Increasing Water Supply Must Balance Conservation Measures

In a recent commentary, tax-fighter Jon Coupal exposed one of the hidden agendas behind Senate Constitutional Amendment 4, which was recently introduced in the California Legislature. Coupal writes: “They wish to charge those water users they perceive as ‘bad’ more per gallon than those users they perceive as ‘good.’ The beauty of ‘cost of service’ rates, however, is that they are fair for everyone: You pay for what you use.”

California’s consumers already endure tiered rates for electricity consumption, where if their electricity consumption goes beyond approved levels, they pay more per kilowatt-hour. At least with electricity, there is some rationale for tiered pricing, because when demand exceeds capacity the utility has to purchase power from the grid at the spot market rate. But in the case of water that’s a much harder case to make. Water prices are negotiated far in advance by water utilities.

The reason utilities want to charge tiered rates is so they can discourage “over-consumption” of water, in order for them to avoid running out of water during times of severe drought. What happened repeatedly over the past few years was that suppliers to many regional water districts could not meet their contracted delivery obligations. Understandably, water districts want to reduce total annual consumption so, if necessary, they can get by with, for example, only 60 percent of the amount of imported water they would otherwise be contractually entitled to.

Punitive rates for “overuse,” however, will effectively ration water, as only a tiny minority of consumers will be wealthy enough to be indifferent to prohibitively high penalties.

There is a completely different way for water districts to address this challenge. An optimal solution to California’s water supply issues should incorporate not only conservation, but also increasing supply. And to fund new supplies of water, utilities should experiment with tiered pricing that only incorporates moderate price increases. Doing this would mean a large portion of consumers will not be deterred from “overuse,” and the extra revenue they provide the utility could be used for infrastructure investment to increase supplies of water through myriad solutions – including runoff capture and enhanced aquifer storage, sewage treatment to potable standards, seawater desalination, and off-stream reservoir storage.

The following images excerpted from a spreadsheet provide a simplistic but illuminating example of how reasonable tiered pricing could, in aggregate, fund massive investment in additional supplies of water. In the first example, below, with assumptions highlighted in yellow, are water consumption profiles for a regional water utility district that engages in punitive pricing for overuse of water. As can be seen in the large yellow highlighted block to the center left, when unit costs for water are tripled for those consumers who “overuse” water, the number of “over-users” is a small 4 percent minority of all consumers, and the number of “super-users” is a minute 1 percent of all consumers. Consequently, the utility only collects $900,000 per month, barely 5 percent of its revenue from consumers, from households that are deemed to have overused water.

FINANCIAL IMPACT TO UTILITY OF PUNITIVE PRICING FOR “OVERUSE”

The next example, below, shows hypothetical consumption profiles for a regional water utility district that engages in reasonable pricing for overuse of water. Again, as can be seen in the the large yellow highlighted block to the center left, when unit costs for water are increased by 50 percent (instead of 300 percent) for those consumers who “overuse” water, the number of “over-users” is a significant 20 percent minority of all consumers, and the number of “super-users” is a substantial additional 10 percent of all consumers. Consequently, the utility collects $3,000,000 per month, 14 percent of its revenue from consumers, from households that are deemed to have overused water.

FINANCIAL IMPACT TO UTILITY OF REASONABLE PRICING FOR “OVERUSE”

This is a simplistic analysis, requiring caveats too numerous to mention. Utilities get much of their revenue from property taxes, not from consumer ratepayers, and fixed service fees still constitute most of the amount that appears on a typical household water bill. The utility’s internal cost for water, pegged here at $.20 per CCF, is actually calculated through a maddeningly complex and somewhat subjective cost-accounting exercise that takes into account the amortization of capital costs for treatment, storage and distribution facilities, operating costs, as well as actual contracted purchases from, for example, the California State Water Project. But there is a deeper debate over principles that these examples are designed to emphasize, one with profound consequences for our quality of life in the coming decades.

By implementing severe financial penalties to utility customers who “overuse” their water, electricity, or anything else, state regulators are effectively imposing rationing on all but extreme high-income households. Complying in the face of punitive rates for overuse requires consumers to submit to undesirable lifestyle adjustments including short duration, low-flow showers, low flow faucets that require long wait times for hot water to arrive through the pipes and long wait times to fill pots, remotely administered, algorithmically managed “affordable” times for washing dishes and laundry, mandated purchases of expensive new internet enabled appliances that are ridiculously difficult to simply turn on and use, require regular warranty payments because they break down so much, with annual fees imposed to update their software.

We don’t have to live this way. California’s residential households consume less than 6 percent of the water diverted and used in California for environmental, agricultural, and commercial purposes, yet by far they pay the most to maintain and upgrade this infrastructure. Indoor water overuse is a myth, as all indoor water is either being completely recycled by the sewage treatment utility, or should be. Raising rates causes consumers to under-use water, despite most of a utility’s costs being for the operations infrastructure, creating a vicious cycle of rate increases to maintain sustainable revenues. And when consumer water use is crammed down further and further, the overall system of water infrastructure is progressively downsized until there is not enough resiliency and overcapacity in the system to absorb a major disruption such as an earthquake, a dam failure, or acts of terrorism.

The conventional wisdom in California as expressed in policies enforced by an overwhelming majority of Democrats in the state Legislature is that we must live in “an era of limits.” But this motto, originally coined in the 1970’s by Governor Jerry Brown, is in direct conflict with the spirit and culture of Californians, as exemplified by the dreams they offer the world from Hollywood and the miraculous innovations they offer the world from Silicon Valley. The idea that California’s legislators cannot enact policies designed to increase supplies of water and energy enough to make life easier on the citizens they serve is absurd, and must be challenged.

Ed Ring is the vice president of policy research for the California Policy Center.

Is California’s Elite Willing to Fight for More Infrastructure? Or Just Bash Trump?

In the wake of unrest on the UC Berkeley campus last week, Robert Reich has managed to get himself some fresh national news coverage. Reich served as Secretary of Labor in the Clinton administration, and is currently a professor at the University of California at Berkeley. Reich made news by suggesting the rioters who forced cancellation of a speech at UC Berkeley by Milo Yiannopoulos were not left-wing rioters at all, but instead were right-wing provocateurs. On his own website, here’s Reich’s latest take on this: “A Yinnopoulos, Bannon, Trump Plot to Control American Universities?

It’s always tough to prove a negative, but Reich is on thin ice here. Were the rioters who nearly shut down Washington, D.C., during Trump’s inauguration last month right-wing provocateurs? Were the rioters who shut down a Yiannopolous appearance at UC Davis a few weeks ago right-wing provocateurs? Are the hundreds, if not thousands, of marchers, including rioters, who tore through a dozen major cities in the U.S. in the wake of Trump’s unexpected election victory all right-wing provocateurs? Is it right-wing zealots who are waging an ongoing war against every new pipeline in the nation? Or are they establishment reactionaries and their anarchist bedfellows?

Since Robert Reich made himself a household word this week, perhaps it is important to reiterate one of the most important lessons that the American electorate has taken to heart over the past few years, and certainly while observing the Trump phenomenon: The “establishment” in America is an alliance of extremely wealthy individuals, multi-national corporations and the professional class that serves them, big labor unions especially including public sector labor and the government agencies they control, the financial institutions, and the leadership of both major political parties. To describe this establishment as “right-wing” or “left-wing” misleads more than it illuminates.

Robert Reich is an elite member of this establishment.

Back in mid-2016 California Policy Center research Marc Joffe made Robert Reich a poster-child for establishment hypocrisy in his analysis entitled “UC Berkeley’s ‘income inequality’ critics earn in top 2%.” During 2015, Robert Reich earned $327,465, in exchange for teaching one class per week. This is about as perfect an example of elite establishment privilege as you can find. And no wonder college tuition has gotten so expensive.

Robert Reich’s resurgence in the public spotlight is based on him leveraging the name recognition he already had to turn himself into one of the most vocal critics of president Trump. But if Robert Reich, apart from costing taxpayers $327,465 per year to teach one class per week, wants to make an actual contribution to society, he should be thinking harder about what he’s for, and not just expand his fan base by bashing the new president.

Californian infrastructure development, supposedly a critical focus of Reich’s labor movement, would be a good place to start. But even there, Reich is not being helpful.

Here is Reich’s most recent essay on the topic: “Trump’s Infrastructure Scam,” published on January 23rd. In this piece Reich argues that private sector participation in infrastructure development creates extra costs and drives funds into projects such as toll roads and toll bridges that generate high revenue to investors, but neglects other sorely needed amenities such as water treatment plants. There is some validity to some of the claims Reich is making. But he’s not offering a solution.

For decades California’s infrastructure has been neglected because (1) most public money that might have been spent on infrastructure went instead to government employee pension funds and government payroll departments to pay over-market compensation to unionized public employees, (2) projects had to pass muster with the environmentalist lobby, greatly shrinking the range of possible projects, and (3) to avoid conflict with the labor union lobby, approved projects were always needlessly expensive. Now we’re years behind.

Reservoirs

Build an offstream reservoir? Why work that hard? Bash Trump and be a hero!

California now has congested, inadequate roads that are embarrassingly, destructively pitted, costing billions in damaged cars and trucks and lost productivity. We have inadequate water storage capacity and cannot capture sufficient storm runoff. We are way behind deploying water treatment technologies that would render it impossible to overuse indoor water because 100 percent of it would be recycled. We only have one desalination plant of any scale on the California coast. The list goes on. In every area of infrastructure, we are behind most of the rest of the U.S., and we are behind most of the rest of the developed world.

Before Trump, and ever since Trump’s inauguration, what has Robert Reich been saying about infrastructure?

Nothing. If you look through the Robert Reich archives, you can go back to 2012 and not find even one commentary on the subject of infrastructure. Now he attacks Trump’s infrastructure proposals, seeing only the bad and none of the good, but for years he has been silent on this topic.

Overall, when it comes to Trump, where Reich complains, the rest of California’s establishment – the democratic wing of America’s bipartisan establishment – shrieks with indignation. Why figure out complex water ownership issues so we can finally build the Sites Reservoir, when you can stand in solidarity against Trump and earn headline after headline? Why do the hard work to develop a multi-state pool of pension fund assets that can be poured into arms-length infrastructure investment in water recycling, when you can heroically declare California a “sanctuary state?”

Establishment leaders like Robert Reich have a choice. They can acknowledge that we need more infrastructure here in California and figure out how to structure new initiatives that include federal funding, or they can hide behind the media-friendly politics of race, gender, and “climate” – abetted with crowd-pleasing Trump bashing – and do absolutely nothing.

*   *   *

Ed Ring is the vice president of policy research for the California Policy Center.

Questions for Someone Who Supports Superior Benefits for Government Workers

“Without disputing the figures, Monique Morrissey, an economist with the Economic Policy Institute in Washington, D.C., said the findings are misleading because they do not compare specific classes of employees or account for differences in education levels and total hours worked.”
California Is Golden State For Public Employees, by Michael Carroll, AMI Newswire, Jan. 31, 2017

Ms. Morrissey has a point, even though there was no intent to “mislead.” While our recent study “California’s Public Sector Compensation Trends,” found that full-time public sector workers in California earn pay and benefits that average at least twice as high as their counterparts in the private sector, going into comparisons by specific class of employee was beyond the scope of that particular study. But Ms. Morrissey is missing the forest for the trees.

First of all, as acknowledged in Carroll’s article where Morrissey is quoted, the study found that California’s public employees earn pay and benefits that average 39 percent higher than their public sector counterparts in the rest of the U.S. So especially in California, we conclude there are two classes of workers – public sector workers, whose 2015 pay and benefits averaged $139,691 for full-time work (if you properly fund their pensions), and private sector workers, who, very best case, earned pay and benefits that averaged $62,475.

Everybody knows that public sector workers have, on average, higher levels of education than private sector workers. Should this translate into average (and median, by the way) total earnings that are twice what all private sector workers receive? It challenges credulity.

Ms. Morrissey’s biography states, “She is active in coalition efforts to reform our private retirement system to ensure an adequate, secure,and affordable retirement for all workers.” Bravo. That is a goal we share. And so in the spirit of aligning ourselves with practical, feasible, equitable objectives towards achieving that goal, Ms. Morrissey is invited to answer the following questions:

(1)  Do you think what public sector pensions (ref. CalPERS, the largest) pay to California’s government retirees should be three to five times what Social Security offers private sector retirees?

CalPERS pensions

(2)  The average current retiree pension – not including retirement health benefits – for a state/local government worker with 30 years of service is $67,762 per year (click on any pension system to see average per former employer). There are 10 million Californians over the age of 55, 25 percent of the total population. If all of them received a pension of $67,762 per year, that would cost $677 billion dollars, 32 percent of California’s aggregate personal income of $2.1 trillion. Do you think people who are retired should collect state-funded pensions worth more on average than the earnings of people who work? Do you think this is feasible?

(3) Defenders of unaltered state/local government pension benefits in California argue that pension benefits are primarily paid for via investment returns. But they claim investment returns can average 7.5 percent per year (4.5 percent after adjusting for inflation), “risk free.” Are YOU, Ms. Morrissey, willing to personally guarantee that MY retirement investments will earn this much? Because if you are, I’ll invest every penny I’ve got with you.

(4) Our “apples-to-apples” comparison of California’s new “Secure Choice” pension option for private citizens yielded the following comparisons: (a) Public sector: Teachers/Bureaucrats, 30 years work – pension is 75 percent of final salary. (b) Public sector: Public Safety, 30 years work – pension is 90 percent of final salary. (c) Private sector: “Secure Choice,” 30 years work – pension is 27.6 percent of final salary. Do you think this disparity is fair to private sector workers?

(5) Can you explain why public sector pensions are not subject to the same conservative funding and investing rules as private sector pensions are under ERISA?

(6) Do you support government programs that offer ALL American workers the SAME retirement benefits, subject to the SAME formulas and incentives, or not?

In reference to our recent CPC study, Ms. Morrissey is also on record as saying, “There have been a lot of attacks on public-sector unions because their members have been a stalwart voting block for the Democratic Party, but that doesn’t mean they’re overpaid.” This remark suggests Ms. Morrissey thinks nonpartisan “attacks” on government unions aren’t justifiable and won’t happen. That is incorrect.

Government unions, unlike private sector unions, have the ability to negotiate for financially unsustainable pay and benefits because they control their bosses through campaign contributions, because their bosses are politicians instead of business people, and because these pay and benefit packages are paid for through coercive taxes instead of via allocations of precarious profits.

Government unions have created two tiers of workers in this country. Government workers not only have unaffordable pay and retirement security, but their union leaders have an incentive to support government policies that destabilize and divide this nation, because that will create the need for even more unionized government workers. Government unions, intrinsically, are economically damaging and politically authoritarian.

“Unsustainable” means that sooner or later an end will come. When the money is gone, Morrissey and her gang will have a lot more questions to answer.

Ed Ring is the director of policy research for the California Policy Center.

Government Workers in CA Make TWICE as Much as Private Sector Workers

money bagOn Tuesday, the California Policy Center released a study that provided facts about government compensation. It examined state and local payroll data provided online by the California State Controller and proved that the average pay and benefits for a full-time state/local government employee in 2015 was $121,843.

At the same time, the study found that the average pay and benefits for a full-time private sector worker in California in 2015 was half that much, $62,475.

Moreover, the study found that if the pensions these state/local workers have been promised were being properly funded, their actual pay and benefits in 2015 would have averaged $139,691. And that elevated figure still didn’t take into account the impact of properly pre-funding their supplemental retirement health care, nor did it normalize for their myriad paid days off – typically including 14 paid holidays, 12 “personal days” and 20 or more vacation days as they acquire seniority. And let’s not forget the “9/80” program, common in California government but virtually unheard of in the private sector, where public sector salaried professionals can skip a few lunches and show up a few minutes early or depart a few minutes late each workday, and take 26 additional days a year off with pay because, every two weeks, they worked “nine hour days for nine days, then took the tenth day off.”

If you’re not counting, that adds up to 72 days off per year with pay for a seasoned public sector professional. The study didn’t take that into account.

Similarly, the study had to assume that fully 50 percent of full time private sector workers in California are getting excellent comprehensive health care coverage 100 percent paid for by their employer, a 3 percent employer matching payment to a 401K retirement savings account, along with making employer contributions to Social Security and Medicare (and even that does not occur for the millions of independent contractors working full-time in California). But the study made the 50 percent assumption just to ensure that the average, $62,475 per year, was not understated.

Finally please note that in the public sector, the study found that the differences between “average” and “median” total compensation are negligible, with the median often actually exceeding the average. Not true in the private sector, where the impact of ultra-wealthy individuals truly skews the average well above the median.

So welcome to Feudal California, where crippling taxes and regulations are destroying the middle class, while a burgeoning dependent class pays no taxes, and hence votes for every tax proposal they see. Welcome to Feudal California, where the super rich support policies designed to create asset bubbles that make them richer, and don’t care about taxes because they’re so rich they can pay them.

It’s not enough to merely point out the fact that government workers make twice as much as ordinary workers in California, and that the gap is widening. The problem is that the unions who represent government workers control policy in California, and those policies are the reason that private sector workers can’t get ahead. Every major policy in effect or being contemplated in California is designed to raise the cost-of-living, and while the private sector middle class is crushed, the unionized government workers make twice as much, which is enough to survive.

At the same time, the challenges posed by a high cost-of-living are almost entirely regressive, harming the poor disproportionately. It doesn’t matter to a wealthy person if their gasoline costs $2.50 vs. $4.50 per gallon, or their electricity costs $.04 per KWH vs. $.40 per KWH. It doesn’t matter to them if a home costs $150,000 or $650,000. They’re rich. They can afford it.

So instead of fighting to lower the cost-of-living, California’s wealthy elite makes common cause with government unions, working to create artificial scarcity. This creates asset bubbles that translate into more property tax revenue for governments, more investment returns for the pension funds, and gilds the portfolios of the wealthy. And if anyone objects, they’re “deniers.”

California’s elites – wealthy individuals and their government union allies – have cleverly employed the politics of race, gender, and environmentalism to enthrall millions. California’s citizens, by and large, have become convinced that identity grievances and extreme environmentalism matter more than the fact they are in debt to their eyeballs, living from paycheck to paycheck. In a brilliant inversion of reality, these feudal overlords have actually convinced Californians to attribute the reasons for their poverty on race and gender discrimination, rather than economic policies that have made it nearly impossible for anyone to be upwardly mobile – regardless of their race or gender.

The public sector union leadership that runs California is incorrigible. They have bribed their members, and they have convinced their victims to enthusiastically support a political agenda that itself is the real reason they are victims.

Ed Ring is the vice president of research policy for the California Policy Center.

California’s Total Government Debt Rises to $1.3 Trillion

california-debtjust released study calculates the total state and local government debt in California as of June 30, 2015, at over $1.3 trillion. Authored by Marc Joffe and Bill Fletcher at the California Policy Center, this updates a similar exercise from three years ago that put the June 30, 2012 total at $1.1 trillion. As a percent of GDP, California’s state and local government debt has held steady at around 54 percent.

For a more detailed analysis of how these debt estimates were calculated, read the studies, but here’s a summary of what California’s governments owe as of 6/30/2015:

(1)  Bonds and loans – state, cities, counties, school districts, community colleges, special districts, agencies and other authorities – $426 billion.

(2)  Unfunded pension obligations (official estimate) – $258 billion.

(3)  Other unfunded post-employment benefits, primarily for retiree health insurance – $148 billion.

This total, $832 billion, ignores the fact that these pension obligations are officially calculated based on a return on investment projection that currently hovers between 7.0 percent and 7.5 percent, depending on which pension system you consider. But CalPERS, the largest of California’s roughly 90 major state and local government worker pension funds, has already determined they will have to lower their rate of return projection to 6.5 percent, an action that when emulated by other pension systems will immediately raise the unfunded calculation from $258 billion to $390 billion.

Our estimate, which uses the assumptions municipal credit analysts for Moody’s now use when evaluating the credit-worthiness of cities and counties, uses a rate of return projection of 4.4 percent. That rate is based on the Citigroup Pension Liability Index (CPLI), which is based on high grade corporate bond yields. This rate is far more “risk free” than 6.5 percent, much less 7.5 percent, and when you apply this rate to calculate the present value of the future pension obligations facing California’s state and local governments, the unfunded liability soars to $713 billion, bringing the total of bonds, OPEB and unfunded pensions to $1.29 trillion.

This $1.29 trillion does not include deferred maintenance and upgrades to California’s infrastructure, nor does it include California’s share of federal debt. More on that later.

For the moment, let’s just assume the pension funds manage to earn around 5.5 percent per year. That’s less than the reduction to 6.5 percent they’re already acknowledging, but it’s more than the 4.5 percent that professional credit analysts are already using when reporting credit ratings for government agencies. That 5.5 percent assumption would put California’s total state and local debt right around a $1.0 trillion. How much would it cost to pay off a cool trillion in 30 years at a rate of interest of 5.5 percent?

Seventy billion dollars. That’s over $5,000 per year for every household in California. Just to make payments on debt. That’s before any payments for ongoing services.

It gets worse.

As noted in the study, if one allocates federal debt according to state GDP, the share affecting Californians adds another $1.8 trillion to their debt burden. Again, using rough numbers, we’re now talking about $15,000 per year, per household, just to make payments on local, state and federal government debt.

Nobody knows how this will unwind. If interest rates rise, debt service will rise proportionately. To spark inflation to whittle away the impact of debt payments may be the most benign scenario, but only if inflation affects wages and not just assets. Most scenarios aren’t pretty.

The study concludes:

“Combining California’s debt with publicly held federal debt, we estimate a total debt-to-GDP ratio of 125 percent (or 153 percent using the broader definition of federal debt). This level places California distressingly close to peripheral Eurozone countries that faced financial crises in 2011 and 2012. Portugal’s 2015 debt-to-GDP ratio was 129 percent and Italy’s was 133 percent.”

While recommendations were beyond the scope of this study, here are three:

(1) Reform pensions and compensation for government workers so they experience the same financial challenges and opportunities as the citizens they serve. Cap pension benefits at twice the maximum Social Security benefit (around $62,000 per year). At a minimum, enact these reforms for all future work performed, both by new and existing public sector employees.

(2) Invest a significant percentage of California’s pension fund assets in infrastructure projects here in California. By using a lower rate-of-return projection, pension funds can compete with bond financing. They will earn a risk-free rate of return, California will rebuild its infrastructure, and millions of citizens will be put to work.

(3) Reverse the extreme environmentalist agenda that controls California’s state Legislature. Enact reasonable reforms to enable development of land, water and energy to lower the cost-of-living and encourage business growth. Private sector unions should be aggressively leading the charge on this.

There are a lot of good reasons why California is probably not destined to endure the financial paroxysms that already grip nations such as Italy and Portugal. Our innovative spirit and creative culture still attracts the finest talent from around the world. But California’s political leadership will have to admit there’s a problem, and make some hard choices. Hopefully when they finally do this, they will be thinking about the citizens they serve.

Ed Ring is the vice president of policy research at the California Policy Center.

San Francisco grapples with growing crime, blight after years of liberal policies

As reported by Fox News:

San Francisco is earning a growing reputation for more than just its unmatched tech sector – for critics, the city stands as a profound example of the damage ultra-liberal policies can do.

After 20 years of envelope-pushing changes to grow government and ease law enforcement, the once-shining City by the Bay has turned into a place where:

“There’s a very tolerant attitude, you can very much do anything on the streets you want,” said Marc Joffe, director of research at the California Policy Center think tank. “As members of a civilized society, there are things you should not accept. But we have ignored that … and there is nobody on the other side setting limits.”

San Francisco’s lax attitude is nothing new and has served as a beacon for the American counter-culture dating back to the Beat Generation. But the city’s embrace decades ago of free love and drugs has morphed into something else. …

Click here to read the full article

Association of Pension Funds Blacklists Reform Organizations

pensionIn an press release from the National Conference on Public Employee Retirement Systems dated December 19, 2016, the California Policy Center, and its spinoff online publication, UnionWatch, were both chosen, for the 2nd year in a row, as one of only 28 “policy and research organizations” that NCPERS has deemed to be “Think Tanks that Undercut Pensions.” Ponder the significance of this excerpt from that same press release: “Under the Code of Conduct, NCPERS urges its corporate members to disclose whether they contribute to these organizations.”

What exactly were the transgressions of the California Policy Center, and UnionWatch, that earned them a place on this list of undesirables? That earned them an admonition from NCPERS to its corporate members to boycott us, or else? Here is their list of criteria – and, briefly, our response:

How to be a think tank that gets blacklisted by NCPERS:

(1) Advocate or advance the claim that public defined-benefit plans are unsustainable.

Guilty. Public pension funds cannot possibly withstand the next market downturn. Unaltered, they will either bankrupt public institutions or cause taxes to be raised to punitive levels.

(2) Advocate for a defined-contribution plan to replace a public defined-benefit plan.

Not guilty. Our organization does recognize, however, that defined-contribution plans may be the only recourse, if significant changes are not made to restore financial sustainability to defined-benefit plans.

(3) Advocate for a poorly designed cash-balance plan to replace a defined-benefit plan.

Not guilty. We have not invested our resources in serious review of this policy option.

(4) Advocate for a poorly designed combination plan to replace the public defined-benefit plan.

Guilty, except that, of course, we believe a well designed combination plan could work. An example of this, fruitlessly advocated by California Governor Brown, is the “three legged stool” solution: A modest, sustainable pension, participation in Social Security, and a 401K savings plan with a modest employer contribution.

(5) Link school performance evaluations to whether a defined-benefit plan is available to teachers and school employees.

Not guilty. While it is probably true that providing teachers with the golden handcuffs of back-loaded pension benefit formulas guarantee the poor performers will stay on the job while those with talent will be more likely to pursue other employment options, we have not done any investigative work in this area. We applaud those who have.

More to the point, we applaud any corporate interest with the courage to stand up to American’s government union controlled pension systems by supporting pension reform organizations. They have a lot to lose.

Anyone who needs evidence to back up our assertion that government pension systems are joined with powerful financial special interests should consider the relationships between NCPERS – the “National Conference On Public Employee Retirement Systems” – and their “corporate membership.” NCPERS describes itself as “the principal trade association working to promote and protect pensions by focusing on Advocacy, Research and Education for the benefit of public sector pension stakeholders.”

NCPERS helpfully discloses those 36 corporations who have purchased the “enhanced level of corporate membership,” and it includes some of the most powerful financial firms on earth. To name a few: Acadian Asset Management, BNY Mellon, Evanston Capital Management, J.P. Morgan, Milliman, NASDAQ, Nikko Asset Management Americas, Northern Trust, Prudential Insurance Company, State Street Corporation and Ziegler Capital Management.

One would think corporate members with this much clout would mean the tail wags the dog, but NCPERS is a very big dog. As the political voice for nearly all major state and local public employee pension systems across the entire U.S., their lobbying muscle is backed up by nearly $4 trillion in invested assets. At one of their recent conferences, Chevron was a “platinum sponsor.”

Will Chevron ever oppose the lobbying agenda of NCPERS? Probably not. According to Yahoo Finance, BNY Mellon owns 1.34 percent of Chevron’s stock, Northern Trust owns 1.35 percent, and State Street Corporation owns 4.7 percent. That’s just the holdings of the NCPERS “enhanced members.” Moreover, pension systems don’t just invest through intermediaries such as BNY Mellon, they invest directly in these corporations. There is no financial special interest purchasing publicly traded U.S. stocks that is bigger than the pension fund members of NCPERS, and there is no client to the financial firms on Wall Street bigger than the pension fund members of NCPERS. Nothing comes even close.

No report on NCPERS would be complete without documenting just how thoroughly it is dominated by public sector and union operatives. Their president “served 3 terms on the Chicago Fire Fighters Union Local 2 executive board, resulting in two decades of union leadership.” Their first vice president, a retired police officer, “served as the first woman president of her union, FOP Queen City Lodge No. 69, from 2005 through 2015.” Their second vice president “is currently the statewide president of AFSCME Council 67, representing well over 30,000 members in 21 separate political jurisdictions.” Their secretary “has more than 30 years of service as a Tulsa public employee.” Their treasurer “served as a firefighter for 41 years. During his career, he held offices on the board of the IAFF Local 58.” Their immediate past president “is the treasurer of the United Federation of Teachers (UFT), Local 2, American Federation of Teachers (AFT).”

That’s everyone. The entire management team of NCPERS. A government union controlled financial juggernaut, marching in lockstep with the most powerful players on Wall Street. The consequences are grim for the rest of us.

Public employee pension funds are aggressively attempting to invest nearly $4 trillion in assets to get a return of 7.0 percent per year. Collectively, they are underfunded – according to their own estimates which use this high rate of return – by at least $1 trillion. And by nearly all conventional economic indicators, today we are confronting a bubble in bonds, a bubble in housing, and a bubble in stocks. The alliance of financial special interests who don’t want this party to end, and government union leaders who don’t want to lose retirement benefits that are literally triple (or more) what private sector taxpayers can expect, is complicit in policies that have allowed these asset bubbles to inflate. When the bubbles pop, they will share the blame.

In the meantime, they blacklist those of us who call attention to their folly.

Ed Ring is the vice president for policy research at the California Policy Center.

How to Identify a “Good” Bond

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

On November 8th, Californians approved Prop. 51, authorizing $9.0 billion in new borrowing for construction and upgrades of public schools. Also on November 8th, Californians approved 171 local bond measures, authorizing over $22 billion in additional financing for construction and upgrades of public schools.

This new borrowing is only to construct and upgrade K-12 and community college campuses. Total K-12 enrollment in California has been stable at around 6.3 million students for over a decade. Community college enrollment in California is about 2.1 million students. This means that this latest round of borrowing equates to $3,735 per student. And similar sums are thrown at California’s K-12 schools and community colleges for construction and upgrades every two years. What gives?

One of the most obvious problems with voter approved bonds in California is the preference given school bonds. Proposition 39, passed in Nov. 2000, reduced the supermajority needed to pass a bond issue ballot question from 66% to 55%. Meanwhile, all other public construction bonds still need the 66% supermajority. Inevitably, this law has resulted in abundant money flowing into school construction, while neglecting roads and other public infrastructure.

We asked State Senator John Moorlach, the only licensed CPC to hold office in California’s state legislature, and one of the most financially savvy individuals in Sacramento, to comment on what might constitute a “good” bond. Here is his checklist:

(1) Plan: A detailed plan that itemizes what projects will be funded with the bond proceeds is essential. How will bonds be issued and proceeds spent? Most bond measures fall short of providing itemized budgets that clearly explain the use of funds, which magnifies the opportunities for wasteful spending.

(2) Oversight: How will the implementation of the projects funded by a bond be monitored. Who will sit on the oversight board and how will people with conflicts of interest be screened out. What authority will the citizen board have if they uncover misuse of funds? Will they be able to stop work on a project?

(3) Terms: The devil is in the details. A fairly written bond contract will have a ratio of total principal and interest payments to principal of between two-to-one and three-to-one. But bonds still slip through, avoiding informed scrutiny by a financial expert, that can have ratios of total payments to principal amount as high as ten-to-one. Costs of issuance are another area where abuse occurs. A fairly written bond contract will award the underwriters between one and two percent. A small bond, say, under $10 million, may command a fee of around three percent. More than that is unfair to taxpayers.

(4) Reserves: How much cash will be set aside so that district won’t return with more requests for money? Many school districts have new bond measures on the ballot every two years. But the payments on these each of these bonds, not subject to any Prop. 13 restrictions, increase property tax assessments for thirty years or more. With school enrollment in California stable for over ten years, where is this money going?

(5) Maintenance: It is common to see the term “deferred maintenance” listed as one the uses of proceeds for a proposed bond. When new construction is financed with a bond, how much cash will be set aside to maintain these facilities? Equally pertinent, why can’t this maintenance be funded out of operating budgets?

(6) Promotional Funding: Is the campaign supporting a bond paid for by the people who’ll benefit from the bond? There is a clear conflict of interests when the most active participants in the paid political debate over whether or not voters should support a new bond proposal are the underwriters who will collect fees, the construction firms who will do the work, and the teachers unions who will always favor more facilities on their campuses.

(7) Project Labor Agreements: If the bond doesn’t explicitly prohibit cost-boosting Project Labor Agreements, then it is likely they will be incorporated. By excluding non-union shops from the bidding process, project costs are inflated by between 10% and 40%, all of which is borned by taxpayers.

A California Policy Center study released in 2015, “For the Kids” – Comprehensive Review of California School Bonds,” estimated that between 2000 and 2014, California’s voters approved, on average, $10 billion per year on new school bonds. Since then, through November 8th, voters have approved at least another $40 billion of new school bonds. Not including the interest on bonds still outstanding that were issued before 2000, the interest and principal payments on this $180 billion in school bond borrowing costs taxpayers at least $11.7 billion per year.

Adopting these seven criteria to evaluate bonds will go a long way towards ensuring that bond debt is approved by informed voters, and that the proceeds serve the people, especially the students, instead of special interests.

Ed Ring is the vice president of research policy for the California Policy Center.

Californians Approve $5 Billion per Year in New Taxes

For the last few years, using data provided by the watchdog organization CalTax, we have summarized the results of local bond and tax proposals appearing on the California ballot. Nearly all of them are approved by voters, and this past November was no exception.

With only a couple of measures still too close to call, as can be seen, 94 percent of the 193 proposed local bonds passed, and 71 percent of the proposed local taxes passed. Two years ago, 81 percent of the local bond proposals passed, and 68 percent of the local tax proposals passed. No encouraging trend there.

Outcome of Local Bond and Tax Proposals – November 2016

outcome-of-local-bond-and-tax-proposals-november-2016

A simple extrapolation will provide the following estimate: Californians just increased their local tax burden by roughly $4 billion, in the form of $1.9 billion more in annual interest payments on new bond debt, and $2.1 billion more in annual interest on new local taxes. But that’s not even half the story.

California’s voters also supported state ballot initiatives to issue new bond debt and impose new taxes. Prop. 51 was approved, authorizing the issuance of $9 billion in new bonds for school construction. Prop. 55 extended until 2030 the “temporary” tax increase on personal incomes over $250,000 per year, and Prop. 56 increased the cigarette tax by $2 per pack. The cost to taxpayers to service the annual payments on $9 billion in new bond debt? Another $585 million per year. Even leaving “rich people” and smokers out of the equation, California voters saddled themselves with nearly $5 billion in new annual taxes.

But as they say on the late-night infomercials, there’s more, much more, because California’s state legislators don’t have to ask us anymore if they want to raise taxes. November 2016 will be remembered as the election when a precarious 1/3 minority held by GOP lawmakers was broken. California’s democratic lawmakers, nearly all of them controlled by public sector unions, now hold a two-thirds majority in both the state Assembly and the state Senate. This means they can raise taxes without asking for consent from the voters. If necessary, they can even override a gubernatorial veto.

And they will. Here’s why:

There are three unsustainable policies that are considered sacrosanct by California’s state lawmakers and the government unions who benefit from them. (1) They are proud to have California serve as a magnet for undocumented immigrants and welfare recipients. (2) They are determined to continue to overcompensate state and local government workers, especially with pensions that pay several times what private workers can expect from Social Security. (3) They have adopted an uncritical and extreme approach to resolving environmental challenges that has created artificial scarcity of land, energy and water, an asset bubble, and a neglected infrastructure that lacks the resiliency to withstand large scale natural disasters or civil emergencies.

All three of these policies are extremely expensive. “Urban geographer” Joel Kotkin, writing in the Orange County Register shortly after the Nov. 8 election, had this to say about these financially unsustainable policies:

“This social structure can only work as long as stock and asset prices continue to stay high, allowing the ultra-rich to remain beneficent. Once the inevitable corrections take place, the whole game will be exposed for what it is: a gigantic, phony system that benefits primarily the ruling oligarchs, along with their union and green allies. Only when this becomes clear to the voters, particularly the emerging Latino electorate, can things change. Only a dose of realism can restore competition, both between the parties and within them.”

Despite the increase in consumer confidence since the surprising victory of Donald Trump in the U.S. presidential election, the stock and asset bubble that has been engineered through thirty years of expanding credit and lowering rates of interest is going to pop. The following graphic, using data from Bloomberg, explains just how differently our economy is structured today compared to 1980 when this credit expansion began.

1980-vs-2016

As can be easily seen from their price/earnings ratios today, publicly traded stocks are grossly overvalued. Equally obvious is that interest rates have fallen as low as they can go. For more discussion on how this is going to affect the economy, refer to recent California Policy Center studies “How a Major Market Correction Will Affect Pension Systems, and How to Cope,” and “The Coming Public Pension Apocalypse, and What to Do About It.” Despite healthy new national optimism since Nov. 8th, the economic fundamentals have not changed.

California’s democratic supermajority legislators, and the government unions who control them, are going to have a lot of explaining to do when the bubble bursts. For decades they have successfully fed their unsustainable world view to the media and academia and the entertainment industry. For over a generation they have brainwashed California’s K-12 and college students into militantly endorsing their unsustainable world view. This year they conned California’s taxpayers into approving another $5 billion in new annual taxes. But the entire edifice exists on borrowed time.

Ed Ring is the vice president of research policy at the California Policy Center.

Nov. Election Sees More than $34 Billion in Local Borrowing and Local Tax Increases

Money

New local taxes and new local borrowing are a regular phenomenon in California elections, but this year our government union-controlled politicians have outdone themselves. Let’s compare:

November 2014 – $11 billion in new borrowing proposed via 118 local bond measures, 81 percent passed. Of the 117 local proposals for new taxes, 68 percent passed.

June 2016 – $6.2 billion in new borrowing proposed via 48 local bond measures, an estimated 93 percent passed. Of the 42 local proposals for new taxes, an estimated 66 percent passed.

November 2016 – $32.2 billion in new borrowing via 193 local bond measures, and 224 local proposals for new taxes!

Not only do these general and primary and special election tax and bond measures accumulate year after year, but they nearly always pass! The primary source for this information is the California Tax Foundation, who have just produced another excellent guide “Local Tax and Bond Measures 2016.” This time, they have not only compiled a list of all of the proposed local taxes and bonds, but for each of the proposed new local taxes, they have compiled the projected annual collections. The result is stunning.

2016 California Local Tax and Bond Measures

2016-california-local-tax-and-bond-measures

As this table reports, $32.2 billion in new borrowing is being proposed, nearly all of it for schools and colleges. At 5.0 percent annual interest with a 30 year repayment plan, this borrowing will cost property owners another $2.0 billion per year in increased property taxes. If over 90 percent of these bonds are approved by voters, as recent history indicates is likely, California’s taxpayers will suddenly have saddled themselves with nearly $30 billion in new government debt.

Also as reported on the above table, the 224 proposed tax increases are estimated to cost taxpayers at least $2.9 billion per year. “At least,” because CalTax was unable to find revenue projections for 29 of them. And while “sin taxes” on marijuana and soda promise to bring in $58 million and $18 million, respectively, it is sales tax, that everyone pays, that will bring in most of the revenue, over $2.3 billion.

Because local taxes are numerous and dispersed onto hundreds of differing ballots across the state, they don’t get the visibility that state tax increases generate. But collectively they are just as significant. California’s Prop. 30, passed by voters in 2012, generated about $6.0 billion per year. That same tax, which was supposed to be temporary, will be extended through 2030 if voters approve Prop. 55 this year. But if you compare this statewide tax to the proposed local taxes, $2.9 billion per year, along with required payments on the local bonds, $2.1 billion per year, you are adding another $5.0 billion annual burden to taxpayers.

Passing Prop. 30 was a major fight. Similarly, Prop. 55 has huge visibility with voters. But because nearly all of the local measures pass, and because dozens if not hundreds of them appear on the ballot every election, local taxes and bonds matter more. Invisible, ongoing and ever expanding, they are silently elevating the cost-of-living for ordinary Californians as much or more than state taxes.

Where does this money really go? Why is there an insatiable thirst for more taxes and more borrowed funds?

One word: Pensions. One cause: Government unions and their allies in the financial community, who together comprise what is by far the most potent political lobby in California.

May 2016 analysis by the California Policy Center, using the most recent data available from the U.S. Census Bureau, estimated that during 2014, California’s 80+ independent state/local government employee pension systems received $30.1 billion in contributions (ref. table 2-A). Later in that same report, on table 2-C which is displayed below, one can see how much these pension systems actually need to remain financially healthy. At a minimum, they are collecting $8.0 billion per year LESS than they need. And that is if the investments they’ve made yield an annual return of 7.5 percent per year for the next 30 years. At the modest reduction of that projection to 6.5 percent – which even CalPERS has announced they are going to phase in as their new projection for calculating required annual contributions, these pension systems are collecting $22.2 billion per year LESS than they need.

California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI

california-state-and-local-pension-funds-consolidated

If California’s state and local government workers participated in Social Security like the rest of California’s workers, instead of receiving guaranteed defined benefit pensions that on average pay FOUR TIMES what Social Security recipients can expect, there would be no insatiable need for more money for the pension systems. Even if California’s state and local government workers merely received defined benefits that paid, on average, TWICE what Social Security recipients can expect, these pension funds would currently have surpluses. Moreover, there would be money left over in local municipal and school district operating budgets to maintain facilities, instead of having to perpetually borrow.

Six billion dollars per year ala Prop. 30 and Prop. 55. Another $5 billion per year thanks to new proposed local taxes and borrowing just this November. And it’s not even close to enough. California’s state and local government pension systems are going to need somewhere between $50 to $60 billion per year to stay afloat, and currently they’re collecting barely more than half that much.

No wonder there’s the perennial scramble for more. More. MORE.

*   *   *

Ed Ring is the president of the California Policy Center.