent potential ballot measures.

On the Proposition 30 income tax extensions, Brown cited a “fatal flaw” in the measure by stipulating that none of the tax revenue collected by the tax extension would end up in the rainy day fund. (Brown’s budget is adding $2 billion to the fund bringing it up to 65% of its constitutional mandate.)

The governor in response to a reporter’s question said that Prop 30 could make a future budget deficit worse because the tax measure relies so heavily on high-end income taxpayers, who see great drops in their capital gains during recession.

On the minimum wage, the governor pointed out that because the state increased the minimum wage a dollar on the first of the month, the budget had to set aside an additional quarter-of-a-billion dollars from the General Fund to cover state workers. Should the $15 dollar-an-hour minimum wage ballot proposal become law that would cost the state an additional $4 billion. The money has to come from somewhere, Brown said.

Addressing the $9 billion statewide school bond already qualified for the General Election, Brown said much of the money would end up with affluent school districts. It is not well targeted, he said, arguing that the legislature can do a better job than the “developers” who put this together.

Originally published by Fox and Hounds Daily

Gov. Brown budget plan boosts spending but Democrats seek more

As reported by the Associated Press:

SACRAMENTO, Calif. (AP) — On its face, Gov. Jerry Brown’s proposed $122.6 billion California budget plan would seem to please Democratic interests by pumping billions of new dollars into public schools, health care for the poor and public infrastructure, even as it bolsters the state’s rainy day fund.

Brown touted his income tax credit for the poor, a cost-of-living increase for the elderly, blind and disabled and more funding for universities and colleges when he laid out his general fund plan Thursday. He also urged fiscal prudence, calling for the state to put $2 billion more than legally required into its rainy day fund, bringing it to $8 billion by the end of fiscal 2016.

“You’ve got to plan for the down and level that out,” Brown said at a news conference, pointing to a chart showing the state’s boom-and-bust revenue history. “That’s what I’m trying to do in the budget.”

The Democratic governor’s general fund proposal marks the first step …

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Despite California’s budget surplus, unions eye tax hikes

As reported by the Los Angeles Times:

Here is one thing for California to be thankful for: The state treasury is overflowing with tax money.

Long gone are the dark years of multibillion-dollar deficits — $42 billion in 2008 — and sharp cuts in state services, especially healthcare for the poor and education.

Credit the recovering national economy. Gov. Jerry Brown also gets a high-five for holding big spenders in check. But the governor’s 2012 voter-approved, soak-the-rich tax hike was a crucial budget healer.

The nonpartisan legislative analyst’s office reported last week that the state’s tax take for the current fiscal year is expected to exceed earlier estimates by $3.6 billion. And by the end of the next fiscal year, the state is on track to have …

Click here to read the full article

“Myths vs. Facts” Propaganda Will Not Change Pension Reality

California’s largest state/local government employee pension system, CalPERS, has posted a page on their website called “Myths vs. Facts.” Included among their many rather debatable “facts” is the following assertion, “Pension costs represent about 3.4 percent of total state spending.”

This depends, of course, on what year you’re considering, and what you consider to be direct cost overhead for the state as opposed to pass-throughs from the state to cities and counties. But CalPERS overlooks the fact that most of California’s government workers who collect pensions do not work for the state, they work for cities and counties and school districts. As can be seen on the “view CalPERS employers” page on Transparent California, there are 3,329 distinct employer retirement pension plans administered by CalPERS, and the vast majority of these are not state agencies paid from the state budget, but local agencies.

In a study earlier this year, “California City Pension Burdens,” the California Policy Center calculated 2015 employer pension contributions as a percent of total revenue for California’s cities to be 6.85%, more than double the amount CalPERS implies is the average pension burden. But this hardly tells the whole story, because CalPERS is systematically increasing the amounts that their clients will have to contribute as a percent of payroll, and hence, as a percent of total revenue.

UnionWatch has obtained budget documents from Costa Mesa showing how the pension contributions as a percent of payroll will grow between their 2014/15 fiscal year and 2020/21. Over the next six years, as the chart below shows, Costa Mesa’s total payroll is projected to grow from $50.1 million to $54.6 million. Their pension contribution, on the other hand, will grow from $23.2 million to $33.0 million. That is, their pension contribution as a percent of total payroll will increase from 46.3% of payroll today, to 60.4% of payroll in 2020.

Pension chartCosta Mesa’s pension burden as a percent of payroll is a bit higher than average, but not much. And in terms of the percentage increases to pension contributions announced by CalPERS, they are typical. California’s cities, based on CalPERS announced pension increases, can expect to add another 15% of payroll to whatever amount they are already sending to CalPERS each year.

For every dollar they pay their employees in salary, should California’s cities be sending, year after year, $.50 cents or more to CalPERS? That’s the best case. It assumes that CalPERS will continue to be able to realize annual returns on investment of 7.5%, on average over the next several decades. It also assumes they’ve got the demographic projections correct this time, and won’t have to contend with the otherwise happy eventuality of people living longer than their current projection of approximately 80 years. These are big assumptions.

And how much of this fifty cents (or more) on the dollar do the employees themselves pay as a percent of withholding? In many cases, up until recently, they paid nothing. Or if they did pay via withholding, at the same time as they became subject to that requirement, they received a raise to their overall salary of an equivalent amount. But under California’s 2012 Public Employee Pension Reform Act, employees will gradually be required to pay more for their pensions – with a ceiling of 8% for regular employees, and 12% for public safety employees.

If they paid the maximum via withholding, for a miscellaneous employee in Costa Mesa, that 8% equates to a 4-to-1 employer match today, rising to a 5-to-1 matching in 2020. Similar employer matching ratios will apply for public safety employees. How many companies, anywhere, provide 1-to-1 matching, much less 2-to-1, or more? 5-to-1 matching? It is unheard of. For good reason – it is absolutely impossible for a private company to afford this in a competitive economy.

Returning to the Myths vs. Facts page posted by CalPERS, they also assert that “The average CalPERS pension is about $31,500 per year.” This is profoundly misleading. It is based on the assumption that every CalPERS retiree worked a full career in government. Returning to the CalPERS Employers page on Transparent California, one can see a more accurate estimate of the “average pension,” because it is limited to the average for retirees who put in at least 30 years of work. Take a look. For Costa Mesa, the average 2014 pension for a full career retiree was $91,805.

If our cities could afford this, nobody would care, but they cannot. If Social Security, which withholds benefits until a participant, typically, has worked 45 years, could afford to be equally generous, nobody would care. But the average Social Security benefit is around $15,000 per year and even at that pittance, without major restructuring it will go broke.

One can debate forever regarding how much of a premium public employees should receive over private sector workers because they’re, on average, more educated, or take more risks in their jobs. But as it is, taxes are going up to pay pensions and benefits to government workers that are by any objective standard many times greater than what private citizens can ever hope to achieve. No premium, however much deserved on principle, should be this big.

The insatiable demand by CalPERS and other government pension systems for more money to keep these pensions intact does more than create financial stress to our cities and counties. It exempts public employees from the economic challenges that face everyone else. It takes away the sense of shared fate between private citizens and public servants. It undermines the social contract. It exposes a self-dealing, hidden agenda behind all new regulations. It erodes the credibility of laws, ordinances, codes, because perhaps they are merely there to generate revenue.

CalPERS and California’s other government pension systems have the financial wherewithal to lobby and run PR campaigns that dwarf that of reformers. But myths and facts are not defined in press releases. They are defined by reality. The reality is that California’s pension funds have increased their required contributions as a percent of municipal budgets by an order of magnitude in just the last 15-20 years, and there is no end in sight. If and when they can no longer seize public assets to force payment, bully compliant judges to overturn reforms, or find enough money from new taxes to save their financially shattered systems, they are going to have a lot of explaining to do – not only to the beleaguered taxpayers, but to their own members.

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