California Families Are Hungry While a Third of Crops Rot in Fields

Row crops growing in California.

Maximina Molina Sanchez is worried about going hungry this winter. She depends on a food bank in Huron to feed her husband and two kids. But with most agricultural workers out of jobs during the winter, demand is bound to increase, so she worries there won’t be enough food to feed everyone who needs it.

The Sanchez family is among the 22% of people in Fresno County who couldn’t afford the groceries they needed in the past year. Fresno ranks third in the country for food insecurity, according to the Food Research and Action Center.

At the same time, the county leads the nation in agricultural production. A new study from Santa Clara University revealed that a whopping one-third of the hand-picked crops grown in the state are left to rot in the field.

So why can’t this food get to the people who really need it? Food banks are addressing shortages on a piecemeal basis and startups are expanding sales of farmers’ surplus produce. But there is no solution in sight to bridge the food insecurity and crop overproduction that plague the Central Valley because it takes money and labor to harvest the surplus and haul it to food banks.

Todd Hirasuna, vice president of Sunnyside Packing Company in Selma, said he was not surprised by the study’s finding. The company regularly leaves a third of its produce in the field.

“When you lump the whole Valley together, it’s a pretty staggering number at the end of the day,” Hirasuna said.

Hunger in the Valley

The U.S. Department of Agriculture estimated that 10.6 % of households across the state were food insecure in 2018. In 2016, over a fifth of Fresno residents received food stamps and 10.6% of Californians. It’s unclear whether those are the same groups of people. However, according to the Food Research and Action Center, people on food stamps may still be food insecure because the aid doesn’t always cover the cost of the food they need. And many families with insufficient food have incomes higher than the threshold for food stamps.

Second Harvest Food Bank of Silicon Valley found that 27% of residents in Santa Clara and San Mateo counties are at risk of hunger even though they live next to two of the most productive agricultural valleys in the country. The food bank raised the issue with food waste researchers at Santa Clara University, who in turn quantified the amount of surplus in those fields.

“We wondered whether there may be some opportunities to salvage the food left in the fields and direct it to people on food assistance,” said Greg Baker, executive director of the Center for Food Innovation and Entrepreneurship at SCU.

Examining 20 hand-harvested crops on 123 Central and Northern California fields in 2016 and 2017, the researchers found that 34% of edible produce never makes it off the farm. Loss rates varied widely among crops; cabbage, romaine lettuce and strawberries were among the most lost. (Researchers refer to leftover produce as “loss,” not “waste,” because unlike food that ends up in a landfill, it can feed livestock or fertilize the soil.)

Loss rates are likely constant throughout California, according to Baker, but machine-harvested produce experiences much lower levels because the equipment leaves little behind. Produce that can be canned or converted to other foodstuff such as raisins also has lower loss rates.

Baker found that farmers tend to overproduce to fulfill their contracts with buyers. They plant about a third more than they need in case of weather, pests, plant disease, labor availability, field stability and over- or under-sized crops. If after delivering, the price is too low, they leave the rest to rot.

This year, Bowles Farming Company in Los Banos harvested close to 85% of its cantaloupes because market demand was high, according to Cannon Michael, company president. However, last year his company left about 80% of its cantaloupes in the field because prices were too low to justify harvesting.

“Food waste is a big concern of ours,” Michael said. “It’s really frustrating.”

Lisa Johnson, a researcher at North Carolina State University who specializes in food loss and waste, found that in the Southeast, 40% of crops are lost. This is particularly concerning, she said, because the losses stack atop the 30% to 40% of food USDA estimates is wasted each year in stores and households.

‘Why not donate it to people in need?’

Sanchez has seen the loss first-hand. She was a picker until her son, now 9 months old, was born. Life has been difficult since her husband fell off a truck while he was packing lettuce and injured his back a few months ago.

Westside Family Preservation, a food bank in the roughly 7,000-person town of Huron, keeps most of the town’s agricultural workers from starving by supplying such staples as milk, corn flakes, pasta, rice, beans and canned fruits and vegetables. But the food bank regularly lacks the fresh produce grown in the Valley, which Sanchez said she needs to keep her sons healthy.

“Instead of throwing it away, why not donate it to people in need? The cold is coming, it’s going to rain, and these people, we are in need.”

But getting food out of the fields and into the households that need it is far costlier than simply growing it, Johnson explained. With limited budgets, food banks can’t offset the full cost of labor.

The Central California Food Bank serves about 280,000 families in the Valley, including Sanchez’s family. They share surplus and trade vegetables with over 200 food banks nationwide. But supplies often fall short.

“It’s feast to famine,” said Jaclyn Pack, food acquisitions manager at the food bank. “During the summer we’re very feast. I can’t keep our cold storage empty. And during the winter it’s very famine, where I’m constantly trying to figure out how to get product in.”

The food bank provides farms with cardboard boxes and picks them up, and the state gives farmers a tax credit worth 15% of the wholesale value. But Baker said many farmers don’t participate because they either didn’t know about the tax incentives or found the compensation too low. It made more sense to write off the crop as a loss than to donate it.

“It’s not their business,” Baker said. “They’re not running a charity along with their farm. They’re very happy to contribute but it can cost them too much money because they’re operating on slim margins as it is.”

Food banks have tried to get volunteers to glean the produce off the farms but it didn’t work. Frequently there wasn’t enough time to organize enough volunteers and gleaners take far longer and harvest much less than professional field workers.

Food left in fields likely to increase

Steve Linkhart, director of Farm to Family, at the California Association of Food Banks, is working on a statewide solution. He plans to hire the labor the farms already contract to get all the product off the field that could go to food banks. Funding, again, is the main roadblock.

“We have to find a way to offset the labor fees,” Linkhart said.

Growers and researchers say reducing the surplus calls for a seismic shift. They suggested more open communication within the supply chain. Baker said the retailers could shift the status quo by being more flexible on what they accept. That is, taking more produce that is off-size or has imperfections. That way, growers wouldn’t have to overplant.

Last year, investors spent over $125 million on startups looking to address food loss and waste. Imperfect Produce, for example, delivers otherwise unmarketable produce to homes, and recently began delivering boxes in Fresno, Merced and Modesto.

Full Harvest works with growers across California to deliver imperfect fruits and vegetables to food processors across the state and country.

“These are products that didn’t have any channel for incremental revenue,” said Christine Mosely, who runs Full Harvest. “It’s a win-win because the farms are happy to sell it because it would’ve been disced under.”

But a lot more needs to be done to curtail waste at a bigger scale, or get more of it to people in need, and no one has even a roadmap just yet.

Michael at Bowles suspects the problem will only worsen as produce prices stay low and labor costs rise.

“The potential for food to be left in the field is increasing because of the increased human cost,” he said. “That’s why a lot of the big folks are trying to move as much production out to Mexico and Central America, because the cost of labor is so much less.”

Manuela Tobias is a journalist at The Fresno Bee. This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.

Number of homeless people among county’s jail population growing

Almost 40 percent of people in San Diego jails were homeless when arrested last year, marking a significant increase from the previous two years, a study released Thursday showed.

According to the San Diego Association of Governments report, 39 percent of people (180 individuals) interviewed within two days of their arrests in 2018 said they had been primarily homeless in the previous month. In 2014, 22 percent (160 individuals) said they were homeless before their arrest.

Even more people questioned in 2018 said they had experienced homelessness at some time in their lives. Of those interviewed last year, 66 percent said they had experienced homelessness, while 60 percent said the same in 2014. …

Click here to read the full article from the San Diego Union Tribune

Guilt-Ridden Tech CEOs Pony Up Donations — and Disparage Capitalism

Tech mogul Marc Benioff has been winning media accolades for his declaration that “capitalism, as we know it, is dead.” The billionaire founder and CEO of Salesforce, a cloud-based customer-relations company, has launched an advertising blitz promoting his new book, Trailblazer, which calls for a “more fair, equal and sustainable capitalism,” as Benioff put it in a New York Times op-ed on Monday. This “new capitalism” would not “just take from society but truly give back and have a positive impact,” Benioff maintains.

Benioff’s belief that providing products to willing consumers “takes” from society is apparently shared by the 181 CEOs of the Business Roundtable, who rejected the traditional principle of corporate shareholder responsibility this August in favor of “stakeholder responsibility.” Benioff suggests that the Securities and Exchange Commission (or, as he put it in his Times op-ed, the Security and Exchange Commission) start requiring corporations to document how their actions affect this amorphous and infinitely expandable set of “stakeholders.”

Fortunately for anyone seeking to evaluate what the new capitalism might entail, Benioff has provided a concrete example of a CEO solving “social challenges”—the challenge in this case being San Francisco’s festering homeless problem. Salesforce is headquartered in San Francisco and is the city’s biggest employer. In 2018, Benioff, in conjunction with San Francisco’s most fearsome advocacy group, the Coalition on Homelessness, put a new tax on the local ballot to double the taxpayer dollars already going to the city’s main homelessness agency. Proposition C would impose an extra 0.5 percent gross-receipts sales tax on companies with more than $50 million in annual revenue, raising an estimated $250 million to $300 million, all of which would be funneled into the homelessness-industrial complex.

To Benioff, the issue was clear: “Are you for the homeless or not for the homeless? For me, it’s binary. I’m for the homeless,” he told the San Francisco Chronicle. To some of San Francisco’s politicians and business leaders, the matter was less obviously binary. The city’s existing spending on homelessness was already marked by inefficiencies, according to Mayor London Breed; this new surge in taxpayer dollars lacked any oversight to ensure effectiveness and accountability. Twitter CEO Jack Dorsey warned that the additional tax on tech startups would be unsustainable. Mark Pincus, cofounder of gaming company Zynga, tweeted: “Prop c is the dumbest, least thought out prop ever. Please get the facts and vote no.” The city comptroller estimated a loss of up to 875 jobs over 20 years.

Benioff immediately went ad hominem, weaponizing the primary progressive metric of compassion: the willingness to spend money (preferably other people’s). To Dorsey, Benioff tweeted: “Which homeless programs in our city are you supporting? Can you tell me what Twitter and Square & you are in for & at what financial levels? How much have you given to heading home our $37M initiative to get every homeless child off the streets?” Pincus got a similar demand to show the bucks: “Mark what’s your plan & what’s your contribution to helping our homeless? Tell us in detail what @zynga is doing for them now at scale & what your plan is?” For good measure, Benioff again played the child card: “We cannot wait any longer for a ‘better’ or ‘more fair’ plan. The thousands of homeless kids cannot wait.”

Such challenges to money-measured virtue are not easily ignored in San Francisco. Pincus took the bait: “Clearly i agree with you which is why @zynga was the first company to contribute ($500k) when you raised $10m for homelessness.” Predictably, a Twitter follower sneered that the amount was insufficiently compassionate.

Proposition C passed in November 2018. Benioff gushed that San Francisco must now “come together in Love for those who need it most!” He predicted the advent of a new era: “the homeless will have the home & help they truly need!”

But San Francisco has already sent billions of dollars down a bottomless well that only attracts more bodies on the street. Other West Coast cities are also experiencing rising street chaos, for the same reason: relaxed policies toward public-norm violation. The help that the homeless “truly need” comes from uncompromised expectations of civil behavior, not endless bureaucratic growth and ever-increasing government spending.

Benioff’s gigabytes of virtue-signaling for a misguided cause are a reminder of how little the skills required to build a successful company necessarily translate into insights about sound public policy. Benioff underplays the remarkable feat of creating business enterprises that respond efficiently to consumer demand, valorizing instead an arbitrary social-justice mission. Shareholders and society’s alleged “stakeholders” would be better off if businesses focus on their core competencies—in the process providing vital employment—and leave the social problem-solving to leaders with public accountability.

Heather Mac Donald is a contributing editor of City JournalThomas W. Smith Fellow at the Manhattan Institute, and author of the bestsellers The War on Cops: How the New Attack on Law and Order Makes Everyone Less Safe and The Diversity Delusion: How Race and Gender Pandering Corrupt the University and Undermine Our Culture.

This article was originally published by City Journal Online.

Auditor Will Examine How $30 Billion of Education Funds Were Spent

New reports show that six years after Gov. Jerry Brown and the Legislature approved a sweeping overhaul in how school funds were divvied up, the evidence is mixed that the overhaul is accomplishing its main goal: improving the academic performance of the 1.2 million English language learners in California public schools.

Under the law, known as the Local Control Funding Formula, schools with high percentages of English learners, foster children and poor families get additional funding that in 2013 was described as being specifically to help these students achieve proficiency in key subjects. Since then, about $30 billion in LCFF grants have been distributed.

But a 2015 decision by then-Superintendent of Public Instruction Tom Torlakson to allow LCFF dollars to go for teacher raises and other general uses has led to critics such as Assemblywoman Shirley Weber, D-San Diego, arguing that struggling students aren’t getting the help they were promised in 2013. Earlier this year, Weber persuaded a legislative panel to have state Auditor Elaine Howle review how the grants are being spent and possibly examine their effectiveness.

Reformers see bad faith in how law was implemented

The pending audit is highly anticipated by education reform groups which have for years accused the state government of showing bad faith in implementing LCFF. 

Defenders of the law have some data that back up claims it is working as intended. An EdSource analysis of the state’s Smarter Balanced test scores released earlier this month showed that schools with high numbers of LCFF students had seen a 9 percent increase in student English proficiency over the last five years. But the same analysis showed little change in the “achievement gap” between white and Asian students and those of Latino and African American descent. 

And a Public Policy Institute of California report released in August found that increased funding hadn’t changed a fundamental problem that makes progress difficult in struggling schools: They still had teachers who were considerably less experienced than those in wealthier communities. These schools are also far more likely to have teachers offering instruction in fields in which they had no training. The PPIC suggested there was evidence that these issues had gotten worse in recent years.

Because of strong teacher job-protection laws, veteran teachers have considerable latitude about where they work. Schools in wealthy communities that often get help from parental and community fundraisers have a huge edge over schools in poor communities where teachers often feel they have no choice but to bring in basic supplies for students from destitute families.

Civil rights lawyers again target LAUSD over spending

Meanwhile, in Los Angeles Unified, the state’s largest school district, a formal complaint has been filed by the Public Advocates civil rights law firm that alleges that much of the $1 billion-plus in LCFF money the district gets annually is being used in ways that are not properly documented as required by state law. The complaint includes numerous examples from district records of LCFF grants being spent in questionable ways.

In 2016, Public Advocates filed a similar complaint against L.A. Unified, which some district officials strongly disputed. But the next year, the district agreed to provide an additional $151 million to 50 schools with high concentrations of English learners, foster children and students from poor families.

This article was originally published by CalWatchdog.com

Major Southern California Fault Line Eyed After Unprecedented Movement

A major southern California fault capable of producing a magnitude 8 temblor started to move for the first time in 500 years following a series of earthquakes in the Mojave Desert over the summer, according to a new study published Thursday in the journal Science.

The study by geophysicists from the California Institute of Technology and NASA’s Jet Propulsion Laboratory found that the Garlock Fault – which runs east to west for 185 miles from the San Andreas Fault to Death Valley – has slipped .8 inches since July. This is the first movement documented on the fault in the modern historical record.

“This is surprising, because we’ve never seen the Garlock fault do anything. Here, all of a sudden, it changed its behavior,” Zachary Ross, assistant professor of geophysics at Caltech and lead author of the paper, told the Los Angeles Time.  “We don’t know what it means.”

Satellite images show the process called fault creep began after Southern California experienced its largest earthquake sequence in two decades beginning on July 4. A magnitude 6.4 foreshock rocked the Mojave Desert about 120 miles north of Los Angeles before a magnitude 7.1 mainshock hit the next day in addition to more than 100,000 aftershocks. …

Click here to read the full article from Fox News.

Kamala Harris Demands That Warren Promise To Ban Trump From Twitter

When it comes to politics, Democratic presidential hopeful Sen. Kamala Harris (D–Calif.) is “For The People.” When it comes to Twitter, though, she would like to put the fate of President Donald Trump’s account in the hands of one powerful man: CEO Jack Dorsey.

“He and his account should be taken down,” said Harris during Tuesday night’s debate, facing off against Sen. Elizabeth Warren (D–Mass.) who declined to support the move.

Harris made her original case in an October 1 letter to the tech CEO. “These are blatant threats. We need a civil society, not a civil war,” Harris wrote, referring to Trump’s noxious tweets about the Ukraine call whistleblower. “These tweets represent a clear intent to baselessly discredit the whistleblower and officials in our government who are following the proper channels to report allegations of presidential impropriety, all while making blatant threats that put people at risk and our democracy in danger.”

As Reason‘s Elizabeth Nolan Brown points out, Trump’s tweets “are many things—irresponsible, divisive, and unbecoming of a president, to say the very least. His posts accusing Schiff of treason and suggesting he should be arrested (for comments Schiff made on the House floor recently) may even be unconstitutional.”

So how should Trump be held accountable for his tweets, many of which could merit support for impeachment? Should lawmakers be able to access them? Should the American people be allowed to decide what they think of his erratic rants, many of which contain policy prescriptions? Or should one man have the power to press a button and erase it all?

Certainly not the latter. …

Click here to read the full article from Reason.com

California’s AB 5 Will Force More Companies to Leave

Proposition 13 was called the political equivalent of a sonic boom by economist Art Laffer.

In limiting how much local governments could drain from Californians through property taxes, fed-up voters changed the political landscape with the 1978 ballot measure in a way that few state policies have, before or since.

Howard Jarvis’ Proposition 13 swept the country and made headlines around the world.

 Sounds a lot like Assembly Bill 5. The difference is Prop 13 is a force for good. AB 5 is a destroyer. Worse, other states are determined to duplicate California’s mistake.

AB 5, passed and signed last month, virtually bars Californians from working in the gig economy. The law, which implements a California Supreme Court decision, implements imposes a three-pronged test that identifies who’s still free to be a contract worker and who has to be a hired employee. 

A worker can be an independent contractor only if he or she:

  • A) Is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
  • B) Performs work that is outside the usual course of the hiring entity’s business; and
  • C) Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Is there a freelance worker who could possibly pass Part B? 

Under that requirement, janitors could work as independent contractors only when they have contracts with companies not in the business of cleaning. 

Or a rideshare driver could work under a contract with Uber or Lyft only if those companies were primarily in the business of, say, selling vacuum cleaners. 

It’s a rigid framework, says labor law firm Fisher Phillips, that will appear, if it already hasn’t, in “the nightmares of your average gig economy business executives.” 

It’s already a bad dream for workers.

“Despite AB 5, Uber Drivers Would Rather Quit Than Be Employees,” reads the headline to the first installment of a two-part series in the online publication, Los Angeleno. One driver interviewed for the story said that “when the lawmakers make these laws, they don’t live our lives.”

“I have to pick my kids up or drop them off. I do that and come back to work, driving. What shift is going to let me do that other than this?”

Los Angeles Times columnist George Skelton, no puppet for corporations, recently wrote “there are tens of thousands of independent contractors who apparently don’t feel the slightest bit exploited. And they don’t want anything to do with formal employment or unions.”

The few able to pass the test and will remain independent contractors might not be independent for long. 

In a signing statement, Gov. Gavin Newsom said the next step “is creating pathways for more workers to form a union, collectively bargain to earn more, and have a stronger voice at work.” 

It is “in this spirit,” he said, that he would persuade political, labor, and business leaders to support an effort in which “workers excluded from the National Labor Relations Act” would have “the right to organize and collectively bargain.”

When Skelton said that maybe the aim of AB5 was “to rope in more dues-paying union members,” he might have been more correct than he realized. 

Where Proposition 13 set off an extended era of prosperity, AB 5 will rob workers of the freedom and flexibility they want and sometimes need from freelance work, and force more companies to leave the state than already are. California’s once-dynamic economy is on track to becoming permanently sclerotic.

AB 5 is a historic mistake.

No one knows what kinds of jobs Americans will be working in 50 years, not even 25, just as who lived through the Depression had no idea what work was going to be like in the 21st century. 

Classifying jobs through a government order is going to hold back the natural evolution of work. There are already regrets and there will be many more to come.

Kerry Jackson is a senior fellow with the Center for California Reform at the Pacific Research Institute.

Originally published in CalMatters https://calmatters.org/commentary/gig-economy-2/

Kamala Harris’ Unflattering Record of ‘Accomplishments’

During the Democratic presidential candidate debate Tuesday, Kamala Harris touted her “accomplishments” as California’s “top” law enforcement officer.

But what really were those accomplishments?

Research from the RNC reveals her record to be not as flattering as she’d like:

  • Fought to keep inmates locked up in overcrowded prisons so they could be used for cheap labor.
  • Fought to kill Proposition 19 in 2010, a measure that would have legalized marijuana for recreational use, though she now supports federal legislation that would do just that.
  • As California AG, she jailed thousands on marijuana charges and was against legalizing marijuana, but now she wants to legalize it.
  • As California AG, she defended capital punishment.
  • She “championed” a law that put the parents of truant kids in jail. But as a candidate for president, she has been caught trying to cover up her record on truancy.
  • As San Francisco DA, she called the decriminalization of prostitution “completely ridiculous.” But earlier this year, she made a flip-flop and said she supports decriminalizing prostitution.  
  • As San Francisco DA, Harris made increasing bail costs a priority. 
  • As San Francisco DA, Harris prosecuted a mentally ill woman who was shot by San Francisco Police. A Loyola Law School professor said of Harris, “Somebody used very poor judgement in deciding to bring these charges.”
  • As recently as last year, she boasted that as San Francisco DA, she “nearly tripled the number of misdemeanor cases taken to trial” but now she wants to “drastically [limit] the number of people we expose to our criminal justice system.”

Charter School Critics Have Potent New Tool to Block Approvals, Renewals

In an effort to portray a far-reaching bill as a compromise between charter schools and teacher unions, Gov. Gavin Newsom invited leaders of both groups as well as state Superintendent of Public Instruction Tony Thurman to recent signing ceremonies for Assembly Bill 1505.

In remarks at the event, Myrna Castrejón, president and CEO of the California Charter Schools Association, asserted that the new law “affirms that high-quality charter schools are here to stay and that the charter model — one that embraces accountability in exchange for the flexibility to innovate — is worth protecting and is of tremendous value to the students we serve.”

But what Newsom and Castrejón sought to depict as a balancing act was instead seen in most news coverage as the biggest blow yet to the California charter school movement, which began slowly in 1992 but now includes 1,300 schools that educate about 660,000 of the state’s K-12 students.

One modification to the original bill by Assemblyman Patrick O’Donnell, D-Long Beach, was a huge win for charter schools. It allows charter applicants and charters seeking renewals to appeal rejections from local school boards to county and state officials. A provision on requiring all charter teachers have formal credentials was revised to give charter schools until 2025 to comply.

Trustees can cite fiscal concerns in opposing charters

But the single most important part of the new law is the provision most sought by teacher unions and most feared by charter advocates. That is language that allows district boards to reject charters solely on financial grounds.

In an era in which annual school spending has soared — up from about $67 billion in 2014 to a record $102 billion now, a 52 percent increase — it would nominally appear that charters don’t have much to worry about from such a provision. Yet many state school districts are struggling to make ends meet now as much as they did during the Great Recession a decade ago, when state spending plunged nearly 20 percent in a single year.

Analysts say one reason districts are in trouble has to do with the increase in special-education students, who cost significantly more to educate and whose statewide budget got a 21 percent boost in May.

But the main headache is the enormous cost of the Legislature’s 2014 bailout of the California State Teachers’ Retirement System. It mandates that districts increase their CalSTRS payments by 132 percent from 2014-15 to 2020-21. Yet partly because of a significant increase in the number of retiring teachers getting pensions, the actual hit on district budgets over that span is much worse — 196 percent, the Legislative Analyst’s Office said earlier this year.

Pension bailout eating up surge in school funding

This has had the effect of pushing the total cost of compensation to 90 percent or more of the operating budgets in some districts, with by far the state’s largest district — Los Angeles Unified — among the hardest-hit. In May, LAUSD officials warned that a state takeover by 2022 was likely unless voters approved a parcel tax. Voters opposed the tax despite a heavy lobbying campaign. LAUSD’s fiscal reserves may not even cover the next three years unless state education spending keeps going up, district watchers warn.

But the problems are statewide. The state’s Fiscal Crisis & Management Assistance Team — which helps districts in distress — has had to focus on problems in the counties of San Diego, Sacramento, Oakland and more.

In response, a union-led coalition is seeking to qualify a November 2020 ballot measure modifying Proposition 13, the state’s famous 1978 tax-limitation law. It would allow the valuation of commercial properties to go up each year to reflect their value instead of the maximum 2 percent increase allowed under Proposition 13, generating potentially $5 billion or more in new annual funds for schools. 

The coalition had already qualified a similar measure for the 2020 in fall of last year, but decided to withdraw it because of the fear that its harsh potential effects on small businesses would make it a hard sell.

This article was originally published by CalWatchdog.com

How much will YOUR city pay CalPERS in a down economy?

CalPERS still hasn’t issued their actuarial analyses for the period ending 6/30/2018, even though a year ago, the 6/30/2017 analyses were available. Could it be related to the fact that the DJIA index on 10/01/2018 was 26,447 and as of midday 10/01/2019 it sits at 26,599? Did CalPERS have a bad year and what does that mean?

What is alarming in the case of CalPERS and other public sector pension funds is the relentless and steep rate increases they’re already demanding from their participating employers. Equally alarming is the legal and political power CalPERS wields to force payment of these rate increases even after municipal bankruptcies where other long-term debt obligations are diminished if not completely washed away.

Until California’s local governments have the legal means to reform pension benefits, rising pension contributions represent an immutable, potentially unmanageable financial burden on them.

San Marino’s Payments to CalPERS Will Nearly Double by 2025

The City of San Marino, a small Southern California town with barely 13,000 residents, nonetheless offers a typical case study on the impact growing pension costs have on public services and local taxes. Using CalPERS own records and official projections, the City of San Marino paid $3.0 million (not including employee contributions) to CalPERS in their fiscal year ended 6/30/2017. That was equal to 32% of the base salary payments made in that year. By 2025, the City of San Marino is projected to pay $5.1 million to CalPERS, equal to 46% of base pay.

Can the City of San Marino afford to pay an additional $2.1 million per year to CalPERS, on top of the $3.0 million per year they’re already paying? They probably can, but at the expense of either higher local taxes or reduced public services, or a combination of both. But the story doesn’t end there.

The primary reason required payments to CalPERS are nearly doubling over the next few years is because CalPERS was wrong in three critical estimates: how much their pension fund could earn, how much would be paid to retirees, and how much their client agencies had to pay to stay current or catch up. They could still be wrong.

Annual pension contributions are split into two categories:

(1) How many future pension benefits were earned in the current year, and how much money must be set aside in this same year to earn interest and eventually be used to pay those benefits in the future? This is called the “normal contribution.”

(2) What is the present value of ALL outstanding future pension payments, earned in all prior years by all participants in the plan, active and retired, and by how much does that value and liability, exceed the amount of money currently invested in the pension fund? That amount is the unfunded pension liability, and the amount set aside each year to eventually reduce that unfunded liability to zero is called the “unfunded contribution,” or, in plain English, the catch-up payment.

Both of these annual pension contributions depend on a key assumption: What rate-of-return will the pension fund earn each year, on average, over the next several decades? And it turns out the amount that has to be paid each year to keep a pension system fully funded is extremely sensitive to this assumption. The reason, for example, that CalPERS is doubling the amount their participating employers have to pay each year is largely because they are gradually lowering their assumed rate of return from 7.5% per year to 7.0% per year. But what if that isn’t enough?

If the Rate-of-Return CalPERS Earns Falls, Payments Could Rise Much Higher

It isn’t unreasonable to worry that going forward, the average rate of return CalPERS earns on their investments could fall below 7.0% per year. For about a decade, nearly every asset class available to investors has enjoyed rates of appreciation in excess of historical averages. Yet despite being at what may be the late stages of a prolonged bull market in equities, bonds, and real estate, the City of San Marino’s pension investments managed by CalPERS were only 74% funded. As of 6/30/2017 (still the most recent data CalPERS currently offers by agency), the City of San Marino faced an unfunded pension liability of $29 million.

As it is, using CalPERS own estimates, by 2025 the City of San Marino is already going to be making an unfunded contribution that is nearly twice their normal contribution. Another reason for this is because CalPERS is now requiring their participating agencies to pay off their unfunded pension liabilities in 20 years of even payments. Previously, in an attempt to minimize those payments, agencies had been using 30 year payoff terms with low payments in the early years.

Nobody knows what the future holds. The following chart shows how that might play out in the City of San Marino. Notice how at a 4% rate-of-return projection, in 2018-19 the City of San Marino would have had to pay CalPERS $10.1 million; at 3%, $11.8 million.

San Marino is a wealthy community. The median household income of $147,960 is more than twice the median for California of $67,739 (ref. City-Data.com, figures for 2016). But with total municipal expenses of $26.2 million in the fiscal year ended 6/30/2017 (ref. San Marino CAFR, page 10), even San Marino’s budget can be stressed by pension expenses. CalPERS has projected the city’s pension contribution will rise to $5.1 million by 2025, which is 19 percent of total expenses.

At what point do these payments become too burdensome? What if investment returns settle down to an average of only 6 percent per year – can San Marino afford to pay CalPERS the resulting estimate of $7.0 million per year? What about at an even lower 5 percent return – can San Marino afford to pay CalPERS an estimated $8.5 million per year? And what about the employees? Will they start to pay more via payroll withholding? In 2017-18, employees only contributed $767,000 out of $3.8 million.

What about the rest of California?

How would a downturn affect all of California’s public employee pension systems, the agencies they serve, and the taxpayers who fund them? In a CPC analysis published in 2018, “How to Assess Impact of a Market Correction on Pension Payments,” the following excerpt provides an estimate:

“If there is a 15% drop in pension fund assets, and the new projected earnings percentage is lowered from 7.0% to 6.0%, the normal contribution will increase by $2.6 billion per year, and the unfunded contribution will increase by $19.9 billion. Total annual pension contributions will increase from the currently estimated $31.0 billion to $68.5 billion.”

That’s a lot of billions. And as already noted, a 15% drop in the value of invested assets and a reduction in the estimated average annual rate-of-return from 7.0% to 6.0% is by no means a worst case scenario.

To-date, meaningful pension reform has been thwarted by powerful special interests, most notably pension systems and public sector unions, but also many financial sector firms who profit from the status quo. Ongoing court challenges, along with growing public pressure on local elected officials, may eventually offer relief. For these reasons, raising taxes and cutting services in order to fund pensions may eventually become a false choice.

REFERENCES

CalPERS Annual Valuation Reports – main search page
CalPERS Annual Valuation Report – San Marino, Miscellaneous Employees
CalPERS Annual Valuation Report – San Marino, Miscellaneous, Second Tier
CalPERS Annual Valuation Report – San Marino, Miscellaneous Employees (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, Second Tier (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police (PEPRA)
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, First Tier
CalPERS Annual Valuation Report – San Marino, Safety Employees, Fire, Second Tier
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police
CalPERS Annual Valuation Report – San Marino, Safety Employees, Police, Second Tier

Moody’s Cross Sector Rating Methodology – Adjustments to US State and Local Government Reported Pension Data (version in effect 2018)

California Pension Tracker (Stanford Institute for Economic Policy Research – California Pension Tracker

Transparent California – main search page
Transparent California – salaries for San Marino, 2018
Transparent California – pensions for San Marino 2018

The State Controller’s Government Compensation in California – main search page
The State Controller’s Government Compensation in California – San Marino payroll, 2018
The State Controller’s Government Compensation in California – raw data downloads

California Policy Center – Resources for Pension Reformers (dozens of links)
California Policy Center – Will the California Supreme Court Reform the “California Rule?” (latest update)

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Edward Ring is a co-founder of the California Policy Center and served as its first president. 

This article was originally published by the California Policy Center.