Wednesday, August 19, 2009

Let's overhaul California's bankrupt government, not tinker with it more

According to one definition of "govern" it means "to have predominating influence." For the next three years, the "predominating influence" in government in this State will be its evident financial bankruptcy.

In the meantime, we have "Government tinkerers" who sit outside the halls of government and examine the details of what isn't working. They then propose lengthy and detailed "reform initiatives" supposedly designed to make things better.

The verb "to tinker" means "to busy oneself with a thing without useful results." That's what these tinkerers do.

Rather than dealing with the core political structure issues, the tinkerers' work product is always an attempt to deal with the symptoms of a perceived problem. They never seek to cure the disease that is killing California government - initiatives.

The source of the disease is easy to identify. It's the voters. When members of the Legislature who regularly run for office fail to respond as desired, the voters have every right to vote them out of office. Except they didn't and don't vote them out of office.

By the 1960's, the voters were so unhappy with their elected representatives who weren't responding to their concerns that they began to approve confusing and poorly written initiatives offered by well-funded groups, some sincere attempts to solve a problem others masked attempts to gain benefits for a few or to turn ideology into State policy.

Instead of having the discipline to use the ballot box to elect representatives who would deal with problems, Californians so desired to avoid responsibility for their votes that they even approved an initiative placing limits on the of number terms one could be elected to each house of the Legislature in order to prevent themselves from voting for an undesirable incumbent.

Term limits have not solved any problems, an outcome an informed person could have predicted. It did strengthen the Governor's Office, so much so that a few years ago Californians had to recall their Governor for screwing things up.

Many voters want to believe a complex society can be easily governed with what appear to be simple answers. But the only simple answer is to vote out the incumbent legislators when the Legislature is not doing what is needed. The simple voter won't do that. That has permitted the initiative process to become easily manipulated by interest groups with money. The disease that is killing California is a failure of a critical organ to function properly - the voters.

This fall while the tinkerers are developing more initiatives, they will have to compete for headlines against a formidable group calling for a Constitutional Convention. Let's look at some of the players in this competition.

The Commission on the 21st Century Economy

Naturally, we must begin with the tinkerers appointed by State officials. Though it was created in October 2008, Governor Schwarzenegger on March 27, 2009, issued an Executive Order assigning the Commission on the 21st Century Economy to accomplish the lofty single purpose goal of recommending to the Governor and Legislature a new tax structure for the 21st Century.

The problem is that the Commission. with its 7 members appointed by the Republican Governor and 8 members appointed by the Democratic legislative leaders, failed to meet its July 31 deadline reportedly because it has suffered from the ideological split that stalls policy development in American government generally and in California government particularly.

The Governor, being more like his constituency than someone who's been in politics and government for a significant length of time, became impatient and insisted that the panel submit its report by September 20 when he would call for a Special Session of the Legislature to deal with the fiscal crisis. Jon Coupal, President of the Howard Jarvis Taxpayers Association, has from the beginning expressed fear and trepidation about the Commission. But even amidst all his alarms he says:
"The commission will report its findings in September and the governor has already called for a special session of the Legislature to consider and act on its findings. This is probably a mistake as it would be better to see the report first.

"Calling a special session sets up the expectation for action when, in all likelihood, there will be no agreement on the commission's recommendations."
He's right, of course, since Coupal and his group are always a very effective part of the problem not the solution. He knows that the members of the Commission at best will only agree on proposals that tinker with the status quo and the members of the Legislature will probably disagree with even that.

California Forward

In the middle of all the normal official bickering and name-calling that goes on in California politics arose an organization called California Forward. It's a group that has some smart people with credibility in its leadership. They have submitted a letter to the Legislature and the Governor outlining 11 proposals, divided into three broad areas of Constitutional tinkering, all theoretically designed to help make State and local government work better.

They have essentially said if the Legislature can't get behind their proposals, they'll use the initiative process to get their tinkering into law. Their proposals are tinkering and deserve serious review so that we understand the proposals "tinkering." Remember, the verb "to tinker" means "to busy oneself with a thing without useful results."

The first subject they propose to fix by tinkering with the details is entitled "Responsible Budgets on Time." This implies that the legislators who the voters voted into office pass irresponsible budgets late, which is of course, true.

The voters passed a Constitutional provision requiring a two-thirds vote in each house of the State Legislature for a budget to be adopted. Who wouldn't know other than California voters that if the minority opposition has one-third plus one or more of the votes in either house, the temptation to exercise the only group power the minority has would be too great not to abuse.

So how have the California Forward group of tinkerers dealt with the budget adoption process issue? Let's take a look.

1. Pay-as-you-go. Require that new programs identify a funding source for any new spending they require.

Who could find fault with the idea of requiring the Legislature to find funding sources for new spending. That way the spending over the years will be funded. Yep, really simple. Let's take an example any simpleton can understand. Let's start up a program to maintain our roads at the quality level they were maintained in the 1950's and 1960's. Let's identify a funding source. How about a 10¢ gas increase? There! Wasn't that was simple.

No one wants simple solutions confused by thinking. For instance, a thinking person would realize that by 2025 it may be possible that 50% of the vehicles on the road are electric and that someone then might ask: "Why the heck are Californians not maintaining the roads at the level of the 1950's and 1960's? They aren't even doing it at the level of 2006." The thinking person might anticipate the answer: "Gas tax revenues have dropped 70% and the voters won't authorize a 40% tax on electricity to fund road maintenance."

You can take every simple tinkerers solution to a budget problem, add more complex long term thinking, and you will discover why the simple solution never works.

"Pay-as-you-go" is a tinkerers solution. The right solution would be to adopt the new or expanded program and allow future Legislatures to adopt by majority vote whatever taxes it would take to pay for the program if it is still needed. That way you won't have to tinker in 2025 to undo the damage done by tinkerers in 2010.

2. Base Budgets on Results. Require the Governor and lawmakers to set clear goals for programs, measure their results and effectiveness when making budget decisions, monitor performance to improve efficiency, and consider eliminating outdated and duplicative programs.

This is a "really good idea" that has been in vogue at least three times in the past 50 years within the halls of government, particularly at the federal level, using different buzzwords in one form or another. But there is one basic flaw in the idea. The process emphasizes effectiveness in achieving results without questioning the policy achieved.

For example, Performance Budgeting linked with a Planning, Programming, and Budgeting System (PPBS) is a perfectly engineered rational approach to a goal such as developing a fighter aircraft for the Air Force that Congress has authorized.

Successfully achieving the results - purchasing a high performance fighter aircraft that meets all goals - is not irrational within the concept of Performance Budgeting linked to PPBS. The policy decision regarding whether to develop the fighter aircraft at all was made in an irrational environment.

The fact that members of Congress are invested in keeping jobs in their states has nothing to do with the performance of the aircraft or the effectiveness of the budgeting process. Members of Congress want to get reelected by bringing and keeping jobs in their districts. The irrational environment is the voting constituency that sees the fighter aircraft policy decision in the context of the jobs, not in the context of defense needs. Those pesky irrational voters again.

If results were all that were needed, in the early 1900's the Legislature could have started an effective ongoing jobs program by each year buying large quantities of buggy made in California. We'd still have a significant buggy whip industry producing large quantities of quality buggy whips worth every taxpayer dollar. Measuring the results of a budget supporting a stupid policy doesn't in any way solve the problem of stupid policy decisions.

Remember. The verb "to tinker" means "to busy oneself with a thing without useful results." That thing can be results oriented budgeting.

3. Two-year budget. Require the Governor and Legislature to craft two-year budgets with midcourse correction authority, and provide long-term revenue forecasts and capital investment plans.

In the abstract, this sounds like good policy. But why two years? What is the real difference between that and what is happening now? The economy is so unpredictable that one cannot adequately project what will happen six months from now. In fact, in February 2009 the Legislature and the Governor approved a 15-month budget, but to make it work they had to submit complex measures to the voters reflecting compromises between ideological differences within the state. The voters vetoed that compromise budget by turning down all but one of the measures - predictably the one that cut legislator's pay.

4. One-Time Use of One-Time Revenues. Reduce future budget shortfalls by prohibiting the use of unexpected spikes in revenues to increase spending on programs that continue year after year.

What exactly is an "unexpected spike?" And does "to increase spending" on continuing programs mean covering an increase in the cost of programs? When the cost of gasoline "spikes," gas tax revenue "spikes" along with it. But the cost of fuel and materials used in the maintenance and construction of roads also spikes almost proportionately. Do we cut back the miles of highway maintained when gas tax revenues spike? That is just plain weird.

I'm sure someone could tinker with the language of the proposal so it would be less weird.

5. Reduce the Budget Vote Requirement. Reduce the likelihood of budget stalemates by changing the legislative vote requirement for state budget approval to a simple majority (to be adopted in conjunction with the plan’s other fiscal reforms, and while retaining the two-thirds majority vote requirement for tax increases).

Here's a case of "the devil is in the details." The proposal has two parts. First, we shift to a majority vote in the Legislature for budget approval. But then we retain the two-thirds-vote-in-each-house requirement for approval of any increases in taxes. This really is a California tinkerers' solution. Let the majority approve spending. Let the minority veto revenue increases to cover it.

But heck, as long as are just tinkering, addressing half the problem is fine and we Californian's have a love affair with our government spending money it doesn't have.

6. Provide Certainty Regarding Passage of Fees. Clarify the circumstances in which the Legislature and the Governor can impose fees without a two-thirds majority vote to those areas with a clear and justifiable nexus to the service provided.

This is really just to assure that a two-thirds vote in each house is required for approval of any fee increases that cannot dollar-for-dollar be tied to future spending. See 5 above.

The tinkerers in California Forward also have proposals to solve the problems of local government within the State. They head it "Government that’s Closer to the People." Here's a review of the three proposals.

1. Protect Local Revenue. Give communities more control over community-related services and prevent the state from siphoning off local revenue by giving local governments legal ownership of specific funds for community services.

Prior to Proposition 13, local government had control over property tax revenue. Each county, each city, and each special district, all governed by voter-selected representatives, had control over property taxes. In fact, the State had no role in allocating property tax revenues.

If the voters hadn't approved Proposition 13, local government still would have legal ownership of specific funds for community services. Of course, the California Forward letter offers no details. What funds are we talking about - property taxes? What does "more control" mean? Are we going to return to local government the power to set tax property rates?

2. Remove Barriers to Local Government Coordination. Encourage community-level governments to coordinate, consolidate districts when this makes sense, and give county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results.

This is an interesting two-parter that demonstrates the arrogance or ignorance of the members of California Forward, I'm not sure which.

The first part is "encourage community-level governments to coordinate, consolidate districts when this makes sense." Ok. But within every county in California is a Local Agency Formation Commission (LAFCO) formed to do exactly this under the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000 (Sections 56000 et seq. of the Government Code).

The Act, which was a derived from the the Knox-Nisbet Act of 1963 which created LAFCO's in each county, was combined with some other laws in 1985, and was subsequently updated and expanded into the Act of 2000.

In other words, these tinkerers are unhappy with the way the voters' elected representatives in the Legislature and on the 58 LAFCO's have tinkered with this apparently simple problem for 46 years. The California Forward folks have some significant insights that would solve the whole "inefficient district" problem, insight which they want to submit to the voters.

The second part shows even more ignorance about California local government. The proposal is to give "county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results." Counties are an administrative arm of the State. Though they are authorized to provide some local services based on local policy many political scientists argue that California counties aren't even local governments.

And counties throughout the State are starved for revenue to provide even the most basic of locally controlled services because of the demands of State mandates. Suddenly, your County Supervisor and his peers are going to be authorized to redistribute property tax revenue between the County, the cities, and special districts? How does that represent creating "Government that’s Closer to the People?"

Cities and special districts have locally elected city councils and locally elected boards of directors who are "closer to the people." The proposal would take from them control over what little revenue they have. The county is, in the end, obligated to spend most of its tax money on state mandated services many of which (welfare, for instance) are subject to federal requirements. I can hardly wait to hear how giving counties access to the money formerly controlled by cities and special districts is likely to bring government closer to the people.

3. Foster and Fund Long-Term Regional Collaboration. Allow cities, counties and school officials who craft long-term flexible plans to address community needs, to seek majority vote approval to provide funds to pay for them, while retaining the vote thresholds established under Proposition 218.

I don't even know what this means other than it appears to suggest that local taxes could be approved by less than a two-thirds vote required by Proposition 13 for special taxes if done through some regional collaboration. I guess the California Forward members think the voters made a mistake 30 years ago when they approved a two-thirds vote requirement for special taxes?

Let's move on to California Forward's next big area of insight - "Constituent Access and Accountability."

Apparently they have decided that the 80 Assembly members each representing about 460,000 people and the 40 Senate member each representing about 920,000 people aren't sufficiently accessible and accountable.

To put these legislative constituency numbers into perspective, the entire State of Wyoming has about 530,000 people which is only 15% larger than a California Assembly member's constituency. The Governor of the State of Alaska has a constituency of about 650,000 which is 30% smaller than the constituency of a California State Senator.

One might conclude, as I have, that California is too big to be a single state. But the tinkerers of California Forward have two proposals that would solve that problem.

1. Term Limit Reform. Reducing the total time newly-elected state legislators are allowed to serve from 14 years to 12 years, regardless of whether the time is spent in the Assembly or Senate.

The existing term limits approved by the voters in 1990 are among the most limited in the nation - six years in the Assembly and eight years in the Senate. The proposal would allow someone to serve in either house for 12 years, which is longer than the current provisions, or to serve in both houses for a total of 12 years which is shorter than the current provisions.

The only problem I see with this proposed tinkering (other than it won't solve any of the State's difficulties) is that it appears that an identical proposal was rejected by the voters in February 2008.

2. Constituent Access and Accountability. Requiring legislators to spend part of every year in their district, in consultation with constituents and local leaders.

It sounds like the proposal is to send the legislators home to mingle with their 920,000 (or 460,000) constituents for a defined period of time somehow forcing them to do what, exactly?

They all do go home now. They are politicians. They are always running for office. And because of that they are always seeking campaign funds from "local leaders," which is a euphemism for leaders of special interests in the legislator's district.

In fact, an Assembly member, if he or she were half-time as another group is proposing, could theoretically spend 15 minutes with about 4,000 "non-local-leader" constituents over the six months taken off. That's 0.4% of his or her constituency. And that's assuming "local leaders" don't get more than 30 minutes.

Achieving Consensus

After reading these recommendations, I wondered what was going on in the California Forward discussions. Then I read the end of the letter. It says: "We are eager to share with you the results of our efforts, the best thinking of many Californians, and the many options we explored in achieving consensus on this package."

Got it! The California Forward members also could not agree on any significant reform without running into the ideological divides that split California. So their best thinking, around which they could achieve consensus, are solutions that tinker with the Constitution a bit. They like the Legislature and other broad-based groups have run into the truth that California as one state can't be governed except in the most fumbling ways because of the size of, the divisions among, and the irresponsible selfishness of its citizenry.

In 2013 when (1) The Great California Slump ends and the economy starts to recover, (2) legislative districts are redrawn by an independent agency, and (3) legislators will be chosen in a process that includes open primaries (assuming the open primary measure is approved by the voters in 2010) then California State Government may appear less desperate. But the state will not really be governed more effectively. And more tinkering between now and then won't help.

There are really only two ways to make California "more governable": (1) adopt a completely new constitution limited to government structure with a bill of rights or (2) divide California into three states each with its own new constitution.

California's Constitution has been called the perfect example of what a constitution ought not to be. It is the third longest in the world. Tinkerer's initiatives have made it the basis for California's "ungovernability."

Jim Wunderman, head of the Bay Area Council, a year ago called for a complete overhaul of State Government in an op-ed piece in the San Francisco Chronicle. That has evolved into sponsored by the Council which proposes a Constitutional Convention to write a new constitution for the State. The idea has gained momentum with endorsements by most every major newspaper in California, including the L.A. Times which calls it "The Devil We Don't Know." If you enter the words "California constitutional convention" in a Google News search you can find hundreds of articles.

As every student of history knows, calling for a Constitutional Convention has significant risks, particularly in a society ideologically and ethnically divided. To "achieve consensus" on a system that works requires giving up on the economic and social interests of each group. If we do this, my recommendation is that at the beginning and end of that new Constitution the statement that "The voters get the government they deserve."

Three Californias

Another way to make California "more governable" is to divide the state into three states, more or less as proposed at which, though an unlikely option, makes the most sense if we are going to start over. California is clearly three states geographically, politically, and economically.

Whatever choice we Californians pick, the "reorganization" of the now bankrupt California won't accomplish much until the economy begins to recover 2013. When personal income and property values are depressed, no reform proposal will fix the unavailability of money.

It would be better if during the time between now and 2013 everyone stopped the tinkering. We have time to write a new Constitution free of goofy policy details and restoring representative goverment. We even have time to divide our state into three states.

Tuesday, August 11, 2009

How "Cash for Clunkers" could hide the imminent state budget disaster

California State Controller John Chiang Monday afternoon issued his monthly Statement of General Fund Receipts and Disbursements for July 2009. This Statement did not get much press today though, perhaps because it contained confusing and misleading information.

Despite some cautionary statements, Chiang couldn't help but comment:

While the State’s General Fund Revenue came in below last July, there are signs that California’s economy is feeling for the bottom.

Yeah right. California's most carefully conservative state official finally read the memo - "regardless of the numbers, give it an optimistic spin." Yes, the revenue numbers were higher then previous months compared to the prior year. But....

Chiang, who has been hypercritical of the budget process, carefully points out that as of April the legislature had raised the sales tax rate from 7.25% to 8.25% which is a 14% increase. He also notes that the last week in July was the great "Cash for Clunkers" sales marathon. What he didn't explain is that if you adjust for typical monthly changes, for the rate increase, and for the possibility that extra cars were sold in time to be reported, the sales tax revenue increase was in line with May and June declines between years.

He just had to place the July bump in sales tax revenue in some context by saying "any encouraging signs in the economy were virtually nonexistent six months ago" without adding "and July sales tax revenue number is also not an encouraging sign."

Chiang also noted that personal income tax revenue came in 11.5% lower than in July 2008. He didn't mention the increase in the personal income tax rates this year regarding which a caution appeared in the San Jose Mercury News Sunday:

Johanna Sweaney Salt, a certified public accountant with Kaufman, Schmid, Gray & Salt LLP in Claremont, recommends...workers who do not want to be stuck with an unexpected tax bill next year or one that is higher than anticipated should make sure their employers are withholding enough on their state income taxes. That's because the 0.25 percent personal income tax hike went into effect in the second quarter of 2009 but applies retroactively to January.

In other words, people have increased their withholding and quarterly estimates which is showing up in the 11.5% lower personal income tax revenue. So that revenue is also not an encouraging sign.

And even Chiang won't comment on Corporate Tax revenue changes because of the 20% underpayment penalty that went into effect last October. Corporations are probably overpaying their monthly and quarterly payments.

Chiang office indicated that it has not been able to compare the actual revenue to the revised budget approved just two weeks ago. In fact, his office is struggling with these numbers to determine if it can quit issuing IOU's (Registered Warrents) in payment of the State's bills. One thing is for certain, these numbers are going to be hard to use to project what will happen by October when I expect The Great California Slump to hit another "rough patch."

The real danger lies in the fact that the revised unbalanced General Fund budget may not get the attention it needs until the damage to the State is horrendous. Simply because the "Cash for Clunkers" program resulted in a General Fund revenue bubble for July, members of the Legislature may be further encouraged to ignore the problem "elephant in the room."

Thursday, August 6, 2009

Another gloomy job forecast for the Great California Slump

We Californians can expect that the state will have lost a significant number jobs during the period of July-September 2009, according to the latest analysis of Chapman University's Anderson Center for Economic Research. According to the Orange, California, university's press release issued today:

The third quarter’s California Index of Leading Employment Indicator is virtually unchanged from the second quarter reading of 73.4. This suggests that the pace of job losses in the third quarter should remain at about the same rate as the second quarter. This marks the fifth consecutive quarter that the index remained below 100 and an index value below 100 signals negative payroll job growth. The primary factors causing the index to hit a low reading of 72.1 are a sharp drop in California’s residential and nonresidential construction spending and continued decline in real GDP and export growth.

This forecast can be put in the pile of gloomy job loss forecasts including the UOP long term forecast reported below.