California Recovery: No, It Is Not East vs. West

Every now and then, some East Coast based publication sends a reporter out to California to see how the West Coast’s economy is doing.  I think they write these things sitting at a restaurant patio overlooking the Pacific Ocean.  That can be seductive, and lulled into a comfortable sense that all is well with the world, the reporter always gets it wrong.

The most recent example is this New York Times article.  The second paragraph summarizes the article:

Communities all along the state’s coastline have largely bounced back from the recession, some even prospering with high-tech and export businesses growing and tourism coming back. At the same time, communities from just an hour’s drive inland and stretching all the way to the Nevada and Arizona borders struggle with stubbornly high unemployment and a persistent housing crisis. And the same pattern holds the length of the state, from Oregon to the Mexican frontier.

The next paragraph contains the mandatory quote from California’s favorite economic Pollyanna, Steve Levy:

“This is really a tale of two economies,” said Stephen Levy, the director of the Center for Continuing Study of the California Economy. “The coastal areas are either booming or at least doing well, and the areas that were devastated still have a long way to go. The places that existed just for housing are not going to come back anytime soon.”

The article is accompanied by a photo of a couple driving a red Ferrari convertible.  The caption says “Driving through Newport Beach in Orange County. Communities along the coast have largely rebounded from the recession.”

This is all nonsense.

There are two reasonable measures of recovery, jobs and real estate values.  You can forget the real estate values measure.  Values throughout California are down from pre-recession highs.  They are down a lot.  Only San Francisco and Marin counties, with median home prices down 27.7 percent and 32.3 percent, respectively, have seen net median home price declines of less than 40 percent.  Monterey and Madera counties top the state in median home price declines, in excess of 67 percent.

So let’s use jobs.  An area has recovered if it has as many jobs today as it had at the beginning of the recession, December 2008.

We monitor 37 California MSAs.  Combined they represent about 96 percent of California’s population.  By jobs, only one of California’s larger MSAs has recovered, and that county does not fit the story.  Not only is Kings County not on the ocean, it doesn’t even border or have a naturally occurring year-round piece of water.  Kings County, with 37,700 jobs, has about 900 more jobs than it had at the beginning of the recession.  Still, Kings County’s unemployment rate is 17 percent.  Some recovery!

Orange County, which the New York Times article cites as largely rebounded, is down 127,800 jobs from its pre-recession high.  That’s an 8.5 percent decline.  Los Angeles County is down 337,000 or 8.1 percent of jobs.  The difference between unemployment rates, 8.0 percent in Orange County versus 12.1 percent in Los Angeles County, reflects different unemployment levels at the beginning of the recession and the high cost of living in Orange County.  Most people can’t afford to be unemployed long in Orange County.  You either find a job, or you leave.

Here are the Counties that have lost, on net, less than 6 percent of jobs in the recession:


Job Gain
or Loss

Percent change


















San Diego




San Francisco
San Mateo




Santa Clara
San Benito




San Luis Obispo




Santa Barbara




Santa Cruz








It’s hard to find real recovery here.  Three of the sub-10-percent-unemployment-rate counties (Marin, San Luis Obispo, and Santa Barbara) are home to the wealthy, those who serve them, and a very small middle class.  They have not had and will never have anything like robust economies.  Think of them as big Leisure Villages for the terminally fashionable.

That leaves San Diego, San Francisco, San Mateo, and Santa Clara counties as potential vigorous economies.  Let’s look at these regions’ job creation last month.  Unfortunately, the data are only available by MSA.  San Diego County saw job growth of 1,300 jobs in February, an increase of about 0.11 percent.  Santa Clara/San Benito saw job growth of about 4,100, or 0.46 percent.  San Francisco/San Mateo/Marin saw growth of about 7,100 jobs, or 0.74 percent.

It looks to me like there is a small island of relative prosperity: San Francisco, San Mateo, and Santa Clara Counties, but even these counties have not fully recovered.  This island is indeed on the coast, but it represents just a small fraction of the coastal county population.

The idea that there is some sort of Coastal resurgence in California is just absurd.  Certainly, the 593,800 still unemployed in Los Angeles — by far the state’s most populous — are not likely to agree that “The coastal areas are either booming or at least doing well…”

(Bill Watkins is the Executive Director of the Center for Economic Research and Forecasting at California Lutheran University. Originally posted on Fox & Hounds.)

National Education Association Greed Machine in Overdrive: more teacher union extortion

The National Education Association has thrown itself full force into the “corporate loophole” demagoguery campaign. According to the NEA, children are being victimized by avaricious corporate types who don’t pay their fair share of taxes. The NEA exhorts the American people to “stand up for the middle class and support closing corporate tax loopholes at the federal and state level, so that additional resources can be invested in public education and other services that build our communities.” In a message oozing with class warfare, we learn that “Corporate tax loopholes are costing our schools and communities resources that would help the next generation achieve the American Dream.” (Cue the violins.)

They then post a list of programs that would thrive if the greedy corporate bastards would just pay their fair share – Title 1, Pre-K education, etc. NEA of course fails to mention that these programs, though popular, are essentially federal boondoggles. They don’t really do what they purport to do. They do make work for unionized adults, however, which if you haven’t been paying attention, is all NEA really cares about. But I digress….

Using Citizens for Tax Justice as their source, NEA claims that closing the seven largest corporate tax loopholes would provide an estimated $1.487 trillion in additional revenues over the next ten years. Coincidentally, CTJ just happens to be the union founded and funded lobbying wing of something called the Institute on Taxation and Economic Policy.

At this time, the U.S. corporate tax rate is 35% which is the highest in the world and since their fiduciary responsibility is to their stockholders, corporations might indeed need to find ways to save money.

But, maybe there are a few corporate loopholes that should be closed. And I have just the one that we should start with. Using information gathered from the U.S. Department of Labor, RiShawn Biddle reports,

Overall, the NEA collected $399 million in dues and other revenues in 2010-2011, barely budging from revenue numbers last year. This despite a four percent decline in membership, from 3.3 million members in 2009-2010 to 3.2 million in 2010-2011.

Sad to say that the bulk of that $399 million comes from union dues automatically deducted from teachers’ paychecks. Most public school teachers in the U.S. are forced to pay union dues as a condition of employment. And of course, all public school teachers are funded by taxpayer dollars. So it is the private sector that is actually funding an entity that is trying to extort even more money from the private sector.

What did NEA do with that $399 million? One third or $133 million went on politics and “contributions” to groups that support NEA’s agenda. In fact, referring to the National Education Association and the American Federation of Teachers’ political spending, teacher union watchdog Mike Antonucci wrote in 2009,

…America’s two teachers’ unions outspent AT&T, Goldman Sachs, Wal-Mart, Microsoft, General Electric, Chevron, Pfizer, Morgan Stanley, Lockheed Martin, FedEx, Boeing, Merrill Lynch, Exxon Mobil, Lehman Brothers, and the Walt Disney Corporation, combined.

Moreover, if NEA gets its way and the 35% corporate tax rate stays in place and the loopholes are plugged, Americans will be paying more for the products made by corporations. Just what the country needs – higher prices. As of now, Americans will spend more in taxes in 2012 than they will on food, clothing, and housing combined.

Oh, and one other little minor detail. The NEA is a corporation that is accorded a 501(c)(5) tax exempt status. So out of the $399 million they took in, NEA paid $0 in taxes!

It is not only the national teachers unions that get away with loophole flimflam; all the state teacher union affiliates take advantage of their tax exempt status too. In my state, the California Teachers Association brings in almost $200 million a year and pays $0 in taxes. CTA also spends more on lobbying and politics (again, with forced dues) by far than any other corporation in the state.

If we are to close one corporate loophole, we need to start with the one that benefits the teachers (and in fact, all) unions. Parents, children and taxpayers will greatly benefit. The losers will be a certain group of brazen corporate types that have been getting away with theft for far too long.

Perhaps blogger Jason Arluck put it best,

Taken together, the National Education Association (NEA) and the American Federation of Teachers (AFT) represent the single largest lobbying conglomerate in the country, but unlike private firms, their contributions come from the pockets of American taxpayers who are forced to fund not just America’s failing public schools, but also one of main sources of their failure.

Today is April 17th, the day our income taxes are due. It would behoove each and everyone of us to think about how much of our hard earned money we are forced to pay to the more aptly named National Extortion Association and other teachers unions, the true exemplars of corporate greed.

(Larry Sand, a former classroom teacher, is the president of the non-profit California Teachers Empowerment Network – a non-partisan, non-political group dedicated to providing teachers with reliable and balanced information about professional affiliations and positions on educational issues. Originally posted on UnionWatch.)

Vaccination bill gouges parental rights

Discussion about the proper role of the Legislature and state government is never more important than when individual liberties and parental rights are under siege. Anytime the Legislature inserts itself into health care issues, individual rights are compromised.

A bill limiting parental decisions when it comes to the health care of children is going to be heard by the Legislature today, and it shouldn’t be taken lightly.

AB 2109, by Dr. Richard Pan, D-Sacramento, will require that parents who choose to opt out of vaccinating their child, called a personal belief exemption, must obtain a signed legal document from a doctor stating that the parent has received medical information on the pros and cons of vaccines.

It sounds rather innocuous, but is a wolf in sheep’s clothing. Inviting lawyers into the medical examination room between parents and doctors will force many doctors to refuse to sign off on the parent’s opt-out option, for fear of legal retribution.

According to Dr. Pan, “California is one of only 20 states that allows for a personal beliefs, or philosophical exemption, to school or childcare immunization requirements. Under current law, to exempt the child from the immunization requirements, a parent or guardian must only provide a signed written statement or sign their name to a two-sentence standard exemption statement on the back of the School Immunization Record. While parents do have a choice to exempt their children, they are not required to document their concerns about vaccines or affirm that they have reviewed fact-based, accurate information regarding the risks and benefits of vaccines and the risks of vaccine-preventable diseases.”

According to Dr. Bob Sears, a pediatrician in Orange County, “the largest study done to date on this issue (Dismissing the family who refuses vaccines: A study of pediatrician attitudes, Archives of Pediatric and Adolescent Medicine, Oct 2005) reveals that 39 percent of American pediatricians state they will dismiss patients from their office for non-compliance with vaccinations.”

Unwilling medics

Sears wrote in the Flash Report Monday that the implementation of AB 2109 is entirely contingent upon the false assumption that all pediatricians will sign off on a patient’s decision not to vaccinate. Sears said that based on the research, many doctors may be unwilling to sign the parental waiver.

Yet, despite the many benefits of vaccines, the Centers for Disease Control admits that between 3,000 and 4,500 severe vaccine reactions are reported every year in the United States. Some doctors say that the numbers of severe reactions to vaccinations are much higher than the CDC’s numbers.

Besides just the potential for severe reactions to vaccinations, many parents believe that vaccinations are at the root of the dramatic rise in childhood autism. For this reason, many parents are unnerved by Pan’s bill.

Increase in exemptions

The bill’s sponsors, The American Academy of Pediatrics, the California Medical Association and the Health Officers Association of California, state that the continued increase in personal belief exemptions and resultant decreases in community immunization rates “could have a significant impact on public safety and because PBEs are relatively easy to obtain,” and recommend strong support for AB 2109.

The current ease parents have in opting-out of vaccinations for children is why Pan wants to substantially stiffen up the process to make it more difficult, more ominous, and more costly as parents will end up paying for more doctor appointments, searching for any doctor to sign their opt-out form.

Without the vaccinations, parents will not be allowed to enroll children in public school. AB 2109 lacks any recourse for parents.

Sears argued what should be a personal freedom for families would become contingent on a third-party signature, which directly gives the physician ultimate power over their patient’s decision.

The Pacific Justice Institute opposes AB 2109, and states that existing law already provides a reasonable process for exemptions from mandated student vaccinations.

The opposition analysis for AB 2109 states, “This bill changes the current approach and inserts more bureaucracy into intimate medical decisions. The Health Advocacy in the Public Interest indicates that parents must have the freedom to make their own decisions with respect to the vaccination of their children.”

“Numerous letters from individuals, parents, and practitioners state that this bill is an intrusion into the personal freedom of parents to make health care decisions for their children. They state that this measure causes undue burden on parents, discriminates against families utilizing complementary and alternative medicine; and promotes more vaccine use and profit from the pharmaceutical industry.”

Expect to see expenditures and higher costs associated with the bill as well. “If the Commission on State Mandates determines that this act contains costs mandated by the state, reimbursement to local agencies and school districts for those costs shall be made,” the bill states.

The bill would result in preventing children from entering school, violates parental rights, and creates a path for more money to schools to cover associated costs. This is what a bad bill looks like.

(Katy Grimes is CalWatchdog’s news reporter and is a longtime political analyst, writer and journalist. Originally posted on CalWatchdog.)

You Can’t Build High Speed Rail with No Money

The Legislative Analyst’s “concern” that funding is not available for the High Speed Rail (HSR) comes at the same time that the federal government – a source counted on for HSR funds — appears to be turning against the High Speed Rail.

Yesterday, the subcommittee on Transportation under the Appropriations Committee of the United States Senate put a hold on HSR federal funds for the 2013 fiscal year. Ken Orski, editor and publisher of Innovation News Briefs, which follows transportation issues on Capitol Hill, says the full committee usually follows the sub committee’s recommendations.

Orski stated,  “The Democrat-controlled Senate Transportation Appropriations Subcommittee, which usually marches in lock step with the White House, has disallowed all of the Administration’s FY 2013 request for high speed rail ($4 billion).  Of the total $1.75 billion federal rail budget, the Senate Subcommittee has allocated  $1.45 billion for Amtrak and $100 million for the High Performance Passenger Rail grant program to assist  with the improvement of existing intercity services  and multi-state planning initiatives.  The House appropriators, of course, have never intended to vote any money for HSR in FY 2013, but the Senate action puts an end to any hopes that a House-Senate conference might provide even a token amount for high-speed rail in the FY 2013 federal budget.”

So where is the money going to come from for California’s High Speed Rail project?

The new HSR plan says two-thirds of the revenue will come from the Feds. With a Senate Subcommittee taking a similar attitude as the Republican controlled House that seems unlikely.

Private funding? That was part of the original plan. However, private funders want to feel there is a chance to make a profit. If you consider the High Speed Rail Committee’s constantly shape-shifting proposal as a poorly conceived business plan, investors would be foolish to take the risk.

Could HSR pay largely for itself with ridership fees? The estimates on ridership on the HSR have been laughable from the beginning – and that’s being kind.

What about the governor’s plan to use fees generated by the greenhouse gases law, AB 32, for subsidizing the HSR?

Such a move is legally questionable. If such a move were attempted a lawsuit over taxes, fees, and the voters right of approval would probably be filed. The idea may also violate the dictates of AB 32. The Legislative Analyst noted that the HSR effect on greenhouse gases would take an extremely long time and would not be within the required timeline required by AB 32 for greenhouse gas reduction.

If all these funding alternatives fail that leaves the taxpayers.

In 2008 when the HSR bond was on the ballot, voters were told the project would cost $33-billion; that private funds would rush to the project; that annual ridership would equal the population of a number of states – all promises that now appear false.

Polling indicates the voters have changed their minds about supporting HSR.

The taxpayers should not be on the hook for this project. While the legislature is likely to postpone the decision on the HSR to study the facts, legislators should also consider Senator Doug LaMalfa’s proposal to give the voters another chance to vote on the idea.

(Joel Fox is the Editor of Fox & Hounds and President of the Small Business Action Committee. Originally posted on Fox & Hounds.)

Your Autograph Is Worth Money — on CA Voter Initiatives

Among the most valuable autographs from living persons are those from the reclusive “moonwalker” Neil Armstrong, Tiger Woods — who signs very few — and Sir Paul McCartney. But you may be surprised to learn that yours, too, is likely worth money. If you are a California voter, your autograph is worth $3, $4 or even more to those folks standing outside of supermarkets asking for signatures to put initiatives on the ballot.

At the Howard Jarvis Taxpayers Association, we are strong supporters of direct democracy — the powers of initiative, referendum and recall. These powers were given to us by the founders of the original progressive movement — not to be confused with the far left “progressives” of today. The true progressives, including Hiram Johnson who served as California’s Governor from 1911 to 1917, knew that these powers would serve as a strong check against special interest influence in politics.

Nonetheless, like any political process, the power of initiative can be abused. As we know, the initiative process allows citizens to put measures before voters for their final say. We also understand that because it takes nearly a million signatures for a measure to qualify, it is sometimes necessary to augment volunteer efforts by providing incentive compensation to professional gatherers. However, it is important to note most of those soliciting your signature for tax increases are paid professionals. These independent contractors work with little or no direct supervision, and as a result, they are free to promote measures in any way they see fit.

Right now, throughout California, voters are being asked to sign petitions to guarantee adequate funding for education and public safety. Since, for most people, this description is about as controversial as being asked to sign a petition that supports everyone having a “nice day,” the professionals are doing a brisk business and assuring themselves of a lucrative payday.

What is not being told to many who are volunteering their autographs is that if the measure qualifies for the ballot and passes, their taxes will go up. And if Jerry Brown and the megabuck public employee unions behind this measure promote it with the same misleading language as is being used by signature gatherers, there is a good chance it will be approved.

No matter what they call it, the Brown tax is not about education or public safety. The revenue raised from the initiative would go into California’s General Fund, where decisions on how to spend it would be made by the usual suspects in Sacramento. Indeed, given that the retirement funds for state workers are so far underwater they are being viewed by James Cameron in his deep sea submarine, odds are high that new tax revenue will go directly to generous pension benefits.

This is why it is so important for voters to be fully informed now and avoid being fooled into supporting a tax increase that is not about California students and public safety, but is actually a bait and switch scheme to fund the enormous commitments Sacramento politicians have made to the public employee unions that represent the highest paid government workers in all 50 states.

Californians don’t have to fall victim to this misleading campaign. Voters have a right to ask the signature gatherers, “Does this measure increase taxes? And by how much?” To help combat the misinformation on the streets, the Howard Jarvis Taxpayers Association’s No New Taxes Committee has posted a list of questions to ask the professional gatherers when you are solicited. (Go and click on the red banner on the home page that says “Don’t Sign the Petition!”) After voters have more information, we are confident that most will want to “just say no” to signature gatherers working to increase taxes.

(Jon Coupal is president of the Howard Jarvis Taxpayers Association -– California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights. Originally posted on HJTA.) 

Wanted: A Wise and Frugal Government

What drives domestic politics today is government income redistribution. It forms the core of virtually every fiscal battle, since every policy that gives some what they don’t pay for must be funded from others’ pockets.

That gets highlighted during income tax season. The lowest 40% of earners now pay negative federal income taxes as a group (largely due to the refundable Earned Income Tax Credit), and those earning moderate incomes pay relatively small amounts. That forces higher earners to shoulder essentially the entire income tax burden, as well as the future costs of massive deficits.

Unfortunately, the underlying premise behind disproportionate burdens–that it is an appropriate federal government role to take from some to give to others of its choosing–is inconsistent with America’s founding principles. No one said it better than Thomas Jefferson, author of the Declaration of Independence and the most prolific founding father on the topic of our rights and liberty, whose April 13 birthday many Americans now “celebrate” by puzzling over tax forms.

“The functionaries of every government have propensities to command at will the liberty and property of their constituents.”

“The true foundation of republican government is the equal right of every citizen in his person and property and in their management.”

“[R]ightful liberty is unobstructed action according to our own will within limits drawn around us by the equal rights of others. I do not add ‘within the limits of the law,’ because law is often but the tyrant’s will, and always so when it violates the right of an individual.”

“[W]e have more machinery of government than is necessary, too many parasites living on the labor of the industrious. I believe it might be much simplified to the relief of those who maintain it.”

“[A] wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government…”

“If we can prevent the government from wasting the labors of the people under the pretense of taking care of them, they must become happy.”

“The policy of the American government is to leave their citizens free, neither restraining nor aiding them in their pursuits.”

“Our wish is that…[there be] maintained that state of property, equal or unequal, which results to every man from his own industry or that of this fathers.”

“It [is]…ridiculous to suppose that a man had less rights in himself than…his neighbors…This would be slavery, and not that liberty…for the preservation of which our government has been charged.”

“To take from one because it is thought that his own industry and that of his father’s has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association–the guarantee to every one of a free exercise of his industry and the fruits acquired by it.”

Thomas Jefferson left no doubt that the United States was not established to forcibly take from some for others, as that would violate both citizens’ liberty and their property. Our Constitution reflects that same view, containing not a single word authorizing federal income redistribution, but several clauses, which, taken seriously, rule it out. The General Welfare clause is one example. When Washington takes your money against your will for others, you are harmed. When your welfare is reduced, how can the general welfare–which must apply to you as well–be advanced?

April tax time commentary usually focuses on the cost and inconvenience. It ignores that many are exempted from most of those costs, forcing the tab for their government services onto others. But as Thomas Jefferson and our other founders made clear, imposing such disproportionate burdens is inconsistent with core American principles.

(Gary Galles is a Professor of Economics at Pepperdine University in Malibu.)

The Buffet Rule, Reagan, JFK, and Tax Fairness

President Barack Obama beats the drum for his tax hike on the rich emphasizing the “Buffet Rule,” named for investor Warren Buffet, in which no millionaire should pay a lower tax rate than his secretary. It’s all about fairness, the president declares.

President Obama quoted former President Ronald Reagan, a Republican icon, in fighting for his tax plan.

“Some years ago,” President Obama said, “one of my predecessors traveled across the country pushing for the same concept.  He gave a speech where he talked about a letter he had received from a wealthy executive who paid lower tax rates than his secretary, and wanted to come to Washington and tell Congress that was wrong. So this president gave another speech where he said it was ‘crazy’–that’s a quote–that certain tax loopholes make it possible for multimillionaires to pay nothing, while a bus driver was paying 10 percent of his salary. That wild-eyed, socialist, tax-hiking class warrior was Ronald Reagan.”

Meanwhile, Republicans fighting higher taxes quote President John F. Kennedy, a Democratic Party icon, in support of the idea of lower taxes for economic growth.

In his oft-repeated speech to the Economic Club of New York in December 1962, Kennedy argued for tax cuts. “If Government is to retain the confidence of the people, it must not spend more than can be justified on grounds of national need or spent with maximum efficiency…The final and best means of strengthening demand among consumers and business is to reduce the burden on private income and the deterrents to private initiative which are imposed by our present tax system; and this administration pledged itself last summer to an across-the-board, top-to-bottom cut in personal and corporate income taxes…”

While President Obama fashions his rhetoric of tax increases to achieve “fairness,” President Kennedy discussed tax cuts for economic growth as important for America’s security.

Counter arguments pop up whenever this kind of rhetorical jousting occurs.

To balance the Reagan quote, one can find Reagan starting one of his radio commentaries, “Brace yourself, I would like to see the rich pay more tax.” He explained that he wanted to secure more revenue from the highest tax brackets by cuttingtaxes.

Kennedy defenders who object to the use of his arguments for a tax cut say that he wanted to cut taxes from a 91% marginal rate to 65%. They ask: Would the Republicans like to agree to a 65% tax rate today?

In context, Kennedy was arguing for a tax cut to stimulate growth and strengthen the economy, an issue he declared was important to America’s security. “In the long run, that security will not be determined by military or diplomatic moves alone. It will be affected by the decisions of finance ministers as well as by the decisions of Secretaries of State and Secretaries of Defense; by the deployment of fiscal and monetary weapons as well as by military weapons; and above all by the strength of this Nation’s economy as well as by the strength of our defenses.”

On the contrary, President Obama says his tax plan is about fairness. Considering predictions that the revenue will do little to dent the deficit, it is also about politics.

Mitt Romney’s tax return showed he paid about 15% effective tax rate, well below the 30% floor the president wants to set for millionaires. The president, himself, at a 20% effective tax rate, pays a lower rate that his secretary.

But let’s talk fairness. The top 20% of income earners paid 70% of federal taxes in 2007, according to the most recent data available from the Congressional Budget Office. Forty-six percent of taxpayers pay no federal income tax, nor do nearly 1500 millionaires.

If fairness is the goal, a flat tax starting at a certain income mark to protect the poor, removing most of the deductions, especially those that are used almost exclusively by the high-end taxpayers, should be put in place. Then most everyone pays a relatively equal proportion of their income to sustain the government and no one gets special privileges.

Such a plan is as close to fairness as you can get with taxation and would reach toward the goals espoused by both JFK and RR.

(Joel Fox is the Editor of Fox & Hounds and President of the Small Business Action Committee. Originally posted on Fox & Hounds.)

Orange County’s Financial Iceberg Dead Ahead

Photo courtesy Missouri Division of Tourism, flickr

Like the Titanic a hundred years ago that ignored warnings and ran full-speed into a massive iceberg, Orange County is taking enormous financially risks rather than addressing their gapping cash-flow deficit.  The county quietly entered into $518 million of illiquid and unsecured interest rate wagers, mostly financed from the payroll and savings accounts of local schools and other government agencies.  With spending rising as revenue is falling and financial officers exiting as liquidity is drying up; the danger of hitting another iceberg is becoming extreme.  John Moorlach, Chairman of the Board of Supervisors, warned last year: “The County of Orange, which went bankrupt in 1994, is a bankruptcy candidate again.”  He should know as Chairman, he is steering the ship.

Despite falling property and sales taxes, Orange County inexplicably increased spending by $145.8 million for their fiscal year that runs from July 1, 2011 to June 30, 2012.  By late November the county’s cash position was so dangerously low, the county Treasurer skimmed off $73.5 of property taxes dedicated to local schools and community colleges to preserve liquidity.

My last report (here) detailed that three weeks after the schools’ money was hijacked, the Orange County Auditor-Controller made material financial disclosures in the county’s 2010-2011 Comprehensive Annual Financial Report filed on December 16, 2011, stating Orange County had a $30,146,000 shortfall in “Reserves for Contingencies.”  Fifteen days later, he resigned.

In response to a legal demand served on the Orange County Auditor-Controller’s office under the “California Public Records Act”, an internal memo was obtained titled: “Second Report – General Fund Level Available Financing.”  The document dated March 28, 2012, is an internal communication from the Orange County Assistant Auditor-Controller to the County Executive Officer, with copies to the Board of Supervisors.  The chart below taken from the document divulges in green that snatching $73.5 million from schools positively increased county total “cash” by 63% to $200 million.  But in red cautions that the county’s “Fund Balance Available”, which is the source of liquidity to pay the county’s $65 million bi-weekly payroll, is expected to sink by to $23.6 million by June 30, 2012.  As the Assistant Auditor-Controller sternly warned:

Any future use of reserves could potentially worsen today’s difficult cash situation.”

Two days later, he retired.

Fund Balance Available1 300x155 ORANGE COUNTYS ICEBERG DEAD ADHEAD

Orange County first revealed its intention to borrow up to $320 million from the county treasury   to pre-pay ballooning pension and retiree benefits in a Bloomberg interview on January 27, 2011.  John Moorlach, Chairman of the Board of Supervisors and former treasurer stated:  “When you think of the concept of borrowing from ourselves, we ask, ‘Why not?’… “Who’s a better credit than yourself?”  But Moorlach had inside information that the county only had half the total cash and only 13% of the liquidity necessary for the county to secure the transaction alone.  He knew that if the county wanted to do a big deal, they would need to use the cash that local schools and other governmental agencies had deposited into the county treasury and under control of the treasurer.  Despite known concerns about safety and liquidity risks, the Orange County Treasurer bought $287,872,000 of unsecured Pension Obligation Bonds yielding just 1.82%.  SEC filings now confirm that Orange County made $15.1 million profit on this deal with their Treasurer.

On August 28, 2011, John Moorlach warned Orange County was insolvent in an editorial he wrote for the Orange County Register: “The net investment in capital assets doesn’t even cover this debt”.  Regardless of bankruptcy risks, Orange County sold another $229,880,000 of Pension Obligation Bonds on January 18, 2012 yielding .85%.  According to the Orange County Treasurer’s latest monthly report, the Treasurer bought at least another $72 million bonds. The prospectus for the bond sale makes no mention of Chairman John Moorlach’s bankruptcy concerns.  The financial projections states that Fund Balance Available will increase from $41 million to $42 million, whereas we now know Fund Balance Available will fall to $23.6 million.

Captain Edward John Smith of the Royal Mail Ship Titanic knew the night was dark and the water was cold, but he continued run at such high-risk speed that when his lookouts spotted the iceberg there was no time to turn away and spare the lives of 1514 people.  Orange County knows the dangers of financial engineering, yet their leadership is once again willing to take high risks with taxpayer’s money intended for children’s educations.  Readers of this article may scowl that this type of gross incompetence and irresponsibility can only happen in Orange County.  But I suggest you might look into any financial shenanigans happening in your county.

(Chriss Street is a financial writer and speaker, and is author of the book, “The Third Way.”  Visit his blog for more information.)

County legacy: court-ordered pension ‘spiking’

Proposed legislation may curb “spiking” that has made county retirement systems notorious for providing pensions that exceed salaries earned on the job, a legislative committee was told last week.

After the Contra Costa Times revealed that two fire chiefs retired at ages 50 and 51 with pensions well above their salaries, one of them told the Wall Street Journal: “People point to me as a poster child for pension spiking, but I did not make these rules.”

The Los Angeles Times reported last month that a Ventura County chief executive earning $228,000 retired last year with a $272,000 pension — one of 84 percent of the system’s $100,000 and above pensioners receiving more now than earned on the job.

The 20 independent county retirement systems operating under a 1937 act include Los Angeles, the nation’s 34th largest public pension with 156,000 members and $40 billion in assets, and Mendocino with 1,953 members and $350 million in assets.

The California Public Employees Retirement System, which covers about half of the non-federal government employees in the state, sponsored anti-spiking legislation in 1993 making it more difficult to manipulate final pay used to determine pension amounts.

Similar legislation for the county systems cleared the Senate in 1994 but died in the Assembly. In 1997 the state Supreme Court issued a unanimous ruling in a suit filed by Ventura County deputy sheriffs that opened the door for more spiking.

The court said that in addition to the salary any cash commonly received in a pay grade or class for other things, such as uniform allowances and unused vacation time (but not overtime), must be counted toward pensions under the 1937 act.

The ruling was made “even though through the previous years in collective bargaining the counties and their members had agreed that these additional bonuses would not be treated as pensionable, which is how they got them over base salary in the first instance,” Harvey Leiderman, a fiduciary counsel, told the legislative hearing.

The court ruling created pension debt because annual contributions by employers and employees had not been made for pensions based on the additional pay. To cover the new “unfunded liability,” many county systems dipped into reserves built up over years.

“As a result reserves that had been allocated to cover unfunded liabilities created by the Ventura decision were no longer available to mitigate the negative investment experience that happened with the dot-com bubble,” Richard Stensrud, State Association of County Retirement Systems legislative chairman, told the committee.

A stock market led by high-tech stocks boomed in the late 1990s before plunging. What became known as the “dot-com bubble” burst, punching holes in investment funds expected to provide two-thirds of the money needed by many pension systems.

Later court rulings made the Ventura decision retroactive, boosting the pensions of some persons who had already retired. Several counties made court-approved settlements before the Ventura decision, adding to the legal complexity.

Unlike the state pension systems — CalPERS, the California State Teachers Retirement System and UC Retirement — many county systems declined to release the names and pensions amounts of retirees receiving more than $100,000 a year.

In an unbroken string since 2009, seven county retirement systems have lost separate lawsuits seeking information about how pension funds are spent. The suits were filed by several newspapers and reform, taxpayer and freedom-of-information groups.

Superior courts have ordered disclosures by retirement systems in Contra Costa, Stanislaus, Orange, Ventura, San Diego, Sacramento and Sonoma counties, upheld by appeals court decisions in San Diego, Sacramento and Sonoma.

The Los Angeles Times report last month, which focused on information from Ventura and Kern counties, said most of the other 18 county systems resisted requests for pension information or said it would be too costly or laborious.

“Some have asked to be paid for extracting the data — $63,000 in the case of Sacramento County,” said the Times story. The county association legislative chairman, Stensrud, also is the Sacramento retirement system chief executive.

He told the legislative committee the association, working with other stakeholders and legislative staff, backs a bill, AB 340, that would focus on the conversion of additional pay items to cash during the period that determines pension amounts.

Stensrud gave the example of an employer-employee agreement to switch employer-provided health care to a cash “allowance” for health care. The Times story said Ventura County has 60 categories of additional pay that can be converted to cash.

“By focusing on those pay elements, and particularly at that late career stage where it can have that impact, we believe there is a method for getting at spiking, even for current employees,” Stensrud said.

A widely held view is that a series of court decisions means that state and local government workers in California have a “vested right,” protected by contract law, to retirement benefits offered at the date of hire.

“They are entitled to any improvements, but the law protects them from detriments,” said Leiderman, the fiduciary counsel. As a result, most cost-cutting pension reforms are limited to new hires.

Stensrud said the bill authorizes the retirement system to take a “hard look” at final compensation and to be the “spiking police person.” He suggested the new role might need more independence from the “dominant employer.”

On the nine-member county retirement boards, four members are appointed by county supervisors, four are elected by active and retired members and one is the country treasurer or the equivalent.

Gov. Brown’s 12-point pension reform plan calls for more pension board independence and financial expertise. Anti-spiking provisions in the plan would calculate pensions on a three-year average of base pay.

One of the two Republicans on the six-member legislative committee, Sen. Mimi Walters of Laguna Niguel, repeated her call for a vote on the governor’s plan. “I’m worried that perhaps there are some backroom deals going on,” she said.

She referred to remarks by an absent committee member, Assemblyman Michael Allen, D-Santa Rosa, who told a local pension forum the committee was working with the governor’s finance department on a “hybrid” pension plan for new hires.

Sen. Joe Simitian, D-Palo Alto, said his “hope and expectation” is for a reform plan, before the end of August, that all committee members can support. He said lawmakers should have the “house in order” before voters consider a tax increase in November.

The committee co-chair, Assemblyman Warren Furutani, D-Gardena, concurred with the need to have the “house in order” to get new revenue. “Unions and other stakeholders critical of this process — it’s not something we are going to do independent of your ideas and feedback, but there is a broader context for all,” he said.

Mark Klein of SEIU Local 721, with members in six retirement systems, urged the committee to avoid a “one-size-fits all” plan, make changes through collective bargaining and provide an offsetting benefit if employee contributions are increased.

“Everybody talks about a pension crisis,” said Klein. “There is a retirement crisis. There is a revenue crisis. There is an economic crisis. There’s not a pension crisis.”

(Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. Originally posted on CalPensions.)

Why Government Pensions Are Going Broke

Why are government pensions going broke? Wayne Lusvardi wrote about recently it in one of our Special Series on municipal bankruptcy, “California counties are more at risk of going belly up.”

In one sentence, he wrote, “No one knows what rates of return pension funds will yield in the future”

In a reply, “Truthsquad” referred to that sentence, and commented,

“Exactly — but we can look at the past and lifetime of the pension systems in our state. Historically the returns have been well over 8 percent. Framing the picture to say returns will be as low as they are during an economic downturn is bogus, and thus undermines the ‘sky is falling premise of the information provided here.”

But look at the following chart.

It shows the performance of the Dow Jones Industrial Average since 1900, but adjusted for inflation. Pension funds generally mirror the stock market.

Look on the right side. The DJIA has shown essentially no growth for about 13 years, since the dot-com bust of 1999-2000. There was “growth” in the mid-2000s, but it was fake growth from the real estate boom — which quickly became the real estate bust.

This dismal record occurred under both Republican President George W. Bush and Democratic President Barack Obama, as well as under Congress when it was controlled, alternately, by Democrats or Republicans. So there’s plenty of blame to go around. And today’s “gridlock” — the Dems controlling the White House and the U.S. Senate, and Reps controlling the U.S. House — isn’t any better, either.

The assumption by “TruthSquad” and other defenders of the existing pension system is that growth will resume, zoom upward, and make up for the recent stagnation. But how can it make up for 13 years of stagnation?

Basically, you would need another Ronald Reagan to come in and cut taxes and regulations. Check out the chart: After he did that in 1981, growth rose sharply and lasted two decades. Bill Clinton, contrary to popular belief, did not revoke Reagan’s policies, but continued them. Clinton did increase taxes once; but he also cut taxes twice. So it basically was a wash — that is, a continuation of Reagan’s policies.

The Bush “tax cuts” of 2003 were temporary, leading to the ongoing extension crises. That means nobody knows what next year’s tax levels will be, thus scrambling business and personal tax and spending calculations. The economy only will grow when taxes are stabilized — with no new taxes; and when the Federal Reserve Board ends its inflationary, low-interest policies.

Moreover, “TruthSquad” doesn’t point out that even CalPERS doesn’t hold to that 8 percent figure. It recently cut its retrun expectations rate from 7.75 percent to 7.5 percent.

And CalPERS itself pays only 3.8 percent for “terminated pension plans” — those seeking to get out of its system. That’s the real amount that ought to be used in its own calculations.

Federal debt rising

Meanwhile, the U.S. government’s debt is $16 trillion and rising. And that doesn’t even include the debt for federal civilian and military pensions, Medicare, Medicaid and Social Security.

Look at this chart from an article on

There’s nothing but economic disaster that can come from such a heavy load of debt. The fedeeral government will have to continue its recent policies of inflating the currency, meaning more economic stagnation.

Imposing President Obama’s “Buffett tax” won’t help. Assuming it works, it would raise at most $160 billion over 10 years, or $16 billion a year, according to the liberal Center for American Progress. But the budget deficit is more than $1 trillion a year. With interest on the $16 trillion debt also compounding, that $16 billion (note the “b) a year is like spitting in the Pacific Ocean.

Another ‘lost decade’

“TruthSquad” expects economic growth to pick up substantially  because it has in the past. But why should it? Japan already is in its third “lost decade.” America has had one “lost decade,” 1999 to 2009; and now is well into its second, 2010-2012. American economic polices, as outlined above, are as dismal as ever.

Unless you believe Mitt Romney is the reincarnation of the Gipper (I don’t), then there’s nothing but more doom and gloom.

The pension funds will cut more deeply into state and local budgets.

If you disagree with me, then there’s something simple to do: Work to end the taxpayer guarantee for pension payments to retirees. Currently, state and local taxpayers are on the hook for shortfalls in pension performance.

Well, if these pension funds are expected to rise by an average of 8 percent per year, then there’s no problem; there’s no need for a taxpayer guarantee.

Memo to “TruthSquad”: As we say in America, Put your money where you mouth is.

(John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchgog. Originally posted on CalWatchdog.)