Attorney General Reins In Shady Bond Practices

School bond studyIt’s not often that taxpayers get good news, especially in tax-happy California. Even more surprising is when the good news is an official opinion from the state’s Attorney General, someone not normally associated with friendly treatment to taxpayers.

Last November, this column noted that local governments, especially school districts, were prone to engage in questionable campaign activity to secure an unfair advantage in bond elections. Although it is illegal for officials to use public resources (including public funds) to urge a vote for or against a political issue, consultants frequently advise tax proponents to wage one-sided “informational” campaigns. This includes sending out material stating all the good things a bond or tax measure will do, but usually they stop just short of violating the law by telling people how to vote. (Howard Jarvis Taxpayers Association has had multiple successes in obtaining court injunctions against school districts that cross the line into advocacy, but by the time the court rules, the political damage has already been done.) And to top it all off, the “consultants” compensated with taxpayer dollars are frequently given financial incentives if they win.

Fortunately, the incestuous behavior of school districts with political consultants and bond salesmen received a long overdue slap down last week. The opinion, in response to several questions proffered by California’s Controller John Chiang, covers many activities taxpayers have been complaining about for years. As noted in the opinion, “Bond elections typically involve a range of pre-election activities, which can include: conducting opinion surveys to evaluate voters’ attitudes toward a bond issue; developing a financial plan; determining appropriate bond issuance size and tax rates; drafting documents needed to place a bond measure on the ballot; conducting a public-information program; training staff to inform the community about funding needs and bond financing; preparing a tax-rate statement for the voter pamphlet; providing information to the election campaign; conducting informational workshops; and preparing the ballot question itself.

“Although district staff may be able to provide some or all of these functions, it is common for districts to contract with private vendors to perform or support them [and a] practice has developed within the municipal financing industry whereby investment bankers, financial consultants, and bond attorneys (collectively referred to here as ‘municipal finance firms’ or ‘firms’) offer to contract with a school district to provide the pre-election services that the district seeks. Under such an arrangement, the firm agrees to provide the pre-election services at no, or reduced, charge to the district in exchange for the district’s promise to select the firm as its contractor to provide post-election bond services, if the bonds are approved by the voters.”

The Attorney General first concluded what should already be obvious: “A school or community college district violates California constitutional and statutory prohibitions against using public funds to advocate passage of a bond measure by contracting with a person or entity for services related to a bond election campaign if the pre-election services may be fairly characterized as campaign activity.”

But the A.G. went on to conclude more specifically that “a school or community college district violates prohibitions against using public funds to advocate passage of a bond measure if the district enters into an agreement with a municipal finance firm under which the district obtains pre-election services (of any sort) in return for guaranteeing the firm an exclusive contract to provide bond-sale services if the election is successful, under circumstances where (a) the district enters into the agreement for the purpose (sole or partial) of inducing the firm to support the contemplated bond-election campaign or (b) the firm’s fee for the bond-sale services is inflated to account for the firm’s campaign contributions and the district fails to take reasonable steps to ensure the fee was not inflated.”

Admittedly, there’s a lot to unwrap here. But the upshot is that taxpayers should not be forced to finance a political campaign to raise taxes.

Obviously, there are times when the legitimate capital needs of a school district justify a request to voters to assume debt in the form of a school bond. But the process should be driven by actual educational needs, not the desire of consultants and the bond industry to make a fast buck.

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

New eClaim System Makes It Easier to Reclaim Your Property From CA Government

California’s chief fiscal officer is making it easier to reclaim private property held by the state.

State Controller Betty T. Yee announced earlier this month an expansion of the eClaim feature for the state’s unclaimed property program. Property owners will now be eligible to submit their claims for property valued up to $5,000 using the controller’s streamlined paperless electronic claim process.

“The eClaim process is simple, efficient, and can be completed in a couple of minutes,” Yee said in a press release. “An increased threshold of $5,000 will allow many more Californians to claim lost or forgotten property online and quickly receive a check in the mail.”

Unclaimed Property: Your Money Held by the State

Under state law, when there’s been no activity on an account for three years, financial institutions are obliged to report this unclaimed property to the California Controller’s Office. In turn, the controller holds the funds until it is claimed by the owner. The most common types of unclaimed properties are bank accounts, stocks, bonds, uncashed checks, wages, life insurance benefits and safe deposit box contents.

Among the biggest problems facing the state’s unclaimed property program: a lack of public awareness about where people can find their old property. Most people don’t realize they’re owed money from a forgotten insurance settlement or an abandoned stock dividend.

However, for those owners aware of the program, obtaining the necessary paperwork to prove ownership can be costly and time-consuming. Many find the hassle of paperwork not worth a small dollar amount.

Unclaimed Property: eClaim created by Chiang

To address the paperwork hassle problem, in January 2014, then-Controller John Chiang created the eClaim feature to expedite the return process for properties valued at less than $500. Later that year, Chaing increased the value to $1,000. In total, more than 315,000 properties have been returned through the Controller’s eClaim feature.

Screen Shot 2015-11-20 at 10.35.42 AMThe state currently holds more than $8 billion in unclaimed property that rightfully belongs to more than 32 million people and businesses. More than three-quarters of unclaimed properties are estimated to be eligible for the new expanded eClaim feature. Yee says that by increasing the threshold to $5,000, she’ll be able to return another $9.4 million per year.

Among those who could benefit from the eClaim feature is billionaire hedge fund manager turned environmental activist Tom Steyer. The former hedge fund manager has three unclaimed properties, each valued at less than $50, dating back to his time as founder of the San Francisco-basedFarallon Capital Management.

LAO Report: State Can Do More

For decades, the state has made it difficult for owners to obtain their property. From 1990-2007, state law prohibited the Controller’s office from contacting approximately 80 percent of owners.

Earlier this year, the state Legislative Analyst’s Office released a report critical of the state’s unclaimed property system. The state could do a better job of finding owners, the report concluded, instead of passively waiting for the cash to be claimed.

It also argued that the state has a conflict of interest in managing the program.

“In particular, because property not reunited with owners becomes state General Fund revenue, the unclaimed property law creates an incentive for the state to reunite less property with owners,” the report found. “Now generating over $400 million in annual revenue, unclaimed property is the state General Fund’s fifth-largest revenue source. This has created tension between two opposing program identities — unclaimed property as a consumer protection program and as a source of General Fund revenue.”

Unclaimed Property: How to Search for Unclaimed Property

To find out if you have unclaimed property held by the state, go to www.claimit.ca.gov.

Originally published by CalWatchdog.com

Brown and Legislature Hit Infrastructure Funding Gridlock

Infrastructure constructionWith big infrastructure questions still unanswered, Gov. Jerry Brown has found himself at loggerheads with lawmakers in Sacramento.

From water storage to road repair and beyond, legislators have not met Brown eye to eye, raising the prospect of a protracted conflict that continues well into next year, with elections looming next November.

Diminishing returns

Brown had prided himself on a relatively hands-off approach to Sacramento’s fractured political configuration, which has seen moderate Democrats sink strict environmental regulations and Republicans adopt an on-again, off-again approach to negotiations with the governor’s office. “This particular approach of mine has worked in the past,” Brown said, according to the Los Angeles Times. But between California’s drought and its challenges in shifting away from the gas tax to maintain public roads, that comfortable attitude has begun to show diminishing returns.

“Administration officials estimate that $59 billion is needed for state roads, and local officials say an additional $78 billion is required for cities and counties. The longer it takes to reach a deal, the bigger the price tag will be,” the Times reported.

Analysts and opinion writers, long frustrated with the low quality of California’s roads, have homed in on the latest round of infrastructure troubles. “Traffic accidents in California increased by 13 percent over a three-year period — the result of terrible roads and worse drivers,” as Victor Davis Hanson wrote in the San Jose Mercury News. Hanson and others have held up roads as a barometer of the state’s broader political and economic health. “Why is California choosing the path of Detroit,” he asked, “growing government that it cannot pay for, shorting the middle classes, hiking taxes but providing shoddy services and infrastructure in return, and obsessing over minor bumper-sticker issues while ignoring existential crises?”

Looking for leadership

Brown has even taken some implicit heat on infrastructure from within his own administration. The state’s treasury secretary John Chiang recently revealed his belief that the governor needs to launch a new, transparent and top-to-bottom review of California’s infrastructure needs.

“Chiang wants to use the treasurer’s office to foster long-term thinking that California is sorely lacking and arguably has lacked since Pat Brown was governor in the 1960s, Chiang said at his keynote address to the California Debt and Investment Advisory Commission’s event before the Bond Buyer’s California Public Finance Conference,” according to Bond Buyer.

“One of the challenges the state faces is to persuade people of the importance of long-term investment in an environment where many of them distrust the financial markets, Chiang said. That’s where transparency comes in. The state has made progress in governance and management evidenced by its boosted bond ratings, but people still ask what the long-range plan is, Chiang said. […] Such a study would need to come from the governor and the state Legislature, however, not the treasurer’s office, Chiang said. His office’s role would be to provide education.”

Winter worries

Clouding the picture further, Congressional Republicans in Washington have taken Brown to task on plans for shoring up the state’s water infrastructure. “The Republican members of California’s delegation are demanding a government plan to store the deluge of water that could come with El Nino this winter,” the Sacramento Bee reported. “Fourteen GOP lawmakers will send a letter to President Barack Obama and Gov. Jerry Brown on Thursday asking for specifics about how federal and state agencies expect to capture, save and transport water. […] Rep. Devin Nunes, R-Calif., said the governor has opposed a plan approved by the House, and the Senate hasn’t proposed one of its own.”

Meanwhile, the public utilities have joined in the chorus. In an op-ed at the Los Angeles Daily News, California Water Association executive director Jack Hawks warned that “we cannot build a reliable water supply on conservation alone. Customers have been doing an outstanding job during the current drought emergency, but this level of conservation is not sustainable over the long term.”

Originally published by CalWatchdog.com

Gov. Brown, CalPERS Face Off In 2015

A piece of this year’s politics moving into 2015 is Gov. Jerry Brown’s tiff with the California Public Employees’ Retirement System. In particular, Brown remains steamed over CalPERS’ use of temporary pay to pad pensions. In a letter to CalPERS, he said the action “would improperly allow temporary pay resulting from short-term promotions to count towards workers’ pensions.”

Divisions on CalPERS’ Board of Administration, where Brown can count on allied appointees, opened around the controversy. Although Brown’s side in the controversy lost a close vote, plans have already been hatched for a rematch.

The bout has been a long time in coming. As summer turned to fall, Controller John Chiang took CalPERS to task for juicing up pensions while dishing them out at unsustainably high levels. Chiang was just elected state treasurer, so he will remain an ex officio member of the CalPERS board.

In late August, Brown tasked his team with doing all it could legally to prevent CalPERS from engaging in the pension spiking.

In that procedure, a public pension fund passes rules that allow pension levels to be adjusted significantly upward by taking temporary or exceptional kinds of work and pay into account. CalPERS had pushed the credibility of these measures to the breaking point, in effect securing special pension increases simply because employees did their jobs, such as librarians shelving books.

But Brown made a point to object only to CalPERS’ temporary pay rules, which allowed unique, fleeting raises for non-permanent work to be factored into pension setting.

By mid-September, Chiang had concluded that CalPERS’ pension spiking was unacceptable in theory, but unpunishable in practice. CalPERS’ “available resources” for spiking oversight, Chiang concluded, “limit its annual reviews to only 45, or 1.5 percent of the more than 3,000 reporting entities. At this current rate, pension spiking could go undetected for an extended period of time, as each reporting entity would be reviewed, at the earliest, every 66 years.”

The task of auditing CalPERS’ shenanigans had to fall, in other words, to the Legislature.

As a matter of common sense, it was much more attractive for Brown to try to exercise oversight by reforming the rules CalPERS used to set pensions, instead of by pouring the state’s time and energy into auditing those rules after scores of changes went into effect.

A tough matchup

That is why, as the Sacramento Bee reported, Brown’s appointees on the CalPERS board proceeded to force a vote on removing temporary pay from the fund’s cornucopia of pension-spiking sweeteners. Unfortunately for Brown, the vote failed, splitting 7-5 in favor of retaining the objectionable rule.

In an interview, state human resources head Richard Gillihan — a Brown ally on the board who voted against temporary-pay pension spiking — told the Bee that 2015 would offer another shot at reform. “What should or shouldn’t be included in final compensation is absolutely something that we think needs broader revisitation,” he said. “We hope to see that sooner rather than later.”

According to the fund’s website, “The CalPERS Board of Administration consists of 13 members — six elected ‘member representatives,’ three appointed representatives, and four ‘ex officio’ representatives. The elected candidates will serve a four-year term and represent active and retired members in all aspects of CalPERS’ business – including benefit and membership issues, and oversight and investment of Fund assets.”

But as the Bee observed, “The board’s composition will lean more heavily toward labor’s interests next year.” The Service Employees International Union shelled out some $250,000 to secure the election of incoming member Theresa Taylor.

Even though California taxpayers are on the hook for any CalPERS shortfall, they have no say in the six elected “member” representatives. Those representatives are chosen, according to CalPERS, by ballots “mailed to eligible, active state and public agency CalPERS members.”

Leadership trouble

A complication, however, has added further difficulties to the equation. September also saw the board approve the appointment of Ted Eliopoulos, former CalPERS senior investment officer for real estate, as its new chief investment officer.

That provoked the ire of J.J. Jelincic, a board member unable to vote against Eliopoulos because he was recused for being on leave. Jelincic told Pensions and Investments that Eliopoulos lacked “the temperament and management skills” needed for the job.

Pensions and Investments noted, “He said Mr. Eliopoulos relied too much on the advice of consultants, made the wrong decision to increase CalPERS’ exposure to riskier non-core real estate assets before the financial crisis, and played favorites with employees.”

The enmity has served to cloud Brown’s prospects even further for charting an effective course toward CalPERS reform.

This article was originally published by CalWatchdog.com

 

CA Budget Worse Despite $2 Billion New Revenue

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

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

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

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

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

States with Highest Expenditure Burden (Fourth Quarter 2014)

 

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

Pension burdens

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

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

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

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

Bloomberg also reported:

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

Forecast

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

As the LAO reported:

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

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

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

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

This article was originally posted at CalWatchdog.com

CA State Revenues Down Over 10 Percent

State Controller John Chiang announced today that there is more bad news for the Golden State: Revenues are down over 10 percent, or $538 million, from projections. Steven E.F. Brown for the San Francisco Business Times wrote the following:

State Controller John Chiang said California’s revenue was 10.3 percent, or $538.8 million, below budget projections in July.

July was the first month of the Golden State’s new fiscal year, and the tax take was lower in many areas. Only personal income taxes were higher than budget estimates — they came in 2.9 percent, or $89 million, over estimates.

Corporate taxes were 19.3 percent, or $69.5 million below estimates while sales taxes and use taxes were 12.5 percent, or $139.4 million worse than guesses made in the most recent budget.

Both corporate taxes and also sales and use taxes were below their level in July 2010, too, though overall general fund revenue was up $39.9 million, or 0.9 percent, in July 2011 over a year earlier.

California’s budget is a series of guesses about revenue and spending for the year running July 1 through June 30. The controller keeps track of cash levels — how much money the treasury actually has.

Chiang’s office blamed the acrimonious debt-ceiling debate for creating “a great deal of uncertainty for state and local governments, the bond markets, banks and businesses, and the economy.”

In his summary of the situation, Chiang said consumer spending has been dropping, but no one’s sure whether it’s for “a genuine slowdown” or because of logistical problems from natural disasters like this year’s earthquake and tsunami in Japan.

“This is cause for concern, but not panic,” he said.

 

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