Reason Foundation - Policy Areas > California

CA Treasurer Says Public Pensions Will 'Bankrupt' State

adam.summers@reason.org (Adam Summers) — Wed, 04 Nov 2009 20:29:00 EST

Perhaps the powers that be in Sacramento are finally waking up to the fact that the state's public pension system is in need of serious reform.

First, at a seminar in August, California Public Employees' Retirement System (CalPERS) chief actuary Ron Seeling admitted that the cost of pension benefits for state employees is "unsustainable."

Now state Treasurer Bill Lockyer is warning that, without significant reform, pensions will "bankrupt the state."

At a recent joint hearing of the Select Committee on Improving State Government, Lockyer scolded legislators and offered a pessimistic view on the prospect of reforming the pension system: "It's impossible for this legislature to reform the pension system, and if we don't do it we bankrupt the state. And I don't think anybody can do it here because of who elected you." (See about 45 seconds into the video below.)

Lockyer again alluded to the influence of the state employees' labor unions in stifling pension reform in an interview following the hearing. As reported by Ed Mendel of the Calpensions blog, Lockyer spoke of the pressures to satisfy the special interests and major campaign contributors that help elect politicians, saying, "That sense of obligation is always too strong to ever do anything that is going to seriously affect, in an adverse way, the folks who helped elect you."

He, additionally, spoke of the prospect of offering reduced benefits to future state hires, creating a "two-tier" system: "People talk about a two-tier system as a way to do it," Lockyer said. "I think that's ultimately inevitable. But I don't know that it's ever possible legally or politically to do takeaways (of promised benefits)."

An initiative that would create such a two-tier system is currently being drafted by the California Foundation for Fiscal Responsibility (CFFR), a group focused on public pension reform and the organization responsible for collecting and publicizing the "$100,000 Pension Club." (According to CFFR's searchable databases, there are 6,133 retired state and local employees collecting pensions of at least $100,000 through CalPERS, and an additional 3,090 retired educators collecting such generous pensions through the California State Teachers' Retirement System (CalSTRS).)

Lockyer does not like the odds of a pension reform initiative passing, however. With another nod to the power of well-funded labor campaigns, he noted that such an effort would be difficult "when affected interests can dominate the airwaves with their point of view."

California, like many other state and local governments, is being held hostage by its employee labor unions. The state's labor costs are too high and its unions too powerful. When politicians can be bought by labor unions, and then return the favor by imposing pension obligations that will not be realized until long after they are out of office, that is a recipe for fiscal disaster. Even with significant reform, such as a shift to a 401(k)-style defined contribution retirement system comparable to benefits received in the private sector for all new employees, it will take California many, many years to recover from the past and present costs of state employee compensation (if, indeed, it is ever able to recover). Without it, the state will be doomed to perpetual budget crises and broken government.

California to Send 2,300 More Inmates to Out-of-State Private Prisons

leonard.gilroy@reason.org (Leonard Gilroy) — Tue, 03 Nov 2009 12:43:00 EST

Per Southern California Public Radio, California has amended its contract with private prison provider CCA to increase the total number of contracted out-of-state prison beds by an additional 2,300 as part of the state's strategy to get a grip on its prison capacity crisis:

Back in 2006, Governor Schwarzenegger declared a state emergency in California's prisons due to overcrowded conditions he said threatened inmates and prison guards. That proclamation authorized the Department of Corrections and Rehabilitation to temporarily transfer 7,900 inmates out of state over the last 3 years.

The departments' Gordon Hinkle says the transfers enabled California to get rid of thousands of makeshift cells erected in prison day rooms and gymnasiums. "One of the things we've been trying to do in California is to shut down any of the 'bad beds' or dorm-type living situations which creates a higher security risk not only for the inmates but for also for the correctional officers that are working to supervise them."

Under an amended contract with the Corrections Corporation of America, one of the largest private prison operators in the country, California will be able to transfer an additional 2,300 high-security inmates to the company's facilities in Arizona, Mississippi, and Oklahoma. The transfers are expected to begin early next year.

The inmates are likely to be housed at CCA's North Fork Correctional Center in Oklahoma and its Red Rock Correctional Center in Arizona. This is now the fourth time that the contract has been amended since originally signed in 2006, representing a ten-fold increase in three years (from 1,000 in 2006 to 10,468 under the latest amendment).

» Reason Foundation's Annual Privatization Report 2009
» Reason Foundation's Corrections Privatization Research and Commentary

San Diego Needs Pension Reform, Managed Competition to Address Fiscal Problems

adam.summers@reason.org (Adam Summers) — Wed, 21 Oct 2009 20:54:00 EDT

My latest column on Reason.org addresses San Diego's massive budget deficit (now and for the foreseeable future) and the need for the city to adopt significant structural reforms to address its fiscal problems and avoid bankruptcy. These reforms include switching to a 401(k)-style defined contribution retirement system for all future employees and--at last!--implementing the managed competition program overwhelmingly approved by voters nearly three years ago in order to lower the cost of government services by forcing the government to compete with private-sector vendors for contracts to offer those services. The following is an excerpt of that article.

The City of San Diego has released its 5-year forecast—and the future is not pretty. The city is facing a record $179 million deficit this year, followed by additional projected annual deficits of at least $150 million for several years.

[. . .]

While governments at all levels are experiencing falling revenues due to the recession, San Diego's outlook is particularly dire because of egregious missteps the city made regarding its pension system. San Diego's pension problems stem from pension deals reached in 1996 and again in 2002 which led to the city underfunding the system by increasing pension benefits without setting aside enough money to cover the additional costs. The city is still paying for its mistakes today. In addition to an extra $57 million that the city will have to pay from its general fund to cover pension investment losses—an increase in the city's pension contributions of approximately 34%—San Diego must pay $32 million as part of the McGuigan legal settlement to remedy its past pension underfunding.

If this picture is not bleak enough, consider that San Diego's fiscal situation is actually even worse than the 5-year projections because, as Councilman Carl DeMaio notes, the city did not include the costs of its retiree health-care benefits or deferred maintenance, such as street, sidewalk, and storm drain repairs that must be made, in its budget forecasts. The city is planning to pay $43 million next year for retiree health care—barely one-third of the estimated $120 million needed to adequately pay for the benefits. The city is already running a $1.3 billion unfunded liability for retiree health care.

[. . .]

The city should switch to a pure defined-contribution retirement system for all new employees, with compensation levels comparable to those received in the private sector. Savings from this pension reform would be long-term, however, and the city needs some more immediate relief.

To that end, there are many government services that could be performed more cheaply and effectively by the private sector. Forcing the government to compete with the private sector to provide services could result in significant cost savings while maintaining or improving service quality. A 2007 study done by Reason Foundation and the San Diego Institute for Policy Research conservatively estimates that the city could save between $80 million and $200 million a year by implementing managed competition for services such as:

Water and wastewater treatment,

Trash and recycling collection,

Vehicle fleet maintenance,

Street maintenance,

Parks and recreation (including city-owned golf courses),

Library operations,

Permitting,

Facilities maintenance,

Information technology, and

Printing and copying.

Voters saw the wisdom in this "managed competition" approach, and overwhelmingly passed a measure in November 2006 to amend the city charter to allow the city to implement it. But city labor unions have tied up the process, and nearly three years after the voters passed Proposition C, the city is still without a managed competition program.

If labor unions continue to hold the city hostage, they will drive San Diego to the same fate as the City of Vallejo, California—into bankruptcy.

See the full article here.

Other resources:

» Reason pension reform study: The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform (see pages 33-40 for a case study on the City of San Diego)

» Reason-SDI study on managed competition in San Diego: Streamlining San Diego: Achieving Taxpayer Savings and Government Reforms Through Managed Competition

» Reason's privatization research and commentary

Rising Pension Costs, Falling Revenues Lead to a $179 Million Budget Deficit in San Diego

adam.summers@reason.org (Adam Summers) — Mon, 19 Oct 2009 14:38:00 EDT

San Diego Mayor Jerry Sanders addressed the sobering news in a press release:

As we begin putting together a solution to close our budget gap, we will examine every responsible alternative to cutting services. But make no mistake about it, there will be cuts and the public will feel them.

As the San Diego Union-Tribune reported:

The city has generally closed recent budget gaps by eliminating vacant jobs, increasing fees and tapping reserves. Those decisions largely avoided controversial cuts such as laying off employees and closing libraries. That will no longer be possible, Sanders said.

A deficit this size is so significant that we can no longer shield the public from its impacts,” he said.

The city's budget deficits have been exacerbated by the economic recession but began when past leaders chose to increase employee pension benefits without identifying a way to pay for them.

In a speech given to the San Diego County Taxpayers Association last month, Sanders said, "We will make our full pension payment, to the penny. The Mayor and City Council do not determine the amount of the payment, nor should we. Nor should we repeat the mistakes of our predecessors and shortchange the retirement system so we can avoid making tough decisions." Yet, when it comes to San Diego's retiree health-care obligations, it appears that the city is set to repeat the same mistakes that got it into so much trouble with the pension system.

San Diego has implemented some pension reforms in recent years, but they were likely "too little, too late." In 2006, voters approved a measure to require voter approval of future city employee benefits increases. And beginning July 1, 2009, the city implemented a lower tier of benefits to new city employees. The new retirement plan is a hybrid plan that includes a 401(k)-style "defined-contribution" component to shift some of the risk of retirement investments from the city to the employees.

Nonetheless, lawsuits to undo the arguably illegal pension deals of 1996 and 2002 have proven unsuccessful, and the considerable debts that have already been racked up must be paid. The results will be severe negative impacts on city services, and only bold and significant reforms may prevent these service cuts from lingering for many years or keep the city from going bankrupt.

Water and wastewater treatment,
Trash and recycling collection,
Vehicle fleet maintenance,
Street maintenance,
Parks and recreation (including city-owned golf courses),
Library operations,
Permitting,
Facilities maintenance,
Information technology, and
Printing and copying.

If labor unions continue to hold the city hostage, they will drive San Diego to the same fate as the City of Vallejo, California—into bankruptcy.

Other resources:

» Reason pension reform study: The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform (see pages 33-40 for a case study on the City of San Diego)

» Reason-SDI study on managed competition in San Diego: Streamlining San Diego: Achieving Taxpayer Savings and Government Reforms Through Managed Competition

» Reason's privatization research and commentary

Adam Summers is a policy analyst at Reason Foundation.

California Must Do More than Link Teacher Performance and Test Scores

lisa.snell@reason.org (Lisa Snell) — Tue, 13 Oct 2009 12:36:00 EDT

In Governor Schwarzenegger's latest round of bill signing, he approved legislation that would allow California to compete for the $4.5 billion in federal "Race to the Top" education grants. As the AP reports:

California is removing a legal ban on using the results of student achievement tests to evaluate teachers, under a bill signed into law by Gov. Arnold Schwarzenegger.

The bill lifts a barrier that prevented California from applying for $4.5 billion under the federal Race to the Top program. Schwarzenegger says more legislation is needed beyond the bill he signed Sunday. He has called lawmakers back into special session this fall.

Unfortunately, linking test scores and teacher performance will make little difference until California permits seniority-neutral personnel practices for teacher layoffs.

As I wrote in this recent column:

The governor shouldn’t stop at tying test scores to teachers. Layoffs by seniority -- last hired, first fired -- have been part of the California Education Code for over three decades. Schwarzenegger should introduce legislation to adopt a seniority-neutral layoff policy that allows districts to layoff personnel based on effectiveness rather than years of service.

In Los Angeles, Mayor Antonio Villaraigosa experienced the negative consequences of the seniority laws first-hand. Villaraigosa took over 10 low-performing schools under a partnership with the Los Angeles Unified School District. But when layoffs and cutbacks had to be discussed, the mayor learned that all of his schools could be gutted: all of the principals and assistant principals and about 200 teachers would have to be replaced by more “senior” teachers from other schools that were not part of the reform efforts. The education establishment should realize it can’t afford to lose good teachers simply because they haven’t been on the job as long as less effective peers.

Don't Blame Voters for California's Budget Woes

Fri, 09 Oct 2009 15:50:00 EDT

The Wall Street Journal

With the Golden State still struggling to balance its books, politicians from both sides of the aisle have come up with a nifty way to avoid responsibility for the mess: Blame the voters.

Gov. Arnold Schwarzenegger, a Republican, summed it up for his fellow pols recently by telling a reporter: "All of those propositions tell us how we must spend our money. . . . This is no way, of course, to run a state." State Senate President Pro Tem Darrell Steinberg, a Democrat, has made similar comments in denouncing "ballot-box budgeting."

Their indictment is false. Voters aren't tying lawmakers' hands too much, but too little. Here's the background:

For decades, state officials have habitually proposed deep cuts to the most popular programs unless voters agree to higher taxes. Tired of being manipulated, voters have used the ballot initiative to put some programs off-limits.

Nevertheless, a 2003 analysis by John G. Matsusaka, president of the Initiatives and Referendum Institute at the University of Southern California, found that no more than a third of California's appropriations that year were locked in by voter initiatives so stringent that legislators couldn't override them. Most of the appropriations—about $30 billion in 2003—were for Proposition 98, which passed in 1988 and mandates funding for K-12 education.

Even this overstates the case against ballot-box budgeting. K-12 spending has remained remarkably stable at around 40% of the budget pre- and post-Prop. 98. Today, California is 24th among the 50 states in terms of the percentage of its general funds it devotes to K-12. This suggests that education spending is not grossly out of line. Prop. 98 aside, Mr. Matsusaka found that only about 2% or 3% of California's budget is frozen as a result of ballot initiatives.

Mr. Matsusaka's analysis was affirmed last month by the Legislative Analyst's Office, a nonpartisan outfit that advises the legislature. It looked at all the restrictions on the state's budget—not just those imposed by ballot initiatives—and concluded that: "Despite these restrictions, the legislature maintains considerable control over the state budget—particularly over the longer term."

So what happened this year that got the politicians and others so upset with ballot-box budgeting? California faced a $42 billion budget deficit. After a round of spending cuts and $12 billion in new taxes, the governor and the legislature called for a special election and placed a number of propositions on the ballot that would have increased taxes an additional $16 billion and allowed for billions more in borrowing and fund shifts. Voters shot those measures down in May.

After much bickering, lawmakers nearly closed the deficit with severe cuts, but left the governor with a $1 billion deficit to close on his own. He did so by using his line-item veto to strike, among other things, $500 million for in-home care, transportation assistance and other social services.

Now the governor is being sued by a whole host of special-interest groups, including a coalition of organizations representing the disabled. Those organizations (along with Mr. Steinberg, who has filed a separate suit), claim that the governor cannot constitutionally cut spending beyond what the legislature has already cut. The suits ignore that the governor is bound by a constitutional requirement that the state's budget be balanced—but in any case have nothing to do with spending that is mandated by ballot initiatives.

In looking for the causes of the state's budget mess, a good place to start is with the unionized public employees, who have filed their own lawsuit against the budget. Public union ranks have grown a whopping 37% since 1990 and consume about one-third of the $85 billion budget in wages and benefits. California also faces a total unfunded future liability of about $110 billion for pensions and health-care benefits. Still, the state's chapter of the Service Employees International Union and other unions are suing the state because their members are being asked to take a few days of furlough to save the state about $1.5 billion. The unions say this is an illegal pay cut. Regardless of whether it is, ballot initiatives are not the issue.

True enough, some lawsuits are driven by ballot initiatives. The California Redevelopment Association is attempting to stop the state from raiding $2 billion in local redevelopment funds. Sixty years ago voters passed a constitutional amendment to prevent such raids, but the state government has found ways around that prohibition. But restoring the will of the voters in this case is essential for sound budgeting, because local development funds are used to pay for bonded contracts for roads and other infrastructure projects. If the state is allowed to grab these funds, the credit ratings of cities and counties will plunge and their borrowing costs will rise.

Whatever the wisdom of ballot initiatives that protect some programs from cuts, they are not the root cause of California's fiscal disaster. That cause is the government's spending addiction. From 1990 to 2008, California's revenues increased 167%, but total spending soared 181%.

This problem won't be tamed by letting lawmakers get their hands on more tax dollars by scrapping Proposition 13, which limits property taxes, as Mr. Steinberg and other lawmakers have suggested. Rather the solution is to restore the Gann Spending Limit that restricted state spending increases to population growth and inflation and required that anything left over be returned to taxpayers.

Such restrictions kept the state from slipping into a cycle of fiscal chaos in the 1980s by checking government expenditures and forced lawmakers to rebate $1.1 billion in excess revenue in 1987. But voters diluted Gann in 1990, when they passed Proposition 111, exempting infrastructure projects, disaster spending and a number of other state expenditures from the spending limit.

Prop. 111 freed politicians in Sacramento to use the revenues that gushed in during the dot-com boom and housing bubble to grow the state budget to unsustainable levels. If Gann hadn't been neutered, a Reason Foundation study found in February, California would have been rolling in a $15 billion surplus this year.

The Golden State's problem is not overly controlling voters—but out-of-control politicians.

Ms. Dalmia is a senior analyst, Mr. Summers a policy analyst, and Mr. Moore a vice president at the Reason Foundation.

California's Budget Problems Not Due to Voter Initiatives

adrian.moore@reason.org (Adrian Moore) — Sat, 03 Oct 2009 12:50:00 EDT

In this column in the Wall Street Journal, Shikha, Adam and I explain why voter initiatives are NOT the source of California's budget problems.

With the Golden State still struggling to balance its books, politicians from both sides of the aisle have come up with a nifty way to avoid responsibility for the mess: Blame the voters.

Gov. Arnold Schwarzenegger, a Republican, summed it up for his fellow pols recently by telling a reporter: "All of those propositions tell us how we must spend our money. . . . This is no way, of course, to run a state." State Senate President Pro Tem Darrell Steinberg, a Democrat, has made similar comments in denouncing "ballot-box budgeting."

Their indictment is false. Voters aren't tying lawmakers' hands too much, but too little.

Novato, CA Sanitary Board Privatizes Wastewater Treatment Plant

adam.summers@reason.org (Adam Summers) — Wed, 30 Sep 2009 17:50:00 EDT

The Novato Sanitary District board recently voted 4-0 to approve a contract with private water company Veolia Water to turn over the operations of its new $90 million wastewater treatment plant. While privatization is often sought primarily to achieve cost savings, the Novato Sanitary deal illustrates other benefits of privatization. The arrangement will offer the district access to management expertise that might not be available in-house, and will transfer the risk of regulatory compliance from the district to the company.

According to a Marin Independent Journal article about the deal,

District general manager Beverly James hailed the contract as making Veolia responsible for regulatory compliance and fines incurred for non-compliance, as well as liability protection, guaranteed operating costs and long-term stability. "We feel that we have negotiated a fair contract that protects the district's interests," James said.

The compliance and liability issues have been a big concern for the district, as the U.S. Environmental Protection Agency is currently conducting a criminal investigation of apparent environmental violations that occurred in the district in 2006 and 2007. The district could potentially face fines if the EPA finds that violations did, in fact, occur. Under the terms of the Veolia contract, the company would not be responsible for any fines related to violations prior to the deal taking effect.

"This business has gotten too complicated to continue running it with our hometown staff," said board member Bill Long. "This is a new era where you can get a million-dollar fine, and the people of Novato do not want to be exposed to those kinds of fines."

Other Resources:

» Reason Policy Brief: Frequently Asked Questions About Water / Wastewater Privatization

» Reason's Water and Wastewater Research and Commentary

Modernizing California's Tax System

leonard.gilroy@reason.org (Leonard Gilroy) — Wed, 30 Sep 2009 14:57:00 EDT

Yesterday, California's Commission on the 21st Century Economy released its final report outlining a groundbreaking tax restructuring proposal aiming at improving the state's economic competitiveness, simplifying and flattening the tax code and reducing revenue volatility. Key features of the proposal include lowering the state income tax and eliminating both the current corporate income and sales taxes (replacing them with a new, broad-based business receipts tax).

The Wall Street Journal weighs in on the proposal today, giving it mostly high marks:

The heart of the new plan is to broaden the tax base and slash tax rates on personal income, business and sales. California currently ranks at or near the top in all three categories. This has, paradoxically, contributed to the state's inability to pay its bills by driving men and women from the state and leading to revenue boom and bust. We don't agree with everything in this report, but there's no question it would be a huge improvement over the current tax code in its economic incentives, simplicity, revenue stability and fairness.

The commission hasn't recommended a pure flat tax, but something much closer to it. As shown in the nearby table, the income tax rate, which currently tops out at 10.55%, would be chopped to a more reasonable (but still high) 7.5%. (The plan doesn't eliminate the one-percentage-point millionaire income tax surcharge, alas.) Because about 70% of small businesses pay the personal California income tax, the commission found that California's high rate is driving enterprises to the likes of Nevada, Texas and Idaho. The number of tax rates is reduced to three from seven (we prefer one), and thanks to the elimination of credits and loopholes, the new California tax form would fit on a postcard.

Even more impressive is the recommendation to eliminate the corporate income tax and the 5% of the sales tax that contributes to the general fund. These would be replaced by a broad-based Business Net Receipts Tax of no higher than 4%. This taxes businesses on what they produce, minus their costs of purchases from other firms. This is similar to a value added tax. [...]

The commission—chaired by California businessman and former U.S. Treasury official Gerald Parsky—also calls for a rainy day fund by requiring annual revenues above a 10-year rolling average to be put into a reserve fund rather than being spent. [...]

[California's] steeply progressive tax rates are defeating the purposes of progressive government. To wit, only a growing economy can create opportunity for the middle class and enough state revenues to finance schools and health care for the poor. A tax code that depends on 1% of taxpayers, 144,000 filers, to finance 50% of state income tax revenues has proven to be unsustainable, notwithstanding the liberal dogma that says tax rates don't matter.

Tax rates do matter, and on balance, the proposed restructuring would go a long way towards enhancing the state's economic competitiveness. That is, unless other states were to follow California's lead and start slashing their own business taxes...

But let's not put the cart before the horse yet, as the political machinations are only getting started on this proposal. There are some positive early signs, with the bipartisan nature of the proposal and early support from Governor Schwarzenegger and prominent Democrats. However, as the Los Angeles Times reports today, unions and other opponents are already aligning against the proposal.

As they consider this proposal, policymakers need to ask themselves a fundamental question. The state is in an epic fiscal crisis and depends on a volatile, boom-n-bust revenue system that's slowly strangling the state's economy. Can California afford not to pursue sensible revenue reform? Can California do any worse than the system it already has? I think not.

» Reason Foundation's California Research and Commentary

California Unemployment Rate Rises to 12.2%; State Must Improve Business Climate to Combat Unemployment, Budget Problems

adam.summers@reason.org (Adam Summers) — Sat, 26 Sep 2009 23:44:00 EDT

California's unemployment rate rose three-tenths of a percentage point to set a modern record of 12.2% in the month of August, according to the most recent data released by the state's Employment Development Department (EDD). The numbers reveal a troubling trend of the continued widening of the gap between the state's unemployment rate and the national jobless rate, which now stands at 9.7% (see the chart below from an Associated Press article derived from EDD data).

Source: California Employment Development Department

California's unemployment rate is the fourth-highest in the nation, trailing only Michigan, Nevada, and Rhode Island. Gov. Arnold Schwarzenegger noted that the jobless rate underscores the importance of addressing the state's economic problems, stating, "While I am pleased to see fewer jobs lost, my administration will not rest until job growth resumes and employment returns to normal."

If the governor is serious about his statement, California must improve its poor business climate in order to foster job creation and economic growth. As George Will reported in a recent column, California's job growth rate since 2000 is nearly 20% below the national average. California has ranked at or near the bottom in numerous business climate and economic freedom indexes. The American Legislative Exchange Council's 2009 Rich States, Poor States study, which reports the results of the ALEC-Laffer State Economic Competitiveness Index, ranked California 43rd in terms of its economic outlook. The state suffered from low rankings in categories such as Recently Legislated Tax Changes (data is for 2007 and 2008 so it does not even include the $12 billion in new taxes passed in February 2009) -- 40th, State Liability System (tort litigation treatment, judicial impartiality, etc.) -- 44th, State Minimum Wage ($8.00/hour) -- 48th, Top Marginal Personal Income Tax Rate (10.3%) -- 49th, and Personal Income Tax Progressivity -- 50th. The Freedom in the 50 States index of personal and economic freedom, published earlier this year by the Mercatus Center at George Mason University, ranked California 47th. The state scored 44th in the Fiscal Policy subcategory, 46th in Regulatory Policy, and 48th in Economic Freedom. Finally, California was voted the worst state in the nation for jobs and business growth for the fourth year in a row in Chief Executive magazine's 2009 "Best & Worst States" survey of hundreds of CEOs.

If the Golden State is to regain its lustre, it must dramatically reduce the tax and regulatory burden that is driving businesses and jobs to states with fewer impediments and more economic opportunities. Moreover, it will not solve its persistent budget problems without encouraging economic growth. For years, the public sector has been consuming more than its share of resources and cannibalizing the private sector that is responsible for economic growth. It is far past time for the pendulum to swing the other way towards smaller government and a freer, more productive private sector. In addition to reducing taxes and eliminating red tape, the state should get rid of policies such as occupational licensing requirements and the minimum wage, which only serve as a barrier to work, raising unemployment and resulting in higher prices to consumers in the process.

Public Pensions Threaten Solvency of Local Government in California

adam.summers@reason.org (Adam Summers) — Wed, 23 Sep 2009 19:51:00 EDT

My latest commentary on local California government pension problems, and how many local governments got into their current mess by following the state's lead, is posted here. Below is an excerpt of the article.

[. . .]

Currently, the state owes an estimated $63 billion in unfunded pension benefits to government employees. Governor Schwarzenegger’s administration estimates that this figure could rise to as much as $300 billion if state pension funds continue to perform below their anticipated returns. Unfunded retiree health-care and dental benefits are estimated at an additional $118 billion.

The trouble has not been confined to the state level. Many local governments are being hit hard by the latest downturn in the economy—and, as a result, their pension fund investments are seeing lower returns than anticipated. When those investments return less than the rate assumed by the pension board, government employers have to contribute more to the pension fund to make up the difference. Underperforming returns may be smoothed out over a period of years, but the losses experienced over the past two years are so deep that governments across the state will need to significantly increase their contributions to pension funds at a time when their budgets are already strained.

[. . .]

Much of the pension trouble can be traced back to the late 1990s and early 2000s, when state and local governments decided to significantly increase pension benefits while contributing little to nothing to pension systems. Pension fund investments were experiencing unusually high returns due to the “dot-com” bubble. Assuming pension funds could depend on extravagant earnings indefinitely, CalPERS and labor union officials convinced lawmakers that the state could afford benefit increases. In 1999 the legislature passed SB 400, which increased state workers’ pensions by as much as 50% and made the benefit increases retroactive. This action quickly proved to be short-sighted when the dot-com bubble burst and pension investment returns plummeted.

CalPERS had encouraged local governments that participate in its plan to match the state’s benefit increases by offering to reduce their required contributions to the system in exchange for their adoption of the higher benefit levels. Thus, many local governments matched state benefit increases in the early 2000s. For example, Riverside County increased public-safety officials’ pension benefits by as much as 50%, allowing employees with 30 years of experience to retire as young as 50 years old with 90% of their working salaries.

[. . .]

Even governments that resisted large benefit increases have found themselves in trouble. Ventura County did not increase its benefit levels, yet its required pension contributions have more than tripled over a 10-year period. The county’s contributions, currently about $140 million, are expected to double again over the next five years.

This prompted a Ventura County Grand Jury report entitled, “Ventura County Pension: An Uncontrollable Cost,” which was released in June. The Grand Jury report included some recommendations that government officials in Ventura County and around the state should take to heart. They include:

Locking away “excess earnings” realized during good investment years to balance out the bad years, instead of using them to pay greater benefits;

Requiring voter approval of future government employee benefit increases, as San Francisco and, more recently, Orange County and the City of San Diego, do, and;

Studying private-sector compensation and a switch from the current defined-benefit system to a more affordable and predictable 401(k)-style, defined-contribution retirement system, which the private sector has been doing for the last 30 years.

[. . .]

During the late 1990s and early 2000s, when government coffers were flush with tax revenues, it was easy to approve benefit increases that would not have to be paid for until many years later. Now that the bills are coming due, state and local officials, as well as taxpayers, are increasingly realizing that the more we spend to ensure the comfortable retirement of government employees, the less we have to spend on the programs and services citizens expect from their governments. We are finally reaching a day of fiscal reckoning. It will take some political courage to admit that current government pension and retiree health-care benefits are unsustainable—and even more to implement the significant reforms needed to restore fiscal responsibility—but this fortitude is necessary to get California state and local governments back on the right path.

Read the full column here.

Other resources:

» Reason public pension study: The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform (Policy Summary | Full Study)

» Fixing the state's pension mess (published in the Orange County Register)

» Is It Finally Time for Public Pension Reform in California?

Public Pension Problems Mount for Local CA Governments

adam.summers@reason.org (Adam Summers) — Tue, 22 Sep 2009 10:00:00 EDT

California’s public pension system is broken. A decade of fiscally irresponsible behavior by state and local policymakers has left the state with a massive unfunded public pension liability. Unless government officials muster up the political courage to implement reforms that would make government pensions and retiree health-care benefits sustainable, the cost of government services will continue to be inflated and growing pension costs could threaten the very solvency of state and local governments.

Under the state’s “defined-benefit” pension system, workers receive a pension determined by a formula based on the number of years the employee works, a fixed multiplier, and his or her final (or highest) salary. The amount needed to pay the costs of these benefits is determined using assumptions about what the average pension fund investment return will be, how long retirees will live, how much salaries and inflation will increase, etc. These assumptions are projected out decades into the future, which creates a whole other set of problems and allows for fudging of the assumptions to determine how much must be contributed to the system. The benefits are paid for by a combination of employee contributions, employer (in this case, the government) contributions, and pension fund investment earnings.

Currently, the state owes an estimated $63 billion in unfunded pension benefits to government employees. Governor Schwarzenegger’s administration estimates that this figure could rise to as much as $300 billion if state pension funds continue to perform below their anticipated returns. Unfunded retiree health-care and dental benefits are estimated at an additional $118 billion.

The trouble has not been confined to the state level. Many local governments are being hit hard by the latest downturn in the economy—and, as a result, their pension fund investments are seeing lower returns than anticipated. When those investments return less than the rate assumed by the pension board, government employers have to contribute more to the pension fund to make up the difference. Underperforming returns may be smoothed out over a period of years, but the losses experienced over the past two years are so deep that governments across the state will need to significantly increase their contributions to pension funds at a time when their budgets are already strained.

According to a recent Press-Enterprise article, the Riverside and San Bernardino County pension funds each lost about $1.5 billion—roughly a quarter of their value—in the last fiscal year. Riverside County will have to pay an estimated $119 million a year more than its current $144 million pension contribution—about an 83% increase—starting in fiscal year 2013. Similarly, San Bernardino County will have to contribute an additional $100 million to its pension system.

The situation at the local government level is a microcosm of what is going on across the state. The state’s main pension system, the California Public Employees’ Retirement System (CalPERS) (which also administers the retirement systems of numerous local governments) lost $56.2 billion, or approximately 24% of its total holdings, last year. The California Teachers Retirement System (CalSTRS) lost $43.4 billion, about 25% of its portfolio.

Much of the pension trouble can be traced back to the late 1990s and early 2000s, when state and local governments decided to significantly increase pension benefits while contributing little to nothing to pension systems. Pension fund investments were experiencing unusually high returns due to the “dot-com” bubble. Assuming pension funds could depend on extravagant earnings indefinitely, CalPERS and labor union officials convinced lawmakers that the state could afford benefit increases. In 1999 the legislature passed SB 400, which increased state workers’ pensions by as much as 50% and made the benefit increases retroactive. This action quickly proved to be short-sighted when the dot-com bubble burst and pension investment returns plummeted.

CalPERS had encouraged local governments that participate in its plan to match the state’s benefit increases by offering to reduce their required contributions to the system in exchange for their adoption of the higher benefit levels. Thus, many local governments matched state benefit increases in the early 2000s. For example, Riverside County increased public-safety officials’ pension benefits by as much as 50%, allowing employees with 30 years of experience to retire as young as 50 years old with 90% of their working salaries.

“This situation was caused by the actions taken by the state 10 years ago and it rippled out to local governments,” said Riverside County Supervisor Marion Ashley. “We’ve created an ongoing gilt-edged system that is far beyond our wage earners in this county to support,” added fellow Supervisor Bob Buster. For an example of those “gilt-edged” pensions, consider that, according to the California Foundation for Fiscal Responsibility, there are 5,115 retired state and local government employees currently earning annual pensions of over $100,000. There are an additional 3,090 retired educators earning pensions that big.

Even governments that resisted large benefit increases have found themselves in trouble. Ventura County did not increase its benefit levels, yet its required pension contributions have more than tripled over a 10-year period. The county’s contributions, currently about $140 million, are expected to double again over the next five years.

This prompted a Ventura County Grand Jury report entitled, “Ventura County Pension: An Uncontrollable Cost,” which was released in June. The Grand Jury report included some recommendations that government officials in Ventura County and around the state should take to heart. They include:

Locking away “excess earnings” realized during good investment years to balance out the bad years, instead of using them to pay greater benefits;
Requiring voter approval of future government employee benefit increases, as San Francisco and, more recently, Orange County and the City of San Diego, do, and;
Studying private-sector compensation and a switch from the current defined-benefit system to a more affordable and predictable 401(k)-style, defined-contribution retirement system, which the private sector has been doing for the last 30 years.

Unfortunately, the Grand Jury’s main recommendations have so far largely been rejected or ignored by the county. There are some signs of support, however. “When you get into defined benefit pensions, you are putting huge debt burdens on the public,” said Ventura County Supervisor Peter Foy. “We’ve seen these pensions get so far out of control and out of the realm of our ability to pay for them—the market just exaggerated the problem—what I look at is at that point we need to have the public who’s going to be paying these costs with tax increases—they should have the right to vote on any increases.” Foy also supports a lower benefit tier for new employees, and is also open to a defined-contribution plan.

At the city level, Ventura Mayor Christy Weir even went so far as to write in a recent column for the Ventura County Reporter, “[T]he statewide pension system for state, county, school district and local governments is not financially sustainable. I believe Ventura can be a leader in pension reform. That likely means moving from ‘defined benefit’ plans (which guarantee a certain retirement income and are increasingly costly to taxpayers) to ‘defined contribution’ plans (which are more fiscally feasible) for new employees.”

During the late 1990s and early 2000s, when government coffers were flush with tax revenues, it was easy to approve benefit increases that would not have to be paid for until many years later. Now that the bills are coming due, state and local officials, as well as taxpayers, are increasingly realizing that the more we spend to ensure the comfortable retirement of government employees, the less we have to spend on the programs and services citizens expect from their governments. We are finally reaching a day of fiscal reckoning. It will take some political courage to admit that current government pension and retiree health-care benefits are unsustainable--and even more to implement the significant reforms needed to restore fiscal responsibility—but this fortitude is necessary to get California state and local governments back on the right path.

Adam Summers is a policy analyst at Reason Foundation.

George Will Details Problems with California's State Government

adam.summers@reason.org (Adam Summers) — Sat, 19 Sep 2009 23:49:00 EDT

A recent George Will column highlighted some of the many problems plaguing California that have resulted from state government policies.

Having institutionalized envy in a steeply progressive income tax, California depends on 200,000 wealthy taxpayers for 25 percent of its revenue. The state ranks only behind liberal New York in the number of outward-bound moving vans. More people would flee if they could sell their houses. Between 1990 and 2007, the state lost 26 percent of its factory jobs and 35 percent of its high-tech manufacturing jobs. "Detroit, only with sunshine," says Investor's Business Daily. In Nevada (no personal or corporate income tax; sales taxes lower than California's), a Las Vegas organization lures Californians with a talk titled "California Has Lost Its Mind and Las Vegas Is Providing Psychoanalysis."

California has the lowest debt rating of any state, the fourth-highest unemployment rate (11.9 percent), and its job growth rate since 2000 is almost 20 percent below the national average. Some county and state public safety employees retire at 50 receiving at least 90 percent of their final year's pay, forever. Taxpayers pour more than $3 billion a year into state employees' pension funds, 10 times more than they did 10 years ago, and still there are large unfunded liabilities for which taxpayers are liable. More than 5,000 retired state employees' annual pensions exceed $100,000. If public employees did not begin drawing pensions until age 65, California would save half a trillion dollars through 2030.

Between 1997 and 2007, the state work force, including public school employees, grew 24 percent, to almost 900,000. Government spending has grown 40 percent faster under Gov. Arnold Schwarzenegger than under his Democratic predecessor. Since 2005, state spending has increased twice as fast as inflation and population. Democrats blocked allowing online enrollment by parents of their children in state health programs because it might have endangered unionized clerical jobs. As the state prepares to release tens of thousands of felons from prison to comply with a court order and help balance the budget (in 2002 prison guards received a 37 percent raise), it has 19,000 illegal immigrants incarcerated.

It is not a very flattering portrait of the Golden State. Sadly, it is an accurate one, though. Oh, except for the unemployment statistic. According to the California Employment Development Department, new economic data show that the state's unemployment rate has jumped from 11.9% in July to a modern record of 12.2% for August. This is quite a bit higher than the national average of 9.7%.

California's punitive tax structure, its lagging job growth rate, the rate of outmigration, and the rapid and unsustainable growth of the public sector at the expense of the private-sector economy all speak to a disastrous business climate that is strangling the state. Sure, the state needs to make many more cuts to "right-size" its government and balance its budget, but it must also address its stifling business climate by reducing its tax burden and cutting copious amounts of regulations and job-killing red tape if it is to return to prosperity. This is even more important during a period of economic downturn or stagnation.

California Agencies Hide State Audit Results from Public

adam.summers@reason.org (Adam Summers) — Mon, 14 Sep 2009 19:55:00 EDT

The California state government has not been meeting its promise of increased transparency, according to State Inspector General Laura Chick. According to Chick, the results of hundreds of internal state agency audits have been held from the public. As reported in the Los Angeles Times's L.A. Now blog,

State Inspector General Laura Chick called on Gov. Arnold Schwarzenegger today to order agencies to disclose the results of hundreds of internal audits that have been kept from the public despite a promise of new transparency.

"It has come to my attention ... that hundreds of valuable and important reports conducted by state departments and agencies are not yet included on your transparency web-site," Chick wrote to the governor.

"By applying the narrow and technical definition of 'audits,' departments have excluded ... critical reports that remain off-line and out of public view," she wrote.

One 2008 report by the state's Employment Development Department found that the Work Investment Board of Los Angeles County failed to comply with rules governing contract payments, executive salary limits and monitoring of receipts.

"There is no reason why this public document should not be shared with the people of California, who not only paid for the report but also paid for the original grant with their [taxpayer] dollars," Chick wrote.

Another report last year found problems with an agency that provided energy efficiency services to low-income residents in L.A. County. The investigation of Veterans In Community Services found $1.8 million in disallowed costs, kickbacks and fraud.

"Though millions of taxpayer dollars have gone to this agency, and the case has since been closed; the report is not posted on your web-site, hidden out of public view," Chick wrote.

To his credit, Gov. Schwarzenegger immediately ordered all agency audits to be placed on the state's Web site. According to a statement released by the governor's office, Schwarzenegger said, "Bureaucratic and technical excuses for not posting reports will not be tolerated."

The cases listed by the inspector general are only a couple of examples of waste and negligence in a very large government. How much other waste and fraud goes unreported on a regular basis? Taxpayers should keep this in mind the next time a politician argues that there is no waste to cut from the state budget, or that we must look first to cut the most popular or high-priority programs to balance the budget. California needs more employees like State Inspector General Laura Chick who are willing to blow the whistle and shine light on the kinds of waste that are inevitable in an organization as big as the California state government.

Retroactive Pension Benefit Increases Should Be Illegal

adam.summers@reason.org (Adam Summers) — Wed, 09 Sep 2009 21:02:00 EDT

An Orange County Register editorial the other day rightly criticized the practice of retroactively awarding pension benefit increases. As the editorial explains,

The county and the state are struggling under an enormous amount of unfunded liabilities caused by an unsustainable level of pension and health-care promises made to government employees. Essentially, pro-union legislators have raided the treasury on behalf of their allies and haven't worried too much about the costs to the future.

In 2001, the O.C. board voted 5-0 to retroactively increase pensions for long-serving deputy sheriffs, allowing them to retire at age 50 with 90 percent or more of their final year's pay. Even those deputies who were ready to retire were given the pension boost for past years' service. As Girard Miller of Governing magazine has pointed out, "the practice of awarding pension benefits on a retroactive basis is the devil's doing. . . . They serve no purpose except to buy favor with incumbent union members … at the expense of future taxpayers who don't even know what hit them."

[. . .]

The current board's lawsuit questions the constitutionality of retroactivity – calling it a gift of public funds for past service. This is a compelling legal argument that needs to be hashed out in the courts. The deputies union, which has never seen a tax dollar it hasn't wanted to spend, is all of a sudden outraged by the $2 million legal tab for the lawsuit. These strike us as crocodile tears.

Pension benefits are essentially written in stone and cannot be reduced for current employees because many employees have been working for many years under the assumption that they will be receiving a certain level of benefits from the state in their retirement, and they make numerous financial and lifestyle decisions accordingly. Apparently, the logic does not work both ways, however. Labor unions are happy to lobby for more money than their members expected to receive when they retire. As Sacramento Bee columnist Daniel Weintraub noted back in a 2003 article on the emerging public pension problems in California, such retroactive benefits are "not only for future employees but for workers whose retirement contributions had been based for decades on the expectation of a lower benefit."

The Orange County retroactive pension increase in 2001 followed on the heels of the State of California's own retroactive pension increases made possible by the passage of SB 400 in 1999. That boosted pension increases of up to 50% for state employees and ushered in an era of "3% at 50" pension plans (employees can retire as young as 50 and earn benefits of 3% multiplied by the number of years worked, up to a maximum of 30 years, or a total of 90% of their final salaries) for California Highway Patrol officers, "3% at 55" benefits for peace officers and firefighters, and "2% at 55" benefit for other state workers. Local governments quickly followed suit to match the state's increases.

These benefit levels, adopted during the height of the "dot-com" boom, were never sustainable, however, and when the markets--and resulting pension fund returns--inevitably turned sour, state and local governments were left to make up the difference at a time when they were suffering their own fiscal troubles and could least afford to do so. The current recession has compounded the problem. The only silver lining is that it has helped to reveal what years of exceptional returns had kept hidden for so long: that the government simply cannot afford to pay the benefits it has promised.

One can make a case that governments should not be able to suddenly slash benefits drastically for those nearing retirement age, but if you accept that argument then retroactive benefits should also be illegal. Moreover, it is time to "right-size" public pensions and bring them back in line with those of the private sector. Private-sector taxpayers should not have to subsidize the ever-growing gap between government employee compensation and their own.

Let Free Markets Guide Fire Protection Services

adam.summers@reason.org (Adam Summers) — Fri, 04 Sep 2009 22:48:00 EDT

In the third and final part of our three-day series of point-counterpoint articles on the politics and policies of wildfire protection for the L.A. Times Web site, UC Berkely forestry specialist William Stewart and I tackled the issue of whether the government should restrict building in high-risk, fore-prone areas. Dr. Stewart claimed that building codes and zoning regulations help to reduce fire damage. I argued that free markets and private arrangements do a better job of assessing risk, determining and allocating costs, and helping people to decide where they want to live while leaving them free to choose the risk levels and lifestyles that are right for them. We both agreed that the subsidization of fire insurance in California has warped incentives and encouraged building in areas that would be considered too high-risk in a true free market.

See my commentary and Dr. Stewart's response here.

See here to access the "Dust-Up" exchanges from all three days, including Wednesday's columns about whether the state has enough resources to fight fires and whether the private sector should have a larger role in wildfire prevention and protection and Thursday's discussion about what the government does right about preventing and fighting wildfires, and--mostly--what it does wrong.

Below is an excerpt of my column from today.

In your Thursday post, Bill, you voiced your approval of certain building codes passed recently, but I disagree that such government mandates are the way to go. While some building requirements may be advisable, people own their private property and should be free to determine how to build their homes (or which kind of home they want to buy) and what risks they are willing to take in this regard. Furthermore, when building specifications are subject to the political process, they become open to manipulation by lobbying and special interests that would benefit from the new regulations. What if the regulators do not adopt the proper standards? And who is to say what the right standards are? Specifications adopted for some homes and in some locations may not be appropriate for other homes in other locations. These decisions are all determined and tailored to meet specific needs in the free market by builders, insurers and home-buyers.

Zoning regulations should similarly be eliminated and avoided. Growth boundaries and other zoning laws that would prohibit people from living in certain high-risk or "protected" areas are often advocated by environmentalists and anti-growth activists who see people as a scourge of the environment rather than a part of it. Their true agenda is to inhibit development in order to concentrate populations in city centers. But in a free country, people should have the freedom to live where they choose -- including less dense areas closer to nature -- and not to be forced to live in high-density urban centers that might not suit their budgets or their preferred lifestyles.

Simply put, restrictive building codes and zoning laws violate property rights. Free markets and private arrangements do a better job of assessing risk, determining and allocating costs, satisfying consumers' demands and preserving individual liberties than centralized land-use planning. The less property rights are eroded by various governmental edicts and mechanisms, the more free and prosperous we are as individuals and as a nation.

Finally, the private sector should also be instrumental in providing wildfire prevention and protection services. To this end, volunteer firefighters, who make up nearly three out of every four firefighters in the nation, and private firefighters can help to provide protection against wildfire damage. As Orange County Register senior editorial writer and columnist Steven Greenhut argued in an article about the 2003 California fires, "Far better if we had private land and private firefighters, with the costs of firefighting borne privately by those who choose to live in the canyons. But when we choose to live near lands controlled by the government, and the government does a bad job managing them, why are we supposed to feel guilty when our houses burn down?"

Government Policies Exacerbate Fire Damage

adam.summers@reason.org (Adam Summers) — Thu, 03 Sep 2009 17:49:00 EDT

In the second installment of our three-day "Dust-Up," point-counterpoint articles for the L.A. Times Web site on wildfires and government responses to them, UC Berkeley forestry specialist William Stewart and I write about what government does right in fighting and preventing fires, and what it does wrong. Not surprisingly, we both had much more to say about what it does wrong. Dr. Stewart argues that individuals and communities should take more responsibility for protecting themselves and I point out how bad government policies lead to more severe fire damage.

See Dr. Stewart's commentary and my response here.

Below is an excerpt of my column.

I agree with you about the incentives of governments to focus more on fighting wildfires after they crop up than addressing the problem through preventive measures. Focusing more on action -- or, more accurately, reaction -- than prevention is a typical bureaucratic response. The goal seems to be "fighting fires," when it should be managing government-owned land to prevent or minimize wildfire damage. Unfortunately, fighting fires is politically a sexier aspect of the job -- it is more tangible to voters, who can see the news stories of brave firefighters battling the flames to save homes, and politicians can say, "See what we're doing with your tax dollars!"

Simply put, the . . . government manages its lands poorly. It neglects to build firebreaks and conduct controlled burns before wildfires break out and allows underbrush and other tinder to build up -- in some cases, for 40 to 60 years -- which makes the fires all the more severe when they hit. For example, a Los Angeles city inspector in Tujunga related how the federal government failed to respond to requests to clean out brush on open lands. The federal agency claimed that it needed to conduct a study and prepare an environmental impact report before taking any action. Environmental policies and regulations that encourage leaving forests, canyons and woodlands in their "natural" state and prevent the clearing of trees and brush that serve as fuel for the fires only make matters worse. This red tape and bureaucratic nonsense leads to more destruction of property and lives.

Another disastrous government policy is the subsidization of fire insurance. In 1968, California created the Fair Access to Insurance Requirements (FAIR) Plan to be a fire insurance plan of last resort and required all insurers doing business in the state to participate in the insurance pool. This encourages the construction of homes in overly risky, fire-prone areas and is unfair to those who buy insurance in non-fire-prone areas, who must pay higher premiums to subsidize FAIR Plan participants, as well as to taxpayers across the state who have to pay for efforts to save these homes when fires do take place. A true free market in fire insurance would allow insurers to set premiums based on the true value of the fire risk involved and would allow homebuyers to make their purchase decisions accordingly. Some may be priced out by the high cost of insurance in extremely risky areas, and some areas may be uninsurable entirely, but those costs are high for a reason, and they should not be ignored.

Public officials seem to spend an awful lot of time holding news conferences in front of television cameras to offer each other congratulations on the efforts they all are making and too little time providing accurate, real-time information to the public to help them make decisions about how to react to the fires. With resources such as the Internet, satellite pictures and other technology at its disposal, government should be able to provide residents with up-to-date information about exactly where the fire is, and where it is headed at the moment, to help them make better preparations to flee or defend their homes. Yet communication is still lacking, and there always seems to be problems with government emergency notification systems. For example, "The county's new mass emergency notification system failed to inform residents about the status of the fire or evacuation orders," L.A. County Supervisor Mike Antonovich wrote in a resolution. "It was reported to my office that an erroneous evacuation order was announced by the mass emergency notification broadcast system to the community of La Crescenta."

On a related note, as you allude to in your discussion of Australia's approach to wildfires, government should dispose of mandatory evacuation orders. This is particularly important in more suburban areas where the threat is not so much a raging inferno running through the neighborhood as it is falling embers, which can be combated fairly easily to keep homes from going up in flames. Indeed, many homeowners that defied evacuation orders in recent fires were able to save their homes -- and even neighbors' homes -- without suffering harm or necessitating the diversion of firefighting resources to rescue them. In any case, America was founded on the principle that one has the rights to defend his life, liberty and property, and these rights should not be infringed.

In tomorrow's third and final exchange, we will be debating whether the government should do more to discourage building in wildfire-prone areas, or if there are better means of protecting homes in such areas.

Use Private Firefighters to Improve Wildfire Protection

adam.summers@reason.org (Adam Summers) — Wed, 02 Sep 2009 16:47:00 EDT

Today, tomorrow, and Friday I am participating in a three-part, point-counterpoint discussion of wildfire protection services in California on the L.A. Times Web site. My counterpart is William Stewart, a forestry specialist at UC Berkeley.

Today's topic: Experts forecast that climate change will increase the frequency of deadly wildfires. Do state and local governments have enough resources to prevent and fight fires (in other words, will taxes have to be raised to pay for more services), or should the private sector play a bigger role disaster response?

In my commentary, I argue that the problem is not that there are not enough resources to fight fires--in fact, the California Department of Forestry and Fire Protection (Cal Fire) budget has continued to increase despite the recession--and that if any additional resources are deemed necessary, the answer is not more taxes, but rather an adjustment of state priorities and the diversion of funding from wasteful spending and lower-priority or poorly-performing programs to productive programs and functions that will protect lives and property. In addition, California should tap the resources of the rapidly-growing private-sector wildfire protection industry, which, like numerous other private-sector alternatives, typically offers equal or better services at lower costs. Dr. Stewart points out that property owners must accept some responsibility for living in fire-prone areas, and agrees that there is a role for private contractors in providing fire protection services.

See my commentary and Dr. Stewart's response here.

Below is an excerpt from my article.

State and local governments can better provide fire protection services by tapping military resources (which were severely underutilized during the 2006 wildfires in the San Diego area, for example) and private-sector resources. The private sector has a long and distinguished history of providing high-quality services for such things as paramedic services, security services and, yes, even firefighting services at lower costs. The private firefighting industry is growing quickly and is now estimated to be worth billions of dollars.

The National Wildfire Suppression Assn. (NWSA), for example, is a trade group founded in 2000 that now represents more than 150 private companies and 12,000 private wildland firefighters. NWSA reports that about 40% of the resources devoted to fighting wildland fires across the United States are provided by private fire services.

Companies such as Firebreak Spray Systems Co. and insurance company AIG saved homes during the 2007 California wildfires. Private firefighting contractor Rural/Metro provides fire protection services to more than 25 communities, and responds to more than 60,000 calls annually, according to the company's website. The rapid growth of this industry is evidence that, despite the substantial public resources devoted to fire protection, the government is not adequately doing its job and a need remains unfulfilled.

Governments -- including the federal government -- are increasingly contracting out firefighting services, sometimes replacing public fire departments entirely. As is the case in numerous other outsourced services, private fire protection contractors oftentimes provide equal or better services at significantly lower costs. Given the condition of state and local government budgets, this should offer an even greater incentive to utilize private-sector resources to provide fire protection services.

Tomorrow we will be discussing what government does right about preventing and fighting wildfires, and what it does wrong. Stay tuned!

Former San Diego Councilman Convicted of Extortion and Fraud Now Heads City Employees' Union

adam.summers@reason.org (Adam Summers) — Wed, 02 Sep 2009 13:01:00 EDT

A post on the L.A. Times's L.A. Now blog the other day literally caused me to do a double take. The post was about former San Diego Councilman Ralph Inzunza, whose conviction regarding bribes and illegal political contributions from a strip club was just upheld by a federal appeals court. The case involved illegal contributions made by strip-club owner Michael Galardi to Inzunza and Councilman Michael Zucchet, who had just stepped in as acting mayor after Mayor Dick Murphy had resigned from office, in exchange for their efforts to repeal a city law prohibiting nude entertainers from touching patrons. (The ban never was repealed.) Councilman Charles Lewis was also indicted but died before trial.

As a San Diego Union-Tribune article relates,

Zucchet and Inzunza, both 35, were accused of taking $34,500 in cash bribes and campaign contributions from Galardi in a failed plot to repeal the city's "no-touch" ordinance. [Galardi's lobbyist Lance Malone] allegedly delivered the wads of cash from Galardi to Inzunza and Zucchet.

Inzunza and Zucchet were both convicted in 2005 of conspiracy, extortion, and fraud. Inzunza was sentenced to 21 months in prison. Curiously, Zucchet's conviction was overturned by the federal judge who heard the case and the U.S. 9th District Court of Appeals refused the prosecutor's bid to overturn the acquittal order. Both resigned from the city council following their convictions.

Now comes the part that caused my "wha-huh?" moment:

Inzunza has been free on bail since the conviction. Zucchet is now acting general manager of the Municipal Employees Assn.

So, let me get this straight: a city councilman and interim mayor is convicted of conspiracy, extortion, and fraud; resigns in disgrace; and then goes on to be the head of a city employees' labor union?! Perhaps this should not be so surprising, given the shenanigans of labor unions over the years, but it is very revealing about what the union values and what it stands for. In what private-sector business could you be convicted of corruption, extortion, and fraud, and then go on to become the leader of another organization? Perhaps this will be a wake-up call to taxpayers about the kind of thieves and thugs that wield enormous influence over our governments.

California Can Keep Parks Open with User Fees

adam.summers@reason.org (Adam Summers) — Tue, 01 Sep 2009 12:39:00 EDT

Budget cuts have hit numerous functions of the California government recently, and state parks are no exception. Struggling with $14.2 million in cuts this year, officials have responded by threatening to close about 100 parks. A final list of the parks to be closed is expected shortly after Labor Day.

About two weeks ago, the California Department of Parks and Recreation (California State Parks) increased fees at parks around the state in an effort to stave off some park closures, although it acknowledged that the higher fees were still well below the levels necessary to make the parks self-sufficient. In fact, only 13 of the 279 state parks are self-sustaining.

In my latest column posted on Reason.org, I argue that not only could the parks be kept open by setting fees at self-sustaining, "market" rates, but also that user fees are fairer than devoting money from the state's General Fund, and that user fees can improve park management efficiency and accountability as well. Contracting with private and non-profit groups for management of parks can additionally help to drive down operations costs. The following is an excerpt of the article.

In recent years, at all levels of government, user fees have provided an attractive alternative to general appropriations funding. User fees provide a fairer funding source since they ensure that those who actually use government services are primarily responsible for paying for those services, reducing tax dollars and giving people more choices.

User fees also offer practical benefits such as increased park management flexibility—allowing park managers to adjust to economic conditions or changes in park visitors’ recreational preferences—and greater financial accountability. States such as Vermont, New Hampshire and Texas have realized significant park services cost savings through user fees.

Opening up park management and maintenance services to a competitive bidding process, and turning these operations over to private-sector or non-profit groups, could further reduce costs and help to make the parks self-sufficient while addressing maintenance backlogs...

If user fees go up, some will say that the state is pricing out the poor. But there are ways to accommodate all income groups. The demand for park services is not constant year-round, or even throughout the week. Parks that use market pricing would have an incentive to reduce fees during times of low demand and increase fees during times of high demand. Thus, anyone who wanted to save money on recreation fees could do so by visiting parks during off-peak days or seasons.

If that’s not enough, the state could set aside an allotment of passes each day to distribute on a first-come, first-served basis. This method would allow anyone willing to get in line early for tickets to pay with their time instead of their dollars.

California doesn’t “have” to close its parks. By increasing user fees to make state parks self-sustaining and contracting with private-sector or non-profit groups to manage and maintain the parks, California can prevent the threatened park closures. Leveraging volunteer assistance and seeking out tasteful corporate sponsorships to generate additional revenues should also be part of the solution.

As the experiences of other state park systems show, the benefits of recreational user fees and park self-sufficiency are not merely theoretical. A market-based approach to the parks would ensure the future of the park system and offer greater preservation of the state’s natural wonders.

Read the full column here.

Other resources:

» My previous Reason policy study on national parks and user fees: Funding the National Park System: Improving Services and Accountability with User Fees (Full Study | Policy Summary)

» Reason's California-related research and commentary

California Parks Need User Fees

adam.summers@reason.org (Adam Summers) — Tue, 01 Sep 2009 11:43:00 EDT

Has the budget crisis in California reached the point where state officials “have” to close state parks? Officials warn that budget cuts to the tune of $14.2 million could lead to the closure of approximately 100 of California’s state parks for up to two years. The final decision about which parks are to be closed is expected shortly after Labor Day.

Closing these parks isn’t necessary. Increasing park user fees to reflect the actual operating costs, as well as the rising demand, could allow the state parks to remain open.

California has recently imposed some minor park fee increases, yet they are still well below the amount needed—in the absence of additional reforms—to make the parks self-sustaining. Only 13 of the 279 parks and beaches in the California State Park System are financially self-sustaining.

In recent years, at all levels of government, user fees have provided an attractive alternative to general appropriations funding. User fees provide a fairer funding source since they ensure that those who actually use government services are primarily responsible for paying for those services, reducing tax dollars and giving people more choices.

User fees also offer practical benefits such as increased park management flexibility—allowing park managers to adjust to economic conditions or changes in park visitors’ recreational preferences—and greater financial accountability. States such as Vermont, New Hampshire and Texas have realized significant park services cost savings through user fees.

Opening up park management and maintenance services to a competitive bidding process, and turning these operations over to private-sector or non-profit groups, could further reduce costs and help to make the parks self-sufficient while addressing maintenance backlogs.

Some have voiced concerns that increasing fees might unfairly price the poor out of the state parks experience altogether. Beginning August 17, state parks across the state increased day-use and camping fees in order to partially address funding holes left by budget cuts. Those fee increases are expected to raise an additional $200,000 in revenue this year, and a total of $5 million over three years. But, according to a California State Parks press release, “It should be noted that these increases do not raise park revenues to the level of self-sufficiency for the system. Doing that would require steep increases that would price people out of their public park system.”

But how do officials know that self-sustaining park fees would price people out of the park system? It is not as though the state has ever tried to find market prices for park services. In fact, prior to the recent fee hikes, it hadn’t increased fees since 2004. Some parks do not charge day-use fees at all.

Numerous news reports indicate that demand for state parks remains high despite the recent fee increases. The state park system “is currently packed with the highest visitation rates ever recorded,” according to state parks director Ruth Coleman, “because with the economy in the tank, people can’t afford to go anyplace else.”

“Reservations are through the ceiling,” added Jerry Emory, a spokesman for the California State Parks Foundation. “It’s a very viable economic alternative for friends and families to get out and enjoy some quality time.”

If user fees go up, some will say that the state is pricing out the poor. But there are ways to accommodate all income groups. The demand for park services is not constant year-round, or even throughout the week. Parks that use market pricing would have an incentive to reduce fees during times of low demand and increase fees during times of high demand. Thus, anyone who wanted to save money on recreation fees could do so by visiting parks during off-peak days or seasons.

If that’s not enough, the state could set aside an allotment of passes each day to distribute on a first-come, first-served basis. This method would allow anyone willing to get in line early for tickets to pay with their time instead of their dollars.

California doesn’t “have” to close its parks. By increasing user fees to make state parks self-sustaining and contracting with private-sector or non-profit groups to manage and maintain the parks, California can prevent the threatened park closures. Leveraging volunteer assistance and seeking out tasteful corporate sponsorships to generate additional revenues should also be part of the solution.

As the experiences of other state park systems show, the benefits of recreational user fees and park self-sufficiency are not merely theoretical. A market-based approach to the parks would ensure the future of the park system and offer greater preservation of the state’s natural wonders.

Adam Summers is a policy analyst at Reason Foundation.

Lying Figures in California

adrian.moore@reason.org (Adrian Moore) — Mon, 31 Aug 2009 14:07:00 EDT

Bill Leonard, who sits on the CA Board of Equalization, has a weekly newsletter in which he often comments on state budget and tax issues. His latest includes these comments on the state's revenue estimates.

This goes even further back but remember in February the Administration and 2/3s of the Legislature said raising the sales tax would bring in billions more revenue and help balance the state budget? Since then sales tax revenue is down more than 12%. A month ago, the Administration and legislative members emerged from all night sessions to say they had successfully addressed the $26 billion structural deficit only to be told last week by Standard and Poor’s that we are still $15 billion out of balance.

Last week it was announced that the annual adjustment to the state income tax brackets has been adjusted down for deflation. When there is deflation in the overall economy those brackets go down, which is not a good result for taxpayers but it is consistent.

The Administration anticipated there would be deflation but their forecast was way above what has actually occurred. The Administration booked the extra revenues as if they were actual and that is now going to be another addition to the state’s deficit.

Department of Finance spokesman H.D. Palmer had this quote in the San Francisco Chronicle:
"We thought (deflation) would be 2.2 percent," says H.D. Palmer, a spokesman for the state Department of Finance. Because deflation was only 1.5 percent, "There is actually going to be a marginal hit to the state's bottom line."

Estimating revenues in a dynamic economy with volatile taxation policies is doomed to failure. It is an argument for a substantial reserve and lots of flexibility in government spending levels because revenue estimates are generally not to be believed.

This continues a long running problem that a "balanced" budget is passed using rosy revenue projections. In theory if revenues fall short, there should be a "mid-year correction" in which spending is reduced to be in line with actual revenue. But since spending cuts are virtually anathema in Sacramento, this no longer happens. Instead more accounting shell games or more debt have become the answer.

Until real spending and debt limits are established, I see no reason to expect this to change.

Yet More Nickle-n-Diming of California Taxpayers

leonard.gilroy@reason.org (Leonard Gilroy) — Thu, 27 Aug 2009 16:36:00 EDT

Ouch—as if the numerous tax and fee increases adopted by policymakers earlier this year weren't bad enough for California taxpayers, now there's yet another hand picking their pockets. This time though, it's not coming from big-spending policymakers—it's the byproduct of simple math.

Like most states, California automatically adjusts its tax brackets every year to account for inflation. As the Los Angeles Times reports today, the state's negative inflation this year will have the effect of lowering the income levels that trigger each marginal tax rate, bumping many unfortunate taxpayers on the margins into a higher tax bracket:

While Californians are still feeling the sting of income and sales tax hikes signed into law earlier this year, now comes news that state tax authorities plan to take a little more from their pockets.

For only the second time in 30 years, the tax board is lowering the point where each tax bracket begins, bumping many people into a higher category. At the same time, officials are cutting back some deductions. Everyone will pay more, even people whose bracket or income doesn't change. [...]

The new changes apply to the 2009 tax year. Residents are already paying hundreds -- even thousands -- of additional income tax dollars under the quarter-point rate increase and other tax hikes approved in February as part of a budget deal.

"Everything is going up, up, up," said Othman Rabie, owner of a sandwich shop in downtown Sacramento. "And business is going down." [...]

Under the latest changes, for a married couple filing jointly, the top tax rate of 9.55% now begins at $92,698, down from $94,110. Combined with the earlier increases, such a couple with two children, earning $100,000, will see their California income tax bill rise by 22.3%, or $716, according to the state Franchise Tax Board. Their tax would go from $3,208 to $3,924, factoring in a $110 drop in the standard deduction for joint returns.

The last thing California needs is yet another blow to economic prosperity. I haven't heard similar news yet from other states, but I think it's safe to say that it won't just be Californians going through this.

» Reason Foundation's California Research and Commentary

School Choice and More in Los Angeles

lisa.snell@reason.org (Lisa Snell) — Thu, 27 Aug 2009 16:33:00 EDT

Lots of school reform in Los Angeles this week. Of course the big story via Education Week:

The Los Angeles board of education has agreed to open up as many as 250 schools to outside managers in a move meant to jump-start the pace of academic improvement in the nation’s second-largest school district.

In a 6-1 vote that followed a nearly four-hour debate, board members on Tuesday approved a resolution that will allow outside groups—such as charter school operators, community organizations, as well as in-house talent—to compete to operate 50 new schools set to open in the city over the next four years.

The new policy will also invite groups to take on the management task of turning around roughly 200 schools that are chronic underperformers.

And in other school reformy news, The Los Angeles Times reports that the Los Angeles Unified School District has instituted a pay incentive program for high-level administrators.

The incentive pay is mandatory for two new senior administrators who report directly to Cortines. And 17 current employees have the option of joining the program, in which they could increase or lose up to 10% of their salary depending on several measures, including student test scores.

"The district is moving in a more progressive manner," said board member Yolie Flores Aguilar, who supports merit pay for all district employees. Flores Aguilar on Tuesday won support for a controversial plan that would allow charter groups and other outside operators to take over as many as 250 schools.

California Holds Garage Sale to Get Rid of Surplus Property

adam.summers@reason.org (Adam Summers) — Wed, 26 Aug 2009 12:26:00 EDT

The State of California is looking for some extra revenue, so it is doing what any cash-strapped family would do: clear out its unused items and hold a garage sale. As described in this L.A. Times article today, the state's garage sale will take place this Friday, August 28 (8 a.m. to 6 p.m.) and Saturday, August 29 (7 a.m. to 12 p.m.), with a preview of the state vehicles for sale on Thursday, August 27 (8 a.m. to 4 p.m.), in Sacramento. Items have also been put up for sale on eBay and Craigslist. There is everything from adaptors to Zip drives, with plenty of Blackberries, bookcases, cameras, desks, file cabinets, hard drives, laptop computer bags, monitors, routers, and tables available. There are even baseball bats, binoculars, a ceramic cat, fake plants, a golf club, a massage seat, Sacramento Kings memorabilia, a surfboard, a tennis racquet, VCRs, and an Xbox game console (with instructions!). (See here for a complete list of items for sale.) Gov. Schwarzenegger is even autographing the visors of some of the vehicles for sale to up the offers. For more information on the state's surplus property blowout, see the Great California Garage Sale Web site.

All sarcasm aside, the state absolutely should get rid of all its unused or underused property. That's just good asset management. When private companies come upon tough times, they get even more aggressive about divesting themselves of assets they don't need, or are not core to their business, and the government should do the same.

Unfortunately, the state's efforts to get rid of surplus property have been disjointed and piecemeal at best. The watchdog Little Hoover Commission has repeatedly criticized the state for not effectively managing its real property assets (see here, here, here, and here). In 2004, the California Performance Review Commission made several recommendations to improve the state's asset management. (See, for example, recommendations INF 11: Tapping Surplus Property Assets (pp. 757-74) and INF 19: Better Management Needed for California's Real Estate Assets (pp. 823-29) in Chapter 4, and SO 26: Implement a Statewide, Automated Asset Management Tool (pp. 1435-38) and SO 80: Using Innovative Techniques to Enhance Sale of State Surplus Property (pp. 1805-09) in Chapter 7.) In a separate report, the CPR detailed nearly 50 high-value, urban properties owned by the state that it estimated could fetch a combined $1.6 billion to $4.3 billion. (Given today's real estate market, the sales prices would likely be lower, but they would still be significant.) That report was made possible by a Schwarzenegger executive order, which also directed all state entities to review all their real property assets. These assets are recorded by the Department of General Services (DGS) in the Statewide Property Inventory.

That is not to say that there have not been successes, though. In 2001, the state sold surplus real estate in Silicon Valley for $149 million. According to a July 2008 DGS report about state surplus property, during the five years from FY 2002-03 to FY 2006-07, California sold, transferred, or exchanged 43 surplus properties with a combined value of over $218 million. But much more needs to be done. Earlier this year, Schwarzenegger proposed selling some of the state's high-value entertainment venues (entertainment is hardly a core government function)--including the Del Mar Fairgrounds and Race Track, Orange County Fairgrounds, Los Angeles Coliseum and Sports Arena, Ventura Fairgrounds (Seaside Park), and Cow Palace--but even this modest idea of divesting what should be low-hanging fruit has thus far failed to gain much traction.

The Great California Garage Sale may not generate enough revenues to plug the kind of massive budget holes California has experienced in recent years (and likely will be forced to tackle again in the near future), but it is a start, and it's the kind of thing government should be doing anyway as a good asset management practice. Besides, as Jon Coupal, president of the Howard Jarvis Taxpayers Association, asserts, "if this is the beginning of taking a . . . thorough review of our property management practices, it's a good thing."

Other resources:

» See the discussion of asset divestiture and procurement reforms in Reason's California Citizens' Budget study (pages 69-84).

» Reason's California-related research

» Stay tuned to Reason.org for policy analyst Anthony Randazzo's forthcoming how-to guide on government asset management and privatization.