CA Budget & Fiscal Policy is Unsustainable

May Revise 2017While the governor’s leadership has been the key to keeping California in the black and paying down debt, the Legislature continues to grow permanent spending based on an increasingly volatile revenue stream. The Legislature’s highest priority for environmental policy is sustainability. Yet today their highest priority for budget and fiscal policy is unsustainability.

Since the economic recovery began in 2010, taxpayers and the business community have grown the General Fund by $41 billion and special funds by $28 billion, representing an overall revenue increase of $69 billion or 63 percent. In addition, we have also grown local property tax revenues for Prop. 98 more than $10 billion, which is equal to a 72 percent increase.

While California is already the highest taxed state in the nation, the Legislature introduced bills to authorize more than $370 billion in new taxes and fees in 2017 — more than double the state revenues contained in the budget bill.  For example:

  • During this same period in 2017, state funding for K-12 education is set to grow $17 billion, or roughly 50 percent, while state employee pension and health benefit payments are set to nearly double to more than $14 billion.
  • There also is considerable growth in spending for health care and social services expansion.  Since 2009-10, Medi-Cal spending has increased by $9 billion in the General Fund and by $64 billion in state and federal funds.  California is committed, even under existing federal law, to picking up an increasing share of the federal portion.
  • In 2022, the hastily approved minimum wage increase of 2015 will be at full implementation, impacting General Fund costs by $3 billion and all funds by $10 billion.
  • The series of labor agreements approved this year-to-date commit the state to another $4 billion in permanent spending increases.

The passage of these spending priorities required the state to pass $5 billion in new taxes to fund critically needed road and infrastructure repair. Now it is time to prioritize major structural reforms that create long-term economic stability before another recession occurs, the impacts of which could be even more devastating than what we witnessed during the economic downturns in either 2001 or 2008. We must work towards a budget that better protects all Californians and our economy for our long-term future.

resident, California Business Roundtable

This piece was originally published by Fox and Hounds Daily

What Will It Take For California Voters To Change Their Minds?

VotingIn Malcolm Gladwell’s famous book, “The Tipping Point,” his central thesis is how events collate together to form a “tipping point,” that changes individuals, companies, governments and society. Has California reached a tipping point? Seemingly it has. Then why do voters keep electing the same Democrats, and allow the Republican Party to fade away into oblivion?

Moreover, apathetic voters don’t care that the Democratic governor and Legislature say one thing, and do something completely opposite as long as the hot causes are in line with the media and Democratic Party’s narrative of gay marriage, abortion and global warming. Those three shibboleths of California public policy have overtaken the central tenets of state government: infrastructure, public safety and education – since all three are in shambles or disarray at best.

For Democratic voters, independents who lean conservative, but never hear an organized message, along with Republican voters who still long for Reagan, here are issues to consider along with our downward trajectory. Your apathy and unrealistic expectations are taking California to a brutal tipping point that could easily mirror the disaster being ignored by the mainstream media (LA Times, NY Times, ABC, CBS, NBC) about Venezuela since it doesn’t fit their false narrative that socialism espoused by Bernie Sanders should be emulated.

The next number of paragraphs will begin showing the current path for California this year and decades ahead. It is sobering to envision what California will look like for our children if changes in voting patterns and the domination of the Democratic Party aren’t broken.

Gov. Brown and the Democratic supermajority Legislature raised taxes again, and openly misappropriated the funds giving middle-class families and businesses additional reasons to flee the state. If these two trends push forward in the future and the CRP does nothing about this with candidates who can explain what’s taking place in California – versus not supporting a Republican President during election seasons – then the CRP will be relegated to the dustbin of history. Translated, California will remain having the worst environment in the nation for job creation and business friendliness.

Unfortunately, Democrats are now job killers and only believe in the above-mentioned public policy shibboleths along with hating Trump. The days of Gov. Brown’s father, FDR, Truman, JFK and Scoop Jackson are over – Democrats who believed in strong defense, single-family homes, infrastructure, education and two-parent families as the backbone of stable, thriving societies. Imagine a California Democrat who didn’t back abortion-on-demand, gay marriage and global warming and was pro-life instead, questioned the sanctity of marriage and was against global warming – even doubted the veracity of the environmental movements claims? That person wouldn’t win a City Council race against a dead person in San Francisco.

Pensions as currently configured are 100% unsustainable, no matter what the stock market achieves in the near future using historical rates of return. Democrats and Republicans who don’t make a case for pension reform will bankrupt California, and don’t expect Trump or Pence to rescue us. Even Sacramento has ominous pension problems. Hundreds of billions, even trillions are owed, yet voters are only concerned about the three shibboleths?

Unions now run California’s education standards, and three new bills (AB450, AB1209 and SB63) would further influence the destruction of our economy and labor practices all in the name of being progressive Democrats. Yet voters keep voting for these measures and legislators, instead of sensible, business-friendly, moderate Republicans like David Hadley (though I disagreed with him about not supporting Trump during the Presidential election).

Social issues that have nothing to do with California’s upward trajectory are en vogue by Democratic legislators and their supporters: a former teacher at Diablo Valley College was arrested for attacking a Trump supporter with a bike lock at the Berkeley protests and AB1576 would tax items and their price equivalent based on gender for businesses who don’t price items exactly the same throughout California. Litigation for consumers and businesses will skyrocket costs.

Republicans who only want to be moderates and worry about taxes, business growth and strong defense should understand that gender, class and race are additional shibboleths added onto the social diagram of how Democrats beat Republicans in this state. The days of not articulating reasonable social policies are now over since President Obama introduced all three into public policy and the national media to win elections and fragment the United States.

While Gov. Brown and the Democratic-controlled legislature obsess over nothing, Joel Kotkin states:

“In the coming years, California’s claim of being the economic exemplar of the country may be further undermined by legislative overreach. The statewide rise in the minimum wage will hit the lower-wage sector, particularly outside the coastal enclaves. Various plans to boost the welfare state, such as a single-payer health care system (costs $400 billion annually) that includes the undocumented, and a host of union-driven initiatives, seem certain to drive up costs and impose an ever-heavier tax burden on the state’s struggling middle class. Perhaps most threatening, over time, may be a host of new environmental laws which will impose enormous burdens on affordable housing, energy prices and industrial growth.”

This warning is coming from a self-described, “Truman Democrat,” and not a Tea Party Republican or Trump supporter. Somehow, Los Angeles believes receiving an Olympic bid in 2024 or 2028 will alleviate these concerns, without considering what prior cities have done with billion dollar stadiums in bankruptcy, disrepair and out-of-use? What our society should care about and attempt to alleviate before the Olympics being awarded is dropping the homeless rate in Los Angeles – which surged 23% according to the Greater Los Angeles Homeless Count.

San Francisco has taken the illegal-immigrant debate to a new level. Mayor Ed Lee stated in his 2017 State of the City address, “We are a sanctuary city, now, tomorrow, forever,” without understanding the implications of H.R. 2431 that punishes sanctuary cities by withholding federal monies. In 2016 San Francisco received $509,260,129 in federal grants and direct payments. And Democrats who control all levers of state government want to burden businesses with immigration policy, which will only drive more of them out of the state.

California isn’t in a shots-fired civil war, but we are dangerously close to moving in that direction when the mayor of California’s most prominent city so openly defies the federal government. The Civil War decided that federal laws supersede state laws whether we like it or not.

State, county and local monies for mobility are allocated towards public transportation that the public either doesn’t want or use commiserate to cost, or the cost-to-benefit ratio is negative when you consider as an example, the miniscule affect on traffic that bike sharing produces. Meaning, billions are wasted on transportation projects that don’t improve pedestrian safety or traffic mobility. Whereas a better use would be the construction of quality-of-life infrastructure: schools, roads, highways, sidewalks, bridges and water systems.

The biggest killers to California are environmental issues that strictly pertain to global warming as fact and the regulations that will kill this state. As an example, President Obama’s last year in office, he produced regulations that totaled $2 trillion according to the Competitive Enterprise Institute. The Clean Power Plan was just one type of environmental regulation that California wholeheartedly embraced along with the Paris Climate Agreement without understanding the costs or zero affect either would have on cleaner air, efficient use of environmental resources or how China and India would negate any gains by California adhering to these onerous regulations and agreements since both are still building coal-fired power plants.

Moreover, renewable energy and electric vehicles (EVs) don’t currently work now or in the near future as envisioned by Gov. Brown and State Senator Kevin de Leon. Both (EVs and renewables) have vast unanswered questions and technologies that need to be solved before either is scalable the way fossil fuels and the combustible engine is at this time. Since all environmental strategy and policy is based on man-made global warming in California through the Democratic-controlled Legislature then the questions raised here need to be answered before moving forward with global warming-centric political hysteria. That’s not how good policy is made, or to truly answer the questions about the climate changing and what that means for California, the U.S., industrialized nations and the developing world.

As a former Republican State Assembly nominee (43rd State District) I call on the CRP to begin soberly asking why they can’t win elections anymore? Particularly, Los Angeles County (as goes L.A. County so goes this state) when candidates like Pete Peterson should’ve been embraced, his campaign funded by the party, and should currently occupy a top CRP leadership position while gearing up to either run for Governor, Lieutenant Governor or Secretary of State again. Imagine if now, Dean Peterson (Pete is the Dean of Pepperdine University’s School of Public Policy where I am a December 2015 graduate) were Secretary of State?

Dean Peterson ran on a platform of transparency, efficiency and effectiveness for the office, instead of the politicized entity it currently is that knowingly has illegal immigrants on its voter rolls. Anyone who believes there aren’t differences in a Democrat or Republican begin trying to clean up voter rolls, and the mess that brings up to find out the differences. Dean Peterson would’ve have accomplished that task, or at least wouldn’t have added to the disaster. The CRP and national party should embrace him and others vibrant candidates like him as well.

California has gotten lucky economically through Silicon Valley exploding, Los Angeles exploding home prices and the popular presidency of Barack Obama protected by and prodded forward by the media. A narrative not unlike Pravda during the Soviet Union’s days, but still we have the highest poverty rates, welfare usage, income inequality and fleeing of citizens over the other 49 U.S. states. We’ve created a system that is no longer sustainable in the long-run and unless voters change their minds, character or sources of voting information then the words of Samuel Johnson, in Oliver Goldsmith’s The Traveller, will come true: “How small, of all that human hearts endure, That part that laws or kings can cause or cure.”

Todd Royal is a geopolitical risk and energy consultant based in Los Angeles.

Jerry Brown Leveraging Payroll in Scheme that Bankrupted Orange County

May Revise 2017Gov. Jerry Brown and State Treasurer John Chiang plan to tap California’s government payroll accounts to make long-term subsidized loans to the state’s public pension plan in a scheme that hasn’t been tried since it bankrupted Orange County in 1994.

Breitbart News recently reported that although Gov. Brown’s 2017-2018 May Budget Revision trumpeted that California will collect an extra $2.5 billion in capital gains taxes, the same data revealed that sales taxes, which are considered the best measure of the health of the state’s economy, “were revised down by $1.2 billion, reflecting weak cash receipts.”

Deep in the 91-page budget report, Brown also revealed that last year’s 22 percent jump to $279 billion for the retiree pension and lifetime healthcare liabilities will force the state’s annual pension plan contributions to almost double from $5.8 billion this year to $9.2 billion by FY 2023-24.

Brown warned that deteriorating tax trends and mushrooming pension payments put California at risk of suffering a catastrophic $20 billion deficit in a “moderate recession.”

But according to the Los Angeles Times, Brown apparently has convinced State Treasurer and fellow Democrat John Chiang to bail out a big piece of the state’s rising pension costs for the next 12 years by making a $6 billion loan at a highly-subsidized interest rate from the Treasury’s $76.5 Billion “Pooled Money Investment Account” (PMIA).

The PMIA has traditionally served as a money-market fund for the state’s general fund, agencies, counties, and cities to invest short-term cash, including payroll accounts. According to the PMIA’s September 2016 audit, the fund earns only a 0.88 percent current yield, because it provides overnight cash liquidity to depositors by investing in U.S. Treasurys and agencies, plus high-quality repurchase agreements, certificates of deposit, and commercial paper with an average maturity of 185 days (about 6 months).

The last time a state or local treasurer running a government money market fund participated in this type of “borrowing short and lending long” scheme was Orange County’s Bob Citron.

The OC Treasurer was celebrated as a genius by local political leaders for making almost $1.3 billion in excess profits over an 9-year period by investing $7 billion of county and local government short term and payroll cash in longer term 5-year U.S. Treasury Bonds. Unfortunately, Citron’s fund suffered a $2.3 billion loss in 1994 and “the OC” filed the largest Chapter 9 municipal bankruptcy in history.

The resulting scandal and huge loss of taxpayers’ funds caused the Securities & Exchange Commission to adopt Rule 33-7320, which severely restricts money-market mutual funds from leveraging principal risk by “borrowing short and lending long.”

But under U.S. constitutional state sovereignty, the SEC has no jurisdiction over any funds managed by the Treasurer of the State of California.

Treasurer Chiang claims he supports the pension loan, because the CalPERS pension plan will pay his PMIA the more favorable yield of a 2-year Treasury Note, currently yielding 1.21 percent. But that means the PMIA is being asked to make a highly subsidized loan, since the current yield on an equivalent 12-year California General Obligation bond is 2.23 percent, or about 85 percent higher.

This piece was originally published by Breitbart.com/California

Trump’s Budget Will Cut Payments to California

President Trump’s proposed budget would likely result in billions of dollars of cuts to vital health and human services programs in California, state Democratic lawmakers and advocates for the poor said Tuesday,” reported the Los Angeles Times,

“It’s unconscionable and un-American,” blasted Gov. Jerry Brown, who himself slashed state social spending to balance the budget.

In announcing the May Revision to his budget proposal for fiscal year 2017-18, Brown warned, “We have ongoing pressures from Washington and an economic recovery that won’t last forever.”

Actually, to use a line from another California governor, Ronald Reagan: You ain’t seen nothin’ yet. The cuts in California programs soon will be much larger than those in Trump’s proposal, and they will strike whether or not he’s president, or the White House occupant is Elizabeth Warren or the ghost of Lyndon Baines Johnson. Nor will it matter if Nancy Pelosi again becomes House speaker and is joined by Chuck Schumer as Senate majority leader.

The reason is simple: The Baby Boomers will continue retiring, and Social Security and Medicare payments will gobble up an increasing proportion of federal spending. That will crowd out everything else: spending for defense (especially wars), even though Trump now wants to increase defense spending $50 billion a year; and for all discretionary spending, including for health, education and welfare transfers to state governments.

According to Brown’s May Revise budget proposal, general fund spending would be $124 billion for fiscal 2017-18, which begins on July 1.

Brown’s January budget proposal included more details on federal funding. For example, turn to p. 28, Figure K-12-05. We see the $90.7 billion in revenue for K-12 education will come 61% from federal sources.

Seiler-1

The May Revise also warns: “The state must also continue to plan for and save for tougher budget times ahead. The federal government is contemplating actions – such as defunding health care for five million Californians, eliminating the deductibility of state taxes, and zeroing out funding for organizations like Planned Parenthood – that could send the state budget into turmoil….

I got some of the following charts from an article on the libertarian website LewRockwell.com, by Gary North, Ron Paul’s first economic adviser. Title, “Guns or Granny: The Looming Political Battle of the West.” North, who has written about this issue for years, copied the charts and data from non-libertarian sites. His analysis makes sense to me. But feel free to come up with your own interpretation of the independent data.

His conclusion, “Sometime before the 20’s are over, there will be no more discretionary slice of the budgetary pie. At that point, there is going to be a guerilla war in Washington. It will be a battle over the size of the slices of pie. Political voting blocs that thought the size of their slice was guaranteed will find that it isn’t.”

Check out this chart:

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The first thing to note is federal taxing is limited to 20% of GDP. In America’s entire history, it only briefly went slightly above that amount during World War II, until Hitler and Tojo were defeated. Then it went back below the 20% threshold. Americans just won’t be taxed more.

In most years since 1970, the federal government has spent more than revenues, usually around 23% to 25% of GDP. That is, spending is at least 3 to 5 percentage points above revenues. That’s how presidents and Congress have run up a massive debt that now clocks at $20 trillion. This year’s projected deficit of $603 billion, in the proposed Trump budget, sure doesn’t help. The rising debt, of course, means higher interest payments in the future – meaning less money to spend on other areas.

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Note that there is no connection between the top marginal income tax rate and tax receipts. Even if President Warren boosted the top tax rate back to 90%, as it was in the 1950s, total tax receipts would not rise, but would remain under 20%.

So, there isn’t going to be any more money. And more Baby Boomers will be retiring, putting extra demands on Social Security and Medicare. That means: Something has to give.

North’s point is that old people are not going to let their Social Security and Medicare be cut before everything else is cut: defense, education, environmental programs, science, etc.

Here’s a chart I found from the UC Davis Center for Regional Change from the 2014 California election:

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Notice how those ages 64-74 voted more than six times those of ages 18-24. That was not a presidential election year, but the votes affected congressional races. And it’s the Congress that passes the bills, not the president. In a democratic system, with majority ruling, if it’s Social Security and Medicare vs. aid to colleges and K-12 schools, who’s going to win that battle? Who is more likely to write a letter to Rep. Porkbarrel insisting on funding? It won’t matter whether the honorable representative is a Democrat or a Republican.

Finally, here’s a pie chart of federal spending in 2015:

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Notice the two slices on the right: Social Security is 24% of the budget. And 25% goes for health care – which includes not only Medicare for retirees, but Medicaid (Medi-Cal here), the Veterans Administration, federal retiree health guarantees, etc.

Those two slices are guaranteed to increase, which means the rest of the slices will have to be cut. Even in that nutty new math they teach under Common Core in the California public schools, all of something = 100%, not 110% or 150%.

When the feds cut the gravy train, which inevitable, the California state budget, like most of us aging baby boomers, is going to find it’s going to have to go on a diet.

John Seiler wrote editorials for the Orange County Register from 1987 to 2016. He now writes freelance White Papers. His email: writejohnseiler@gmail.com

If taxpayers are ‘cheap,’ it’s because they aren’t stupid

tax signCalifornia’s already overburdened taxpayers are, once again, being blamed for being the problem, now that Gov. Jerry Brown has labeled those who object to his new $5.2 billion gas and car tax as “freeloaders.”

Taxpayers have become accustomed to being insulted by those who want more of their money. A few years back, Barbara Kerr, then-president of the California Teachers Association, said taxpayers who opposed new taxes were “cheap.” This was the same view echoed by high-tech billionaires who financed the successful effort to make it easier to impose new property taxes to pay for school bonds. (It should be noted that billionaires are often insensitive to new taxes that mean little to them, but which can require a significant sacrifice to average California families.)

Californians are already struggling with a heavy tax burden. We rank first in state sales tax and marginal income tax rates and, when adding in the carbon tax, our gas tax is already the highest — and it is about to go much higher. Even with Proposition 13, the per capita property tax burden in the state ranks in the top 20.

It should come as no surprise that average folks find these new taxes onerous, taxes that, conservatively, could cost them and their families many hundreds of dollars a year. Adding insult to injury, much of the new revenue will go to accommodate bicycles and for mass transit, perhaps even the governor’s pet bullet train. This, of course, represents the political elites’ refusal to recognize that, for most people, biking to work, even with bike lanes that crowd out motorists, is not practical. They are equally out of touch when supporting spending close to a hundred billion dollars on a bullet train that will help few, if any, get to work or do their shopping.

In Sacramento, they have no trouble coming up with millions of dollars to pay legal bills for illegal immigrants, billions for the train and gold-plated compensation for bureaucrats. But, somehow, we can’t get our roads fixed unless taxpayers come up with additional bribe money in the form of new taxes.

But wait, there’s more, as they say on those late-night TV commercials. When gas taxes were last raised in 1990, the Sacramento politicians promised the new revenue would be a panacea for all our transportation woes. But spend it all on fixing roads and bridges they did not. When, after a decade of overspending, the state found itself in the red during a declining economy, gas tax money was pilfered for other Sacramento priorities, priorities that did not include new highways or road maintenance. Even after voters approved two separate ballot measures to force lawmakers to spend the billions of dollars in annual revenue on the roads, the state found a way around these mandates, even going so far as to changing the definition of the gas tax so that it would be exempt from the voter-approved requirements.

Well, the governor, and the rest of the Sacramento gang that approved the new gas tax, can call taxpayers “cheap” and “freeloaders” if they want, but they can’t call us stupid. We see exactly what is going on.

Jon Coupal is president of the Howard Jarvis Taxpayers Association.

This piece was originally published by at HJTA.org

Jerry Brown Embraces Pension Shell Game

Jerry Brown budgetLOOMING PENSION PAIN–The Jerry Brown administration last week released its revised May budget and, lo and behold, it has finally decided to (kind of, sort of) tackle the state’s massive and growing level of unfunded liabilities – i.e., the hundreds of billions of dollars in taxpayer-backed debt to fund retirement promises made to the state’s government employees.

It’s best to curb our enthusiasm, however. The governor didn’t have much of a choice. This was the first state budget that is compliant with new accounting standards established by the Governmental Accounting Standards Board that requires states to more properly account for retiree medical and benefits beyond pensions.

Because of those new standards and low investment returns, the state’s unfunded liabilities (including the University of California retirement system) soared by an astounding 22 percent since last year. But even this new estimate of $279 billion in liabilities is on the optimistic side. Some credible estimates pin California state and local governments’ pension liabilities at nearly $1 trillion, based on more realistic rate-of-return predictions.

The pension system invites eyes-glazing-over debates about the size of the liability. That’s because debts are calculated on guesswork about future investment earnings. The California Public Employees’ Retirement System (CalPERS) recently voted to lower its predicted rates from 7.5 percent a year to 7 percent. The lower the predicted rate, the higher the liabilities, which is why CalPERS and the state’s unions are so bullish on Wall Street.

CalPERS’ latest investment returns were below 1 percent, but the agency insists there’s nothing to worry about and no need to do the unthinkable (reduce future benefit accruals for current employees.) That’s the same CalPERS, of course, that in 1999 assured the Legislature that a 50-percent retroactive pension increase wouldn’t cost taxpayers a dime.  I suppose CalPERS was right. It didn’t cost a dime, although it did cost many billions of dollars. Their returns were then yielding 13.5 percent a year, and CalPERS figured the heyday would go on forever.

The other reason to be skeptical of the Brown administration’s commitment to solving the problem can be found in the May revise itself. The budget “includes a one‑time $6 billion supplemental payment” to CalPERS, according to the Finance Department. “This action effectively doubles the state’s annual payment and will mitigate the impact of increasing pension contributions due to the state’s large unfunded liabilities.”

Where is the extra $6 billion coming from in a budget that supposedly is so pinched that the governor recently signed a law raising annual transportation taxes by $5.2 billion?

Simple. The state is borrowing the money to pre-pay some of its debt. “The additional $6 billion pension payment will be funded through a loan from the Surplus Money Investment Fund,” according to the budget summary. “Although the loan will incur interest costs (approximately $1 billion over the life of the loan,) actuarial calculations indicate that the additional pension payment will yield net savings of $11 billion over the next 20 years.”

In other words, the state will be borrowing the money at fairly low interest rates and then investing the money and earning, it hopes, higher rates. The difference will help pay down some of those retirement debts. Even the well-known pension reformer, Sen. John Moorlach, R-Costa Mesa, lauded the administration for embracing that idea.

But it’s something of a shell game. It should work out well, provided the markets do as well as the state expects. In doing this, however, the state is taking out new debt that will need to be repaid. There’s no free money here. A number of localities have embraced a similar strategy with pension-obligation bonds, which are a form of arbitrage, in which the government is borrowing money and betting on future market returns.

This gimmick is similar to the one people will embrace in their personal lives. Are those credit-card debts crushing the family budget? Then borrow money from the home-equity line of credit at 5 percent and use it to pay down the 10-percent credit card loans. It makes sense, but it doesn’t deal with the real problem of excessive consumer spending.

“This is the Band-Aid,” said Dan Pellissier, a former aide to Gov. Arnold Schwarzenegger and well-known state pension reformer. “The surgery everyone is trying to avoid is on the California Rule – changing the benefits public employees receive in the future.”

When it comes to pensions, everything comes back to that “rule,” which isn’t a rule but a series of court precedents going back to the 1950s. In the private sector, companies may reduce pension benefits for their employees in the future. An employee can be told that, starting tomorrow, she will accrue pension benefits at a lower rate. The California Rule mandates that public employees, by contrast, can never have their benefit levels reduced.

That limits options for reform. In 2012, Gov. Brown signed into a law the Public Employees’ Pension Reform Act (PEPRA), which promised to address the pension-debt problem by primarily reducing benefits for newly hired employees. A reform that affects new hires will reduce contribution rates but won’t make an enormous difference until they start retiring.

“Gov. Jerry Brown’s attempt at pension reform has failed,” opined Dan Borenstein, in a recent East Bay Times column. The reason: the rapidly growing pension debt. “The shortfall for California’s three statewide retirement systems has increased about 36 percent. Add in local pension systems and the total debt has reached at least $374 billion. That works out to about $29,000 per household.”

CalPERS rebutted Borenstein by arguing that he “greatly oversimplifies and needlessly discounts the real impact that Governor Brown’s pension reform has had since it took effect in January 2013.” The pension fund insists, “PEPRA already is bending the pension cost curve – and will keep doing so with greater impact every year going forward.”

Yet the growing liabilities and the administration’s latest budget plan suggest that whatever minimal cost savings PEPRA is achieving aren’t nearly enough. Of course, union-controlled CalPERS’ goal isn’t protecting taxpayers or the state general fund – it is to enhance the benefits of the state workers whose pensions it manages.

As Calpensions explained, that $6 billion of borrowed money doubles the amount of general-fund dollars that the state is paying to deal with pension obligations. Meanwhile, as the state borrows money to pay that tab, it raises taxes to fund transportation. If Brown and the Legislature had trimmed pension costs, it would not have needed to raise gas taxes and the vehicle license fee. And the problem reverberates for local governments, too.

The May revise also showcased the same old issue with the administration’s priorities. Los Angeles Times columnist George Skelton noted that “Brown’s entertaining rhetoric itself made him sound, as usual, like a skinflint, a penny-pinching scold. But the introductory document could have been written by Bernie Sanders, if not Depression-era Socialist Upton Sinclair, the losing 1934 Democratic candidate for governor who ran on the slogan ‘End Poverty in California.’”

The budget championed myriad big-spending programs, including higher pay for public employees. So the state has been spending like crazy, but can’t manage to deal with its pension problem – at least not without borrowing money to temporarily paper over its growing debt.

All these games are about avoiding dealing with the obvious fact that California’s public-employee pensions are absurdly generous, filled with costly and anger-inducing features (spiking, double-dipping, liberal disability retirements, etc.) and unsustainable.

In 2011, the state’s official watchdog agency, the Little Hoover Commission, argued to the governor that “Public agencies must have the flexibility and authority to freeze accrued pension benefits for current workers, and make changes to pension formulas going forward to protect state and local public employees and the public good.” Six years later, the governor is still just chipping away at the edges by embracing gimmicks.

Steven Greenhut is a contributing editor to the California Policy Center, on whose website this piece originally appeared. He is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Prepped for CityWatch by Linda Abrams.

California Tax Increases Have Consequences

May Revise 2017This is the 30th California state budget I’ve written about after I drove out here in 1987 to write editorials for the Orange County Register. Looking over the years, my theme has been the same: The state’s taxpayers can only bear so high a burden of taxing and spending. When that burden gets too large, the economy as a whole suffers, the tax base erodes – and massive deficits ensue.

So it’s not surprising that in Gov. Jerry Brown’s May Revise to his budget for fiscal year 2017-18, which begins on July 1, revenue expectations are dampened. That is despite the national Trump Boom for the economy which in April produced a surprise $182 billion surplus in federal revenues, instead of the deficit economists expected.

As Brown pointed out in his press conference revenues are up by $2.5 billion from his January budget proposal – but $3.3 billion less than what he projected a year ago. Of that extra $2.5 billion, about $1.1 billion will go to schools (following the Proposition 98 formula that around 40% of new income must go to schools). The rest will go to restore some funding, such as to child care, that had been cut in January.

The general fund total will be $124 billion. By contrast, that first budget I wrote about three decades ago was just $33 billion. And the state was better run.

Brown cautioned of the economic recovery, “Moreover, by the time the budget is enacted in June, the economy will have finished its eighth year of expansion – just two years short of the longest recovery since World War II.”

“Make no doubt about it,” he said, “cuts are coming in the next few years, and they’re going to be big. It would be imprudent not to prepare for it.” He also fingered potential cuts in Obamacare and other federal spending, depending on what is done by President Trump and Congress.

Strangely, he also ridiculed Trump’s tax-cut plan to boost the sluggish economic growth of recent years by cutting the top income tax rate to 35% from the current 39.6%. There would be two other tax brackets, 10% and 25%. The corporate tax rate would be cut to 15% from 35%. And the mind-bogglingly complex Alternative Minimum Tax would be axed.

Although not a “flat” tax plan, which would levy one rate for all types of income, the Trump plan would be flatter than the current system, and much simpler.

“The idea we’ll have a massive tax cut and spend $1 trillion on infrastructure doesn’t make sense,” Brown said. “You need real money to do real things.” Actually, Trump’s infrastructure plan reportedly “is expected to be more about regulatory reform and alternative financing than a federal spending spree.”

And in his own 1992 run for president, Brown crafted an even bolder tax-cut plan, a flat tax of just 13% for everything, calling it “a silver bullet solution for the economy. With one stroke, the major source of venality and graft will be eliminated and the Byzantine strictures of the Internal Revenue Code made so simple that even a sixth-grader will understand them.”

His 1992 plan was designed by famed economist Arthur Laffer, who helped design the 1978 Proposition 13 tax cuts in California that undergird state growth since then, Ronald Reagan’s 1981 tax cuts that boomed the 1980s economy – and Trump’s new plan.

Indeed, the current national economic boom is an anticipation of the Trump tax cuts – albeit the final numbers aren’t yet in place.

So, why is California lagging the federal boom? The reason is simple: California keeps heaping higher costs – taxes and regulations – on its citizens and businesses, discouraging the higher production that broadens the tax base. Consider just the tax increases since November:

  • The Proposition 55 extension of the Proposition 30 “temporary” income tax increase. Even Brown conceded in his press conference, “We already are taxing at 13.3%. Nevada is 0%. So you have to be careful.” Apparently there’s still some of the 1992 Jerry Brown around who knows taxes can get too high.
  • The Proposition 56 tobacco tax increase of $2 a pack, which especially will hit poor people; the wealthy now seldom smoke.
  • The Proposition 67 plastic bag tax of $300 million a year.
  • The gas tax of $5.2 billion a year. Brown said it just restores the equivalent purchasing power of the gas tax as it existed under the Deukmejian administration in the 1980s. The proportion had been eroded by inflation. But what about the money going to “mass transit”? How do we know the gas tax won’t be siphoned off to the general fund during a recession, as have past gas-tax increases? And how about an equivalent cut in other taxes to balance the new slam on taxpayers?

State Controller Betty Yee’s revenue estimates a day earlier, on May 10, were close to Brown’s. “April personal income tax (PIT) receipts of $12.76 billion lagged by $707.6 million, or 5.3%,” she estimated. But the big blow came from sales taxes, “April retail sales and use tax receipts of $696.7 million fell short of projections in the governor’s proposed 2017-18 budget by $106.7 million, or 13.3%.  For the fiscal year to date, sales tax receipts of $18.99 billion are $453.5 million below the revised estimates released in January.”

More study will be needed. But I think what’s happening is Californians are reacting to the massive new tax increases listed above – and are anticipating getting hit with yet more new tax increases from the revenue-deluded Legislature, with its 2/3 supermajority. So they’re spending 13.3% less.

Although I’m not a smoker – except for a stogie every four months – friends of mine are. A pack a day means $2 less a day, or $730 less a year – after income taxes. That means they have to cut down in other areas of spending, and are. Less spending means less sales tax revenue. Just for that tax.

Said state Sen. John Moorlach, D-Costa Mesa, of the May Revise, “California’s unrestricted net deficit, according to the state’s Comprehensive Annual Financial Report, remains at $169 billion. That’s $4,374 per person. This marks almost no improvement from the previous year.”

On the positive side, the governor adopted Moorlach’s proposal to prepay CalPERS by $6 billion. As the May Revise document explained, “The additional $6 billion pension payment will be funded through a loan from the Surplus Money Investment Fund. Although the loan will incur interest (approximately $1 billion over the life of the loan), actuarial calculations indicate that the additional pension payment will yield net savings of $11 billion over the next 20 years.”

And the Rainy Day fund will increase to $8.5 billion, or 66% of the funding mandated by Proposition 2.

In other areas, in the journalists’ conference call later with Budget Director Michael Cohen, I asked how much the governor was willing to contract out for engineers for the new infrastructure projects. A report by the Legislative Analyst’s Office found 3,500 featherbedding jobs at Caltrans.

Cohen said there would be such contracts with private firms, but only in the short term. Because these are long-term spending projects, Caltrans will do the construction. “We scheduled 240 positions to be downsized, but now will keep them for the time being,” he said.

On the University of California and California State University spending controversies, Cohen said, “At UC, we hold $50 million from them until they implement” reforms in the recent auditor’s report that criticized them, and in an agreement with the governor. And on the recent UC tuition increase, he said more money will be given to Cal Grants.

Brown himself, in his earlier press conference announcing his budget, had attacked “university salaries that are way too high, particularly for their administrators.” But essentially, nothing is going to change in systems where, for UC, the high-paid administrators have doubled their numbers the past two decades and now outnumber professors. It’s like an army with more generals than privates.

If Republicans want to have some fun, they should take up my recommendation to put on the ballot an initiative that a) cuts tuition and b) pays for it by cutting the number of UC and USC administrators in half.

In sum, as Jerry Brown’s penultimate budget, the May Revise pushes the state’s out-of-whack finances into the future of whatever governor succeeds him. Although Brown has been more frugal than spendthrift predecessors Gray Davis and Arnold Schwarzenegger, who left office with massive deficits hanging over the heads of Californians, he has not solved the state’s endemic fiscal problems, but once again has kicked the can down the road.

He likely was the last governor with the experience, savvy and clout to advance both needed pension reform and comprehensive state tax reform, such Laffer’s proposed flat tax of about 6.5% for California. Instead, Brown can say with Louis XIV, “Après moi le deluge.”

In his press conference on the budget, Brown derided Lafferesque supply-side tax cuts as “voodoo economics” and “what Bob Dole called the plan of a ‘riverboat gambler.’” But what does the history show? The “voodoo economics” crack came from George H.W. Bush against Reagan’s economic plan during the 1980 campaign. The voters picked Reagan over Bush in the 1980 GOP primaries, then Bush became vice president. Reagan cut taxes. The economy boomed.

Bush became president in 1988 because he solemly pledged, “Read my lips! No new taxes!” But as soon as he got a chance, he repudiated both his pledge and Reagan’s “voodoo economics” tax cuts by increasing taxes in 1990. The economy tanked; the deficits got worse, not better. Bill Clinton was elected in 1993 on a pledge of a “middle class tax cut.”

In 1993, Bill Clinton broke his pledge and increased taxes, which Democrats now still wrongly maintain was behind the 1990s economic growth. But as Paul Harvey would say, here’s the rest of the story. After Clinton lost both houses to Congress to Republicans in 1994, he flipped. In 1995 he cooperated with Republican House Speaker Newt Gingrich on massive capital gains tax cuts that boosted the economy – and derided Dole as “the tax collector of the welfare state.”

In Clinton’s ’96 campaign, he ran a great ad touting his tax cuts while deriding Dole’s $900 billion in tax increases. Voters re-elected Clinton. Then Clinton and Gingrich passed more tax cuts, which boosted the economy so much the federal deficit ran a surplus for a couple of years, the only time that has happened the past 50 years.

It’s too bad, but except for Silicon Valley billionaires, Californians are going to miss the Trump Boom.

John Seiler is a former Editorial Writer at the Orange County Register

This piece was originally published by Fox and Hounds Daily

Laguna Beach becomes first city in Orange County to ban smoking in town

As reported by the Orange County Register:

LAGUNA BEACH — The only place people will be allowed to smoke in this resort town will be inside their homes and cars.

On Tuesday, May 9, the City Council voted unanimously to expand its ban on smoking that already covers beaches and parks.

The new ordinance bans smoking throughout the city, including on sidewalks, bike paths, alleys and in parking structures. The ordinance is the first such restrictive ban in Orange County. It will go into effect after a second reading in 30 days.

The ban also applies to vapes and e-cigarettes. Last summer, Gov. Jerry Brown signed a package of tobacco bills that included these devices in the state’s smoking ban restriction. The ban would also apply to smoking marijuana in the same places tobacco smoking is prohibited. …

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California Is Headed Into a Very Dark Pit

california-flagAs California still continues thumbing their nose at the brute, non-global-warming believing Donald Trump, we the people may need him now more than ever. After eight years of doing away with 70 years of post World War II deterrence, realpolitik, balancing hostile nations and leading the world, supposedly California voters thought it was more prudent “to lead from behind.” And now the price to restore global deterrence that will protect California is being paid.

These actions, where elections have consequences, now find California in the cross hairs of North Korean nuclear missiles. Global warming, human rights (whether gay rights or religious freedom) and despising Donald Trump/Republicans won’t take precedent when the threat ignored by “strategic patience” takes aim at Los Angeles and San Francisco for nuclear annihilation. Eight years of hand wringing and indecisive rhetoric has produced North Korea, Iranian, Chinese and Russian belligerence. Each of these war-seeking nations will strike California (the heart of the U.S. economy) if and when they are given the chance.

None of these issues are crossing the California Legislature or Gov. Brown’s collective minds at this time. If that’s the case then what is the state of the state? We’re on our way to passing the largest transportation tax in the history of California, according to State Senator John Moorlach, that will do nothing to alleviate the current transportation issues, address concerns about former transportation taxes that were appropriated elsewhere or address Cal Trans union-led inefficiencies, instead of accounted for transparency. Additionally, CalSTRS continues missing investment return rates, and the unfunded liability will drain state, city and county finances in only a few years. Other California pensions aren’t doing much better, and these workers who were promised one thing will more than likely never see there money in the coming decades.

Something will have to give – pensions to public employee unions. The promise was, we (the Democratic controlled state), will promise you hundreds of billions of taxpayer money, if only you keep electing us without ever actually asking how that plays out in the real world of diminished returns, an aging society and an already overtaxed electorate. California is also trillions in debt along with almost a trillion dollars of infrastructure (roads, bridges, dams, canals) work that needs to be done immediately.

Through this maelstrom, Gov. Brown is leading in polls to replace Senator Feinstein if she retires and the California Legislature has solid approval ratings. Yet crime soars in all major California cities after the passage of anti-cop, anti-incarceration propositions (47 and 57) and AB109. Democratic voters, moreover, allow the governor to reign over a “green clergy or green clerisy state,” says Joel Kotkin, to the detriment of the very constituents he claims to help with his anti-carbon, non-negotiable environmental policies.

Now cities such as Hermosa Beach want to be carbon-free without ever asking the economic, long-term, scalable viability of renewable energy to replace coal or gas-fired power plants. With the difficulties imposed by environmental mandates, (which do nothing to offset coal-fired carbon use by countries such as Germany, the U.K., China, India, most of Asia and Africa), the U.S. Census Bureau now reports housing permits and construction have slowed in Los Angeles County. Los Angeles, where I am based, continues to pass higher taxes while flouting federal immigration law. When does the madness stop? Or does it ever, particularly if Prop. 13 is overturned and state revenue would soar. That is an ever-looming possibility to solve budgetary gaps, but California continues voting for Democrats who govern this way.

What California has become, moreover, is a paradox of dysfunctional Republicans and Democrats who aren’t the kind of Democrats our parents grew up under – Pat Brown, FDR, Truman and Kennedy – men who cared about middle class prosperity and jobs, instead of billionaire Tom Steyer’s environmental edicts. Which is ironic, since he made billions off fossil fuels. We also lead the nation in illegal immigration, increasing welfare recipients, decreased incarceration causing skyrocketing crime rates and a overregulated middle class that is fleeing the state. But this is good for Democrats since the arriving poor take their place hoping for generous entitlements, service jobs or some type of government employment that benefits the California Democratic Party. It’s a perfect storm of how California is headed into a very dark pit of titanic proportions.

According to a Social Science Research Council report California has the most un-equitable levels of income, education levels and standards of living between coastal and inland communities. But as Joel Kotkin states: “Our emerging republic of climate” will only exacerbate these problems while tech, entertainment and media companies keep headquarters in California, but the real work is done in Texas, Nevada, North Carolina and other low cost, low tax states. California, however, was once the heart of the American dream, but the Democratic Party and apathetic, longing-for-Reagan-Republicans have killed that dream until voters change their patterns.

California losing its manufacturing base, aerospace and military industries is analogous to the U.S. losing deterrence; seeking to recapture that lost spirit is among the most dangerous moments when great powers lose their way. California and the U.S. will find this out at their peril whether this year or in the near future – but we will find out.

Allowing the North Koreans to develop an ICBM or signing a nuclear agreement with the world’s largest sponsor of terrorism – Iran – or letting the Chinese militarize the $5 trillion a year South China Sea while backing down to Assad continuing to gas his population are the same as California wholeheartedly believing in climate change/global warming without ever asking the consequences of your actions? California and the U.S. are on a sure-fire path to war – militarily and economically – because what was once normal (deterrence and middle class prosperity) have been replaced by fashionable, progressive policies. The false canard of sloganeering has taken over from that passé, dullard way of studying how economies grow, jobs are created and families being at the epicenter of public policy is no longer in vogue.

I implore California voters to begin asking themselves, their families and friends why they keep voting for the same public officials while expecting different results. Further, President Donald Trump doesn’t need us – and would beat Hillary Clinton again if the election was held today – so the Legislature and Gov. Brown should make nice immediately. One strategically placed nuke flips California’s massive electoral college votes to the next Republican running for president. That’s not made up scenarios, but realpolitik at its scariest. So stop the nonsense and imprudent hatred of the president. Our lives and state may depend upon it, quicker than we want to believe.

While elite, California enclaves decry high crime rates, they voted for the very people who put in place the propositions that treat criminals the way a parent treats a child who takes an extra piece of candy. Deterrence works – for societal criminals, murderous, nation-state tyrants and for California policymakers – but for now, sticking our heads in the sands and hoping for the best while Senator Kevin de Leon and Gov. Brown shove climate change legislation down our economic throats won’t stop North Korea or the downfall of California.

Todd Royal is a geopolitical risk and energy consultant based in Los Angeles.

Gov. Brown signs bill OKing $52 billion tax to fix state roads

As reported by the San Francisco Chronicle:

SACRAMENTO — Gov. Jerry Brown signed into law Friday a bill that will raise $52 billion in new taxes and fees to pay for the state’s roads and bridges.

Brown signed SB1, as he was expected to, without any fanfare or ceremony. He also gave final approval to two companion bills that were needed to lure reluctant lawmakers to support the transportation bill.

Under SB1 the state’s gas excise tax, which is currently 18 cents, will increase by 12 cents per gallon. The excise tax on diesel fuel, which is used by the commercial trucking industry, will increase by 20 cents a gallon to 36 cents. The diesel sales tax also will rise to 5.75 percent from 1.75 percent. Those increases begin Nov. 1.

Beginning Jan. 1, vehicle registration fees will increase by $25 to $175 depending on the value of the vehicle. Owners of zero-emission vehicles will begin paying an additional $100 annual fee beginning in 2020. …

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