The Bare Bones Era - 2012: When a "balanced budget" isn't balanced

For those of us who remember the era of Governor Jerry "Moonbeam" Brown 1.0 when we thought the quality of governmental leadership in our State was at an all time low, yesterday set a new standard for low here in the Magic Kingdom.

The etymology of the word leadership tells us that it involves the "characteristics necessary to be a leader."

At one time a "leader" was differentiated from a "follower." Unfortunately, that no longer seems to be the case in California politics (and maybe politics across the U.S.).

It appears that somewhere between the middle of the 20th Century and the first decade of the 21st Century, we have developed a new approach to selecting those who hold elected office in our governmental systems. The term "leadership" is passé, or as the younger generation says, so yesterday.

Today we are offered "celebrityship," from celebrity + -ship which would involves the "characteristics necessary to be a celebrity." Wikipedia tells us that a celebrity "is a person who has a prominent profile and commands a great degree of public fascination and influence in day-to-day media." We also are told:

While people may gain celebrity status as a result of a successful career in a particular field (primarily in the areas pertaining towards sports and entertainment), in other cases, people become celebrities due to media attention for their extravagant lifestyle or wealth (as in the case of a socialite such as Kim Kardashian); for their connection to a famous person (as in the case of a relative of a famous person, such as Chaz Bono); or even for their misdeeds (as in the case of a well-known criminal such as Ronnie Biggs).

California has established that the best qualification for Governor is celebrity status. For instance, Arnold Schwarzenegger was a successful actor who had almost no experience in government at any level. When he first ran for Governor, Jerry Brown had little experience in government but was the son of a Governor.

Let me digress a minute to discuss "celebrityship" in 21st Century politics.

It is fairly clear that if you are competent as an elected officeholder, but lack the style and background to bring you to celebrity status, you won't get much press coverage.

When you're a celebrity the press will cover you because you're a celebrity. Thus, Donald Trump who has become a well-known celebrity because of his family wealth and television success has considered running for President and offers significant political celebrityship despite a background clearly described in Wikipedia (with footnotes) that might otherwise preclude him from being considered for elected public office:

Donald Trump is the son of Fred Trump, a wealthy New York City real-estate developer. He worked for his father's firm, Elizabeth Trump & Son, while attending the Wharton School of the University of Pennsylvania, and in 1968 officially joined the company. He was given control of the company in 1971 and renamed it The Trump Organization....

By 1989, the effects of the recession left Trump unable to meet loan payments. Trump financed the construction of his third casino, the $1 billion Taj Mahal, primarily with high-interest junk bonds. Although he shored up his businesses with additional loans and postponed interest payments, by 1991 increasing debt brought Trump to business bankruptcy and the brink of personal bankruptcy. Banks and bond holders had lost hundreds of millions of dollars, but opted to restructure his debt to avoid the risk of losing more money in court....

On November 2, 1992, the Trump Plaza Hotel was forced to file a prepackaged Chapter 11 bankruptcy protection plan after being unable to make its debt payments....

In January 2002, the Securities and Exchange Commission brought a financial-reporting case against Trump Hotels & Casino Resorts Inc., alleging that it had committed several "misleading statements in the company's third-quarter 1999 earnings release." The matter was settled with the defendant neither admitting nor denying the charge.

...On October 21, 2004, Trump Hotels & Casino Resorts announced a restructuring of its debt. The plan called for Trump's individual ownership to be reduced from 56 percent to 27 percent, with bondholders receiving stock in exchange for surrendering part of the debt. Since then, Trump Hotels has been forced to seek voluntary bankruptcy protection to stay afloat.

...On February 17, 2009 Trump Entertainment Resorts filed for Chapter 11 bankruptcy; Trump stating on February 13 that he would resign from the board. Trump Entertainment Resorts has three properties in Atlantic City. Trump's unsuccessful libel lawsuit against author Timothy L. O'Brien, for O'Brien's estimating his net worth at less than $250 million, was dismissed in 2009. In the lawsuit it was revealed that in 2005, Deutsche Bank valued Trump's net worth at $788 million, to which Trump objected.

People like Trump, a lot of people. They like to follow his activities. He offers celebrityship.

So does Governor Jerry "Moonbeam" Brown 2.0 who, as noted in these posts, gets "good press" and his "spin" on any subject receives coverage no matter how big an untruth it is.

And so yesterday, the Democratic majority in the California Legislature essentially adopted a budget for the fiscal year 2012-13, more or less the same Moonbeam 2.0 balanced budget proposal offered in May. The Democratic Legislative leaders called the adopted version a balanced budget.

Here's how you "balance" a State General Fund budget in California.

In the late fall of 2011, Moonbeam decided he was going to get the voters to approve a tax increase by putting an initiative on the ballot in November 2012. So he estimated how much of a shortfall the budget would have and came up with a plan which, at the time, he determined would "balance" the budget. Later, because he's a celebrity who needs his fans, he compromised with the California Teachers Association, and together they put forward a plan which will be on the ballot in November.

The Legislative Analyst and the Director of Finance are tasked with determining the financial impact of ballot measures in California. Here is what they say about the Moonbeam 2.0 - CTA measure:

Estimates of the revenue increases vary--for 2012-13, from $4.8 billion to $6.9 billion; for 2013-14 through 2015-16, from $5.5 billion to $6.9 billion on average each year; and for 2016-17, from $3.1 billion to $3.4 billion.

The budget as proposed and adopted includes $8 billion in revenue for the General Fund from the proposed tax measure, a law that may or may not be approved by the voters in November (at this point before the anti-tax forces start any attacks, the polls indicate that support for the measure has already dropped to nearly 50%).

The irony here isn't that this $8 billion in "wished for" revenue is included in the balanced General Fund budget. The irony is that it was obvious by late March that the General Fund deficit for 2012-13 was going to be $16± billion.

So that "wished for" $8 billion wasn't enough to balance the budget.

Regardless of the ballot measure, the budget assumptions include about $2 billion in capital gains taxes from Facebook's  IPO without reevaluation after it became obvious in the third week of May that it wasn't the huge success anticipated.

The budget contains $1.4 billion in property tax revenue from local redevelopment agencies that the Legislature abolished last year. No one knows how much money will actually be available. The Legislative Analyst says that number is too high.

The State Air Resources Board this fall plans to auction off cap-and-trade credits for carbon emissions. No one know how much money will be generated. The funds were to help with the State's renewable energy programs. But the balanced budget estimates that the auction will generate $1 billion and transfers half into the General Fund. No one knows if that is legal.

The General Fund budget includes $400 million from the national mortgage banking lawsuit settlement, monies that were to help troubled homeowners.

There are many other "revenue" gimmicks. The General Fund plan includes raiding transportation money and other special funds (i.e., child abuse prevention money from special license plates).

Then there's the expenditure side of the budget. It of course includes delaying payments on loans. It includes delaying funding for schools and other local agencies. It assumes wage cuts in the form of "furlough days" but the Legislature refused to adopt Legislation establishing those furlough days. It assumes significant reductions in persons needing public assistance and medical care even though California's employment situation since the beginning of The Great California Slump clearly shows little or no recovery (click on the graph to see a larger version):

Another irony is that most of the seats in the Legislature also are up for election in November.

Because the winners of our elections will be determined on their celebrityship skills, there will be no significant changes in the membership of the Legislature.

The final irony is that last year the Governor and Legislature simply threw $4 billion extra into "Revenue Not Otherwise Classified" hoping it would materialize, which it didn't. It was promised that if it didn't materialize, someone would spend $4 billion less, but they didn't.

Of course, we don't really want leadership anyway. Leadership this year came from Molly Munger and the California PTA in the form of a ballot measure providing money for education. They know that to keep the employment picture from permanently looking like the graph above, we need to educate and train our children for a 21st Century economy. But for their ballot measure to pass California's upper middle class (those families with incomes between $80,000 and $500,000) would need to overcome its self-involvement addiction and its fascination with celebrityship, with the Donald Trumps whose success comes at the expense of others.

That won't happen because plans providing for the future come from leadership not celebrityship. The last thing California's upper middle class wants is someone telling them to skip upgrading to the soon-to-be-released Chinese-made iPhone 5 and pay some extra taxes.

Moonbeam knows this which is why his inadequate tax measure might pass. Whatever good it might do it will do using the money of "the others," the so-called 1% and the working poor.

Californian's prefer the substance one can find in a moonbeam.

The Bare Bones Era - 2012: Once upon a time...

This coming Friday is the Constitutional deadline for the California Legislature to adopt a balanced budget. Democratic legislative leaders, Democratic Governor Jerry Brown, and their minions are making the final edits on the new fairy tale they'll call a balanced budget.

 Their creation would rival  Hans Christian Andersen's "The Emperor's New Clothes" which is simply the story of a vain Emperor who hires two tailors who promise him the finest suit of clothes from a fabric invisible to anyone unworthy of his position or otherwise hopelessly stupid. When the Emperor "dresses" in the new suit and parades before his subject, a child too young to understand the need to keep up pretenses blurts out the Emperor has no clothes.

Outside the State Capitol Building some people have been blurting out the fact that California's budgets have been unbalanced for years. But the rest of the folks, including those inside the Capitol Building as well as most California voters, keep up the pretense.

The latest to point out the naked obviousness of the California State Budget is the folks at the venerable Standard & Poor's (S&P) rating service. In a 12-page report released today Californian's can learn, but don't want to know, that:

...In our view, whether the state has had a genuinely balanced budget at any point in the past decade or more is debatable. But despite California's recurring budget problems being the subject of considerable news and analytic coverage, we believe their origins are not well understood.

A complex maze of constitutional and statutory provisions governing California's budget process seems to contribute to misconceptions about the state's finances, in our view. Some observers blame the state's fiscal morass on over-spending, large pension and retirement liabilities, or an excessive tax burden, which theoretically could weaken its economic climate. Whether the state's handling of these areas is appropriate public policy is different from the question of whether the state's approach in these areas contributed to its current fiscal position. ...In our view, retirement liabilities have contributed little if anything to California's current budget problems. Spending and taxes relative to the state's economy also do not appear to be causing the recent fiscal imbalance when viewed over the past several decades. Instead, we find that revenue generated by the state's tax system has been growing at a slower rate in recent decades while becoming more volatile. During the same years, the general fund has become the source of payment for an increasing share of the state's educational system as a result of a variety of direct and indirect changes in state law. In our view, it is mostly through these expansions of the general fund's scope of funding responsibility, which we consider particularly inflexible, that spending has contributed to fiscal imbalance....

Those words come from an organization that has no ideological agenda. To summarize, they say that the problem we have with our budget has nothing to do with spending or taxing too much, or from public employee pensions. They explain:

...Total tax revenues generated by the state's tax regime are volatile and insufficient for its current level of spending. But we don't see the state's existing spending level as the key source of its budget distress. In fact, the state is currently spending less as a share of its economy than it has at any point in the past 39 years.

Instead, they tell us that the problem is our tax structure:

...We can infer from these data that in 2010, when the PIT accounted for 51.5% of total general fund revenue, the state relied on the top 1% of taxpayers for 11% of general fund revenues. In 1979, the top 1.05% of taxpayers funded just 2.7% of general fund revenue.

The governor's revised budget proposal for fiscal year 2013 would rely on PIT for 63% of total general fund revenue. Applying the recent income distribution rates would imply that the portion of total general fund revenue from the top 1% of income earners would increase in fiscal 2013 to 13% or more. Sales and use tax, as a source of revenue, has moved in the other direction: it would equal 22% of general fund revenues in fiscal year 2013 (assuming the one-fourth cent SUT increase sought by the governor), down from 38% in 1979.

In great detail they provide a historical analysis offering without judgement data that reflects the fact that it was in 1978 California's voters took charge of the State's finances by approving Proposition 13. Their comment quoted earlier that "the general fund has become the source of payment for an increasing share of the state's educational system" which has "has contributed to fiscal imbalance" reflects, of course, the fact that the voters decided to commit general fund revenues to education through several propositions.

In other words, the people who have incurred incredible amounts of credit card debt buying consumer goods, who bought houses that were overpriced and which they couldn't afford, and who elect legislators and governors who cater to their prejudices really have no idea how to manage the finances of the State of California, home to one of the world's largest economies.

Being aware of the fact that the fairytale budget now being written will depend upon the voters approving a tax initiative measure proposed by the Governor and a teachers union, the S&P writers note:

The governor's tax initiative would temporarily increase income tax rates on the state's high-income earners and would raise the statewide SUT by one-fourth of a cent. Most of the projected revenue increase (93%) would come from the higher income taxes. By boosting total tax revenues, the governor's initiative would alleviate to some degree the budget pressure from the slowing revenue growth. On the other hand, by relying on high-income earners that generate a greater share of their overall income from capital gains, the tax initiative would likely exaggerate the volatility of the state's revenue base. To the extent policymakers used any breathing space afforded by the additional temporary revenue to pursue structural tax reforms, we think the tax initiative could ultimately be beneficial to the state's credit quality. If no reforms were undertaken during this period, the underlying deficit would presumably reemerge once the temporary tax rates expire. Under this scenario, we believe any general fund relief derived from the temporary tax increase could wind up being a missed opportunity.

This is, of course, a polite way of saying that the voters and their legislators are about to make things worse because they won't overhaul the tax system to impose a greater share of the burden on the middle class, particularly the upper middle class, using a stable source of tax revenue, ...like say, oh, I don't know,... property taxes maybe?

Instead, the vast majority of California's voters generally want to tax someone other than themselves, such as the now almost mythical wealthy 1% which in California means all those high tech billionaires.

Economic benefits from the high-technology sector also appear to us to come at the cost of strikingly higher revenue volatility, which coincided with the dot-com boom in the late 1990s. That period, followed by bubble conditions in the housing market, led to a surge of capital gains as a share of income in the state. Windfall revenues from surging capital gains income are unpredictable, but as the state has lurched from one budget crisis to the next, lawmakers have typically spent these gains on recurring expenses. Income tax revenue from capital gains as a share of general fund revenues ranged from 3.0% to 14.8% between 2000 and 2010. In his revised budget proposal, the governor reduced the forecast for capital gains income and assumes essentially no growth in the equity markets for the duration of the calendar year. Although the tempered outlook could make the new revenue forecast more accurate, compared with earlier forecasts, it now includes additional revenue assumed from the recent Facebook initial public offering (IPO). The Facebook-related revenue in the forecast boosts state revenues by $1.5 billion to $1.9 billion, contingent on the outcome of the November 2012 tax initiative. But this revenue is also subject to capital market uncertainties. While setting aside any such revenue in a reserve may comport with a theoretical best practice, we believe that the politics of doing so might be impractical if it required spending cuts beyond those already deemed severe by policymakers. On balance, California's software and biotechnology fields attract significant investment, including, for the fourth year in a row, more venture capital investment than all other states combined. Therefore, we believe the high-technology sector benefits the state's long-term credit quality, but the greater reliance on high-income earners that it brings exposes the general fund to the vagaries of the capital markets.

In other words, funding government using taxes depending upon year-to-year swings in profits made in capital markets is foolish. And what they observe is:

Apart from a resurgent economic-driven change, we believe that the only realistic near-term potential for increased tax revenues under consideration is the governor's tax initiative, which would exaggerate the state's revenue reliance on a portion of the taxpayer base we already consider concentrated.

This is, after all, California where we have Governor Moonbeam and the Democratic Legislature about to publish a fairytale and have the voters help them keep up the pretense of a balanced budget.

In the meantime, the ideological opposition is telling voters solve the budget problems by reducing pensions. The S&P writers note:

The state's pension liabilities, while large, contribute little if anything to its current budget predicament.

We are, after all, the home of the Magic Kingdom and vote as if we live in Fantasyland. And so our story for 2012 begins: "Once upon a time...."

The Bare Bones Era - 2012: Tech giveth and tech taketh away

Last week's Facebook IPO was a bit of a flop, disappointing those in our State government who had hoped for huge taxable profits.

This week's headlines reflect the long-term impact of California's child-like dependency on new bright shiny objects designed in the Bay Area and Silicon Valley - Hewlett-Packard to Cut 27,000 Jobs.

Jerry "Moonbeam" Brown's opponent in the California 2010 Gubernatorial election was Meg "Teletubby" Whitman, the former CEO of eBay, whose success at that dot-com company was built on making bad acquisitions of other companies and outsourcing labor (for more details see the July 2010 post Governor Moonbeam or The Overpaid Corporate Bigwig).

After losing to Governor Moonbeam who took office in January 2011, that same month Whitman joined the HP Board of Directors and in September was appointed CEO. The HP Board had publicly renounced the prior decade of of acquisitions and layoffs that seemed to have led to long-term failure. Instead the Board emphasized focus on investment and innovation. So Whitman was the logical choice since her success at eBay was built on making bad acquisitions and outsourcing labor....
Eight months after assuming the position of CEO, at this week's quarterly earnings call Whitman offered assurances about innovation and investments, and oh but right now HP needs to layoff 8% of its workforce or 27,000 people. To put that layoff number in perspective, that's just 12,000 more people than eBay employed at the end of Whitman's tenure there, so she's obviously gained in stature being able to fire that many people.

She explained that HP would be taking $3.5 billion in charges against earnings over two tax years to provide severance and early retirement packages for some folks being laid off. That means it will be at least three years before the layoffs might generate a dime for new investment and innovation.

One needs to be aware of this from the Silicon Valley Mercury News story:

HP has taken an ax to its workforce on several other occasions in recent years. In June 2010, it announced it was cutting about 9,000 positions "over a multiyear period to reinvest for future growth." Two years earlier, it disclosed a "restructuring program" to eliminate 24,600 employees over three years. And in 2005, it said it was cutting 14,500 workers over the next year and a half.

In a note to its clients this week, Deutsche Bank analysts said past layoffs "have done little to improve HP's competitive position or reduce its reliance on declining or troubled businesses." And despite HP's assertion that the latest cuts will enable the company to reinvest in other key market areas, Deutsche Bank questioned that rationale because the company "has been restructuring for the past decade."

Don't get confused. The issue here is not what HP needs to do.  The issue here is California tax revenue, specifically personal income taxes and corporation taxes.

Governor Moonbeam and his Legislature were hoping for big income tax revenues from a tech company one time IPO to somehow save the State.

What they were doing is committing malfeasance. Perhaps too many of them learned math in California schools. This graph reflects the truth about California's tech industry:

As was explained about this graph in the February 2011 post Lies big and small: Why California will fail to fix Brown 1.0's mess:

This "M-curve" is typical for employment changes associated with new technology. Jumps in employment are followed by a drop, followed by another spike, followed by a drop. There are things we know about this from experience in the latter quarter of the 20th Century and the first decade of the 21st Century.

One of those things we know is that being in the center of technology innovation does not give the Bay Area and San Jose a permanent increase in jobs, it just keeps employment steady.

We know that American manufacturing employment in the computer industry is actually lower than it was immediately prior to beginning of assembly of the first PC, the MITS Altair 2800, in 1975. We know that about 1.5 million workers - factory employees, engineers, and managers - work in computer manufacturing in Asia. These things are facts. They shouldn't surprise us. It is disturbing that political leaders lie about it.

Perspective - the big picture view - is essential to managing the State of California's finances. The fact is that the fiscal health of the State depends entirely on taxable personal income of Californian's and how much of that income they spend purchasing merchandise subject to state and local sales taxes.

In the last fiscal year before politicians started to panic over The Great California Slump, 2006-07, personal income and sales taxes brought in 72% of all State revenue which was typical for the prior five years.

Corporation taxes, the next highest single revenue source, brought in only 9% of the total State revenue. In the State known for its motor vehicle traffic, Gas Taxes bring in about 3% of total State revenue and Vehicle License Fees another 2.5%.

In that year, one-third of all State revenues, about $41 billion, went to support local public schools (K-14), augmented by about $20 billion in local property taxes.

Also in that year,  about 5% of all State revenues, about $6.2 billion supported the two California university systems.

Don't get lost in all these numbers. The simple fact is that 70%-75% of all state revenue comes from Californian's paying income and sales tax. And about 45%-50% of those monies are used to support public education, preschool through graduate school.

When the total personal income of Californian's drop, we have a problem funding public education. In 2008, taxable personal income fell about 9% from the year before and the taxes due on it fell 18%.  Compared to 2006-07, by 2010-11 taxable sales had fallen 11%.

If we had responsible leaders in our State government, tax revenue from a one-time corporation IPO would not be a factor in budgeting. What would be a factor is employment numbers. That's all that matters in California.

That great economic miracle, Facebook, launched in 2004 now has about 3,200 employees and some in California's tech sector.

Over the last decade, in the process of acquiring 59 companies HP has announced job cuts totaling 120,000 some in the California Tech Sector. Right now HP's workforce is about 350,000 with 54,500 in the U.S. including about 16,000 in California.

While exact numbers are not publicly available, it is likely that while Facebook, one of our wow-isn't-this-an-economic-dynamo tech companies, was hiring 3,000 people, HP, one of our former wow-isn't-this-an-economic-dynamo tech companies, likely laid off 5,000 Californians.

Yeah, sure, there will be some income tax revenue from the Facebook IPO in the next year. At the same time, income tax revenue from employment plus sales tax revenue will remain stagnant or even decline, in constant dollars.

Since 1990, the tech sector - with the help of California's Democratic Party politicians - defrauded Californian's into thinking tech was going to be the source of stable job growth and therefore stable tax revenue growth. In fact, it is as unstable as the construction and the film industries, and maybe even as seasonal as agriculture. But those politicians raised long-term spending commitments in years when one-time extra revenues came in.

For government and schools in California, how Moonbeam and the Legislature handle the 2012-13 Budget will be critical. Honest leadership requires forcing Californian's to face up to the fact that taxes on personal income and sales cannot sustain the current General Fund expenditure levels, even with Brown's tax-the-rich-and-the-poor scheme. The Great California Slump will continue.

In February 2011, the truth about our situation was stated clearly and honestly to President Obama by one person who understood how the tech sector really works:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. "Those jobs aren’t coming back," he said....

The future of California's middle class cannot be found in venture capital used to create new technologies. As the New York Times article describing the exchange between Obama and Jobs noted:

The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that "Made in the U.S.A." is no longer a viable option for most Apple products.

At some point in the future, there won't even be jobs flipping burgers at MacDonald's or restocking socks at Walmart because there won't be enough working Californian's who can afford to buy them. We need to educate and train our children for a 21st Century economy.

Californian's need to recognize the leadership offered by Molly Munger and pass her tax initiative measure designed specifically to achieve that goal. That would, of course, require California's upper middle class (those families with incomes between $80,000 and $500,000) to overcome its self-involvement addiction. Governor Moonbeam knows that won't happen because he doesn't want to take the political risk of providing honest leadership.

The Bare Bones Era 2012: California School Boards Association caves to political playground bullies. Or were they just greedy and ignorant?

This past Sunday, the California School Boards Association posted a news release on their web site:

  In an unprecedented move, the Delegate Assembly, the governing body of the California School Boards Association (CSBA), voted today to endorse both of the revenue initiatives that will appear on the November ballot to help fund public schools and other needed statewide services.  The Delegate Assembly, CSBA’s primary policy-making body and the foundation of the organization’s governance structure, consists of nearly 300 locally-elected board members from 21 regions across the state.

    "With the release of the May Revision, it’s clear that school-age children stand to lose significantly without new revenue.  The school funding crisis is at historic proportions," explained Jill Wynns, president of CSBA.  “Public schools have sustained more than $20 billion dollars in revenue reductions and deferrals since 2008...."

 This endorsement is unique. "CSBA is the only statewide educational association to endorse both initiatives.  While each initiative presents a different funding scenario for our schools, the bottom line is that both will generate billions of dollars in much-needed revenue for public education," said Vernon M. Billy, CSBA executive director.  He added, "The initiatives are stop-gap measures that minimize the hemorrhaging.  Ultimately, we need the Legislature to commit to sustained adequate yearly funding."  According to Billy, CSBA opted for the dual endorsement because schools desperately need funding.  Yet, he and the CSBA leadership want to make it clear to the public that the governor’s initiative does not provide new funding for schools.  Instead, it bolsters the General Fund with new revenue...

One of the two ballot measures the CSBA decided to endorse is the one sponsored by Governor Jerry Brown  and the California Teachers Association, the State's powerful teacher's union that strongly dominates the California Democratic Party.

As the news release makes clear far down the page, well below the level that short-attention-span news organizations will notice, "the governor’s initiative does not provide new funding for schools.  Instead, it bolsters the General Fund with new revenue."

What the news release does not make clear is that the other measure, which is not described nor mentioned by any descriptive name, does provide new funding directly to schools, bypassing the Legislature and the Governor, to be managed by local school boards. That other measure drafted by Molly Munger and supported by the California PTA has been discussed in this blog many times before.

One would think that strongly backing the Munger-California PTA measure would be a "no brainer" for the CSBA. It provides monies for the locally-elected school board members to use to improve California's economic future by educating California's children for a 21st Century economy.  It is not a "stop-gap measure" like the Brown-CTA measure.

The Brown-CTA measure would put about $5 billion a year for five years into the State General Fund. Going into the new fiscal year beginning July 1, the General Fund is facing a $16 billion deficit. How the $5 billion will be spent will be completely controlled by the Legislature, subject only to vetoes by the Governor. Every indication is that the funds will be thinly spread around to many priorities, perhaps including education or perhaps not.

In contrast, the Munger-California PTA measure would for 11 years direct about $11 billion or more a year from a tax increase to education costs.

For the first four years 60% of revenues go to K-12 schools on a per pupil basis, 30% to repaying school bond debt, and 10% to early childhood. Thereafter, it directs 85% of revenues to K-12 schools on a per-pupil basis, 15% to early childhood programs.

The funds are subject to local school board control, audits, and public input. The measure specifically prohibits the state from directing or using new funds.

One might suppose that the California School Board Association members just simply decided they would like both measures to pass thinking that $17 billion in new revenue would be available. But that would mean that nobody in charge at the California School Board Association can read. The Brown-CTA measure states:

In the event that this measure and another measure that imposes an incremental increase in the tax rates for personal income shall appear on the same statewide ballot, the provisions of the other measure or measures shall be deemed to be in conflict with this measure. In the event that this measure receives a greater number of affirmative votes than a measure deemed to be in conflict with it, the provisions of this measure shall prevail in their entirety, and the other measure or measures shall be null and void.

The Munger-California PTA measures states:

In the event that this measure and another measure or measures amending the California personal income tax rate for any taxpayer or group of taxpayers, or amending the rate of tax imposed on retailers for the privilege of selling tangible personal property at retail, or amending the rate of excise tax imposed on the storage, use or other consumption in this state of tangible personal property purchased from any retailer for storage, use or other consumption in this state, shall appear on the same statewide election ballot, the rate-amending provisions of the other measure or measures and all provisions of that measure that are funded by its rate-amending provisions, shall be deemed to be in conflict with this measure. In the event that this measure receives a greater number of affirmative votes than any such other measure, the rate-amending provisions of the other measure, and all provisions of that measure that are funded by its rate - amending provisions, shall be null and void, and the provisions of this measure shall prevail instead.

In other words, both measures contain the standard language found in most initiatives that creates a "most-votes-take-all" approach. Only one measure can prevail.

So the California School Board Association considered a measure that puts about $5 billion of new revenue into the General Fund which has a deficit of $16 billion, monies to be managed by the Legislature. And it considered a measure that collects about $11 billion in new revenue and distributes it to the the California School Board Association member districts to be managed by the school boards in California.

After careful consideration, they decided to not endorse anything by endorsing them both. Who makes that kind of decision?

It's difficult not to believe that the pressure from Jerry Brown and the California Teachers Association - the California political playground bullies - prevented the CSBA from doing the logical thing which would have been to support the Munger-California PTA measure. No real upside exists for the member school boards to have the Brown-Teacher's Union measure prevail.

The CSBA is a group of school board members we Californian's have elected. We Californian's deserve the crappy government we get.

The Bare Bones Era - 2012: Brown's Budget - Is the sky really falling?

The headlines are flying today as Governor Jerry "Moonbeam" Brown announced the May version of his ideas about a 2012-13 Budget. Most seem to imply the sky is falling.

It is almost impossible to compare Moonbeam's budget proposal to past years because of his "realignment" of revenues and expenditures, such as shifting prisoners to counties. It is almost impossible, but not quite impossible.

And if one attempts to see how Moonbeam's proposal compares to actual revenues and expenditures in 2002-03 - ten years ago - it is even a little more complicated.

Nonetheless, it is possible to compare his proposal to 2002-03 after:

1. adjusting for "realignment" of responsibilities to counties,
2. adjusting for the additional costs for voter authorized bond issues since 2002-03,
3. adjusting for the elimination of a substantial annual property tax relief expenditure beginning in 2003-04,
4. adjusting for the unscrupulous credit taken against CalPERS earnings, and 
5. adjusting for population growth plus the cost of living index.

What one finds is that Moonbeam's January 2012-13 General Fund Budget revenue projection was $12± billion higher than one might reasonably expect would result from "normal" budget growth based on population and CPI increases compared to 10 years ago.

His new May budget proposal revenue is $9.5± billion higher. And if one deducts the revenue from his proposed tax increase, then his revenue projection is "only" $4± billion higher than one might expect compared to 10 years ago.

Don't misunderstand the situation. Our State and local government finances are in a mess. But it is a cumulative problem we have created which can only be fixed by radically restructuring our State government. We're never going to do that.

And it is essential that the voters pass Molly Munger's California PTA backed initiative to fund education, with the funding bypassing the Legislature and the Governor. But that opinion has to do with building an economic future for California's children.

Nonetheless, don't accept Brown's explanation:

"I said at the beginning when I ran for this job that it has taken a long time, more than a decade, to get into this mess. We're not going to get out of it in a year -- or even two years. But we're getting there. We're making real progress," Brown told reporters in releasing his updated budget.

Yeah, more than a decade. How about we started getting into this mess with Brown's failures in his first two terms and he's not making "real progress" now.

The Bare Bones Era - 2012: Brown admits a deficit of $16 billion

A little before noon today these headlines appeared California deficit has soared to $16 billion, Gov. Jerry Brown says and Brown: California facing $16 billion shortfall. A little after noon, The Sacramento Bee offered this headline Gov. Jerry Brown: State budget deficit now $16 billion - double January estimate.

Apparently this week Governor Jerry "Moonbeam" Brown "discovered" some "unanticipated" problems with the 2011-12 adopted General Fund Budget and his January proposed General Fund Budget for 2012-13. Thus the press dutifully reports:

California's budget deficit has grown to a projected $16 billion and the state will have to make severe cuts to schools and public safety if voters reject tax hikes in November, Gov. Jerry Brown announced Saturday.

The Democratic governor said the state's shortfall grew from $9.2 billion in January because tax collections have not come in as high and the economy isn't ramping up as fast as the administration had hoped. The deficit has also gone up because billions of dollars in state cuts have been blocked by lawsuits and federal requirements.

"This means we will have to go much farther and make cuts far greater than I asked for at the beginning of the year," Brown said. "But we can't fill this hole with cuts alone without doing severe damage to our schools. That's why I'm bypassing the gridlock and asking you, the people of California, to approve a plan that avoids cuts to schools and public safety."

For his constituency which has a short attention span, Brown spins this in a less-than-3-minute   YouTube video late in a Saturday morning and the press dutifully reports it without comment. You have to admire how he controls the news cycle. No details, just a "golly folks, it seems a problem has mysteriously developed."

In fact, it was a problem built into the 2011-12 adopted budget. As noted here on June 29, 2011:

...It's a budget predicated on significant revenue growth. In the first seven months of the current fiscal year, 2010-11, the total of Corporate, Personal Income, and Sales Taxes exceeded 2009-10 by 12.16%. Based on that surprising news, every budget proposal discussion since February has assumed continuation of the growth.

The problem is February through May the 2010-11 total was the same as 2009-10. If February - May is indicative of a trend, the adopted budget will be $10-$12 billion short on revenue without even considering the gimmicks that may not work because they are illegal.

And as pointed out here February 11 "what is clear is that Moonbeam's Administration has no idea what's going on."

Finally, as noted here Tuesday "the actual revenue shortage two months from now can be estimated to a range that is, itself, nearly 5% to 10% of the annual budget." We can't offer a better estimate because of how poorly California's uninformed, incompetent voters have structured the State's tax revenue.

Whatever Moonbeam proposes for 2012-13 in the next week will be based on guesses about revenues and expenditures, that together predict an ending balance that easily could be off by 15% or more.

In May 2009 I noted here:

In Grapes of Wrath, John Steinbeck told a story about how folks migrated to California to find hope within The Great Depression. We are now in what Time Magazine calls "The Great Recession" but California is not going to be a place to find economic hope.

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available.

In January 2011, Moonbeam said the description of State's financial situation was "so horrible that we don't want to release it." And so he didn't, instead proposing a foolish budget to a foolish Legislature for a foolish population. At that time I said:

Is it horrible? Depends on our perspective, I guess. If one increases the amount disbursed from the General Fund in 1990-91 by the increase in population and cost-of-living since then, we should be disbursing $80± billion from the General Fund 2011-12. Brown's budget, which uses all kinds of gimmicks, is $7 billion higher than that.

An honest budget from Brown would have told Californian's the truth - we need to cut education and safety net General Fund support by 50% from 2007-08 levels. The immediate cause is that our economy crashed. We are in The Great California Slump.

But the underlying reason our government is in that position is that since 1978 we've relied on taxes that are too sensitive to the economy - sales, income, and corporate taxes.

When we gave up a huge chunk of our property tax revenue, we made our schools and government too dependent on economic cycles. In a recession we may buy less at Wal Mart because our income dropped 25%, but we don't pull one of our four kids out of school because the school's income dropped 25%.

In 2007-08 the State disbursed from the General fund $107.3 billion with only $103.4 billion in receipts coming in. In January, Moonbeam submitted a General Fund Budget proposing to disburse $92.947 billion. But these aren't "apples-to-apples" comparisons as $6 to $8 billion has been "realigned" meaning costs and some revenues have been shifted to counties, the most infamous of which has been to move prisoners from prisons to county jails.

An honest statement is that in January Brown proposed for 2012-13 to disburse $92.947 billion, or 93% of 2007-08 disbursements after factoring in the realignment. He should have proposed for 2012-13 to disburse no more than $83.7 billion or 86% of 2007-08 disbursements after factoring in the realignment. He proposed to disburse $9.2 billion too much.

Compounding his problem is the fact that at the end of the 2011-12 Fiscal Year, it appears that there will be some deficit carry-over from 2011-12 plus the General Fund owes schools and local governments monies that were "borrowed" in the past three years to be repaid in the future.

Moonbeam says this all combines to $16 billion due in 2012-13 that we don't have. Apparently the the description of the State's financial situation that in January 2011 was "so horrible that we don't want to release it" is still as horrible, but rather than honestly confront it 18 months ago, he now intends to confront it when it will cause more real damage in the long term.

Oh, and by the way, in his YouTube announcement today he reminds you to support his tax increase ballot measure which will soften this $16 billion problem by between $4.8 billion to $6.9 billion by taxing the working poor and the well-off-to-very-wealthy.

The only problem facing Moonbeam's Finance Department in attempting to predict tax revenues in the next two years is just how to predict how much income tax from capital gains will result from the Facebook IPO. It may not be quite as much tax revenue as one would expect. We recently learned:

Eduardo Saverin, the billionaire co-founder of Facebook, renounced his U.S. citizenship before an initial public offering that values the social network in upward of $90 billion, a move that may reduce his tax bill.

...Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in this country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world's largest social network holds its IPO.

Of course, California needs to quit taxing these folks so high if we want California's economy to recover. As I noted in March when pointing out that Moonbeam's popular tax-the-rich-and-poor tax measure is bad policy compared to Molly Munger's measure:

The difference between the measures is one appeals to the idea that we can simply tax the rich to solve our problems, an idea that has a strong emotional appeal right now. Many want to ignore the idea that there is a limit on how much California can attempt to tax the so-called wealthy "1%". The simple fact is that companies can move their "headquarters" out of California. And if their executives and major investors move their "primary" residences out of California (keeping both the Carmel "beach bungalow" and the Tahoe "cabin", of course), those taxable profits from future high tech IPO's would leave California also.

It is dangerous when a politician like Brown chooses to compromise with those selling the emotions of class warfare. He could have backed Munger's measure as does the California PTA.

It will be interesting and likely disturbing to see how much damage to California Moonbeam 2.0 and his allies can do to further the damage Moonbeam 1.0 did in his first two terms.

Californian's could, of course, vote to approve Munger's measure backed by the California PTA.

It would generate $10 billion to $11 billion per fiscal year beginning in 2013-14, monies that would go to local school boards instead of the Legislature. It is the one tax increase measure now circulating specifically aimed at improving California's economic future by educating California's children for a 21st Century economy.

Californian's could vote to approve it instead of Moonbeam's measure. But they probably won't because they seem to like Moonbeam even though he regularly lies to them.

The Bare Bones Era - 2012: Reality Lost in California Political Spin

State Controller John Chiang has released General Fund cash flow figures for the 2011-12 Fiscal Year through April. That leaves just two months remaining to estimate what actual cash revenue may come in during this fiscal year. So in the spirit of wishing to help the apparent helpless, let me offer the following estimates to State Officials:

This is pretty straightforward as we only have to estimate two more months.

Compared to the 2011-12 Adopted Budget, General Fund cash revenue will be between $3.1 and $7.1 billion less.

Compared to Jerry Brown's January Estimate, General Fund cash revenue in will be between $4.3 and $8.3 billion less.

In other words, the actual revenue shortage two months from now can be estimated to a range that is, itself, nearly 5% to 10% of the annual budget.

As noted in the previous post, experts are telling us to shift to a two year budget cycle. Comparing the known margin of error committed by Brown's Department of Finance, it appears that by using a two-year budget cycle instead of revenue estimates for the adopted budget being off by 6%, they'll likely be off by 11%.

Many involved in budgeting were taught to use the most conservative estimate for revenue and then budget disbursements accordingly.  They would find the April 2012 situation ... odd? Through April this fiscal year cash disbursements have exceeded cash revenue by $14.6 billion. Of course, last year at this time cash disbursements had exceeded cash revenue by $9.8 billion. Somehow they made it work by the end of the fiscal year. So it's all good, right?

Governor Brown is out selling his initiative to increase taxes on the poorest workers and the richest among us. The official title and summary indicates it would generate in 2012-13 between $4.8 billion to $6.9 billion. Looking at the April cash numbers, doesn't seem like enough money to avoid further significant cuts in the budget. But Brown has convinced many union members - teachers, nurses, state employees - that it is enough to avoid major cuts. So it's all good, right?

 Even though voters have demanded the Legislature adopt a balanced budget by June 15, we know they won't even talk much about it until after the June 5 primary election. We know what they will adopt will be balanced like last year by using "overly optimistic" projected revenues and, unlike last year, assume voter approval of Brown's proposed tax increase on the poorest workers and the richest among us.

If, by next January, that political spin hasn't worked out, the November General Election will be behind us and the next one will be nearly two years off. So if need be, we can lay off large numbers of teachers, nurses, and state employees.

The Bare Bones Era - 2012: Cult gurus and delusional constituencies

It is May 2012. Theoretically the Legislature must adopt a balanced budget by June 15. So where are we in this process?

In January the greatly-admired California guru, Governor Jerry "Moonbeam" Brown, offered a budget that was based on wildly inflated revenue projections for the remainder of fiscal year 2011-12 and the new fiscal year 2012-13. It didn't matter as he will offer a revised budget this month, except....

Governor Moonbeam is selling a tax initiative measure that might do certain things if those projections were correct. Teachers and other unions have withdrawn their own proposals based on political promises made, promises made that could have only been kept in the best of circumstances.

Right now polls show that a majority would approve Moonbeam's initiative. But no one has really challenged his numbers and the public is delusional enough to believe that extra taxes on the rich for five years will solve all of California's State Budget problems.

If Moonbeam's measure passes, using his January revenue projections for the rest of this fiscal year and next fiscal year, it appears that by the end of June 2013 the cumulative revenue shortage will range between $8.8 billion and $25.9 billion. Yes, the shortage could be less than the $8.8 billion if wealthy Californians earn a lot more taxable income in the next 15 months than they did in the last 15 months. It's possible. But it would have to be a lot more.

If the Legislature decides to use his revenue projections and his measure passes and the wealthy don't make a lot more, then at best only $8 billion will have to be cut from schools, welfare, and public safety.

Moonbeam is the guru for one cult - California's Democratic Party. The other cult - California's Republican Party - is without a single guru, but instead is led by California Republican Party Chairman Tom Del Beccaro, Senate Republican leader Bob Huff and Assembly Republican leader Connie Conway who are on a statewide campaign tour opposing Moonbeam's tax measure.

In the midst of all this is California Forward, an organization that has started submitting signatures on an initiative that would "reform" California's budget process by first requiring a two year budget. The fact that in January 2012 the Governor couldn't accurately project revenues through June 2012 says all you need to know about the measure. Nicolas Berggruen, a billionaire investor and California Forward's guru, has pledged to spend $20 million to "reform" California government.

And, of course, there is Molly Munger's measure backed by the California PTA described here as"the one tax increase measure now circulating specifically aimed at improving California's economic future by educating California's children for a 21st Century economy."

It has no chance with the voters, according to all the pundits who laud Munger's initiative, one of whom said it "makes more public policy sense than Brown's. It just makes less sense politically." It makes less sense politically because even though it funds schools while moving control of the funds to the local school boards, it does so by providing fairly reliable revenue in the form of taxes on the working upper-middle class (as well as the rich), the only place reliable revenue can come from. Good lord, who'd want to actually pay for educating our kids?

In the meantime, there is absolutely no chance anything significant will happen with the State Budget before the June 5 primary.

Perhaps the Legislature can adopt a budget by the fictional June 15 deadline, 10 days after the primary. They'll adopt something they call "balanced." Like last year, it will be based on wildly inflated revenue projections including the assumption Moonbeam's measure will pass. It will not force further budget reductions which would affect teachers, nurses, and other public employee union members nor programs for the disabled or senior citizens. Instead, "triggers" will be built in to cut those programs if Moonbeam's initiative measure fails to pass (note, the triggers will not deal with the fact that revenue will be significantly short if the measure does pass).

We'll have to deal with all that after December 21, 2012, after the Mayan Calendar "ends", when some cults (other than the two main political parties in California) believe the world will end....

What's the purpose of an economy? A 2012 reminder what "a recovery" means in the lives of real people.

In October 2009 post here, a question was raised was: "What's the purpose of an economy?"

As I review headlines in the news media, it's obvious that the typical reporter covering the economy doesn't ask that question. And as I read the headlines in the news media, it's obvious that California's politicians don't ask that question.

To review, in that post I offered two different perspectives on the "purpose" of an economy. The first perspective is that of most 21st Century economists and international corporations.

It is about statistical data related to something called "productivity" measured in terms of computers recording data, data that could be about the production of food for people.

But it could be and, in the economic data we see reported, is frequently about robots that produce more robots designed to produce robots creating income for corporations retained in the bank accounts those corporations. The benefits of productivity are quantified only in the sense that electronic numbers representing value transfer between the producer and the entity receiving the product are acknowledged. In an obvious sense today, everything that the economists measure are really the results of computers exchanging data.

The other perspective is data about how well the economy is servicing the general populace as they attempt to meet their material needs. This can be found in statistics examining how well the economy is distributing among the people the resources necessary to acquire food, clothing, housing, health care, and education.

The following graph is a reminder that here in California, while The Great California Slump appears to have bottomed out, we are nowhere near a recovery if the purpose of an economy is to provide our people with income needed for food, clothing, housing, health care, and education.

It's nice that new unemployment claims are down. It's nice that the number of foreclosures is down. It's nice that as reported per capita personal income in California "grew at the fastest rate in five years during 2011" and is now only 4.75% below 2007, though we know it that income is distributed less equitably than in 2007.

Let's just not forget that we have a 1.4+ million job recovery gap and are not likely to see that number change significantly in this decade.

While The Great California Slump has bottomed out, it is not over, our economy has not recovered. As I wrote here in a previous post:

...The goal of our California grandfathers and fathers as reflected by the writings of Steinbeck and the speeches of Pat Brown were being achieved in the 30-year period from 1950-1980. In the next 30 years, 1980-2010, there has been a slow, but systematic decline in access to the middle class, culminating in the effects of The Great California Slump which I now believe will be the period from November 2007 through late-2017.

We are in the era created by Jerry Brown and his generation, not in the era created by Pat Brown and The Greatest Generation.

Moonbeam's unrealistic wishes and dreams will be very destructive

We are approaching government budget season here in the State of California, so again it's time to dream, to pretend, and to not engage in any in-depth thought about our future.

 On May 30, 2010, I posted the following:

It's fitting that Disneyland was created in California.

It's fitting because we now have two branches of state government that live inside the Magic Kingdom of the late 1950's - in two "lands" far away from reality. The Governor's Office has been relocated to Fantasyland. The Legislature has relocated to Tomorrowland.

Way too many of the voters of California also live inside the Magic Kingdom - in three radically different worlds far away from reality and incomprehensible to each other.

Some live in Main Street USA, a fictional early 20th century Midwest town totally without a corresponding community reality in 21st Century California.

Some live in Frontierland hoping to confront the challenges of the 21st Century with a muzzle loading rifle while wearing a coonskin cap - a reality that never existed in California even when Ronald Reagan was Governor.

Some live in Adventureland where crocodiles, hippos, and other "African Queen" dangers, completely foreign to and absent from 21st Century California, fill people with fear and consume tremendous amounts of their psychological energy.

On April 3, 2011, I posted:

It's clear now, with the election of Jerry Brown, Californian's put the perfect Governor in Fantasyland - Governor Moonbeam - to replace The Gubernator.

California had serious budget problems when Brown was running for Governor in 2010. Almost all those problems stemmed from his pandering to the public and the press when he was previously Governor (1975-83).

For whatever reason, Californians refuse to believe this. The mainstream press, as was the case before, seems to think Brown isn't the problem. But slowly, some old-timers have started remembering openly, such as Sacramento Bee columnist Dan Walters who recently wrote:

While Brown opposed Proposition 13, the era's landmark anti-tax measure, he quickly embraced it after its passage in 1978, declared himself to be a "born-again tax cutter," and sponsored a hefty state income tax cut as he sought re-election to a second term.

Whether California was under siege from crime is questionable, but Republicans bludgeoned Democratic politicians as soft on crime, and Brown didn't want to be a victim.

He and legislators responded with lock-'em-up crime measures aimed at putting more felons behind bars. California's prison population, about 20,000 inmates, started climbing, and late in his governorship, Brown agreed to place a small construction bond issue on the ballot.

What Walter's didn't explain was that one of the reasons Prop 13 passed was a repeating of a descriptive term "obscene state surplus" coined by Moonbeam 1.0's fellow Democrat Jesse M. "Big Daddy" Unruh.

Unruh, then State Treasurer who previously was the powerful Speaker of the California State Assembly from 1961 to 1969, was displeased with Brown. Brown was pleased with himself because of the surplus. He had refused to use any of it to offset huge rises in property tax revenue created by extreme real estate value growth.

It was the first time the voters who approve of Brown discovered they dislike his policy. But somehow, California voters had by 1978 begun to separate in their minds politicians from policy.

Proposition 13 passed and, despite denials by anti-tax politicians and bloggers, became the basis of the financial problem that plague our State and local governments.

And as Walter's points out, the State's problems were exacerbated by "let's don't try to lead, let's get reelected" policies regarding crime and prisons adopted by Brown and his fellow Democrats in the Legislature back then.

As Walter's goes on to explain without offering any opinion on future implications, confronted with horrendous prison overcrowding the U.S. Supreme Court ordered the State to fix the problem including reducing the prison population to "only" 137.5 percent of design capacity by mid-2013. Brown and the Legislature have responded using a policy they call "realignment" which is a euphemism for "passing the buck" by sending lower-level felons from prison into county jails and maybe, or maybe not, funding the costs the counties will incur.

Oh, and they plan to ask the U.S. Supreme Court to permit 145 percent of design capacity, which would allow 5,000 to 6,000 more inmates. In other words, our political leaders are telling us it's ok to house in our prisons nearly 50% more people than they were designed to house.

The Bee in another article tells us about the Moonbeam-led State Corrections Department:

Officials estimated the department would see its workforce cut by about 6,400 staffers as a result of the long-term plan, and allow the prison system to meet the requirements of court-ordered mandates on crowding, health-care and mental health by the end of next year.

If you believe this, I have some State-owned bridges to sell you.

In the meantime, Governor Moonbeam and the Legislators are singing a blue tune about the fact that the budget is out of balance by some amount between $7 billion to $14 billion. In another recent post, Walter's noted:

With the state budget mired in deficits, Gov. Jerry Brown and legislators, especially his fellow Democrats, are searching under every fiscal rock for money to spend.

That search has spawned an odd syndrome involving what could be three big pots of money – a competition among liberals over how they should be spent if, indeed, they materialize.

What Walter's is telling us is that it's an election year. Our legislators are struggling to keep reality from intruding on the State Budget until after November.

The sad part of the situation is that in January 2011, newly-reelected Governor Moonbeam could have presented a balanced proposed 2011-12 Budget. Yes, the cuts in schools, care for the aging and the young, courts, wildfire fighting capabilities, etc., would have been drastic, maybe even catastrophic. But by this year, California's self-destructive middle class voters would have been forced to confront reality.

Now Moonbeam and the Democratic Legislature have taken California's government services down a road preferred by the radical right. They are offering a completely inadequate, useless "tax the rich and the poor" tax increase initiative measure which they tell us with a straight face will prevent further cuts.

While singing his blue tune about the budget, Governor Jerry "Moonbeam" Brown keeps up a deception, but sometimes I wonder of these song lyrics apply:

The result of this deception
Is very strange to tell
For when I fool the people
I fear I fool myself as well!

In the meantime, California's once-proud public education system - from pre-school to graduate school - has become a shadow of the promise it offered the children of The Greatest Generation.

In the meantime, California's progressive programs to care for the elderly, the disabled, and the children of poverty are becoming comparable to Mississippi's.

In the meantime, California's once-strong, booming economy that existed from 1950 through 1980 has completely stagnated, buried in goofy ideas about taxation, environmentalism, and "green" potential.

At the risk of repeating myself too often:

We are approaching government budget season here in the State of California, so again it's time to dream, to pretend, and to not engage in any in-depth thought about our future.

It's fitting that Disneyland was created in California.

It's fitting because we now have two branches of state government that live inside the Magic Kingdom of the late 1950's - in two "lands" far away from reality. The Governor's Office has been relocated to Fantasyland. The Legislature has relocated to Tomorrowland.

Way too many of the voters of California also live inside the Magic Kingdom.

It appears that Californians have become moonbeams themselves, believing these Magic Kingdom song lyrics:

When you wish upon a star
Makes no difference who you are
Anything your heart desires
Will come to you

If your heart is in your dream
No request is too extreme
When you wish upon a star
As dreamers do

Unfortunately, embracing Governor Moonbeam's unrealistic wishes and dreams will be very destructive.

Good grief folks, it's California. Don't support wise public policy!

Sometimes I wonder if California really is run by the crazies.

So far, two of the state's major newspapers have literally said we cannot support carefully crafted, wise public policy basically because Governor Jerry "Moonbeam" Brown, the Democratic Legislative Leaders, and teachers unions prefer unwise, poorly designed public policy.

We have two competing initiative measures circulating to get enough signatures to get on the November ballot.

One was prepared by Molly Munger and supported by the California PTA. Munger's measure would increase income taxes in a progressive manner on every income earner in California except the poorest workers among us. It is the one tax increase measure now circulating specifically aimed at improving California's economic future by educating California's children for a 21st Century economy.

In February the Sacramento Bee's Editorial Board said: "Munger makes a compelling case that this is a once-in-lifetime chance to invest directly in the improved education of California's children." But that wasn't good enough for them to back Munger's measure over the one proposed by Governor Moonbeam. They clearly said it would be better to focus on dumping more money into the State General Fund as the measure sponsored by Governor Moonbeam would do.

So far, in the past week The Los Angeles Times has published an Op-Ed piece and a piece by their Capitol Journal columnist explaining that Munger's measure is better but we have to support Moonbeam's.

The venerable Times Capitol Journal columnist George Skelton explained as he tells Munger to step aside (emphasis added):

No public poll — or recent private survey that I'm aware of — shows Munger's tax initiative with any real chance of passing voters' muster in November.

...Munger became increasingly frustrated with Brown after repeatedly trying to unite with him on a school funding proposal and being rebuffed.

Actually, Munger's tax measure makes more public policy sense than Brown's. It just makes less sense politically.

Of course, Skelton has repeatedly endorsed Moonbeam's measure and attacked Munger. This is the first time he's clearly acknowledged: "Munger's tax measure makes more public policy sense than Brown's." How could people know Munger's measure is better? Up to this point, not by reading Skelton in the Times.

The other piece published in the Times was an Op-Ed piece by Jim Newton in which he says:

Both measures start with the recognition that California is deeply in debt and that even years of cutting haven't brought it into balance. Brown would address that shortfall with a combination of a sales tax increase and a tax hike on income of more than $250,000 a year. In economic terms, that's not an ideal approach. It increases the tax burden on the poorest Californians, who pay a greater percentage of their incomes in sales taxes and who can least afford to pay higher taxes, and the richest Californians — those whose incomes gyrate most wildly with the economy and thus contribute to the instability in the state's revenue collections.

Munger's proposal, by contrast, avoids sales taxes altogether and boosts state income taxes by 1% across the board. That still means that high-income taxpayers would shoulder most of the burden because the income tax is progressive, but they wouldn't shoulder all of it. And taxpayers at all levels would have to chip in. That's more stable and more widely distributed than Brown's plan....

Brown's plan has the advantage of focusing its burdens on the poor, who don't vote much, and the rich, of whom there aren't very many....

...Munger's pitch is simple: California's educational system is tragically broken, and voters, even voters who don't usually like taxes, have said they are willing to pay something to fix it.

But nobody in the press has even hinted at the idea they'll support Munger's measure over Moonbeam's.

It's sad, really. If you read Munger's measure which practically nobody does, it offers serious solutions to our biggest economic problem and does so in a manner designed to avoid the problems of our dysfunctional State Government.

It wisely cuts out of the decision-making process politicians in the serially floundering Legislature plus the Governor, leaving it all to school boards.

Because it relocates to local school boards decision-making on how within certain guidelines the money is to be spent, it cuts the statewide union lobbyists out of the picture, forcing local teachers to work with locals school boards.

And it prevents the new funds from being used for administration.

And it even gets more taxes from the wealthy even though the press generally says Moonbeam's measure is a "tax the rich" measure.

And it.... I could go on and on, but I've already done that in a previous post.

It's disturbing that our serious, responsible California press can't support Munger's measure, though they admit it is much better public policy, because according to them the voters would prefer to extract money from the poorest working people among us, as well as from the richest among us, to dump into the State General Fund for the Legislature and Governor to play with.

Yeah, right.

The "compelling, once-in-a-lifetime chance to invest directly in the improved education of California's children" tax increase initiative

Recent news reports in California's major newspapers indicate that there is one, maybe two, rarely three, tax increase initiatives circulating for signatures worth mentioning in stories regarding the State's budget problems. Reading those stories, you would never know there are nine (9) tax increase measures circulating right now. All have been discussed in previous posts.¹

Now we read in the press that Governor Jerry "Moonbeam" Brown and the California Federation of Teachers (CFT) have negotiated a compromise that could permit a jointly sponsored initiative rather than continue with their current two competing initiatives, which are the ones that have received most of the press coverage.

The compromise measure would basically be Brown's initiative but with the sales tax increase dropped to ¼% while at the upper end of the income tax the increase would be higher, similar to the CFT initiative. The sales tax would still expire in 2016, but the income tax hike would be extended two more years. It has been submitted to the Attorney General.

Moonbeam is getting a lot of criticism about this compromise because it significantly shifts the tax increase proposal into the "class warfare" camp of taxing only the very wealthy, the so-called 1%. Moonbeam's gyrations with the CFT are not the primary subject of this post, however.

We Californians are being diverted from considering our state's problems. Most of the time, debate and discussion found in those news stories (as well as the comments about those stories on various web sites) all seem to be occurring between ideologues who either...

1. want to eliminate all government or
2. want to solve all social problems by providing more money to government.

Lost in the midst of this rhetoric about tax initiative proposals are...

1. the goals to be accomplished with the additional money,
2. what period of time the additional tax levies will need to be in effect to accomplish those goals, and
3. the potential impact of the tax increase alternatives on real people and California's economy.

What one might think are the critical issues remain completely undebated and under-reported, lost in spin, with Moonbeam's camp being the best at spinning.

The fact is that Moonbeam and the CFT simply want money for the State General Fund to patch the significant holes that resulted as a side effect of The Great California Slump, which began with The Great Recession, created a significant loss of jobs in the private sector, and has destabilized the California economy.

Giving the Legislature and the Governor more tax money to spend however they see fit doesn't seem like a very good way to address The Great California Slump. From 1997-98 through 2010-11, cumulative disbursements from the State General Fund have exceeded cumulative receipts from revenue by a whopping $46.7 billion. This $46.7 billion deficit spending was approved at the time by the Legislators and the Governors. It is disturbing because we could have just as easily had a "rainy day fund" of $27± billion without any tax increases in the past four years.²

It's difficult to muster any positive feelings for a tax increase that doesn't specifically address improving California's economic future. Educating California's children for a 21st Century economy is the one clear way we can improve things for future generations.

One of the initiative measures being circulated for signatures right now was developed by activist heiress Molly Munger working with the California PTA. It receives far less press attention than the ones proposed by Moonbeam and the CFT even though the Sacramento Bee Editorial Board said:

Munger makes a compelling case that this is a once-in-lifetime chance to invest directly in the improved education of California's children. If her timing were different, and if Munger had first attempted to get her proposal passed through the Legislature, we'd be tempted to support it.

The Bee's Editorial Board knows no one could get any tax measure through the Legislature. It also knows Munger filed her measure before Brown. But they had to come up with some excuse to say that it represents "a compelling case that this is a once-in-lifetime chance to invest directly in the improved education of California's children," but....

The case Munger makes is compelling because her measure is far, far better than Governor Brown's precisely because Munger's focuses on improving the education and hopefully the economic potential of the next generation.

Munger's measure is complicated but carefully crafted. Here's a summary of how it would work if adopted:

1. It provides for increased income taxes beginning January 1, 2013 and, unless renewed by the voters in November 2024, ending on December 31, 2024; it is the only measure circulating now that provides revenue beyond 2016 and still provides an end date, 2024, when the voters can reexamine whether its been effective and whether it is still needed; virtually every economist says that the economic dislocation in California created by The Great California Slump will last well beyond 2016.
2. In a single concession to the political power structure of the state, for fiscal years between 2012-13 and 2016-17, it allocates 30% of the funds resulting from the tax increase to a fund from which school bond debt can be paid; the net effect is to lessen the pressure of The Great California Slump on the General Fund by whatever that 30% revenue represents, which Munger hopes the Legislature will use to prevent further drastic cuts in programs that provide food and medical care to children.
3. The remainder of the funds (which after 2016-17 means all of the funds) are to go into a California Education Trust Fund (CETF) to be allocated 85% to K-12 school funding and 15% to early childhood education.
4. The Trust Fund is to be supervised by a Fiscal Oversight Board; the measure states: "The members of the Board are the State Controller, State Auditor, State Treasurer, Attorney General, and Director of Finance. The Fiscal Oversight Board shall be responsible for ensuring that CETF funds are distributed exactly as provided by this Act and are used solely for the purposes set forth in this Act"; note that no member of the State Legislature nor any appointee of the Legislature is on this Board, a fact which is not lost on the politicians.
5. Recognizing that in California income tax revenue is subject to wild swings up and down, the measure provides for a mandatory five year averaging of growth in income tax revenue to determine the increase in each year's revenues to be available for spending; no matter how much pressure the Fiscal Oversight Board may get from various constituencies, huge spending increases because of one-time revenue increases will not be possible, a fact which is not lost on the politicians or special interests; this would avoid the problem of the new revenue being spent hiring too much staff and creating too many special programs in years when income tax revenue is very high, thereby creating in the lean years the problem of having to lay off that staff and ending the programs.
6. The K-12 monies will be distributed to school districts, county offices of education, governing boards of independent public charter schools, and the governing bodies of direct instructional services provided by the state (such as the California Schools for the Deaf and the California School for the Blind) based upon the number of students they teach; the funds must supplement state, local and federal funds committed for public K-12 schools and early care and education as of November 1, 2012, and shall not be used to supplant or replace the per capita state, local or federal funding levels that were in place for these purposes as of that date (there is a provision for a CPI adjustment and an exception for an overall reduction in federal funds).
7. The measure provides complicated, but concise and clear, provisions for establishing and funding an Early Childhood Quality Improvement and Expansion Program generally under the supervision of the elected California State Superintendent of Public Instruction, not the Legislature.
8. In contrast to the projected budget deficits of around $13 billion a year, it is conservatively estimated that the measure will generate about $11 billion the first year, increasing over time; from a logical standpoint this compares favorably against the other measures that would generate between one-third to two thirds of that amount, at a minimum at least $4 billion short of balancing the budget, while claiming in Moonbeam's measures, to guarantee "solid, reliable funding for schools, community colleges, and public safety while helping balance the budget and preventing further devastating cuts to services for seniors, middle-class, working families, children and small businesses"; Munger's measure makes no wild claims. 
9. Detailed restrictions to avoid siphoning off money for uses other than education, including prohibiting "lending" of the funds" and detailed audit provisions including public review are included in the measure, all under the oversight of the Fiscal Oversight Board.

Munger's measure does not offer the same emotional content as the CFT measure or the Moonbeam-CFT compromise measure. Here is a comparison of impact of the measures on various levels of taxable family income (meaning a two-earner family):

As can be seen from this chart, the Brown-CFT Compromise measure would increase by a whopping 27% taxes paid by a family with a taxable income of $10,000,000. It would also increase by about 3.5% taxes paid by a family with a taxable income of $14,642. And it would increase by about 1% taxes paid by a family with a taxable income of $136,118.

Munger's measure measure would increase by "only" 18% taxes paid by a family with a taxable income of $10,000,000. It would not increase taxes paid by a family with a taxable income of $14,642. But it would increase by about 14% taxes paid by a family with a taxable income of $136,118 because it retains a progressive income tax model that requires everyone to share in the support of education.

The difference between the measures is one appeals to the idea that we can simply tax the rich to solve our problems, an idea that has a strong emotional appeal right now. Many want to ignore the idea that there is a limit on how much California can attempt to tax the so-called wealthy "1%". The simple fact is that companies can move their "headquarters" out of California. And if their executives and major investors move their "primary" residences out of California (keeping both the Carmel "beach bungalow" and the Tahoe "cabin", of course), those taxable profits from future high tech IPO's would leave California also.

It is dangerous when a politician like Brown chooses to compromise with those selling the emotions of class warfare. He could have backed Munger's measure as does the California PTA.

I describe Brown's approach as The Moonbeam Complex Free Up General Fund Money and Fix Nothing Tax Increase Initiative because that is what it is. Yes, some of the money will be applied to education and public safety, but much of it will free up State General Fund monies for the Legislature and Governor to play with. Because the taxes expire in 2016, they offer no potential solution to problems resulting from The Great California Slump. And in terms of any meaningful policy goals, Moonbeam's measure offers nothing.

California voters have good reasons to approve Munger's measure as it represents a thoughtful approach to the future of our State. They should reject any of the measures carrying Brown's endorsement.

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¹This post is a followup to a series of posts beginning in December 2011 on tax initiative proposals:

• Moonbeam, billionaires, high school seniors, and workers - the tax increase initiative competition
• 2012 Tax Initiatives Chapter 1: California's Property Tax Problem and the Ghost of Howard Jarvis
• 2012 Tax Initiatives Chapter 2: The Truth and Mythology of Taxing Oil and Gas Well Production
• 2012 Tax Initiatives Chapter 3: The Guillotine Option - "Tax The Rich"
• 2012 Tax Initiatives Chapter 4: Spinmaster Moonbeam's Enticing, "Cagily Worded" Tax Proposal
• 2012 Tax Initiatives Chapter 5: Income Tax Only Initiatives
• Polling stops the billionaire's beauty and barber shop tax proposal; Moonbeam has typo

²Here is the past fourteen years of the State General Fund cash disbursements and cash receipts from revenues (from the June Year End Statements prepared by the State Controller):

Apparently, we simply cannot keep from spending more than we are willing to pay in taxes. And yet, in hindsight we could have been responsible with our tax money during that period leaving us with a sufficient rainy day fund that, without any tax increases, could have carried us through 2020, something like this:

Yes, that's hindsight. But the conservative right has been given their anti-tax argument handed to them on a platter by irresponsible Legislators pandering to constituencies, the latter being us.