Brown’s Budget Sends Message to UC

January 11, 2015 By James Poulos 2 Comments

Fresh from his historic inauguration to a fourth term as governor, Jerry Brown unveiled his proposed 2015 budget with a Friday press conference that swiftly attracted reactions from Sacramento and beyond. All told, Brown envisions a general fund totaling $113.3 billion. It’s an eye-popping figure to some, but a relatively modest one for California observers who have watched Brown curb the excesses of his party’s more profligate wing.

Amid rampant speculation that he would make up for this winter’s embarrassing loss on the University of California tuition-hike issue, Brown made education one of the centerpieces of his approach — giving UC more money, but not as much as they sought. It was a characteristic maneuver, showing how Brown’s main challenge in his final term will involve placating big-budget Democrats without drawing the ire of Republicans focused in a pre-election year on economic growth.

But it also can be seen as just an opening salvo in his battle with UC President Janet Napolitano, who wants to raise tuition 28 percent over the next five years.

Feast or famine?

The college controversy surrounding the UC budget took center stage during Brown’s presentation. Not only was his reputation on the line. Last year the Board of Regents secured itself a raise while hiking student tuition.

But Brown’s basic governing strategy went to work. He offered UC $120 million more for the year. From his standpoint, the allocation was generous, with some other parts of the government in Sacramento receiving no increases at all.

But for UC, it was a miserly, even retaliatory, gesture. As the Fresno Bee reported, Napolitano is on record claiming that Brown’s sum isn’t adequate to keep up UC’s current level of quality.

In fact, Brown’s dig at UC went deeper, as shown in K-12 and community college spending. “Brown’s proposal includes a $2.5-billion funding increase for schools and community colleges, the result of higher-than-expected tax revenue,” reported the Los Angeles Times.

The lopsided approach to funding schools appeared to do what Brown had hoped — tamping down criticism despite leaving the door open for a renewed battle with the University of California.

In a quick roundup of reactions from Democrats, the Sacramento Bee found a common theme: praise for the K-14 figure, paired with somewhat muted criticism on the subject of increased social services spending. Tom Torlakson, the union-backed Superintendent of Public Instruction, gave Brown “an ‘A’ for K-14 education,” although he paradoxically suggested “we still have a long way to go.”

State Sen. Tony Mendoza, D-Artesia, called himself “extremely pleased” with Brown’s $8 billion allocation. While Assemblyman Jim Cooper, D-Elk Grove, called the budget “great news for California’s kids” and suggested legislators only “prudently examine restoring cuts” to what he called “vital social services.”

Courting Republicans

Although GOP power in Sacramento is still a shadow of its former self, Brown indicated through his budget that he hopes to avoid a full-blown conflict with Republicans on fiscal-responsibility issues. Calling California’s financial situation “precariously balanced,” he indicated his desire to “avoid” the “boom and bust” of budgets in years past.

Warning against “exuberant overkill,” he gave Republicans a rare opportunity to offer measured praise without showing weakness. As the Los Angeles Times observed, Brown pointedly excluded funds that would provide Medi-Cal to unlawful and undocumented immigrants — a measure currently under consideration in the Legislature. Further, he vowed he’d work together with both parties to address California’s basic infrastructure problems, including Republican grievances like state roads.

Assembly Republicans reached by the Bee struck a common theme resonant across the GOP: Brown’s budget could be taken seriously, even if it was a disappointment. Melissa Melendez, R-Lake Elsinore, and Republican Leader Kristin Olsen, R-Modesto, both emphasized the state’s need for a plan for economic growth.

With voters approving the recent Republican-backed rainy day fund, Proposition 2, and Brown willing to sustain the reserve, Republicans have reason to believe putting careful pressure on Brown over the course of this year could pay dividends.

This article was originally published by CalWatchdog.com

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Brown’s 4th Inaugural Looks to CA Past, Future

January 6, 2015 By John Seiler 1 Comment

Gov. Jerry Brown’s unprecedent fourth, and final, inaugural address had an aura of “Back to the Future” about it. Given at 10 a.m. this morning before the assembled Legislature, he looked back to his first inaugural address 40 years ago; and to the gubernatorial inaugural in 1959 of his father, Pat Brown.

He also recalled, among other things, “the discovery of gold … the Transcontinental Railroad, the founding of great universities … oil production … the State Water Project.” The latter was a singular accomplishment of his father.

These were echoes of the items on his own agenda, including, “We are leaders in renewable energy and efficiency … we are building the nation’s only high-speed rail system … we are confronting the drought and longer-term water issues.”

He added that he helped push through Proposition 1, the $7 billion water bond. “And I’m proud to report that as a result, by the end of the year, we will be investing in long overdue water projects,” he said.

For any governor, the primary issue is the state budget. On Friday, Brown will issue his budget proposal for fiscal year 2015-16, which begins on July 1. He looked back at the parlous state of the budget when he took over the governor’s office four years ago, “Then, the state was deep in debt – $26 billion – and our unemployment rate was 12.1 percent. Now, the state budget, after a decade of fiscal turbulence, is finally balanced – more precariously than I would like – but balanced.”

Budget limitations

This included soon making “the last payment on the $15 billion of borrowing made to cover budget deficits dating back to 2002.” He was referring Proposition 57 from the March 2004 ballot, part of the program of Arnold Schwarzenegger, elected governor five months earlier in the famous recall election of Oct. 2003, initiated to patch up a $40 billion budget deficit.

At the time, state Sen. Tom McClintock (now a U.S. representative) and others warned Prop. 57 delayed needed cuts to the budget and saddled future budgets with its repayment. That proved the case when the Great Recession hit in 2008-09 and radical budget-cutting was needed, including to pay for Prop. 57.

Also in 2004, Schwarzenegger pushed Proposition 58, the California Balance Budget Act, a rainy-day fund to cushion future budget deficits. It was sold by Schwarzenegger as a guarantee Prop. 57’s bonds would not just be used for future spending. But Prop. 58 proved unenforceable.

In today’s address, Brown touted his own Proposition 2, which voters passed last fall. He said his new budget will include “saving $2.8 billion in the state’s new constitutionally protected Rainy Day Fund.”

Whether Prop. 2 proves durable, or falls to future budget pressures the way Prop. 58 did, remains to be seen. But after Prop. 2 was passed, “S&P raised the state’s credit rating from A to A-plus, citing the stability offered by Proposition 2,” reported the Sacramento Bee.

Pension reform

The biggest threat to balanced budgets remains the state’s pensions. Brown said:

“We have to face honestly the enormous and ever growing burden of the many commitments we have already made. Among these are the costs of pensions and retiree health care, the new obligations under the Affordable Care Act, the growing government costs of dealing with our aging population, bonded indebtedness and the deferred maintenance on our roads and other infrastructure. These specific liabilities reach into the hundreds of billions of dollars.

“My plan has been to take them on one at a time. We have now taken steps to deal with the unfunded teachers’ pensions and those of the public employees. For the next effort, I intend to ask our state employees to help start pre-funding our retiree health obligations which are rising rapidly.”

No details were provided, but they presumably will be forthcoming in Friday’s budget proposal. But as the U-T San Diego reported recently, the $4.5 billion yearly deficit of the California State Teachers’ Retirement System already is digging in to state and local school budgets:

“Administrators say they’re at a loss for how they’ll come up with the cash, which for some districts could be tens of millions per year. …

“Some school districts in San Diego County highlighted the sticker shock in so-called “interim midyear” budget reports released this month that show escalating contributions from teachers, school districts and even the state as a way to dig the teachers’ retirement fund out of debt over the next several years.”

Projects

Brown touted two of his favorite projects, high-speed rail and reducing greenhouse gases. Construction on the rail begins on Friday. But Brown gave no indication where money for the $68 billion project will come from above the $9 billion from the Proposition 1A bond voters approved in 2008; and $3.5 billion from President Obama’s 2009 stimulus package.

The new Republican majority in the U.S. Senate is as hostile to any more funding as is the House of Representatives that again will be controlled by the GOP. There is no private funding.

Brown promoted the state’s continuing efforts to reduce greenhouse gases:

“The United Nations’ Intergovernmental Panel on Climate Change, backed up by the vast majority of the world’s scientists, has set an ambitious goal of limiting warming to 2 degrees Celsius by the year 2050 through drastic reductions of greenhouse gases. If we have any chance at all of achieving that, California, as it does in many areas, must show the way. We must demonstrate that reducing carbon is compatible with an abundant economy and human well-being. So far, we have been able to do that.

“In fact, we are well on our way to meeting our AB32 goal of reducing carbon pollution and limiting the emissions of heat-trapping gases to 431 million tons by 2020. But now, it is time to establish our next set of objectives for 2030 and beyond.”

But California comprises only 2 percent of the global economy. No other state has anything like AB32, the Global Warming Solutions Act of 2006. And neither does any other country, besides some movement in Europe. Certainly, rising powers China and India are not being inspired by California to retard their ambitious rise out of poverty.

Upbeat

There also were, possibly, only minor hints in his Fourth Inaugural of whether he might run for president for the fourth time. But he might have been testing themes of progressive, prudent governance. He touted raising the minimum wage and “real protections for our hardworking immigrants, including the issuance of long-awaited driver’s licenses.”

And he ended on a cautious, even frugal, yet upbeat note:

“With big and important new programs now launched and the budget carefully balanced, the challenge is to build for the future, not steal from it, to live within our means and to keep California ever golden and creative, as our forebears have shown and our descendants would expect.”

It could be a compelling narrative in Democratic primaries should he choose to run against Hillary Clinton and Elizabeth Warren. After President Nixon and President Reagan, will Brown seek to become California’s third Oval Office occupant?

This article was originally published on CalWatchdog.com

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Is It Time To Garnish The IRS’ Pay?

December 21, 2014 By Rachel Stoltzfoos 2 Comments

The IRS has abused its power and misused its resources, so it deserves the budget cuts it got in the 2015 spending bill, a leading anti-tax group argues.

“If the IRS wants to see an increase in its budget, it probably should stop harassing conservatives,” Americans for Tax reform spokesman told The Daily Caller News Foundation. ”They used their resources in a completely inappropriate and political way that has basically ruined the reputation of the agency on the Hill.”

Congress cut the IRS budget by $346 million in the 2015 spending bill, reported Politico, and the agency has absorbed about $1 billion in cuts since 2010. It’s one of the only agencies whose budget was cut this year.

“[The cuts] are a logical response to the stewardship they’ve had with the resources they’ve been given,” Kartch told TheDCNF. “They’ve been given certain resources to implement the mission of the agency, and they’ve used them to harass Tea Party organizations. They’ve used them to harass conservative taxpayers. They’ve basically politicized the entire Cincinnati office for several years.”

Commissioner John Koskinen has already announced a hiring freeze and suspension of overtime hours, and said Thursday the most recent cuts could shut the agency down temporarily.

“People call it furloughs,” Koskinen said, according to Politico. “I view it as: Are we going to have to shut the place down? And at this point, that will be the last thing we do … but there is no way we can say right now that that wont happen.”

The cuts come as the IRS prepares to take on new responsibilities implementing Obamacare, and in the face of a mandatory government-wide pay raise Koskinen said will cost $250 million.

Kartch accused Koskinen of trying to extort Congress by purposely absorbing the cuts in a politically painful manner. In addition to the shutdown, Koskinen has warned taxpayers refunds could be delayed this year.

“They have a mandate to implement [the cuts], but the resources that they allocate is up to them,” Kartch said.

But Alan Viard, a budget and tax policy analyst at the American Enterprise Institute, said across-the-board cuts won’t fix the problem and are likely to hurt taxpayers.

“I’m very concerned about what the IRS did on the 501c4 applications by the tea party groups, and so it’s quite proper to try to stop that type of abuse or make sure it doesn’t happen again,” Viard told TheDCNF. “But just cutting the agencies overall funding is really not a good way to do that.”

Viard suggests a more targeted approach, such as clarifying 501C4 laws or reassigning certain responsibilities to other agencies, rather than the easier option of spending cuts.

“It really backfires by harming ordinary taxpayers who still have to comply with the complicated tax code Congress has imposed upon us,” he added. “Having given us this complicated tax system, I think it behooves Congress to try to give the IRS the resources to administer that system.”

This piece was originally published by the Daily Caller News Foundation

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CalPERS Numbers Attract Fresh Scrutiny

November 26, 2014 By James Poulos Leave a Comment

The California Public Employees’ Retirement System looks to see 2015 as another controversial year, especially around four budding controversies.

First, attention has focused in recent weeks around the way CalPERS pays its board members and executives. An investigation by the Sacramento Bee revealed that, for 15 years, CalPERS has reimbursed the “government pay and benefits of five board members who are on full- or part-time leave from their jobs to conduct fund business.”

While some board members receive little or even no money for their service, others received hundreds of thousands of dollars. Priya Mathur — recently stripped of her administrative posts, but not fired after repeatedly violating state ethics laws — was paid just shy of $300,000 during the last fiscal year. During the same period, John Chiang, an ex-officio board member in his capacity as the state controller, received nothing. He also will receive nothing when he remains on the board in January when he becomes the state treasurer, another ex-official CalPERS board membership.

Bonuses

Second, CalPERS executives received a substantial increase in lavish bonuses. The San Francisco Chronicle reported a 14 percent increase in bonus payments over the fiscal year before last, with $8.7 million going to investment staff and nearly $300,000 to the fund’s non-investment executives.

“The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios,” according to CalPERS spokesman Brad Pacheco. In an effort to deflect criticism for the windfalls, the Chronicle noted, CalPERS maintained it “must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street.”

According to Pacheco, “spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees.”

Secret deals

Third, in an area fraught with Wall Street competition of a different sort, CalPERS has proven itself willing to play political hardball to ensure financially stressed cities pay it first, and investor-creditors later. In an exclusive, Reuters cast a spotlight on how that process has played out secretly in the case of San Bernardino.

Speaking on condition of anonymity, a “senior city source” revealed details of CalPERS’ deal with the city that a judicial gag order had sought to keep under wraps. Although it hasn’t published a completed budget, San Bernardino has set aside over $10 million for an unnamed creditor — which the source identified as CalPERS.

The city’s decision “to strike a deal with CalPERS first, and begin paying arrears before a bankruptcy exit plan could be formulated, shows the reluctance of California cities to take on the pension giant,” concluded Reuters.

Demographic destiny

Fourth, CalPERS has faced a new round of investor skepticism over its approach to funding. The Moody’s ratings agency warned this week that cities like San Bernardino will face increasing pressure from CalPERS obligations, “even after the relief provided by the bankruptcy adjustments” authorized by the courts. “The ratings agency calculated that San Bernardino’s adjusted net pension liability for the 12 months to the end of June 2014 was $731 million — nearly 10 times its outstanding debt,” according to the Chief Investment Officer website.

CalPERS’ unfavorable demographics were likely responsible for the projected future increases in required contributions. At PublicCEO.com, Ed Mendel reported that “in a few years CalPERS retirees are expected to outnumber active workers, a national trend among public pension funds that makes them more vulnerable to big employer rate increases.”

CalPERS has managed in recent years to boost its funding level to some 77 percent. But now, Mendel observed, “some think getting to 100 percent funding may become difficult if not impossible. Employer contribution rates would have to be raised to an impractical level, crowding out funding for other programs, and investments would have to yield unlikely returns.”

According to prevailing interpretations of the California Constitution, taxpayers are on the hook for any fund shortfalls.

This article was originally published on CalWatchdog.com

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CA Budget Worse Despite $2 Billion New Revenue

November 23, 2014 By Wayne Lusvardi 2 Comments

California’s budget picture is sort of like that old Sandy Dennis high-school movie, “Up the Down Staircase.”

Going up: Legislative Analyst Mac Taylor just reported tax receipts jumped $2 billion over projections in the fiscal 2014-15 budget the Legislature passed, and Gov. Jerry Brown signed, last June. And the state’s credit rating was bumped up to A+ by Standard & Poor’s after voters on Nov. 4 passed Proposition 2, which strengthened the state’s rainy-day fund. The last time the bond rating was increased to A+ was in 2006.

Going down: Despite the added revenue, the state has reached a limit on what it can spend, according to a new study by insurance-asset manager Conning and Company, “Municipal Credit Research: State of the States.”

Moreover, for October Conning ranked California 36th among the states on its percentage of Expenditure Burden, defined as a percentage of the burden on general fund revenues for debt, future pensions and Medicaid expenditures. That’s four ranks lower than for April.

And as CalWatchdog.com calculated, California also has the largest Expenditure Burden in terms of absolute dollars, as shown in the following table. (Expenditure Burden is the far-right column.)

States with Highest Expenditure Burden (Fourth Quarter 2014)

 

State Expenditure Burden, percent of general fund Total General Fund Budget 2014-15  (in $billion) Expenditure Burden in Absolute Dollars (in $billion)
Nevada 43.2% $6.6 $2.851
Ohio 36.4% $30.677 $11.17
Illinois 30.3% $65.9 $19.97
California 25.4% $107.987 $27.43
Kentucky 24.7% $5.776 $1.43

Pension burdens

Gov. Brown’s June budget report correctly projected the state’s “Wall of Debt” will be cut from $34.7 to $13.8 billion by the end of fiscal 2014-15 next June 30.  But this picture of the debt omits future unmet pension burdens and Medicaid spending.

Just before the election, Controller John Chiang – on Nov. 4 himself elected as the new state treasurer – released figures on pension debt that confirmed a crisis long raised by pension critics. He warned:

“The unfunded actuarial accrued liability of the state’s pension systems — or the present value of benefits earned to date that are not covered by current plan assets — shows it has steadily risen from $6.33 billion in 2003 to $198.16 billion in 2013.”

That warning was confirmed by Paul Mansour, Conning’s head of muni research. He told Bloomberg, “California is still being held back by relatively high debt and pension levels…. We are more cautious on them than the [bond] rating agencies.”

Bloomberg also reported:

“California has $87 billion of bonds paid from the general fund, more than twice as much as a decade ago, according to data from the state. Voters also approved $7.5 billion for water infrastructure bonds this month [Propositon 2]. Its $2,465 of debt per resident is the third-highest burden among the 10 most-populous U.S. states, according to a report issued last month by Treasurer Bill Lockyer. New York ranks first, with $3,204 per person. The median among all states is $1,054.”

Forecast

There’s another reason why the new $2 billion in revenue the LAO forecast doesn’t much help long-term pension and medical-expenditure burdens. Proposition 98, passed in 1988, mandated about 40 percent of any revenue – including new revenue – must go to public schools.

As the LAO reported:

“A $4 billion reserve would mark significant progress for the state, but maintaining such a reserve in 2015-16 would mean little or no new spending commitments outside of Proposition 98, the funding formula for schools and community colleges.”

So of that extra $2 billion, just $1.2 billion of it can be used for other spending, debt reduction or reserves — about 1 percent of an $108 billion general-fund budget.

Moreover, according to the LAO, despite the new revenue, the general-fund’s balance actually has declined due to adjustments, including “a $358 million downward adjustment relating to an allocation of state sales and use tax (SUT) to local governments to correct for past accounting issues. All told, these adjustments result in an entering fund balance of $2.2 billion, or $243 million lower than the budget’s assumptions.”

Bottom line: California’s budget problems are far from over. Every good-news story going up the stairs seems to be met by a bad-news story going down.

This article was originally posted at CalWatchdog.com

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The California Redevelopment Dispute

November 12, 2011 By John Hancock Leave a Comment

The fate of California’s redevelopment agencies (RDA’s) is frequently discussed in the news these days. However, resolution is close—on November 10th, oral arguments will be heard by the State’s Supreme Court in the case California Redevelopment Agencies v. Matosantos.

The issue at hand in this important case is the constitutionality of Governor Jerry Brown’s proposed elimination of all 400 of the state’s redevelopment agencies. A critical facet of his budget proposal, Brown claims the move will save the state $1.7 billion this year. Characterizing the state’s redevelopment agencies as a “piggy bank” from which the state must now draw, he plans to redistribute the money back to counties, schools, cities and other special districts.

However, he’s also proposed that RDA’s can avoid elimination if certain steps are taken by their local jurisdictions, including an agreement that the RDA’s will pay $1.7 billion this fiscal year and $400 million in subsequent budget years in statutorily mandated revenues to school entities and other special districts.

Panicked redevelopment agencies are contending that the proposed cuts violate Proposition 22, passed by voters in November 2010, which prohibits the state from borrowing or taking funds used for transportation, redevelopment or local government projects.

Opponents to Governor Brown’s proposal feel that RDA’s are needed more now than ever as the state struggles to recover from the recession. The wholesale elimination of RDA’s, they maintain, eliminates important tools to spur job creation, increase tax revenues, and induce economic growth.

However, proponents of Governor Brown’s proposal, including State Controller John Chiang, claim that RDA’s are mismanaged and waste funds that would be better used to pay for schools and other critical services. Chiang, who recently reviewed 18 RDA’s statewide, cited numerous reporting flaws, questionable payment practices and inappropriate uses of affordable housing money.

This issue –like so many the justice system and voters encounter– begs the question: which decision will positively impact the most people? If political radical and philosopher Jeremy Bentham, an early advocate of utilitarianism, were to ponder the situation, would he lend support to Jerry Brown, attempting to balance a budget and mindfully funnel funds into what he believes are our most critical areas of need; or would he cast his vote with the RDA’s, who enable and encourage local government autonomy and revitalization?

There’s no denying that the ruling by California’s top court – whether in favor, or a rejection of Governor Brown’s controversial move – will impact taxpayers and jurisdictions across the state.

The court has promised a decision by January 15, 2012, which is when the first RDA payments would be due.

(John Hancock is the President of the California Channel.  This article was first posted in Fox & Hounds.)

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