How to Resurrect California’s Republican Party

CA GOPAnyone taking a look at California’s June 2018 state primary ballot would have plenty of evidence to suggest the Republican Party in that state is dead. For starters, California’s GOP has two credible candidates for governor, businessman John Cox and State Assemblyman Travis Allen, which in a normal state might be a good thing. But California’s Republicans are a super-minority party in an open “top-two primary” that pits them against at least two well-funded Democratic candidates, Lt. Governor Gavin Newsom and former Los Angeles Mayor Antonio Villaraigosa. Although Cox is polling better than Allen, they’re both likely to be aced off the ticket in November.

Worse, California’s Republicans have no viable candidate for U.S. Senate. The most recognizable candidate — indelibly listed as “Republican” on the ballot despite being kicked out of the recent GOP state convention — is Patrick Little, whose campaign website’s home page includes a “learn more” button on the topic of “How We Will End Jewish Supremacism.”

There is not one higher state office in California where a Republican has a realistic chance of victory. Nearly every position — lieutenant governor, attorney general, treasurer, controller, and state superintendent of schools — Democratic candidates are likely to win. The lone exception is insurance commissioner, where the respected Steve Poizner, who has already held that office as a Republican from 2007 to 2011, is now running as an independent.

California’s GOP Party Organization Has Failed

If you go to the California GOP website to view endorsements, you will see the party faithful failed to choose a gubernatorial candidate. This failure of leadership means that their two candidates, Allen and Cox, are likely to split the support of GOP voters, which increases the likelihood that neither Republican will advance to the general election. (Though current polling suggests Cox could squeak through.) Given the fierce determination of both these candidates, one might forgive the state GOP for not managing to make a selection.

But the state GOP’s failure to make endorsements, which are critical in open primaries where only the top two candidates advance, continues down the ticket.

For state treasurer, there is “no endorsement,” despite two Republican candidates on the ballot. For U.S. Senate, there is “no endorsement,” despite 11 Republican candidates on the ballot. That lapse renders it likely that the top Republican vote-getter in the race for U.S. Senate will be the candidate with the most name recognition — you guessed it, the loathsome Patrick Little.

For insurance commissioner, the state GOP apparently didn’t know what to do, since most of them realize former Republican Steve Poizner is a good choice. So instead of “no endorsement” showing up, they simply omitted that position from their list of endorsements. Why couldn’t the state GOP recruit and promote top candidates? Is there really any excuse for this, when there are still tens of thousands of highly successful men and women who are registered Republicans in California and would be good candidates?

When you look for leadership in California’s Republican party, you might consider the last candidate for governor who had a respectable showing: Meg Whitman. (The less said about Neel Kashkari, the better.) But Whitman just publicly endorsed a Democrat, Antonio Villaraigosa. With leadership like that, who needs enemies? Is Whitman a RINO? Is she a turncoat? Or, to be brutally honest, is she just recognizing the cold reality that California is a one-party state, so she wants to support the person she perceives to be the lesser evil?

Demographic Trends Favor the Democrats

If demographic trends and current voting patterns persist, California is going to be a one-party state for a very long time. According to the Public Policy Institute of California, among California’s “likely voters,” more whites are registered as Republicans, 39 percent, than Democrats, 38 percent. But “whites” are only 38 percent of California’s population, and that percentage is dropping fast. Among residents under 18 years old, excluding illegal aliens, whites are now barely 25 percent of California’s population. Why does this matter?

Because among likely voters, Latinos registered as Democrats (62 percent) far outnumber Latino Republicans (17 percent). Among blacks, the disparity is even greater—82 percent Democrat versus 6 percent Republican. Among Asians, where the disparity is less, the Democrats still have a nearly two-to-one advantage, 45 percent to 24 percent.

California’s Democrats successfully have tainted Republicans as racist ever since Governor Pete Wilson supported Proposition 187 in 1994. That citizens’ initiative, narrowly passed by voters then utterly decimated by liberal judges, would have—gasp!—denied taxpayer-funded public services to illegal immigrants. Ever since, any attempt to place realistic curbs on benefits for illegal aliens has been met with militant opposition by Democrats who control a supermajority in California’s legislature. California’s Democrats have played the race card with impunity.

In late 2016, when incoming President Trump proposed to deport criminal aliens, Democratic Assemblyman Ricardo Lara—now running for insurance commissioner—threatened to “fight in the streets” to preserve “the work we have done.” Democratic State Senator Kevin de León—now running for U.S. Senate against long-time incumbent Democratic Dianne Feinstein—frequently refers to “President Trump’s racist-driven deportation policies.” California attorney general Xavier Becerra has been quoted stating that “Trump was showing himself to be a racist in every respect.” Examples are endless. This November, California’s Democrats are going to make Patrick Little and Donald Trump the running mate of every Republican on every ballot in the state.

But will this work forever? Does California’s GOP have to stay dead? Will “people of color” continue to believe that California should be a one-party state?

Demographics Is Not Destiny

Eventually, California’s Democrats are going to go too far, because their policies are economically unsustainable. Gavin Newsom, the favorite to occupy the governor’s mansion in 2019, proposes a single-payer health care system for the state, something that would cost at least $200 billion a year, in addition to sowing chaos throughout California’s healthcare industry. Meanwhile, California’s Democrats propose to offer full health insurance coverage to illegal immigrants, spend tens of millions to provide free college tuition to illegal immigrants, in a state where taxpayers already fund over $25 billion per year to provide public services to illegal immigrants.

How long can this go on?

Objecting to these costly programs may attract accusations of racism, but growing numbers of Latinos, blacks, and Asians, along with white liberals, may eventually decide that Democrats no longer have the answer. All it will take is one major stock correction, or one more downturn in the historically cyclical tech industry, and California’s public finances will implode. All of a sudden, hundreds of billions in tax receipts necessary to sustain free health care, free tuition, and public-sector pensions, to say nothing of benefits for illegal aliens, will vaporize. Economic calamities that reach deep into the pocketbooks and tragically disrupt the lives of ordinary voters have a way of focusing the mind.

The GOP’s case in such times, and to prevent such times, is not abstruse. It goes like this: For decades, Democrats have told you that the most important issue in the world was protecting yourselves from white racism. But while you were voting for the people who kept telling you this, their government unions, controlled by Democrats, were destroying the public schools that might have provided your children with a useful education.

Their government bureaucracies, controlled by Democrats, were driving small businesses out of business with ridiculous, punitive regulations, forcing many of them to flee the state, denying you jobs and entrepreneurial opportunities.

Instead of investing in transportation and water infrastructure to enable a reasonable quality of life to long-time residents and new arrivals alike, Democratic politicians used taxpayers’ money to overpay the government employees, so that government unions would fund the Democratic Party.

The GOP’s case doesn’t end with exposing racism as a diversion from the real issues of economic growth. It also exposes extreme environmentalism, and the synergy between the environmental movement, the overbuilt public sector, and left-wing oligarchs.

For decades, these extreme environmentalists, all of them Democrats, prevented perfectly benign land development in a state literally sprawling with open space. They did this in the name of saving the earth, downplaying how the resulting real estate bubble pumped up government property tax receipts and goosed the returns for the real estate portfolios in government pension funds. They prevented private investment in cheap conventional energy—in particular, clean natural gas and nuclear power—so residents have to pay twice as much (or more) for electricity as people in other states. Democrats barred private investment in oil drilling and refining, and imposed automotive and fuel standards in conflict with the rest of the United States, so Californians pay substantially more at the gas pump.

A Pro-Growth Economic Opportunity Agenda for California

Turning California back into the land of opportunity isn’t that hard, since it still has the best universities, the best weather, and the largest, most diverse economy in America. And California’s GOP politicians can make it happen, by promoting a pro-growth agenda at the same time as they expose identity politics and extreme environmentalism for what they are — a gigantic scam that distracted voters from the real issues. Here is a pro-growth, economic opportunity agenda for California:

Education

Restore the balance in California’s colleges and universities so that the ratio of faculty to administrators is 2-to-1, instead of the current ratio that allows administrators often to outnumber teachers.

End all discrimination and base college admissions purely on merit. Expand STEM curricula so it represents 50 percent of college majors instead of the current 20 percent.

Enforce the Vergara reforms so it is easier to retain quality public school teachers and easier to fire the incompetent ones. Eliminate barriers to charter schools.

Criminal Justice

Restructure the penal system to make it easier for prisoners to perform useful public services. For example. along with working the fire lines during fire season, they could work all year clearing dead trees out of California’s forests. Use high-tech monitoring devices to reduce costs. Reserve current prisons only for the truly incorrigible.

Infrastructure

Scrap the high-speed rail project and instead use the proceeds to add one lane to every major interstate in California, and upgrade and resurface all state highways.

Use additional high-speed rail funds to complete plant upgrades so that 100 percent of California’s sewage is reused, even treated to potable quality.

Pass legislation to streamline approval of the proposed desalination plant in Huntington Beach, and fast-track applications for additional desalination plants, especially in Los Angeles.

Spend the entire proceeds of the $7 billion water bond, passed overwhelmingly by Californians in 2014, on storage. Build the Los Banos GrandesSites, and Temperance Flat reservoirs, adding over 5.0 million acre feet of storage to the California Water Project. Pass aggressive legislation and fund aggressive legal actions and counteractions, to lower costs and enable completion of these projects in under five years (which is all the time it used to take to complete similar projects).

Energy

Permit slant drilling to access 12 trillion cubic feet of natural gas deposits from land-based rigs along the Southern California coast. Build an LNG terminal off the coast in Ventura County to export California’s natural gas to foreign markets. Permit development of the Monterey Shale formation to extract oil and gas.

Permit construction of “generation 3+” nuclear power plants in geologically stable areas of California’s interior. Permit construction of new natural gas power plants.

Housing

Repeal the 2006 “Global Warming Solutions Act” and “Sustainable Communities and Climate Protection Act” of 2008 and make it easy for developers to build homes on the suburban and exurban fringes, instead of just “in-fill” that destroys existing neighborhoods.

Pensions and Infrastructure

Require California’s public employee pension funds to invest a minimum of 10 percent of their assets in infrastructure projects as noted above. They could issue fixed rate bonds or take equity positions in the revenue-producing projects, or a combination of both. This would immediately unlock approximately $80 billion in construction financing to rebuild California’s infrastructure. At the same time, save the pension systems by striking down the “California Rule” that prevents meaningful pension reform.

These reforms would lower the cost of living in California, at the same time as they would create resource abundance and hundreds of thousands of high-paying jobs.

Why Republicans Are the Most Qualified to Rescue California

Once you’ve debunked the narrative that Republicans are racists, it is easier for voters, regardless of their ethnicity, to see their virtues. To a startling degree, California’s Republican legislators typically come from business backgrounds, whereas most Democratic legislators come from a government agency or a nonprofit background.

In 2016, an analysis of the biographies of California’s state legislators showed that 69 percent of Republican legislators came from a business background, 19 percent of them had some business and some government or nonprofit experience, and only 11 percent of them came exclusively from a government or nonprofit background. By contrast, only 6 percent of Democrats came from a business background, only 18 percent of them came from a mixed business and government or nonprofit background, while a whopping 76 percent of them came exclusively from a government or nonprofit background. One can draw profound conclusions from this unambiguous data.

In business, competence is emphasized; in government, personal connections are everything. In business, the objective is to competitively build and run productive companies; in government, to control, coerce, and redistribute. To work in business one must study engineering or finance and accounting. To work in government, one may study sociology or earn a major in any number of social justice-oriented “studies.”

What is the result of California’s Democratic lawmakers, in overwhelming numbers, lacking any experience in business? A state where financial realism is eclipsed by confrontational, utopian fantasy. A state where self-righteousness and self-deception are the currency of governance, instead of factual analysis and hard choices. A state where the infectious optimism that defines and is a prerequisite for business leadership is absent from a dismal capital.

Republicans can offer an irresistible alternative. They can promote abundance instead of scarcity; prosperity instead of an “era of limits;” hope and opportunity instead of resentment, retribution and redistribution; universal upward mobility instead of divisive scrapping for diminishing wealth.

They need to get busy.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. This article originally appeared on the website American Greatness.

California’s Transportation Future – Next Generation Vehicles

The next generation of vehicles will transform transportation in several fundamental ways. What is coming will be as revolutionary in our time as the transition from horses to horseless carriages was over a century ago. Some increments of this dawning revolution are already here in realized products. Electric drivetrains. Collision avoidance systems. Self-driving cars. Cars on demand. Aerial drones. Nearly all of the enabling technology for this dawning revolution is already here. Artificial intelligence. Visual recognition and sensor systems that use radar, sonar and LIDAR laser scanning. Mapping capabilities. GPS. Data collection. Memory chips. Communications systems. And every one of these technologies, along with investment capital, more than anywhere else, is concentrated in California.

As this revolution unfolds, our conception of what constitutes vehicular transport will change. Many vehicles will be modular and reconfigurable. On the road surface, the wheeled chassis, or “skateboard,” will contain the essentials to power and navigate the vehicle. Depending on the duty cycle, a skateboard chassis may be small, only capable of carrying a two passenger cabin, or small freight payload. Other skateboards will range in size from those capable of carrying a sedan or SUV sized passenger unit, all the way to the largest versions which, with freight or passenger units attached, would weigh up to 80,000 pounds.

Even more variation will be present in the passenger modules. An SUV sized passenger module, for example, might hold 6-8 passengers like a mini-bus. Or it might be a conference room or an office where a group of passengers could conduct work while being transported. Or it might be a sleeper unit, a rolling hotel room, where a lone passenger or a family or work crew would sleep while en-route to their destination.

Perhaps even more amazing are the aerial modules that are coming. A passenger module may arrive at a staging area on a wheeled chassis, where an aerial drone will attach itself to the top of the passenger module at the same time as that module is released from the skateboard chassis. In an automated, seamless process, the occupants will then be flown beneath this drone to their intended destination.

SELF DRIVING VEHICLES

All of the above is happening with surprising rapidity. Dozens of partnerships between major automakers and the technology partners they need to complete this process have already been formed and continue to be formed. San Francisco based Uber is working with Volkswagon and Nvidia, a major chipmaker and world leader in visual computing. Uber is also working with Toyota to develop self driving cars. Silicon Valley based Tesla continues to test “full self-driving hardware,” competing with Google spin-off Waymo, also located in Silicon Valley. Another credible Silicon Valley self-driving car startup is Aurora, which as reported by the San Jose Mercury earlier this year, is “formed by one-time heads of autonomous car projects at Google parent Alphabet and Tesla [and] will develop self-driving electric vehicles with Volkswagen and Hyundai Motor.”

Not to be excluded, Silicon Valley heavyweight Apple is confounding critics who claimed they might find achieving their business model of vertical integration too challenging to include vehicles. According to a March 2018 report in Fortune, referring to testing in California, “with 45 cars on the road, Apple is now testing more vehicles than its top rivals. Tesla, for instance, has 39 permits. Uber has 29 permits, according to the report. Alphabet’s Waymo had more than 100 permits in June 2017 and has 24 now.”

According to the same report, “Apple is now second behind General Motors’ Cruise company, which has 110 self-driving car permits in California.” The GM owned company, Cruise Automation, is headquartered in San Francisco. GM’s strategy? According to The Street, GM intends to “deploy self-driving taxis in dense urban environments to take passengers from point A to point B. Rather than a one-time sale of the vehicle, the automaker can milk hundreds of thousands of dollars in revenue per vehicle.” And in that same report, Ford’s strategy is “using a new vehicle capable of carrying both people or items. The unit will run a hybrid engine and operate about 20 hours per day.”

The Mercedes F 015 “Luxury in Motion” Self-Driving Concept Car

Mercedes F 015

The above photo of the Mercedes F 015 “Luxury in Motion” Self-Driving Concept Car provides a glimpse into just how much vehicular travel is going to change. Note that the dashboard and control surfaces, including an almost vestigial steering wheel, are on the right side of the compartment. The front seats are swiveled to face the rear seats, turning the area into more of a lounge or conference room than a traditional vehicle compartment. The presumption is that most of the time the car will be self-driving, allowing the passengers to pursue many of the same sedentary activity options in the vehicle that they might pursue outside the vehicle.

When it comes to major automakers and high-tech corporations, it’s hard to find a company that’s not getting involved in autonomous vehicles. A March 2018 report in TechWorld attempts to catalog all of them – some not already mentioned above include Rinspeed AG, a Swiss automaker teamed up with Samsung; Volvo, teamed up with Uber; Chinese internet giant Baidu’s self-driving vehicle platform Apollo, which includes vehicle hardware, software and cloud data platforms to help others in the autonomous cars industry; Intel, which bought Israel-based driverless car technology firm Mobileye, in partnership together with BMW; Audi in partnership with graphics cards maker Nvidia; the list goes on.

Convinced yet? Driverless vehicles are coming. They are coming in myriad forms and will employ myriad business models. Stepping to the curb and using your phone to dial up a robotic ride, any type of ride, to any destination, will become commonplace. Scheduling personalized transportation services in advance will become routine. Ownership models will become more diverse. Individuals will own cars, but so will automakers, transit agencies, taxi services; who will own these cars of the future and to what purpose is only limited by one’s imagination.

PASSENGER DRONES

If the world of self-driving cars is just around the corner, then just down the street, also set to arrive sooner than expected, are passenger drones. And again, most of the major players are operating in California. Uber has formed “Uber Air,” or Elevate, to develop aerial transportation systems. Google has two companies, operating in stealth, Cora, and Kitty Hawk. Also active in California are the companies Aurora, in partnership with Boeing, and Vahana, in partnership with Airbus.

Cora’s experimental electric powered “Air Taxi” –
takes off like a helicopter, flies like a plane

Air Taxi

An interesting company based in Santa Cruz is Joby Aviation. While over a $130 million in financing and over 120 employees isn’t all that much so far, Joby Aviation appears to be a serious contender. Investors include Intel Capital, Toyota AI Ventures, JetBlue Technology Ventures, and Capricorn Investment Group. Despite being one of the most secretive startups in a sector where stealth is the rule, not the exception, an excellent report on Joby’s progress was published by Bloomberg earlier this year.  From a remote test station deep in the mountains of California’s central coast, the Bloomberg reporters were given a ride. From the article: “Powered by electric motors and sophisticated control software, the taxi performs like a cross between a drone and a small plane, able to zip straight up on takeoff and then fly at twice the speed of a helicopter while making about as much noise as a swarm of superbees.”

This is fascinating stuff. Apparently most “air taxis” (or “sky cabs”) being developed are powered by electricity, and in many respects are just enlarged versions of the drones now commonly used by hobbyists and photographers. Joby Aviation intends to build an aircraft with a range of 150 miles on a single battery charge, carrying up to four passengers. They would travel at relatively low altitudes to avoid having to pressurize the cabin. They expect to be “100 times more quiet during takeoff and landing than a helicopter and near-silent during flyovers.”

LAND/AIR HYBRIDS

No discussion of the imminent revolution in vehicle transportation is complete without considering the possibility of travel by land and by air in the same passenger module, with a separate wheeled module for land travel, which detaches from the passenger module when it is lifted airborne by a flight module. As reported earlier this year in Electrek.co, Audi and Airbus are working on just such a solution. The following two images are from a visualization of this futuristic transportation option prepared by Italdesign in partnership with Audi and Airbus.

Aerial drone/electric car hybrid concept –
passenger module prepares to detach from land module

Aerial drone electric car

Aerial drone/electric car hybrid concept –
passenger module now attached to flight module

flight module

The Hyperlane Option

If the Hyperloop might represent the fastest conceivable mode of land based travel, then, similarly, the “Hyperlane” might represent the fastest conceivable mode of travel by autonomous wheeled vehicles on a flat road surface. The hyperlane concept was conceived by UC Berkeley graduate students, Baiyu Chen and Anthony Barrs, who proposed the hyperlane concept in 2017 as their winning entry in the Association of Equipment Manufacturers “Infrastructure Vision 2050 Challenge.” AEM’s 2017 challenge to entrants was to present concepts to “support high-speed transportation by the year 2050.”

As reported in Fortune, “The duo’s idea was to construct a ‘Hyperlane,’ or a single platform the size of four interstate lanes that would run parallel to pre-existing highways in order for self-driving cars to travel at high speeds with no chance of getting into a jam. …’we realized we could remove the tracks and deploy new, emerging technologies like autonomous vehicles.’”

Whether the Hyperlane is a dedicated four lane highway, elevated over existing highways on existing right-of-ways, or additional specialized lanes similar to the HOV lanes we’ve already got, emerging automotive technologies support safer, denser traffic at higher speeds. Electric traction motors not only have extraordinary torque which delivers impressive acceleration, they also have a wide functional RPM range, zero to 20,000, far greater than combustion engines. Back in the 1990s, a prototype version of the now legendary General Motors EV1 was clocked at 183 MPH. The current crop of electric vehicles have top speeds that are deliberately limited by software; the Chevy Volt tops out at 100 MPH, the Tesla Roadster at 125 MPH, and the Tesla Model S at 130 MPH.

Using dedicated lanes for high speed vehicular travel has been tried already. The fast lanes on the German autobahns easily qualify. If you’re driving 120 MPH in the fast lane on the autobahn, you’d better watch your rear view mirror, because if a car traveling 160 MPH crashes into your rear end, it’s your fault. German drivers obey strict rules, the most critical of which is slower drivers must always yield to faster drivers by moving promptly into the left lanes, and faster drivers must never pass on the right. And it works. The fatality rate on the autobahn is much lower than on the United States interstate system.

The Case for Cars

The conventional enlightened policy wisdom is that driving cars on roads is an obsolete way for millions of people to travel. Policy driven alternatives, costing billions each year, include light rail, high-speed rail, trolleys and bike lanes. In support of these policy alternatives, “transit villages” are zoned, along with “densification,” based on the theory that if more people live near mass transit stations, and, in general, if more people live and work in smaller urban footprints, there will be less need for people to own cars.

To explore the costs and benefits of densification and urban containment goes beyond the scope of this report. But the primary problems currently inherent in relying on cars to fulfill the requirements of mass transportation – low speeds, unsafe, congested roads – are all being solved through innovation. With upgraded roads and updated driving laws, modern cars can sustain speeds as fast or faster than California’s proposed high speed rail. And there are a variety of ways that the new innovations that are transforming vehicular travel will increase safety and relieve congestion.

Private sector funding:

With minimal government investment, the private sector is creating connected and autonomous vehicles, completely redefining the car. The enabling technologies draw from diverse industries, resulting in consortiums that bring together participants from sectors including automotive, semiconductor, telecommunications, smart phones, aerospace, robotics and AI. One challenge is ensuring that the makers of this next generation of vehicles incorporate common standards.

To navigate the roads without a driver, self-driving cars rely on vehicle to vehicle (V2V) and vehicle to infrastructure (V2I) communications. The Michigan-based Center for Automotive Research, (CAR) with a mission ” to educate, inform and advise stakeholders, policy makers, and the general public on critical issues facing the automotive industry,” has produced several recent reports evaluating what they call “intelligent transportation systems.” In their 2017 report “Planning for Connected and Automated Vehicles,” they define V2V systems as “wireless communication between vehicles, such as safety warnings and messages.” They define V2I systems as “wireless communications between vehicles and the infrastructure, such as a system that connects a vehicle to cellular towers for navigation purposes.”

As the technology matures, several industry associations are working to harmonize standards for intelligent transportation systems, nationally and globally. In CAR’s 2016 report “Global Harmonization of Connected Vehicle Communications Standards,” they explain how interoperable communications systems in vehicles are necessary to resolve the following questions:

  • Which entities communicate and to whom (e.g., vehicle, pedestrian, roadside infrastructure, central servers)?
  • Which message set is used within the communication?
  • What media and channel allocation is used (e.g., 5.9 GHz)?
  • What application is implemented and how?

Private entities supported by industry are funding this effort and working closely with the U.S. Dept. of Transportation as well as with most states. Just a few of the major organizations involved in this effort include the International Organization for Standardization (ISO), ASTM InternationalSAE InternationalInstitute of Electrical and Electronics Engineers (IEEE), National Transportation Communications for Intelligent Transportation System Protocol(NTCIP), American National Standards Institute (ANSI), European Committee for Standardization (CEN), European Committee for Electrotechnical Standardization (CENELEC), and the European Telecommunications Institute(ETSI).

In April 2018, as reported in the industry publication Transport Topics, two of the most prominent associations involved in setting standards, the Institute of Electrical and Electronics Engineers and the American Center for Mobility announced they have signed a memorandum of understanding with the  to help accelerate development and deployment of voluntary technical standards for connected and autonomous vehicles.

Lower costs to the consumer:

To some extent, the fact that consumers will spend less for transportation is a function of the convergence of increasingly automated manufacturing, the availability and superiority of new composite materials to replace expensive steel, global competition, and progressively lower costs for software, chip sets, sensors and other high-tech components. Moore’s law is alive and well, and doesn’t just apply to semiconductors. But lower costs and more options for consumers of transportation will not only result from ongoing advances in manufacturing, they will also result from the rollout of a variety of new business models that offer a variety of new modes of transportation.

The disruptive impact of Uber, a ride hailing service that has challenged the taxi industry to its roots, is an early example of what is coming. Uber and its competitors are already testing autonomous vehicles, something that will become common. These driverless taxis will cost less to ride, since there won’t be a driver. Similarly, privately funded “micro-transit” services will offer mini bus services based on a connectivity and AI driven dynamic awareness of consumer demand and road conditions, offering shared rides based on aggregating riders who are boarding and exiting the mini bus along routes that are optimized to move the most passengers the fewest miles in the lowest amount of time.

Ride sharing, the 21st century version of picking up a hitchhiker, will also become a more viable option than ever. For example, participants in many ride sharing services will be members, vetted in a manner similar to the vetting that occurs with the hosts and the occupants of Airbnb properties. The advantage for the vehicle owner, of course, is a having a paying passenger join them on their commute, with the added benefit of becoming eligible to drive in carpool lanes.

Car sharing, where the user takes over a vehicle, is similar to a conventional car rental. The differences are a reflection of the new technologies. For example, using their smart phone or other connected device, consumers will order a car, and within minutes the driverless vehicle will arrive wherever they are. The car can be rented by the hour, or per day, or for a longer period. The price includes fuel and insurance costs.

Also on the way are mobility services, online aggregators of all transportation options. These mobility services will offer consumers transportation options tailored to their preferences. A consumer will be presented with a variety of ways to reach their destination, ranging from a single vehicle going point-to-point to a collection of travel legs utilizing public and private transit services.

The sheer variety of these emerging transportation options, primarily funded by the private sector, suggest that there will be vibrant competition for the consumer, driving down prices. Another significant factor in lowering prices is the fact that in general, the transportation services being offered will involve multiple riders on each vehicle, spreading the per-mile costs over more people, lowering per-mile costs for each of them.

Less traffic congestion:

The ability of next generation vehicles to create cost-incentives for individuals to opt out of purchasing their own cars will reduce the number of cars competing for space on congested roads. It will also reduce the demand for parking spaces and parking garages. This will be accomplished in a variety of ways. Through ride hailing, ride sharing and micro-transit services, fewer cars will be used to deliver the same number of commuters from bedroom communities to urban centers. Through sharing of self driving cars, an early commuter may arrive at their destination, but the car itself will immediately drive itself to the nearest next consumer, transporting them to their destination instead of taking up a parking space for the rest of the day. Mobility services will present consumers with customized options, resulting in compelling incentives for them to opt out of purchasing a car, or a second car.

The other way 21st century vehicles will alleviate traffic congestion is because as semi-autonomous vehicles – for example, collision avoidance systems which are already standard on most new cars – and fully self-driving vehicles become widely adopted, the safe distance between vehicles will shrink, as will the safe speed for vehicles. The adoption of next generation vehicles will mean that the same network of lanes and roads will be able to deliver more people. Michigan’s  Center for Automotive Research, in their 2017 “Future Cities” report, depicts how in the long term, once autonomous cars are fully adopted, urban boulevards may be reconfigured with narrower lanes and fewer lanes, without compromising mobility.

Autonomous Cars – Same Road Capacity With Narrower and Fewer Lanes

Autonomous Cars

PREPARING FOR NEXT GENERATION VEHICLES

It appears likely that the technologies for next generation vehicles, operating on roads and in the air, will mature faster than our ability to develop policies and infrastructure to accommodate them. This is particularly difficult since autonomous vehicles will not suddenly displace conventional manually controlled vehicles on our roads, but will share the roads with them for many decades. But the encouraging possibility with next generation vehicles is that the public infrastructure necessary to support them is relatively limited compared to the transit solutions that currently consume huge allocations of public resources.

For example, establishing uniform standards for autonomous vehicles is being actively coordinated and funded by the major automakers and aerospace companies, along with other private sector participants. The role of the state and federal departments regulating highway travel and aviation is vital, but will not consume significant funds compared to the cost of major infrastructure investments.

In the case of aviation, next generation solutions, ranging from passenger drones today to the supersonic electric airplanes that are likely tomorrow, are virtually all designed for vertical takeoff and landing, meaning that expensive airport runway infrastructure does not require expansion in order to accommodate them.

Similarly, autonomous land-based vehicles are designed to operate at higher speeds in closer proximity to each other, reducing the need to increase road capacity. Moreover, the emerging business model for next generation vehicles strongly incentivizes consumers to forego purchasing their own car, opting instead for ride hailing, ride sharing, car sharing and micro-transit services, which also reduces the number of cars sharing the road. These new mobility solutions will also reduce demand for parking spaces and parking garages, taking further pressure off of infrastructure requirements.

It may be that for urban areas, the impact of next generation vehicles combined with the contributions from aerial transportation options, combined with congestion pricing, will mean that the only road investment necessary within urban centers is to maintain and upgrade existing roads. For major intercity connector roads, highways and freeways, however, important policy decisions loom. Because as it is, these roads are not designed or maintained in a manner sufficient to allow next generation vehicles to reach their potential.

The implications of this are profound. Next generation vehicles, in all sizes and configurations, have the potential to replace most if not all proposed mass transit solutions both for intercity and long-range travel. The maximum safe and sustainable cruising speed of a modern electric vehicle is conservatively pegged at 120 MPH. Vehicles of the future will not only be configured similarly to conventional cars and SUVs, they will also be mobile hotel rooms, entertainment lounges, offices, conference rooms, and buses of all sizes, offering countless levels of services. On properly designed and maintained roads, there is no reason these vehicular solutions cannot replace literally all current or proposed modes of surface based transit, certainly including high-speed rail but probably including light rail as well.

Policymakers have a choice. They can recognize that private industry is creating new ways to travel on land and in the air. They can cooperate to develop uniform standards and updated laws to expedite this transformation. They can revise zoning laws, redirect funding priorities, and invest in new roads and communications infrastructure. Or they can neglect road construction and instead continue to build public mass transit systems that offer dubious prospects of ever solving growing transportation bottlenecks.

Elon Musk’s Boring Company is a privately funded transit solution that transports private vehicles point-to-point underground, moving them on and off surface streets with elevators. On the Boring Company’s FAQ page, focused on ways to dramatically reduce the costs of tunneling, a provocative assertion is made: “The construction industry is one of the only sectors in our economy that has not improved its productivity in the last 50 years.”

The next installment in this series will explore the implications of this assertion. What would it take to improve productivity in the heavy road construction industry? There has been a healthy public discussion regarding how much it will cost to build California’s high speed railroad. But how much would it cost to build roads in California? How much would it cost not only to catch up on all the deferred maintenance on California’s roads, and upgrade them incrementally, but to actually build new roads, north to south and coast to mountains, engineered for the cars of the future?

*   *   *

This article is the 3rd in a series on California’s transportation future. The first installment was “California’s Transportation Future, Part One – The Fatally Flawed Centerpiece,” published in April 2018. The second installment was “California’s Transportation Future, Part Two – The Hyperloop Option,” published in May 2018. Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

California’s Unsustainable Energy Policies

 

Solar panelsGlowing tributes to Gov. Jerry Brown’s environmental legacy obscure how long California has been proclaiming itself the leader in fighting “climate change.” The crusade began with Brown’s predecessor, Arnold Schwarzenegger, who promoted and signed the “Global Warming Solutions Act” in 2006, setting initial targets for greenhouse-gas reduction and empowering the California Air Resources Board to enforce compliance with laws and regulations aimed at achieving these goals. Other significant legislation followed. Senate Bill 107, also passed in 2006, mandated a “renewable portfolio standard,” wherein at least 20 percent of California’s electricity would come from renewable sources by 2010. In 2008, the landmark Sustainable Communities and Climate Protection Act directed cities and counties to increase the housing density of their communities.

When Brown took over as governor in 2011, major environmental legislation accelerated. A 2011 law raised the renewable-portfolio standard to 33 percent by 2020; another, passed in 2015, pushed the standard to 50 percent by 2030. In 2016, California set a greenhouse-gas emission-reduction target of 40 percent below 1990 levels by 2030 and extended its “cap-and-trade” program to 2030. This is just a partial list. High-speed rail, water rationing, “urban-containment” policies, a virtual prohibition on conventional energy development, retrofit mandates for trucks and dwellings, and much more have come down from Sacramento in an attempt to “address climate change.”

Will any of it work? Is California setting an example that the world can follow?

The short answer: no. Renewables alone cannot power the global economy. The latest data on global energy consumption by source show how dependent the world remains on fossil fuels. In 2015, oil supplied 33 percent of all energy consumed globally, with coal accounting for 29 percent and natural gas 24 percent—adding up to 86 percent of all energy consumed. Hydro-electric power added another 7 percent and nuclear power 4 percent. Renewables—primarily wind and solar power—contributed the remaining 3 percent. Even tripling renewable capacity would scarcely affect the primacy of fossil fuel to the world’s economy. Moreover, renewables are not “greener” than conventional energy, particularly if conventional energy is produced using the cleanest technologies available. If all the governments on earth enforced on their people the experiment that California is committed to, the result would be the collapse of civilization.

Back in the 1990s, before environmentalism had become so politically divisive, the Worldwatch Institute published one of the most reputable environmentalist journals, in which the organization consistently advocated for methane (natural gas) as the “transitional fuel” to power the global economy until breakthrough technologies such as fusion power or satellite solar power stations became commercially viable. More recently, environmental activists such as Greenpeace cofounder Patrick Moore have championed nuclear power as an essential component of our energy future. No place on earth is more capable of developing clean fossil fuel and nuclear power than California. A 2012 report for the Congressional Research Service estimated that California offshore areas contain 10.13 billion barrels of oil and 11.73 trillion cubic feet of natural gas. Onshore, the state boasts the Monterey shale, which may contain upward of another 15 billion barrels of oil, according to the U.S. Energy Information Administration. Recommissioning and expanding California’s San Onofre nuclear power station and retaining the Diablo Canyon nuclear facility could easily provide five gigawatts of baseload electricity—enough to keep millions of electric vehicles on the road.

Similarly, no place is more capable than California of developing abundant water resources—though the state’s wrongheaded policies have helped create chronic water shortages. California still boasts the most elaborate system of inter-basin water transfers in the world. Upgrading water storage by, for example, raising the height of the Shasta Dam could allow Californians to collect additional millions of acre feet of storm runoff each year. And if California embraced state-of-the-art desalination technology, additional millions of acre-feet could supply arid Southern California cities along the coast, where most Californians reside.

In short, California has a choice to make: it can impoverish its population by creating an artificial scarcity of land, energy, and water, enforcing draconian restrictions on development in the name of fighting climate change. Or it can face reality and become a pioneer in a new age of clean-energy development. If the Golden State chooses the second course, it will create a viable example for the world to follow.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. This article originally appeared in City Journal.

Will the California Supreme Court Reform the “California Rule?”

California Supreme CourtMost pension experts believe that without additional reform, pension payments are destined to put an unsustainable burden on California’s state and local governments. Even if pension fund investments meet their performance objectives over the next several years, California’s major pension funds have already announced that payments required from participating agencies are going to roughly double in the next six years. This is a best-case scenario, and it is already more than many cities and counties are going to be able to afford.

California’s first major statewide attempt to reform pensions was the PEPRA (Public Employee Pension Reform Act) legislation, which took effect on January 1st, 2013. This legislation reduced pension benefit formulas and increased required employee contributions, but for the most part only affected employees hired after January 1st, 2013.

The reason PEPRA didn’t significantly affect current employees was due to the so-called “California Rule,” a legal argument that interprets state and federal constitutional law to, in effect, prohibit changes to pension benefits for employees already working. The legal precedent for what is now called the California Rule was set in 1955, when the California Supreme Court ruled on a challenge to a 1951 city charter amendment in Allen v. City of of Long Beach. The operative language in that ruling was the following: “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

To learn more about the origin of the California Rule, how it has set a legal precedent not only in California but in dozens of other states, two authoritative sources are “Overprotecting Public Employee Pensions: The Contract Clause and the California Rule,” written by Alexander Volokh in 2014 for the Reason Foundation, and “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform,” written by Amy B. Monahan, a professor at the University of Minnesota Law School, published in the Iowa Law Review in 2012.

Pension benefits, most simply stated, are based on a formula: Years worked times a “multiplier,” times final salary. Thus for each year a public employee works, the eventual pension they will earn upon retirement gets bigger. Starting back in 1999, California’s public sector employee unions successfully negotiated to increase their multiplier, which greatly increased the value of their pensions. In the case of the California Highway Patrol, for example, the multiplier went from 2% to 3%. But in nearly all cases, these increases to the multiplier didn’t simply apply to years of employment going forward. Instead, they were applied retroactively. For example, in a typical hypothetical case, an employee who had been employed for 29 years and was to retire one year hence would not get a pension equivalent to [ 29 x 2% + 1 x 3% ] x final salary. Instead, now they would get a pension equivalent to 30 x 3% x final salary.

Needless to say this significantly changed the size of the future pension liability. For years the impact of this change was smoothed over using creative accounting. But now it has come back to haunt California’s cities and counties.

Amazingly, the California rule doesn’t just prevent retroactive reductions to the pension multiplier. Reducing the multiplier retroactively might seem to be reasonable, since the multiplier was increased retroactively. But the California rule, as it is interpreted by public employee unions, also prevents reductions to the multiplier from now on. And on that question the California Supreme Court has an opportunity, this year, to make history.

Ironically, the active cases currently pending at the California Supreme Court were initiated by the unions themselves. In particular, they have challenged the PEPRA reform that prohibits what is known as “pension spiking,” where at the end of a public employee’s career they take steps to increase their pension. Spiking can take the form of increasing final pension eligible salary – which can be accomplished in various ways including a final year promotion or transfer that results in a much higher final salary. Another form of spiking is to increase the total number of pension eligible years worked, and the most common way to accomplish this is through the purchase of what is called “air time.”

Based on fuzzy math, the pension systems have offered retiring employees the opportunity to pay a lump sum into the pension system in exchange for more “service credits.” Someone with, say, ten years of service, upon retirement could pay (often the payment that would be financed, requiring no actual payment) to acquire five additional years of service credits. This would increase the amount of their pension by 50%, since their pension would now be based on fifteen years x 3% x final salary, instead of 10 years x 3% x final salary. To say this is a prized perk would be an understatement. How it became standard operating procedure, much less how the payments made were calculated to somehow justify such a major increase to pension benefits, is inexplicable. But when PEPRA included in its reform package an end to spiking, even for veteran employees, the unions went to court.

The spiking case that has wound its way to the California Supreme Court with the most disruptive potential started in Alameda County, then was appealed to California’s First Appellate Court District Three. The original parties to the lawsuit were the plaintiffs, Cal Fire Local 2881, vs CalPERS (Appellate Court case). On December 30, 2016, the appellate court ruled that PEPRA’s ban on pension spiking via purchases of airtime would stand. The union then appealed to the California Supreme Court.

An excellent compilation of the ongoing chronology of the California Supreme Court case Cal Fire Local 2881 v. CalPERS (CA Supreme Court case) can be found on the website of the law firm Messing, Adam and Jasmine. It will show that by February 2017 the unions filed a petition for review by the California Supreme Court, and that the court granted review in April 2017. In November 2017, Governor Brown got involved in the case, citing a compelling state interest in the outcome. Apparently not trusting his attorney general nor CalPERS to adequately defend PEPRA, the Governor’s office joined the case as an “intervener” in opposition to Cal Fire Local 2881. For nearly a year, both petitioners and respondents to the case have been filing briefs.

This case, which informed observers believe could be ruled on by the end of 2018, is not just about airtime. Because whether or not purchasing airtime is protected by the California Rule requires clarification of the California Rule. The ruling could be narrow, simply affirming or rejecting the ability of public employees to purchase airtime. Or the ruling could be quite broad, asserting that the California Rule does not entitle public employees to irreducible pension benefits, of any kind, to apply for work not yet performed.

One of many reviews of the legal issues confronting the California Supreme Court in this case is found in the amicus brief prepared by the California Business Roundtable in support of the respondents. A summary of the points raised in the California Business Roundtable’s amicus brief is available on the website of the Retirement Security Initiative, an advocacy organization focused on protecting and ensuring the fairness and sustainability of public sector retirement plans. An excerpt from that summary:

“The Roundtable brief asserts the California Rule has numerous legal flaws:

(1) It violates the bedrock principle that statutes create contractual rights only when the Legislature clearly intended to do so.

(2) It violates black-letter contract law by creating contractual rights that violate the reasonable expectations of the parties.

(3) It violates longstanding constitutional law by assuming that every contractual impairment automatically violates the California and Federal Contract Clauses.

(4) It lacks persuasive or precedential value. The Rule was initially adopted without anything resembling a full consideration of the relevant issues.

(5) It has been almost uniformly rejected by federal and state courts—including by several courts that previously accepted it.

(6) It has had—and will continue to have—devastating economic consequences on California’s public employers.”

Pension reform, and pension reformers, have often been characterized as “right-wing puppets of billionaires” by the people and organizations that disagree. The fact that one of the most liberal governors in the nation, Jerry Brown, actively intervened in this case in support of the respondent and in opposition to the unions, should put that characterization to rest.

If the California Supreme Court does dramatically clarify the California Rule, enabling pension benefit formulas to be altered for future work, it will only adjust the legal parameters in the fight over pensions in favor of reformers. After such a ruling there would still be a need for follow on legislation or ballot initiatives to actually make those changes.

What California’s elected officials and union leadership, for the most part, are belatedly realizing, is that without more pension reform, the entire institution of defined benefit pensions is imperiled. Hopefully California’s Supreme Court will soon make it easier for them all to make hard choices, to prevent such a dire outcome.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

REFERENCES

California Government Pension Contributions Required to Double by 2024 – Best Case
– California Policy Center

California Public Employees’ Pension Reform Act (PEPRA): Summary And Comment
– Employee Benefits Law Group

Allen v. City of of Long Beach
– Stanford University Law Library

Overprotecting Public Employee Pensions: The Contract Clause and the California Rule
– Alexander Volokh, Reason Foundation

Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform
– Amy Monahan, Iowa Law Review

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?
– California Policy Center

Cal Fire Local 2881, vs CalPERS (Appellate Court case)
– JUSTIA US Law Archive

Cal Fire Local 2881 v. CalPERS, California Supreme Court, Case No. S239958 – Case Review
– Messing, Adams and Jasmine

Intervener and Respondent State of California’s Answer Brief on the Merits
– Amicus Brief, Governor’s Office, State of California

Amicus Brief of the California Business Roundtable in Support of Respondents
– Amicus Brief, California Business Roundtable (CBR)

RSI Supports California Business Roundtable Amicus Brief
– Summary of CBR Amicus Brief by Retirement Security Initiative

Resources for California’s Pension Reformers
– California Policy Center

The Underrecognized, Undervalued, Underpaid, Unfunded Pension Liabilities

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

“It’s the economy, stupid.”
–  Campaign slogan, Clinton campaign, 1992

To paraphrase America’s 42nd president, when it comes to public sector pensions – their financial health and the policies that govern them – it’s the unfunded liability, stupid.

The misunderstood, obfuscated, unaccountable, underrecognized, undervalued, underpaid, unfunded pension liabilities.

According to CalPERS own data, California’s cities that are part of the CalPERS system will make “normal” contributions this year totaling $1.3 billion. Their “unfunded” contributions will be 41% greater, $1.8 billion. As for counties that participate in CalPERS, this year their “normal” contributions will total $586 million, and their “unfunded” contributions will be 36% greater at $607 million.

That’s nothing, however. Again using CalPERS own estimates, in just six years the unfunded contribution for cities will more than double, from $1.8 billion today, to $3.9 billion in 2024. The unfunded contribution for counties will nearly triple, from $607 million today to $1.5 billion in 2024 (download spreadsheet summary for all CalPERS cities and counties).

Put another way, by 2024, “normal contribution” payments by cities and counties to CalPERS are estimated to total $2.8 billion, and the “unfunded contribution” payments are estimated to total almost exactly twice as much, $5.5 billion.

So what?

For starters, every pension reform that has ever made it through the state legislature, including the Public Employee Pension Reform Act of 2013(PEPRA), does NOT require public employees to share in the cost to pay the unfunded liability. The implications are profound. As public agency press releases crow over the phasing in of a “50% employee share” of the costs of pensions, not mentioned is the fact that this 50% only applies to 1/3 of what’s being paid. Public employees are only required to share, via payroll withholding, in the “normal cost” of the pension.

Now if the “normal cost” were ever estimated at anywhere near the actual cost to fund a pension, this wouldn’t matter. But CalPERS, according to their own most recent financial report, is only 68% funded. That is, they have investments totaling $326 billion, and liabilities totaling $477 billion. This gap, $151 billion, is how much more CalPERS needs to have invested in order for their pension system to be fully funded.

A pension system’s “liability” refers to the present value of every future pension payment that every current participant – active or retired – has earned so far. In a 100% funded system, if every active employee retired tomorrowand no more payments ever went into the system, if the invested assets were equal to that liability, those assets plus the estimated future earnings on those invested assets would be enough to pay 100% of the estimated pension payments in the future, until every individual beneficiary died.

A pension system’s “normal payment” refers to the amount of money that has to be paid into a fully funded system each year to fund the present value of additional pension benefits earned by active employees in that year. When the normal payment isn’t enough, the unfunded liability grows.

And wow, has it grown.

CalPERS is $151 billion in the hole. All of California’s state and local pension systems combined, CalPERS, CalSTRS, and the many city and county independent systems, are estimated to be $326 billion in the hole. And that’s extrapolated from estimates recognized by the pension funds themselves. Scenarios that employ more conservative earnings assumptions calculate total unfunded liabilities that are easily double that amount.

With respect to CalPERS, how did this unfunded liability get so big?

An earlier CPC analysis released earlier this year attempts to answer this. Theories include the following: (1) Letting the agencies decide which type of asset smoothing they’d like to employ, (2) permitting the agencies to make minimal payments on the unfunded liability so the liability would actually increase despite the payments, (3) making overly optimistic actuarial assumptions, (4) not taking action sooner so the unfunded payment wouldn’t end up being more than twice as much as the normal payment.

One final alarming point.

CalPERS recently announced that for any future increases to the unfunded liability, the unfunded payment will have to be calculated based on a 20 year, straight-line amortization. This is a positive development, since the more aggressively participants pay down the unfunded liability, the less likely it is that these pension systems will experience a financial collapse if there is a sustained downturn in investment performance. But it begs the question – why, if only increases to the unfunded liability have to be paid down more aggressively, is the unfunded payment nonetheless predicted to double within the next six years?

CalPERS information officer Tara Gallegos, when presented with this question, offered the following answers:

(1) The discount rate (equal to the projected rate-of-return on invested assets) is being lowered from 7.5% to 7.0% per year. But this lowering is being phased in over five years, so it will not impact the 2018 unfunded contribution. Whenever the return-on-investment assumption is lowered, the amount of the unfunded liability goes up. By 2024, the full impact of the lowered discount rate will have been applied, significantly increasing the required unfunded contribution.

(2) Investment returns were lower than the projected rate of return for the years ending 6/30/2015 (2.4%) and 6/30/2016 (0.6%). Lower than projected actual returns also increases the unfunded liability, and hence the amount of the unfunded payment, but this too is being phased-in over five years. Therefore it will not impact the unfunded payment in 2018, but will be fully impacting the unfunded payment by 2024.

(3) The unfunded payment automatically increases by 3% per year to reflect the payroll growth assumption of 3% per year. This alone accounts, over six years, for 20% of the increase to the unfunded payment. The reason for this is because most current unfunded payments are calculated by cities and counties using the so-called “percent of payroll” method, where payments are structured to increase each year. CalPERS is going to require new unfunded payments to not only be on a 20 year payback schedule, but to use a “level payment” structure which prevents negative amortization in the early years of the term. Unfortunately, up to now, cities and counties were permitted to backload their payments on the unfunded liability, and hence each year have built in increases to their unfunded payments.

The real reason the unfunded liability has gotten so big is because nobody wanted to make conservative estimates. Everybody wanted the normal payments to be as small as possible. The public sector unions wanted to minimize how much their members would have to contribute via withholding. CalPERS and the politicians – both heavily influenced by the public sector unions – wanted to sell generous new pension enhancements to voters, and to do that they needed to make the costs appear minimal.

As a result, taxpayers are now paying 100% of an “unfunded contribution” that is already a bigger payment than the normal contribution, and within a few years is destined, best case, to be twice as much as the normal contribution.

Camouflaged by its conceptual intricacy, the cleverly obfuscated, deliberately underrecognized, creatively undervalued, chronically underpaid, belatedly rising unfunded pension liabilities payments are poised to gobble up every extra dime of California’s tax revenue. And that’s not all…

Sitting on the blistering thin skin of a debt bubble, a housing bubble, and a stock market bubble, amid rising global economic uncertainty, just one bursting jiggle will cause pension fund assets to plummet as unfunded liabilities soar.

And when that happens, cities and counties have to pay these new unfunded balances down on honest, 20 year straight-line terms. They’ll be selling the parks and libraries, starving the seniors, releasing the criminals, firing cops and firefighters, and enacting emergency, confiscatory new taxes.

Whatever it takes to feed additional billions into the maw of the pension systems.

Budget surplus? Dream on.

*   *   *

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

RELATED ARTICLES

How to Restore Financial Sustainability to Public Pensions, February 14, 2018

How to Assess Impact of a Market Correction on Pension Payments, February 7, 2018

California Government Pension Contributions Required to Double by 2024 – Best Case, January 31, 2018

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?, January 24, 2018

How Much More Will Cities and Counties Pay CalPERS?, January 10, 2018

If You Think the Bull Market Rescued Pensions, Think Again, December 7, 2017

Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?, October 26, 2017

Coping With the Pension Albatross, October 13, 2017

How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances, September 29, 2017

Pension Reform – The San Jose Model, September 6, 2017

Pension Reform – The San Diego Model, August 23, 2017

A Post-Janus Agenda for California’s Public Sector Unions

School education“If you do not prevail in this case, the unions will have less political influence; yes or no?” Kennedy asked. “Yes, they will have less political influence,” Frederick answered.
–  an excerpt from the Janus vs. AFSCME trial, quoted in the Washington Post, February 26, 2018

This past week the U.S. Supreme Court heard arguments in the Janus vs. AFSCME case. Mark Janus, a public employee in Illinois, is challenging the right of unions to charge “fair share” fees, because he disagrees with the political agenda which he claims his fees help pay for.

What if government unions were accountable to their members? What if the politics of these unions mirrored the politics of the members? Would Mark Janus still want out?

It’s already possible for public employees to “opt-out” of paying that portion of their dues that fund explicitly political activity, although in practice the unions typically make that opt-out process very difficult. But Mark Janus is arguing that all dues paid to public sector unions are political, because the consequences of collective bargaining in the public sector impact taxes, government debt, budgets and spending priorities. He is arguing that the agenda of public sector unions, including collective bargaining, is inherently political.

In reality, saying all public sector union activity is inherently political is itself an understatement. In California, public sector unions spend about $300 million per year on explicitly political activity – funding political campaigns, political action committees, and lobbyists. But they spend at least another $700 million every year not just on collective bargaining – which for government workers is inherently political – but on education campaigns that attempt to influence voters on countless political topics.

Equally important is the influence California’s public sector unions wield that doesn’t derive its power from how much money they can spend, but from the fact that elected officials come and go, but the union hierarchy is permanent. Public employees who want to advance in their careers do not cross these unions.

Government unions are so powerful that only a very aggressive outcome in the Janus ruling will suffice to significantly undermine their power in California. The court must rule that union membership must be renewed annually via a transparent opt-in process. Only then will these unions become accountable to their members.

If there is an aggressive ruling in the Janus case that truly forces public sector unions to become accountable, imagine how it may affect the political agenda of these unions. One may hope it would ignite a civil war within these unions. Even in California, for example, about 40% of public school teachers identify as conservatives. Among public safety employees, a majority identify as conservative. Yet these unions are the power behind a state legislature ran by the most liberal politicians in the history of the United States.

Just for a moment, consider what these unions could do, if their leadership was committed to making California a land of opportunity again:

A PRO-WORKER AGENDA FOR CALIFORNIA’S PUBLIC SECTOR UNIONS
(if they actually cared about ALL of California’s working families)

1 – Restore the balance in California’s colleges and universities so that the ratio of faculty to administrators is 2 to 1, instead the current ratio wherein administrators often outnumber teachers.

2 – End all discrimination and base college admissions purely on merit. Expand STEM curricula so it represents 50% of college majors instead of the current 20%.

3 – Enforce the Vergara reforms so it is easier to retain quality public school teachers and easier to fire the incompetent ones. Eliminate barriers to charter schools.

4 – Restructure the penal system to make it easier for prisoners to perform useful public services. For example. along with working the fire lines during fire season, they could work all year clearing dead trees out of California’s forests. Use high-tech monitoring devices to reduce costs. Reserve current prisons only for the truly incorrigible.

5 – Scrap the High-Speed Rail project and instead use the proceeds to add one lane to every major interstate highway in California.

6 – Use additional High-Speed Rail funds to complete plant upgrades so that 100% of California’s sewage is reused, even treated to potable quality.

7 – Pass legislation to streamline approval of the proposed desalination plant in Huntington Beach, and fast-track applications for additional desalination plants, especially in the Los Angeles basin.

8 – Spend the entire proceeds of the $7 billion water bond, passed overwhelmingly by Californians in 2014, on storage. Build the Los Banos Grandes, Sites and Temperance Flat reservoirs, adding over 5 million acre feet of storage to the California Water Project. Pass aggressive legislation and fund aggressive legal actions and counter-actions, to lower costs and enable completion of these projects in under five years.

9 – Permit slant drilling to access 12 trillion cubic feet of natural gas deposits from land-based rigs along the Southern California coast. Build an LNG terminal off the coast in Ventura County to export California’s natural gas to foreign markets. Permit development of the Monterey Shale formation to extract oil and gas.

10 – Permit construction of “generation 3+” nuclear power plants in geologically stable areas of California’s interior. Permit construction of new natural gas power plants.

11 – Repeal AB32 and SB375 and make it easy for developers to build homes on the suburban and exurban fringes, instead of just “in-fill” that destroys existing neighborhoods.

12 – Require California’s public employee pension funds to invest a minimum of 10% of their assets in infrastructure projects as noted above. They could issue fixed rate bonds or take equity positions in the revenue producing projects, or a combination of both. This would immediately unlock approximately $80 billion in construction financing to rebuild California’s infrastructure. At the same time, save the pension systems by striking down the “California Rule” that prevents meaningful pension reform.

These reforms would lower the cost of living in California, at the same time as they would create resource abundance and hundreds of thousands of high-paying jobs.

It is encouraging to think that the Janus ruling will reduce the political influence of public sector unions. But another possibility is equally tantalizing, that Janus will force unions to become accountable to their members. This, in turn, could be reflected in these unions fighting, for a change, to help all Californians.

To expect public sector unions to pursue the agenda outlined above is fanciful. But if California’s public sector unions were as committed to that pro-growth agenda as they are to their current agenda which is bankrupting California’s cities and counties at the same time as it obsesses over race, gender, and environmentalist extremism, they could probably get all of it done. And no other special interest could do this.

Only California’s public sector unions have enough power to successfully take on their current allies; the environmentalist lobby, the trial lawyers, and their puppet masters, the leftist oligarchy. No other special interest could take on these profiteers who have gotten filthy rich spouting leftist tripe, while they impoverished a generation of Californians.

Post Janus, it is time for a civil war within public sector unions. Using, hopefully, their option to not opt-in, it is time for public servants who care about ordinary Californians to make their voices heard.

Edward Ring is an analyst with the California Policy Center, which he co-founded in 2010. He is a prolific writer on the topics of political reform and sustainable economic development, and has been interviewed, published or quoted by the Wall Street Journal, Forbes, the Economist,  Die Zeit, the Los Angeles Times, Politico, and other media outlets.

Innovative Incarceration Could Result in Lower Costs and Safer Citizens


PrisonThe average annual cost to house a prisoner in California is $71,000, and according to the California’s Legislative Analyst’s Office, the cost has risen 45% since just 2011. And as costs have soared, California’s policymakers have resorted to creative ways to release inmates from California’s overcrowded prisons. But what if that Californian creativity could be harnessed to lower the cost of incarceration?

This process began in 2011, when the U.S. Supreme Court ruled that California must reduce its state prison population to no more than 137% of its design capacity within two years. In an attempt to comply, the state Legislature passed Assembly Bill 109, which required non-violent, non-serious, and non-sexual offenders with sentences of longer than one year to be housed in county jail facilities rather than state prisons.

Because AB109, the so-called prison “realignment,” merely shifted costs for incarceration from the state to the counties, two additional measures of significance were passed in an attempt to reduce the overall inmate population. These were sold to voters as reform initiatives, and both of them passed with substantial majorities. Prop. 47, passed in 2014, reclassified several felonies as misdemeanors, which had the effect of reducing prison sentences in new cases, and earlier release for prisoners sentenced for crimes no longer classified as felonies. Prop. 57, passed in 2016, granted early release opportunities to inmates with good behavior who had committed non-violent crimes.

These measures resulted in the early release of tens of thousands of inmates onto California’s streets. Since enactment, violent crime has increased in California, although the data is mixed. For example, according to the FBI, while violent crime in California increased in 2015 and 2016, it increased across most of the U.S. in those years. As stated in a recent study by the Public Policy Institute of California, “California’s violent crime rate increased by 3.7% in 2016 to 444 per 100,000 residents. There have been other recent upticks in 2012 and 2015, but the statewide rate is still comparable to levels in the late 1960s.”

More recently – most crime statistics for 2017 are not yet available – the L.A. Times reports that in 2017 “in Los Angeles, homicides are down, but violent crime is up.” A big picture perspective on crime trends in California can be seen in this graphic produced by Politifact.com using data from the California Legislative Analyst’s Office:

California Crime Trends – Crime Rates per 100,000 Residents

California Crime Trends

As can be seen, rates of crime in California rose throughout the 60s and 70s, reaching a high plateau that lasted right up until around 1994, when California passed the three strikes law. After that, crime rates fell precipitously for years, reaching historic lows. Since 2014, rates of crime have been rising, even though they remain relatively low from a historical perspective.

But why should we be happy with a 0.4% rate of violent crime? Why should 4% of Californians be victimized by a violent criminal in any given decade? And who’s to say that crime rates would not have continued to decline, if it weren’t for the passage of Props. 47 and 57?

More to the point, whether or not Californians should or should not incarcerate more criminals, or impose longer sentences on criminals, Californians don’t have that option. Because it costs too much to house prisoners in California. How can California house more inmates without building more conventional prisons, which are staggeringly expensive?

An excellent resource prepared by BackgroundChecks.org shows the costs per prisoner in other states. Nevada, our neighbor to the east, only spends $17,851 per year per prisoner. Alabama has the lowest cost, at $14,780 per prisoner. Arizona, $25,397. Even Oregon and Washington, California’s left coast comrades in bloated inefficient government excess, manage to spend far less than California does, paying per prisoner costs of $44,021 and $37,841, respectively.

Why?

When you read up on costs per prisoner in other states, the results are somewhat amusing. Because in those states, the conventional wisdom is that costs are out of control. Alabama’s costs per prisoner have “doubled since 2003.” In Nevada, “overtime costs continue to mount.” Imagine that. But in all states, the same factors contribute to rising costs to house prisoners. California just spends more, in every category. Here is a table from California’s Legislative Analyst’s Office showing details of the cost per prisoner.

California’s Costs per Prisoner – Itemized Costs

Costs per prisoner

It’s likely these costs are understated. Does “Security” include the additional amounts that will be necessary to properly fund the pensions that are due our correctional officers? Does “Facility Operations” include the payments on the billions that have been borrowed by the state to construct California’s 34 state prisons?

In the recently approved California state budget for 2017-18, $11.4 billion is allocated to the Department of Corrections, up another $286 million (2.6%) from last year. But again, this doesn’t begin to represent the true cost to taxpayers. A recent UCLA study estimated the cost of incarceration for just the County of Los Angeles at nearly $1.0 billion last year.

It’s likely the total cost to California’s taxpayers to incarcerate criminals – taking into account state and local expenses – is easily twice the $11.4 billion budgeted by the state. And these inflated costs can be attributed to two causes. First, the excessive costs caused by unionized government – pensions in particular, and excessive costs to build state prisons, caused by a union controlled state legislature requiring needlessly expensive project labor agreements. Second, and arguably even more significant, the overall excessive cost-of-living in California – also a byproduct of policies enacted by California’s union controlled state legislature – which makes everything more expensive.

The burden of realignment – foisting responsibility for state prisoners back onto the counties where they were convicted – is also an opportunity. Because counties, like states in our federal system, are laboratories of democracy, laboratories of policy. Why can’t California’s counties experiment with new modes of incarceration. If inmates are sequestered to Cal Fire to work the fire lines, why can’t they do other tasks throughout the rural regions of California? Why not use inmates to improve rural access roads, remove dead trees from our drought-stressed forests, or even work in agriculture?

While many inmates may be too dangerous to do this sort of work, with new technologies to monitor and control prisoners, it is possible that prisoners who would not be viable candidates for these programs in the past would be qualified today. Electronic monitoring devices are becoming increasingly sophisticated. Why not use these devices to monitor not only location, but heart rate or, who knows, even brain waves or other physical indicators of imminent fight or flight? Wouldn’t adding additional capabilities to these devices allow more effective means to deter escape and even prevent violence? Why not use swarms of inexpensive drones to hover in the vicinity of inmates, reducing the number of guards required, and replacing some or all layers of expensive security fencing? Why not equip these drones with nonlethal means to prevent escape or violence?

Law enforcement has stayed abreast of new technologies and that is one of the reasons rates of crime are down sharply across America. While the impact of new technologies must be constantly scrutinized, and some of them may be problematic, there is no reason not to extend these tools beyond law enforcement into the corrections industry. It’s reasonable to assume most inmates would prefer a virtual prison to the penitentiary. One that afforded them mobility, equal or greater safety, a mission, a chance to engage in a vocation, and fresh air. Such innovation might also bring welcome relief to taxpayers.

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?

Gimmick – a concealed, usually devious aspect or feature of something, as a plan or deal.
– Dictionary.com

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

In the past week, from Millbrae’s city hall to the inner sanctum of the CalPERS leviathan in Sacramento, defenders of pensions have been active. In particular, they have criticized the recent analysis, published by the California Policy Center, “How Much More Will Cities and Counties Pay CalPERS?” It would advance the ongoing debate over pensions to summarize the points of the CPC analysis, how CalPERS and their allies attacked those points, and how those attacks might be challenged.

On January 19th, in a report published online by Chief Investment Officer magazine entitled “CalPERS: Ring’s Flippant Claim of ‘Tricky Accounting Gimmicks’ Is False,” author Christine Giordano interviewed CalPERS spokesperson Amy Morgan. Tellingly, they did not discuss the substance of the CPC analysis, which specified, using CalPERS’ own data, how much more cities and counties are going to have to pay CalPERS. They focused instead on specific criticisms of CalPERS that followed those payment calculations.

As noted by the title of the report, CalPERS spokesperson Amy Morgan seemed to suggest the characterization of their accounting practices as employing “gimmicks” is not backed up by evidence. Morgan is invited to review the following evidence, after which she may join our readers in deciding whether or not “gimmicks” were employed.

GIMMICK #1  –  THE CORRUPTION OF “ASSET SMOOTHING”

Asset smoothing is a practice whereby pension funds do not overestimate their assets after years of good returns, nor underestimate their assets after years of poor returns. It is a good way to avoid overreacting to market volatility. But in 2001, when the Dow Jones stock index had already been correcting for over a year and the Nasdaq was collapsing, CalPERS abdicated their responsibility to set the rules on smoothing.

When participating agencies in the CalPERS system were contemplating whether or not to follow the lead of the California Highway Patrol (SB 400, 1999) and retroactively increase pension benefits, CalPERS sent projections to these agencies in which a CalPERS actuary presented to elected officials three distinct values for the assets they had invested with CalPERS. Remarkably, that document gave these agency officials the liberty to choose which one they’d like to use – the higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating. The usual disclaimers were present, but the mere fact that city officials were given three scenarios is suspect. Obviously these officials would be under pressure to pick the scenario that provided the biggest benefit enhancement for the lowest cost. Read “Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?” for more details including several source documents.

One of the most revealing documents is exemplified by the “Contract Amendment Cost Analysis,” sent to Pacific Grove by CalPERS in July, 2001. Here is an excerpt from that document, showing the choices CalPERS offered Pacific Grove:

The available rate choices are offered under three different Alternatives:
Alternative 1 – No increase in Actuarial Value of Assets
Alternative 2 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 100% of Market Value of Assets
Alternative 3 – Actuarial Value of Assets increased by twice the increase in the Present Value of Benefits due to the amendment, limited to 110% of Market Value of Assets

To reiterate: CalPERS provided abundant disclaimers. They suggested that given recent “market volatility,” city officials “are strongly encouraged to have in-depth discussions with your CalPERS actuary about the financial consequences of any amendment.”

Now let’s get real: Further on in this same letter, CalPERS provides a breakdown of how much pension benefit enhancements will cost in terms of annual contributions as a percent of payroll under each of these three scenarios:

Alternative 1 – The actuarial value of the assets is not tampered with, the normal cost goes from 4.6% to 25.0%.
Alternative 2 – The actuarial value of the assets is lifted up to market value, the normal cost goes from 4.6% to 19.9%.
Alternative 3 – The actuarial value of assets goes up to 110% of the market value, the normal cost – to implement a massive, retroactive enhancement to pension benefits – goes from 4.6% to 6.2%.

What option would you choose, if you were a city manager whose own pension would be enhanced, or a city council member who has to answer to powerful unions whose members want more generous pension formulas?

The reason CalPERS was able to cram this through, in July 2001 as the market was cratering, was based on their decision to present various asset “smoothing” options to members. Why? Because the smoothing options they’d been using were understating the value of their assets because stock values had exploded in the final years of the 1990s. One can only speculate as to why they did this as late as July 2001 when it was obvious the internet stock bubble had popped. It’s possible CalPERS officials knew several agencies had already lobbied for pension benefit enhancements and the officials were under pressure to leave no agency behind. But to offer local bureaucrats and elected officials a choice of various asset smoothing methods was passing the buck.

Overnight, the CalPERS practice of asset smoothing went from being a prudent accounting guideline to a clever rationalization for disastrous policy decisions. If that’s not a gimmick, I don’t know what is.

GIMMICK #2 – CREATIVE AMORTIZATION OF UNFUNDED LIABILITY

When you talk about “tricky accounting gimmicks,” it’s hard to find one worse than the methods the participating agencies chose to amortize their unfunded liability. To be fair, final responsibility for these decisions usually rests with the cities and counties. But CalPERS should have tried to crack down on these practices a long time ago, and indeed, has recently become more aggressive in doing just that. The basic choice facing agencies with huge unfunded liabilities is whether they want to pay them off aggressively, or come up with creative accounting techniques that push the tough repayments into the future. For example, instead of using a “level payment” repayment calculation, many of them use a “percent of payroll” scheme which allows for graduated payments.

In practice, this means calculating a stream of payments that will pay off the liability in 30 years, but varying the payments so that as projected payroll increases, the payment increases. This allows agencies to make low payments in the early years of the amortization term, which frequently means the unfunded liability isn’t even being reduced in the early years of the amortization term. Then when the payments become burdensome, they refinance the new, larger unfunded liability, to get that unfunded payment down again, in a new tranche, again using the same “level percent of payroll method.”

Anyone who lost their home because a “negative amortization” loan conned them into buying something they couldn’t afford would likely call that type of loan a “gimmick.” Similarly, negative amortization payment schedules on unfunded pension liabilities are also gimmicks. To their credit, CalPERS is now recommending 20-year straight line amortization. Which begs the question, why didn’t they do this all along?

GIMMICK #3 – OVERESTIMATING LONG-TERM RATE-OF-RETURN ASSUMPTIONS

CalPERS spokesperson Morgan correctly claims that CalPERS returns have averaged an 8.4% return over the past 30 years. But Morgan conveniently selects the 30 year timeframe to capture all of the pre-1999 run-up in stocks that began in the Reagan years as interest rates were reduced from inflation-fighting highs of 16% (30 year T-bill in the early 1980s) and American consumers began piling on debt. The 20-year return for CalPERS investments through June 30, 2017 is 6.58%. And these last 20 years of returns are far more relevant, because not quite 20 years ago is when CalPERS began to offer pension benefit enhancements that were sold as affordable when they clearly are not.

But if CalPERS is exceeding its projected rates of return over the past 30 years, why is it only 68% funded (ref. CalPERS 2016-17 CAFR, page 4, “Funding”)? At the end of a prolonged bull market, pension systems should be overfunded. Being 68% funded would not be terribly alarming if we were at the end of a prolonged bear market, but we’re in the opposite place. How can CalPERS possibly claim their actuaries are doing a competent job, if the system is this underfunded at this point in the market cycle? For more on this, read “If You Think the Bull Market Rescued Pensions, Think Again.”

It is important to emphasize that even if CalPERS can get a 7.0% return on investment – and there is some chance that they can – why did the agency wait until it was 68% funded to announce the drop in its projected returns from 7.5% to 7.0%? The United States economy is in the terminal phases of a more than 60 year long-term credit cycle, and one might argue there is a stronger case to be made that even 7.0% is highly optimistic. But we like optimism, so never mind that for now. Why wait until 2018 to phase in that half-point drop? The actuaries at CalPERS are well aware how sensitive their payment schedules are to even half-point drops in long-term rate-of-return assumptions. Overstating returns understates true cost. Is this an accounting gimmick? Only if you can prove intent. But read on.

GIMMICK #4 – QUIETLY ALLOWING THE UNFUNDED PAYMENT TO DWARF THE “NORMAL” PAYMENT

Every year, each active worker who gets CalPERS benefits vests another year of service. This means that in the future, during their retirement years, they will have an incrementally greater pension benefit in recognition of one more year of work. To pay for that incrementally greater pension benefit in the future, additional money must be invested today. That amount of money is called the “normal” contribution. But when the “normal” contribution isn’t enough, and it hasn’t been for years, the so-called unfunded liability grows. This unfunded liability represents the amount by which invested pension assets need to increase in order to earn enough to eventually pay for all the future pensions that have been promised.

This “unfunded liability” may seem theoretical when a pension system has hundreds of billions in assets. But it has to get paid down, because when there aren’t enough assets in the pension system earning interest, higher contributions are inevitably required from the participating agencies. If the unfunded liability isn’t reduced via catch-up payments, it will grow even if the normal contributions are adequate to cover newly earned benefits.

This reality is corroborated using CalPERS’ own data, which announces that payments required, as a percent of payroll, are set to increase by 50% (in some cases much more) over the next six years in nearly every agency it serves. And where are these projected increases most pronounced? In the unfunded contribution – that payment to reduce the unfunded liability.

And why does the unfunded liability grow in the first place? Because the normal contribution is too low. Why is the normal contribution too low? Could it be because public employees are only required to assist (via payroll withholding) to pay the normal contribution? Could that be the reason that lifespans were underestimated and returns were overestimated? The actuaries obviously got something wrong, because CalPERS is only around 68% funded. You can download the spreadsheet that shows the impact of this on California’s cities and counties here – CalPERS-Actuarial-Report-Data-Cities-and-Counties.xlsx.

In the original CPC report, along with the term “gimmick,” the term “outrageous” was used. If you don’t think sparing the beneficiaries of these pensions any responsibility to share in the costs to pay down the unfunded liability isn’t outrageous, you aren’t paying attention. For example, by 2024, using CalPERS own data, the City of Millbrae will be paying CalPERS a normal contribution of $1.0 million, and an unfunded, or “catch-up” contribution of $5.8 million – nearly six times as much! Is Millbrae just an isolated example? Not really.

Again, using CalPERS’ own data, in 2017-18, their 426 participating cities will contribute $3.1 billion to CalPERS, an amount equal to 32% of their cumulative payroll. In 2024-25, just six years from now, they are estimated to contribute 5.8 billion, 48% of payroll. And the normal vs unfunded contributions? This year in the cities in the CalPERS system, 13% of payroll constitutes the normal contribution and 19% of payroll constitutes the unfunded contribution – for which current employees and retirees have no responsibility to help pay down. In 2024-25? The normal contribution is estimated to increase to 16% of payroll, and the unfunded contribution, rising to $4.0 billion, is estimated to increase to 33% of payroll.

Put another way, today the unfunded “catch-up” pension contribution for California’s cities, cumulatively, is 140% of the normal contribution. By 2024-25, that “catch-up” contribution is going to be 210% of the normal contribution, more than twice as much! And participating individual employees and retirees have zero obligation to help pay it down, even though that payment is now twice as much as the normal payment.

But it’s not the fault of the individual beneficiaries. The responsibility lies with CalPERS and the politicians they reassured for all these years, using gimmicks.

Let’s review these practices: (1) Letting the agencies decide which type of asset smoothing they’d like to employ, (2) permitting the agencies to make minimal payments on the unfunded liability so the liability would actually increase despite the payments, (3) making overly optimistic actuarial assumptions, (4) not taking action sooner so the unfunded payment wouldn’t end up being more than twice as much as the normal payment.

“Gimmicks”? You decide.

THE CASE OF MILLBRAE

On January 22, the San Mateo Daily Journal published an article entitled “Millbrae officials question, criticize pension cost report.”

The paper’s Austin Walsh reports that Millbrae officials told him that using staffing projections to calculate Millbrae’s future pension burden won’t work because Millbrae has fewer employees than most municipalities. Here’s how Millbrae’s Finance Director DeAnna Hilbrants put it: To limit pension costs, Millbrae contracts for positions in police, fire and public works departments. Quote: “Most notably, Hillbrants pointed to Millbrae joining the Central County Fire Department with Burlingame and Hillsborough and contracting with the San Mateo County Sheriff’s Office for law enforcement.”

What Millbrae officials are saying is that because they contract out much if not most of their personnel costs, their pension contribution is a small percent of their total budget. What they neglect to acknowledge is the fact that the Central County Fire Department and the San Mateo Sheriff’s Office themselves have pension costs, which are passed on to Millbrae to the extent Millbrae uses their services. Millbrae may have made a financially beneficial decision to outsource its public safety requirements. But they did not escape the pension albatross.

CALPERS IS NOT UNIQUE

What has been described here does not just apply to CalPERS. It is the rule, not the exception, for every one of California’s pension systems to engage in the same gimmickry. The consequences for California’s cities, counties, agencies, and system of public education are just beginning to be felt.

How Much More Will Cities and Counties Pay CalPERS?

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

When speaking about pension burdens on California’s cities and counties, a perennial question is how much are the costs going to increase? In recent years, California’s biggest pension system, CalPERS, has offered “Public Agency Actuarial Valuation Reports” that purport to answer that question. Notwithstanding the fact that CalPERS predictive credibility is questionable – i.e., they’ve gotten it wrong before – these reports are quite useful. Before delving into them, it is reasonable to assert that what is presented here, using CalPERS data, are best case scenarios.

In partnership with researchers at the Reason Foundation, the California Policy Center has compiled the data for every agency client of CalPERS, including 427 cities and 36 counties. In this summary, that data has been distilled to present two sets of numbers – payments to CalPERS for the 2017-2018 fiscal year, and officially estimated payments to CalPERS in the 2024-25 fiscal year. In calculating these results, the only assumption we made (apart from the assumptions made by CalPERS), was for estimated payroll costs in 2024. We used a 3% annual growth rate for payroll expenses, the rate most commonly used in official actuarial analyses on this topic.

So how much more will cities and counties have to pay CalPERS between now and 2024? How much more will pensions cost, six years from now?

On the table below, we provide information for the 20 cities that are going to be hit the hardest by pension cost increases. To view this same information for all cities and counties that participate in the CalPERS system, download the spreadsheet “CalPERS Actuarial Report Data – Cities and Counties.”

CalPERS Actuarial Report Data
The Twenty California Cities With the Highest Pension Burden ($=M)

Payments to CalPERS

If you are a local elected official, or if you are an activist, journalist, or anyone else with a keen interest in pensions, these tables merit close scrutiny. Because they not only show costs estimates today, and seven years from now, but they break these costs into two very distinct areas – the so-called “normal” costs, which are how much employers have to pay into the pension fund for current workers who are vesting one more year of future benefits, and the “catch-up” costs, which are what CalPERS charges employers whose pension plan is underfunded.

Take the first city listed, Millbrae. By 2024, we predict Millbrae will have the highest total pension payments of any city in California that belongs to the CalPERS system.

The table presents are two blocks of data – the set of columns on the left show current costs for pensions, and the set of columns on the right show the predicted cost for pensions. In all cases, the cost in millions is shown, along with the cost in terms of percent of total payroll.

Currently, as can be seen on the table, for every dollar it pays active employees in base wages, Millbrae must contribute 59 cents to CalPERS. This does not include payments to CalPERS that Millbrae collects from its employees via withholding. The same data show that, by 2024, for every dollar Millbrae pays active employees in base wages, they will have to contribute 89 cents to CalPERS. Put another way, while Millbrae may expect its payroll costs to increase by $1.4 million, from $6.3 million today to $7.7 million in six years, their payment to CalPERS will increase by $3.1 million, from $3.7 million today to $6.8 million in 2024.

But here’s the rub. Nearly all of this increase to Millbrae’s pension costs are the “catch-up” payments on the city’s unfunded liability. In just six years Millbrae’s payment on its unfunded liability will increase by 99%, from $2.9 million today to $5.8 million in 2024.

Why?

What are the implications?

It is difficult to overstate how outrageous this is. Here’s a list:

1 – Virtually every pension “reform” over the past decade or so has exempted active public employees from helping to pay down the unfunded liability via withholding. Instead, their increased withholding – in some cases supposedly rising to “fifty percent of pension costs” (the PEPRA reforms) – only apply to the normal contribution.

2 – In order to appease the unions who, quite understandably, lobby for the lowest possible employee contributions to pension funds, the “normal cost” is calculated based on financially optimistic projections. The less time an actuary predicts a retiree will live, and the more an actuary predicts investments will earn, the lower the normal contribution.

3 – In order to cajole local elected officials to agree to pension benefit enhancements, the same overly optimistic, misleading projections were provided, duping decision makers into thinking pension contributions would never become a significant burden on cities and counties, and by extension, taxpayers.

4 – Because cities and counties couldn’t afford to pay down the growing unfunded liabilities attached to their pension plans, tricky accounting gimmicks were employed, where minimal catch-up payments were made in the present in exchange for bigger catch-up payments in the future. The closest financial analogy to what they did would be the “negative amortization” mortgages that were popular prior to the housing crash of 2008.

5 – The consequence of this chicanery is that today, as can be seen, catch-up payments on the unfunded liability are typically two to three times greater than the normal contribution. And it’s getting worse. In 2024, Millbrae, for example, will have a catch-up contribution that is nearly six times as much as their normal contribution.

6 – When a normal contribution isn’t enough, and the plan becomes underfunded, the level of underfunding is compounded every year because there isn’t enough money in the fund earning interest. The longer catch-up payments are deferred, the worse the situation gets.

Yet the normal contribution has always been represented as all that should be required for pension plans to remain fully funded. Just how bad it has gotten can be clearly seen on the table.

Take a look at Pacific Grove, fourth on the list of CalPERS cities with the highest pension burden. Pacific Grove is already paying 40 cents to CalPERS for every dollar it pays to its active employees. But in six years, that amount will go up to 75 cents to CalPERS per dollar of salary to active employees. And take a look at where the increase comes from: Their catch-up payment goes from 1.7 million to $4.4 million in just six years.

Why?

Why isn’t Pacific Grove paying more, now, so that it can avoid more years of having too little money in its pension plan, earning interest to properly fund future pensions? The reason is simple: Telling Pacific Grove to go out and find another $2.7 million, right now, is politically unpalatable. In six years, most of the local elected officials in Pacific Grove will be gone. But where is Pacific Grove going to find this kind of money? Where are any of California’s cities and counties going to find this kind of money?

One final point: These pension plans are underfunded after a bull market in stocks has doubled since it’s last peak in June 2007, and has nearly quadrupled since it’s last low in March 2009. When stocks and real estate have been running up in value for eight years, pension plans should not be underfunded. But they are. CalPERS should be overfunded at a time like this, not underfunded. That bodes ill for the financial status of CalPERS if and when stocks and real estate undergo a downward correction.

CalPERS, and the public employee unions that dominate CalPERS, have done a disservice to taxpayers, public agencies, and ultimately, to the individual participants who are counting on them to know what they’re doing. They were too optimistic, and the consequences are just beginning to be felt.

  *   *   *

The Hidden Agenda of Extreme Environmentalism

We live in the most expensive state in America, and it is completely the result of political choices made by the California legislature. Across all sectors – oil, gas, electricity, water and housing – environmentalist arguments prevail. But there is a hidden agenda that most sincere environmentalists still don’t recognize. An agenda that pursues profit and power, instead of practical environmentalism that balances the interests of the planet with the interests of the people.

Even Gov. Brown has refused to support a ban on fracking in California. Moreover, there are reserves of oil and gas in California that don’t require fracking. Using slant drilling, for example (a technology that didn’t exist back in the 1970’s when offshore oil drilling was banned), you can access natural gas reserves in the Santa Barbara Channel from land based rigs. But fossil fuel development is only one issue that ought to be up for debate.

San OnofreWhat about nuclear power? The technology has come a long way in the last fifty years. Even if coastal reactors are considered too dangerous, why not build some in geologically stable areas inland? There’s plenty of land in the Mojave Desert where nuclear power plants could be sited. And what about desalination? It’s only too costly if you consider California prices – artificially inflated – they build desalination plants in Israel for one quarter the price per output. Why can’t we?

What about water storage – what about the proposed Sites and Temperance Flats reservoirs? What about sewage reuse? Californians produce about 3 million acre feet of sewage each year, much of which is cleaned and poured into the ocean, when if we cleaned it a bit more we could reuse it.

What about housing? California’s a supposed sanctuary state, inviting millions of people in. Where are they going to live? Why do you think, even in the inland valleys, homes are priced at $400,000 or more (usually much more)? Do you actually think homes need to cost this much?

All of this is contrived, artificial, politically created scarcity. And it is making a lot of people filthy rich, while it makes life very difficult for 90%+ of California’s residents – old and young, regardless of ethnicity or immigration status.

Environmentalists in California act like they have all the answers. They are arrogant and selective in the facts they use. What about all the embodied energy in wind and solar installations? Do we ever hear about the payback periods for all the energy it took to build that stuff? What about the impact when taking into account the need for natural gas peaking plants that have to spin into action every time the sun goes behind a cloud or the wind dies down? What about the difficulty in storing intermittent energy, or the fact that sourcing rare earth metals for electric car batteries is causing environmental havoc all over the planet?

One might assume that of someone holds these positions they must not care about the environment, but if so they’d be wrong. We need an honest discussion about these issues, without ceding the discussion to environmentalist trial lawyers, phony “green” entrepreneurs, and oligarchs who control the artificially scarce supplies of entitled land, housing, electricity, gas, and water. Because they just want to keep things the way they are so they can continue to make money.

There’s two sides to this story.