Pensions: The high cost of ‘socially responsible’ investment policy

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

SACRAMENTO – A newly released report from the California Public Employees’ Retirement System confirms that, fulfilling the Legislature’s directive to divest from coal-related investments, the pension fund has now largely exited from coal stocks. But as news reports this week suggest, this “socially responsible” investment policy has come at a price, as coal stocks soar under the Trump administration’s fossil-fuel-oriented energy policy.

The Public Divestiture of Thermal Coal Companies Act of 2015 required CalPERS to “identify, engage and potentially divest from companies meeting the definition of ‘thermal coal companies.’” The pension fund was directed to do so “consistent with its fiduciary responsibilities,” providing some wiggle room for the fund, whose primary duty is to maximize investment returns to make good on its public-employee pension obligations.

Nevertheless, CalPERS promptly identified two dozen publicly traded companies that generate at least 50 percent of their revenue from mining thermal coal, as required by the law. As the recent report explains, three companies adapted their business model and redirected their investments toward clean energy. As such, they were exempt from divestment. CalPERS had no holding in eight other companies identified under the act.

But 14 companies “failed to indicate applicable business plan adaptations, or failed to respond to CalPERS engagement efforts and were subject to divestment,” according to the report. As the Sacramento Bee explained, “stocks for 13 of the 14 companies are worth more than they were a year ago when the pension fund was divesting from the industry.” The shares of one of those firms were trading at 15 times their April 2016 levels.

There’s little question that the act was designed to achieve a social goal, rather than one related to increasing CalPERS’ investment returns. “Coal combustion for energy generation is the single leading cause of the pollution that causes global climate change,” said the bill’s author, Sen. Kevin de Leon, D-Los Angeles, as quoted in the Senate bill analysis. He added that coal is “a leading cause of smog, acid rain, and toxic air pollution” and that “most U.S. coal plants have not installed these technologies.”

CalPERS’ investment staff tends to oppose socially oriented investments, but the CalPERS board has the final say. The issue was debated at the CalPERS Board of Administration meeting in May. The Sacramento Bee reported on union officials who criticized the policy at the board meeting. “We cannot afford to lose funding for law enforcement officers in exchange for a socially responsible investment policy,” said Jim Auck, treasurer of the Corona Police Officers Association.

This isn’t the first time that there’s been tension between the fund’s politically oriented investment goals and its desire to increase investment returns. At a board meeting last year, CalPERS investment officials argued for an end to a 16-year ban on tobacco-related investments made by the system’s own investment officers. (Tobacco investments by outside firms were still allowed.) Because tobacco stocks had rebounded since 2000, news reports estimated that the pension fund had lost about $3 billion because of that decision. The fund’s total investments are valued at more than $300 billion.

Instead of following the investment team’s advice, the CalPERS board continued to ban tobacco investments and also decided to divest about $547 million in tobacco-related investments handled by outside firms. That decision also was based on social goals. Advocates for tobacco divestment argued that CalPERS ought not invest in firms that sell deadly products.

At the time, the tobacco-divestment decision was particularly controversial because CalPERS faced investment returns of a measly 0.61 percent. Now, with CalPERS’ latest returns showing a robust 11.2 percent gain, it makes continuing with the coal divestment plan – and other socially oriented investment strategies – an easier option to pursue.

Regarding coal, CalPERS isn’t the only state agency to pursue divestment. Last summer, California Insurance Commissioner Dave Jones launched his Climate Risk Carbon Initiative, which called for any insurance companies that do business in California to divest “voluntarily” from most of their thermal-coal investments. The state vowed to publicize the names of companies that didn’t comply and ramped up mandatory reporting requirements.

Insurance commissioners regulate insurers to assure they have the resources to pay any claims. Yet the department’s divestment request clearly had a social (and some say political) goal. Jones justified it by arguing that such investments put the companies at risk. “As utilities decrease their use of coal and other carbon fuel sources … investments in coal and the carbon economy run the risk of becoming a stranded asset of diminishing value,” he said in a statement.

But critics of the policy, including a 2016 study by this writer, note that insurers are invested in extremely conservative positions, mostly in fixed-income bonds, and that even the insurer with the largest percentage of coal-related investments (TIAA-CREF) had only 1.76 percent of its total assets in such holdings. Furthermore, the value of the stocks already reflects the well-known uncertainties that the insurance commissioner raised. Jones’ office argued, in response, that “since 2011, coal prices, cash flows, and company valuations have fallen sharply thus adversely affecting and bankrupting numerous coal companies.”

The broad question, especially for CalPERS, is the one raised by the union officials at the recent board meeting: Are the political and social gains of divesting from these industries worth the costs in investment returns?

Chief investment officers “invest for value and don’t appreciate being hamstrung by legislators who don’t know how to manage a diversified portfolio,” said Sen. John Moorlach, R-Costa Mesa, who voted against Sen. de Leon’s divestment act. “I think I’m the only legislator who managed a $7 billion portfolio. And the studies I’ve seen have shown that social investing has produced lower returns.”

Despite the recent good-news returns, CalPERS has an enormous amount of unfunded liabilities – the shortfall in assets to make good on all the long-term pension promises made to government employees. The system is only funded at around 68 percent. This should be of concern not only to the agency, the Legislature and public employees who depend on a CalPERS retirement, but to California taxpayers. Ultimately, they are the ones who will pay for any pension shortfalls.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

The article was originally published by CalWatchdog.com

Democrats want to extend health coverage to undocumented immigrants

Health for allCalifornia’s Democratic legislators want to extend health benefits to undocumented young adults, the continuation of an effort that ushered children without legal status into the state’s publicly funded health care system last year.

It is unclear when the program would start or how much the state would spend if the proposal, which could cost up to $85 million a year, is approved by Gov. Jerry Brown. Lawmakers are working out details ahead of their June 15 deadline for passing a new budget.

The plan would provide full-scope coverage for 19-to-26-year-olds who qualify for Medi-Cal, the state’s name for Medicaid. Currently, the federally funded program covers only emergency visits and prenatal care for undocumented residents. Under the proposal, revenue from taxes on tobacco products would absorb expenses for all other coverage.

Democratic Sen. Ricardo Lara of Bell Gardens has been one of the strongest voices for expanded care. In 2015, he pushed for coverage for all adults. That proposal was changed to admit only undocumented children; it took effect last year. This year, he said in a recent video message to supporters, “We are going to make the final push to ensure we capture our young adults.”

Supporters’ ultimate goal is to include all undocumented adults, said Anthony Wright, executive director of Health Access California, a health care consumer group backing the proposal.

“We believe without coverage people are sicker, die younger and are one emergency away from financial ruin. It has consequences for their families and their communities — both health and financial consequences,” he said.

The plan would mean that undocumented children currently in the program would not age out at 19, putting low-income undocumented immigrants on a par with those allowed to stay on their parents’ insurance under Obamacare until they are 26.

Sen. John Moorlach, a Costa Mesa Republican, opposes an extension of benefits. One reason is financial. California doesn’t have “a balance sheet we can brag about,” he said, citing the state’s debt load, among other reasons.

Secondly, he disapproves of illegal immigration. Moorlach migrated to the U.S. legally as a child with his family from the Netherlands.

“I’m kind of offended that we feel an obligation to pay for expenses for those who did not come through the front door,” he said. “I certainly have compassion and want to help people in need, but I’m having difficulty, as a legal immigrant, because we are already in such bad fiscal shape.”

Advocates argue that undocumented immigrants help propel California’s economy with their labor and the taxes they pay, and that they cost the state money when they don’t work because of illness or when they end up in the emergency room.

“Health care is a right,” said Ronald Coleman, director of government affairs for the California Immigrant Policy Center, an advocacy organization and supporter of the proposal. “These are folks we are investing in through the California Dream Act and through other programs our state offers, and it makes sense to invest in our future, which our young adults will be.”

Estimates vary for how many people this expansion of Medi-Cal would serve and what the costs would be. Each house of the Legislature has passed its own version of the proposal, with differing figures attached.

The Assembly allocated $54 million a year to cover an unspecified number of additional enrollees, with a July 2017 start date. The Senate proposed $63.1 million in the first year, beginning in 2018, and $85 million annually thereafter, also without specific population numbers.

Coleman’s center, which is working closely with lawmakers on the issue, estimates about 80,000 new people would be eligible, and the cost would be around $54 million a year. That assumes the federal Deferred Action for Childhood Arrivals program continues, because it provides access to Medi-Cal. If  DACA were eliminated, the figures would increase to about 100,000 eligible people and about $84 million in annual costs, Coleman said.

The governor’s proposed budget does not include the proposed expansion or any money for it.

Kevin, a 19-year-old Angeleno who asked that only his first name be used because he lives in California illegally, wants the proposal to succeed. He has been working for more than a year to distribute information about Medi-Cal children’s coverage to immigrant families.

He meets all but one of the requirements for DACA: He was not in the country before June 15, 2007. He arrived in the U.S. in 2011 at age 14 from Guatemala, on a visa that later expired. He graduated high school, has no criminal record and is now majoring in Business Administration at California State University, Los Angeles.

“There’s this misunderstanding that young people are healthy,” said Kevin, who suffers from eczema. He worries about the chronic condition flaring up. “When it gets worse, it doesn’t let me do anything with my hands.”

He is enrolled in a county health insurance program for low-income residents, but he can’t afford a dermatologist. He can barely pay for the prescription lotion he uses for the eczema and sometimes goes without it.

“We are trying to have a better economic standard, and we are like the building blocks of this society,” he said. “Having health insurance will allow us to focus more on school and do our regular day-to-day activities. A healthier society works better for everyone.”

If lawmakers can now agree on details, a consensus proposal will go to the full Legislature for approval. The deadline for that is June 12.

This piece was originally published by CalMatters.org

Why California’s Finances Could Derail Their Energy Plans

Energy power linesAccording to State Senator John Moorlach, R-Costa Mesa, California has real financial problems that need to be immediately addressed. A self-described Truman Democrat, Joel Kotkin, in a recent syndicated article echoes the same sentiments. Some of the problems are California has the highest taxes overall in the nation, worst roads, underperforming schools, and the recent budget has at least a $1.6 billion shortfall.

Moreover, depending on how the numbers are analyzed California has either a $1.3 or a $2.8 trillion outstanding debt. This is before counting the maintenance work needed for infrastructure, particularly roads, bridges and water systems. Yet tax increases aren’t covering these obligations, and even the bullet train project, which held so much promise when it was passed are now billions over budget.

However, the financial strain also has California’s net financial position running a $169 billion deficit according to the Comprehensive Annual Financial Report, which puts California ranked last in the nation. Deferred maintenance on our state roads and highways is roughly $59 billion. Estimates of California’s unfunded pension liabilities – assuming a rate of return – above 5% has CalPERS at $114.5 billion, CalSTRS at $76.2 billion and UC Pension at $12.1 billion.

California in addition has the highest unfunded retiree medical liability in the nation, second highest gas taxes when cap and trade is added, highest corporate and individual income taxes, and lastly has the worst business competitive environment in the U.S. as well.

Our biggest issue of all could be that our nation’s unfunded pension liabilities have reached upwards of $5.6 trillion with California’s share at $956 billion. These above-mentioned sobering assessments of our state’s financial and societal health are reasons to question why California has become an outlier of progressive policies – particularly when it comes to energy – with renewable energy being at the forefront of our overall energy portfolio.

At one time California was the leader in sensible environmental, education, manufacturing and cultural polices, but those days have seemingly passed. As the country moved to the right during the recent election, California has entrenched itself as the stronghold of the left-leaning, progressive movement. Nowhere has this played itself out than in California’s embrace of global warming with AB 32 and SB 32. Both energy policies are known to restrict economic growth, and make all forms of energy more expensive. Whether you believe or not in global warming and climate change, California’s embrace of the fundamental tool for economic growth – affordable, scalable energy – has now become harder than ever to achieve with the voters, California legislature and Governor’s full embrace of these policies.

At this time California isn’t creating middle or upper middle class jobs, except in the northern California region. With San Francisco leading the way. Apple just announced they are creating 2,000 jobs in Arizona with firms such as Toyota, Tesla and Carl’s Jr., having followed suit the last few years. Recent labor announcements about California creating 21,600 private sector jobs in December turned out to be a false narrative.

According to payroll processing company Automatic Data Processing Inc. working with Moody’s Analytics Inc., put the figure at only 2,400 “goods producing types of jobs.” Meaning that nine out of ten jobs created were service sector, minimum wage paying levels jobs.

With this type of employment opportunities being created how are Californians expected to pay for an energy portfolio that strongly relies on renewable energy? This could be turned around with great paying careers that the oil and gas industry provides. As an example, according to Russell Gold’s book “The Boom,” page 62, the average oil-field worker made $91,400.

Renewable energy at this time doesn’t work on the type of basis that could power neighborhoods, cities, counties, or this state. Additionally, renewable’s technology hasn’t solved a number of key issues for energy security, reliability and scaling at a cost effective measure to reach all California markets.

These main problems are: 1) storage of excess energy, 2) intermittent weather issues when using wind and solar, 3) generous tax credits needed for profits (Tesla as an example), and 4) modernizing the grid needs to take place, because renewable energy causes surges that California’s grid isn’t able to handle from over 38 million Californians.

As California relishes its role fighting the new President, it is hard to imagine his administration doing anything to assist California lowering its energy costs. It’s not hard to imagine that if you live in Los Angeles, San Francisco or other expensive coastal enclaves that a $200,000 a year salary isn’t enough once taxes are paid. Therefore, why is California nudging the new President towards confrontation?

Gun control, immigration, and even snubbing him at his inauguration, members of the California Congressional delegation are playing a dangerous game. Joel Kotkin has many times called California’s energy policy an amalgamation of “green clergy, or a clerisy.” Trump also has control over federal dollars. California is expected to receive $105 billion this year, with $78 billion going to health and human services programs. Likewise Trump has nominated pro-fossil fuel advocates to the Departments of State, Energy, Interior and the EPA. It doesn’t seem wise for California to not want to work with the Trump administration on opening up parts of California to energy exploration to assist with politically disagreeable problems now in the mix.

California has billions of gallons of oil and trillions of cubic feet of natural gas sitting off our coastlines and in the Monterrey shale. Jobs aren’t being created that can sustain working families, infrastructure is lagging and our energy portfolio isn’t functioning correctly to contain costs.  Our high-energy costs are one of the biggest factors why companies and CEOs are leaving California.

Many astute energy observers believe California will need to cut 100,000 jobs and increase energy prices to meet our ambitious climate goals. These goals could be met with moving towards natural gas and nuclear-powered plants.

A desirable goal for the new year would be for voters to begin considering voting for moderate, business-friendly Democrats, and sensible environmental Republicans who believe in an all-of-the-above approach when it comes to energy policy.

This perfect amalgamation of animosity rapidly approaching California could be mitigated with sensible, low-cost energy policies that benefit all of California.

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

Senator Moorlach Cautions Majority Party on the Costs of the Holder Hire

attorney-general-eric-holderSACRAMENTO – Senator John Moorlach, R-Costa Mesa, provided the following statement regarding the legislative Democrats’ decision to hire former U.S. Attorney General Eric Holder as their next line of defense against the incoming Trump Administration.

“If the majority party continues to poke President-elect Trump with a short stick, then they better be prepared with a Plan B. And, as far as I can tell, there is no alternative plan should these combative moves not be received well by the incoming Trump Administration.

“We cannot and must not jeopardize Federal funding to our state, counties and cities. They cannot afford it, especially with increasing pensions costs at the door.”

The above statement was sent out in a press release from the office of state Sen. John Moorlach.

How to Identify a “Good” Bond

Photo courtesy of kenteegardin, flickr

Photo courtesy of kenteegardin, flickr

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“There Ought NOT Be a Law” Project

20111103 CA RegulationsSometimes, in frustration over a perceived injustice, it is easy to think, “there ought to be a law,” but Californians should be careful what they wish for.

The state is awash in laws. Every two-year session, lawmakers introduce thousands of bills, and in the most recent, the governor signed 1,708 into law.

This brings to mind an old German proverb, “The more laws, the less justice.” This is because many of these bills are intended to benefit narrow special interests, like government employee unions, rent seeking businesses and professional groups, and pet projects like high-speed rail.

Then there are the less damaging bills that still amount to a waste of time and taxpayer dollars, although many of these provide a good source of amusement. Although some of the silliest laws are at the local level – in Chico detonating a nuclear device will cost you $500, in Carmel women are prohibited from wearing high heels and in San Francisco it is illegal to store anything but a car in a garage – the state continues to attempt to be competitive. In California, it is illegal for a vehicle to exceed 60 mph if there is no driver.

In Sacramento, for many self-absorbed Legislators, getting a bill passed is an extension of their ego. Perhaps this helps explain why, some years ago, a bill was introduced to make the banana slug the state mollusk. That one did not pass, but still, California was the first state to adopt a state rock, serpentine. Ironically, after spending time on approving this selection in 1965, it came up again in 2010 when one state senator decided serpentine is politically incorrect because it contains asbestos and she promoted legislation to remove its state status.

For some, just introducing legislation, whether it passes or not, has become a source of income. Twenty years ago, one senator introduced 143 bills in one session. This turned out to be a pay for play scheme where bills were introduced for those willing to pay. This lawmaker ended up spending time in prison for accepting bribes, and the public scrutiny forced the politicians to limit the number of bills that can be introduced to 40. Still, with 120 legislators, this means that there is the potential to introduce a mind-boggling 4,800 bills, each with the potential to become law. And introducing bills remains an effective method for raising campaign cash.

Even the most innocuous seeming bills can be a problem for taxpayers. Several years ago, Gov. Schwarzenegger criticized the Legislature for dithering over finding a solution to the state’s then $26 billion deficit, while plenty of time was found to deal with the issue of cow tail docking.

While humane treatment of animals may deserve consideration, taking time to pass a law, like making Spanish moss the official state lichen, has a cost. Even if we consider lawmakers’ time worthless, and many do, there are still thousands of dollars spent on legal analyses by the Office of the Legislative Analyst and on printing costs.

This raises the question, do lawmakers still have too much latitude when determining how may bills they introduce? Some states, like Colorado, survive while limiting legislators to no more than five.

And what about the tens of thousands of laws already on the books? Certainly, there is justification to make an examination and to seek to simplify the legal code under which we all must live, by striking those found to be unnecessary.

Enter Senator John Moorlach who has kicked off the “There Ought Not Be a Law” project and is looking for submissions from the public on repealing laws that would help streamline government, and remove regulations that impose unreasonable burdens on taxpayers. The senator will be taking nominations for laws to be reduced or repealed until the first of the year. To learn more, go here.

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.

This piece was originally published by HJTA.org

What Threat Does a Democratic Supermajority in the Legislature Really Pose?

Photo courtesy Franco Folini, flickr

Photo courtesy Franco Folini, flickr

Once again, we’re confronted with the possibility of Democrats grabbing two-thirds control of both houses of the California Legislature. As with the U.S. Senate at the national level, because of higher voter turnout Democrats in California generally do better in presidential election years (2008, 2012) than in the non-presidential years (2010, Tea Party time, and 2014).

The last time this happened, after the 2012 election, Gov. Jerry Brown joked to Democrats in the Legislature, “Remember, hug a Republican.” But then Dems had a problem leveraging their two-thirds supermajorities because several legislators were promoted to the state Senate or the U.S. Congress, leaving vacant seats. Then special elections sometimes elected Republicans, such as state Sen. Andy Vidak of Hanford in July 2013. That election ran up $5 million in campaign costs.

It used to be the two-thirds vote was needed to pass the state budget. That brought up the quasi-undemocratic Gang of Five meetings of the governor and the Democratic and Republican leaders of the Assembly and state Senate. Republicans had real clout and could delay passage of a budget for weeks, even months.

All that ended in 2010, when voters passed Proposition 25, allowing a majority vote for passing the budget. Also helping pass budgets by the June 15 deadline have been large new revenues from the economic recovery and the adept moves of a governor now in his fourth term in office.

Today, the two-thirds supermajority only applies to tax increases, putting measures on the ballot and reversing gubernatorial vetoes.

Tax increases likely won’t be on the agenda because two more probably are going to pass on Nov. 8: Proposition 55, the “extension” of Proposition 30 from 2012. And Proposition 56, the $2 a pack increase in cigarette taxes to further impoverish poor and lower-middle-class smokers. Even Democrats have a limit of how much they can increase taxes. (Don’t they?)

Of course, if the economy tanks next year, once again we’ll have $20 billion budget deficits, and howls for higher taxes to pay for the overspending during the recent years of prosperity. But the deficits usually lag the start of a recession by a year or two, bringing us to 2018, another election year, so the increases would just be put on the ballot.

As to putting measures on the ballot, after the 17 mind-numbing initiatives put before voters this year, does anyone really want any more in 2018? How about that “advisory” initiative, Proposition 59, stuck before voters when the Legislature passed Senate Bill 254? It urges California members of Congress to reverse the Citizens United decision by the U.S. Supreme Court that allowed campaign contributions by corporations.

Here’s some advice to the Legislature: Stop putting initiatives on the ballot! Let the people only do so through the signature process.

As to overturning vetoes by governors, the last time that happened was in 1979. If Dems do regain their two-thirds majorities, what’s likely to happen is a repeat of 2013: fighting over open seats interspersed with increased clout for moderate Democrats.

As Capital Public Radio reported in January 2013, “The most important members of the California Legislature this year might not be the two Democratic leaders – despite the two-thirds supermajorities they hold in each chamber.  And it almost certainly won’t be the Republicans.  They’ve been courted for key votes in recent years but now don’t have the numbers to block any bills on their own. The leverage in this legislative session may well lie with a newly-critical voting bloc: moderate Democrats.”

Republicans’ role? Pretty much what it has been in recent years. They sometimes pair up with Democrats to give bipartisan legitimacy to bills, such as the excellent asset forfeiture bill passed this year. And they put on the eyeshades like state Sen. John Moorlach, R-Costa Mesa, a CPA, and look at the budget numbers.

It’s something. And it’s not likely to change until the return of the Emperor Norton.

Veteran California columnist John Seiler now edits the Seiler Report. His email: writejohnseiler@gmail.com

This piece was originally published by Fox and Hounds Daily.

Budget Deception: Weird Accounting Diminishes Accountability

BudgetThis week, after reaching agreement with Gov. Brown, the California Legislature will pass the state budget for the 2016-17 fiscal year. In so doing, it will meet its Constitutional deadline of June 15th.

A few weeks ago, this column attempted to provide some clarity to ordinary citizen taxpayers on basic state budget issues. This included an explanation of the difference between “general fund” expenditures and “special fund” expenditures. The column also reviewed California’s higher than average level of taxation and its legendary wasteful practices.

Those budget issues are confusing enough but there is something else going on that confounds even those of us who have at least some familiarity with government finance. Specifically, California has manipulated accounting rules that are, at best, confusing and, at worse, intended to conceal the true condition of state finances.

For most folks, figuring out the family finances isn’t all that difficult. Most people have a relatively stable and predictable amount of income they can spend and, on the flip side, they have a pretty good grasp of their expenses. Of course, even the best laid plans can be thrown off with the layoff of a breadwinner or, on the positive side, an unexpected bonus or inheritance.

But with government, predicting revenue can be tricky. Given this unpredictability, one would think that the state would want to base its accounting decisions on best practices. But that isn’t the case at all. Without going into all the wonkish details, the Department of Finance uses various “accrual” techniques to attribute revenue, not to the year in which it was received, but rather to a previous or future fiscal year depending on what political ends the administration seeks to achieve. Venerable Sacramento Bee columnist Dan Walters calls this “hide the pea” accounting and even the Legislature’s own Legislative Analyst has criticized the practice.

For all the funky accounting on the revenue side, it is much worse on the spending side. Here, under proper “accrual” rules, California should be counting the massive amount of debt we’re racking up differently. But with manipulative accounting, the state can actually spend more money than it receives in a given year and still report a budget surplus. This debt, as it relates to public employee pension obligations, is nothing more than spending tomorrow’s money today. But if it is spending money today, it should be counted as such.

David Crane is a Lecturer in Public Policy at Stanford University and president of Govern For California who has written extensively on California’s deceptive accounting practices. He points out that proper accounting could have stopped the largest non-voter-approved debt issuance in California history. That 1999 debt was not a bond. Rather, it was retroactive pension increase for state employees. Had that cost been “booked” the way businesses account for future liabilities, the legislature may very well have thought twice about undertaking such a huge financial burden.

The good news is that the days of deceptive government accounting may be numbered. The Governmental Accounting Standards Board has, for the last several years, been forcing government entities to finally begin reporting pension obligations and “Other Post-Employment Benefits” in a way that is both more honest and transparent. Also, the California Legislature now has as a member Senator John Moorlach, a no-nonsense accountant who predicted the Orange County bankruptcy several years ago. He, like Crane, is shining a light on California’s budgetary shenanigans. With a looming downturn in the economy, this enhanced transparency will be critical.

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.

Engaging in Transportation Reform Head On

california roads infrastructureLast week’s column presented the case for strong opposition to any new transportation taxes in California. But on Thursday, the Executive Director of Transportation California, Will Kempton, published a response in Fox and Hounds, a California political blog run by Joel Fox, which repeated the need for higher taxes.

Will Kempton is a respected transportation expert who agrees with the central premise of my original column. That is, that California’s transportation crisis can no longer be ignored. California has a transportation and road repair maintenance backlog that some estimate will total $58 billion over the next ten years. It is also true that, thanks to alternative vehicles and more fuel efficient cars (and never mind the infamous “gas tax swap”) that fuel tax revenues have become more volatile year-over-year.

So, now that we’ve agreed on the need, how do we deal with it? Mr. Kempton argues that we have no choice but to raise taxes. Not only do we disagree, but it is abundantly clear that practically all of this backlog can be funded using existing General Fund resources. Consider:

  • Nearly $1 billion a year of truck weight fees are being diverted from road repair to paying off transportation bond debt. Total: $10 billion over ten years.
  • Nearly $9 billion in bonds for high speed rail can be diverted for road construction. (And if voter approval is deemed necessary, that measure passes in a heartbeat).
  • Currently, California spends only 20 percent of its $10 billion General Fund transportation budget on road maintenance. Especially with General Fund revenue at record levels, a boost to 50 percent does not seem excessive: Total: $30 billion over ten years.
  • Currently, $500 million in $3 billion worth of cap-and-trade funding goes to road maintenance. Doubling that amount adds $5 billion over ten years.

The grand total of these reforms is $54 billion over ten years. Granted, not all of these things can be done overnight and the first two items will likely require statewide voter approval. But the Legislature still has plenty of time to qualify a constitutional amendment for the November ballot. And obviously, placing a greater General Fund emphasis on transportation projects will require that we figure out how to prioritize our resources better in the face of a record $122 billion budget.

Let’s be honest. It is really the word “prioritize” that is at issue here. Some of these reforms will be easier to implement than others, but unless we engage them head on, which hasn’t happened in the Legislature, how can we ever hope to solve this problem? Taxpayers should refuse to accept the incessant call for higher taxes when relatively simple reforms that could add tens of billions of dollars of funding to our roads, without raising taxes, are ignored. How can we discuss a punitive and regressive gas tax increase when common-sense legislation by State Senator John Moorlach to privatize a small portion of CalTrans projects, or to  establish a pilot project to have county transportation agencies assume projects from CalTrans, are quickly rejected in their first policy committee?

We agree with Kempton that the status quo is no longer acceptable. But there are a myriad of fiscal and policy changes that are viable and should be discussed and implemented. And until legislative Democrats, the transportation community, labor and environmentalists are willing to even come to the table, why should the burden be on California motorists to pay higher taxes?

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.

This piece was originally published by HJTA.org

It’s Time to Shift Road Funding to Counties

los-angeles-freeway-helicopter-1Last week, yet another high-profile scandal involving mismanagement rocked the California Department of Transportation – Caldrons, and yesterday I  introduced Senate Bill 1141, which would launch a pilot program shifting road funds and maintenance duties from Caltrans to county governments.

Caltrans is one of the worst managed, most inefficient government agencies in the nation.  Just look at the metrics. Californians pay among the highest gas taxes and the highest per-mile road maintenance, yet we also have the nation’s fifth worst roads.  Those are clear signs that Caltrans is dysfunctional and wasting taxpayer money.  If Caltrans was a private company, it would have been out of business long ago.

SB 1141 would launch a pilot program that allows two California counties to handle their own road maintenance needs, and to receive the road funding that typically would have been administered by Caltrans for those maintenance needs.

County governments are much more accountable to the taxpayers than the bureaucracy at Caltrans. County governments know their needs and have a history of getting the job done. Senate Bill 1141 allows counties to prove they can do much better than Caltrans.

Last week, the State Auditor found that Caltrans had intentionally lied to legislators about implementing the results of a 2009 efficiency study – one that recommended moving money and manpower to the highest need areas and managing efficiencies to help fix roads with the existing resources.  Caltrans management reassured legislators that they were implementing the study’s recommendations, when, in fact, they had ignored them altogether and continued with an inefficient, labor-union friendly resource allocation.

Auditors also found that Caltrans has little, and often no, cost control measures, and that Caltrans often fails to even track project costs.  The State Auditor is telling it straight when she says there are ‘weak cost controls’ that ‘create opportunities for fraud, waste and abuse.’ Sixty-two percent of Caltrans projects are over budget, and now we are beginning to know why.  We can no longer tolerate this nonsense. It’s time to provide constructive and necessary solutions.

SB 1141 would provide a real-world study on moving resources to counties and making our road dollars stretch much further.  More information on SB 1141 can be found HERE.

California State Senate, 37th District

Originally published by Fox and Hounds Daily