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Out of Control Policy Blog Archives: 7.7.13–7.13.13

California E-Cigarette Bill Not Based On Evidence

Electronic cigarettes, commonly known as e-cigarettes, are battery-powered devices that vaporize liquid solutions containing nicotine and sometimes additives for flavors. Unlike cigarettes, no combustion is involved and only vapors are emitted. Research has suggested that many individuals currently use the smokeless devices to assist in smoking cessation.

To date, there has been limited research examining the health effects of e-cigarette use. While some studies have been done and found effects on the pulmonary system, research has focused primarily on acute effects. A June 2012 peer-reviewed study examined the acute effects of e-cigarette use on breathing resistance--a measure of respiratory inflammation. Relative to controls, study participants who used an e-cigarette device were found to have slightly higher lung resistance.  The study found that there were "immediate adverse physiologic effects after short-term use that are similar to some of the effects seen with tobacco smoking." However, the study authors cautioned "that although the differences within our study are of statistical significance, the clinical changes may be too small to be of major clinical importance," and encouraged long-term research. They also suggested that "it is possible that if e-cigarette use were a short-term bridge to smoking cessation, the long-term health benefits associated with their use might outweight the short-term risks."

Further research into effects on heart function prompted one researcher to state that "laboratory analyses indicate that it is significantly less toxic and our study has shown no significant defects in cardiac function after acute use." Research on secondhand exposure to e-cigarettes has been even more limited. In contrast, there exists extensive evidence that cigarette smoking not only is associated with a litany of negative health outcomes, but that secondhand exposure can be harmful to others. In brief, there is still significant research that needs to be done to discern what the long-term health consequences are, and how extensively electronic cigarettes impair health functions in the short-term.

Currently, California does not have laws as to where an individual may use e-cigarettes. Restrictions on where an individual can smoke are presumably grounded in this empirical research.

Senate Bill 648, sponsored by Senator Ellen Corbett (D-East Bay) would extend existing restrictions on where cigarettes are smoked to e-cigarettes. Voting in support of the bill means that the State of California “finds and declares that regulation of smoking in the workplace is a matter of statewide interest and concern,” and that as a result, e-cigarettes must be treated the same as cigarettes.

Bill analysis for the Senate Committee on Health summarizes the goal of the bills thusly: “(a) to minimize the use of products that pose unknown health risks particularly unregulated products that deliver drugs such as nicotine to the user; and (b) to prevent confusion in the enforcement of smoke-free laws caused by the perception that e-cigarette smokers are actually smoking conventional cigarettes.”

The bill analysis cites opposition arguments that “electronic cigarettes have not been shown to cause harm to bystanders, and the evidence to date shows that health risk associated with electronic cigarettes is comparable to other smokeless nicotine products…” The only response to these claims are vague concerns over the "potential" negative health effects of e-cigarettes and e-cigarette exposure.

The limited amount of research done seemingly supports the idea that e-cigarette vapor really isn't a significant risk. A 2012 study in Inhalation Toxicology sought to determine the impact on air quality that “high nicotine e-liquids” had compared to tobacco smoke. The study concluded that “electronic cigarettes produce very small exposures relative to tobacco cigarettes,” and that the study “indicates no apparent risk to human health from e-cigarette emissions based on the compounds analyzed.” A 2013 study published in Tobacco Control studied vapors from 12 brands of e-cigarettes for toxicants and carcinogens found in tobacco smoke. The researchers found that while some toxicants were found in the vapors, "levels of the toxicants were 9-450 times lower than in cigarette smoke" and concluded that "substituting tobacco cigarettes with e-cigarettes may substantially reduce exposure to selected tobacco-specific toxicants."

Despite this, the California Senate voted 21-10 anyway to expand cigarette restrictions onto e-cigarettes. The California Assembly is expected to take up the bill when they get back from summer recess in August.

The bill purports to be proactive in restricting the freedom of individuals to engage in what apparently, to the California Senate, “is a matter of statewide interest and concern.”  Existing and proposed legislation infringing on the decision making of business owners as to whether or not certain (non-criminal) behaviors (e.g. e-cigarette uses) should be permitted on their property serve only to cheapen the value of law and extend government power into areas of life it doesn’t need to be involved with. Considering the lack of evidence that e-cigarette consumption is a “matter of statewide interest and concern” and that the only available evidence shows that it apparently poses “no apparent risk to human health,” we can only hope that California Assembly members ask themselves: Do we really need this law?

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Another Bullet Train Boondoggle Bites the Dust

Some good news.  My colleague Wendell Cox writes:

The application for a $5.5 billion federal taxpayer loan to start construction on the proposed Victorville California to Las Vegas high-speed rail line has been suspended indefinitely, according to Rep. Paul Ryan, chairman of the U.S. House of Rep.'s budget committee and Sen. Jeff sessions, ranking member of the US Senate budget committee. In a July 11 letter, Congressman Ryan and Sen. Sessions indicated that former US Sec. of Transportation Ray LaHood had informed the operator, Xpress West, of the decision.

Ryan and Sessions related that Secretary LaHood’s letter, “explains that ‘serious issues persist’ with the XpressWest loan application; that there are ‘significant uncertainties still surrounding the project’; and that, as a result, USDOT has "decided to suspend further consideration" of the XpressWest loan request.”

The nature of the cited "serious issues" and “significant uncertainties” are not known made public by USDOT, but they are manifest. They were detailed in our August 2012 policy report--The XpressWest High-Speed Rail Line from Victorville to Las Vegas: A Taxpayer Risk Analysis.

Congressman Ryan and Sen. Sessions, had written a joint letter dated March 7 to Secretary LaHood characterizing the taxpayer risks as untenable and heavily citing our report. They asked for a Government Accounting Office investigation of the project and asked Secretary LaHood to suspend final determination on the taxpayer loan until the GAO investigation is completed.

Our report had expressed concern that there might not even be a market for the service, since no place in the world do people drive 50 to 100 miles to get to a train to take them the last 175 miles. 

Even it were assumed that such an unconventional market existed, we judged the ridership, and thus the revenue projections to be grossly exaggerated. Unlike the project ridership projection consultants, we applied a “reference class” ridership analysis, which used actual ridership from other similar routes around the world. That yielded a forecast from 53 percent to 76 percent below promoter projections. This could have led to losses of from $4.3 billion to $10.4 billion over 24 years. The report predicted a default on the federal taxpayer loan by the ninth year of operation (In 2000, we made a similar default projection, due to the similarly bloated ridership estimates by promoters of the Las Vegas Monorail. That project subsequently defaulted on its bonds).

The Victorville to Las Vegas train depended on a long-term (35 year), $5.5 billion to $6.5 billion low interest loan from the Federal Railroad Administration's Railroad Rehabilitation and Improvement Financing Program (RRIF). No payments would have been required for the first six years. Our concern was that, if ridership was not sufficient to cover the operations and loan payments, taxpayers could lose the entire amount --- approximately 10 times the loss in the well publicized taxpayer loss in the Solyndra loan guarantee. This does not include the inevitable subsidies from taxpayers of California and Nevada that would have likely been necessary to keep the line running.

Xpress West was just another of a number of high speed rail projects around the world marketed as commercial ventures. Yet, the International Union of Railways indicates that only two routes, Tokyo to Osaka and Paris to Lyon have recovered their capital and operating costs from commercial revenues. In the end (or the beginning), the taxpayers virtually always pay. They have been spared that fate by the Department of Transportation decision in the Xpress West case.

There has been no statement from Xpress West. 

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Latest Articles on Reason Foundation

Is California Going the Way of Detroit?

I suppose it was not surprising when Detroit announced recently that it was going to default on $2.5 billion in debt, raising the prospect of becoming the largest municipal bankruptcy in the nation's history (yet another one!). The population has been fleeing the once-thriving city for decades, and it has been racked with corruption and an inability to even keep its street lights on (see here and here). With many other state and local governments struggling under the weight of unfunded pension liabilities and other debts, one can't help but wonder if a similar fate will befall residents in places like California and Illinois in the not-too-distant future.

In a desperate attempt to stave off bankruptcy, Detroit Emergency Manager Kevyn Orr announced a plan that would offer creditors a mere 10 cents on the dollar. This includes unfunded pension claims. According to a FoxNews.com news article,

More than 42 percent of Detroit's 2013 revenues went to required bond, pension, health care and other payments. If the city continues operating the way it had before Orr arrived, those costs would take up nearly 65 percent of city spending by 2017, Orr's team said.

“We’re tapped out,” Orr told WWJ-TV. “We need to come up with a plan to restructure our debt obligations and our legacy obligations going forward—that is: pension, other employee benefits, health care, so on and so forth.” Added Orr, “The average Detroiter has to understand this is a culmination of years and years of kicking the can down the road. We can’t borrow any more money. We started borrowing from our own pension funds.”

California may not be Detroit, but it certainly has done quite a bit of can kicking itself and is headed down a similar path. The state's notoriously bad business climate (worst in the nation for nine years running, according to a Chief Executive magazine survey of business leaders) has been driving businesses and entrepreneurs out of state for years. In addition, its unfunded pension and retiree health-care liabilities have grown to the hundreds of billions of dollars, and yet there appears to be no appetite for serious reform among lawmakers in Sacramento. As my colleague, Sal Rodriguez, similarly noted in a recent blog post, California's budget can only be considered balanced if its significant unfunded pension, retiree health care, and other liabilities are ignored.

In a column that originally ran in the Orange County Register a couple of weeks ago, I examined the Detroit fiscal mess and drew some parallels with California:

California is facing its own debt tsunami. This includes what Gov. Jerry Brown has identified as a roughly $30 billion “wall of debt” due to borrowing in past budgets, and over $10 billion the state has borrowed from the federal government to fund its unemployment insurance program. Most significantly, unfunded pension and retiree health-care liabilities total anywhere from $224 billion to $378 billion to $535 billion, depending on whom you ask.

[. . .]

As Will Rogers once quipped, “If you find yourself in a hole, the first thing to do is stop digging.” Yet, judging by California’s new budget, politicians haven’t learned any lessons from the state’s deficit-riddled past.

Implementing 401(k)-style defined-contribution retirement plans and pegging government employees’ salaries and benefits to levels comparable to those earned in the private sector would correct the course. Even then, it will take serious budget reforms to address the liabilities that have already been racked up. These measures include implementing spending and debt limits, privatizing functions that can be performed cheaper by the private sector, eliminating duplicative and unnecessary programs and commissions, lowering taxes and regulation to spur economic growth, reducing the number of state employees, and avoiding boondoggles like the high-speed rail project.

See the full column here.

As the bipartisan Little Hoover Commission's February 2011 report on California's public pension systems warned,

Actuaries estimate that in the next few years, government agencies in the CalPERS system will need to increase contributions into their pension funds by 40 to 80 percent from 2010-11 levels. Required government payments into pension funds will remain at heightened levels for decades, assuming that investments continue producing returns of nearly 8 percent annually, an optimistic scenario. [Emphasis added]

As the report noted, this means taxpayers will essentially be paying for a "second government": one government to provide the services they have come to expect from the government and another government of retired public employees that no longer provide those services.

Regardless of one's political or ideological leanings—whether they be a libertarian or fiscally conservative desire to shrink the size and scope of government and return more of the taxpayers' money through tax cuts or tax rebates, or whether they be a progressive appetite for devoting more spending to social programs or other priorities—the fact is that pension and retiree health-care costs will eat up more and more of state budgets, leaving less and less for those government services, tax cuts, or other spending priorities. It is time for politicians to stop burying their heads in the sand and start implementing real reforms. If they don't, before they know it, California will be Detroit.

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Unpacking the June Unemployment Report

Last Friday, while most of America recovered from a long day of stars and bars reverie, the latest indication that the American economy is not in recovery dropped in the form of the June unemployment report. In a new commentary for Reason.org, I break down the numbers, which were not bad, but not good:

Official unemployment (U3) was unchanged at 7.6% from May to June. However, the more accurate measure of unemployment (U6) that includes workers who have recently been dropped from the labor force actually increased dramatically from 13.8% to 14.3%. In relative terms, that is a movement not seen in many, many months.

The nearby chart shows this increase in the U6 as out of step in recent months. But that is not the only thing to take away from the report. Consider also that both the labor force participation rate and the employment population ratio (which we discussed last month) technically improved by a tenth of a percentage point in June compared to May. But don't get too excited -- as the next figure shows both measures are still terribly low. Bureau of Labor Statistics data has a pretty high margin of error and a 0.1 percentage point shift is statistically insignificant. In practical terms the numbers remain the same as the last few months.

For the full analysis check out the commentary here.

Also see Adam Millsap's discussion of D.C.'s recent bone headed choice to kill off job creation.

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DC City Council Passes Law Likely to Kill 1,000 Jobs

Today the Washington, D.C. city council voted 8-5 to force Wal-Mart to pay their workers no less than $12.50 per hour if the world wide chain continues with plans to build stores in the area. The Large Retailer Accountability Act was designed by the city council to make Wal-Mart pay a "living wage," and requires large retailers to pay workers at least 50% more than minimum wage. Before the ruling Wal-Mart threatening to terminate their plans to build in the D.C. area, since the wage floor directly cuts into the business model of the retail giant. While some D.C. elitists will undoubtedly rejoice and say good riddance to the "big box" retailer, many other, less fortunate residents of D.C. will remain jobless as a result of this unfair, job-killing proposal.

The academic literature is certainly mixed on how much the minimum wage affects overall employment (see here and here). However, research does decidedly show that increases in the minimum wage adversely affect the earned income of low wage workers -- precisely the type of worker that will find employment at Wal-Mart.

While the aforementioned studies are interesting, it is important to note the differences between the general minimum wage laws analyzed in these papers and what is happening in D.C. In the case of Walmart and D.C., the wage law only applies to certain large retailers, not businesses in general. It is also not a marginal change. The law increases the minimum wage paid by Walmart by over 50%. Is it any wonder that Wal-Mart is thinking about pulling out of the D.C. market when many of its workers will cost 50% more than what their competitors pay?

But enough about how this is unfair to Walmart, what does it mean for job seekers? With an unemployment rate in the District (8.5%) higher than the national average (7.6%) the D.C. city council's bill will eliminate nearly a thousand possible jobs that were already set to open up in D.C. In fact, if Wal-Mart follows through on their plan to withdraw from the D.C. market, the earned income of the nearly 1,000 workers that would have chosen to work at Wal-Mart will definitely fall, since presumably these workers would have only chosen to work at Wal-Mart if the pay there was higher than their next best option (which for a number of people right now is sitting a home at a computer filing job applications).

What's better: a job that pays minimum wage or no job at all? Which is more livable: minimum wage income or no income at all?

While the overall employment effects of general minimum wage laws may be ambiguous, the employment effects of the D.C. proposal are not. The D.C. city council's bill will fail to improve anyone's standard of living and instead deny consumers access to low-priced goods and services and jobs.  

For more on unemployment in America, see our earlier op-ed today about national trends in the labor market.

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“Race to the Top’s” Pricey Centralized Effort to Improve Teacher Evaluations Demonstrates Few Positive Results

Updated teacher evaluations are a key facet of the Obama Administration's "Race to the Top" school reform agenda. Schools across the country have implemented new methods of teacher evaluation in order to garner some portion of the $4.35 billion in education grants attached to the program. The new evaluations rate teachers based on a combination of student academic progress, as measured by test scores and other traditional academic metrics, and observations by principals and other administrators. The observation component replaces the old criteria of "classroom management" and "planning" with 60 specific elements including "engaging students in cognitively complex tasks involving hypothesis generation" and "testing and demonstrating value and respect for low expectancy students." Teachers deemed competent by these new standards are allowed to continue working, while teachers rated "less than effective" are subject to improvement or dismissal. 

However, the results of these new evaluations have been questionable, appearing highly skewed in favor of the teachers. For example, in Florida 97 percent of teachers were deemed effective or highly effective, and in Michigan and Tennessee 98 percent of teachers were rated effective or better. These numbers suggest that either the vast majority of teachers are extremely qualified or the new evaluations are inaccurate barometers of teacher performance.

"It is too soon to say that we're where we started and it's all been for nothing," said Sandi Jacobs, vice president of the National Council on Teacher Quality, a research and policy organization. "But there are some alarm bells going off."

These excessively favorable ratings are likely the result, at least in part, of inconsistencies in standardized testing techniques. Because standardized tests have changed significantly in recent years, and are now undergoing even greater changes due to the new "Common Core" curriculum standards, administrators have been reluctant to uphold high test-score standards for their teachers. 

"We have changed proficiency standards 21 times in the last six years," said Jackie Pons, the schools superintendent for Leon County, Fla., in which 100 percent of the teachers were rated "highly effective" or "effective."

Additionally, teachers' unions have pushed to deemphasize the influence of test scores on teacher evaluations. They claim that the data is error-prone for a number of reasons. For example, in Florida some teachers did not have enough testing data for the students they taught to complete evaluations, so they were evaluated based on the scores of students in their schools that they did not necessarily instruct. In Atlanta there was widespread cheating by teachers because their pay and employment was directly tied to their evaluation ratings.

Impressions of the new program are not entirely unfavorable, however. In Washington D.C., three years after implementing the new evaluation system, the number of teachers rated effective or highly effective rose from 82 to 89 percent, a statistic Scott Thompson, the deputy chief of human capital for teacher effectiveness for D.C. public schools, interprets as an indication that the new evaluations are positively affecting teacher performance. Thompson also noted that 400 teachers have been fired as a result of the new evaluation system, and hundreds more have relinquished their jobs voluntarily after receiving low ratings.

The new evaluation system appears to be a mixed bag in terms of effectiveness-- comically inaccurate in some school districts, but seemingly beneficial in others. 


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L.A. Becomes Latest to Pass Nanny-State Plastic Bag Ban

First, the environmentalists wanted to get rid of paper grocery bags because they were the result of destroying too many trees. Then the market developed a lighter, stronger alternative in the form of plastic bags. Now the environmentalists want to get rid of these, too, and force everyone to bring their own reusable bags (typically made from cotton, hemp, or polypropylene, a plastic polymer different from that of the typical plastic grocery bag) when they go to the store.

Los Angeles recently became the latest—and largest—U.S. city to ban plastic grocery bags. By a 9-1 vote, the L.A. City Council voted to prohibit stores that sell perishable food from issuing plastic bags to customers, and would require the stores to charge customers 10 cents per recyclable paper bag used. Councilmember Bernard Parks cast the lone dissenting vote. Under the measure, larger stores—defined as those larger than 10,000 square feet, or which make more than $2 million per year—would have to comply beginning January 1, 2014, while smaller stores would have until July 1, 2014 before the rules kick in.

The L.A. plastic bag ban appears to have been modeled after a California statewide proposal that fell just three votes shy in the state Senate a few weeks prior to the L.A. vote. That bill, SB 405, introduced by State Senator Alex Padilla (D-Los Angeles), and its companion bill in the Assembly, AB 158, would similarly have banned plastic grocery bags and mandated that stores charge 10 cents per reusable paper bag. According to a Senate Floor bill analysis of SB 405, roughly 70 local governments—including Long Beach, Los Angeles County (unincorporated areas), San Francisco, San Jose, and Santa Clara County—in California have now implemented plastic bag bans. In addition, "Most of these cities and counties also require stores to charge a fee for a paper carryout bag, and a few have banned both single-use plastic and paper carryout bags."

Sen. Padilla claimed that the passage of the measure by the City of Los Angeles "breathes new life" into his statewide plastic bag ban proposal.

In a column for the U-T San Diego, I wrote about the state ban and why prohibiting plastic bags would be bad for both individual freedom and the environment:

According to the U.S. Environmental Protection Agency [see Table 19], plastic bags, sacks, and wraps of all kinds (not just grocery bags) make up only about 1.6 percent of all municipal solid waste materials. High-density polyethylene (HDPE) bags, which are the most common kind of plastic grocery bags, make up just 0.3 percent of this total.

The claims that plastic bags are worse for the environment than paper bags or cotton reusable bags are dubious at best. In fact, compared to paper bags, plastic grocery bags produce fewer greenhouse gas emissions, require 70 percent less energy to make, generate 80 percent less waste, and utilize less than 4 percent of the amount of water needed to manufacture them. This makes sense because plastic bags are lighter and take up less space than paper bags.

Reusable bags come with their own set of problems. They, too, have a larger carbon footprint than plastic bags. Even more disconcerting are the findings of several studies that plastic bag bans lead to increased health problems due to food contamination from bacteria that remain in the reusable bags. A November 2012 statistical analysis by University of Pennsylvania law professor Jonathan Klick and George Mason University law professor and economist Joshua D. Wright found that San Francisco’s plastic bag ban in 2007 resulted in a subsequent spike in hospital emergency room visits due to E. coli, salmonella, and campylobacter-related intestinal infectious diseases. The authors conclude that the ban even accounts for several additional deaths in the city each year from such infections.

The description of plastic grocery bags as “single-use” bags is another misnomer. The vast majority of people use them more than once, whether for lining trash bins or picking up after their dogs. (And still other bags are recycled.) Since banning plastic bags also means preventing their additional uses as trash bags and pooper scoopers, one unintended consequence of the plastic bag ban would likely be an increase in plastic bag purchases for these other purposes. This is just what happened in Ireland in 2002 when a 15 Euro cent ($0.20) tax imposed on plastic shopping bags led to a 77 percent increase in the sale of plastic trash can liner bags.

In addition, a report for the U.K. Environment Agency found that cotton reusable bags would have to be used 131 times before they would have a lower global warming potential than HDPE bags. (And this was assuming that no HDPE bags were reused. Factoring in the extent to which HDPE bags are reused for trash bin liners and other purposes, the cotton reusable bags would have to be used 173 times to get the same result.) Unfortunately, according to another study, reusable bags are only used about 51 times before they are discarded, which, according to the former study, makes them much less environmentally-friendly.

If this was not enough, plastic bag bans come with serious economic costs. Customers have to pay for the more costly paper and reusable bags in the form of higher food costs, taxpayers have to pay for an inflated government bueaucracy (not to mention the paper bag taxes that are oftentimes imposed), and lots of people that work in the plastic bag industry are put out of work. According to one industry estimate, a statewide plastic grocery ban in California would threaten approximately 2,000 jobs in the plastic bag manufacturing and recycling industry.

Banning things—whether they be fireworks, foam fast-food containers, fast-food kids' meal toys, medical marijuana dispensaries, or even sleeping in your own car—unfortunately seems to be a popular public policy, especially at the local government level. And plastic bag bans are especially en vogue these days, despite their mistaken or ignorant economic and environmental foundations. Let us hope that when such proposals are inevitably brought up again in California and in state and local governments across the nation, rationality will win out over groundless emotional pleas, and freedom will triumph over nanny-statism. As I maintained in the U-T San Diego article,

Environmentalists have every right to try to convince people to adopt certain beliefs or lifestyles, but they do not have the right to use government force to compel people to live the way they think best. In a free society, we are able to live our lives as we please, so long as we do not infringe upon the rights of others. That includes the right to make such fundamental decisions as “Paper or plastic?”

See the full column here.

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The Crony Capitalism of Sallie Mae

Reason Foundation released a new policy brief today, looking at the crony capitalism of Sallie Mae. This is the second in a series about crony capitalism, the first being a brief examining the Community Development Block Grant program.

In the brief, co-authored by Scott Piazza and Victor Nava, we show that Sallie Mae has used its political influence to build and maintain its profitability in spite of the financial crisis and throughout numerous attempts to reform the industry. It has used this influence recently to secure massive servicing contracts from the expanded Direct Loan Program, acquire a multi-billion dollar bailout of the student loan industry, and to procure the removal of significant debtor protections from privately issued student loans, of which the company is the largest originator.

The resulting situation is unfair to students and taxpayers alike: students end up paying higher college tuition fees and are saddled with more debt; taxpayers are left sitting on a ticking time bomb of accumulated government-backed debt. When the student loan bubble bursts and Uncle Sam is called upon to bail out Sallie Mae, the cost could run into the billions.

For more, read the policy brief "Sallie Mae and Uncle Sam: Cronyism in Higher Education Finance"

Also see our first crony capitalism policy brief: "Crony Capitalism and Community Development Subsidies"

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Cuts Won't Stop the Crony Capitalism or Corruption in the CDBG Program

Last month, House Republicans introduced a $44.1 billion transportation and housing bill which includes a $1.3 billion cut to the federal Community Development Block Grant program (CDBG). While the cut does slash government spending for the block grant program in half, it doesn't address the crony capitalism inherent in the CDBG program which breeds the waste, fraud, and corruption continually seen within the CDBG program.

You don't need to look far in the past to see this sort of corruption taking place. In June, the Department of Housing and Urban Development (HUD) sent a scathing letter to the Mayor of Honolulu Hawaii, calling on the city to return nearly $8 million in CDBG funds that it gave to Opportunities and Resources Inc. (ORI), a nonprofit redevelopment organization in central Oahu. The Aloha Gardens Wellness Center and Camp Pineapple 808 both were projects developed by ORI with federally issued CDBG money meant to serve elderly and disabled persons, but since completion, the projects haven't exactly been used for their advertised purpose.

The HUD report claims ORI had been marketing the centers to the public as venues for weddings, parties, banquets, fundraisers, corporate retreats, conferences and family reunions. The city also lent ORI nearly $1.2 million in CDBG funds between 1989 and 1995, which it decided to forgive back in 2010. HUD found that this decision was made by city employees who were running for elected office while receiving campaign donations from ORI representatives.  The report states:

"ORI has maintained significant support over many years by the direct involvement of high ranking City and State officials...The direct involvement of the officials' appears to have placed pressure on staff resulting in the City ignoring regulatory violations in favor of completing the project and satisfying ORI's requests."

The fraudulent behavior in cases like Honolulu is precipitated by the crony capitalism sewn into the fabric of the program-in order to get public money you need to have close ties with public officials. It's how the game works, which leads to certain private companies getting preferential treatment over others at best, and straight up corruption at worst.

Community Development Block Grants are the largest subsidy program run by the Department of Housing and Urban Development (HUD), providing funds to over 1,200 state and local governments. HUD claims the grants support low-income individuals, prevent slums and blight, and address immediate threats to community welfare by funding public and private infrastructure improvements.

But by allowing federal dollars to go towards funding private interests, a system of crony capitalism is created that is nearly impossible to get rid of. Crony capitalism is best defined as private interests colluding with government to acquire subsidies or economic benefits that give them an advantage or special privilege in the marketplace that would not otherwise exist. Usually this takes the form of lobbying, donating to a city council member's campaign, or just knowing the right people. Sometimes though certain parties will cross the line and engage in outright corruption that no one can defend.

This kind of corruption is not limited to just Hawaii. Once again in June, HUD found that the City of Pine Bluff, Arkansas improperly spent nearly $200,000 in CDBG funds and failed to properly document an additional $279,000 in expenditures. The city is accused of spending more than 20% of CDBG funds on "administrative costs", purchasing properties without redeveloping them, disbursing funds to contractors before receiving bids, and not following federal project documentation guidelines.

Instances like this happen all too often when it comes to the CDBG program, as private interests jockey for every last bit of taxpayer money from the hands smarmy local politicians who are in charge of distributing it. Cuts to the CDBG program, while welcomed, won't end the cronyism and corruption inherent in the program. The best solution is to just eliminate the program. The latest cuts bring us halfway there, so now is the time to just go all the way and end the crony capitalism once and for all.

For more on community development cronyism see our piece for the Heartland Institute here.

Also see our Policy Brief, Crony Capitalism and Community Development Subsidies here.

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California Misses Opportunity to Oppose State Pension Bailouts

California had an opportunity this year to take a stand against irresponsible fiscal policies and warn the federal government against any bailouts of state pension systems. This opportunity came in the form of a very simple and common-sense measure, but, like most such measures in California, it was rejected by the politicians in Sacramento.

The measure, Assembly Joint Resolution 10, sponsored by Assemblywoman Shannon Grove (R-Bakersfield), would have urged the federal government "not to take any action to redeem, assume, or guarantee state debt, and would [have urged] the Secretary of State to report to Congress any negotiations to engage in an action that would result in an outlay of federal funds on behalf of state creditors." While the resolution denounces bailouts of all kinds of state debt, it is pension debt with which it is primarily concerned, and for good reason: California's unfunded state pension and retiree health care liabilities are estimated at anywhere from $224 billion (official state estimates) to $400 billion or $500 billion (based on several academic studies).

Sadly, members of the Assembly Committee on Banking and Finance apparently did not seem interested in taking a stand against a possible—some might say likely—future federal bailout of state pensions, and the measure failed on a party-line 8-3 vote.

As explained in a CalWatchdog article about the measure and the hearing, the "No Pension Bailout" measure was inspired by the Illinois Policy Institute's Pension Project. In terms of public pension liabilities, Illinois is one of the few places that is actually worse off than California. In his 2012 budget proposal, Illinois Governor Pat Quinn called for a federal guarantee of state pension debt. Measures such as AJR 10 are intended to prevent states and the federal government alike from even thinking about pushing such an irresponsible policy in the future.

Aside from the specifics related to pubic pensions, federal bailouts of state debts are simply a bad idea. I was asked to testify on AJR 10 at the Assembly committee hearing to address such concerns. The following is an excerpt of my remarks.

Other states are dealing with similar pension and other debt problems. The concern is that a terrible precedent would be set if the federal government were to start bailing out state governments. This would be detrimental for several reasons.

  1. It would undermine our federalist system, effectively turning sovereign states into wards of the national government.
  2. It would create a serious moral hazard. Just as the federal bailout of the so-called “Too-Big-to-Fail” banks only rewarded irresponsible and risky financial behavior, a federal backstop for state debts would only encourage irresponsible and risky fiscal policies.
  3. This would force citizens of states that do manage their finances well to pay for states that do not. Californians certainly would not want to pay the debts of Illinois or other states any more than residents of the other 49 states would want to pay for ours.
  4. It could cause the Legislature to lose control over its own budget decisions. Federal funds already make up over one-third of the total annual budget. As I’m sure you all know better than anyone, federal funds often come with strings attached, and the strings that might be imposed by the current or future administrations and Congresses for a bailout might be very different from the ways the Legislature would want to spend the money.
AJR 10 represents a chance for California to take a stand to reinforce the state’s sovereignty and oppose a policy that would have many serious negative effects across the nation. I fear that failure to adopt a measure such as AJR 10 would not only be a missed opportunity to take a leading role in asserting California’s strength and fiscal responsibility, but would also indicate that the state is not even capable of taking a symbolic step to ensure that its own fiscal house is in order.

See the full text of my testimony on AJR 10 here.

Related Research and Commentary:

» Testimony to the California Assembly Committee on Banking and Finance on AJR 10

» "No Bailout for State Pensions" (Orange County Register)

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California Needs to Address State Employee Paid Leave Abuses

California's liabilities for state workers' vacation and other paid leave has become a growing problem in recent years. This has been exacerbated by furlough policies that provide workers with a strong incentive to take time off during furlough days, allowing them to rack up additional unused paid leave time. While discussion of state employee compensation is dominated by pension and salary considerations, the state should not overlook the increasing costs of employees' vacation/annual leave benefits.

Earlier this year, California's nonpartisan Legislative Analyst's Office issued a report highlighting abuses of paid leave benefits by state employees. The LAO report concluded that the state's vacation/annual leave liabilities are at "historic levels," and that its cap on unused leave is "totally ineffective."

According to a Bloomberg analysis of vacation and other paid leave benefits in the 12 most populous states, lump-sum payments to California state workers averaged three times as much as those made to workers in the other 11 states. In addition, between 2005 and 2011, more than 1,390 California state employees received retirement checks that were larger than their base salaries.

In an article that ran in the Orange County Register, I addressed California's inability to control these costs:

California’s paid leave benefits are significantly greater than both public sector and private sector employers. The LAO analysis found that paid leave time is normally limited to between 20 and 40 days per year in most places. Most federal government employees get 30 days of vacation and leave. It’s 40 days for New York state workers, and between 23 and 67 days of leave, depending on the length of employment, for Texas state workers.

By contrast, most California state employees can save up to 80 days of vacation and other paid leave time each year. California’s correctional officers now have unlimited leave since the 80-day cap was removed in their most recent contract, and California Highway Patrol officers are allowed up to 102 days of leave.

While vacation and leave costs account for between 8 and 15 percent of annual salary costs in most places, it has now grown to about 27 percent of worker salary costs in California.

To make matters worse, caps on leave are typically not enforced. According to the LAO, “there does not appear to be any concerted or consistent effort by state control agencies to enforce the cap.” Astonishingly, paid leave caps were exceeded for more than 23,700 employees in January 2013.

In light of these problems with current state employee paid leave policies, California should enact the following reforms:

  1. Reduce the amount of maximum leave to 40 days of leave per year.
  2. Implement a “use-it-or-lose-it” policy on vacation time.
  3. Cap lump-sum payouts made to employees who are leaving or retiring at $15,000 (New Jersey currently has such a cap).
  4. Institute a leave buyback program in which workers could choose to cash out existing leave balances at their current salaries.

While these measures may not eliminate all the problems with the state's compensation policies, they would represent good first steps towards reining in the exorbitant benefits that many state workers are receiving at taxpayers’ expense.

See the full article here.

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