Reason Foundation

Reform California’s Tax System to Boost Economy

Posted on February 13, 2013, 6:26pm | Adam Summers

In my most recent policy study study, co-published by Reason Foundation and the Howard Jarvis Taxpayer Foundation, I analyze what I consider to be some of the more egregious special-interest corporate and sales and use tax carve-outs in California and argue that the state could improve its woeful business climate—and, thus, the economy in general—by eliminating such tax breaks and lowering the general corporate tax rate by an amount equal to that of the "extra" tax revenues that the state might expect to get without these tax breaks.

As I note in the study, the impact of reducing California's corporate tax rate in a revenue-neutral way by eliminating these targeted and unfair tax breaks could be significant. As Howard Jarvis Taxpayers Foundation chairman Jon Coupal and I note in a recent Orange County Register column,

The Franchise Tax Board says the corporate tax rate could be reduced 14 percent across the board, without losing any net tax revenue, simply by getting rid of one tax break—the Research and Development Tax Credit.

Furthermore, the Reason-Howard Jarvis study shows that eliminating other corporate tax breaks for things like movie companies, computer software, timber growing, farm machinery, and the "Accelerated Depreciation of Research and Experimental Costs" credit would allow the state to reduce the overall corporate tax rate by 20 percent or more.

Each time state lawmakers carve out a special tax credit or implement policies that favor certain businesses or industries through the tax code or through regulation, they also harm other industries.

[. . .]

The error of such tax breaks is compounded when one considers that they are effectively subsidizing many business activities that would have taken place even without the tax breaks. It's corporate welfare that California doesn't need and can't afford.

In addition, the state is notorious for its lack of oversight of these tax policies. A Department of Finance analysis of state tax credits concluded that the legislative intent was "not specified" for 70 of the 82 tax expenditures reviewed.

California's terrible business climate—due primarily to its burdensome taxes and regulations—has played a significant role in its economic stagnation and malaise. California has the ninth-highest corporate tax rate in the nation, at 8.84%, and the highest rate in the entire western half of the continental United States (which gives one an idea why so many businesses are fleeing to states like Texas, Utah, Nevada, Idaho, and North Dakota).

According to Chief Executive magazine's Best/Worst States for Business survey, California's business climate ranked dead last for the eighth year in a row. Among the responses from the CEOs surveyed were the following:

• “California continues to head in the wrong direction as its tax policies will drive more businesses and people to relocate in other states. State politicians feel business and commerce are ‘necessary evils’ that provide the funds to enable pursuit of their misguided agendas.”
• “California government is difficult to work with and very bureaucratic. Taxes and regulation are high and unruly.”
• “California is begging for businesses to leave its state.”
• “California is going in the wrong direction if that’s even possible.”
• “California is out of control. They have too much government who have nothing better to do than to harass businesses in the state. They need to cut the size of their regulatory bodies in half.”
• “California is the worst! They are doing everything possible to drive a business out of their state. If the environment in CA was not so good, they would have lost half of their population.”
• “California regulations, taxes and costs will leave only tech, life sciences and entertainment as viable. If you aren't an elitist no room here for the middle or working classes.”
• “California’s regulation and specifically labor regulation is a job killer. We will be moving our business out of CA and the State will lose 100’s of jobs simply due to the poor regulatory environment.”
• “California’s taxes and ongoing changes for regulations are devastating. One never knows from even day to day what new interpretation of an existing regulation or new regulation will befall you and your small business.”

It is time policymakers in California realize the more taxes and more regulations are not getting the job done. If they truly want to jump-start the state's economy and "create jobs" (which, of course, only private-sector businesses—not the government—can do), they should reverse the many years of failed policies by reducing the high taxes and voluminous red tape that are strangling the state's economy. A good place to start would be to level the playing field by getting rid of special tax breaks for politically-favored industries and cutting business taxes across the board.

» See the full op-ed article here.

» The Reason Foundation-Howard Jarvis Taxpayers Foundation California tax credits study is available here.

» See my previous blog post about the California tax credits study here.

New Reason Study Calls for California Tax Reform

Posted on January 30, 2013, 2:04pm | Adam Summers

In his State of the State Address last week, California Governor Jerry Brown asserted, "California is back, its budget is balanced, and we are on the move." Sadly, economic reality belies the governor's optimism. California still has the third-highest unemployment rate in the nation at 9.8%, a rate 26% higher than the national average of 7.8%. It has the highest income tax rate in the nation, the highest state sales tax, the highest gas tax (tied with New York), and the eighth-highest corporate tax rate (and the highest rate west of the Mississippi River, making it even less competitive with its neighboring states). Add to this the fact that California has the worst credit rating in the nation (now tied with Illinois), mainly due to its significant debt and hundreds of billions of dollars in unfunded pension and retiree health care liabilities, and one of the worst—if not the worst—business climates in the country. The passage of Proposition 30, with its roughly $50 billion in new tax increases over the next seven years, last November certainly won't help matters. This is certainly not the track record of an economic powerhouse, or even a state on the upswing.

There are many ways to turn around the California's fiscal and economic fortunes—cutting spending, eliminating burdensome regulations, privatizing government services, ditching boondoggles like the California high-speed rail plan, implementing real pension reform, etc.—but today I would like to focus on how tax reform could help to revitalize the state. In addition to its high general personal income, corporate, and sales tax rates, California's tax code is plagued by numerous special carve-outs for politically-favored businesses and industries. In a new study by Reason Foundation and the Howard Jarvis Taxpayers Foundation, I highlight some of the more egregious corporate and sales and use tax credits, exemptions, and deductions offered by the state and argue that eliminating such tax breaks and using the "savings" to lower the overall corporate tax rate would promote a better business climate, and thus help improve the state's economy.

The results of such tax reforms could be significant. The Franchise Tax Board estimates (see page 10 of this California Senate Office of Oversight and Outcomes report) that if the Research and Development Credit alone were eliminated, the overall corporate tax rate could be reduced by about 14 percent, thus improving the business climate for all industries. If some of the other tax breaks discussed in this report were also eliminated—including the Accelerated Depreciation of Research and Experimental Costs, Double-Weighted Sales Factor, Film Credit, Low-Income Housing Credit, Hiring Credit, Percentage Depletion of Mineral and Other Natural Resources, and Expensing of Timber Growing Costs breaks (see Table 1 on page 14 of the study)—the Reason-Howard Jarvis report finds that California could likely reduce its overall corporate tax rate by more than 20 percent.

The infamous Solyndra case is a perfect example of why tax breaks are a bad idea. In addition to the $528 million in federal loan guarantees that taxpayers lost when the company went belly-up, the company also wasted $25 million in California state tax exemptions from a "green energy" tax credit program. Rather than trying to play favorites or cater to special interests through preferential treatment in the state's tax code, politicians should ensure that the playing field is level, and that tax rates are as low as possible, and otherwise let the free market and the choices of consumers and entrepreneurs—through the forces of supply and demand—determine which businesses and services are most desirable and best meet their needs.

When the state encourages economic activity in one segment of the economy—be it through tax breaks or direct subsidies—it necessarily discourages economic activity in all other segments of the economy by making them relatively less competitive. These opportunity costs are often ignored by policymakers. The error is compounded when you consider that much of the tax breaks end up being used for business activity that would have occurred with or without the tax breaks.

If this were not enough, another negative consequence of such tax breaks is that they breed even more special-interest lobbying. The more industry groups, environmental lobbys, or other special interests see that lobbying "investments" pay off, the more money is directed to lobbying Sacramento and the less is put to productive use in the economy.

If California wants to jump-start its economy and become a place that Gov. Jerry Brown and taxpayers across the state can be optimistic about, a good start would be to simplify and reduce its onerous taxes. The new Reason-Howard Jarvis study offers some recommendations about how to go about this:

 

• Eliminate special tax treatment wherever possible, particularly in cases where:

 

a)     The tax break’s purpose is not clearly defined,

b)     The tax break is not serving its intended purpose or has outlived its intended purpose,

c)     The tax break is narrowly tailored to benefit a specific industry or type of business, or

d)     The tax break is clearly an example of the government picking winners or losers for ideological or special-interest reasons.

• Wherever possible, lower broad tax rates down to tax break levels, rather than raise tax break levels up to broad tax rates.

 

• Require a clear statement of purpose and performance measures for each tax break—including existing tax breaks without a clear statement of purpose or relevant performance measures—in order to facilitate evaluations of the impact of tax breaks on taxpayers and the state budget.

• Eschew static analysis of state tax breaks and return to dynamic analysis of their effects on taxpayers and the state budget.

• Establish a sunset commission to periodically evaluate tax breaks and other state regulations. A citizen’s commission would aid the legislative sunset commission similar to the state of Washington model. Adopt legislation requiring that both existing and future tax breaks must be evaluated every 5 or 10 years. Tax breaks not acted upon within this period would automatically be repealed.
• Adopt a BRAC-style commission (similar to that used to close unneeded federal military bases) to evaluate existing tax breaks and regulations. The two-thirds supermajority makes it difficult enough to repeal existing tax breaks. Under such a process, an independent panel of taxpayers, perhaps with additional representatives from the Franchise Tax Board, State Board of Equalization, and Legislative Analyst’s Office, would be appointed to evaluate and recommend tax breaks for elimination. The recommendations, once approved by the governor, would be submitted to the legislature, which would not be allowed to make any amendments and could only vote up or down on the entire package. A simple majority of both houses would be required to approve the recommendations.

 

See the California tax credits study here.

California Shouldn't Raise Minimum Wage

Posted on January 28, 2013, 2:31pm | Adam Summers

Democratic lawmakers in Sacramento, emboldened by their new supermajority status, are now tempted to use their added power to push an aggressive legislative agenda. One such effort, which they have tried, but failed, to implement during the past several years is an increase the state’s minimum wage, currently $8 an hour. Assemblyman Luis Alejo (D-Salinas), has introduced AB 10, which would increase the minimum wage to $9.25 an hour over three years and tie additional increases to inflation growth thereafter.

In a recent column for the Orange County Register, I argue that while a minimum wage might sound like a good and compassionate policy, it actually destroys job opportunities for many (not to mention the damage it does to the freedom to voluntarily agree to the price of one's labor).  The recent imposition of a living wage ordinance on large hotels in the City of Long Beach, California, is a case in point.  Consider the following excerpts from the O.C. Register article.

In the November 2012 election, voters in Long Beach overwhelmingly passed Measure N with 64 percent of the vote. The measure, pushed by labor unions such as Unite Here 11 and the Los Angeles County Federation of Labor, AFL-CIO, requires hotels with 100 or more rooms to pay their employees at least $13 an hour and guarantee annual raises.

After the passage of Measure N, Christine Petit of the Long Beach Coalition for Good Jobs and a Healthy Community, which sponsored the measure, crowed, “This ordinance means a lot to the workers, who will get the wage increases just in time for the holidays.” But this was a case of “Be careful what you wish for.”

In response to the measure's passage, some hotels were unable, or unwilling, to shoulder the extra financial burden. Instead of paying their employees more, they announced they'd lay off workers and reduce their number of available rooms so they would not have to comply with the new rules. The 174-room Best Western Golden Sails and the 143-room Hotel Current plan to dramatically reduce their number of available rooms to 99 rooms each to avoid the ordinance.

In December, just before the rules went into effect, the Best Western Golden Sails also reportedly posted a notice that "all employees will be considered terminated after their last shift of duty on or before Dec. 15." The Long Beach Press Telegram reported that "some" of the employees would be rehired but around 75 people were expected to permanently lose their jobs.

[. . .]

When a minimum wage law is imposed, or increased, business owners have a choice to make. They can reduce their costs, usually by laying off employees or cutting employees' hours, or they can try to increase their revenues by hiking prices and hoping customers will pay the higher prices.

[. . .]

Politicians in Sacramento should think long and hard about the fragile economy before pushing a minimum wage increase. For local and state businesses teetering on the edge of survival, the increased costs could be the last straw.

The good intentions of those who propose raising the minimum wage cannot outweigh its unintended consequences and economic reality. Try as they might, politicians can change the laws with regard to the minimum wage, but they cannot repeal the laws of supply and demand.

If the minimum wage was truly a wise and compassionate policy, then why stop at $9.25 an hour, as AB 10 proposes, or $13 an hour, as Long Beach mandated for large hotels? If arbitrarily raising the minimum wage to $13 an hour could magically create prosperity, why not raise it to $100 an hour? Wouldn't we all be rich if the minimum wage was raised to $100 an hour? The answer is obvious: business owners simply could not afford to pay $100 an hour, people would lose their jobs, stores would go out of business in droves, and commerce would grind to a halt. The fact that a minimum wage of $9.25 an hour or $13 an hour will not destroy quite as many jobs and businesses as a $100 an hour minimum wage is hardly reason to support it.

If simply passing laws could create wealth and eradicate poverty, politicians would be the most popular and celebrated people on the planet and people would avoid being poor without even having to work their way up the economic ladder. But take a good look around and ask yourself: Is this the way the world really works?

See the full op-ed article here.

How the War Between Proposition 30 and Proposition 38 Makes the Case for Proposition 32

Posted on November 1, 2012, 2:54pm | Lisa Snell

In today's Orange County Register, I argue that the teachers union opposition to Prop. 38 makes the case for Prop. 32.

While there is a long list of reasons to be skeptical of both propositions, the big thing that's puzzled me since the debate is this: How could any rational member of the California Teachers Association or any teacher possibly endorse Prop. 30 over Prop. 38? Molly Munger's Prop 38, hands down, offers students and teachers more money, more control, and more job security. In fact, Munger's proposal is so much better that, for once, the state PTA split with the teacher's union to back Prop. 38 . . . 

For reasons that include the bargain the teachers unions have made with Gov. Brown to keep pensions for teachers largely intact, as well as the threat by Gov. Brown to cut $6 billion from schools this year if Prop. 30 fails, the teachers unions have revealed their true colors, yet again, siding with Gov. Brown over the best interests of students and teachers.

From the very beginning, public employee unions and their allies have circled the wagons in opposition to Prop. 38. They've spent tens of millions in direct support of Prop. 30, while simultaneously funding direct attacks using organizations such as Democrats Against Proposition 38.

The war between Prop. 30 and 38 provides the case for Prop. 32, the initiative that prohibits corporations, unions, and government employers from deducting union dues that are used for political purposes from their workers' paychecks without their consent.

If given the opportunity and direct control over their political contributions, some teachers would have been more likely to support Prop. 38, which protects jobs and guarantees a funding stream to their individual schools.Yet, as it is in every political issue in California, the teachers union makes the political choice for each individual teacher.

UC Salaries and Administrators Grow Rapidly Despite Huge Budget Shortfalls

Posted on September 11, 2012, 10:58am | Lisa Snell

Even as California suffers through huge ongoing budget deficits and raises tuition at UC campuses across the state, the Orange County Register finds that salaries in the UC system have climbed by 29 percent in the last six years.

One area that seems to be recession-proof is employment in the UC system. The Register reported, "Spending on University of California salaries has climbed nearly 29 percent over the past six years, even as the public system grapples with ballooning retiree expenses that have created a long-term $24.6 billion shortfall.

"The 10-campus system paid $10.6 billion for 259,043 jobs last year, up from $8.2 billion in 2006, according to an Orange County Register analysis of the latest UC pay data. Staff numbers grew by about 6 percent over the same period, and student enrollment increased by about 10 percent."

I argue in the Orange County Register story that while large salaries could be a problem, the larger problem is the rapid growth in school administrators in the UC system.

The real problem with UC is not the high salaries of marquee teachers and coaches, Lisa Snell told us, but the "huge evidence that the number of administrators has grown astronomically in recent years." Snell is the director of education at the Los Angeles-based Reason Foundation.

She pointed us to a study by Keep California's Promise, a project of the Council of UC Faculty Associations. It found that, from 1994-2009, faculty rose about 33 percent, from about 6,500 to 8,669. But the number of senior managers rose 194 percent, from about 3,000 to 8,822 in the same period, a near-tripling of managers.

Indeed, the 8,822 managers in 2009 were more than the 8,669 faculty. Does every professor need his hand held in class by a manager?

 

 

 

 

California Legislature Mandates that "Public Service" Be Required for University Tenure

Posted on September 6, 2012, 2:53pm | Lisa Snell

As Dan Walters reports in the Sacramento Bee:

A third element would be required in the hiring and promotion of faculty members. It's called "service." The specifics of Assembly Bill 2132 appear to give great weight to political, or at least semi-political, activities favored by those on the political left.

They include, in the words of a legislative bill analysis, "developing programs for underserved populations" and "outreach programs developed to promote cultural diversity in the student body."

The California State University system would be required to make "service" an element with teaching and the bill "encourages" the constitutionally independent University of California to include "service" in its evaluations.

It is a mistake for the state of California to "legislate" faculty requirements for tenure and promotion even at public universities. This is a one-size-fits-all policy and it politicizes "public service" and ignores legitimate reasons why in some disciplines public service may not be a priority for promotion. Is a faculty member completing research on breast cancer also required to complete public service in addition to their basic research? The emphasis on "public service" for future employment should be at the discretion of the University and faculty and should not be a matter for the California legislature to even consider, much less enforce. 

Gov. Brown's Pension Reform "Outline" Underwhelms

Posted on August 28, 2012, 6:11pm | Adrian Moore

Governor Brown's pension reform "outline" is out.  California is certainly in desperate need of pension reform. Heck that was true back in 2005 when Reason called out the crisis before anyone was paying attention.

But Brown's proposal falls well short of the mark, in several ways.

First, as John Fleischman quicly pointed out, it does nothing to address the state's huge unfunded pension liability.

Second, some of the proposed reforms appear to require changes to current bargaining agreements, like getting rid of all 3 percent formulas. So the "reform" can pass the legislature, but get tossed by the courts for violating existing bargaining agreements.  Brown can say "I passed reforms, but the courts threw them out."

Third, I agree with John that nothing in the outline appears to be permanent. The next legislative session could overturn any or all of these reforms.  Judging by the state legislature's track record of giving the union's anything they want, and reneging on legislative deals to constrain spending, there is no reason to expect anything different this time around.

In fact, the whole thing looks fishy. The government worker unions in CA have consistently opposed anything like these reforms. Now going into an election Brown and the legislature are going to stand up to them? When they are most vulnerable to the kind of election pressure the unions bring to bear?

Ahh, but see, there is Proposition 30 on the table, Gov. Brown's big tax increase initiative. Most of the unions support it, and a good show of "reform" buys a lot of credibility with voters for the the arguments that the tax increases will fund a new, reformed state government.  But if those reforms can be unwound by the next legislative session, suddenly union quiescence makes more sense. Get the tax increase passed with some sham pension reforms, then unwind the reforms next year.  Win win for unions and politicians, lose lose for taxpayers.

California Parks’ “Special Fund” and the Health of Golden State Recreation

Posted on August 2, 2012, 9:00am | David Aloyts

Recent revelations from the California Department of Parks and Recreation point to $54 million in special funds squirreled away during a time when budget deficits are forcing nearly one quarter of all California parks to shutter their doors. This money, accumulated over the course of 12 years, was enough to cover the department’s cuts several times over. Several top officials at the department have been forced to resign because of the department’s lack of transparency in this time of fiscal trouble, including Ruth Coleman, the longest-running parks director in state history, and her heir apparent. All involved claim no knowledge of the funds’ existence.

While this scandal has brought to light what appears to be a case of government mismanagement and unaccountability, it has also been a proof-of-concept for the decentralized creation of public goods. Most of the 70 State Parks that lost their funding were saved by a combination of nonprofits and local governments who wanted to keep them open to protect their own interests. If more parks were set to close, it is likely even more outside funding would come out of the woodworks to protect them. While this sudden drop of dozens of state recreational facilities is nearly unprecedented, transferring the operations of such properties is becoming increasingly popular, along with the leasing or privatization of other venues such as zoos and libraries.

These new funds potentially could have kept some of California’s State Parks open for a few more years. Unfortunately, these are one-time sources of revenue rather than a permanent solution to the department’s budget deficit. The biggest fall-out from all of this is that it could make reaching such permanent solutions more difficult. Already, Sonoma County park advocates decided to cancel a local sales tax ballot measure which was set to provide long-term funding for the area’s closing State parks. Strangely, supporters who claimed the State’s financial mismanagement was “just too much [to overcome],” are putting financial responsibility for these important assets back into the State’s hands.

Maybe Ms. Coleman, who was known for advancing outdoor recreation and forging partnerships with corporations and nonprofits, did not do such a bad job after all. By not announcing these funds, she at once concentrated park funding in California’s most popular parks where they could do the most good, while simultaneously making sure parks in underserved areas remained permanently funded through private and local sources of income.

In the end, this news is a surprising change of pace: government officials irresponsibly saving money instead of irresponsibly spending it.

With budgets strained tighter than ever it is becoming increasingly necessary to have legislators more informed and accountable. For further insight, check here.

Is California Still Going to the Dogs on Pet Groomer Licensing?

Posted on July 10, 2012, 2:41pm | Adam Summers

In a previous blog post I wrote about an effort to require every pet groomer in the State of California to obtain a state license, along with all the requisite fees, requirements, and arbitrary regulations that go along with that. The bill, SB 969, generated such a backlash from business groups and the grooming industry (although there were doubtless some that supported imposing tougher, higher-cost standards on their current and would-be competitors) that it was watered down so that instead of imposing mandatory licensing it now calls for the establishment of a voluntary state certification program (which means there would still be more needless bureaucracy).

While this is an improvement over the original legislation, since the state would no longer force groomers to jump through all its hoops while driving up costs to businesses (and, ultimately, consumers), it should still give groomers and consumers alike pause (or is that "paws"—sorry, couldn't resist). As I mentioned to a reporter for an article on the legislation in the L.A. Times, the voluntary certification would likely be merely a short-term stepping stone to imposing mandatory licensing in the future, as evidenced by the previous attempt to do just that and the fact that the tendency over the last several decades has been for the number and stringency of government licensing laws and regulations to grow.

Moreover, a state certification programs would be duplicative and unnecessary. There is no shortage of private pet groomer associations and certification organizations, including:

• International Professional Groomers, Inc.
• International Society of Canine Cosmetologists
• National Dog Groomers Association of America
• Professional Cat Groomers Association of America
• Northern California Professional Groomers Association
• Southern California Professional Groomers Association

In addition to offering testing and certification services, organizations like these offer groomers training, continuing education, and mentoring programs. Voluntary (private) certification allows groomers to meet certain standards and advertise their competency to consumers, while still leaving groomers and consumers free to choose whether certain certification is necessary to do the job. This allows for the greatest competition, the lowest prices, the most consumer choice, and the greatest economic opportunity and freedom to work in the occupation of one's choosing. Businesses that offer shoddy work will suffer from their bad reputations and cease to be in business, and if harm is done to pets owners may seek legal recourse. (Aggrieved pet owners may even be able to avoid the legal system and receive just compensation for themselves and punishment for the negligent groomer by enlisting the aid of certification organizations or groups such as the Better Business Bureau.)

The L.A. Times column also cited my 2007 occupational licensing study, which, in addition to outlining the economic and moral arguments against mandatory (government) licensing, contained a fairly comprehensive listing of which occupations require licenses from each of the 50 states. By this metric, California was the most regulated state in the nation, requiring licenses for 177 occupations—nearly double the national average of 92. This should not be surprising for a state that consistently places at or near the bottom in surveys of state business climates.

In light of its poor business climate, California should be looking to expand economic opportunities and freedom, not restrict them. Especially in an economic climate like today's where there is such a concern for jobs, jobs, jobs, state and local governments should simply get out of the way and remove licensing and other harmful business regulations.

One groomer quoted in the L.A. Times article probably said it best:

"I want the government out of my salon," said Johnny Ray, co-owner of the Dog House in North Hollywood. "It's just a money grab."

Related Research and Commentary:

» "State is barking up wrong tree on pet groomer licensing" (U-T San Diego op-ed)

» "Bill would hound pet groomers" (Orange County Register editorial)

» "California Bill Proposes Licensing for Pet Groomers" (Reason.org blog post)

» Occupational Licensing: Ranking the States and Exploring Alternatives (Policy Study)

» "California Licenses Most Jobs in Nation" (Los Angeles Business Journal op-ed)

» "Lawyer Licensing Laws Lead to Higher Prices, Less Consumer Choice and Access to Legal Services" (Reason.org blog post)

» "Occupational Licensing and the Beard Trimming Turf War in Texas" (Reason.org blog post)

» "State Licensing Mandates for Movers in Illinois Increase Prices, Reduce Job Opportunities" (Reason.org blog post)

 

Stockton Begins Legal Battle in U.S. Bankruptcy Court Today

Posted on July 6, 2012, 12:53pm | Harris Kenny

Updated on Friday July 6, 2012 at 1:28 PM Eastern.

Last week Stockton, California became the largest city (by population) to file for bankruptcy in U.S. history. The initial hearing is today in U.S. bankruptcy court in Sacramento. The trial is especially significant because the city’s lawyers are attempting to use bankruptcy to impose losses on its bondholders, which include private financial institutions and the state of California. Steven Church of Bloomberg reports:

No U.S. municipality has used bankruptcy to force bondholders to take less than the full principal due since at least 1981, and possibly as far back as the 1930s, according to lawyers and court records.

Church reports the city’s three largest creditors include:

1. California Public Employee Retirement System (CalPERS), $147.5 million;
2. Wells Fargo Bank NA as trustee for $124.3 million in pension obligation bonds; and
3. Wells Fargo Bank NA as trustee for three other sets of bondholders owed $107 million.

One of the most interesting subplots will be the legal battle between CalPERS, and Wells Fargo Bank North America and Assured Guaranty Ltd. Cate Long, a guest contributor to Reuters’ MuniLand blog, speculated on Twitter today whether or these calculations are accurate though. Assured Guaranty Ltd. insured $161 million of Stockton’s bonds. Meanwhile, National Public Finance Guarantee, which has insured about $224 million of Stockton's debt, is owned by MBIA Inc. Combined, MBIA Inc. and Assured Guaranty Ltd. hold approximately $385 million in Stockton's debt, and at this point they are allowed to argue together in court. In the case of principal reduction, these parties arguably have the most to lose.

This morning, Church wrote:

Bondholders will be limited to two main options if they are to block Stockton in court, said Lee Bogdanoff, a bankruptcy attorney: get the case thrown out or defeat the city’s reorganization proposal.

“The most important power they have is a seat at the negotiating table,” Bogdanoff, a founding partner of Klee, Tuchin, Bogdanoff & Stern LLP in Los Angeles, said in a telephone interview. “They can try to influence the decision makers.”

Today’s hearing will differ from a typical corporate case, Bogdanoff said. Unlike a company, the city doesn’t need to ask U.S. Bankruptcy Judge Christopher Klein for permission to pay any bills it ran up before filing for court protection, such as wages, utility bills or rents. As a result, creditors won’t be able to use the hearing to pressure the city on its spending habits, Bogdanoff said.

The first legal question today is about the city's mediation process. California Assembly Bill (AB) 506 passed earlier this year requiring distressed municipalities to enter mediation before declaring bankruptcy. While Wells Fargo Bank NA was awarded three city parking garages and city hall, the parties failed to resolve their differences. The intention behind AB 506 was for future cities filing for bankruptcy to avoid the flurry of lawsuits that ensued after Vallejo, California’s filed for bankruptcy several years ago.

Scott Smith of The Stockton Record reports:

Marc Levinson, the lead attorney hired to represent Stockton, will ask U.S. District Judge Christopher Klein to unseal a 790-page document at the heart of a three-month-long, closed-door mediation process that attempted, yet failed, to avert bankruptcy.

Levinson argues in court papers that this massive document, which resembles a bankruptcy plan, lays out in detail what the city in mediation asked its major creditors to give up...

Proving in court that a municipality first tried to avoid bankruptcy and that it is, in fact, broke are basic facts that must be established before moving ahead with a bankruptcy case...

(U.S. District Judge Christopher Klein) is expected to rule from the bench today on two other motions that Stockton filed:

• First, the city wishes to set an Aug. 9 deadline for any challenges to the legitimacy to Stockton's bankruptcy.
• Second, the city has asked to maintain a website designed to tell each of the 6,000 stakeholders of upcoming hearings and filings, rather than having to send each a notice by overnight mail, which would be costly and labor intensive."

For more on California municipal finance issues, see my previous posts on Stockton and Mammoth Lakes. For the latest on Detroit, Michigan, see Detroit and Michigan: A Fragile Bargain and Detroit and Its Unions Fight Over Work Rules from Melissa Maynard of Stateline.

California Democrats, Deep Pockets, and Ideological Irrelevance

Posted on July 5, 2012, 6:54pm | Ankur Chawla

California legislators have agreed on a budget deal that satisfies their adopted special interest groups while crippling California residents across the spectrum.  This time around it is especially interesting because, believe it or not, legislators have agreed to cut numerous welfare programs in order to protect the interests of public sector unions in Sacramento.

Governor Jerry Brown and the state legislature reached a deal on a balanced budget in the state of California for the upcoming fiscal year, beginning on July 1, 2012.  The $92 billion budget for FY 2012-2013 is facing a projected deficit of $15.7 billion, which the budget deal attempts to close through a combination of cutting or shifting funding for a number of social service programs, and raising revenue through an ambitious November ballot initiative that attempts to amend the California Constitution in order to raise the sales tax and increase state income taxes on those who earn over $250,000 annually (keep a look out for Reason's upcoming commentary on this hefty tax package).

What stuck out while the budget was being negotiated last week was the sheer amount of power that public unions have over budgetary spending in Sacramento.  Even while entertaining deep cuts to welfare and education programs, California lawmakers refused to pass Governor Brown's budget while it contained language that would cut hours and pay for public workers.  The notion that Democratic legislators tragically accept budget cuts when it comes to helping the poor and marginalized while simultaneously fulfilling favors to public unions is astounding.  According to Bloomberg, they rejected a proposal to authorize furloughs (unpaid days off) if unions didn't agree to a one-year 5% deduction in payroll.  Furthermore, they took out language that allowed the use of private contractors in place of public workers to save money.           

Democratic lawmakers rejected a proposal in the May Revision of the governor's budget, which called for a 7% cut in hours to public workers in In-Home Supportive Services (IHSS), a state program that provides personal care to senior citizens in their homes, which saves taxpayers $225 million.  Here is the official language:

"Across-the-Board Reduction in IHSS Hours - The May Revision reflects a decrease of $99.2 million General Fund in 2012-2013 from a 7-percent across-the-board decrease in authorized hours effective August 1, 2012.  Similar to the 3.6-percent across-the-board reduction that under current law sunsets on July 1, 2012, recipients may direct the manner in which the reduction of authorized hours is applied to previously authorized services."

The plan was to cut hours by removing tasks such as doing laundry from the assigned duties of in-home workers.  California lawmakers led by Assembly Speaker John Péréz and Senate President Pro Tempore Darrell Steinberg balked at this idea.  While these 'heroic' lawmakers fought to protect the rights of workers to get paid by taxpayers for doing the laundry, they said not a word about, for instance, the state cutting the Healthy Families program.  This program, which provided health insurance for 880,000 poor children, shifts the children to the purview of the largely inefficient Medi-Cal program.

Unions, especially those in the public sector, have had a pervasive influence and deep pockets in California politics.  During the 2010 election cycle, unions contributed almost $75 million to politicians and ballot initiatives, according to the National Institute on Money in State Politics.  And earlier this month, a number of unions called upon their members to hold protests in Sacramento against cutting their hours, branding it as a campaign to save the money and lives of "California's most vulnerable residents."  All this while ignoring the almost $1 billion in cuts on welfare-for-work programs for poor residents and the 8.7% cut in funding for children in low-income families.

This is not about the merits of state social programs. It is about the disconnect between Democratic state legislators' rhetoric vs. their power politics.  When our 'leaders' in the state legislature decided to stoically accept the situation, shake their heads, provide some choice quotations for the media and resignedly concede to welfare cuts while simultaneously scratching the backs of entrenched public unions, they made it clear that this was more about political expediency than anything else.  And is it so surprising?  A quick search reveals that Assembly Speaker John Péréz, a powerful figure in Sacramento and key opponent of Brown's IHSS payroll cuts, has deep ties to well-funded unions.  Indeed, his biggest campaign contributors were trade unions and public sector unions, with almost 88% of contributions coming from outside of his district.  Assembly member Bob Blumenfield, the Chairman of the Assembly Budget Committee, also received his largest campaign contributions from unions, with as much as 93.2% of the contributions coming from outside of his district (the "representative" from Southern California received most of his campaign funding from Sacramento).

The branding and rhetoric on the part of the politicians and unions has been painfully and disappointingly typical.  Steinberg, when asked why he rejected the furloughs, said that he simply wanted to give the unions more time to negotiate.  Péréz stated, "We have worked hard to preserve In Home Supportive Services for the thousands of Californians with debilitating medical conditions who rely on the support from IHSS caregivers to ensure they can live independently, at lower cost to the tax payers."  SEIU Local 1000, California's largest public union, argued in a statement that the IHSS cuts in hours would, if passed, "put vulnerable seniors and people with disabilities and people with disabilities in danger."  And one union executive by the name of Bruce Blanning made the case that outsourcing jobs to private companies would be more costly than using salaried public workers. 

It is hard to believe that politicians with vested interests in union well-being are fighting for the benefit of California's worst-off residents.  The sugar-coated rhetoric from the lawmakers like, "We know our loved ones would rather be cared for in their own homes by providers who want to stay them say healthy" is dishonest at best.  The argument that exorbitant and unnecessary social programs save taxpayer money is deceitful, the logic inconsistent.  And the insistency of the unions that outsourcing public programs to private contractors is more expensive than investing in public worker salaries and pensions is asinine.  It seems these smoke and mirror arguments exist because, for whatever reason, these California lawmakers like to pretend to hold some semblance of an ideology while conducting their backroom dealings.  Let it be a lesson: deep pockets are a far more lucrative sell for these California lawmakers than ideological consistency will ever be.

Mammoth Lakes, California Files for Bankruptcy

Posted on July 5, 2012, 2:56pm | Harris Kenny

Earlier this week Mammoth Lakes, California filed for bankruptcy, news largely missed in the run up to the Fourth of July holiday. The Mammoth Lakes Town Council voted unanimously on Monday July 2 to authorizing the filing of a petition for relief under Chapter 9 of the Bankruptcy Code in U.S. federal court. Mammoth Lakes has 7,700 permanent residents and is located about 300 miles north of Los Angeles. Mammoth Lakes is Mono County’s only incorporated community and it is best known for its proximity to Mammoth Mountain Ski Resort.

On June 27 the town issued the results of its AB 506-mandated mediation, which included 16 total parties but did not include its largest creditor, Mammoth Lakes Land Acquisition (MLLA). The mediation lasted 60 days and a full list of agreements reached is available on the town’s website here. Parties include groups like CalPERS (California Public Employee Retirement System), public employee unions, non-profit organizations, contractors, bodies of government, for-profit developers and financial institutions. MLLA was one of several parties that did not participate in mediation.

According to a statement issued by the town:

Bankruptcy, unfortunately, is the only option that the Town is left with, after its largest creditor, Mammoth Lakes Land Acquisition (MLLA) repeatedly refused to mediate its $43 million judgment against the Town, and obtained a State court order requiring payment of the full judgment by June 30, 2012.

City officials distill their fiscal woes down to two problems:

1. "A lack of sufficient revenue to pay its current and anticipated obligations, as evidenced by a $2.7 million initial shortfall in its 2011-2012 fiscal year budget, balanced through painful measures in June 2011, an additional unanticipated shortfall of $0.9 million in the same 2011-2012 fiscal year that forced the Town to reduce its already low available cash, and a projected $2.8 million budget shortfall in its 2012-2013 fiscal year.
2. A Writ of Mandate issued by a State Court ordering the Town pay a $43 million judgment owed to MLLA by June 30, 2012.”

The $43 million judgment owed to MLLA appears to be what pushed Mammoth Lakes over the edge. The Los Angeles Times reports:

A state appellate court decision in December 2010 upheld the judgment and chastised the town for trying to back out of the agreement it signed in 1997 with Mammoth Lakes Land Acquisition.

The agreement required the developer to make improvements to nearby Mammoth Yosemite Airport’s fixed-based operations. In return, it would receive rights to develop a $400-million Hot Creek hotel project on 25 acres at the airport and an option to buy the land.

The court found that Mammoth Lakes changed its priorities in 2007 after it determined the project would interfere with Federal Aviation Administration policy governing the use of the airport property for aeronautical purposes and, as a result, derail the town’s plans to extend the runway to accommodate Boeing 757 passenger jets.

The developer, which had invested in some improvements at the airport, filed a breach of contract lawsuit against the town after it refused to move forward with the hotel project until the FAA policy issues were resolved.

The court found the city had not lived up to its end of the bargain.

This filing is reminiscent of Stockton, California’s recent filing, in that the city was ill equipped to handle the economic downturn and aggressive economic development projects initiated during the boom years went sour. It's important to note that every city is unique and this reinforces that we are not seeing contagion at the local level. Mammoth Lakes is hoping that through bankruptcy they can solve fiscal woes and either free up revenue, or issue additional bonds, to pay its creditors over the next ten years.

The following public services will remain open and/or available:

• The Police and Fire Departments, along with other safety partners such as paramedics and Sheriff's office, will provide high levels of response and care;
• Road, parks, and airport maintenance services will continue as scheduled;
• Town Office business hours and service deliver will continue as usual without interruption of services;
• Community services and providers such as Mammoth Hospital, Mammoth Community Water District, and Mono County are separate from the Town and are not impacted.

For more on municipal finance issues, see my previous posts on Stockton, California and Jefferson County, Alabama. For an update on Harrisburg, Pennsylvania, see this post by Maggie Clark of Stateline (in short, the state barred the city from declaring bankrupcty until November 30.) For an update on Detroit, Michigan, see this post from Melissa Maynard of Stateline (in short, officials continue to hammer out the details of the consent agreement signed in April by Michigan Governor Rick Snyder and Detroit Mayor Dave Bing.)

Why California can Only Cut Education and Public Safety

Posted on June 29, 2012, 11:07am | Adrian Moore

Yep, California faces a $16 billion budget deficit and the only solution Sacramento can come up with is cutting education and public safety and a massive tax increase.  Over the interweb this morning I got this list of real California state government entities.  I have checked it over and it looks legit to me, I couldn't find any on the list I knew to no longer exist. But you can see why the only possible cuts are to vital services, right? There's nothing unnecessary on this list, right?

California Academic Performance Index (API) * California Access for Infants and Mothers * California Acupuncture Board * California Administrative Office of the Courts * California Adoptions Branch * California African American Museum * California Agricultural Export Program * California Agricultural Labor Relations Board * California Agricultural Statistics Service * California Air Resources Board (CARB) * California Allocation Board * California Alternative Energy and Advanced Transportation Financing Authority * California Animal Health and Food Safety Services * California Anti-Terrorism Information Center * California Apprenticeship Council * California Arbitration Certification Program * California Architects Board * California Area VI Developmental Disabilities Board * California Arts Council * California Asian Pacific Islander Legislative Caucus * California Assembly Democratic Caucus * California Assembly Republican Caucus * California Athletic Commission * California Attorney General * California Bay Conservation and Development Commission * California Bay-Delta Authority * California Bay-Delta Office * California Bio Diversity Council * California Board for Geologists and Geophysicists * California Board for Professional Engineers and Land Surveyors * California Board of Accountancy * California Board of Barbering and Cosmetology * California Board of Behavioral Sciences * California Board of Chiropractic Examiners * California Board of Equalization (BOE) * California Board of Forestry and Fire Protection * California Board of Guide Dogs for the Blind * California Board of Occupational Therapy * California Board of Optometry * California Board of Pharmacy * California Board of Podiatric Medicine * California Board of Prison Terms * California Board of Psychology * California Board of Registered Nursing * California Board of Trustees * California Board of Vocational Nursing and Psychiatric Technicians * California Braille and Talking Book Library * California Building Standards Commission * California Bureau for Private Post Secondary and Vocational Education * California Bureau of Automotive Repair * California Bureau of Electronic and Appliance Repair * California Bureau of Home Furnishings and Thermal Insulation * California Bureau of Naturopathic Medi cine * California Bureau of Security and Investigative Services * California Bureau of State Audits * California Business Agency * California Business Investment Services (CalBIS) * California Business Permit Information (CalGOLD) * California Business Portal * California Business, Transportation and Housing Agency * California Cal Grants * California CalJOBS * California Cal-Learn Program * California CalVet Home Loan Program * California Career Resource Network * California Cemetery and Funeral Bureau * California Center for Analytical Chemistry * California Center for Distributed Learning * California Center for Teaching Careers (Teach California) * California Chancellors Office * California Charter Schools * California Children and Families Commission * California Children and Family Services Division * California Citizens Compensation Commission * California Civil Rights Bureau * California Coastal Commission * California Coastal Conservancy * California Code of Regulations * California Collaborative Projects with UC Davis * California Commission for Jobs and Economic Growth * California Commission on Aging * California Commission on Health and Safety and Workers Compensation * California Commission on Judicial Performance * California Commission on State Mandates * California Commission on Status of Women * California Commission on Teacher Credentialing * California Commission on the Status of Women * California Committee on Dental Auxiliaries * California Community Colleges Chancellors Office, Junior Colleges * California Community Colleges Chancellors Office * California Complaint Mediation Program * California Conservation Corps * California Constitution Revision Commission * California Consumer Hotline * California Consumer Information Center * California Consumer Information * California Consumer Services Division * California Consumers and Families Agency * California Contractors State License Board * California Corrections Standard s Authority * California Council for the Humanities * California Council on Criminal Justice * California Council on Developmental Disabilities * California Court Reporters Board * California Courts of Appeal * California Crime and Violence Prevention Center * California Criminal Justice Statistics Center * California Criminalist Institute Forensic Library * California CSGnet Network Management * California Cultural and Historical Endowment * California Cultural Resources Division * California Curriculum and Instructional Leadership Branch * California Data Exchange Center * California Data Management Division * California Debt and Investment Advisory Commission * California Delta Protection Commission * California Democratic Caucus * California Demographic Research Unit * California Dental Auxiliaries * California Department of Aging * California Department of Alcohol and Drug Programs * California Department of Alcoholic Beverage Control Appeals Board * California Departme nt of Alcoholic Beverage Control * California Department of Boating and Waterways (Cal Boating) * California Department of Child Support Services (CDCSS) * California Department of Community Services and Development * California Department of Conservation * California Department of Consumer Affairs * California Department of Corporations * California Department of Corrections and Rehabilitation * California Department of Developmental Services * California Department of Education * California Department of Fair Employment and Housing * California Department of Finance * California Department of Financial Institutions * California Department of Fish and Game * California Department of Food and Agriculture * California Department of Forestry and Fire Protection (CDF) * California Department of General Services * California Department of General Services, Office of State Publishing * California Department of Health Care Services * California Department of Housing and Community Development * California Department of Industrial Relations (DIR) * California Department of Insurance * California Department of Justice Firearms Division * California Department of Justice Opinion Unit * California Department of Justice, Consumer Information, Public Inquiry Unit * California Department of Justice * California Department of Managed Health Care * California Department of Mental Health * California Department of Motor Vehicles (DMV) * California Department of Personnel Administration * California Department of Pesticide Regulation * California Department of Public Health * California Department of Real Estate * California Department of Rehabilitation * California Department of Social Services Adoptions Branch * California Department of Social Services * California Department of Technology Services Training Center (DTSTC) * California Department of Technology Services (DTS) * California Department of Toxic Substances Control * California Department of Transpor tation (Caltrans) * California Department of Veterans Affairs (CalVets) * California Department of Water Resources * California Departmento de Vehiculos Motorizados * California Digital Library * California Disabled Veteran Business Enterprise Certification Program * California Division of Apprenticeship Standards * California Division of Codes and Standards * California Division of Communicable Disease Control * California Division of Engineering * California Division of Environmental and Occupational Disease Control * California Division of Gambling Control * California Division of Housing Policy Development * California Division of Labor Standards Enforcement * California Division of Labor Statistics and Research * California Division of Land and Right of Way * California Division of Land Resource Protection * California Division of Law Enforcement General Library * California Division of Measurement Standards * California Division of Mines and Geology * California Divisi on of Occupational Safety and Health (Cal/OSHA) * California Division of Oil, Gas and Geothermal Resources * California Division of Planning and Local Assistance * California Division of Recycling * California Division of Safety of Dams * California Division of the State Architect * California Division of Tourism * California Division of Workers Compensation Medical Unit * California Division of Workers Compensation * California Economic Assistance, Business and Community Resources * California Economic Strategy Panel * California Education and Training Agency * California Education Audit Appeals Panel * California Educational Facilities Authority * California Elections Division * California Electricity Oversight Board * California Emergency Management Agency * California Emergency Medical Services Authority * California Employment Development Department (EDD) * California Employment Information State Jobs * California Employment Training Panel * California Energy Commission * California Environment and Natural Resources Agency * California Environmental Protection Agency (Cal/EPA) * California Environmental Resources Evaluation System (CERES) * California Executive Office * California Export Laboratory Services * California Exposition and State Fair (Cal Expo) * California Fair Political Practices Commission * California Fairs and Expositions Division * California Film Commission * California Fire and Resource Assessment Program * California Firearms Division * California Fiscal Services * California Fish and Game Commission * California Fisheries Program Branch * California Floodplain Management * California Foster Youth Help * California Franchise Tax Board (FTB) * California Fraud Division * California Gambling Control Commission * California Geographic Information Systems Council (GIS) * California Geological Survey * California Government Claims and Victim Compensation Board * California Governors Committee for Employment of Disabled Pers ons * California Governors Mentoring Partnership * California Governors Office of Emergency Services * California Governors Office of Homeland Security * California Governors Office of Planning and Research * California Governors Office * California Grant and Enterprise Zone Programs HCD Loan * California Health and Human Services Agency * California Health and Safety Agency * California Healthy Families Program * California Hearing Aid Dispensers Bureau * California High-Speed Rail Authority * California Highway Patrol (CHP) * California History and Culture Agency * California Horse Racing Board * California Housing Finance Agency * California Indoor Air Quality Program * California Industrial Development Financing Advisory Commission * California Industrial Welfare Commission * California InFoPeople * California Information Center for the Environment * California Infrastructure and Economic Development Bank (I-Bank) * California Inspection Services * California Institute f or County Government * California Institute for Education Reform * California Integrated Waste Management Board * California Interagency Ecological Program * California Job Service * California Junta Estatal de Personal * California Labor and Employment Agency * California Labor and Workforce Development Agency * California Labor Market Information Division * California Land Use Planning Information Network (LUPIN) * California Lands Commission * California Landscape Architects Technical Committee * California Latino Legislative Caucus * California Law Enforcement Branch * California Law Enforcement General Library * California Law Revision Commission * California Legislative Analyst's Office * California Legislative Black Caucus * California Legislative Counsel * California Legislative Division * California Legislative Information * California Legislative Lesbian, Gay, Bisexual, and Transgender (LGBT) Caucus * California Legislature Internet Caucus * California Library Development Services * California License and Revenue Branch * California Major Risk Medical Insurance Program * California Managed Risk Medical Insurance Board * California Maritime Academy * California Marketing Services * California Measurement Standards * California Medical Assistance Commission * California Medical Care Services * California Military Department * California Mining and Geology Board * California Museum for History, Women, and the Arts * California Museum Resource Center * California National Guard * California Native American Heritage Commission * California Natural Community Conservation Planning Program * California New Motor Vehicle Board * California Nursing Home Administrator Program * California Occupational Safety and Health Appeals Board * California Occupational Safety and Health Standards Board * California Ocean Resources Management Program * California Office of Administrative Hearings * California Office of Administrative Law * California Office of AIDS * California Office of Binational Border Health * California Office of Child Abuse Prevention * California Office of Deaf Access * California Office of Emergency Services (OES) * California Office of Environmental Health Hazard Assessment * California Office of Fiscal Services * California Office of Fleet Administration * California Office of Health Insurance Portability and Accountability Act (HIPAA) Implementation (CalOHI) * California Office of Historic Preservation * California Office of Homeland Security * California Office of Human Resources * California Office of Legal Services * California Office of Legislation * California Office of Lieutenant Governor * California Office of Military and Aerospace Support * California Office of Mine Reclamation * California Office of Natural Resource Education * California Office of Privacy Protection * California Office of Public School Construction * California Office of Real Estate Appraisers * California Office of Risk and Insurance Management * California Office of Services to the Blind * California Office of Spill Prevention and Response * California Office of State Publishing (OSP) * California Office of Statewide Health Planning and Development * California Office of Systems Integration * California Office of the Inspector General * California Office of the Ombudsman * California Office of the Patient Advocate * California Office of the President * California Office of the Secretary for Education * California Office of the State Fire Marshal * California Office of the State Public Defender * California Office of Traffic Safety * California Office of Vital Records * California Online Directory * California Operations Control Office * California Opinion Unit * California Outreach and Technical Assistance Network (OTAN) * California Park and Recreation Commission * California Peace Officer Standards and Training (POST) * California Performance Review (CPR) * California Permit Information for Business (CalGOLD) * California Physical Therapy Board * California Physician Assistant Committee * California Plant Health and Pest Prevention Services * California Policy and Evaluation Division * California Political Reform Division * California Pollution Control Financing Authority * California Polytechnic State University, San Luis Obispo * California Postsecondary Education Commission * California Prevention Services * California Primary Care and Family Health * California Prison Industry Authority * California Procurement Division * California Public Employees Retirement System (CalPERS) * California Public Employment Relations Board (PERB) * California Public Utilities Commission (PUC) * California Real Estate Services Division * California Refugee Programs Branch * California Regional Water Quality Control Boards * California Registered Veterinary Technician Committee * California Registrar of Charitable Trusts * California Republican Caucus * California Research and Development Division * California Research Bureau * California Resources Agency * California Respiratory Care Board * California Rivers Assessment * California Rural Health Policy Council * California Safe Schools * California San Francisco Bay Conservation and Development Commission * California San Gabriel and Lower Los Angeles Rivers and Mountains Conservancy * California San Joaquin River Conservancy * California School to Career * California Science Center * California Scripps Institution of Oceanography * California Secretary of State Business Portal * California Secretary of State * California Seismic Safety Commission * California Self Insurance Plans (SIP) * California Senate Office of Research * California Small Business and Disabled Veteran Business Enterprise Certification Program * California Small Business Development Center Program * California Smart Growth Caucus * California Smog Check Information Center * California Spatial Information Library * California Special Education Division * California Speech-Language Pathology and Audiology Board * California Standardized Testing and Reporting (STAR) * California Standards and Assessment Division * California State Administrative Manual (SAM) * California State Allocation Board * California State and Consumer Services Agency * California State Architect * California State Archives * California State Assembly * California State Association of Counties (CSAC) * California State Board of Education * California State Board of Food and Agriculture *California Office of the Chief Information Officer (OCIO) * California State Children's Trust Fund * California State Compensation Insurance Fund * California State Contracts Register Program * California State Contracts Register * California State Controller * California State Council on Developmental Disabilities (SCDD) * California State Disability Insurance (SDI) * California State Fair (Cal Expo) * California State Jobs Employment Information * California State Lands Commission * California State Legislative Portal * California State Legislature * California State Library Catalog * California State Library Services Bureau * California State Library * California State Lottery * California State Mediation and Conciliation Service * California State Mining and Geology Board * California State Park and Recreation Commission * California State Parks * California State Personnel Board * California State Polytechnic University, Pomona * California State Railroad Museum * California State Science Fair * California State Senate * California State Summer School for Mathematics and Science (COSMOS) * California State Summer School for the Arts * California State Superintendent of Public Instruction * California State Teachers Retirement System (CalSTRS) * California State Treasurer * California State University Center for Distributed Learning * California State University, Bakersfield * California State University, Channel Islands * California State University, Chico * California State University, Dominguez Hills * California State University, East Bay * California State University, Fresno * California State University, Fullerton * California State University, Long Beach * California State University, Los Angeles * California State University, Monterey Bay * California State University, Northridge * California State University, Sacramento * California State University, San Bernardino * California State University, San Marcos * California State University, Stanislaus * California State University (CSU) * California State Water Project Analysis Office * California State Water Project * California State Water Resources Control Board * California Structural Pest Control Board * California Student Aid Commission * California Superintendent of Public Instruction * California Superior Courts * California Tahoe Conservancy * California Task Force on Culturally and Linguistically Competent Physicians and Dentists * California Tax Information Center * California Technology and Administration Branch Finance * California Telecommunications Division * California Telephone Medical Advice Services (TAMS) * California Transportation Commission * California Travel and Transportation Agency * California Unclaimed Property Program * California Unemployment Insurance Appeals Board * California Unemployment Insurance Program * California Uniform Construction Cost Accounting Commission * California Veterans Board * California Veterans Memorial * California Veterinary Medical Board and Registered Veterinary Technician Examining Committee * California Veterinary Medical Board * California Victim Compensation and Government Claims Board * California Volunteers * California Voter Registration * California Water Commission * California Water Environment Association (COWPEA) * California Water Resources Control Board * California Welfare to Work Division * California Wetlands In formation System * California Wildlife and Habitat Data Analysis Branch * California Wildlife Conservation Board * California Wildlife Programs Branch * California Work Opportunity and Responsibility to Kids (CalWORKs) * California Workers Compensation Appeals Board * California Workforce and Labor Development Agency * California Workforce Investment Board * California Youth Authority (CYA) * Central Valley Flood Protection Board * Center for California Studies * Colorado River Board of California * Counting California * Dental Board of California * Health Insurance Plan of California (PacAdvantage) * Humboldt State University * Jobs with the State of California * Judicial Council of California * Learn California * Library of California * Lieutenant Governors Commission for One California * Little Hoover Commission (on California State Government Organization and Economy) * Medical Board of California * Medi-Cal * Osteopathic Medical Board of California * Physical Therapy Board of California * Regents of the University of California * San Diego State University * San Francisco State University * San Jose State University * Santa Monica Mountains Conservancy * State Bar of California * Supreme Court of California * Teach California * University of California * University of California, Berkeley * University of California, Davis * University of California, Hastings College of the Law * University of California, Irvine * University of California, Los Angeles * University of California, Merced * University of California, Riverside * University of California, San Diego * University of California, San Francisco * University of California, Santa Barbara * University of California, Santa Cruz *

California's state motto ought to be "We do everything. Everything."

What Happened in Stockton?

Posted on June 27, 2012, 3:41pm | Harris Kenny

Last night the Stockton, California City Council voted 6-1 to adopt a spending plan for operating under bankruptcy protection, and to file a motion with the courts to share information from the confidential mediation. With almost 300,000 residents, Stockton is the largest city to file for bankruptcy in U.S. history.

In February 2012 Stockton voted to enter bankrupcty mediation. Policymakers negotiated with the city's creditors for months starting in late March 2012 and ultimately failed to prevent the filing. Negotiations were in compliance with AB 506, a new California law requiring municipalities file for reorganization of debt, and Stockton was the first city to file for use the law since its passage. Negotiations may not have been a waste of time though because they may help the city avoid a string of lawsuits, according to the Los Angeles Times, which is what happened after Vallejo, California’s filing in 2008.

While high profile stories like this signal blood in the water for narrative-hungry national media outlets, think tanks and pundits, there are often layers of complexity. So, what happened in Stockton? And is it happening anywhere else?

The most important takeaway right now is that no, Stockton’s decision to file bankruptcy is not necessarily a harbinger of things to come. The city’s financial situation is unique and does not reflect the financial standing of a significant number of municipalities in the U.S. That being said, there are relevant themes that policymakers and investors should recognize.

California Common Sense issued the definitive report on Stockton's financial situation entitled, "How Stockton Went Bust: A California City's Decade of Policies and the Financial Crisis that Followed." The report details the three most significant factors, which are distinct but interrelated, contributing to Stockton’s bankruptcy.

1. The housing and financial collapses.

The housing bust decimated Stockton’s housing prices, and so went the city’s property tax (and related) revenues. Housing prices plunged from nearly $400,000 in median home prices in 2006, down to $110,000 in 2009 (where median prices were in 2000 before the bubble.) Meanwhile the city has the second highest rate of foreclosures in the country. Revenues from related areas, such as: sales taxes, utility user’s taxes and housing permit fees also plunged.

The city burned through emergency cash funds and took efforts to rein in spending that weren’t enough. For example, they issued a hiring freeze for open positions in May 2008 and cut the general fund by $90 million in the last three years. Despite those efforts they continued to run budget deficits.

2. Excessive optimism and unsustainable compensation promises.

City policymakers appear to have mistaken the real estate bubble for real growth. (The Los Angeles Times reports that state mediation law requires assigning blame in cases of bankruptcy, which will determine whether this was an honest mistake or if there was corruption at play.) This reported optimism led to breakneck pace spending on various redevelopment initiatives. The city sold $129 million in bonds to fund rehabilitating the Philmathean building’s rehabilitation, the downtown marina and waterfront’s development and the Hotel Stockton’s renovation.

California Common Sense found that the city also renegotiated generous compensation for city employees, when employee services compose approximately three fourths of the city’s almost $200 million budget. For example, city employees receive a guaranteed salary increase from 2.5-7%, depending on General Fund revenue growth—even if the General Fund shrinks from the previous year. Meanwhile employee healthcare costs are also rising, growing at a rate of almost 10 percent over the past decade. Other post-employment benefits (OPEB), including pensions, are also rising steadily. The city now faces more than $800 million in unfunded liabilities for pensions and OPEB.

3. An ill-timed bond offering.

In 2007 the city sought to lower it’s pension costs, so policymakers undertook a bond offering to lower interest payments on roughly $125 million of its pension obligation. The proceeds of these pension obligation bonds were given to the California Public Employees’ Retirement System (CalPERS) to manage. California Common Sense found that CalPERS was overexposed to the real estate and stock markets, so it was unable to meet the expected returns. The original pension obligation bond money is now worth under $100 million while the city owes $248 million.

Increased debt payments, combined with multiple years of negative net annual activity, ultimately pushed Stockton over the edge. While bankruptcy will sort out the details of the city’s restructuring, it’s safe to say that employee services (namely police and fire) will be at-risk throughout the process. Public safety represents 80%, or almost $160 million, of the city’s nearly $200 million annual budget. Stay tuned to Reason Foundation’s Out of Control Policy Blog for more on Stockton in the days and weeks ahead.

"There's Always Next Year" for a Sound California Budget

Posted on June 26, 2012, 1:58pm | Adam Summers

As a long-suffering Chicago Cubs fan, one thing came to mind as I pondered the latest state budget that California legislators are in the process of finalizing: there's always next year. Each year Cubs fans get their hopes up that this will be the year that they break the Billy Goat Curse and end their long World Series drought, now up to 104 years. Alas, each year hopes are dashed (oftentimes early in the season) and fans are left to hope that next year things will be different.

It is much the same with the California budget. Every year taxpayers hope that this will be the year legislators and the governor will get their act together, act like adults, and address the fundamental, long-term problems that plague the state's budgeting process in an open and honest manner. And, just like Cubs fans, they are always disappointed as policymakers ignore the important issues, money is wasted on failed or useless pet programs, and the accounting gimmicks and overoptimistic revenue projections quickly unravel to reveal a substantial deficit (which is usually followed more proposals to increase taxes).

This is the subject of my most recent commentary. Below is an excerpt of that column.

While the usual special interests will bemoan supposedly severe budget cuts, as with the struggling European governments, claims of austerity are illusory. The budget passed on June 15 calls for $92.1 billion in (General Fund) spending, an increase of more than 6 percent over the current budget. This would be the biggest budget since the recession, eclipsed only by the 2006-07 and 2007-08 fiscal years at the height of the financial and housing bubbles.

The budget also estimates that General Fund revenues next year will total $94.4 billion, more than 10 percent higher than the $86.8 billion received this year. Keep in mind that the new budget bill assumes passage of Gov. Brown's tax increase proposal in the November election, and the resulting $8.5 billion in additional tax revenue. In other words, without the tax increase, revenues would be about $87 billion, basically the same as this past year. This is hardly a crisis—unless you continually spend more money than you have.

[. . .]

Yet, what has been the reaction of the legislature and the governor? They are planning to waste more money by spending over $2.8 billion this year (and untold tens of billions in future years) on a high-speed rail boondoggle that everyone and their mothers, from both sides of the political aisle, have criticized for its lack of feasibility, ridiculously optimistic assumptions, and poor management. In addition, the legislature has opted to punt on even the modest public pension reforms offered by Gov. Brown when the Senate refused to approve putting Brown's 12-point pension plan before voters on the November 2012 ballot. According to the Stanford Institute for Economic Policy Research, CalPERS faces an unfunded liability of $170 billion, while CalSTRS has a $104 billion deficit. Local governments are looking at an additional $136 billion in unfunded liabilities. Moreover, according to the State Controller's Office, unfunded health-care benefits for retired state employees are an additional $62 billion.

Yet the legislature continues to put its head in the sand and hope the problem will go away. Perhaps it is expecting to tax the state to prosperity, despite the fact that this never has worked in the past and never will work. Even Democratic State Treasurer Bill Lockyer, who has indicated his support for Brown's tax increase, is growing wary of the increasing tax burden being placed on the state's richest and most productive residents. Addressing the effects of additional tax increases, particularly on the wealthy, Lockyer noted: "The potential for out-of-state migration is substantial enough that we have to be very sensitive about those rates."

At least California residents have a power that Cubs fans do not: they can change the players and even the rules of the game. If lawmakers do not start taking their responsibility to produce an honest and responsible budget more seriously, they may find that the taxpayers will make more and more of those decisions for them.

See the full article here.

Milpitas Public Works Partnership Belies California Dysfunction

Posted on June 19, 2012, 6:21pm | Harris Kenny

California: The ready and willing standard bearer of political dysfunction. When its lawmakers aren't busy pretending to balance a $92 billion budget (turns out they relied on gimmicks to close a $15.7 billion budget deficit), they're getting ban-happy by legislating everything from over-the-counter cold medicine to foie gras. But before you lose hope in the Golden State, turn your eyes to Milpitas in Santa Clara County.

Last week the Milpitas City Council announced their first-ever public works public-private partnership to rightsize the department. The city's public works department came under fire over the past year due to deteriorating park conditions ranging from broken irrigation systems and dead shrubbery, to graffiti and vandalism marring benches. Rather than accept city staff promises to restore conditions over the course of three years, policymakers turned to the private sector.

The City Council voted to award two related contracts to Colorado-based Terracare Associates for park and street landscaping, and repair services. The Milpitas Post reports:

Under its parks maintenance contact, Terracare will be paid an annual base price of $1,326,155 for the first two years and $1,369,638 for years three through five. The contract for these services is for one year with four one-year options for renewal, city reports state.

Terracare will be charged with maintaining 24 city parks and sports fields with equipment and personnel to provide routine landscape maintenance services, pruning, trash pick-up, weed removal, turf care, plant replacements, irrigation system maintenance and fixture and equipment repair services.

Under its streetscape maintenance and repair contract, Terracare will receive an annual not-to-exceed amount of $125,218 for all aspects of landscape and irrigation system maintenance for the city's landscaped streetscapes, medians and rights of way.

The council's approval allows the city manager to grant yearly increases pursuant to the contract without further city council action. Terracare was chosen above three other similar firms and was determined to be the most advantageous to the city, reports state.

This is a small step towards solving the overwhelming political dysfunction at California's state and local level; but for parkgoers and motorists in Milpitas, partnerships like this make all the difference. For more on local government privatization, see Reason Foundation's Annual Privatization Report 2011: Local Government Privatization available online here.

Being Taken for a Ride on High-Speed Rail in California

Posted on April 27, 2012, 4:21pm | Adam Summers

In my latest commentary, I once again tackle the boondoggle that is the California high-speed rail project, specifically, the most recent version of what passes for a business plan from the California High-Speed Rail Authority (CHSRA).

When the High-Speed Rail Authority recently released yet another version of its purported business plan, it was just another day in the world of the ever-changing high-speed rail plans and assumptions made by the Authority and its backers. The fourth incarnation of the plan relies upon sharing tracks with commuter trains in both Los Angeles and the Bay Area in order to trim estimated costs from $98.5 billion to "only" $68.4 billion—still more than 50% more expensive than the plan voters thought they were approving in November 2008. But, as the non-partisan Legislative Analyst's Office (LAO) observed, this plan makes no more sense than any of the previous ones.

The LAO analysis concludes,

We find that HSRA has not provided sufficient detail and justification to the Legislature regarding its plan to build a high-speed train system. Specifically, funding for the project remains highly speculative and important details have not been sorted out. We recommend the Legislature not approve the Governor’s various budget proposals to provide additional funding for the project.

The vast majority of the expected funding continues to be wishful thinking. As I relate in my article,

As with every other attempt at a plan, the latest effort from the CHSRA lacks any basis in reality. Once again, most of the funding is to come from unidentified federal and private-sector sources that almost certainly will not materialize. In fact, 83.2 percent of the project’s proposed funding is unaccounted for, including $38.6 billion the CHSRA hopes to receive in federal funds (in addition to the approximately $3.5 billion in federal stimulus and transportation funds that has already been allocated), $13.1 billion expected from private investors, and $5.2 billion to come from other sources such as local governments.

In response to such criticisms, CHSRA Chairman Dan Richards argued that it is simply common practice for transportation projects to go forward without knowing from where the money will come. “I spent 12 years on the [Bay Area Rapid Transit] board in the transit world; we never knew where all of the money was coming from,” Richards said. “Our colleagues in Southern California just adopted a $540 billion regional transportation plan for the Southland, for the next 20 years, same time period we’re talking about here. They don’t know where all of the money is coming from.” Added Richards, “It is just part and parcel of the transportation world that people don’t know these things now.”

If ever there was a window into the mindset of a government central planner, this is it. So the excuse for such irresponsibility and carelessness with scarce taxpayer dollars is the notion that “Everyone else (in government) is doing it!” Besides, who needs to know minor details like how something is going to be paid for when your state faces yearly multi-billion-dollar deficits?

Yet CHSRA board member Mike Rossi calls the new business plan “credible, reasonable, and transparent.” Many of the high-speed rail planners are clever people, so it is hard to believe that they could be so divorced from reality. There are many special interests involved in a project of this scope, however (which is yet another reason why such things should be left to the voluntary decisions of people in a free market, rather than forced down people's throats through the political process), so perhaps it is simply an attempt to intentionally delude taxpayers whom they hope will be too apathetic or uncritical to notice otherwise.

One of the things that continually amazes me is how basic assumptions such as the cost of the project and the estimated ridership—which affects everything from how much revenue the system will generate to how much it will affect traffic congestion and greenhouse gas emissions—can change so dramatically, so quickly, and yet the supporters of high-speed rail cling to the project with religious fervor and never question how these seemingly arbitrarily-determined numbers affect the viability of such a large project. As I argued in my column,

The CHSRA and many advocates of high-speed rail have demonstrated that they are beyond reason, despite all the facts that contradict their hopes and assumptions. High-speed rail advocacy has become more of a religious crusade than a policy position. Avoiding the facts stacking against this project is how cost estimates can triple, then be reduced by one-third. It’s how ridership estimates can magically plummet to one-third of their original estimates (see this CalWatchdog article for a good summary on the project’s changing assumptions). It’s how major decisions such as changing from dedicated high-speed rail tracks to tracks shared with slower commuter trains on both ends of the system can be made. And yet with all these arbitrary changes, high-speed rail acolytes have not batted an eye or even questioned how the plan can still be considered feasible, much less profitable.

Moreover, the bond measure (Prop. 1A) that voters narrowly passed back in 2008 requires that a trip between Los Angeles and San Francisco on the high-speed train system take no more than 2 hours, 40 minutes. That probably would not have happened even under the older plans, but seems to be pure fantasy now that the high-speed trains will have to share tracks with slower commuter trains at both ends of the system. As Quentin Kopp, former California state senator and CSHRA chairman who was a leading figure in pushing for the passage of Prop. 1A and the creation of the CHSRA, admitted of the new plan, “This isn’t high-speed rail.” Added Kopp, “High-speed trains have separated tracks. That’s how they could achieve speeds and travel times promised to voters in the 2008 ballot measure.”

The high-speed rail project is such a disaster on so many fronts—economically, politically, even environmentally—that one can only hope that the plug will be pulled before California wastes more billions of dollars it does not have. At the very least, voters should have the chance to re-vote on such a project that is so different from the one put before them in 2008. Barring that, it will be up to the voters to use the initiative process to kill the high-speed rail system in order save themselves from more financial waste and abuse.

See my full article here.

California is Barking Up the Wrong Tree with Pet Groomer Licensing Bill

Posted on February 27, 2012, 2:10pm | Adam Summers

Earlier this month, I wrote about a proposed bill in California to require state licensing for pet groomers.  The legislation, SB 969, would impose fees on would-be groomers, require applicants to pass written and practical examinations administered by the Veterinary Medical Board, mandate detailed and burdensome record-keeping requirements for groomers, dictate certain other business practices, and spawn an army of bureaucrats to go around inspecting every dog grooming business in the state at least once a year.

None of this will do anything to improve the quality of pet grooming services—the supposed rationale behind the bill—but it will increase the cost of grooming services, reduce competition and consumer choice, and, because of the high costs of fees and compliance with state regulations, deny gainful employment to many who would otherwise be competent groomers and entrepreneurs. This is California big government thinking in a nutshell: there must be a government solution to everything, and taxes and regulations can surely cure every real or imagined ill in the world. Of course, in reality, this only serves to deny Californians economic liberties and opportunities, which they oftentimes seek elsewhere (as evidenced by their migration to more business-friendly states like Texas, Nevada, and Utah).  No wonder the state is saddled with such a poor business climate and mired in unsustainable spending and chronic and significant budget deficits.

In a San Diego Union-Tribune op-ed column, I make the case against the pet groomer licensing bill and occupational licensing in general. Below is an excerpt of the article.

While we love our pets dearly and want to protect them from harm, mandatory state licensing is not the answer. As numerous economics studies of a wide variety of professions have demonstrated, licensing rarely leads to improved service quality, and oftentimes results in worse quality. While this might sound counterintuitive, there are several reasons for this.

The one-size-fits-all regulations imposed by the state may be arbitrary (not necessarily an accurate measure of groomer competence) and give consumers a false sense of security about the competency of licensed groomers, causing them to be less cautious about whom they do business with than they otherwise might be. In addition, licensing fees and regulations restrict competition by making it more difficult for people – even those who would be skilled groomers – from entering the business.

Less competition means less pressure to offer the best services and the lowest prices. The higher prices that would result from licensing would cause many people to resort to do-it-yourself grooming, which may result in more pain to pets since the owners are not trained to do this. For the same reason, there are more electrocutions where there are stricter licensing regulations for electricians and poorer dental health where dental licensing requirements are overly stringent.

[. . .]

Some may still cry, “There ought to be a law!” but groomers who harm pets can already be prosecuted under laws against negligence and fraud, as with any other case of poor service or breach of contract. This does not mean that there are, or should be, no standards for groomer competence. Voluntary (private) certification allows practitioners who meet the criteria of a certification organization to advertise their certification to signify to customers that they offer high-quality services, while leaving consumers and noncertified practitioners free to do business if they so choose. Pet grooming organizations such as the National Dog Groomers Association of America, National Cat Groomers Institute of America, International Professional Groomers and International Society of Canine Cosmetologists have their own testing and other certification requirements and offer workshops, seminars and other events to provide groomers and consumers more information about their members’ qualifications. The use of referrals from veterinarians or friends and resources such as Yelp, Angie’s List, and the Better Business Bureau may also help to avoid many poor groomers in the first place.

See the full article here.

Related Research and Commentary:

» "California Bill Proposes Licensing for Pet Groomers"

» Occupational Licensing: Ranking the States and Exploring Alternatives

» "California Licenses Most Jobs in Nation" (Los Angeles Business Journal)

» "Lawyer Licensing Laws Lead to Higher Prices, Less Consumer Choice and Access to Legal Services"

» "Occupational Licensing and the Beard Trimming Turf War in Texas"

» "State Licensing Mandates for Movers in Illinois Increase Prices, Reduce Job Opportunities"

Red-Light Cameras and the Enigmatic Jerry Brown

Posted on February 6, 2012, 4:39pm | Harris Kenny

Kevin Fagan of the San Francisco Chronicle reports:

California has the most expensive red-light camera tickets in the world - the fine is so steep that one camera in Oakland generates more than $3 million a year - and a Fremont man [Roger Jones] is launching a protest group [Red Light Camera Protest Group] to do something about that…

Anyone in California snapped violating a red light pays a fine of $480, and according to the traffic-watch site TheNewspaper.com, no other jurisdiction anywhere has a tab that high. The second-highest fine in the United States is $250, and it is usually more like $100.

The Legislature passed two bills in the past two years that would have reduced the fine or limited the cameras' use, but both were vetoed. When he killed the most recent measure, Gov. Jerry Brown said the matter should be left to local jurisdictions.

The state Department of Finance has estimated that red-light cameras bring in more than $80 million annually to the state and $50 million to cities and counties - and that, Jones and his supporters say, is the real reason they continue to snap away at motorists.

Not all $480 from each ticket goes to the cities or counties that authorize the cameras - more than half goes to the state or to the companies that run the devices. And not all tickets result in convictions.

(HT DrudgeReport)

For more on red-light cameras (or photo traffic enforcement) in Oakland, see the accompanying infographic furnished by the Chronicle here.

The larger storyline that can be teased out of this article is where Gov. Brown stands on the issue of state versus local control. [Note that regarding red-light cameras (above), Gov. Brown vetoed these bills specifically insisting the matter be left to local jurisdictions.]

My colleague at Reason magazine Katherine Mangu-Ward noted last September:

California Gov. Jerry Brown (D) has been dropping some surprisingly sweet vetos recently, including nixing a bipartisan bill which would have imposed a $25 fine for kids who ski or snowboard without a helmet… And he killed another bill increasing penalties for texting or calling without a hands-free device while driving.

These vetoes imply a common sense embrace of local government at the most fundamental level: the individual. This is consistent with the maxim that it’s practically impossible to protect people from themselves.

On the other hand, last fall Gov. Brown signed AB 438, which restricts local governments from making decisions about what is best for their own libraries. As I note in a September 2011 op-ed in The Orange County Register (available here), the bill drew scorn from across the political spectrum. For example, Dan Carrigg of the League of California Cities spoke out against the bill saying, “We hope the governor will veto the bill, since he has talked a lot about the importance of retaining local authority.”

Anyone familiar with Jerry Brown’s lengthy career in politics knows it’s difficult to pin down his political philosophy, and the issue of red-light cameras appears to only complicate things further.

For more on red-light cameras in California see my previous posts about Los Angeles (where the City Council voted last summer to phase out the program entirely) here and here. Similarly, lawmakers in Colorado are debating legislation that would allow the state to override local control by banning red light cameras entirely, which I cover in a previous blog post here. 

California Bill Proposes Licensing for Pet Groomers

Posted on February 3, 2012, 5:14pm | Adam Summers

It appears that California truly has gone to the dogs. The state is facing a $9.2 billion budget deficit, a $10 billion unemployment insurance fund deficit, and unfunded pension obligations in the range of $400 billion to $500 billion, yet the busybodies in the state legislature are seeking to add another occupation to the long list of those burdened by unnecessary state regulation: pet grooming. As I noted in a 2007 study, Occupational Licensing: Ranking the States and Exploring Alternatives, California already "leads" the nation by requiring licenses for some 177 occupations, almost double the national average. The new bill, SB 969, proposed by state Sen. Juan Vargas (D-San Diego), would establish licensing standards for dog groomers and dog grooming schools under the Veterinary Medical Board. Violations of the regulations could result in fines of $500 to $2000 and/or imprisonment of 30 days to a year in jail.

The bill would establish minimum age and education requirements for potential licensees (18 years old and at least a 10th grade education), impose licensing fees, and charge the licensing board with developing standardized written and practical demonstration tests for applicants. In addition, it would require an inspection of every licensed pet groomer in the state each year and mandate that licensees maintain detailed records for two years ("including a list of any chemicals used while performing the services and any medical conditions discovered during the performance of services"). Moreover, as a San Diego Union-Tribune article about the bill notes, the legislation has drawn criticism from groomers because it would also force them to individually cage animals that would be calmer if they were not confined.

The Orange County Register today ran an editorial that effectively illustrates the fallacies of licensing pet grooming. As I told the Register,

"Licensing pet groomers is not the answer to poor-quality grooming services. Imposing a top-down state bureaucracy will likely not improve pet safety or grooming quality, but it will result in less competition, less choice for consumers, and higher prices. Higher prices will arise from the reduced competition and the need for practitioners to offset the cost of compliance with unnecessary regulations. When there is less competition, there is less pressure on practitioners to offer the best prices and service quality."

The artificially higher prices caused by licensing would have some other unintended consequences, such as encouraging people to save money by clipping their pets' nails or cutting their hair themselves. Since the average person is not as trained as a pet groomer (licensed or not), this will result in more pain—not less—for pets.

If dog groomers want to get together and form their own voluntary certification organization, that is great. They could set their own standards and have the organization certify those that meet those standards. This would signify to customers that the certified practitioners offer a higher standard of service while still maximizing the freedom and choice of both consumers and groomers that elect not to be certified.

There will always be some bad pet groomers, with or without licensing. In cases where pets are injured or the groomer otherwise does not meet reasonable standards of service, there are already laws on the books against negligence, fraud, breach of contract, and causing harm to people or property. Licensing would simply create an illusion of competence (and an army of bureaucrats) while increasing prices and reducing competition and consumer choice.

Related Research and Commentary:

» Occupational Licensing: Ranking the States and Exploring Alternatives

» "California Licenses Most Jobs in Nation" (Los Angeles Business Journal)

» "Lawyer Licensing Laws Lead to Higher Prices, Less Consumer Choice and Access to Legal Services"

» "Occupational Licensing and the Beard Trimming Turf War in Texas"

» "State Licensing Mandates for Movers in Illinois Increase Prices, Reduce Job Opportunities"

San Francisco Chronicle: California running out of money again

Posted on February 1, 2012, 6:52pm | Harris Kenny

Update: John Gramlich of Stateline (a project of The Pew Center on the States) reports that California lawmakers are already hungrily eying the potential revenue windfall from Facebook's $5 billion initial public offering (IPO) this week. According to Gramlich, Facebook's IPO could generate as much as $1 billion in direct new revenue. While this good news may be encouraging to a state weary with bad news, it won't meaningfully solve any problems. Decades-long fiscal mismanagement can't be solved in one fell swoop.

Wyatt Buchanan of the San Francisco Chronicle reports:

California will run out of cash by March 1 if the Legislature does not take immediate action, Controller John Chiang told budget leaders at the Capitol in a letter Tuesday.

The controller recommends borrowing and delaying some payments to deal with the shortfall, which he projects will last seven weeks. Absent that kind of action, which lawmakers and the administration of Gov. Jerry Brown say is assured, the state would probably have to send IOUs and delay tax returns.

"Although this cash-management plan relies on still more borrowing, payment delays and deferrals, we believe this is the most prudent and responsible course of action considering we have about four weeks before the advent of a cash shortfall," Chiang wrote in a letter to the chairmen of the Assembly and Senate budget committees.

He called the plan to borrow and put off some bills the "ideal way" to avoid IOUs and tax-refund delays.

Anyone familiar with California policy shouldn't be surprised by today’s news since California’s fiscal situation can be described as nothing short of a nightmare. Buchanan continues:

The controller said the overarching problem is that, as of the end of the calendar year, the state was spending $2.6 billion more than was included in the budget while tax revenue coming into state coffers was $2.6 billion below projections.

He said $3.3 billion must somehow be found if the state is going to bridge the seven-week cash shortfall period, but the situation could get worse if there is more overspending and further reductions in tax income…

Chiang said the state will fall below a $2.5 billion "cushion" of cash on hand on Feb. 29, and the next day it would be in the red. The problem would grow to a $730 million deficit by March 8, and the overall cash shortfall would last until sometime around April 13, he said.

Not everyone is deterred by Chiang’s warnings. State Sen. Mark Leno (D-San Francisco), who is chairman of the Senate Committee on Budget and Fiscal Review, told Buchanan, “(the projected shortfall is) a very short-term cash-management situation. All budgets are, by nature, an educated guess.” This is news to California’s millions of families and businesses who know the state expects them to pay their bills on time.

Fortunately there are many reforms that California policymakers can pursue when they decide to get the state's fiscal house in order. Below are links to some recent Reason Foundation research on this subject:

>> Jerry Brown Continues to Push High-Speed Rail Boondoggle while California Drowns in Debt by Adam Summers

>> California’s Employment Dysfunction by Harris Kenny

>> California, Illinois Continue to Make Other States Look Good by Harris Kenny

>> California's High-Speed Rail Fibs by Adrian Moore

>> The Detailed Concerns of the CA HSR Peer Review Group by Adrian Moore

>> Jerry Brown's Budget Proposal Gets Plenty of Reaction by Adrian Moore

For more, see Reason Foundation's California Research Archive here.

Jerry Brown Continues to Push High-Speed Rail Boondoggle while California Drowns in Debt

Posted on January 27, 2012, 2:59pm | Adam Summers

The California high-speed rail project has become a disaster before the first track has been laid. Perhaps that is a blessing because it may allow the state to pull the plug on the project before sinking billions of dollars it does not have into it. Assemblywoman Diane Harkey (R-Dana Point) has introduced a bill, AB 1455, which would eliminate any bond funding for the project that has not already been contracted, state Senator Doug LaMalfa (R-Richvale) has promised to bring forth legislation that would authorize a revote on the project, and Beverly Hills resident Peter Seidel has started circulating a petition for an initiative called the No Train Please Act which would kill the project entirely.

Considering that cost estimates have soared from between $40 billion and $45 billion just a couple of years ago to between $98.5 billion and $117.6 billion now, and ridership estimates have plummeted from 117 million passengers per year by 2030 to between 23 million and 34 million per year by 2035, while the state is running a $9.2 billion budget deficit, a $10 billion unemployment fund deficit, and an unfunded pension liability in the range of $400 billion to $500 billion, pushing forward with the high-speed rail project is unconscionable and incredibly fiscally irresponsible. Yet Governor Jerry Brown is trying to move ahead with the project at the same time he is pushing a $35 billion tax increase ($7 billion a year for five years).

In my new commentary I argue that it is time to face reality on this boondoggle of a project and end it before California pours billions of dollars down a rat hole. Below is an excerpt of the article.

Even under optimistic scenarios, the CHSRA has identified only about 15 percent of the funding necessary to build the project. The other $85 billion or so is supposed to somehow come like manna from heaven, primarily from the federal government, which is engulfed in an even greater fiscal crisis than California (not to mention the fact that Congress has repeatedly indicated it is not going to support any additional high-speed rail funding any time soon—see here, here, and here). The CHSRA also claims some of the funding will from the private sector, which has shown no interest in investing in a project with poor prospects, an unrealistic business plan and massively inflated ridership predictions.

Earlier this month, the California High-Speed Rail Authority’s own Peer Review Group even recommended that the legislature not approve bond sales for the project, concluding, “We cannot overemphasize the fact that moving ahead on the HSR project without credible sources of adequate funding, without a definitive business model, without a strategy to maximize the independent utility and value to the State, and without the appropriate management resources, represents an immense financial risk on the part of the State of California.”

Nevertheless, “We’re pushing forward,” Gov. Brown said recently of the administration’s plans for the high-speed rail system. Added Brown, “We’re going to build, we’re going to invest, and California is going to stay among the great states and the great political jurisdictions of the world.”

Not if we keep spending money we don’t have on boondoggle projects, we won’t, Gov. Brown. He then reiterated his support for the project in his 2012 State of the State address and called on the legislature to approve the appropriation of bond proceeds for the first segment of the project.

This is like your neighbor, who let’s say is an average Joe struggling to get by during the ongoing economic malaise, announcing that he is going to buy an expensive Tesla Roadster (gotta support “green jobs” and all that), even though he already has a car and is having trouble paying the rent and utility bills as it is. Complicating matters are the facts that he does not know just how high the price of the car will be (it has already more than doubled since last year) and he probably won’t be using it very much anyway. Oh, and you and a whole bunch of other people who haven’t agreed to it yet will be paying for almost all of it. This is the insanity of the California high-speed rail project.

See the full article here.

Related Research and Commentary:

» The California High-Speed Rail Proposal: A Due Diligence Report

» "California High-Speed Rail: The Next Stop is Bankruptcy"

» "State Voters Were Railroaded"

California’s Employment Dysfunction

Posted on January 23, 2012, 4:54pm | Harris Kenny

The Associated Press reports:

California’s unemployment dipped slightly in December to 11.1 percent, down two-tenths of a percent from the previous month. 

Nonfarm payroll jobs increased by 10,700 last month, for a total gain of 240,300 jobs in 2011…  

California remains above the national jobless rate of 8.5 percent. 

California’s unemployment rate was near 12 percent for months and has been above 11 percent since 2009. 

The state’s rate fell to 11.3 percent in November, the lowest since May 2009.

Given California’s sustained period of high unemployment, and its reputation for unusually poor governance, marginal improvements like this offer little consolation to its residents. However, the Bay Area Council Economic Institute recently published a report that offers substantive solutions for the Golden State that show another economy is possible if policymakers are willing to partner with the private sector.

The full report, entitled Accelerating Job Creation in California Through Infrastructure Investment: Opportunities for Infrastructure Asset Formation and Job Creation Using Public-Private Partnership Procurement Methods, is available online here.

The report is a continuation of the Bay Area Council Economic Institute’s five-year focus on identifying global infrastructure best practices and applying them to California with respect to the unique environment, challenges, and opportunities there. The report specifically seeks to focus on leveraging infrastructure asset formation to stimulate near- and long-term job growth and maximize productivity in infrastructure assets.

This post does not constitute a wholesale endorsement of the report, however there are several vitally important takeaways:

• “As California confronts a sustained budget crisis and high unemployment, the quality and state of repair of its infrastructure does not correspond to its population density or the size of its economy.” (p. 5)
• “In 2006, the Bay Area Council Economic Institute calculated that California has an unfunded infrastructure shortfall of between $527 billion and $737 billion. Consistent with that finding, the Nicholas Berggruen Institute puts the state’s infrastructure deficit at $765 billion.” (p. 5-6)
• “Calculations by the Bay Area Council Economic Institute for construction of new non-residential structures in California indicate that  $1 billion in infrastructure investment creates approximately 13,468 jobs. This suggests the strong potential of infrastructure investment as a vehicle for job creation in the state. Infrastructure investment of between $250 and $750 billion could create an estimated 3.4 million to 10.1 million jobs.” (p. 6)
• “California does not need to invent a new concept for infrastructure investment to attain the results described above. There are two recent projects in California that illustrate the benefits of the (public-private partnership) approach: the Long Beach Courthouse sponsored by the Judicial Council of California Administrative Office of the Courts, and the Presidio Parkway sponsored by the California Department of Transportation.” (p. 10)
• “… California’s infrastructure procurement methods and processes have not been reviewed or modernized in decades. SB 4 (2009) opened the door for the expanded use of private capital and (public-private partnership) methods for state transportation projects, but it did not create institutional mechanisms that would firmly embed alternative procurement in the state’s decision-making processes, nor did it promote investment in other important infrastructure. While California was once a world leader in infrastructure asset formation, the absence of modernization and innovation in recent times leaves it far behind the global best practice standard of performance.” (p. 12)

The authors go on to list nine actionable prescriptions for state policymakers: 

1. The administration should recognize that the state must be open to alternative methods for infrastructure delivery, and the Governor should endorse P3 as an important tool in California’s strategy to rebuild infrastructure and create jobs... (p. 17);
2. Create a comprehensive infrastructure plan for California... (p.17);
3. Create an Infrastructure Procurement Center of Expertise... (p. 18);
4. Leverage Existing Programs and Capacity... (p. 19); 
5. Establish a public-private sector comparator process... (p. 19);
6. Develop an Availability Payment Standard for California... (p.19)
7. Develop a Labor Protection Standard... (p. 20);
8. Adopt an Infrastructure Life-cycle Planning and Budgeting Process... (p. 20); and
9. Reform the California Environmental Quality Act... (p. 20).

These sorts of common sense reform initiatives are increasingly common in the U.S. and around the world, and it’s time for California policymakers join the party. For more on this topic, explore Reason Foundation’s Highways Toll Roads and Public-Private Partnerships Research Archive and California Research Archive.

California, Illinois Continue to Make Other States Look Good

Posted on January 19, 2012, 2:57pm | Harris Kenny

Yesterday Sunshine Review, a nonpartisan non-profit organization dedicated to state and local government transparency, released its first State Government Salary Report [available online here], which analyzes public sector employee salaries in 152 local governments spanning eight states. The editors of Sunshine Review selected eight states with relevant political contexts, including: California, Florida, Illinois, Michigan, New Jersey, Pennsylvania, Texas, and Wisconsin.

It shouldn’t surprise regular readers of Reason Foundation’s Out of Control Policy Blog that California earned a gold medal with 1332 public sector employees making over $150,000 each year. The gold medal earning Golden State topped second place Illinois, which received a silver medal for its 867 employees making over $150,000; and dominated third place Texas, which received a bronze medal for its 194 employees making over $150,000.

California had the highest paid public official of the governments surveyed, with the top spot going to Robert Rizzo, former city manager of Bell, California. Rizzo made $787,637 in 2008, but his total compensation added up to $1.5 million when taking other government benefits into account. Illinois placed second again, with the second highest salary of the governments surveyed going to William Foley, Chief Executive Health Office of Health Care in Cook County, Illinois. Foley earned $500,000 in 2011. California also nabbed third place with Elaine C. Yang, Senior Physician for Los Angeles County, earning $430,909 in 2009.

Rizzo was featured in the following reason.tv piece entitled Protest in Bell: City Residents Say “Enough!”:

Another interesting takeaway from the report is that medical personnel earn more than most governors in the states surveyed, according to Sunshine Review:

(I)n 2010, for example, the average governor's salary was $130,595. Compare this average to top earners in Florida’s public sector. In Jacksonville, Florida, the top salary for 2011 was $208,119.00 for an employee in the Medical Examiner's office. For Hillsborough County, the highest earner in the county as of 2011 is the Chief Medical Examiner, who brings in $250,411.20.

This issue of public vs. private compensation is as controversial as it is complex. As my colleague Adam Summers wrote in a May 2010 report entitled Comparing Private Sector and Government Worker Salaries [available online here]:

There has been much debate over whether public sector employees are overpaid or underpaid, relative to their private sector counterparts, and how to make an "apples-to-apples" comparison of the compensation received by each since job functions are oftentimes quite different.

Summers’s full report is worth reading because it explores issues like the difficulty of compensation comparisons, productivity differences, job security differences, the rising number of government workers, public-sector pension and retiree health-care benefit differences, and more.

California's High-Speed Rail Fibs

Posted on January 10, 2012, 3:42pm | Adrian Moore

In today’s The Wall Street Journal, Wendell Cox and Joseph Vranich write:

A few days ago, the California High Speed Rail Peer Review Group, an expert body mandated by state law, expressed serious doubts about the proposed Los Angeles-San Francisco rail system. It concluded that it "cannot at this time recommend that the legislature approve the appropriation of bond proceeds" because the project "represents an immense financial risk" to the state.

But hell hath no fury like a state agency scorned. The California High-Speed Rail Authority issued a quarrelsome response claiming that the rail system is, well, a bargain! The agency repeated its claim that without high-speed rail, Californians would pay more because the state would have to build equivalent transportation capacity through road and airport expansions costing about $171 billion, or between $53 billion and $73 billion more than the $98 billion to $118 billion estimated cost of a rail line.

The constant refrain that it's "more expensive not to build the rail line" is specious. But it deserves further explanation because of the light it sheds on tricks used to justify other ill-conceived projects to an unsuspecting public.

Cox and Vranich go on to make many of the arguments first made in their 2008 Reason Foundation study of the California high-speed rail plan:

The claimed cost of airport expansion is bloated, too. Bullet train proponents assume a very small average plane size into the future, as if airlines wouldn't use larger planes—such as the latest generation single-aisle Boeing 737s or Airbus 321s—to meet demand. Even without high-speed rail, in other words, no new runways or gates would have to be built beyond what will be needed anyway, and the assumed billions of dollars required to expand airports is just another unsubstantiated claim by rail promoters.

These absurdities aren't surprising. A study we prepared for the Reason Foundation in 2008—"The California High-Speed Rail Proposal: A Due Diligence Report"—showed that high-speed rail proponents had overstated costs for alternative highway and airport capacities by a factor of more than 60.

There is more that is wrong with the California high-speed rail project. The Alice-in-Wonderland plan is based on greatly exaggerated ridership projections, hallucinatory promises of billions in private investment pouring into the system, and the expectation that the now-canceled federal high-speed rail program will magically provide many billions more.

Full column here.

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