Prop. 10 May Cost the State, Communities Millions While Freezing Housing Construction

urban-housing-sprawl-366c0Anyone concerned about the future of the state and local budgets should pay particular attention to what the state’s non-partisan legislative analyst had to say about Proposition 10, the ballot measure that repeals the Costa-Hawkins Rental Housing Act, including protections for tenants and single-family home owners.

The Legislative Analysts Office (LA) noted Prop 10 could cost local governments up to “tens of millions of dollars per year” in new costs and the state could lose up to “hundreds of millions of dollars per year” in revenues. 

In the analysis, the LAO also noted that the value of rental housing would decline and that rental units also would likely be sold and no longer be available for rentals.

This, say experts, would work California’s affordable housing crisis even worse.

In addition, the LAO predicts that “If many localities enacted strong rent control legislation, other economic effects (such as impacts on housing construction) also could occur.”

What does all this mean? For one thing, less money for key government services from healthcare to childcare to transportation. Proposition 10 would create scarcity, not just in California’s already broken housing market, but in state and local coffers. That will set the stage for a new round of budget battles in Sacramento and in cities and counties across California.

Proposition 10 also will cost our state and our communities millions of dollars, reduce the number of available apartments and homes available for rental and could result in a housing freeze – which is the last thing California needs right now.

We all agree that the state needs to take steps to address the chronic housing shortage, and out-of-control housing costs in communities across the state. But Proposition 10 is the wrong solution. It will only make California’s affordable housing crisis worse.

ice president of Public Policy, Los Angeles Chamber of Commerce.

This article was originally published by Fox and Hounds Daily

California Teacher Pension Debt Swamps School Budgets

School educationCalifornia’s public schools have enjoyed a remarkable restoration of funding since the bone-deep cuts they endured during the recession, but many are now facing a grave financial threat as they struggle to protect pensions crucial for teachers’ retirement.

Over the next three years, schools may need to use well over half of all the new money they’re projected to receive to cover their growing pension obligations, leaving little extra for classrooms, state Department of Finance and Legislative Analyst’s Office estimates show. This is true even though the California State Teachers’ Retirement System just beat its investment goals for the second straight year.

Some districts are predicting deficits and many districts are bracing for what’s to come by cutting programs, reducing staff or drawing down their reserves—even though per-pupil funding is at its highest level in three decades and voters recently extended a tax hike on the rich to help pay for schools.

At the same time, some districts are grappling with how to simultaneously afford raises for teachers who have threatened to strike.

The situation could become even more bleak if California’s economy doesn’t keep growing.

If there’s another recession – which economists say is increasingly likely given the record length of the expansion underway now – the higher pension payments scheduled could push some districts deeper into the red, Legislative Analyst’s Office data indicates.

“Many districts’ budgets would be upside down with expenses growing faster than revenues,” said Michael Fine, CEO of the Fiscal Crisis and Management Assistance Team, the state agency responsible for overseeing schools with financial problems.

School systems that saved money over the last few years will be able to use it to buy time, Fine said, but those reserves “won’t eliminate the impact or make that problem go away.” Tackling it will likely require new sources of revenue or an array of cuts.

“Building maintenance could suffer, grounds care could suffer, class size could suffer, instructional coaches could suffer, athletic programs could suffer, technology could suffer, intervention programs could suffer” Fine said.

The problems stem from the state Legislature’s reticence to mandate steeper payments into the California State Teachers’ Retirement System. The system was badly underfunded and careening toward collapse four years ago when school districts, teachers and the state all agreed to pay more to reduce its unfunded liability, which now stands at $107 billion.

Districts took on the greatest share of those new costs, agreeing to increase payments from 8 percent of their payroll in 2013 to 19 percent by 2020.

No matter how burdensome the larger and larger pension payments may be, actuaries say they’re necessary to protect teachers’ hard-earned retirement and prevent the system from running out of money. Teachers don’t get social security, and unlike firefighters or police officers, most retirees earn modest pensions of about $55,000 a year.

The Brown administration has directed an additional $20 billion to the state’s public schools since 2013 and says districts have had plenty of time to plan for the pension payments ahead. But many school leaders and advocates want the state to invest even more, especially since California still ranks near the bottom in per-pupil spending compared to other states.

“Knowing that these liabilities were growing, we provided districts with the resources they needed to plan accordingly,” said H.D. Palmer, a spokesman for the state Department of Finance.

Meanwhile, the state’s largest teachers union is downplaying the problem and encouraging its members to bargain for raises. California’s teachers may be among the nation’s most generously paid, but they say the money doesn’t go very far because the state’s cost of living is so high.

School officials are left with a Gordian knot of politically charged problems, forced to make escalating payments into the pension fund while trying to elevate disadvantaged students’ sagging classroom performance, which remains among the country’s worst despite the state’s big investment in their learning through a policy championed by Brown.

“We need to graduate more kids and close academic achievement gaps, but we can’t move the needle when costs are rising like this,” said Dennis Meyers, executive director of the California School Boards Association, who stressed that his group is not seeking to reduce teachers’ retirement benefits.

“We simply need more revenue, and we’re out here waving the white flag, looking for relief.”

Each of California’s school districts is bound to tackle these challenges differently, so CALmatters visited three of them whose circumstances are emblematic of what others across the state are experiencing. During those visits, we spoke with the people working to solve the problem.

Fremont Unified devotes a greater share of its budget to salary than any other district in the state (discover the percentage devoted to salaries at each of California’s school districts here). So when the largest pension payments are phased in, Fremont will be hit especially hard. That means the district’s budget could face cuts even as enrollment in the Bay Area school system grows.

Sacramento City Unified knew that larger pension payments were coming and saved money to prepare for them. Then the local teachers union criticized the district for hoarding cash and threatened to strike. Now, the contested funds are being used to finance a raise that teachers say is long overdue and that the county superintendent believes the district can’t afford.

And in Los Angeles, growing demand for charter schools and a dwindling birth rate has led to declining enrollment in the district’s own schools, which means pension payments will rise even as the district’s state funding shrinks. School officials recently predicted that a quarter billion dollar budget deficit was just two years away.

♦♦♦

Raul Parungao’s distinctive grin and his cheery demeanor belie his concern about Fremont Unified’s finances.

Situated between Oakland and San Jose in the pricey Bay Area, the school system pays its employees more than most. That makes it a desirable place to work but also means it will be hit especially hard when the largest payments required under Brown’s pension plan are phased in.

“There’s this sense in the community that we’re flush with cash, but I try to remind people about the other half of the story,” said Parungao, the district’s chief business officer.

Even though revenue is rising because enrollment is growing, the district must hire and pay more employees to serve them. And over the next three years, while Fremont predicts its revenue will grow by $26 million, a 7 percent bump, it also expects its employee pension and health care costs to climb by $14 million, a 23 percent surge.

“Here’s the bottom line: the extra revenue we expect to get from the state won’t be enough to keep pace with our pension contributions,” Parungao said. “The problem hasn’t exploded big yet, but it will. It’s only a matter of time. I haven’t met another chief business official who isn’t concerned about this.”

Meanwhile, Fremont’s teachers just won a small raise after months of protracted negotiations.

The current pay scale is competitive, with veterans making $114,000 a year, but leaders of the local union say about half of teachers still don’t make enough to live in the district and must commute from up to an hour away.

But no matter how tough it may be for the district to afford this 1 percent pay hike, teachers deserve one, said Victoria Birbeck, the union’s president.

“The series of small raises we’ve received haven’t covered cost of living,” she said. “Besides, the district has known about the governor’s plan for a few years now. There should have been better planning.”

Parungao said planning isn’t the problem.

The district stretched to offer teachers a raise last year and even had to shift its budget by millions of dollars to accommodate that 2 percent increase, which came after a 13 percent bump over the prior three years. Plans to upgrade students’ textbooks and computers were postponed and class size for kindergarten, first and second grade students increased slightly.

Given the district’s rising pension and other fixed costs, the new agreement’s $7 million price tag will be tough to accommodate. Still, Michele Burke, one of the district’s board members, acknowledged that for many teachers, $1 spent on pensions isn’t as good as $1 spent on salary.

“As we negotiate with the union, STRS is the elephant in the room,” she said in an interview before the deal was finalized, referring to the acronym for the California State Teachers’ Retirement System. “We’re paying toward your future, but those payments don’t help put food on the dinner table.”

Sacramento Mayor Darrell Steinberg only worked with a few key players one weekend last fall when he helped broker a deal to avert a citywide teacher strike, and former school board president Jay Hansen was one of them.

Hansen had tried for months to negotiate the terms of a pay increase for the city’s 3,000 teachers, but the district and leaders of the local teachers union were far apart and neither side would budge. An acrimonious relationship between the two camps was partly to blame for the impasse.

“It’s like the Hatfields and the McCoys,” Hansen said. “No one remembers why they can’t get along.”

At issue during the talks was the $81 million sitting in Sacramento City Unified’s savings account, a sum the district had built up over several years with spoils from California’s booming economy.

The union said the money should go toward class size reduction and raises for teachers that would make the district a more attractive place to work. Sacramento educators are paid less than their peers in nearby districts, but they also receive more generous lifetime health benefits, records show. The district said that it had saved the money to help cover rising pension and employee health care costs in the lean budget years ahead.

In the end, Steinberg helped craft an agreement that gives Sacramento teachers an 11 percent raise over three years. But just a few weeks after Steinberg announced the deal during a celebratory news conference on the steps of City Hall, Sacramento County Superintendent Dave Gordon delivered some bad news: the district can’t afford it.

“Based on the review of the public disclosure and the multi-year projections provided by the district, our office has concerns over the district’s ability to afford this compensation package and maintain ongoing fiscal solvency,” Gordon wrote in a December letter to the district.

The district’s own budget offers proof of Gordon’s concerns.

Over the next three years, the school system anticipates its revenue will grow by $6 million, a 1 percent increase, while its pension and health care costs grow by more than $18 million, an 11 percent increase. A popular summer program for struggling students has already been eliminated to save money.

A second letter Gordon sent in January further underscores his concerns. He called the district’s plan to use one-time money to help cover the cost of the new contract a “poor business practice” that “only perpetuates the district’s ongoing structural deficit.”

“The pension contributions are putting a strain on everyone’s budgets,” Gordon said in an interview.

Even though Hansen had been the union’s adversary during months of stalled contract talks, he defended the district’s decision to offer teachers a raise, calling it “the right thing to do” despite the school system’s escalating pension and health care costs. “We did it anyway,” he added.

Steinberg echoed Hansen’s perspective.

“A strike would have been calamitous for everybody,” he said. And Sacramento isn’t the only place in California where teachers are thinking about a show of force. At least half a dozen other local unions fighting for higher wages have held labor actions in recent months.

In an interview with CALmatters that union leaders cut short after refusing to answer some questions, Executive Director John Borsos rejected any suggestion that the district won’t be able to afford the contract it recently signed or that it ever claimed to have needed the money stockpiled in its savings account to cover rising pension costs.

“They have more than enough to cover the pension increases,” Borsos said. “And they didn’t make that argument at the bargaining table.”

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Gov. Jerry Brown promised his 2014 funding plan would shore-up California’s teacher pension system, but at least one young Los Angeles teacher, Josh Brown, says he’s not counting on it. The Oliver Wendell Holmes Middle School special educator is so worried about the system’s solvency that he has an alternative retirement plan: using a portion of his salary to invest in the stock market.

“I’m a fifth-year teacher, I’m 30 years old, and I’m paying into a pension system that may or may not be around when I retire,” he said. “If I were 65-years-old and retiring soon, I would feel differently. Right now, I feel frustrated and worried.”

The largest payments required under the plan will be tough for many districts to manage, but they’re going to be especially vexing for large urban districts like Los Angeles Unified, which lost 100,000 students in the last decade and expects to shed more (here’s the toll of that under-enrollment, school by school). That’s a problem because California’s schools are funded on a per-pupil basis and fewer students means less money.

In Los Angeles, the swift enrollment decline is due to a dwindling birthrate and growing demand for charter schools, which are publicly funded but independently run, meaning their budgets are separate from the district’s.

Over the next three years, the district anticipates its employee pension and health care costs will climb $90 million, a 5 percent increase, while its revenue dips about $270 million, a 4 percent decline. The result is a $258 million budget deficit in 2020 that the district can no longer paper over, push off or ignore.

“We’re going to have to tighten our belts to save our schools,” said Nick Melvoin, a board member whose stark views on district finances have been criticized by skeptical local union leaders and fellow board members. “We’re in a death spiral.”

The district plans to tackle the deficit with a one-time $105 million bailout from the state and central office staff reductions. But observers says officials will soon need to consider some painful measures it has so far been able to avoid, like boosting high school class sizes or closing schools with dwindling numbers of students.

At least 55 schools across the district are under-enrolled by a quarter, and ten of those are half empty, a CALmatters analysis of building capacity and enrollment data shows.

“Our costs are rising, and as a result, there are hard choices and trade-offs to make each time we look at the budget,” said Scott Price, the district’s chief financial officer.

Parent Paul Robak fears that if the district doesn’t tackle its budget problems soon, it could be taken over by the state. At a recent board meeting, he urged the members to reject a healthcare spending plan that would further squeeze the budget. The members listened and thanked him for testifying before approving the agreement.

“It’s as if the board members are prancing down the lane and covering their ears, pretending nothing’s wrong,” said Robak, who has been active on the district’s parent councils for a decade. “Everyone will lose if we fail to act.”

Board member Kelly Gonez also acknowledged the district’s budget woes and the pressure of rising pension and health care costs but said officials should be trying to ease the pain by finding new sources of revenue, not by making cuts. All but one other board member declined to comment.

Even as a fiscal crisis looms, Los Angeles teachers are negotiating for a raise.

“Everyone who works in the district comes to work with an expectation they’re going to be treated fairly. They need to be treated fairly,” Austin Beutner, a former investment banker and the district’s new superintendent, told the Los Angeles Times. “How we strike that balance remains to be seen.”

United Teachers Los Angeles President Alex Caputo-Pearl declined CALmatters’ request for an interview. However, at a Pepperdine University event held before the state bailout was announced, he pledged to keep pushing for more money and predicted that the state would come through.

“If we take it off the table,” Caputo-Pearl said, “then we are acknowledging that the public district system is going to go off a fiscal cliff, which (is something) I’m not willing to acknowledge.”

♦♦♦

Flooded with calls from anxious school officials, Sen. Anthony Portantino of La Canada Flintridge and several other Democrats pushed earlier this year for a fix that would boost districts’ funding by $1 billion a year. In the end, Portantino convinced Brown to include about half as much in the state budget he signed a few weeks ago.

He insisted that the money be “flexible,” meaning districts may use it to cover rising pension costs or for anything else. But California’s schools are still underfunded compared to other states, and to better fulfill their responsibility to students and taxpayers, that must change, he said.

“In a few months, we’ll have a new governor with a new set of priorities,” Portantino said. “Is there more to do? Absolutely.”

CalSTRS’ first official report on the impact of districts’ growing pension obligations is due to the Legislature mid next year, when school budgets will likely be squeezed the most.

In the meantime, Fine hopes a recession doesn’t strike soon and that districts can manage their budgets without needing to make cuts or send out pink slips. He was a deputy superintendent in Riverside during the Great Recession and remembers how painful it was to carry out round after round of layoffs.

“We lost one of the best counselors and some very bright teachers. I had to layoff someone who years earlier had taught my young children how to swim,” Fine said. “I remember their faces.”

This article was originally published by CalMatters.org

State job-creation incentives fail to produce desired results

JobsIn February 2014, Gov. Jerry Brown’s administration unveiled an Economic Development Initiative to replace an enterprise zone program that had fallen out of favor after nearly three decades. Enterprise zones offered tax incentives to promote the starting of businesses in areas with high unemployment, but many analyses concluded they didn’t have a substantial positive effect. Now a centerpiece of Brown’s replacement initiative is offering up similar mixed-to-poor results.

The California Competes program was initially billed as providing $180 million through the end of fiscal 2014-15 for tax credits to lure businesses to the Golden State or to keep them from leaving. As the Sacramento Bee reported at the time, emergency regulations were hastened into place to get the program up and running.

Panorea Avdis, the chief deputy director of the Governor’s Office of Business and Economic Development, justified the move in a memo obtained by the Bee: “This program must go into effect immediately to help minimize the migration of business to other states and to encourage growth and expansion in this state.”

Four and a half years later, the sense of urgency among Brown aides about getting California Competes started is hard to square with its disappointing results. A recent Legislative Analyst’s Office report offered many criticisms:

– Slightly more than a third of awarded credits – 35 percent – went to companies that primarily competed with other California businesses, meaning the credits create no additional economic activity, lead to an unfair competitive advantage for firms getting the credits and consume state resources that could have been use for constructive purposes.

– There were no metrics to judge the effectiveness of the remaining 65 percent of credits, which went to companies that sold goods or services both in California and out.

– The size of the hiring and investment commitments the companies made per $100,000 of tax credits has declined steadily in recent years, reflecting a lack of enthusiasm about the value of the credits.

– The interest in the program had waned among small businesses, which had 25 percent of available annual tax credits set aside for their use. The LAO noted that in the last fiscal year – 2016-17 – only 49 percent of the credits were awarded, or about $30 million.

LAO says close program, but role in Amazon bid may provide cover

“The executive branch has made a good-faith effort to implement California Competes, but the problems described above are largely unavoidable,” the LAO wrote. “We recommend that the Legislature end California Competes. In general, broad‑based tax relief – for all businesses – is preferable to targeted tax incentives.”

Because the program loses its authority to grant tax credits at the end of fiscal 2017-18, the LAO report may shape the Legislature’s and the Brown administration’s decision on what to do about California Competes. The LAO says if the program is retained, its eligibility rules should be tightened up and other provisions should be revised to make it more likely the credits go to companies facing competition from rival firms in other states.

But at least until Amazon makes its decision on where to locate its second North American headquarters, the LAO’s call to shut down California Competes is unlikely to be heeded. In October, some $200 million over five years in California Competes funding was listed as the single biggest incentive to get Amazon to build its second home in California – topping the long list of tax and regulatory incentives that the Brown administration offered Amazon as enticements.

If California Competes is eventually shuttered, some state politicians are likely to strengthen their calls for the full revival of another economic development program shut down at Gov. Brown’s behest – redevelopment. In theory, redevelopment takes a portion of incoming local government revenue and directs it to projects with the promise to improve the local economy or to provide needed facilities.

Critics of redevelopment say it has a long history of being used for crony capitalism in California and that the diverted revenue often goes to cover routine City Hall expenses. But former Los Angeles Mayor Antonio Villaraigosa has made reviving redevelopment a key focus of his 2018 gubernatorial campaign, arguing that it is essential to building more affordable housing and responding to California’s housing crisis.

This article was originally published by CalWatchdog.com

Prop. 13 Report from Legislative Analyst Elicits Mixed Reactions

property taxTwo weeks ago, the California Legislative Analyst released a report entitled “Common Claims About Proposition 13.” On balance, the report was a (mostly) objective view about California’s landmark property tax reduction measure.

As the title of the report implies, there are many claims about Prop. 13, what it does and what it doesn’t do. In fact, we at Howard Jarvis Taxpayers Association have collected a lengthy list of “myths” about Prop. 13 that are deeply ensconced in urban legend. For example, the monolithic education bureaucracy repeatedly claims that Prop. 13 starved public education in California. But the fact is that we now spend 30 percent more on a per student, inflation adjusted basis than we did just prior to Prop. 13’s passage – a time in which there is broad consensus that education in California was the best in the nation. Whatever it is that caused the decline in the quality of public education, it certainly hasn’t been the lack of revenue.

The release of the LAO report instigated a great deal of reaction, ranging from cheers to jeers depending on one’s pre-conceived opinions about Prop. 13. Every interest group, it seems, has cherry picked the report to confirm what they already believe. But objectively, for Prop. 13 defenders, we see much in the report that supports what we’ve been saying for decades.

Abraham Lincoln is quoted as saying, “We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.” Here are the “roses” we see in the report:

First, the report says that residential and commercial properties turn over at about the same rate, and that Prop. 13 is not the cause of this. It also says that residential property tax growth is only slightly more than that from business properties, but this is due to greater residential development. This runs directly counter to those who desire to strip Prop. 13 protections from business properties.

Second, the report states that small businesses pay less in property tax because of Proposition 13, and that Prop. 13 does not serve as a disincentive to create small businesses. This busts another bubble floated by Prop. 13’s detractors.

Third, and most importantly for the Jarvis faithful comprised of senior homeowners, the report shows that assessed valuation limits provide greater security to retirees.

About the only item in the report that Prop. 13 haters can point to is the LAO’s conclusion that wealthy Californians, who own higher value properties, have benefited more than those with modest homes. But to this we respond with a resounding “Duh.” Obviously, given that Prop. 13’s rate limits and limits on increases in taxable value apply equally to all property, those with more expensive properties will benefit more. Prop. 13’s protections were never designed to be means tested. It provides the same rules to every property owner in California, from the owners of modest bungalows to mansions and from small mom and pop businesses to corporations. It doesn’t pick winners and losers. Only winners.

As California’s leading defender of Proposition 13, we have only a few of quibbles with the LAO report. Here, we will discuss only one. Specifically, the report makes much of the fact that local governments had the power to reduce tax rates prior to Prop. 13’s enactment in 1978 and that this – it is implied – offset the rapid increases in taxable value that homeowners were experiencing. This is true, but in theory only. In reality, while local governments had that power, they didn’t use it. Reductions in tax rates in no way even closely offset increases in taxable values. How do we know this? Simple. Against every special interest and editorial in California, voters – by a 66 percent margin – launched the modern tax revolt known as Prop. 13. All that was missing were the torches and pitchforks. If tax rates had indeed been reduced, this revolt would never have happened.

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

High-Visibility Tobacco Tax Initiative Receiving Lots of Attention, Money

SmokingSACRAMENTO – There’s broad agreement that the 17 initiatives on the statewide ballot on November 8 cover some of the most significant public-policy issues to come before voters in more than a decade. For instance, voters will have a chance to legalize marijuana, outlaw the death penalty, put an end to the state’s virtual ban on bilingual education, approve a broad gun-control package and reduce prison sentences for some non-violent felons.

But two months before the election, one of the highest-visibility measures also is fairly narrow in scope. Proposition 56 would raise California’s relatively low tobacco tax (relative to other states) by $2 a cigarette pack – and increase taxes by an equivalent amount on all other tobacco products (cigars, chewing tobacco, etc.). It also would significantly increase taxes on electronic cigarettes and vaping products. It has high visibility right now because of a series of advertisements opponents are running on radio stations across the state.

Supporters pitch the measure as a means primarily to boost public health. “An increase in the tobacco tax is an appropriate way to decrease tobacco use and mitigate the costs of health care treatment and improve existing programs providing for quality health care and access to health care services for families and children. It will save lives and save state and local government money in the future,” according to the initiative’s findings.

Gov. Jerry Brown recently signed into law a package of anti-tobacco bills that, among other things, raise the smoking age to 21. Studies of addiction show that teens who begin smoking are more likely to continue this dangerous habit throughout their lives. Backers of this initiative argue that raising the prices of cigarettes is another main way to dissuade people from smoking. And they point to the costs to the health system imposed by smokers.

But the measure’s opponents are focused increasingly on the spending aspects of the proposal. According to the official ballot argument against the measure, “Prop. 56 allocates just 13 percent of new tobacco tax money to treat smokers or stop kids from starting. If we are going to tax smokers another $1.4 billion per year, more should be dedicated to treating them and keeping kids from starting. Instead, most of the $1.4 billion in new taxes goes to health insurance companies and other wealthy special interests, instead of where it is needed.”

An analysis by the non-partisan Legislative Analyst’s Office confirms that only a small percentage of the estimated $1.4 billion in new revenues are earmarked to such programs. The main priority of the new funds, based on the LAO analysis, is to “replace revenues lost due to lower consumption resulting from the excise tax increase.” That reinforces the odd conundrum faced by California and other states. They use tax and regulatory policies to promote public health by reducing smoking, but then struggle to find funds to pay for ongoing programs as the number of smokers – and therefore the number of tobacco-taxpayers – keeps falling.

The initiative then earmarks some funds to law enforcement, to University of California physician training, to the state auditor and to administration. But 82 percent of the remaining funds go to “increasing the level of payment” for health care related to Medi-Cal, the state’s health-care program for low-income people. Prop. 56 opponents therefore argue it’s designed mainly to benefit health-insurance companies and other interest groups – and includes few limits on how they spend the money they receive.

Furthermore, the initiative bypasses educational-funding requirements under Proposition 98, the 1988 initiative that now requires approximately 43 percent of state general-fund revenues to be directed to the public-school system. As the LAOexplained, “Proposition 56 amends the state Constitution to exempt the measure’s revenues and spending from the state’s constitutional spending limit. (This constitutional exemption is similar to ones already in place for prior, voter-approved increases in tobacco taxes.) This measure also exempts revenues from minimum funding requirements for education required under Proposition 98.”

It’s not unusual for a major tax hike measure to ignite controversies over how the new revenues will be spent. But there’s a serious question about whether this initiative will meet its health-improvement goals given the way the tax hammers a common product used by people to quit smoking.

In a research paper co-authored with my R Street Institute colleague Cameron Smith, we note the measure boosts excise taxes on vaping by 320 percent. The key, stated goal of the tobacco tax increase is to dissuade people from buying cigarettes. By the same logic then, the massive boost in taxes on e-cigarettes seems designed to dissuade people from using them.

Yet as Public Health England explained: “The comprehensive review of the evidence finds that almost all of the 2.6 million adults using e-cigarettes in Great Britain are current or ex-smokers, most of whom are using the devices to help them quit smoking or to prevent them going back to cigarettes.” That government health agency urges public-health officials to promote vaping as a way to improve public health. Some U.S. studies come to similar conclusions.

Proposition 56 backers argue that vaping hasn’t been proven safe and the devices haven’t been around long enough to know long-term health effects. They also fear teens will begin vaping and then move on to combustible cigarettes, which everyone agrees are dangerous. And they point to a recent University of Southern California study suggesting teens who vape are six times more likely to begin smoking cigarettes than teens who don’t vape.

In reality, the study seems mainly to reflect “the difference between teens inclined to experiment and teens not so inclined,” according to a public-health expert we quoted. Furthermore, the e-cigarette industry doesn’t claim vaping is safe – they say it is a safer alternative to cigarette smoking. Research suggests they are about 95 percent safer.

California has the second-lowest smoking rate in the nation at around 12 percent. Only Utah has a lower percentage of smokers. So Proposition 56 doesn’t effect a broad swath of the public – but it is a contentious measure given questions about where the tax dollars will go and about its heavy-handed treatment toward vaping. Compared to many of the other initiatives on the ballot, this one might seem simple, but it’s about far more than whether the state government should boost taxes on a pack of cigarettes by two dollars.

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

This piece was originally published by CalWatchdog.com

Cap-and-Trade Revenue Drastically Lower Than Expected

carbon-tax-1In yet another blow to California’s besieged bullet train, revenues from this year’s cap-and-trade carbon credit auction fell drastically below the state’s goals, triggering a selloff that left analysts unsure of the system’s long-term viability.

“The results of last week’s quarterly auction were posted and revealed that instead of the $500-plus million expected from the sale of state-owned allowances, the state will get only about $10 million, less than 2 percent,” the Sacramento Bee reported.

“The poor results confirmed reports circulating in financial circles that the cap-and-trade program has begun to stumble. February’s auction resulted in some allowances being left unsold — the first time that had happened. Afterward, there was a brisk trade in the secondary market as speculators began dumping their holdings due to uncertainty about the future of the program, which may expire in 2020.”

Officials and activists swiftly sought to downplay the damage. “Over the long-term allowances will be needed, and so the allowances that will be offered through the auction will need to be purchased,” said Ross Brown of the Legislative Analyst’s Office. “But in the short-term it’s hard to know and it depends on the underlying supply and demand.” From an environmentalist standpoint, meanwhile, “it’s important to remember that […] it’s the declining cap — not the price or number of allowances sold at auction — that drives emissions reductions,” wrote Alex Jackson at the National Resources Defense Council. “That is the purpose of the program, not raising revenue.” But with 2020 looming, Jackson allowed, the one-two punch against high-speed rail and cap-and-trade have cast doubt on California’s strategy of fusing infrastructure and environmentalism into a single economic policy.

Case and controversy

Adding to the upheaval, the carbon credit regime itself has wound up in court, as the state Chamber of Commerce pushes to prove that the legislation authorizing its creation — AB32 — has run afoul of the state constitution. “Propositions 13 and 26 require a two-thirds majority for the Legislature to approve new or higher taxes and fees,” as Hoover Institution fellow Carson Bruno wrote at the Bee. “Whether or not AB32, which barely passed in 2006, is unconstitutional depends on whether the cap-and-trade revenues constitute either a tax or a fee. These auction revenues fit the definition of both a tax and fee. They are imposed by a government entity, spent on government activities and are collected in exchange for a transaction — in this case a permit to emit greenhouse gases.”

Officials have countered that argument in court. “The state contends the fees are not taxes, but a consequence of regulations,” as the Times noted. But a judge hearing arguments “recently asked a series of questions that perhaps fueled speculation that he might rule in favor of the suit,” according to the paper.

The governor’s gambit

Flexing his considerable political skill and discipline to balance competing interests to his ideological left, Gov. Jerry Brown had labored to ensure that cap-and-trade funds could be leveraged to make the train a viable public and private sector investment. That presumed a degree of stability in revenues that now can’t be relied on. “The rail authority had been expecting about $150 million,” the Los Angeles Times observed; now, it will receive just $2.5 million. “Whatever prompted the lack of buyers, the auction is a stark example of the uncertainty and risk of relying on actively-traded carbon credits to build the bullet train, a problem highlighted in recent legislative testimony by the Legislative Analyst’s Office and a peer-review panel for the $64-billion high-speed rail.”

Brown had hedged against just such an eventuality, however. State finance spokesman H.D. Palmer “noted that there is a $500-million reserve set up in anticipation of volatility that could help close the gap,” the Times added. But Brown will have to clear the emergency expenditure in Sacramento, where some liberal lawmakers, hoping to channel more money to environmental policy, could try to nix the scheme by aligning with Republicans long bent on scrapping the train.

This piece was originally published by CalWatchdog.com

Government Waste Negates Justification for Transportation Tax Hike

LA-Freeway-Xchange-110-105A personal digression: My father was head of the Iowa Department of Transportation (then called the Iowa Highway Commission) in the late ’60s and early ’70s before he was appointed by President Ford to serve as Deputy Federal Highway Administrator. (Of course, he lost that job when Jimmy Carter became president, but he continued to work in the private sector for a transportation think tank.) When I was in high school, I remember him coming home from an ASHTO conference. That organization, the Association of State Highway and Transportation Officials, was a pretty well respected group and still is. He was complaining bitterly about what was going on in California. I don’t recall his exact words, but the gist of it was that the new head of California’s transportation agency, called CalTrans, had been taken over by a certifiably crazy person (with no background in transportation policy) by the name of Adriana Gianturco. According to my father, in the 1950s and ’60s, California had the best transportation agency in the entire world. But all that changed with the election of a new, anti-growth, small-is-beautiful governor by the name of Jerry Brown.

Now, fast forward 40 years. Gov. Brown, version 2.0, proposes a budget that assumes a big increase in transportation taxes and fees. The California Legislature shouldn’t just say no, it should say hell no.

Where to start? First, let’s take judicial notice of the fact that California is already a high tax state with the highest income tax rate and the highest state sales tax in America. But more relevant for the issue at hand, we also have the highest fuel costs in the nation. This is because of both the 4th highest excise tax on fuel and the fact that refineries are burdened with additional costs to comply with California’s environmental regulations.

The high cost to drive in California might be understandable if we were getting value for our tax dollars. But we aren’t. A big problem is that Caltrans is dysfunctional, plain and simple. It has never fully recovered from the days when the agency was effectively destroyed by Gianturco. A report by the California State Auditor just a couple of months ago concluded that a primary responsibility of Caltrans – maintenance of our highways – is not being executed in a manner that is even close to being efficient or competent. Senator John Moorlach, the only CPA currently serving in the California legislature, reacted saying that “This audit reinforces the fact that our bad roads are not a result of a lack of funding. They’re a result of a lack of competence at Caltrans.” Moreover, a report by the Legislative Analyst concluded that Caltrans is overstaffed by 3,500 employees costing California taxpayers over a half billion dollars a year. All this compels the obvious question: Why, for goodness sake, do we want to give these people even more money?

Another unneeded and costly practice consists of project labor agreements for transportation construction projects. These pro-union policies shut out otherwise competent companies from bidding on projects resulting in California taxpayers shelling out as high as 25% more than they should for building highways and bridges.

Finally, California’s environmental requirements are legendary for their inefficiency while also doing little for the environment. Exhibit A in this foolishness is Gov. Brown’s incomprehensible pursuit of the ill-fated high speed rail project. Not only has the project failed to live up to any of the promises made to voters, it is currently being kept alive only by virtue of the state’s diversion of “cap and trade” funds which are supposed to be expended on projects that reduce greenhouse gas emissions. But in the Kafkaesque world of California transportation policies, the LAO has concluded that the construction of the HSR project actually produces a net increase in emissions, at least for the foreseeable future.

No one disputes the dire need for improvements in California’s transportation infrastructure. But imposing draconian taxes and higher registration fees that serve only to punish the middle class while wasting billions on projects that don’t help getting Californians get to work or school cannot and should not be tolerated. Legislators who present themselves to voters as fiscally responsible need to understand that a vote for higher transportation taxes will engender a very angry response from their constituents.

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 piecd was originally published by the Howard Jarvis Taxpayers Association

Hurting Business Owners Is No Way To Help The Poor

PovertyWhen George Washington was on his deathbed, his doctors tried to save his life by bleeding him, which was considered good medicine at the time.

California businesses must feel like the father of our country did when he tried to stop the bleeding but the well-intentioned practitioners wouldn’t be stopped.

With California’s income taxes, sales taxes, energy prices and other costs at or near the highest in the nation, plus a regulatory and legal climate that escalates costs and creates high-risk uncertainties, many businesses have left the state, reduced hiring or cut hours and wages.

California’s poverty rate is 23 percent — 27 percent for children. There are now 12 million Californians enrolled in Medi-Cal, the safety-net health insurance program for low-income people.

This is a crisis, and California has to take action to address it. But we shouldn’t take actions that are inspired by the medical beliefs of George Washington’s doctors.

A proposed ballot initiative called the “Lifting Children and Families Out of Poverty Act” is exactly that kind of action. The measure would open a hole in Proposition 13 and start to draw money out of California real estate valued at more than $3 million.

The proposed mechanism is a property tax surcharge. It would begin at 0.3 percent on assessed property values over $3 million and rise to 0.8 percent on values greater than $10 million. Although it would apply to both residential and commercial property, its greatest impact would be on California businesses.

Property taxes bring in about $55 billion to the state treasury annually, and the state Legislative Analyst’s Office estimates that the surcharge would collect between $6 billion and $7 billion in its first year. But the money would not go into the general fund. None of the cash would be available to pay for Medi-Cal and none of it would be allocated toward Proposition 98’s minimum funding requirement for education.

Instead, the billions would go into a new special fund called the Lifting Children and Families Out of Poverty Fund, which would be used to fund programs and make grants to organizations that provide services.

Which programs? What organizations? Where? These decisions would be made by the California Department of Education. The measure would put the CDE in charge of reviewing plans and annual reports submitted by communities that apply to become “California Promise Zones” eligible to receive money from the fund.

The ballot measure would increase funding for cash grants to the poor and for subsidized tax-refund checks to low-income workers. It would spend billions on subsidized child care, loans for child care providers, grants for students studying to be child care providers, and loan forgiveness for child development professionals. It would also pay for preschool in designated areas, and for home nursing visits to check on families with young children.

About 10 percent of the money raised would be spent on job training, including tax credits for businesses that participate in the training programs.

But education, training and child care, while important, are not going to lift people out of poverty unless they can find good jobs.

A true anti-poverty agenda would be focused on improving the conditions for business expansion and job creation throughout California. It would include tax cuts, an end to lawsuit abuse, and an effort to prune unnecessary regulations, as well as funding for education, job training and child care.

We’ll never cure poverty by bleeding job creators. That’s the medically proven path to the tomb.

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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

When Will Unions Fight to Lower the Cost of Living?

A report issued earlier this year from California’s Office of Legislative Analyst “California’s High Housing Costs: Causes and Consequences,” cites the following statistics:  “Today, an average California home costs $440,000, about two-and-a-half times the average national home price ($180,000). Also, California’s average monthly rent is about $1,240, 50 percent higher than the rest of the country ($840 per month).”

It’s actually much worse than that. Anyone living on California’s urbanized coast, from Marin County to San Diego, has to laugh at the idea that a modest home can be found for anywhere close to $440,000, or a decent rental can be found for anywhere close to $1,240 per month. In most urban areas within 50 miles of the California coast, finding a home or a monthly rental at twice those amounts would be considered a bargain.

These prohibitive costs for housing are mirrored in California’s unusually high costs for electricity, gasoline, water, and, of course, California’s unusually high taxes. The cost of living in California is one of the highest in the nation – along the coast, it’s probably the highest in the nation. For this reason, it’s completely understandable that California’s state and local government unions perpetually agitate for higher pay and benefits for their members. But they’re leaving everyone else behind.

The problem with the oft-repeated mantra “teachers, nurses, police and firefighters need to be able to live in the communities they serve” ought to be obvious. Nobody can afford to live in these communities, unless they’re either very wealthy, or they’re early arrivals whose mortgages are paid off and whose children have graduated from college. Otherwise, if they live on the California coast in a decent home, they’re in debt to their eyeballs.

This is a failure of policy, and the worst possible response is to exempt public sector workers – the most powerful voting bloc in California – from the consequences of these policies. Because the most enlightened public policies that union leadership might advocate – all unions, public and private – are not to raise pay and benefits for their members, but to lower the cost of living for everyone. And the way to lower the cost of living for everyone is to permit competitive development of land, energy, water and mineral resources.

Along with permitting private interests to compete, California needs to change how public money is invested. California’s biggest infrastructure project in decades is the high-speed rail project, which was originally sold to voters as costing $9.5 billion. According to a 10/24/2015 report in the Los Angeles Times, here are the latest projections:

“After cost projections for the train rose to $98 billion in 2011, vociferous public and political outcry forced rail officials to reassess. They cut the budget to $68 billion by eliminating high-speed service between Los Angeles and Anaheim and between San Jose and San Francisco.”

The L.A. Times report goes on to describe how high-speed rail is again over-budget. If it’s ever built, it’s likely to cost approximately $100 billion. Using an online mortgage calculator, you will see that a 5 percent, 30 year fully amortized $100 billion loan will require total payments per year from taxpayers of $6.4 billion. That’s over $1,000 per year from each of California’s taxpaying households. Don’t count on ridership revenue to help pay capital costs – it is highly unlikely ridership will even cover operating costs.

The opportunity here, however, is that California’s high-speed rail project may never be built. Because one of the conditions of the project is attracting a percentage of matching funds from private investors, and these commitments are not pouring in. Unions who are currently fighting for high-speed rail will need to find new projects to support. Regardless of what you may think about unions, as long as they have the political clout they’ve got, their support for new projects could be good, if they modify their criteria.

California’s unions need to support competitive resource development and they need to advocate public/private investment in revenue producing civil infrastructure that passes an honest cost/benefit analysis. These policies would not only lower the cost of living, they would create millions of jobs. The problem with high-speed rail isn’t that it doesn’t create jobs, the problem is destroys more jobs than it creates. High-speed rail would be a parasitic economic asset dependent on taxes and subsidies to exist, while not even making a dent in California’s overall transportation challenges.

Unions in California need to return to the core ideals of the labor movement, which is to care about ALL working families. And if they care about those ideals, they will make hard political choices. They will take on California’s super-sized environmentalist lobby, along with their powerful friends, trial lawyers and crony green capitalists. They will challenge the biased studies that claim California cannot solve its land, energy, water and transportation challenges without what is essentially rationing. They will recognize that policies that create artificial scarcity only empower the rich and the privileged. They will participate in a new dialogue aimed at identifying measured and decisive ways to unlock California’s abundant resources; aimed at identifying infrastructure projects that are financially viable enough to attract private investment. They will get out of their comfort zone, confronting old allies, and finding new friends.

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Ed Ring is the executive director of the California Policy Center.