Wednesday, November 30, 2011

Totalitarianism Redux: California's "Carbon-Neutral" Future

We write a lot about the threat that taxes and business regulations present to Californians' freedoms, but there's truly no greater threat to individual liberty here than the one posed by environmentalism. Politicians here are like most politicians elsewhere: they want to confiscate your money and give it to their friends, and little else. But California's environmentalists are a different matter. All too often, mainstream representatives of this movement sail right past the simple idea of preserving beautiful outdoor spaces, embracing draconian policy prescriptions that would significantly curtain Californians' personal freedoms as well as economic activity. If you don't believe us, please harken back to June, when we wrote about the brave green new world being envisioned by the California Council on Science and Technology. Aside from assuming that 20% of the state's energy would be provided by technologies that don't exist yet, the CCST authors were happy to recommmend raising enough tax revenue to replace all natural gas heating in the state via retrofit, to mandate the use of electric cars, and to recommend a number of "behavior change" programs to make us all produce less carbon. You might think that proposals to forcibly return California to the technology of the Dark Ages might only be the work of fringe lunatics, but the CCST report was sponsored by the California Energy Commission, CARB, and SD Bechtel.

Of course, in order for this massive social engineering project to get off the ground, the environmental lobby is going to need the news media to downplay the seriousness of what's being proposed. If you want an example of that, check out this piece at California Watch. While we often appreciate CW's work, such as their reporting on the High Speed Rail project, this article reports breezily on an alarming paper recently published in the journal Science. It's not clear that the CCST authors contributed to the Science report (the organizational affiliations appear to be the same), but their ideas are very similar. (The full manuscript is unfortunately behind a paywall; the abstract is here.) Yet California Watch only focuses on how difficult it'll be for California to achieve huge reductions in greenhouse gases in the next 40 years, and only mentions things like "behavior changes" along the way.

If you want the context, we'll help you out. The authors of the Science article are talking about reducing carbon emissions to 80% below 1990 levels by 2050. To put this in perspective, forget about 1990 for a moment: if we were going to bring carbon emissions down by 80% from today's levels, we'd have to bring them to the level they were at in 1935. You know, when only six million people lived in California. You're kidding yourself if you think the changes required to achieve the goal in question won't dramatically affect the way you live your life.

Legislative Analyst: High Speed Rail "Does not Meet the Requirements" of the Law

California's High Speed Rail project has been a disaster in the making for a long time, but it wasn't until this past May that we saw the first major red flag: a report from the non-partisan Legislative Analyst in Sacramento. Political observers accustomed to the LAO's dry, wonkish style had to be surprised by their withering criticism of the state's rail authority. Their recommendations included abolishing HSRA, reconsidering the "Train to Nowhere" construction plan, taking the project offline, and renegotiating the terms of its federal funding. Governor Jerry Brown and many of his allies have continued to push the project, though the news hasn't gotten better for HSRA since the LAO report; most recently, a major problem with plans for running trains through San Jose has emerged, and Kings County (where the construction is slated to begin) has filed a lawsuit to stop it. Further, San Diego County officials are openly questioning whether the project should be scrapped, given that HSRA's revised plan has the train going no further south than Anaheim. And now, the LAO has weighed in again.

According to the latest Legislative Analyst review of the project, the current plan for building the high speed rail line is almost certainly illegal. Back in 2008, of course, California voters authorized $9 billion in bonds for the project through Prop 1A; per the language of 1A, HSRA is required to complete an environmental impact review, identify a corridor for the project, plan for setting up a usable line segment, identify all source of committed funds, and specify a schedule for the receipt of these funds. Currently, rail officials have only identified funds to be used on the "train to nowhere" segment in the Central Valley, on which no trains will be run until a second piece of the line is built. In addition, the train to nowhere was chosen to evade environmental requirements associated with federal rail funding, implying that HSRA hasn't complied with environmental regulations on a usable segment.

It's not clear whether the true believers will be dissuaded by this report, any more than the May report slowed them down; for magical thinking in the service of creating a worthless, multi-billion-dollar boondoggle, few government bodies disappoint less often than HSRA. Yet with rail opponents increasingly taking their cause to the courts, the LAO may have just created a significant problem for the project.

Monday, November 28, 2011

Fouling Off "Three Strikes"

Casual observers of California politics may wonder whether there's a connection between the state's chronic insolvency, its overcrowded prisons, and the outsize political influence of its prison guards' union. A big reason for all three, of course, is the "three strikes and you're out" sentencing policy, by which people can be sentenced to life in prison for a relatively minor felony offense, if that offense is their third. Civil liberties advocates have decried the three-strikes law for years, and after the U.S. Supreme Court ordered the Golden State to reduce the size of its prison population in May, the need for reforming it became clearer than ever. And now, it looks like a concrete proposal is afoot to curb three-strikes' worst aspects.

According to the San Francisco Chronicle, a proposed ballot measure would remove the three-strikes mandate for low-level, non-violent offenders. Unlike prior reform efforts, however, prisoners convicted of rape, murder, child molestation, or other particularly offensive crimes would be unable to appeal life sentences under the new measure. This stands in contrast to 2004's Prop 66, which was vehemently opposed by both law enforcement and our current Governor, who apparently thought releasing thousands of convicted felons was much worse seven years ago than it is today. The initiative's supporters believe that roughly three-quarters of the state's 4,000 nonviolent third-strikers could be eligible for re-sentencing. If so, the total savings to taxpayers could total $150 to $200 million a year. If this can be had without consigning thousands of Californians to life in prison for nonviolent offenses, all the better.

Workers of, um, Richmond, Unite!

A couple weeks ago, we wrote about the disastrously misguided thinking going on in the Bay Area city of Richmond. In spite of the crime and high unemployment that continues to plague the town, its leadership is apparently embracing socialism rather than the union-centered crony capitalism so popular elsewhere in California. Recently, the city chose to pander to the Occupy movement by taking steps to divest itself from dealings with businesses that don't pay income taxes, because, after all, why bother with things like context when you have large employers to push out of Richmond? And now, according to the LA Times, they may have discovered the answer to their economic troubles: the workers' cooperative.

We'll dispense with your first question right away: no, we're not kidding. Apparently, Mayor Gayle McLaughlin (a key contender for Golden State Liberty's 2011 Worst Politician in California award) recently saw the future of her city in a visit to Mondragon, Spain. Mondragon is a Basque town dominated by the Mondragon Corporation, a web of cooperatives employing some 83,000 people. Since August, Richmond has paid activist Terry Baird to work on setting up cooperatives in the city's bleaker pockets. These businesses include a hot-dog stand, a small solar-energy outfit, and a bicycle shop.

Our experience with the coop model is rather limited. We went to college in a small town that had a cooperatively owned bar in the main business district; in the time we lived there, it was the only pub in town that went out of business, amid rumors that the worker-owners had given away too many free drinks to their friends. That should tell you something about how much trouble Richmond is in: its mayor is embracing a business concept used by a bar that couldn't make money selling beer to college students. If that's not enough, keep this in mind: Richmond's mayor is embracing Spain as a model for economic growth. That's right: if you like the idea of 20% unemployment and swooning debts that threaten to take down a continent, then Richmond may be the town for you.

Sunday, November 27, 2011

LA Times: Maybe, Just Maybe, California is in Trouble

Regardless of how well or poorly things are going at any given time, one thing you can always count on in California is the tendency of its media and its political and cultural elites to focus on the joys of living here, glossing over the negatives. Even now, with the Golden State limping through its deepest recession since the Cold War ended, the same sort of boosterism prevails: if you don't believe us, have a glance at this May editorial in the Sacramento Bee, or this Milken Institute report from last month. As such, whenever we hear a mainstream voice questioning the idea that California's blessings make it somehow immune to the troubles of other places, we sit up and notice. And today, we see an example of this skepticism coming from, of all places, the LA Times.

Basically, the demographic changes underway in California these days are so stark that not even the Times can miss them. In 2010, only about 20% of those living in California were from somewhere else, a 100-year low. Partly this is a result of slowing in-migration from other places; the tide of Americans moving here from other states had ebbed by the 1970s, and by 2000 the flow of immigrants from other countries had slowed as well. But partly it's the result of a trend that's been evident since 2005: Californians leaving for other places. The implication of these trends, for the Times authors, is that the demographic changes that have characterized the Golden State for decades are likely to slow, and its future will depend on whatever its native-born population can bring to the table. Unfortunately, this is the Times we're talking about, and the piece largely shrinks from the broader implications of its subject. The authors wrap up by noting that many California ex-pats still hope to save up the money to move back, declaring that "those who depart may soon mourn what they leave behind: diversity of every stripe, mountains, ocean, climate. Especially climate." In other words, the state may be prohibitively expensive to live in and offer too few opportunities, but the appeal of the lifestyle it promises will ultimately bring the people back.

We'll admit to finding California's weather and scenery absolutely heavenly, and we'll state up front that our friends, family, and our neighborhood would make it hard to say goodbye to the place. That said, though, we're willing to be more hard-headed about it than the Times writers are. The simple fact of the matter is that the end of the Cold War and the gradual takeover of the state's political system by environmental extremists and organized labor have made California no place for a middle-class existence. There are still delightful places to live in the Golden State, but doing so will cost you a fortune, even if you're only renting. And putting up with the high cost of living just doesn't make as much sense as it used to. Many Americans (in California and elsewhere) are coming to grips with the hard truth that finding wealth and prosperity is no longer a question of finding the right employer in corporate America to take care of you. If you want to be wealthy and taken care of, you need to find some way of creating value for other people, so that you can take care of yourself. And more and more Californians seem to be reaching the conclusion that this is largely impossible in a state where taxes and the cost of living make saving a pipedream, and where the hostility of government to business places high barriers against the creation of that value.

Saturday, November 26, 2011

San Francisco Shows Us Democracy in Action

It's not a coincidence that we write so seldom about electoral politics; like many libertarians, our skepticism toward government intervention extends to the idea that voting confers any special legitimacy on that intervention. For one thing, elections are entirely too easy to manipulate. If you want an example, you could do worse than to take a look at the most recent mayoral election in San Francisco, which showcased the city's ranked-choice voting system.

The system works like this: if any candidate gets more than 50% of the votes in an election, he or she is declared the winner. If there's no majority winner, the candidate with the fewest votes is dropped, and his or her votes are redistributed among the others; this continues for as many rounds as it takes for a candidate to gain a majority share of the remaining votes. Of course, as more ballots cancel out, the number of votes needed to determine a winner decreases. In the San Francisco race, Ed Lee had only 43% of the vote after 12 rounds of dropping candidates, yet was declared the winner. Leaving aside the fact that 42.5% of eligible voters decided the mayor for everyone else, this implies that more than 31,500 San Franciscans were effectively disenfranchised in the election, because they didn't vote for either Lee or runner-up John Avalos. If you think ranked-choice voting sounds like a system that stacks the deck in favor of establishment candidates, well, you're not alone.

Medical Marijuana Advocates in San Francisco: Not Feeling the Hope and Change

Back in November 2008, we predicted that much of the euphoria and optimism attending the election of Barack Obama would dissipate into feelings of disillusionment and betrayal. In particular, we expected Obama to break drastically with expectations and campaign promises to be a disaster for civil liberties. And unfortunately we've been entirely correct. Most recently, the President has chosen to confound and dismay his most ardent supporters in California by declaring war on the state's medical marijuana industry. And according to this piece in the San Francisco Chronicle, the federal crackdown is starting to make itself felt in the economy of the state's most Obama-loving city.

Statewide, the UFCW (which has been working on unionizing dispensary workers since May 2010) estimates that 2,500 jobs have been lost since the crackdown was announced in late September. In San Francisco, it's a good thing that so much high-technology employment is taking place these days, because three medical pot clubs have shut their doors in the city by the Bay, taking 50 jobs with them. Of course, if you're a medical marijuana advocate in the Bay Area, you might not necessarily be troubled by violent assertions of government power. You might, on the other hand, be troubled by things that reduce tax revenues, and all the sales and payroll tax dollars that medical marijuana dispensaries remit to government have also vanished as a result of the push to shut them down. The Divinity Tree dispensary, which closed its doors in the Tenderloin on November 11, claims it paid no less than $200,000 in taxes every year. Another, Medithrive, paid some $68,000 in payroll taxes and permit fees this year.

None of these things is necessarily good, of course: it's not as though union workers are hurting much in the Golden State these days, and governments in the state desperately need to adjust themselves to life with fewer tax revenues. But it does illustrate the peculiar contempt the President seems to have for his most passionate supporters.

If You Think the Trigger Cuts Won't Happen, California has a Building to Sell You

While much of our energies these days go to mocking the flaws of California's current budget, it's important to remember that the Legislature actually passed two spending plans this year. The first, which cost lawmakers their pay for a while and drew out Jerry Brown's veto pen, wasn't as different from the one Brown signed as you might think, but it featured a handful of maneuvers that couldn't even pass Controller John Chiang's smell test. One of these was the sale of 11 state-owned buildings for an upfront total of $1.2 billion.

While we like the idea of selling government-owned assets into private hands, the sale illustrates Sacramento's unwavering ability to turn gold into lead. One problem is that selling off court buildings without approval from the Judicial Council is illegal. The second, larger problem is that the state is required to lease back buildings it sells for at least two decades. According to the Legislative Analyst, the "sales" would thus amount to 10% loans, and the resulting profit at taxpayer expense could violate laws against giving gifts to private citizens. In other words, it's a decent idea in principle, but the way California would implement it is terrible. And it was a good thing that Brown vetoed the budget that contained it.

Unfortunately, that was then, and California is once again scrambling for cash, this time to avert mid-year trigger cuts. And according to the Sacramento Bee, the same bad idea is finding new life. The private capital group trying to buy the buildings, California First, has apparently restructured its deal to lower the cost to taxpayers. The new proposal would raise the $1.2 billion through bond issues rather than private capital, and the buildings would be returned to public ownership after 30 years. Of course, without any of the details or any information on the assumptions the equity group used, it's hard to say more. But on the face of it, the new plan doesn't look much different from the old one. At the end of the day, it's still the government borrowing hundreds of millions of dollars on the taxpayers' credit card.

Wednesday, November 23, 2011

Happy Thanksgiving!

Just as an FYI, we'll be doing a lot of cooking tomorrow. And drinking beer. And watching football. And enjoying time with family. So it's unlikely we'll be doing any blogging.

We hope all of you have a safe and happy holiday, and that you take the time to remember all the things you're thankful for. We spend an awful lot of time writing about things we don't like, but we're grateful for both the creative outlet this blog provides, and for all the cool people we've met through it. The Golden State has many, many, many problems, but we're very thankful for the life we have here. And we hope you feel the same.

Looking for the Logic in Government-Union Relations

Before the financial crisis began exposing the shaky foundations of California's economy in 2007, it was hard to imagine a day when governments in the Golden State would actually contest the pay and benefit demands of their unionized employees. Yet in many, many corners of the state, that day is indeed upon us. Unfortunately, the rights of the taxpayers actually footing the bill for the promises of politicians aren't nearly as sacred here as you might hope.

On one hand, the taxpayers in Riverside County appear to have it pretty good. According to this report in the Press Enterprise, negotiations between the County and the local SIEU failed to produce a new agreement. On Monday, the union voted overwhelmingly to reject Riverside's contract offer, and to authorize a general strike. As such, Tuesday saw county officials impose their latest contract on the 5,800 employees represented by SIEU, under which these workers will contribute 3% of salary toward their pensions beginning in December, a rate than jumps to 8% in 2013. Future employees of Riverside County will see drastically reduced pensions under the contract. This is just the latest such move by the county, which imposed salary and pension cuts on its sheriffs and managers unions earlier this year. Yet with the recession hitting the Inland Empire especially hard and the county budget $80 million in the red, it's heartening to see someone diverging from the more typical "pass everything on to the taxpayer without making tough decisions" approach.

Unfortunately, responsible governments can only do as much as the courts will allow, and any effort to protect taxpayers at the expense of unions has to confront the will of judges. Who are, of course, appointed by politicians who are FTEs of organized labor. On Monday, Orange County found out that a government employee's belief that they're entitled to a lucrative benefit for life can constitute an enforceable contract, even if there's nothing in print to suggest that they're correct. And yesterday, the city of Costa Mesa learned that a written contract with unions is worthless if the unions decide they don't like a particular part of it. We've written a lot about Costa Mesa's effort to avert a financial crisis by outsourcing a large chunk of public jobs, which has made them a target of legal action by the city's Employees Association. Even though its contract with Costa Mesa allows for outsourcing city jobs and the six-month notice the union received, the Employees Association sued for breach of contract. And yesterday, a judge refused the city's request to throw the suit out. It's not clear that the union's argument will pass muster at trial next year, but it's not a good sign that such an obviously absurd claim has been allowed to stand.

What Rough Beast Slouches Towards San Jose to be Born?

Somewhat under the radar, a very interesting moment in the battle between California's public employee unions and its taxpayers is taking place in San Jose. Facing a budget deficit of about $80 million (for those keeping score at home, this would be eleven straight years of budget holes) and soaring costs for retirement benefits, the state's third-largest city has spent this year pursuing a bold plan for reforming its out-of-control pensions. While most of the pension reform proposals around California involve reducing the benefits of future government workers, San Jose's problems are so severe that it's planning a ballot measure to claw back the benefits of current employees as well. Their argument, essentially, is that the spending cuts required to offset the growing pension liabilities will require cuts to public safety and other services so drastic that the city will become all but unlivable. Back in June, Mayor Chuck Reed offered this description of what the San Jose of 2016 could look like:
A volunteer fire department, a mostly volunteer police department, and not much else. All libraries except Martin Luther King would be closed. All community centers, most likely closed.
After backing down in June on a plan to bring the plan to this month's ballot, Reed is moving forward in earnest these days. As reported in the San Jose Mercury News, the City Council made the case yesterday for a state of fiscal emergency. This sets the stage for a vote on December 6; if this vote goes the Mayor's way, the fiscal emergency will be declared, and Reed's reform measure will end up on the ballot in a special March election. The city has been in negotiations with its unions to avert this election, but according to council members, the concessions offered fall well short of what San Jose needs to avoid steep cuts in fire and police services, as well as the closure of most libraries and recreation centers.

Of course, San Jose's problems are likely far from over even if it can get the measure passed by voters. Current workers' benefits are generally viewed as vested rights, so at a minimum Reed's plan will be tied up in court for a while. We admire the Mayor's political courage on this issue, but we'd still guess that this saga ends either with a bankruptcy filing or the end of San Jose as a place where anyone might want to live.

This Day in Bad Ideas: Think Long's Ballot Super-Committee

We've already taken a hatchet to the Think Long Committee's proposal to extend California's unsustainable status quo on the backs of private industry. But it turns out we should've delved more deeply to find all the layers of absurdity in their plan. According to this report in Capitol Notes, a $10 billion tax hike in the middle of 12% unemployment is apparently not the worst idea in Think Long's proposal.

An even worse idea than handing the fate of the political system over to this guy.
One part of the plan that billionaire Nicolas Berggruen wants to put on next year's ballot calls for the creation of a "Citizen's Council for Government Accountability." Basically, this council would be a sort of Super-Committee, with the power to put both statutory and constitutional measures on the ballot without interference from the Legislature or any requirement to gather signatures. The committee's proposed statutes would only require a simple majority, while constitutional amendments would require a two-thirds majority. The idea being that the Citizen's Council, freed from the need to play electoral politics or raise millions in special-interest cash, will represent the public's interests in a way that the Legislature and the current initiative process fall short of. Or something.

Where do you start with this? The idea that the Council would be immune to the efforts of special interests is laughable. Nine of the 13 members would be appointed by the Governor, with two of those spots reserved for those with an independent or third-party affiliation; the other four members, two Democrats and two Republicans, would be appointed by the leadership in the Legislature. Does anyone with even a passing familiarity with the culture of Sacramento believe that Jerry Brown, Darrell Steinberg, and John Perez would fail to appoint a super-majority to get every pro-union, green-energy, and tax hike plan they can think of onto the ballot? More generally, does anyone really believe that this committee would be composed of average laypeople, as opposed to insiders? Yet this almost certainly isn't an accident.

The problem with Think Long is that it's fundamentally a product of the political elites that very much want to maintain their position in California's status quo. To these people, the biggest problems facing the Golden State are the difficulty and cost of getting a massive middle-class tax hike, draconian environmental regulations, and a business environment favoring organized labor and big in-state employers passed into law. The partisan gridlock and hopeless incompetence in the Legislature have made it almost impossible to get what they want via traditional representative democracy, and the costs of gathering petition signatures and advertising for ballot initiatives can easily run into the millions. For the taxpayers, of course, this is a wonderful thing: taxes have gone down this year, and there are signs that the jobs picture may be turning around. But the Think Long people don't necessarily care about the taxpayers; like all elitists since the beginning of time, they believe that the things they want will be best for everyone. With the Citizen's Council in place, all they'd need to do is make sure their friends got elected to the key offices in Sacramento, so that they could stack the committee appropriately. But let's not pretend that it's about giving the rest of California "a more active voice regarding the long term future direction of the state."

Tuesday, November 22, 2011

A Suggestion to Los Angeles' Business Community: Camp Outside City Hall

It's hardly a secret that the city of Los Angeles is notoriously hostile to private enterprise. There are the horrible taxes, which the government is reluctant to reform in spite of its 12% unemployment rate. There's the daunting maze of regulations and licensing requirements, which has led to a thriving underground economy there. And many of the city's small business owners have reason to complain about exorbitant rents and an inadequate police presence near their shops. With all of this, you might think that Mayor Antonio Villaraigosa is deaf to the concerns of the ordinary citizens trying to make ends meet in LA. Yet according to this LA Times report, you'd be wrong: apparently all you need to get the mayor's attention is a camp on the steps of City Hall and an incoherent list of demands.

I made my own head hurt with this move.

Even though the Occupy LA protests have yet to make any actual demands, and indeed don't appear to have any sort of leadership or spokesperson, the city's government is apparently sick of the encampment outside City Hall. As such, they've offered the Occupiers a sweetheart deal that many small businesses in LA would kill for: 10,000 square feet of downtown office space, on a $1 annual lease. What's more, Los Angeles is also offering free farmland to protesters who wish to use it, and to construct housing for the homeless who have joined the protests. Yes, you read that correctly: in order to avoid a violent, Oakland-esque confrontation with a protest they want to disperse, Villaraigosa is willing to basically hand them valuable property. It's not clear who the city is negotiating with, but we're sure its beleaguered and ignored law-abiding citizens are enjoying the red-carpet treatment an angry mob is receiving.

Orange County May Lead the Way in Bankrupting Other Counties This Time

Pessimistic observers of California politics generally agree that underfunded public pensions have the potential to devastate governments at all levels in the Golden State. What's generally not conceded, however, is that reducing already-promised retirement benefits is the only way of stepping back from this particular cliff. Unfortunately for taxpayers, government pensions don't work like those in the private sector; it's widely believed that benefits promised to current public employees and retirees are "vested," and cannot be reduced. And yesterday, we got our first taste of how government-appointed judges are likely to rule on the subject.

On Monday, the California Supreme Court issued a ruling in a case brought by the Retired Employees Association of Orange County against the county Board of Supervisors. Back in 2006, the Supervisors negotiated a deal with its employees union by which retirees were split off from the medical risk pool of current workers. Although the move helped Orange County corral its unfunded medical liabilities, many retirees saw their premiums skyrocket, as they were no longer able to benefit from being pooled in with a younger population. The retirees sued for breach of contract and a violation of due process, essentially arguing that the risk pooling was a vested benefit to which they were entitled for life. The big problem with their argument — the risk pooling stipulation isn't written down anywhere — was evidently not a problem for the Court, which ruled unanimously that "a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution." In other words, if government retirees think they were promised something for life, that could constitute an implicit "guarantee" that taxpayers are on the hook for.

The suit heads back to the Ninth Circuit, which will have to rule on whether Orange County actually broke an unwritten promise to its retirees. While we're curious about that outcome, we can't help but be pessimistic about the broader implications of this ruling. If a vested right to benefits for government workers can be "implied," it's hard to imagine any way forward for reforming current workers' pensions.

Monday, November 21, 2011

Tom Del Baccaro On California Taxes: Magical Thinking Isn't the Answer

We don't normally look to the California GOP as a source of insight, but we enjoyed this piece at Fox & Hounds from the Party's chairman, Tom Del Baccaro. While it's unsurprising that Del Baccaro is not thrilled about all the plans for tax hikes that seem to be crawling out of the woodwork, he surprises us a bit by framing these plans in an intelligent way.

These days, if you're a politician, pundit, or policy analyst in California, chances are you see the state's problems as a case of insufficient tax revenue. As such, any plans you devise for fixing those problems will involve finding some way of dramatically raising taxes; as Del Baccaro puts it, you believe that "there are untaxed pots of gold and that if only we would tap them our budget problems would go away." Of course, getting at those pots of gold is easier said than done. Given California's high (and highly regressive) income and sales taxes, a broad plan to raise these taxes is likely to face stiff public opposition, as Jerry Brown found out this past spring. Raising taxes on the richest Californians might sound appealing and get the public's approval, but even noted anti-tax ideologue Bill Lockyer is doubtful that this will help the state much. You could also try taxing businesses, as the Think Long Committee has suggested, but you run a risk making the state's business climate and economic conditions even worse, which no one wants at a time of 12% unemployment. For the most part, the debate about California's future boils down to a pointless, revolving discussion of these three options.

What Del Baccaro points out, to his credit, is that this debate takes place against a backdrop of massive increases in the size of government. Between 2006 and 2010, government spending shot up 60% in California, and Brown is proposing a stunning $12 billion hike in the general fund budget next year. And why is this the case? Because our political class is hopelessly addicted to making spending commitments it can't pay for. Back in 2007, you may recall that a number of cities ramped up spending on their unionized employees even as tax revenues were collapsing. And even now, it's not clear that the Golden State will pull the plug on its hopeless High Speed Rail project, even though there's almost no chance even a fraction of the plan can be paid for and there's no plan to actually operate it. Yet we're supposed to believe that these same folks are ready to break character by taking a massive pile of money and using it to pay down debt and shore up existing programs. That's right: the same people whose reckless expansion of spending created the problem in the first place are going to turn over a new leaf and stop doing what they've spent their careers doing. And we won't end up having the same debates again in a few years after that pile of money is wasted on hopelessly costly new commitments.

Del Baccaro also raises a point that's not made nearly often enough: it's not as though taxation is a costless activity. The tax debate in California frequently assumes that the "untaxed pots of gold" are simply lying around, stuffed under some millionaire's mattress waiting for the government to take them and put them to work. But the savings of the wealthy invariably become the capital that private industry uses to create products and jobs, and market demand can't really exist if the public at large has no money. In other words, taxation invariably suppresses economic growth. Given the grim economic conditions in the Golden State and it's already-heavy tax burden, it's long past time to bring further spending cuts into the discussion of how to fix California's finances.

Adventures in Property Rights: Colorado River Pact on Verge of Collapse

Few issues are more omnipresent in California politics than water rights, and few conflicts have been as bitter as the one over the Colorado River. In recent decades, population growth in places like Arizona and Nevada has reduced the Golden State's claims to the River's water, creating conflicts among its various water districts. In 2003, the districts reached a landmark settlement, the centerpiece of which was Imperial County's agreement to sell water to San Diego. In yet another example of what happens when you trust government to assign property rights rather than the free market, however, the pact is in danger of falling apart.

As reported by the Sacramento Bee, arguments begin today in Sacramento's 3rd Appellate District court, which will decide within a few months whether or not to overturn a 2010 decision that struck down the water pact. The latter decision, issued by Superior Court Judge Roland Candee, essentially concluded that California's open-ended commitment to save the Salton Sea as part of the 2003 pact set an impossible precedent, requiring the government to promise money to unacceptably costly projects. The Sea, California's largest lake, sits far below sea level, and thus requires the runoff from the nearby farms in Imperial County. As its waters recede, the resulting dust is likely to create terrible air quality problems. Yet former Governor Schwarzenegger pegged the cost of saving the Sea at $9 billion, which, needless to say, California doesn't have. On the flip side, the agreement has dramatically reduced San Diego's dependence on the Metropolitan Water District of Southern California. Again, insofar as this is a case of governments attempted to allocate an economic good by fiat, it's impossible to say what the "right" answer is here. But it's hard to imagine the court crafting a solution that's any better than the deeply flawed one the politicians came up with before.

Cutting Taxes is Hard to Do, Especially When You Love Them

If you want to understand why Los Angeles continues to struggle through the economic recession, even as the picture brightens in other large California cities (San Diego and San Francisco come to mind), the city's gross receipts tax is a good place to start. Logic dictates, of course, that cutting taxes on business is a sensible thing to do if you're interested in seeing those companies grow and hire people. And most of the time, that logic trumps ideology: even limousine-socialist San Francisco found it in its heart to cut its payroll tax back in the spring, encouraging growing tech firms like Twitter to expand in blighted neighborhoods. Yet as this Daily News report describes, doing things that make sense is sometimes harder than it appears.

The problem with LA's gross receipts tax is, basically, that it's very effective at what it does: killing business by extracting massive sums of money from private hands. It accounts for roughly 10% of the city's general fund budget, or about $425 million a year. As such, even as businesses flee for nearby communities and the county's unemployment rate remains near 12%, efforts to eliminate the tax have proceeded slowly. Last week, the City Council embraced a plan to extend a tax holiday on new businesses until 2015, and to phase out the tax for mutual fund agents. In addition to embracing these ideas, Mayor Antonio Villaraigosa also wants to exempt new car dealers from the tax. While these are positive signs, many critics of the receipts tax view them as too little, too late.

More generally, LA's efforts to get rid of the tax raise as many questions as they answer. The government in Los Angeles is not exactly known for its commitment to tax reform, and people like Councilman Bernard Parks appear more focused on maintaining the city's current spending than on reducing it to more sustainable levels. Even if the tax holiday is implemented, what happens when it expires and LA is (presumably) still broke? Certainly, the glacial pace of plans to scrap the tax speaks volumes on its own.

Sunday, November 20, 2011

Think Long Should Think Harder

Tomorrow, a group of wealthy California philanthropists is set to remind us how much better we'd have it if we only put our lives in their hands. Calling themselves the Think Long Committee, politicians like Gray Davis and Arnold Schwarzenegger and business luminaries like Eli Broad and Google's Eric Schmidt will announce a plan for saving the Golden State from collapse. Unfortunately, the plan offers exactly the kind of out-of-the-box thinking you'd expect from a committee featuring Gray Davis.

The centerpiece of Think Long's plan is a dramatic reform of the state's tax code: in contrast to Jerry Brown's hopelessly unpopular income and sales tax hikes, they would make California's taxes broader and more regressive. On the plus side, income taxes would drop sharply. Incomes below $45,000 wouldn't be taxed; a 2% rate would apply to incomes between $45,000 and $95,000; and incomes above $95,000 would be taxed at 7.5%. On the minus side, it would eliminate most deductions on personal income. The state's minimum sales tax rate would also fall, from 7.75% to 7.25%, but it would apply to services (basically, everything except health care and education) as well as goods. In a nod to the Governor's failed jobs plan, Thing Long would drop the corporate tax rate from 8.84% to 7%, but would raise taxes on out-of-state employers by applying the so-called "single sales factor." The group estimates that this plan would raise an additional $10 billion in tax revenues for Sacramento, mostly due to the tax on services. According to their plan, the money would be used to retire debt in the first year, and would go to schools and local governments thereafter. Think Long plans to put its members' money behind two ballot measures that would implement their proposal.

Mark us down as unimpressed by all of this. First of all, the plan has political problems. Insofar as it would repeal the requirement to compensate schools in the event of budget cuts, the powerful teachers' unions will labor furiously to stop it. And insofar as the service tax would doubtless translate into higher prices for consumers, it's not clear whether the public will get behind it. But Think Long also needs to Think Carefully about the underlying economics. Given how much the private sector in California is struggling with the state's regulatory environment, a hefty new tax on business is not the way to address an unemployment rate that's still over 11%.

More generally, it appears that Think Long focused on figuring out a politically palatable way of paying for the status quo in Sacramento: a better idea would've been to ask some serious questions about that status quo. Clearly, billions in new taxes will be needed if our government is to have any hope of paying for the programs and benefits it's promised so far; yet the reason California finds itself in that predicament is our government's long-running predilection for creating spending programs that can't be paid for. So why should anyone believe that an extra $10 billion every year would be spent retiring debt and funding existing programs, as opposed to expanding these programs or adding new ones? In other words, given everything we know about Sacramento, it's hard to believe we wouldn't see another Think Long Committee sometime down the road, with a new plan to fix a new financial mess. If these folks really want to chart out a better future for California, they should start asking more difficult questions about what spending the state can realistically afford, and what spending should be cut in the interest of economic recovery.

Saturday, November 19, 2011

If At First You Don't Succeed, Change the Rules: The Curious Case of the State Fire Fee

If you want to understand how government works these days in California, you could do worse than to recall the strange saga of the state's new fire fee. For those of you who haven't been paying attention, the story goes like this:

1. Shortly after taking office a year ago, Jerry Brown began a push to extend California's 2009 sales and income tax hikes for five additional years. The plan required two Republican lawmakers in each house of the Legislature to agree to a ballot measure putting the tax hikes before voters. Never mind that Californians were likely to reject the increases. As the budget negotiations creeped into June, it became obvious that GOPers had no intention of agreeing to higher taxes. Brown and his Democratic colleagues in the Legislature abruptly shifted tactics: instead of seeking Republican cooperation, the Dems passed a simple majority budget without them. This involved closing the budget's remaining deficit with spending cuts, accounting maneuvers, and tax increases that weren't called tax increases. Though it was called a fee hike rather than a tax, the fire fee is only constitutional under a very, very charitable interpretation of Prop 26.

2. The state budget assumed a flat $150 fee charged to homeowners living in fire-prone areas, and estimated that it would bring in $50 million in revenues. So it came as a surprise to Sacramento that the Board of Forestry and Fire Protection announced plans in August to impose a fee of only $90, with some homeowners only being charged $70. The move came in response to significant backlash from property owners.

3. Normally, negotiations between two parties involve finding a compromise in the middle that both sides can live with. Unfortunately, that's not how negotiations work in Sacramento. Days after the fire board's proposal was announced, Brown and the Legislature returned with a counter-offer: a minimum fee of $175, with additional charges starting at $1 per acre for the first 100 acres. That's right: even though the budget they passed capped the fee at $150, Brown and lawmakers decided they wanted more than that. In retrospect, it's a little surprising to us that Sacramento doesn't decide on arbitrary tax increases like this more often.

4. Fortunately, the fire fee was one of those items lost in the avalanche of bad bills accompanying the end of the Legislative session in September. A few days of negotiations followed the $175 fee proposal, but ultimately it died in the Senate.

5. Last month, Brown returned to the issue by taking his case to the people stacking the Board of Forestry and Fire Protection with his own appointees. After appointing four new Democrats to the nine-person Board, Brown got a new vote on a $150 fee proposal (some 90% of affected homeowners will qualify for a $35 discount). Unsurprisingly, things went his way this time. With a fee in place, now all we have to do is wait for the resolution of the lawsuits that conservative groups are almost certain to bring.

Friday, November 18, 2011

Santa Ana and Its Unions Agree: Dealing with the Budget Crisis Will Be More Fun in 2013

Ever since September, we've been following the crisis that hit the Orange County city of Santa Ana after its weak tax take and Sacramento's seizure of its vehicle license and redevelopment funds wiped out its "balanced" budget. Since then, amid rumors that it could file for bankruptcy or run out of cash this month, the City Council has moved quickly to outsource a variety of city services, and is trying to negotiate concessions with its unionized employees to close the deficit. According to Voice of OC, Santa Ana is close to deals with its police and service employees' unions that could save some $15 million, or about half of the budget hole they're staring at.

Unfortunately, the deals themselves don't represent any sort of serious effort to address the city's problems. Much of the "savings" comes in the form of deferred expenditures: temporary increases in pension contributions, reductions in overtime for police, and furlough days for service employees. City Councilman Sal Tinajero describes the agreements this way: "To be honest with you, it's something to get us through right now, because we don't have reopeners. I think this buys about 18 months." In other words, it's a textbook example of "kicking the can down the road." We suppose it's possible that Santa Ana will use those 18 months to address the structural problems that led to this crisis. But we're not optimistic. If the city had the vision and the political courage to make those kinds of decisions, they probably would've done so already.

Gridlock in Sacramento Means One Thing: Good News for California's Economy

We're proud of our reputation as a source of grim commentary on the California economy, so the latest news out of the Employment Development Department is throwing us for a bit of a loop. According to the EDD, the state's unemployment rate dropped to 11.7% last month, and all told the Golden State added nearly 26,000 payroll jobs. Taking into account the upward revision in the September numbers, California has created some 86,000 jobs in the past three months. The full report is here.

More specifically, 35,500 new jobs were added in seven sectors of the state's economy: construction, information, finance, professional and business services, educational and health services, leisure and hospitality, and other services. In contrast, almost 10,000 jobs were lost in government (blessedly), manufacturing, mining and logging, and the trade, transportation and utility sectors. Since last October, employment in California is up 1.7%, with a total gain of 240,000 jobs. Claims for unemployment benefits held steady, and new claims for unemployment benefits were up almost 15,000 from September. Most encouragingly, unemployment in California's most populous counties appears to be easing. In northern California, Marin (7.9%), San Francisco (8.1%), San Mateo (7.9%), Santa Clara (9.5%), Alameda (10.1%), Contra Costa (10.0%), Napa (8.3%) and Sonoma (9.3%) counties all had unemployment rates below the state average. The picture is more mixed in southern California: joblessness remains high in Los Angeles (11.9%), San Bernardino (12.8%) and Riverside (13.7%) counties, and post-apocalyptic in Imperial County (28.9%), but below-average in Orange (8.5%) and San Diego (9.7%) counties.

The gradual improvement we're seeing here obviously has many causes. We may not be seeing the schizophrenic growth in evidence during the summer, but the flood of newly printed dollars appears to be finding a home in the VC-connected sectors of the San Francisco and Silicon Valley economies. Still, we can't help but smile when we think back to all the hand-wringing we were hearing from politicians and newspaper columnists in the spring and summer. We know it's hard for everyone to comprehend, but somehow, some way, California's economy may be coming back to life in spite of the failure of Jerry Brown's "jobs plan." That's right: recovery can happen even without renewing taxes on energy and slapping $1 billion in new corporate taxes on out-of-state employers. And could it be that the 1% drop in income and sales taxes that occurred when Brown's tax plan failed was actually a good thing as well? In spite of all the dire warnings we got about the catastrophe that would follow lower taxes, it's almost looking like lowering taxes in a recession is a good thing. The lesson in all this? When Sacramento has trouble getting things done, things start to look up for the rest of us.

Deadbeat Alert: Fitch Warns of Trigger Cuts' Impact on School Districts' Credit

File this one under "something something tangled web we weave something something." We've already ripped into Jerry Brown and the Legislature for eschewing responsible public finance and assuming that the Tax Fairy would bring $4 billion in extra money to "balance" California's budget. And so far, it looks like we were right to do so. But as bad as the "trigger cut" idea was, our public servants found a way to make them even worse: adding political cronyism to the mix. Specifically, an education trailer bill found its way into the budget at the last minute; this bill, AB 114, prohibited school districts from laying off the Democrats' friends in the teachers' unions, and also prohibited planning for the trigger cuts in any way. Now, with almost $2 billion in mid-year budget cuts to K-12 education looming, we may be seeing the consequences of playing Santa Claus to organized labor back in July.

Hey Darrell. Check it out. Bankrupt school district over there.

According to this report, the Fitch rating agency has warned that the trigger cuts could significantly affect the credit ratings of school districts across California. Essentially, districts that have a Negative Rating Outlook or cash problems will be reviewed for possible downgrade. Since early 2010, Fitch has downgraded 14% of the California districts it rates; 22% of districts in the Golden State currently have a negative outlook with the agency. While some districts may be able to absorb the cuts by laying off staff and/or shortening the school year, many are pessimistic about achieving the mid-year labor concessions they'd need to make these offsets happen. As such, these districts will be forced to dip into whatever cash reserves they have.

Attention Silicon Valley Libertarians: James Altucher to Speak at Santa Clara University

If you're a libertarian in the Bay Area looking for something to do next Monday evening, you might want to check this out: James Altucher is giving a lecture at Santa Clara University. Fans of Lew Rockwell's website will recognize him as a frequent contributor and sometimes guest on Lew's podcasts. An internet entrepreneur and a veteran financial writer for outlets like The Financial Times,, and Seeking Alpha, James is the author of the Altucher Confidential blog, one of the most entertaining and compelling things on the web these days, as well as a new book called I Was Blind But Now I See. It's hard to say what the subject of his talk will be, but it's likely to cover entrepreneurship, creativity, money, and personal happiness.

The talk is at 6 pm Monday, in Weigand Room 102 of Santa Clara's Arts and Sciences Building. Details are available through the Society of Libertarian Entrepreneurs' San Jose Facebook page.

Thursday, November 17, 2011

Reason on Carl DeMaio and San Diego Pension Reform

Slowly but surely, reform of public pensions is coming to the fore as a major political issue in California. The $500 billion unfunded liability in CalPERS, CalSTRS, and the University of California retirement system gets the most attention, but the underfunded city and county pensions are creating serious problems that suggest what the future may hold. And while the union-dominated Legislature promises to thwart the tepid reforms being proposed by Governor Jerry Brown, officials at the local level aren't waiting for Sacramento to lead the way. As we see in the latest installment of Reason TV, one such official is San Diego Councilman and mayoral candidate Carl DeMaio. Next June, voters in California's second-largest city will weigh in on DeMaio's Comprehensive Pension Reform plan, which will attempt to address San Diego's $2 billion unfunded pension liability by switching new hires to a 401(k)-style defined-contribution pension, curbing spiking practices, and installing a five-year cap on pensionable compensation.

Of course, unionized public employees aren't taking the measure lying down, which should surprise no one. Throughout the spring and summer, the Orange County town of Costa Mesa was vilified by media pundits, unions, and politicians for its efforts to combat a looming pension crisis by downsizing its workforce. And the final chapter has yet to be written on the radical reform proposal being pushed by San Jose, which is looking to avert financial disaster by curbing the pensions of current city workers. Mayor Chuck Reed, who has championed the plan, initially backed down in the face of pressure from both organized labor and the state's Democratic establishment. But city voters are still expected to see the plan on a ballot next November. Down in San Diego, unions' panic over DeMaio's plan was a bit clearer: as the video shows, they attempted to stop it by harassing volunteers gathering signatures for the measure's petition, and through a radio campaign that attempted to trick residents into believing that signing the petition could expose them to identity theft.

BREAKING: E-Bullion Founder James Fayed Sentenced to Death

Back in May, Camarillo businessman James Fayed was found guilty of first-degree murder in a Los Angeles courtroom over his involvement in a plot to kill his wife Pamela. The story drew our interest because Fayed and his wife once ran the digital gold currency e-Bullion. Though they hold fascinating potential as an alternative to the mad ways of the Federal Reserve, digital currencies are still vulnerable to scam artists, and in 2008, James Fayed was arrested by federal agents on charges of running an illegal money-transfer operation. The indictment created a bitter rift between the Fayeds, who filed for divorce and accused each other of embezzling large sums from their business. Pamela Fayed chose to cooperate with authorities, but was killed in a Century City parking garage by men her husband had hired. And today, the Beverly Hills Courier reports that Fayed has received the death sentence for his crimes, after Superior Court Judge Kathleen Kennedy rejected defense requests for a new trial and a reduction to life in prison.

Guess Which State Is the Only One Left in the Western Climate Initiative?

And yes, you only get one guess. According to this report, California's nearest neighbors have decided to make disinvestment in the Golden State even more attractive: Arizona, New Mexico, Montana, Utah, Oregon and Washington have formally withdrawn from the Western Climate Initiative. Founded in sunnier times in 2007, the WCI was an agreement between seven U.S. states and the Canadian provinces of Ontario, Manitoba, Quebec and British Columbia to set up a cap-and-trade program to reduce greenhouse gas emissions. But years of recession have a way of focusing minds on the consequences of economic policies that are, you know, expressly intended to destroy jobs. Well, except in California, which will now have to save the world by destroying jobs on its own. Arizona and other states, meanwhile, will take part in North America 2050, a new initiative intended to develop climate policies that spur growth. Since this will probably involve subsidizing green technologies, we doubt it's going to work any better than cap and trade. But it is heartening to see the political establishment actually taking the recession seriously, and recognizing their own role in prolonging it.

Richmond: Committing Economic Suicide to Prove a Point

The time we spent in downtown Oakland recently brought us into our closest contact yet with the Occupy movement. When a close family member was discharged from the hospital two weeks after major surgery, we experienced the joy of driving through the protest during Friday evening rush hour while taking her home. Needless to say, our opinions of the movement haven't changed much since we first wrote about it last month. There are a lot of things to dislike about the Occupiers: their sense of hopeless victimhood, the incidents of violence in their camps, and their monopolization of public space. But maybe worst of all is the economic ignorance that's spread like wildfire from the protests. Truly, no good can come from the sight of politicians lining up to pander to these people. If you want an example, check out this report from the East Bay city of Richmond.

With unemployment topping 16% and a long history of violent crime, you might think that a place like Richmond would be hard at work trying to create more economic opportunity for its citizens. Unfortunately, this is the Bay Area we're talking about, and class warfare and grandstanding are taking precedence over logic and economics these days. Back in June, the City Council nearly foisted the highest sales tax in the Bay Area on its blue-collar populace. And now, they're pandering to Occupy Wall Street by proposing to divest the city from business dealings with private companies that don't pay net income taxes. That's right: never mind the poverty, unemployment, and crime, Richmond has a statement to make! Namely, that it doesn't want large employers to do business with the city, that it can't be troubled with little things like context (i.e., many companies didn't pay income tax between 2008 and 2010 because of, you know, massive losses and crony capitalism), and that it cares more about displays of solidarity than actual solutions to real problems. Mayor Gayle McLaughlin states Richmond's stance far better than we could: "This movement is asking something of us as public officials. This item is a place where we can say, 'We represent the many.'" If you've been to Richmond recently, you can judge for yourself how "representing the many" is working for McLaughlin.

California Cities Seize Properties in Order to Save Them

The good folks at California Watch bring us this interesting report on the scourge of blighted homes afflicting many cities in the Golden State. Since the housing crisis hit California like a freight train, beginning in 2007, many towns have struggled with the resulting epidemic of eyesore properties. Unfortunately, their solution to this problem is about what you'd expect: "temporarily" seizing the property and placing it in the hands of a court-appointed receiver, who is given a favorable loan to pay for cleaning things up.

Under what's called a health and safety receivership, city agencies responsible for enforcing code violations take control of vacant or rundown properties and hand them over to private parties like the California Receivership Group, which claims a 30-40% increase in business in the past year alone. The loans that receivers take out to improve the properties are given priority over any other loans (except tax liens) against the property. Though it offers few statistics, the report notes that the Los Angeles county suburb of Whittier has placed 15 properties into receivership in the past six months, and says the city of Eureka has also been active in this regard.

Of course, the process only makes sense if the property itself is worth enough to rehabilitate it, and if the receiver is able to get a loan. Nevertheless, the potential for abuse here is worrying. Given the history of eminent domain abuse in California, it seems unwise to give local governments another avenue for declaring a property "blighted." At the end of the day, this is about taking private property away from its owners, and in many cases turning people out of their houses.

Wednesday, November 16, 2011

BREAKING: Millbrae to Outsource Its Police Department

This evening brings us another small victory for taxpayers on the San Francisco Peninsula. Just days after Palo Alto voters gave a hearty thumbs-down to the notion that organized labor should have privileges not available to the rest of recession-battered California, we have news this evening that the city of Millbrae is taking steps to dissolve its police department and outsource law enforcement to the San Mateo County Sheriff's Department. Along with its neighbors in Half Moon Bay and San Carlos, Millbrae becomes the third city in the past year to contract out for police with the Sheriff's Office. The move will save the financially troubled town some $1.1 million next year.

Adventures in Central Planning: County Realignment More Popular than Expected

When Jerry Brown first floated his county realignment plan, some libertarians were cautiously optimistic about it, seeing the chance for strengthening local control of law enforcement and reducing the crowding in California's teeming state prisons. Skeptics, of course, viewed it as a cynical ploy to close part of a then-$26.5 billion state budget gap by shifting new public safety responsibilities onto the shoulders of counties. Perhaps unsurprisingly, the skeptics have had the better of the argument thus far. Both city and county officials in some of the Golden State's most populous corners have complained about the costs of the realignment to their already-strained departments. And in a report that makes us glad we recently moved out of a neighborhood that housed a county jail, counties all over California are finding that the numbers of prisoners being diverted through the program is far greater than they expected.

The LA County Men's Central Jail: Worse than State Prison?

According to the report, Los Angeles County has added 900 new prisoners to its system, rather than the 600 they expected to have. The Sheriff's Department there has funding to add 1,800 beds, but they now expect to add some 8,000 prisoners in the next year. Additionally, LA County is under court order to prevent overcrowding in its jails. Meanwhile, Orange County expects to hit its jail capacity by next May, instead of sometime in 2013, and they don't see any way to electronically monitor all the inmates they're going to have to release. Riverside County's jails are at 93% capacity, and will likely be full by January. The Kern County Sheriff even had to free 50 parole violators last week because it had no beds for them.

Back when the most recent budget was passed, we (and others) speculated that it was Jerry Brown's way of extorting higher taxes out of the public: making spending cuts so obnoxious and unpleasant to taxpayers that they'll give in to Sacramento's demands for more money, thus relieving Brown and the Legislature from having to make any difficult decisions or any change to the status quo in California. Now, we're starting to see the predictable consequences of this approach: convicted felons will be hitting the street, unmonitored, in the very near future.

BREAKING: Legislative Analyst Forecasts $13 Billion Deficit, Trigger Cuts

File this under "the more things change, the more they stay the same." On the heels of a grim report on the state's finances from Controller John Chiang, the Legislative Analyst's Office has released their own report on what sort of tax revenues California might expect for the remainder of the fiscal year. And, well, skeptical as one might be about Sacramento's willingness to follow through on the budget's mid-year "trigger cuts," it's looking like they might not have much choice.

Please disperse. Nothing to see here.

According to the LAO, California is expected to fall about $3.7 billion short of the $4 billion in extra tax dollars that Jerry Brown and Democrat lawmakers laughably assumed would "balance" the budget. Unless another equally laughable accounting maneuver can be found, the state will need to cut $2 billion in spending next month. K-12 education would lose $1.4 billion, the Cal State and UC systems would lose $100 million each, and services for disadvantaged Californians would lose hundreds of millions as well. Since the teachers' unions won a gift from the Legislature, whereby the trigger cuts can't include teacher layoffs, it's likely the K-12 cuts will come in the form of a shorter school year.

If that's not enough good news for you, the state has a projected budget deficit of $13 billion. That is, it has a $13 billion deficit if you assume that the trigger cuts and everything else cut this year become permanent, and spending stays flat. If you factor in the $12 billion increase in spending that Brown is planning for next year, the deficit almost doubles.

Palo Alto Unions Lose their Binding Arbitration Battle

When you think of Palo Alto, you generally think of things like Stanford University, technology startups, and limousine-liberal Democratic politics. Yet signs are appearing that the town that always seems to be hosting a technology summit or a campaign fundraiser for President Obama doesn't share his affection for organized labor.

Okay, okay, this isn't really Palo Alto.

Back in September, we wrote about the fight the City Council was waging against its firefighters union, in an effort to abolish binding arbitration in disputes with unionized public employees. The firefighters attempted to stop the proposal, known as Measure D, from seeing the November ballot, filing an unfair labor practices complaint against the city and urging California's Public Employment Relations Board to issue an injunction stopping the measure. Fortunately, neither of these efforts succeeded, and last week Palo Alto voters easily passed Measure D. And today, the San Jose Mercury News reports that an administrative law judge has thrown out the firefighters' labor practice complaint.

Basically, the passage of Measure D is a victory for Palo Alto's taxpayers, insofar as the city will no longer be required to submit to binding mediation by an outside arbitrator (an arrangement that invariably favors the unions) if it needs to impose budget cuts during lean times. Outside of Silicon Valley, it's yet another sign that reliably liberal parts of California are becoming less willing to preserve the privileged status of unionized government workers.

Oakland Taxpayers Not Willing to Pay for City's Mistakes

Proponents of taxing California's residents into oblivion, including the news media and the political establishment in Sacramento, are reportedly heartened by the successes of recent local tax initiatives around the state. With 40 of 53 measures to increase or extend taxes, fees, or bonded debt passing in cities, counties, and school districts statewide, the thinking goes that Jerry Brown's plan for some unspecified tax hike at the state level just got a shot in the arm. Yet the latest news out of Oakland should give Brown and others something to think about.

If you haven't been following events in Oakland these days, here's what you missed: a $58 million budget gap, which was closed by a comically dishonest accounting maneuver; the resignation of the police chief amidst conflict with Mayor Jean Quan and the challenges of implementing Jerry Brown's "prisoner realignment" plan with a shrinking force; and turmoil in the mayor's office following the police department's aggressive response to the Occupy Oakland protests. In other words, you could say Oakland has troubles. But the city had a plan for fixing its woes: higher taxes. Measure I, the so-called "fiscal emergency parcel tax," was an $80 tax intended to fund a broad range of city services while giving Oakland time to sort out its finances. Of course, given the city's history of spending money it doesn't have, one could forgive the voters for being skeptical that the new money would actually end up going to public services. And according to the Oakland Tribune, the contentious bill went down to defeat, along with a measure to give the city more time to fund its police and firefighters' pension fund.

While we don't necessarily agree with their premise, many Californians are okay with voting higher taxes on themselves, but most would insist that certain conditions are met. Specifically, they want the money directed at concrete public services rather than vanishing into broadly-defined slush funds, and there is a point at which voters will consider taxes too high. It's not certain what sort of tax plan Brown will ultimately propose, but Sacramento faces a serious credibility problem on both of these fronts. California has an unfortunate history of finding new ways of spending tax hikes, rather than shoring up existing programs, and lest we forget, Brown is planning on a massive increase in spending next year. And yes, the Golden State continues to have the most regressive tax structure in the nation, meaning that any broad tax increase at a time of 12% unemployment will be deeply unpopular. So, while Californians are often receptive to public provision of services and the taxes that pay for them, the developments in Oakland suggest that this may not translate into the blank check that Brown likely wants.

Tuesday, November 15, 2011

High Speed Rail: A $98 Billion Infrastructure Boondoggle with No Place to Go

For people of limited economic imagination, like our Governor, massive public infrastructure projects are the key to turning the tide of California's economic misfortune. And they don't come much more massive than the High Speed Rail project. Sadly, practical reality has proven to be a more determined opponent of the project than any politician. And the news has only gotten worse in recent days.

A new and sizable problem for the High Speed Rail Authority emerged yesterday, this time from an unlikely source: San Jose. According to the Mercury News, HRSA has determined that its plan to run an underground tunnel from the south into Diridon Station isn't going to work. Basically, the poor soil in the area means they can't run the train through a shallow tunnel, but the high groundwater means a deeper tunnel isn't going to work either. As a result, the Rail Authority wants to pursue other options; these include running new tracks along the ground into the station, or else building a giant concrete structure to carry the trains above the city. San Jose hates the first alternative, insofar as it's eyeing the land HRSA would need for a new baseball stadium that may one day be home to the A's, and it hates the second option because it would create horrible blight in an area the city's spent millions trying to redevelop. This news will doubtless be music to the ears of homeowners along the San Francisco Peninsula, who continue to oppose HRSA's plan to run the train through their backyards up to the city. Importantly, it's a big blow to any plan to connect the rail line directly to San Francisco: any other plan would almost certainly require the construction of a new bridge spanning the Bay.

The second bad piece of news to hit HRSA comes from Kings County, where the construction is supposed to start. This small county in the Central Valley is reportedly suing HRSA to halt the ground-breaking. This is, of course, less than surprising, insofar as the county filed a motion with the Federal Railroad Administration in August, asking DC to reject HRSA's environmental impact statement. This time, Kings County is arguing that California can't legally spend $2.7 billion in taxpayer money because, essentially, things have changed. Their argument is that the projected costs have ballooned, and the sources of funding have dried up to such an extent that only a fraction of the proposed project can actually be built. Of course, this isn't the only lawsuit HRSA is facing over its plans for the line, but it seems likely that construction will have to wait until this latest suit is resolved.