Wednesday, March 30, 2011

The Fed's added $33.3 billion to California 2009-10 State spending

Elaine Howle is California's State Auditor. She's one of those generally unknown State officials whose role is more important than the Lieutenant Governor. Howle, a C.P.A., was appointed California's first female State Auditor in 2000 after working 17 years for the California State Auditor's Office (previously known as the Office of the Auditor General).

Tuesday her office issued one of the many legally required annual audit reports. Entitled State of California: Internal Control and State and Federal Compliance Audit Report for the Fiscal Year Ended June 30, 2010, this 307 page document is a typical, boring accounting document, generally not of much interest to the public. But Howle is kind enough to provide a one page fact sheet as she has for a number of years.

That fact sheet provides enlightenment for those of us who have wondered why, given the nearly $20 billion reduction in State General Fund disbursements between fiscal years 2007-08 and 2009-10, California's economy did not go into a free-fall in late 2009.

This year's fact sheet says: "From July 1, 2009 through June 30, 2010, California received $120.7 billion in federal funds to carry out more than 350 programs or program clusters—with $42.0 billion for education programs and $38.7 billion for health and human services programs. Funds received under the American Recovery and Reinvestment Act of 2009 accounted for $23.0 billion of the $120.7 billion received."

Last year's fact sheet said: "From July 1, 2008 through June 30, 2009, California received nearly $107.6 billion in federal funds to carry out 335 programs or program clusters—with $44.2 billion for education programs and $34.3 billion for health and human services programs."

The previous year's fact sheet said: "From July 1, 2007 through June 30, 2008, California received nearly $87.4 billion in federal funds to carry out 323 programs or program clusters—with $38.7 billion for education programs and $30.5 billion for health and human services programs."

In total, here is what California received in federal funds:
  • 2007-08 $ 87.4 billion
  • 2008-09 $107.6 billion
  • 2009-10 $120.7 billion
Of course, there is nothing simple about how the money is spent. Federal priorities might not be the State's preference. But I couldn't help but compare these numbers to the State General Fund disbursements as reported by the State Controller:

  • 2007-08 $107.3 billion
  • 2008-09 $ 98.2 billion
  • 2009-10 $ 86.6 billion

And, even though they may be apples and oranges, the total of these two sources of funds flowing through the State into the economy were as follows:
  • 2007-08 $194.7 billion
  • 2008-09 $205.8 billion
  • 2009-10 $207.4 billion
So despite the fact that State disbursed $20.6 billion less from the General Fund, $12.6 billion or 6.5% more general government funding ran through the economy in 2009-10 than in 2007-08.

Specifically regarding the two areas of most concern to many, education and health & human services, the federal funds disbursed were as follows:
Education
  • 2007-08 $38.7 billion
  • 2009-10 $42.0 billion
Health & Human Services
  • 2007-08 $30.5 billion
  • 2009-10 $38.7 billion
Again, we need to understand that the federal funds were not at all disbursed in the manner General Fund disbursements are divided. But if we add to these numbers State General Fund disbursements for education and health & human services, we get the following results:
Education
  • 2007-08 $90.9 billion
  • 2009-10 $83.1 billion
Health & Human Services
  • 2007-08 $59.2 billion
  • 2009-10 $61.8 billion
Between these two sources, education disbursements dropped 8.6% instead of the 21.3% drop in General Fund disbursements alone. Health & human services increased 4.5% instead of the 19.4% drop in General Fund disbursements alone.

We need to note that these numbers do not include the one-time stimulus $23.0 billion spent in 2009-10 under the American Recovery and Reinvestment Act of 2009 (ARRA).  According to the report details, an additional $2.8 billion was allocated directly from the U.S. Department of Education for education purposes through this act. An additional $5.6 billion was allocated directly from the U.S. Department of Health and Human Services for health and human services purposes under this act.

It's difficult for those of us outside the halls of government to classify all the monies under ARRA. For instance about $33 million disbursed through the U.S. Department of Agriculture was for various nutrition programs, some of which may relate to school lunch programs and some to health and human services.

As another example, $251 million was disbursed for Workforce Investment Act programs. It is unknown how much of that money went to the Los Angeles Unified School District which offers WIA funded occupational training at locations like the Abram Friedman Occupational Center.

The point here, of course, is that economic decline from The Great California Slump was less steep than it would have been. It appears that actual reductions in government supported education and health and human services activities may have been far less drastic than one might have inferred from the General Fund disbursement reductions which were as follows:
Education
  • 2007-08 $52.2 billion
  • 2009-10 $41.1 billion, 21.3% less
Health & Human Services
  • 2007-08 $59.2 billion
  • 2009-10 $61.8 billion, 19.4% less
This adds to a credibility problem facing Governor Moonbeam and the Legislature. The impact of a 20% cut in the General Fund may appear to have been minimal. The tendency  is to minimize program cuts in the activities important to their constituency. They likely will hold the line through  fall 2011 until the voters can vote on a 5-year "extension" of the 2009 tax increases.

The problem is that all of the 2009 tax increases will have expired by June 30. So any way you try to spin it, the measure will be a tax increase measure and people will understand that.

If, despite all the hand-wringing and despair from the politicians and the press, the voters haven't lived with significant cuts for at least six months, the measure may fail.

Here's a comparison of what Brown proposed as a budget for 2011-12 to what he and Democrats should have adopted by now:

The "Balanced" column reflects the kinds of cuts needed. While modifications to distribution of the pain would be determined by the politicians and the actual total could increase depending on revenues, variations would probably be less than 10% of the total shown.

And whatever the federal government will do in 2011-12, it will be far less than in 2009-10.

But when your in-laws are living with you because they're unemployed and their house was foreclosed on, you may have a hard time believing that anything drastic is going to happen at your kid's school - because it hasn't. In fact, because of the Moonbeam and the Democrats, no significant cuts have been made since the adoption of Proposition 13 during Moonbeam's first term.

As I noted in my previous post, Brown's General Fund budget was still about 10% higher than if you applied population growth and cost-of-living increase factors to the 1990-91 budget. And in 2007-08 the Legislature spent 35% more than those factors would have indicated.

Why would you vote for a 5-year "temporary" tax increase? Why not 2-years? That's "temporary." At least Moonbeam will still be in office and will have to actually do something to solve the problem.

Tuesday, March 29, 2011

Mildred Pierce, the good Lord, A. Alan Post, the Republican budget working paper, and Jerry Brown


The "Mildred Pierce" Experience

If you watched the premier episodes of HBO's miniseries "Mildred Pierce," perhaps you noticed the enhanced sounds of coffee shop patrons discussing how the press was indicating the economy has turned around. It was a pointed commentary.

The scene was set in 1931-32 Los Angeles. What viewers were vaguely aware of is that on September 5, 1929, the Dow hit a high of 382.01. By July 8, 1932, the Dow hit a low of 40.56. It was The Great Depression.

Two months later, September 8, 1932, the Dow had doubled hitting a high of 81.39. Compared to 382.01, this still shouldn't have seemed worth noting. But it was the source of all that silly economic optimism being discussed. In 1932, about 34 million people belonged to families with no regular full-time wage earner. So predictably, by February 27, 1933, the Dow dropped 39% to a low of 49.68.

Unemployment was the problem in The Great Depression. By 1936, all the main economic indicators had regained the levels of the late 1920's, except for unemployment, which remained high. In 1937, the American economy again experienced a crash, lasting through most of 1938. Production declined sharply, as did profits and employment. Unemployment jumped from 14.3% in 1937 to 19.0% in 1938. As we all know, the economy for workers did not recover until WWII.

The wisdom of HBO's "Mildred Pierce" is that for California the "facts" of our economy can be seen in the chart below, not in the optimistic press discussing various economic indicators:


Only the good Lord knows

Now, you may ask, what does massive, sustained unemployment have to do with the California budget? If you ask that, perhaps you should be answered as Governor Moonbeam1 answered a reporter when essentially asked when and if the State budget would be balanced: "Only the good Lord knows."

You see, Moonbeam can't even acknowledge that the problems he faces today he actually created as Governor 30 years ago. Solutions have become beyond human comprehension, according to our state's leader. Of course, given the problems Moonbeam created for himself just in the past year in order to get elected, indeed it may be true.

Moonbeam's most significant newly created problem is that he promised during his campaign to take any tax increases to the voters. He did so despite The Gubernator's experience working with the Legislature two years ago as explained here:
After voters soundly rejected five budget-related ballot measures, Gov. Arnold Schwarzenegger and state lawmakers agreed Wednesday on one thing - they need to act quickly to solve the state's budget woes on their own.

"With an overwhelming majority, the people told Sacramento, 'Go and do your work yourself, don't come to us with your problems,' " Schwarzenegger said in Washington before flying back to Sacramento.
Instead of heeding this lesson, thinking himself smarter and better than Schwarzenegger, Moonbeam stupidly boxed himself into another election to balance the budget, making compromise with Republicans impossible in his mind. He explained the situation this way on YouTube:
This is a matter that's too big, too irreversible, to leave just to those whom you've elected. This is a time when the people themselves can gather together in a special election and make the hard choice....
In other words, Moonbeam and the Legislature who taxpayers pay to make these decisions find the responsible solutions just too hard to discern, too complex to choose, and too likely to get their core constituencies upset.

That last concern is the one that counts because we don't have a leader in Moonbeam, we have a poll watcher. The lesson he learned from The Gubernator is that trying to lead, trying to compromise, just makes you unpopular with the world's most fickle electorate. (And anyone knows using YouTube is a way to get popular if you can just get enough hits since it makes you look so 21st Century even if you are an old guy.)

And so today he abandoned any further effort to negotiate with Republicans.

The problem here is an inherent refusal to engage in honest discourse and embrace the observations of John Stuart Mill about his experience with democratic government:
One of the most indispensable requisites in the practical conduct of politics, especially in the management of free institutions, is conciliation; a readiness to compromise.

I became practically conversant with the difficulties of moving bodies of men, the necessities of compromise, the art of sacrificing the non-essential to preserve the essential.
One would think that Moonbeam's Jesuit education - combined with his experience as Governor when Proposition 13 was passed - would have made him acutely aware of what is essential to make institutionalized representative democracy work.

The Republican working paper

Instead, through spin he has persuaded much of the press to embrace a characterization of the Republicans in the Legislature as unwilling to compromise. And many are unwilling to compromise to preserve the essential. But so are many Democrats, apparently including the Governor.

Angered by that characterization repeated to the press by the Democratic leadership, the key Republican Legislators negotiating with the Governor released a working paper list of subjects discussed or to be discussed during the negotiations. Senate GOP Leader Bob Dutton and Sen. Bob Huff, R-Diamond Bar, vice chairman of the Senate Budget Committee, upon releasing the working paper made this statement:
"Governor Brown challenged Republicans to be engaged in the budget process. Republicans have been engaged for months. Today he was presented with a thorough outline, which reiterates our priorities, including: getting our state back on track by reining in runaway spending; controlling unsustainable public employee pensions; getting people back to work; protecting and improving our state's public education system; and making critical adjustments to the governor's flawed budget.
The Associated Press story called the document "a comprehensive wish list of more than 50 demands."

The LA Times also called it a "list of demands" noting:
Brown spokesman Gil Duran called the list "a hodgepodge."

...It is unusual for such a negotiating document to be made public in the midst of talks and could be a sign negotiations are collapsing.

"Serious negotiations cannot be carried out through the press," Duran said.
You've got to be kidding! After the past two months, a Democrat saying "negotiations cannot be carried out through the press" is hypocrisy of the worst form.

The Republican working paper deserved some serious evaluation by the press. Any honest attempt should have begun with at least noting the unmentioned-in-the-press context.

The Honest Context. If one adjusts the amount disbursed from the General Fund in 1990-91 by the increase in population and cost-of-living since then, the result is a General Fund 2011-12 disbursement target of $80± billion.

In 2007-08 the Democratically-controlled Legislature irresponsibly disbursed $107.3 billion, roughly $27 billion more. An obvious economic bubble resulted in unsustainable revenue they could distribute to their demanding constituency, many of whom were on their own track of wildly irresponsible personal spending. Predictably, the economic bubble burst in the second quarter of that fiscal year.

Though still about 10% higher than what California population growth and cost-of-living might have justified to a reasonable person, in 2009-10 that General Fund number had to be cut 19.3% to $86.6 billion. The Great California Slump (or worldwide, The Great Recession)had eliminated the chance of wild overspending, though the Legislature approved and The Gubernator signed a 20% sales tax increase.

That's honest context from fiscally conservative point-of-view. Within that context, here's more of the Moonbeam Administration spokesman Duran's response to the Republican working paper:
"This is basically Republicans trying to ram through an agenda that does not reflect the fact that we have a Democratic governor and Democratic majorities in both houses of the Legislature," he said.
So what is this Republican agenda he's referring to with regard to the budget?

In the working paper, they have all the key negotiating points under a heading "BIG OUTSTANDING PIECES OF THE PUZZLE" which seems like a good place to begin an evaluation. Let's examine the big items, the ones that individually exceed $1 billion.

1. The Republicans apparently have concerns about "additional cuts in Governor’s budget not adopted by dems ($1.7 billion)." This doesn't seem unreasonable as this money must come from somewhere.

2. The Republicans apparently feel someone should "account for higher than projected revenues - $1.3 billion." This also doesn't seem unreasonable, though maybe it will just be applied to resolve their concerns in "1." above.

3. The Republicans apparently think that taking "more from Prop 10 & 63 ($1 billion – would require going back to voters)." This is a bit more complicated, needing explanation.

According to a Legislative Analyst's Office (LAO) report:
Proposition 10 was enacted by the voters of California in the November 1998 election. The initiative measure created the California Children and Families Commissions, now commonly known as the state and local First 5 Commissions, which rely upon revenues generated by state excise taxes on cigarettes and other tobacco products to fund early childhood development programs for children up to age five. The state commission (which receives 20 percent of revenues) and county commissions (which receive the remaining 80 percent) operate the First 5 programs.
First 5 LA in January explained:
Brown proposed taking $1 billion in funding from First 5 California and county First 5 commissions in 2011-12, as well as half of all future First 5 revenues on a yearly basis. The budget proposal also redirects to state coffers another $50 million from First 5 California, the state Proposition 10 Commission, to fund state-supported early intervention services for disabled children.
Despite Moonbeam Administration arguments to the contrary, the Legislative Analyst stated "This proposal would require voter approval because it changes the allocation of funding originally provided under Proposition 10." The Republicans agree. Here, Moonbeam is being unreasonable, not the Republicans.

Then there's Proposition 63. According to Wikipedia:
Proposition 63 was a California ballot proposition on the November 2, 2004 ballot. Its official name and title on the ballot was the Mental Health Services Act....

It was an initiative statute that levied an additional 1 percent state tax on incomes of $1 million or greater to fundamental health service programs beginning January 1, 2005....

A later ballot measure, Proposition 1E appeared on the May 19, 2009 special election ballot. This measure would have authorized a fund-shift of approximately $230 million annually in income tax surcharge revenue currently earmarked for Proposition 63. However, the measure was defeated.
Despite the fact that the voters in 2004 approved this tax increase for a specific purpose and in 2009 voted against shifting these funds, the Moonbeam Administration unreasonably proposed shifting the money. The Republicans want the voters to vote on that.

3. The Republicans apparently are concerned that the "current budget is at least $400 million short of Governor’s level (+$500 million phony cuts)."  This actually now totals to over $1 billion. This doesn't seem like an unreasonable concern.

4. The Republicans apparently want discussion on "additional cuts - LAO letter - $13.5 billion." On February 10, 2011, at the request of Democratic Senator Mark Leno, chair of the Senate Budget and Fiscal Review Committee, the LAO prepared a letter describing what could be done to balance the budget without the tax increase extensions.

Leno released the 11-page letter with considerable spin. The very limited press coverage offered words like "grim" and "doomsday." But nobody offered an honest analysis of the proposals.

Indeed some of the proposals seem a bit drastic. The letter explains that the alternatives were to include expenditure reductions, shifts or transfers of existing states funds to benefit the General Fund, and increases of non-tax revenues. The proposals could be only ones that did not require voter approval. Jason Sisney, the LAO director of state finance, explained:
"We tried to score savings we thought were realistic under the law," Sisney said. "We attempted to identify as many options that would avoid touching core programs as much as possible."
The problem is, the Democrats do not even want to talk about it. And yet, if they could work out $4± billion of those cuts:
  • the temporary State sales tax rate increase to 6% from 5% would not have to be extended
OR
  • the temporary income tax rate increase that expired at the end of last year would not have to be extended.
Attempting to accomplish that doesn't seem completely unreasonable.

5. The Republicans apparently want serious consideration of a compromise alternative on the Governor's proposal targeting up to $1.7 billion by eliminating Redevelopment Agencies. Specifically they advocate a proposal by Senator Bob Huff (R-Diamond Bar) which is a borrowing plan, one which he said would make it optional for locals to participate, thus avoiding the 'state taking the money' ban under last fall's Proposition 22. This doesn't seem unreasonable.

It is a simple fact that in November when the voters were electing Moonbeam, 60.7% of the voters approved Proposition 22 telling him to not "require a community redevelopment agency (A) to pay, remit, loan, or otherwise transfer, directly or indirectly, taxes on advalorem real property and tangible personal property allocated to the agency" nor "(B) to use, restrict, or assign a particular purpose for such taxes for the benefit of the State, any agency of the State, or any jurisdiction."

6. The Republicans apparently want to discuss not eliminating "Enterprise Zones" but examine potential reforms. They also view the proposal a $1.4 billion tax increase. Given the employment graph above, open discussion of this doesn't seem unreasonable.

7. The Republicans apparently want careful analysis before considering the Governor's proposal to shift various service responsibilities to counties without providing for long-term funding. Many of the structures created dividing the responsibilities to provide these services were created based on decades of experience. Brown decided in a month to propose changing them which seems unreasonable.

8. The Republicans apparently have strong preferences about what is to be submitted to the voters. They feel that three measures should be submitted including a tax increase extension, a spending cap, and pension reform.

They propose that the extension of the temporary tax increases should be 18 months, not five years. That seems more consistent with the term "temporary" and Moonbeam would still be Governor giving him the opportunity to work on the State's real budget problems. This doesn't seem unreasonable.

Regarding a permanent "hard" spending cap, the Governor has already said no. So the Republicans offered a different proposal:
  • Hard cap (based on CPI & population) until:
    1. Specified budgetary debt is paid down (e.g. ERBs, Loans, Prop 1A borrowing, VLF GAP loan, Non-98 deferrals, education deferrals, maintenance factor)
    2. A 10% rainy day reserve is obtained
  • Base Year 12-13.
  • Carve Prop 98 spending out of cap
  • Revenues above the cap to be used to pay down debt, to build reserve, or other 1-time expenses
  • Transition to ACA 4: At end of the hard cap, implement provisions of ACA 4 (the 2010 measure). (Some of the dates in ACA 4 would need to be changed.)
The idea of negotiating language for a spending cap ballot measure is hard to disagree with when one considers what the Democrats did with the budget from 1990-91 to 2007-08.

Finally there is the pension reform ballot measure proposal. The Republicans feel that the Governor has agreed to the "Little Hoover Commission’s recommendations - minus existing employees and no mandatory hybrid for current employees." The original State employees' retirement system implementation measure was put on the ballot as Proposition 5 in November 1930, in The Great Depression. The voters approved the Proposition. Suggesting that reform as agreed to by the Governor also be put on the ballot doesn't seem unreasonable.

Those are the "BIG OUTSTANDING PIECES OF THE PUZZLE" presented. Yes, the Republicans' working paper has stuff in it about revising the California Environmental Quality Act, a proposed Office of Management and Budget following the federal model, and education reform. But none of it is part of list of big outstanding pieces.

A. Alan Post versus Moonbeam 1.0

A. Alan Post died last Saturday at the age of 96. For nearly a third of my life, as the California Legislative Analyst A. Alan Post represented the voice of "responsible government" in California state government - note the word is "responsible" not "responsive."

Post resigned the position in Moonbeam's first term as Governor and Proposition 13 was the outcome of bad government.

Post said of Proposition 13 that it replaced one unfair tax system with another. He described the situation as follows: "The need for reform was obvious, but some liberals wanted too much, and so reform efforts in the Legislature failed. It was left to the initiative process, and the time was right for Jarvis."

After the passage of Proposition 13, Jerry Brown appointed Post chair of the newly created California Commission on Government Reform which became known as the Post Commission. They produced a good report.

Post subsequently said: "I wasn't getting much help from Jerry Brown or his director of finance, Dick Silberman. We even had a tough time getting the report printed and distributed.

"When the report was finished, I went into Governor Brown's office to deliver it personally, and I told him 'a lot of people have put in a lot of time and effort in the making of this, and I expect you to do something with it.' He said 'I will,' but he didn't. He was busy getting himself re-elected.

"I think it was a good report, but I guess I'd have to say that it was of marginal value because it was never really given a chance to be effective. It was not a success, but I believe it could have led to significant resolutions if the governor had been more helpful."

The Jerry Brown Experience

As near as I can tell - particularly after reading the "Big Outstanding Pieces of the Puzzle" section of the Republican budget working paper - Brown is still just perpetually attempting to retain political power, forever making sure Democrats get reelected, forever catering to the most irresponsible .

Brown spokesman Gil Duran confirmed this attitude when he said of the working paper: "This is basically Republicans trying to ram through an agenda that does not reflect the fact that we have a Democratic governor and Democratic majorities in both houses of the Legislature."

Reading this one might believe it is only the threat of the initiative and recall processes available in California that the California legislature has not joined the Democratic-majority Illinois legislature which in January passed personal income-tax increases of 66 percent and corporate income-tax increases of 45 percent. Such an act would restore the General Fund budget to 2007-08 levels.

Nothing he has done since he was elected again implies that Brown is trying to fix anything he did wrong 30 years ago or will do so in 2011. In my opinion, had he still been alive A. Alan Post again would have said at the end of this year: "The need for reform was obvious, but some liberals wanted too much."

Since his party's core constituency still wants too much, Moonbeam's best answer to a budget solution is: "Only the good Lord knows."

Maybe the good Lord, A. Alan Post, and Mildred Pierce would have some wisdom to offer Moonbeam and all the Legislators: "You're state is in the middle of a depression, swallow some of that sinful it's-all-about-me pride, quit worrying about getting reelected, and through compromise work your way to a better future in the form of responsible California government."
Footnotes:
1I see Jerry Brown as Governor Moonbeam, enamored with the currently impossible solutions for government that could in several decades become improbable or even possible.

Tuesday, March 22, 2011

Spinach, popular political action figures, and the California voters

The current debate over the 2011-12 California State Budget has now been reduced to examining Field Poll results.

This week's poll tells us that neither the Governor nor the Legislature have a 50%+ approval rating, even though both were elected less than six months ago.

Last week's poll told us that a majority of voters would approve Brown's proposed temporary tax increase extension but a majority would not pay higher taxes because of the budget deficit. Huh? That doesn't make any sense!

Since 2001, California has needed a leader as Governor who sees the bigger picture. So we first voted in The Gubernator and then returned to office Governor Moonbeam, both of whom wanted to be a popular "political action figure."

California voters like people who seek celebrity status, because we know they won't deviate from the conventional wisdom current among us. We know they will not do things that are good for us. We would never vote for a "Popeye the Sailor Man" action figure because he might tell us we need to eat spinach.

Apparently the current California liberal conventional wisdom is that the State getting more money through income and sales taxes is the best available budget solution despite all the evidence in front of their noses proving that bad government comes from a revenue structure too strongly tied to the vagaries of the economy.

Apparently the current California conservative conventional wisdom is that educating and providing for all the children among us is not a budget priority despite all the evidence in front of their noses proving that poorly performing children will result in a poorly performing future American economy - bad for America and bad for capitalism.

The Gubernator action figure cut 2009-10 General Fund expenditures for education and children about 20%, and temporarily increased tax rates and collections generating 12% more key tax revenue than otherwise would have been received. The Governor Moonbeam action figure proposes to continue the same course of action. A Popeye action figure would not propose this action.

Popeye's 2011-12 budget proposal would have been a balanced budget, with all the drastic cuts and with no tax measure. That is the ultimate result of Proposition 13. That is what the voters approved during Brown's previous term as Governor. We have yet to try to live with Proposition 13. We should.

At the same time, Popeye would have shown himself to be a gutsy, responsible leader, giving us a chance to eat spinach. He would have started the process for an initiative for a March 2012 well crafted ballot measure to fix the flaws of Proposition 13 including increasing the 1% of assessed value tax rate to 1½%.

At that point in time, the voters again could become a multitude of "The Decider action figures" by indicating:
  • whether they like the true policy results of the major State government "spinach-free reform" from the last time Brown was Governor, as finally experienced in the form of an all cuts 2011-12 budget;  or
  • whether they would prefer to eat the spinach by remedying our imbalanced revenue system and by properly supporting with taxes the services that will determine the success of the generations of our children and grandchildren.
Approving more spinach-free short term patches like a 5-year extension of increases on sales and income taxes is stupidity. It's simply a bad way to finance government. It's a bad way to avoid the inevitable. But it's easy, and we Californians want "political action figures" that offer us "easy."

Monday, March 7, 2011

Class warfare, public employee unions in California, their pensions, and the Little Hoover Commission

As noted in many press reports, union membership in the private sector has dropped so low that the unions are nearly irrelevant.

During the period from 1973 to 2010 private sector union membership dropped by half and as a percentage of the total workforce dropped by three-quarters. The number of private sector pension plans has also dropped by over two-thirds.

During the same period, public sector union membership doubled and as a percentage of the total workforce has increased by half.

Not surprisingly, in 2010 many in the voting public views public sector employee pension programs with some envy and dismay while public employees are looking at the voting public with shock. As usual one should look at this situation in historical context.

Let's examine one messy subject first.

Class Warfare

According to the many right wing pundits, advocates for workers are engaging in "class warfare." Yeah....

What I am discussing here is the decline of the American Middle Class (American households with a ten year average annual net income plus annual net worth growth valued at less than $200,000, but more than $30,000) - be they workers, small business owners (people who file a Schedule C or a Schedule K-1 with their tax return which reports their primary source of income), and landlords. We are not discussing the poor (the under $30,000 group).

The "other" class we are discussing is the American Investor Class (the over $200,000 group).

To figure out which class you're in, first add up your net income for the past ten years. Then take your net worth (the market value of all your assets less all you owe) at the end of  2010 and subtract from it your net worth at the end of 2000. Add those two numbers together and divide the total by 10. If the resulting number is greater than $200,000, you're either in the Investor Class or somehow you squandered over $2,000,000 in the past ten years.

In previous posts, I've presented the figures for the nation, but recapping quickly, the 1960's a pattern of income distribution became noticeable, as indicated on this chart (click on the chart to see a larger version):

What this chart shows is that after WWII the Gross Domestic Product after adjusting for inflation and population growth grew 186% but the benefits were distributed as follows:
  • Investor Class income growth is three times the actual economic growth rate;
  • Worker-income is 20% less than the economic growth rate
  • Small business owner (small business owners probably not in the Investor Class) income growth is 80% less than the economic growth rate; and
  • Landlord (both residential and commercial, also probably not in the Investor Class) income ...well... it appears to have been a roller-coaster ride that ends at a point 50% less than the economic growth rate.
More to the point, for $1 of dividends and interest earned by investors, the wages and benefits paid to workers have dropped from nearly $10 to around $4 as indicated in this chart:

In California, the income shift has been similar to the nation. The California Franchise Tax Board reports that during the two decades between 1987 and 2008 the inflation-adjusted incomes of the top 10% of California taxpayers increased by 43%; the top 1% by 81%. Incomes of the lower 60% dropped by around 12%. The 2009 numbers are just being released, but the median income fell in 2009 by 5.1% to the lowest level since 2004.

This history also can be seen in the loss of the defined-benefit pension plan in the private sector as seen in the chart below:

Essentially, the number of defined-benefit pension plans in the private sector was on the rise until the mid-1980's. But by the mid-1990's two-thirds of those plans were eliminated. The process of replacing those plans with 401(k) plans was well under way.

The difference in the plans is critical to understanding the meaning of retirement security for the Middle Class worker versus the interests of the Investor Class.

The defined benefit plan provided for a guaranteed pension upon retirement. The employer was to provide from its capital the pension guarantee, directly through investments and/or purchased annuities.

The 401(k) is a tax-deferred pseudo savings account for the worker (advocated by the capitalist right to loosen up capital locked in conservative pension investments).

It is true that 401(k) monies can be invested in government bonds so that it is secure, but it may not grow enough to provide for an adequate retirement.

Or it can be invested in the stock market directly or through mutual funds, at high risk, providing working capital for the investment community with the chance of high returns and a great retirement (much like betting on the craps table at Las Vegas).

One theme is clear from these charts. Sometime after 1952 and before 1962, the American Investor Class literally and systematically began to increase its share of American economic growth to the detriment of the American Middle Class.

Now, according to the right-wing talking heads, any organized push-back by the American Middle Class must be viewed as "Class Warfare" but the actions of the Investor Class are just good clean fun.

Since before the beginning of the 20th Century, we had Class Warfare. We will always have Class Warfare. The issue is about what constitutes a fair return on investments versus a fair income for labor. To the extent that labor gains usually through collective action and political power, small businesses and small landlords gain and investment returns are limited. Large investors don't want those limits and will fight a war to eliminate those limits.

So yes, we have Class Warfare. So what?  Well, in 2011 having pretty much put the private sector Middle Class worker in an economic decline, the Investor Class is attacking the last bastion of unionism and defined-benefit pensions - government employees.

About Organized Labor in the Public Sector in California

In the past, for many government employees a psychological distance existed between their own self-view and unions such the United Steelworkers which is the largest industrial union the North America with 705,000 members, the Teamsters Union with its 1.4 million member or the Carpenters Union with about 520,000 members or the storied United Mineworkers.

Consider the California Teachers Association, a movement founded within a framework of a progressive social agenda, not necessarily militant unionism, which represents 340,000 educators. Consider this history of the CTA from its website:
Founded in 1863 during the Civil War as the California Educational Society, CTA won its first major legislative victory in 1866 with a law providing free public schools to California children. A year later, public funding was secured for schools that educated nonwhite students. More early victories established bans on using public school funding for sectarian religious purposes (1878-79); free textbooks for all students in grades 1-8 (1911); the first teacher tenure and due process law (1912); and a statewide pension, the California State Teachers’ Retirement System (1913).

CTA led efforts to outlaw child labor in the state and enact other protections for children (1915), and to strengthen the teacher due process law (1921). In the 1940s, the union was the only major organization in California to protest against the internment of Japanese-Americans during World War II.

...After a decade of school strikes and teacher organizing, California K-14 educators at last won the right to bargain collectively in 1975 when the CTA-sponsored Educational Employment Relations Act, also known as the Rodda Act, was signed into law by Gov. Jerry Brown. The pent-up frustrations led to a rare and historic burst of union certification work — within 18 months, 600 of 1,000 CTA/NEA locals statewide secured bargaining rights in their school districts.
In essence, beginning in 1866 the CTA was a professional organization dedicated to progressive political causes, mostly related to education and teachers but broader in scope. It was 100 years after its founding that activities associated more with unions than professional associations became the public image of the CTA.

The California State Employees Association began as an advocate for the creation of a retirement system. In 1923 some of the pre-CSEA leaders from Sacramento, Los Angeles and San Francisco visited Gov. F. W. Richardson. A soon as they mentioned creating a retirement system for state employees, the Governor threw them out of his office.

In 1927, with the economy of the state booming, they prevailed upon then Governor Clement Young who appointed a special commission to study the issue. The commission produced a favorable report. An implementation measure was put on the ballot as Proposition 5. In November 1930, in The Great Depression, the voters approved the Proposition.

In 1931 Governor James Rolph signed the legislation creating the California Public Employees Retirement System. Also in 1931 these early state employee leaders and several hundred others created CSEA. They immediately turned their attention to getting rid of the "spoils" system of patronage jobs by getting the voters to create in 1934 the State Personnel Board giving it broad regulatory powers in setting up and administering the recruiting, examination and selection process, and in establishing employment standards and employees’ conduct and disciplinary procedures.

In 1933 one of CSEA's achievements was the establishment of a state employee credit union.

Again, collective bargaining did not begin until 1975. Since then, CSEA has reorganized into a federation of four affiliated organizations, the Service Employees International Union Local 1000 representing 95,000 California state employees through nine bargaining units; the Association of California State Supervisors representing 7,000 state civil service managers, supervisors and confidential employees who are excluded from collective bargaining; the California State University Employees Union representing 16,000 employees of the California State University system; and the California State Employees Association Retirees.

These two "unions" were not formed to engage in collective bargaining, though they were focused on progressive agendas that affected their members. And in that background, there may be a disconnect from the rest of the populous.

One has to comment that perhaps public sector unions, many of which didn't call themselves a "union,"  may have let down the very people they now depend upon to understand their situation - the simple plight of workers. Americans simply don't know what they owe to unions.

The two national teachers' unions are large and influential. This makes one wonder why the union movement that essentially made the large American Middle Class possible is held with such disdain by so many of the teachers former students who themselves are workers. Nationwide, state and local government employee organization members interact with other Americans daily, but their IT employee friends apparently cannot relate to the benefits of unions. Apparently, communications have broken down.

That's a problem. The public employees had better start communicating about the benefits of unions to the middle class.

The California Public Employee Pension Systems

Before moving on to the details of California's public employee pension systems, we need to acknowledge one significant political factor - the threat pension funds represent to the free-wheeling international corporate community.

1. Iran, CalPERS, and the Council on Foreign Relations

The Center for State and Local Government Excellence, an independent non-profit organization, commissioned Center for Retirement Research at Boston College to undertake a comprehensive examination of state and local government retirement plans which has resulted in a series of papers that can tell you far more than you ever wanted to know about those plans. While no one can examine an issue as complex as this without some bias, these are pretty well done.

One of the papers is entitled Is CalPERS a Sovereign Wealth Fund? The concept of "Sovereign Wealth Funds" is a highly charged subject particularly for the political right wing in the United States. The study had to include a paper on CalPERS because it is perceived as a potential threat by the most rabid free market advocates. From this paper:
While these funds are hard to define in precise terms, all agree they are government-sponsored pools of financial assets. With roughly $3 trillion under management today and forecasts that suggest this number could approach $10 trillion in under a decade, many wonder what role these public investment funds will play in private markets. Due to SWFs’ government sponsorship, some fear that they will be used illegitimately to advance political, instead of commercial, agendas....

...While all seem to agree that the China Investment Corporation and the Abu Dhabi Investment Authority are SWFs, there is a lively debate as to whether public pension funds, such as the California Public Employees Retirement System (CalPERS), are also SWFs. While CalPERS itself is adamant that it is not, others disagree.
After reviewing the "lively debate," the Boston College study concurs with the International Monetary Fund that government pension funds are not SWFs.

However, I cannot ignore the fact that within the United States CalPERS using its share voting power has pressured some Boards of Directors to improve corporate ethics by appointing independent directors, overhauling audit committee procedures, and alter corporate policies. Further, it has also restricted its foreign investments. That has unsettled the international corporate world and the powers that be. Consider the controversial Council on Foreign Relations, the source of many conspiracy theories. Benn Steil, Senior Fellow and Director of International Economics for the Council, wrote an opinion piece in 2008 that appeared in the Wall Street Journal stating:
If California were a national economy, it would be the eighth largest in the world. And its Public Employees’ Retirement System, Calpers, with $259 billion in assets, would rank fifth among the world’s SWFs. Combine it with the $169 billion California State Teachers’ Retirement System (Calstrs), and California runs the second largest SWF in the world, just behind the United Arab Emirates.

Calpers is a political entity in every sense of the word. Its board is comprised of four members of the state political hierarchy, two appointees of the governor, one appointee of the legislature and six elected members -- all six of whom have long ties to organized labor, including the board president, Rob Feckner, who is also executive vice president of the California Labor Federation. Calpers’s investment policies are politically driven, often dictated by the legislature, and even involve foreign policy goals.
While it may be true that the attack on public employee pensions is only a side-effect of a Republican assault on the political power of public employee unions, it is also more likely it has been orchestrated by international corporate interests pushing back at retirement systems such as CalPERS that see part of the job as a shareholder is to press for corporate ethics and international human rights. The objections articulated by Steil even extend to a moderate Republican and corporate interests in countries our government defines as rogue:
Gov. Arnold Schwarzenegger tried to tame the behemoth in 2005 by forcing public employees to join a defined-contribution pension plan. But he was driven into retreat by strong union opposition, and last October he joined the effort to politicize investments by signing legislation to force Calpers and Calstrs to divest about $3.4 billion in stock of companies that do business in Iran.
Yes, we wouldn't want to stop government employee pension money from being invested in ways that help Iran, identified by the world community and our own government as a rogue nation. And the solution advocated to make certain we don't see these kinds of restrictions is to force public employees into defined-contribution benefit plans like private sector employees.

2. The California Little Hoover Commission Reform Proposals

On February 24, 2011, the Little Hoover Commission of the State of California issued a report entitled Public Pensions for Retirement Security which makes recommendations regarding pension plans for State and local government employees, including school employees.

This report arrived after proposals from politicians and citizens ranging from eliminating to overhauling the pension systems for public employees filled the news media. Even the non-partisan Legislative Analyst offered a comment that the "goal should be to preserve public retirement systems that more closely resemble those of other Californians." What other Californians and what does "closely resemble" mean? It's a statement reflects a problematic political attitude ignoring real life.

Yes, the State employs janitors and laborers, but it employs more people whose jobs are akin to support and accounting staff and various professionals. Perhaps that State should have been invested in Google in 1998 and distributing shares to employees as part of their compensation package. What makes a person think like this???

As posted here previously, the Business Insider recently announced:
Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America.
The article generated from a study done by Joshua D. Rauh of the Kellogg School of Management of Northwestern University. His study, generally quoted by the right as the guy who skewered "pro union" studies, concluded that Califonia's state pension funds could be bankrupt by 2030 without changes.

Changes were already put in place last year. Additional changes are needed. But the State of California, its school systems, and many of its local governments rely upon the California Public Employee Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS). Neither of those systems is in trouble today.

The only complaint today is that proper employer contribution levels for 2011-12 require too much money. But too much based on what? The "what" is we don't want to pay it because it will require reducing services or raising taxes. This attitude has been reflected in past budgets which is a cause of the somewhat higher rates today.

Look at the contribution levels of the State as a percentage of payroll over the past 40 years.  Democrats who controlled the Legislature kept their constituencies happy by not meeting the State's retirement contribution obligation rather than not increasing programs. So at the very moment when the state really doesn't have the funds to provide minimal services, we have to meet our obligations by reducing services further instead of skipping a retirement contribution or two because in good times the Legislature and Governor gave away the windfalls.

Some local governments are in worse shape. The fact is that some of California's local governments which (mis)manage their own employee pension plans have pension systems that are essentially bankrupt. Many others appear to have substantial unfunded liabilities which are causing significant financial problems for the governmental entities involved.

Stupid solutions abound in the halls of our State Capitol. But at the federal level, House member Devin Nunes of Visalia proposes that state and local governments provide more extensive information about assets and liabilities focusing particularly on the potential effects of their assumptions on future pension trust fund earnings. He wants more complex reporting using several different assumptions. Sure, more complex reports about actuarial calculations are the solution, yeah, right.

Nothing about that reporting would have saved the County of Orange or the City of San Diego from the mismanagement that has resulted in serious pension fund problems. What would have saved them would have been a bill 30 years ago requiring all local agencies to use CalPERS (or CalSTRS where educators are involved). But no one would suggest that, as all that local money is viewed as a trough for the local investment banker and politician hogs. The only thing better would be if the system had been a 401(k) so that they could tell the employees and retirees "so sorry, but it was the market crash."

It needs to be noted that both state funds have recovered from The Great Recession market crash. The Winter 2011 CalPERS newsletter states:
"Beating market benchmarks, CalPERS earned 13.3 percent on investment in the fiscal year that ended June 30, 2010.
"...The overall return was almost 6 percentage points higher than the assumed rate of return of 7.75 percent for adequate funding of retirements. It brought the 20-year return average through June 30, 2010 to 7.65 percent."
But we do have an extensive report from the State's Little Hoover Commission. The press has already extensively misrepresented the report. Some of the more militant unions that have not negotiated lower cost packages during The Great California Slump have asserted that the recommendations are illegal or immoral. It appears the Democrats in the Legislature have dismissed the report out of hand.

All this, of course, makes it likely that the report offers some intelligent analysis and suggestions.

So let's look at it.

Little Hoover Commission Recommendations
Recommendation 1: To reduce growing pension liabilities of current public workers, state and local governments must pursue aggressive strategies on multiple fronts.
  • The Legislature should give state and local governments the authority to alter the future, unaccrued retirement benefits for current public employees.
  • State and local governments must slow down pension costs by controlling payroll growth and staffing levels.
What's most interesting surrounding this first recommendation is how strongly it has been asserted by many politicians, unions, and legal experts that the first part of this recommendation cannot be done. Thus we have a statement like this:
"The Little Hoover Commission is recommending something that it admits the courts have already determined is illegal and would violate the promise that government made to its public servants when they were hired," said Bruce Blanning, Professional Engineers in California Government Executive Director.
It's amazing how many times I have read in the press a similar statement.That isn't what I understand the courts have said. The courts did say several times that the government cannot take away from its employees what has been earned in the past pursuant to a written or implied contract. What Commission's report refers to is unaccrued retirement benefits for current public employees, meaning that in the future the contract may change.
"The idea that the state would go back on a deal it made with existing public servants is ridiculous," California Association of Professional Scientists (CAPS) President Patty Velez said. "Most state scientists turned down bigger salaries in the private sector to join the state workforce with the promise of job security and retirement security. Pension changes, just like salary and other benefit changes, belong at the bargaining table."
That pension changes belong at the bargaining table simply means that any contract changes have to be made based upon the State's collective bargaining process. There is nothing incorrect about that. And the Little Hoover Commission didn't say otherwise.

If there is a problem with these two statements from union leaders, it is the rhetoric saying the recommendations "would violate the promise that government made to its public servants when they were hired" and who "join the state workforce with the promise of job security and retirement security." These are the educated members of our state workforce. Somewhere in their educations they must have heard about The Great Depression when public employees took wage and benefit cuts, at least those that kept their jobs. Perhaps they even heard about teachers being paid with school district "warrants" that were IOU's as they couldn't be cashed.

So let's don't game the system to much, here. Union leaders can protest, that's their job. Legislators and Governors on the other hand are the employers, management. They are not supposed to respond to this rhetoric. Not that they're supposed to be union busting capitalists. They are just supposed to not reject Hoover Commission reports out of hand.
Recommendation 2: To restore the financial health and security in California’s public pension systems, California should move to a “hybrid” retirement model.
  • The Legislature must create pension options for state and local governments that would retain the defined-benefit formula – but at a lower level – combined with an employer-matched 401(k)-style defined-contribution plan.
  • The 401(k)-style component must be risk-managed to provide retirement security and minimize investment volatility.
Recommendation 3: To build a sustainable pension model that the public can support, the state must take immediate action to realign pension benefits and expectations.
►To provide more uniform direction to state and local agencies, the Legislature must:
  • Cap the salary that can be used to determine pension allowances, or cap the pension, at a level that is reasonable and fair. Once the employee exceeds the threshold, employees and employers could make additional retirement contributions into a riskmanaged, 401(k)-type defined-contribution plan.
  • Set appropriate pension eligibility ages to discourage early retirement of productive and valuable employees.
  • Set a tight definition of final compensation, computed on base pay only, over a five-year average to prevent and discourage pension “spiking.”
  • Set uniform standards for the maximum hours that retirees can return to work and continue to receive public-sector pensions.
  • Set uniform standards and definitions for disability benefits.
  • Restrict pension allowances to exclude service in an elected office.
  • Eliminate the purchase of “air time.”
  • Strengthen standards for revoking or reducing pensions of public employees and elected officials convicted of certain crimes involving the public trust.
►To minimize risk to taxpayers, the responsibility for funding a sustainable pension system must be spread more equally among parties:
  • The Legislature must prohibit employees and employers from taking contribution “holidays,” except under rare circumstances.
  • The Legislature must prohibit retroactive pension increases.
  • The Legislature must require employees and employers to annually adjust pension contributions based on an equal sharing of the normal costs of the plan.
  • State and local governments must explore options for coordinating pension benefits with Social Security.
Some pretty solid recommendations are contained in Recommendations 2 and 3. Sure, there are some policy issues that may not be acceptable. But dismissing these proposals sends the wrong message.

I am leery of any proposal involving the addition of a 401(k)-type plan in order to reduce the defined benefit plan. Just because employees in the private sector have abandoned labor organizations and allowed employers to take away their defined-benefit pensions doesn't make it a good idea.

Most baby-boomers and older people with 401(k) type plans have discovered the down side in The Great Recession. One has to keep in mind that CalPERS can, and has, completely recovered from losses in The Great Recession. The same cannot be said for the millions of individual 401(k) accounts.

CalPERS does offer a 457 deferred compensation plan. It allows investment in a broad range of mutual funds like most such plans. The 5-year return in all of those funds is far less than CalPERS has earned, like most such plans.

If there is to be a defined-contribution element in the state pension funds, it should be simply mixed into the investment pool of CalPERS removing from the international corporate community any opportunity to interfere in investment of government pension funds.

Perhaps a combination including a defined benefit element based upon an earnings ceiling, a defined contribution element for earnings above that ceiling, and the 457 plan would offer enough security and benefits to attract good employees while reducing the risk carried by the public agencies.

But a better solution would be to require public agencies to pay sufficient contributions in the current system to cover future costs plus eliminate all the possibilities for last minute "improvements" to a retiree's benefits.
Recommendation 4: To improve transparency and accountability, more information about pension costs must be provided regularly to the public.
  • The Legislature must require government retirement boards to restructure their boards to add a majority or a substantial minority of independent, public members to ensure greater representation of taxpayer interests.
  • All proposed pension increases must be submitted to voters in their respective jurisdictions.
    The ballot measures must by accompanied by sound actuarial information, written in a clear and concise format.
  • The Legislature must require all public pension systems to include in their annual financial reports:
    The present value of liabilities of individual pension funds, using a sensitivity analysis of high, medium and low discount rates.
    The government entity’s pension contributions as a portion of the general operating budget and as a portion of personnel costs, trended from the past and projected into the future.
  • The State Controller must expand the Public Retirement Systems Annual Report to include the above information.
  • Administrative fees to pension systems should be considered as a funding source to support actuarial expertise and the timely production of the report.
  • The Legislature must require pension fund administrators to improve procedures for detecting and alerting the public about unusually high salary increases of government officials that will push pension costs upward.
Personally, I don't think any of these things will do any good. They are focused on local agencies, not the state. They assume that providing the public more information will make things better when in fact practically nobody bothers to read the currently available information. A better recommendation would be to fold all local retirement plans into CalPERS and CalSTRS.

In the end, we need to understand that the state public employee pension programs were initiated in good faith. Yes, there are abuses but they can be stopped with some pretty straightforward rules. The two statewide systems are not in any immediate trouble and with some modifications and proper contribution rules, we don't have to worry about them nor are they some huge burden on the state budget. Because these two systems are stable and generally well-managed, all local government retirement systems should be folded into them.

In summary:
  • Americans need to understand that "Class Warfare" is a constant given in modern economic systems.
  • For the past 60 years, the Investment Class has successfully diverted the lion's share of economic growth to themselves, away from members of the Middle Class whether labor, small business, and landlords.
  • Right at the moment there is an orchestrated attack on public employee unions (which tend to support Democrat's running for office as the better of two evils?) with public pension systems as a significant target because the larger ones represent a potential threat to the freewheeling international corporate world.
If this sounds paranoid, rest assured it is but that doesn't mean they aren't out to get you, members of the American Middle Class. The facts and numbers are available. They should be worrying you, particularly because of what they will meanj to your children and grandchildren.

Tuesday, March 1, 2011

Sometimes the truth

I have taken the press to task for swallowing Governor Moonbeam's spin on the budget. So I  must acknowledge an article in the San Francisco Chronicle Sunday that tries to clearly state the truth:
Brown touts his plan to solve California's $26.6 billion deficit as a mix of $12.5 billion in major cuts, $12 billion in additional taxes that need voter approval, and the rest coming from "other" solutions, which are largely internal borrowing.

But the tax proposal is actually worth more - $14 billion. Meanwhile, the proposed spending cuts involve shifting billions of dollars from their intended use to pay for other programs. Not counting those shifts, the cuts total about $8 billion.
It's still a little fuzzy to me. In Brown's budget document, the cash flow projection for the General Fund in Schedule 6D (Appendix 11, Page 192 of the PDF of his budget) indicates a proposed $87.5 billion in disbursements. On the previous page, he projects $86.7 billion in disbursements in 2010-11, and shows on the page before that $86.7 billion in actual disbursements in 2009-10 which coincides with the Controllers report for June 30, 2010.

So if we cut the disbursements from the General Fund high of $107.3 billion in 2007-08 to $86.7 billion in 2009-10, I'm trying to figure out what a proposal for 2001-12 of $87.5 billion represents an $8 billion cut from?

But this article comes the closest I've seen to laying out the facts of Brown's budget. Congratulations are in order given that this proposed budget would shuttle money around like it's on a craps table while the dice are being thrown to determine who, if anyone, will put out the fires, both figuratively and literally, the latter in the case of wildfires.