Gov. Brown presentation of the annual May revise of the state budget this morning wasn’t the duck-and-shuffle we’ve grown used to, in which our gov du jour confesses that revenues weren’t nearly as good as “projected” (read: in our wildest dreams) when the budget was first released in January, then launches into a long list of proposed cuts.
Nope, the Prop 30 tax increase and an improved California economy have the state economy up and walking again … if a bit zombie-like. Brown led the zombies with a dreary but true warning that the economy is still under threat, with lots of stuff at the federal level (sequestration key among them) trickling down to hurt the state.
There’s also plenty wrong in California, as it trudges along dead-eyed and scary with a burden of up to $1.1 trillion of combined state and local government debt, and an over-sized, over-paid, over-coddled and under-performing quarter million state employees. We’re also waiting to see if the recent tax hikes and California’s ongoing regulatory zealotry will increase the exodus of business owners and the wealthy from the state, taking their tax payments with them.
Dem Response: Polite Hostility
The Democrat super-majority knows it has to say it’s dedicated to not squandering the current cash flow, but look at their reactions and you see some between-the-lines and not so between-the-lines clues that they are cued up and ready to spend, baby, spend. All quotes are from the SacBee.
I agree we must aggressively pay down our state’s debt and set aside money for a reserve, but there’s a disappointing aspect to this proposal. It’s important that we also begin making up for some of the damage done to tens of thousands of Californians. – Sen. Pres. Pro Tem Darryl Steinberg
Our economy is showing signs of recovery but our budget is sending us mixed signals. The modest surplus we now possess took a lot of sacrifice to obtain and we cannot squander it. With many Californians still out of work, this budget is not just about paying down debt and saving money for a rainy day. It is also about growing our economy and broadening opportunities for Californians to succeed through education and a better environment for small business. – Assembly Budget Committee chair Bob Blumenfield
The May Revise continues to shortchange the most vulnerable in our state–such as those who need health care, child care, access to justice, or essential support services to escape poverty. – Dem Assemblyman Robert Dickinson
California’s fundamentals are still wrong. We are too dependent on taxing the wealthy, we are a long way from getting control over burgeoning pension and benefit costs, far too much education funding is wasted on fulfilling unnecessary reporting mandates from Sacramento and paying under-performing teachers, and, as mentioned above, our social welfare programs need to be brought in line with other states’.
But at least the budget’s in the black for a change.
Pension Oblivion
My friend Shawn Dewayne, a financial planner who often includes tax-free municipal bonds in his customers’ portfolios, is concerned about the impact of out-of-control city/state pension costs is having on munis. When he saw this car recently near his Newport Beach office, it pretty much summed up the whole pension mess for him, as it does for me.
The plate translates as “Ex Newport Beach Fire Department” and it’s affixed to a 2013 Ferrari California 30, a car that retails for $208,000 before all the VERY costly extras and options Ferrari offers. Shawn tells me that a week earlier he saw another very expensive car – a Shelby Cobra 427 – with the license plate “I (heart) STERS,” as in CalSTERS, the California teachers’ retirement fund. And keeping up the car/pension theme, he told me of a retired water district general manager who recently spent $200,000 on a professional rebuild of his 60′s supercar, an Olds 442. (Oh, how I lusted after that car in my youth!)
Sure, these three well off ex-public servants could have had lucrative side businesses, but more likely they’ve just got great retirement benefits. A retired fire chief, for example, can relax and buy a Ferrari on the $200,000+ annual pension benefit that’s common for that job, along with Cadillac (or Ferrari) medical coverage.
The Death of CalPERS?
There’s one thing – and only one thing – I like about California’s out-of-control retirement pension and benefit programs: I get to throw back on the Left the word they love to over-use so much: Unsustainable!
The programs are so unsustainable that CalPERS just announced its going to hike the amounts municipalities who are enrolled with them must pay by … get this … 50 percent. Sure, they’re going to phase it in, but a 50 percent hike is still a 50 percent hike – and when you multiply it by 1.6 million, the number of California government workers covered by it, you’re looking at some very serious bucks.
To see how this hits home, look at the small town of Canyon Lake, a party town of a place in Riverside County. CalPERS already has increased the town’s contribution rate from 12.8 percent of an employee’s salary to 17.9 percent over the last three years, and the City Council was looking it going to 26.8 percent this summer – before the 50 percent rate hike starts to kick in. So they did what any logical person would do.
They decided to quit CalPERS. According to news reports, it’s going to cost Canyon Lake $660,000 to say farewell. That’s the amount of unfunded liability CalPERS is carrying on Canyon Lake’s small employee base, and the city figures the cost of financing the payment will be less than the cost of putting up with CalPERS jacking up rates instead of paring down benefits. Cities with more employees, especially those who have been shorting CalPERS because of their own financial unsustainabilities, will be looking at much bigger divorce settlements.
But they’re looking, nonetheless. I know of one special district that is trying to figure out how to raise the money needed to divorce itself from the system and I’m sure the upcoming rate hike will swell the numbers. If American business ingenuity kicks in as I suspect it will, you’ll see new financing tools to fund CalPERS split-ups. When that happens, the move toward sustainable pensions could become a stampede, leaving the nation’s biggest and baddest pension plan crushed in the dust.
That’s just the sort of “rebuilding California one catastrophe at a time” I predicted in Crazifornia, so don’t be surprised if it happens.
Public Servants? What Public Servants?
The originator of the term “public servant” is gone and long-forgotten, but kudos to whoever came up with that very impressive bit of spin. It certainly has a better connotation than “lazy, under-ambitious paper-shuffler.”
It’s not surprising many government workers identify with the term. If they have forsaken other, higher paying jobs so they can work diligently and tirelessly for the public’s benefit, then they have earned some right to use the word. But they lose that right if they’re clinging stubbornly to benefit plans that cheat the public.
It’s hard to think “public servant” when considering the members of various public employee unions who allow their union bosses to stubbornly and dogmatically protect unsustainable public employee pensions and retirement benefits, even while driving municipalities into insolvency and forcing governments to cut services to the public. If government workers see themselves as public servants, then the majority of them need to face reality, stand up at their next union meeting and shout:
I didn’t sign up for this! I don’t want my retirement plan to harm the citizens I have pledged to serve. It’s time to admit that human decency and professional responsibility top legal precedents. It’s time to be motivated by fairness, not greed! Hey, union boss! Rewrite our contracts!
Have you heard a single public employee union member – a single public servant – say that modest trimming around the edges of their benefit programs isn’t enough? That their fixed benefit retirement plans must be converted NOW to fixed contribution plans? That they shouldn’t expect municipalities that are going broke to continue to pay more into their employees’ retirement plans than the employees themselves pay? That the life-time free medical care in their contracts isn’t free – it costs the public?
No, of course you haven’t.
Until this becomes a chorus that drives union leaders to relent and allow full-blown rewriting of existing contracts, government workers are not public servants. Rather, they are public masters, lording over the public, not serving them.
I suggest you start calling them that, and when they ask what you mean, give them an earful.
Public Servants or Buccaneers?
There’s a new retirement community for California’s public employees called Treasure Island. It’s a lovely place where they can “Harrr! Harrr! Harrr!” their way through their golden years as they live off their treasure chests piled high with the plunder they stole from the people during their working years.
Treasure Island appears to be located in Fresno County. Surprised? You shouldn’t be:
Fresno County’s pension costs are expected to grow in the coming year — again — continuing to tie up more than one of every four dollars at the county’s disposal.
County leaders have taken steps to address the increasing burden, but their actions are yet to turn around a retirement system in which promises far exceed cash flow.
The increase in costs, detailed in a retirement report released last week, has put county administrators on damage control — trying to absorb the hit in next year’s budget while sparing already-underfunded county programs, from unmaintained parks to short-staffed libraries to a scaled-back Sheriff’s Office.
“It’s going to be very difficult for the county over the next few years,” Supervisor Debbie Poochigian said. “As pension costs go up, it just takes more of the pie and leaves less for everything else.”
The new retirement report projects that the county will have to contribute about $7 million more during the 2013-14 fiscal year over the current year to stay on top of its pension obligations — a total of $176 million.
That’s up 50% over five years.
Including retirement debt, about $212 million of the county’s roughly $1.8 billion budget next fiscal year will go toward pensions. (Fresno Bee)
When it becomes this bad – inflated, over-promised pensions taking up one quarter of a county’s budget, with the amount growing every year! – why aren’t “public” servants rising up and saying, “Enough! This is unconscionable! We can’t steal from the public like a bunch of buccaneers sailing about plundering and raping! Re-write our contracts NOW!”
But of course, they aren’t saying that, or anything like it.
Many ask why Muslims don’t speak out against terrorist jihad. It’s even worse with public employees, because they don’t just not speak out against unsustainable pensions. No, they (or the union reps they hide behind) shout down any voice of reason that calls these pirates’ pensions what they truly are – the legalized theft of public funds.
The State of the State of Despair
Governor Brown had something to say to Crazifornia this morning as he kicked off his State of the State speech:
Against those who take pleasure, singing of our demise, California did the impossible.
That would be me – about 300 pages worth of singing of our demise, or at least the increasing probability of our demise.
The impossible, as Brown defined it, is that “We have wrought in just two years a solid and enduring budget.” I agree it’s two years since he took office. I’m not at all ready to call the budget solid and enduring, as it is based on a lot of assumptions that still could go sideways.
Brown was quick to give credit to those who had a part in “doing the impossible.”
You, the California legislature, did it. You cast difficult votes to cut billions from the state budget. You curbed prison spending through an historic realignment and you reformed and reduced the state’s long term pension liabilities.
That’s a pretty impossible characterization of what the state did. Pushing prison expenses off to counties instead of addressing the root causes isn’t fixing anything, and it’s certainly not heroic. It just transfer to pain to counties that can’t fight back.
The touted reform and reduction of the state’s long term pension liabilities, while welcomed, was akin to the rate of speed of a great Roman galley when only one oarsman is rowing. Trimming around the edges is not a haircut. Reducing benefits for new hires still saddles us with 30 years of unaffordable liability from the previously hired. (More on this in a minute.)
Then, the citizens of California, using their inherent political power under the Constitution, finished the task. They embraced the new taxes of Proposition 30 by a healthy margin of 55% to 44%.
Yes they did, and now we get to watch the Legislature burn through that money instead of approaching it, to use a favorite word of the Sacramento majority, with sustainability as a goal. And watch tax revenues drop off in the latter years of Prop 30′s seven year life as business owners peel out to other states, taking their taxability with them.
Members of the legislature, I salute you for your courage, for wholeheartedly throwing yourself into the cause.
What else is he going to say to his Democrat super-majorities? Now came the most telling 22 words of the speech:
I salute the unions–their members and their leaders. You showed what ordinary people can do when they are united and organized.
And there you have Jerry Brown. A union guy through and through. A guy who knows who’s buttering his bread. A guy who knows that big, fat public employee unions equal big, fat Democrat election margins.
Things are looking better in California since I wrote the last word of Crazifornia. Unemployment is down. That’s good; we’re all for less human suffering. And tax revenues are up. That’s certainly one way to close a deficit – not my favorite way, but certainly a way.
Still, sorry Jerry! I’m still singing of our demise. I’ll change my tune when taxes go down and California starts treating businesses like assets instead of asses; when the union grip on Sacramento is loosened and we seriously address the $250-$500 billion shortfall in public employee benefit funding by rewriting contracts and reducing benefits for existing employees; and when we have a governor who kills High Speed Rail and stops trying to single-handedly save the world from climate change.
It’s not too much to ask. But in California it is, to use Brown’s words from earlier today, doing the impossible.
The Twelve Days of Crazifornia
“On the twelfth day of Crazifornia,
Gov. Moonbeam gave to me twelve months of craziness,
Eleven propositions
Ten UC tuition hikes,
Nine “high-speed rail links,”
Eight states’ worth of takers,
Seven-ty percent underfunded pensions,
Six billion in debt
Five fleeing comp’nies,
Four bankrupt cities,
Three falling bridges,
Two super-majorities
And a tax hike on millionaires.”
California was even crazier than this in 2012.
It looks like Guv Moonbeam re-gifted us this year. After all, we got twelve months of craziness last year, and the year before that, and the year before that, and the year ….
I am one day late posting the twelfth of the twelve days because my wife and I are in Arizona visiting our oldest daughter, who fled California because of one of its major crazy features: unaffordable housing. In California, the cost of over-regulation adds 30 percent or more to the cost of housing, which explains why all ten of the nation’s top ten cities for regulations’ burden on housing costs are in California.
Legislators are well aware of the impact their regulations are having on the housing industry, and they know how important new home sales are to the state’s economy. As recently as 2007, new home sales – not resale homes, just new ones – generated more dollars in sales than any other industry in the state, even more sales than all the retail sales combined.
If they would dial back the regulations, it would help they state. The Democrats in Sacramento know this. So what did they do in this crazy year? They increased the energy efficiency standards for new homes, which will add at least $1,500 to the cost of even the most modest home – and even more in the most hard-hit parts of the state.
Crazily, California already has the nation’s most demanding home energy efficiency standards. We’re doing a great job. We can rest on our laurels and still be the best in the nation. But no, recession or not, the Legislature ratcheted up what the state demands of homebuilders.
Why? To save the world from global warming of course. Will a small incremental gain in the energy efficiency of homes in a state where new homes already are extremely energy-efficient cause global temperatures to drop? No, of course not. It will do nothing but make the state less attractive.
Here’s some more California craziness from 2012:
One-third of the nanny-state laws passed in the nation were passed by California legislators, including most famously one that would make it illegal to try to turn around gender confusion issues in children.
California became the #! Judicial Hellhole in the nation, the #1 state for outrageous pay to state workers, topped by a state psychiatrists’ “earnings” of $822,000, and the #1 state for the number of people in poverty.
During the year, school districts all over the state started obligating themselves to expensive bonds to meet their outrageous pension obligations. Schools in Poway (San Diego County), for example, took on bond debt that will cost $1 billion in order to meet pension obligations of $100 million. A school district having pension obligations of $100 million? That’s almost as crazy!
Speaking of San Diego County, San Diego sued itself over a bridge that cost twice its estimated cost.
The year also saw the state’s first carbon credits auction under its first-in-the-nation state carbon cap-and-trade program. (Less crazy states aren’t considering such a program, or have delayed them because of the recession.) Moonbeam wanted $1 billion from the auction but only got $289 million. Do you sense the whole campaign against carbon is more about raising state revenue than saving planets?
On and on it goes. Obviously, the craziest thing that happened all year occurred in November, when voters sized up the Democrats who are so responsible for much of the state’s crazinesses and decided to award them with a legislative super-majority.
Expect things to be even crazier in 2013.
The Seventh Day of the Twelve Days of Crazifornia
“On the seventh day of Crazifornia,
Gov. Moonbeam gave to me seven-ty percent underfunded pensions,
Six billion in debt
Five fleeing comp’nies,
Four bankrupt cities,
Three falling bridges,
Two super-majorities
And a tax hike on millionaires.”
Let’s imagine a California utility that installs 30 percent of the required air scrubbers on its power plants. Or a California manufacturer that disposes of 30 percent of its hazardous waste materials correctly, but dumps the other 70 percent in a nearby river. Do you think the state would let them get away with it? Of course not!
Then why are the voters of the state letting the state get away with promising its employees the moon, but never getting around to funding 70 percent of those promises?
The managers of the state’s pension programs and the legislators who oversee them would quibble with my analysis. They would say they don’t need to fully fund the pensions because investment income will fill the gap before the employees all retire. I could easily draw another “imagine a California company that” analogy, but you all are quick and don’t need it.
The falseness of the pension income claim – a deliberate falseness, also know as a lie – is that the pension funds lost money on bad investments during the recession, and have not yet made that money up. They’re continuing to estimate their return on investments will be over seven percent, when the actual return is now one or two percent.
The Little Hoover Commission – California’s Grand Jury – reported in 2011 that, “California’s pension plans are dangerously underfunded, the result of overly generous benefit promises, wishful thinking and unwillingness to plan prudently.”
Brown’s pension reform plans are deemed by taxpayer organization leaders to be about 25 percent of what’s needed. And those are only plans. As they move through the pack of wolves at the California Legislature, most hungry for the next wad of cash doled out by the public employee unions, they will be watered down. And if anyone sues over this mismanagement, the case will be heard by judges awaiting their pensions, who won’t do anything to jeopardize their promised pot of gold.
Besides, the proposals are mostly directed at new hires and ignore the vast and growing sums due those hired before even the current meager reforms go into effect. Here’s what I write about that in Crazifornia’s chapter on the budget and pensions:
The major problem is that most current public employees are guaranteed defined-benefit plans, under which their benefits are guaranteed no matter how well, or badly, the underlying pension investments perform. Reforms include, at a minimum, a shift to defined contribution plans for new hires, under which employees contribute a certain amount, usually with matching contributions from the taxpayers. The final pension payout then is not guaranteed, but depends on how well the investments perform. The taxpayers are not on the hook for poor investment performance.
Jack Dean, proprietor of Pension Tsunami, a website that has succeeded in raising journalists’ awareness of the public-employee pension crisis, explained to me over lunch why the public employee fat cats will continue to present a problem no matter what the younger employees do, or what sort of lesser pension plan they are forced to accept.
“I do talk radio shows,” he said between bites of his sandwich, “and people will call in and ask, ‘What can we do to stop this right away?’ and my answer is, ‘You can’t stop it.’
“We’re stuck with what’s in the pipeline right now – all the current employees with contracts that spell out their pensions, and judges who rule those contracts cannot be breeched. So, all we’re left with is switching to a defined-contribution plan for new hires, instead of the defined-benefit plan the earlier employees have.”
I said that would help in 30 or 40 years when the new-hires retire with fully vested benefits, and wondered if the state could survive the long and well-paid retirements of the current generation of workers.
“You’re right,” he said. “We’re going to have to live through something that’s like the Deepwater Horizon oil leak in the Gulf. You can cap it off so there’s no more oil coming out – but then you have to deal with everything that’s floating around in the Gulf, and you say, ‘What in the Hell do we do with all this stuff now?’ What do we do with all the liabilities from the current employees’ defined benefit plans, which we’ll have to pay on from when they retire until they die?”
The Sixth Day of the Twelve Days of Crazifornia
“On the fifth day of Crazifornia,
Gov. Moonbeam gave to me six billion in debt
Five fleeing comp’nies,
Four bankrupt cities,
Three falling bridges,
Two super-majorities
And a tax hike on millionaires.”
When I started writing Crazifornia, the state’s budget deficit was $24 billion. As I wrapped it up, the deficit was about $6 billion. The Legislature shouldn’t be taking any credit for the improvement. Rather, we can thank a slightly improved economy … and revenues from taxes on new Facebook millionaires.They didn’t get as rich as the state bean-counters hoped, but when you’re drowning in red ink, any black ink looks good.
With November’s passage of new taxes – Prop. 30 and Prop. 39 – Legislative Analyst Mac Taylor is projecting an FY 2103 deficit of “just” $1.9 billion. Let’s not kid ourselves. When there’s a $1.9 billion hole in your pocket, it doesn’t mean you’re solvent, even if it makes you less of a laughingstock.
Taylor couched the $1.9 billion prediction with enough disclaimers to make a Wall Street lawyer dizzy. It’s predicated on assumptions about economic growth, job growth, investment returns, bond rates, General Fund spending levels (gulp!) and several others, any one of which could crash the projection. As we’ve said before, this is today’s California, so it’s safe to assume the worst … especially with Democrats having unassailable majorities in both houses and the governorship.
Sacramento Bee columnist Dan Walters nailed it when he wrote recently,
When push comes to shove, will Democratic leaders tell their political allies that even more austerity is needed to reduce debt and balance the budget, or will they cave in to the pressure to restore spending?
The numbers may change, but the political equation remains the same. There are always more demands than there is the money to meet them.
The Fourth Day of the Twelve Days of Crazifornia
“On the fourth day of Crazifornia,
Guv Moonbeam gave to me four bankrupt cities,
Three falling bridges,
Two super-majorities,
And a tax hike on millionaires.”
This very easily might have been our entry for the fifth, sixth or seventh day, since there are so many municipalities in California on the edge of their very own fiscal cliffs.
As it was, Stockton, San Bernardino and Mammoth Lakes went over the edge in 2012. Many media outlets reported that the city of Atwater did the same, but as of this writing, it looks like the city just might avoid going BK … if its employees agree to layoffs and concessions. Big if. We wish Atwater well, but we needed something to fill the fourth day on our list, so here they are. Besides, this is California, where we all have come to expect things will turn out badly.
Stockton, by the way, is the largest city in the U.S. to ever go bust – another dubious #1 ranking for California. And San Bernardino is right behind at #2.
Moody’s, the bond-rating agency, took a look at the health of the rest of California’s cities and wasn’t impressed:
“[We expect] more bankruptcy filings and bond defaults among California cities, reflecting the increased risk to bondholders as investors are asked to contribute to plans for closing budget gaps.”
Liberal publications like the LA Times give shrinking tax receipts the top billing among the causes for these bankruptcies, but what else would you expect from such a knee-jerk pro-labor, pro-taxes bunch? The rest of us know the primary cause of those growing budget gaps is the stupidly, criminally extravagant pension plans that government leaders have offered to government workers … and, usually, to themselves.
In fairness, we must note that Mammoth Lakes filed to avoid a multi-million dollar court judgment it lacked the bucks to pay … did we mention that California was recently named the nation’s “#1 Judicial Hellhole?”
Judging Judges Biased
Illustration: Wall Street Journal
When writing in Crazifornia about public employee pensions and the $250 billion to $500 billion hole they’ve sunk California into, every possible solution I wrote about faced a common, seemingly insurmountable problem: judges.
Orange County faced this problem when it went to the courts to undo a retroactive pension increase many felt was unconstitutional. An attorney hired by the county to evaluate the merits of the case foresaw the problem in his evaluation, as I disclose in Chapter Nine of Crazifornia:
[Orange County supervisor John Moorlach] hired as his chief of staff a law professor and tasked him with researching the constitutionality of the retroactive increase. The law professor’s conclusion: “I think we have a lawsuit here.” The board, intimidated by the thought of suing public safety officers, hired an independent attorney to review the issue. His conclusion: “The retroactive increase is unconstitutional.” A third attorney advised them that the lawsuit could lose on a technicality because “judges get state retirement benefits too.”
For the same reason, lifetime union man Jerry Brown felt confident he could propose some fairly significant pension reforms earlier this year. He knew, the legislature knew and his union godfathers knew that even if the legislature were to pass his proposal word-for-word (which won’t happen), a judge would strike it down. The same goes for the authors of AB 340, a pension reform bill that incorporated much of Brown’s proposal.
Today, thanks to a very informative and well researched article by Ed Mendel in the CalPensions blog, we have an even fuller view of the story:
The public employees most lightly touched by a pension reform signed by Gov. Brown last month are the judges, whose court rulings on public pensions can affect their own pensions and retirement income.
Judges have the biggest pension formula and make one of the smallest pension contributions. But unlike others covered by the reform, current judges are not expected to pay half the normal pension cost, and new judges do not get a lower pension. …
Did the framers of the reform bill, AB 340, which was negotiated in private by the Brown administration and legislative leaders, go easy on the judges to reduce the risk of lawsuits in which judges have a personal stake?
See the entire article here. It’s an important read.
Judges get 3.75 percent of their final pay for each year served, with a retirement age of 65 or 70, depending on how many years they’ve worked. The police and fire pension formula many criticize as unsustainable nets retirees 3 percent of their final pay at age 50.
True, judges do tend to start being judges later in life than most others in the workforce, but that 3.75 percent sweetener does have a suspicious scent of payoff to it.