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Redistricting in California: Competitive Elections and the Effects of Proposition 11

george.passantino@reason.org (George Passantino) — Wed, 01 Oct 2008 00:00:00 EDT

Introduction

California voters will evaluate Proposition 11 this fall, which seeks to replace the existing process of redrawing political boundaries for congressional, senatorial, assembly and State Board of Equalization offices. At the heart of this initiative is a growing perception that the current process for drawing these maps is rife with conflict of interest—particularly when legislators draw the very districts they will represent, allowing them to select their constituency.

This paper will introduce an abbreviated history of redistricting in California and various attempts at reform over the past several decades. The paper will also summarize the current initiative’s major elements and address some key issues that voters should consider in this debate. The goal of this effort is to ensure that voters can make a well-informed decision.

Not the Time for Tax Increases in California

george.passantino@reason.org (George Passantino) — Fri, 01 Aug 2008 00:00:00 EDT

Orange County Register

The skyrocketing costs of gas, food and basic necessities are seriously hurting hardworking families across the state. To get by, people are cutting costs wherever they can.

With this backdrop, it is virtually impossible to understand how some Sacramento politicians can even put forth their current proposals. Senate Democrats want $11 billion in tax increases, while Assembly Democrats "only" want $6 billion in tax increases to close the state's $15.2 billion budget deficit for the fiscal year that started July 1.

The state Senate's package would be the equivalent of a $300 tax increase for every man, woman and child in California. That's definitely not a recipe for improving the state's economic conditions or helping working families.

The mere fact that the Sacramento is considering tax increases instead of scouring for ways to cut costs shows how dysfunctional and out of touch government has become.

The state operates more than 300 boards and commissions - several with six-figure salaries for their politically appointed members. There are also several dozen agencies, departments and other bureaus that completely overlap one another. California has four different entities that collect taxes. Wouldn't a one-stop tax collector do the trick? What does the State Personnel Board do that the Department of Personnel Administration couldn't? Those two agencies actually spent years in lawsuits - suing each other, with taxpayer money.

In addition to the wasted personnel resources, California is sitting on gold mines of property resources that sit idly by. The state government owns one of the most scenic - and expensive - waterfront properties in all of California and could reap hundreds of millions from its sale. No, it isn't a public park that needs protecting. It's San Quentin Prison. Shouldn't the state at least consider selling the beautiful waterfront land overlooking the San Francisco Bay, moving the outdated prison to much cheaper real estate inland - where a modern prison could be built?

Sacramento should explain why tax increases are preferred to selling state-owned golf courses, the so-called MTV beach house in Malibu, parking garages, and high-value urban land like the Los Angeles Memorial Coliseum. There are also thousands of vacant acres surrounding existing state prisons and hospitals that could be put into productive private use, generating revenue for the state. This wouldn't even impact existing operations of those facilities because it is extra land that the state owns.

Most lawmakers would hopefully agree that selling unused property is a better deal than raising taxes or gutting public services. Still, virtually none of this underused property has been put on the market. In fact, in May a bill to sell the L.A. Coliseum and surrounding land was handily defeated, even as it was estimated that it could bring in as much as $400 million.

When a typical family faces a financial shortfall, they adjust their spending and adapt to their new situation, living this way until their situation improves. It is what we all call "kitchen-table economics."

Taxpayers deserve the same level of fiscal discipline from our elected representatives. But instead of making tough choices, lawmakers typically revert to accounting gimmicks, irresponsible borrowing, and, in this case, proposals for higher taxes to solve the problems that have amassed under their watch.

Even in good times, when revenue is flush, this represents bad governance. When economic conditions are tough, as they are now, it is downright irresponsible.

Put a Lid On State Budget, Already

george.passantino@reason.org (George Passantino) — Wed, 12 Dec 2007 10:56:00 EST

Orange County Register

Four years ago, Gov. Arnold Schwarzenegger rode into Sacramento brandishing the sword of fiscal discipline. He vowed to avenge the California taxpayer and end the budget deficit created by former Gov. Gray Davis' profligate spending. "I will not rest until our fiscal house is in order," he proclaimed. Four years later, we are still not there.

The Legislative Analysts Office just warned that next year's state budget faces a deficit of $10 to $11 billion. To exacerbate the problem, California already has approximately $20 billion in debt due to previous budget problems. Rather than "blowing up the boxes" of state government, Schwarzenegger has continued to grow it.

Since his first budget, revenues have increased by approximately 32.2 percent while general fund spending has increased by 36.6 percent. This fact reveals the folly of believing that increases in revenue can resolve the fiscal imbalance. Increases in revenues simply trigger more spending.

Elizabeth Hill, the Legislative Analyst, tried to offer a measure of optimism suggesting that if current projections hold, the budget crisis could nearly correct itself within three years. But consider that even the most sophisticated analysts have been unable to accurately predict an end to the current economic conditions. And secondly, is it reasonable to anticipate that current projections will remain viable in three years? After all, the fiscal conditions of the state have worsened by $6 billion since August. The state has trouble with three month projections, let alone three year forecasts.

If Schwarzenegger is serious about getting the state's fiscal house in order once and for all, he should immediately declare a fiscal emergency and order a special session of the legislature—before the holiday break.

Schwarzenegger has proposed leasing the California State Lottery to a private entity for a lump-sum payment, estimated between $14 billion to $37 billion. Rather than using the revenues to finance his highly controversial universal healthcare proposal, the money should be used to eliminate the current deficit and create the time to achieve permanent budgetary reform. As such, during this special session, Schwarzenegger should tie efforts to address the current deficit to longer-term solutions that prevent this problem from occurring the next time the state economy slows.

Fortunately, the governor has already identified many of the needed long-term reforms in his landmark California Performance Review, which he can immediately implement.

For example, the Performance Review plan included an ambitious effort to trim some of the fat out of state government by consolidating similar departments, which would allow the government to take advantage of a continuing wave of state employee retirements to gradually reduce its workforce without firing anyone. This could save in excess of $3 billion over the course of five years, according to the report.

Similarly, the plan identified several billion dollars in surplus or questionable real estate owned by the state – think MTV beach houses - that could be sold to a more productive private use and could be realistically achieved within the next two years. This could easily contribute more than $1 billion and reduce ongoing state maintenance costs.

During this fiscal transformation, California could also shift to a performance-based budget where spending decisions are based on performance measurements of state programs—not just on what was spent last year as we currently do. Just because a program got money last year, doesn't mean it deserves money this year.

But to be truly successful, Schwarzenegger must limit the state's ability to spend recklessly. You can reform all you want, but if you do not put in place reasonable limits on state spending, the state will inevitably find itself in this position again.

Spending and revenue limits are effective because they force lawmakers to prioritize spending and make choices - the way normal families live every day. This is precisely what California needs – a fiscal policy that forces smarter spending.

Even recalled Gov. Gray Davis has seen the light. In a November speech, Davis said: "…every governor who serves more than just a couple years will experience both the good and the bad that comes with our economy…The answer, of course, is to adopt a spending limit which stockpiles money in good years that you can draw down in bad years."

Schwarzenegger has talked long enough about reforming the state's spending and his record has created a platform for his ousted predecessor to step to his right on fiscal matters. We have "torn up the credit cards" multiple times now only to order new ones. Now, is the opportunity for meaningful action, not more promises.

The Chilling Effect of the Schwarzenegger-Bush Freeze

george.passantino@reason.org (George Passantino) — Thu, 06 Dec 2007 10:59:00 EST

Flash Report

It is easy to call yourself a supporter of economic freedom and the rule of law amidst a rapidly rising economy. Now with dark clouds of the recent rise in mortgage foreclosures—and more expected on the horizon—political expediency has eroded the support for free markets in some of its perceived champions.

Even self-proclaimed devotees of the late Milton Friedman, President George W. Bush and California Governor Arnold Schwarzenegger, sound more like critics than Friedman supporters.

In the wake of a perceived mortgage crisis both have attempted to use the coercive power of government to solve the problem. Both plans center on agreements with the largest mortgage servicing companies to "voluntarily" freeze interest rates on adjustable rate mortgages for a set period of time.

Upon Friedman's death, President Bush remarked that "Milton Friedman has shown us that when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market's invisible hand, which improves the lives of people, the government's invisible foot tramples on people's hopes and destroys their dreams." Perhaps the President should re-read his talking points and share a set with the governor.

There are several flaws in the approach to "voluntarily" freeze rates. First, it is disingenuous to call the plan completely voluntary. When a government seeks a "voluntary" commitment in one hand, you can be sure that the hammer of regulation is hidden behind the back in the other hand.

Moreover, such a freeze is tantamount to a moral bailout. While it may not necessarily be a financial bailout of the S&L magnitude, it bails out lenders and borrowers from bad decisions and forces someone else to shoulder the cost. Behind each mortgage is a pool of investors that make life decisions, such as retirement planning, based on an expected return of those investments. Forcing these investors to eat a loss by government fiat is fundamentally unfair. Moreover, this tramples the rule of law and the sanctity of a contract. And, of course, as the regulatory feeding frenzy grows, you will no doubt see a host of new efforts to clamp down on lending practices and in doing so eliminate the access to capital that so many families depend upon.

Equally troubling, the proposals seem to try to encourage responsible borrowing by only applying to people that are current on their notes but who can't afford the rate adjustment. It doesn't take a Nobel Prize economist to figure out that thousands of families that actually can afford the rate adjustment, and who made those decisions willingly, will nonetheless seek relief by claiming that they will not be able to afford it. And what constitutes not being able to afford it? Does a family that goes out and finances tens of thousands of dollars worth of home entertainment equipment and luxury automobiles and whose monthly debt obligations have increased dramatically qualify for relief?

Perhaps most troubling of all is that this move to freeze rates and ratchet down the industry with new, tougher regulation completely misses one fundamental reason that so many Californians have turned to adjustable rate mortgages and other exotic loans. The price of housing in California is simply too high.

Is it any surprise that five of the 10 areas with the highest foreclosure rates nationally are in California, or that in some markets there are more foreclosures than new homes for sale?

If Schwarzenegger and Bush want to stay true to their philosophical allegiances to Friedman, they could start by tackling the root causes of the affordability crisis that has driven so many families to secure loans that are a poor fit for their unique conditions.

According to statistics from the California Building Industry Association, California homes were on par with national prices as late as the 1970s. As development became more difficult in California, prices relative to the nation began to shoot upward. Now, California home ownership rates are 10 percent lower than the rest of the nation.

If California really wants to ensure that people have a home to live in, we need to make housing more affordable. New regulations on mortgages or short term freezes will not do that.

The price of regulation—both in hard dollar fees and in the costs of time—can easily add $50,000 to the cost of each home. That can account for $300 or more in each monthly payment. In many jurisdictions, the cost of regulation is much higher than that.

At the same time the costs of regulation are increasing, anti-growth activists have become experts at utilizing the California Environmental Quality Act (CEQA) and other well-intended laws to stop development or force substantial delays which also results in significant costs. The longer a home takes to build, the more it costs in interest and construction expenses. On top of that, finding land that is suitable for development is increasingly difficult, and when land is found, political pressures typically mount against "affordable housing." While such conditions exist in varying degrees around the nation, there is a uniform need to address them.

While it may seem politically appealing for government to directly help people keep their homes, as Friedman said of government intervention, the results are usually disastrous. Both Schwarzenegger and Bush would do well to focus, instead, on underlying cost drivers of the housing market that are truly governmental in origin.

People, faced with home prices they simply cannot afford, have far too often found refuge in loans that probably don't fit their personal economic conditions. While no amount of intervention can eliminate the obligation that anyone has to fully understand and honor the terms of the contract they sign, it would nonetheless be helpful for government to eliminate or reduce some of the cost drivers that they developed and which have helped fuel this perfect storm.

Spiderman and Schwarzenegger

george.passantino@reason.org (George Passantino) — Tue, 29 May 2007 00:00:00 EDT

In the blockbuster Spider-Man 3, Spider-Man/Peter Parker finds himself waging a war of the soul.

The friendly neighborhood Spider-Man—the one defined by humanity, righteousness and justice—is pitted against a black-suited alter ego that is more self-absorbed and aggressive.

"The power [of the black suit] feels good," Peter Parker admits. "But you lose yourself to it."

California's own action hero knows the feeling. In essence, this is the same battle that Gov. Arnold Schwarzenegger appears to be fighting within his political heart.

On one side, we have Arnold the "reformer" who was ushered into Sacramento on a wave of promises to "blow up" the boxes of big government, buck special interests, and restore fiscal sanity to the Golden State. The Milton Friedman-esque Arnold speaks of focusing on the state's core competency, improving service, and "doing more with less."

In his 2005 State of the State Address, when the reformer was his dominant side, he declared, "To solve the budget's continuing structural deficit, we must reform the way the government spends its money. And to restore the trust of the people, we must reform the way the government operates."

This year he has proposed paying down billions in state debt ahead of schedule, privatizing the California Lottery for higher returns, and selling off EdFund, the state-controlled entity that administers federal student loan operations in California. This is precisely the kind of cost-cutting, streamlining and out-of-the-box thinking Californians expected when they elected him.

But while the reformer is pursuing meaningful change, his black-suited alter ego is busy proposing a budget that spends $1.5 billion more than the state will bring in this year. The Legislative Analyst's Office (LAO) says if Schwarzenegger's budget is approved the state shortfall will be $5 billion next year. This big-spending governor is more Gray Davis than superhero.

Under Gov. Schwarzenegger's tenure, State General Fund spending has sky-rocketed by 26 billion during his tenure. By contrast, former Gov. Davis increased spending approximately $19 billion.

And the red ink could get worse. Since November, the state approved more than $40 billion in new infrastructure bonds proposed by Schwarzenegger, the legislature approved an additional $7 billion in prison bonds and there is still more to come. Schwarzenegger still speaks of more massive infrastructure bonds over the coming years. On top of that, the state has somewhere between $40 and $70 billion in health care costs for retirees that it hasn't planned for or funded.

Spider-Man grew frustrated that criminals were spared the swift justice that they deserve and this made him vulnerable to the lure of his alter ego. He found himself exacting his own form of revenge, forgetting his core values.

Likewise, not long after taking office, Schwarzenegger realized that any reform efforts, whether a top-to bottom review of state government or more targeted reforms, would be met with fierce opposition from special interests. He began compromising on core principles and abandoning many of the promises he made during his recall campaign.

"That's his [Schwarzenegger's] problem: He'll surrender at the first sign of a fight," State Sen. Tom McClintock (R-Thousand Oaks) recently surmised.

See our prisons for the prime example of this. Since taking office, state correctional costs have increased by more than 65 percent, rising to roughly $10 billion in his current budget. Additionally, the current budget fails to account for likely increases in correctional guard contracts which the Legislative Analysts Office estimates to cost an additional $330 million per year. It is the sum of decisions like this that has created the situation our state now faces.

In the end, Peter Parker had to battle his alter ego and make a choice about who he was. He realized that he, not external forces, control his legacy. Now, Schwarzenegger must make a similar choice. His governing legacy is being written. Does he want to be remembered as the Governor who took on tough battles, fixed Gray Davis' mess and emerged victorious or the cowering steward that embraced the status quo, even as the state slipped deeper and deeper into crisis? It's his choice.

"It's the choices that make us who we are, and we can always choose to do what's right," Peter Parker waxed poetically.

Let's hope Schwarzenegger has learned that voters sent him to Sacramento to stand up for them by standing up for his "reformer" principles.

Schwarzenegger Goes From Milton Friedman to Big Government

george.passantino@reason.org (George Passantino) — Fri, 09 Feb 2007 16:05:00 EST

Flash Report

When Arnold Schwarzenegger stormed into the governor's office, he swore himself a disciple of the late, great economist Milton Friedman and has routinely cited his influence ever since. In declaring January 29th "Milton Friedman Day" earlier this year, Schwarzenegger praised Friedman for helping to "restore our faith in the freedom of the individual to choose in every sense of the word – political, economic and social."

How sad, if not utterly confusing then, that even as he honors Friedman's contributions to a free society, Schwarzenegger is busy peddling a $12 billion nanny-state healthcare proposal that relies on coercion, new regulations, higher taxes, and social engineering.

It is impossible to reconcile Schwarzenegger's devotion to a Friedman-esque philosophy with his new healthcare proposal. On the one hand, Arnold commented that "when I was first exposed to his (Friedman's) powerful writings about money, free markets and individual freedom, it was like getting hit by a thunderbolt." Yet, his healthcare proposal is a stew of mandates on individuals, businesses, health care institutions, along with various "incentives" to encourage Californians to make healthy lifestyle choices.

To Gov. Schwarzenegger's credit, "TerminatorCare" is built on the recognition that healthcare costs have spiraled out of control. He points to a sharp rise in bankruptcies driven by healthcare costs and the strains that healthcare debts place on families.

Yet, like a bad doctor, he has diagnosed the cost and availability of health insurance as the disease, when, in fact, it is the symptom of a larger problem. California's problem is not that too many families lack insurance. It is, in fact, that health care itself is too expensive.

Ensuring that everyone has insurance will not solve that underlying cost problem and could actually make matters worse. While insurance is a market-driven approach to help cope with unexpected events and costs, it can have the unavoidable consequence of increasing prices by stripping consumers of the cost discipline that comes with actually paying for a service.

As an example, only slightly more than half of Americans have vision insurance and yet, the vision-care industry has enjoyed a dramatic decline in the real cost, even as the range of services has exploded. This revolution has been driven, in part, by a healthy competitive market where producers must compete for business with innovative products (disposable contact lenses, lasik surgery, and light sensitive glasses) and low prices. That is precisely because many of those consumers must actually pay for the services out of pocket.

While most people that need glasses can tell you precisely how much an eye exam and pair of glasses will cost, few individuals can tell you how much a typical doctor visit or how much a night's stay in a hospital costs. Insurance, while it can help cover unexpected costs, exacerbates this lack of consumer information—particularly when the patient never sees an actual bill.

Sadly, the regulations and mandates that Arnold prescribes will only accelerate price escalation.

Mandating that insurance companies cover anyone regardless of their current health will add unhealthy individuals to the coverage pool, driving up costs for everyone. And the most insidious consequence of this mandate is that it may actually discourage insurance coverage by healthy people.

Guaranteeing that all individuals can be covered regardless of their condition is tantamount to allowing someone to buy automotive insurance after they have crashed their vehicle. Such a policy encourages people to not purchase health coverage until they suffer a severe illness or injury.

Although the governor's "individual mandate"—the decree that individuals must have healthcare—is designed to avoid this perverse incentive, it seems like a hollow and unenforceable provision. While such a mandate exists for car insurance, a quarter of the state's drivers still go without coverage—a larger share than individuals that do not have health insurance.

And sadly, the deeper one delves into universal coverage, the uglier the picture for taxpayers and businesses.

If you mandate that everyone must have coverage, then it is a logical extension that you must provide assistance to families that can't afford it. Hence, under the Schwarzenegger proposal a family of four making as much as $61,000 would be eligible for taxpayer-subsidized insurance. As inflation in healthcare costs eats away at the purchasing power of consumers, do not be surprised to see the range of eligible families expand as well.

Additionally, companies with 10 or more employees would either be coerced into providing healthcare for their employees or paying a 4 percent payroll tax. Given that healthcare costs are far greater than four percent of payroll, some businesses may abort their own coverage and ask their workers to shoulder this burden themselves. Doctors and hospitals would not escape the tax sweep either, being forced to pay $3.5 billion in taxes while collecting only $2.2 billion in increased Medicaid reimbursements.

So what do we do about healthcare costs? Fortunately there are answers.

One obvious reform is the use of Health Savings Accounts in conjunction with High Deductible Health Plans. This strategy includes purchasing (at lower cost) an insurance plan with a high deductible and banking the premium savings pre-tax into a Heath Savings Account that can be used for health costs below the deductible. This gives families the coverage they need but allows them to retain direct control over their health care purchases. California, unlike most other states, taxes contributions to Health Savings Accounts. Changing this tax treatment would greatly expand the feasibility of HSAs in California.

Similarly, California regulators should relax restrictions on what products health insurance providers and plans can offer to consumers, including plans with higher deductibles, co-payments, and a range of benefits. The state could also encourage lower-cost healthcare facilities like community-care clinics or clinics run by registered nurses. Such steps would move the state toward market-driven healthcare, as opposed to one that is regulatory-driven.

Schwarzenegger praised the father of free market economics for his devotion to "the simple idea that we are responsible for our own lives, to live them as we see fit as long as it does not violate the liberty of others." By all measures, this latest healthcare proposal represents a troubling shift away from that world view and toward the grandiose view of government that drove Schwarzenegger to America in the first place.

George Passantino is a Partner in Passantino Andersen Communications, LLC and a Senior Fellow at the Reason Foundation. In 2004 Passantino served as a Director of Governor Arnold Schwarzenegger's California Performance Review. An archive of his work is here. Reason's California research and commentary is here. This column originally appeared at FlashReport.org.

Governor's Rose-Colored Glasses Tint the Budget

Wed, 07 Feb 2007 16:12:00 EST

California Political News

As the details emerge on California Gov. Arnold Schwarzenegger's proposed budget, you might have the impression that the fiscal affairs of the golden state are once again in order that the river of red ink, deficits off into the foreseeable future has all but evaporated. Sadly, this couldn't be farther from the truth.

Certainly the governor does deserve some credit for his latest budget. For instance, Schwarzenegger's plan includes changes to state welfare payments similar to successful federal welfare reforms. His budget also honors the public's desire to see sales taxes on gasoline purchases directed toward improving our roads and puts on indefinite hold a massive general obligation bond to construct a questionable high-speed rail system.

But beyond that the budget begins to enter a sort of fantasy world characterized by rosy assumptions, undue optimism, and an utter disregard for the reform agenda that propelled him into office.

Fiscal conservatives are facing the sad truth that the governor they supported has actually increased state spending more than the governor they ousted. Since Schwarzenegger assumed office, general fund spending has increased by an astonishing 31 percent. As Sen. Tom McClintock reports, Schwarzenegger's annual rate of spending increase has been 7.9% compared with Davis' 7.1%. On top of that, the state's debt service, the percentage of the state budget dedicated to just paying off debt, will increase to 8 percent next year, up from 3 percent only three years ago, and will ratchet up more in coming years as more bonds are approved.

A good starting point for a budget is balancing expected revenue changes with expected expenditure changes. Rose-colored glasses are all the rage in Sacramento these days, and the proposed budget relies on optimistic revenue projections rather than confronting increasing spending. With payments on the state debt increasing dramatically, a smart budget would look to match that increase with billions in cuts to match. The last decade of state budgets have taught us that revenue growth simply won't keep up with a spendthrift legislature.

But the raw numbers do not tell the entire story of this budget proposal, which is laced with optimistic projections about future revenues. For instance, the Schwarzenegger's budget is built upon rosy revenue assumptions that have already begun to unravel.

Recent tax revenue numbers reveal that personal income tax payments are already a billion lower than what was anticipated in crafting the budget plan. These personal income tax figures are often seen as a harbinger of things to come at the April tax filing deadline and led Legislative Analyst Elizabeth Hill to call the news "an early warning sign that we want to be really cautious."

Not only does the budget not heed this caution, but the governor's budget also makes a number of other optimistic assumptions about state revenues. For one, Schwarzenegger is already banking on $500 million if the legislature approves a series of compacts that he has negotiated to expand gaming at Indian Casinos in Southern California. This proposal, which would allow Indian-operated casinos to add 22,500 new slot machines to their facilities for a share of the revenue, has been greeted by skepticism. The Legislative Analyst's Office has cautioned that little supporting evidence has been provided by the administration to justify this revenue estimate and the question remains if the legislature will even adopt the compacts.

Similarly, Schwarzenegger's budget assumes that the state will be able to pay some of its obligations to fund the state public employee pension system with a $500 million pension obligation bond that has been mired in court battles since the governor took office in 2003. There is no sign that the courts will reverse their opinion that such a bond is unconstitutional without a vote of the public.

In an unrelated court battle, the governor's budget also assumes a reversal of court decisions that mandated a cost of living increase in the Cal-Works Program. This decision, due in February, could cost the state another $530 million. Combined, Schwarzenegger's budget is banking on more than $1 billion in budget solutions that are wholly dependent on court action and where prospects for victory look dim at best.

But the governor's budget also suffers from the same misstep that Sacramento routinely commits in the annual budget process.

Put simply, California revenues are incredibly volatile particularly from personal income taxes, and lawmakers from both parties find it terribly uncomfortable to acknowledge this volatility.

In December, the so-called "Taxpayer X" surprised the state with a $200 million tax payment yes from one individual taxpayer and this single payment was credited with helping the state's revenue projections to stay on track. A month later, personal income tax revenues are down to the tune of a billion dollars below projections.

What these two unrelated stories should tell us is that we tend to underestimate the fluctuations in state revenues. Bad years tend to be worse than we thought and good years tend to be better, as we saw last year with an influx of $8 billion in unanticipated revenue. Instead of trying to learn from this volatility and tamping down on spending, Sacramento produces a budget, year after year, that can't cope with a decline in revenue.

Faced with such volatility, Schwarzenegger ought to produce a budget that doesn't hope against hope that elusive revenues will materialize or that court decisions will suddenly go his way. Instead, he should be prepared to budget, assuming that none of this revenue will arrive. How different that picture would look.

Ultimately, we elected Schwarzenegger to make tough choices and lead change something that a chief executive is expected to do. That means turning a critical eye to how the state spends its money and demanding results.

When the governor commissioned his comprehensive California Performance Review in 2004, we thought we were getting a results-driven governor. 2,000 pages later, you could literally count on one hand the number of major CPR initiatives that have actually been pursued and none have been the big money saving exercises including selling unneeded state assets, realigning the bureaucracy to cope with the expected wave of state worker retirements (doing more with less), or eliminating unneeded boards, commissions and sundry other state entities.

Over the past few years, Schwarzenegger has learned that reforming a state government as large as California's is very difficult. And it appears he has become content to commit the same crime of pushing problems off into the future with a flurry of new state borrowing, overly optimistic budgets, and a disregard for the painful reality that California will eventually face a downturn in the business cycle. When it does the pain will certainly be more pronounced than anyone in Sacramento is prepared to admit.

George Passantino is a partner in Passantino Andersen Communications and a Senior Fellow at Reason Foundation. An archive of his work is here. Dr. Adrian Moore is Vice President of Research at Reason Foundation. An archive of his work is here. Reason's California research and commentary is here. This column first appeared at CAPoliticalNews.com.

Undermining the Future

Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

California needs to invest in infrastructure, but the five bond initiatives on the November ballot would authorize $42.65 billion in new debt, with annual debt service payments of $2.8 billion, and a total cost to taxpayers of approximately $84 billion, while delivering a lot of pork and little new infrastructure.

The state budget is once again in the red as spending growth outstrips even our healthy revenue growth. At the same time the state is already sitting on a record-breaking mountain of debt that is making borrowing money more expensive and raising debt payment amounts to levels far beyond what is fiscally responsible. The vast new debt we will vote on in November would create tremendous pressure for new taxes. There is no sign that the state’s leaders will reverse course and begin managing spending as debt payments rise.

Forty-five years ago nearly 60 percent of the budget for capital projects came from general and special funds. Currently, almost all state capital improvements are financed with debt. We do not have to put up with this trend. Californians need to take a hard look at the details of the bond proposals provided here before they vote, and consider the many and realistic alternative means of meeting our infrastructure needs.

A Pocket Guide to Propositions on California's November 2006 Ballot

george.passantino@reason.org (George Passantino) — Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

There are a number of important propositions on the November ballot in California. Here are simple summaries of what those propositions do and what Reason recommends voters think about when making their decision on how to vote.

Addressing California's Transportation Needs

Fri, 01 Sep 2006 00:00:00 EDT

Executive Summary

California’s population is projected to reach 48 million by 2030, an increase of 11 million people. The majority of this growth will occur in the state’s three major urban regions (Los Angeles, San Francisco, and San Diego). Vehicle miles traveled by individuals will increase by 30 to 50 percent in these regions, with truck traffic growing even faster, especially in greater Los Angeles. Yet California’s urban freeway systems are already nearing capacity, with pervasive congestion during ever-lengthening peak periods.

By 2030, if current long-range transportation plans are implemented, congestion in the three largest urban areas will be much worse than today’s already intolerable levels. The Los Angeles metro area already leads the nation in congestion, with the Bay Area ranking fourth. To eliminate the most severe congestion requires adding enough highway capacity to more than keep pace with projected growth in vehicle travel. A recent Reason Foundation study projects that between now and 2030, California would need to add 13,132 new lane-miles to do this. That amount of new capacity would cost $122 billion, or about $5 billion per year over 25 years.

While these are not small numbers in any sense, they are reasonable in the grand scheme of transportation spending. In response to this growing crisis, California’s leaders have offered a dismal response.

Proposition 1B, the Highway Safety, Traffic Reduction, Air Quality, and Port Security Bond Act of 2006, would authorize more than $19.9 billion in General Obligation debt, with an annual debt service of $1.3 billion and a total cost to taxpayers of approximately $38.9 billion. The funds would be spent as follows:

$4.5 billion to congested highway capacity projects
$2 billion to highways, local roads and public transit systems
$2 billion to local roads
$1 billion to State Route 99 through the Central Valley
$1.75 billion to local transportation projects and to state highways.
$4 billion to capital projects for local transit systems and intercity rail systems.
$2 billion to goods movement via ports, highways and rail
$1.2 billion to reduce air emissions and replace/retrofit old school buses.
$1.1 billion to security and disaster response on transit systems and in publicly owned ports and harbors
$325 million to railroad crossings and to retrofit local bridges and overpasses

While that is an impressive looking list and it would seem that $19.9 billion could make a substantial improvement to the state’s transportation system, only a limited portion of this money will be used to invest in new infrastructure, and an even smaller portion for new roads and highways. Most funds may go to ongoing maintenance and rehabilitation and to other noninfrastructure uses such as retrofitting buses or improving security on local transit systems. And since most of the money will be apportioned by the legislature if Proposition 1B is approved, we should expect plenty of it to go to local pork barrel projects.

This attention to California’s transportation infrastructure is overdue, but good intentions and recognition of the problem alone do not make good public policy. In reality, this bond proposal is an easy way for California’s leaders to look as if they’re addressing the congestion problem while passing the buck on to future generations and making very little in the way of real long-term improvement.

Californians recognize these doubts. In spite of the overwhelming support for the bond among state leaders and groups like AAA, the Chamber of Commerce, etc., the latest PPIC survey shows only 50 percent of likely voters say they would vote yes on Proposition 1B if the election were held today.

Even more damning is an innovative survey conducted by researchers from San Jose State University and Portland State University as a project for the Mineta Transportation Institute at San Jose State University. They surveyed Californians on different ways to fund transportation projects, and their question about using general obligation bonds like that of Proposition 1B explained that “paying off the bonds from the state’s general fund over 30 years would use money that otherwise might be spent for other state programs and services.” With that reality included, only 29.9 percent of those surveyed said they would support using general obligation bonds like Proposition 1B.

Fundamental problems with the approach of Proposition 1B include:

Roads should be funded by user fees. General obligation bonds paid out of general tax revenues require many Californians to pay for roads they will never use and don’t need. Gasoline taxes at least come close to relating how much you pay to how much you use the system. The use of direct fees—tolls—to pay for many new roads and lanes is increasingly popular with drivers and makes the most economic sense. Gas tax funds could then focus on roads that cannot be toll funded.
Proposition 1B is a drop in the bucket that would decrease momentum for long-term solutions. Many argue that something is better than nothing, but based on impact, 1B would be very close to doing nothing. The bond will not provide congestion relief on interstate freeways. A portion of the funds would be unavailable to the most of the state— $1 billion is devoted specifically to State Route 99. An unknown portion of a $2 billion component of the bond devoted to traffic safety and congestion relief may be spent on public transit. But conventional transit is unlikely to offer much in the way of congestion relief and Proposition 1B’s passage would not change that reality. If the bond passes many will be satisfied that “something” has been done about transportation when what we really need is a radical overhaul of California’s approach to transportation infrastructure.
Essential infrastructure ought to be a priority for general revenue funding. By allowing the legislature to bond for essential infrastructure, taxpayers remove the pressure on the legislature to prioritize the general budget. In 1960-1961 bonds accounted for only 16 percent of infrastructure funding, but by 2002-2003 the figure had grown to 76 percent. Voters have approved bond after bond, and yet here we are again. An expert panel assembled by USC’s Keston Institute “believes that the Department of Finance is singling out transportation to pay a disproportionate share of the General Fund deficit.” This bond would allow our leaders to lean on the crutch of borrowing yet again and continue their habit of shortchanging transportation in the general fund.
Proposition 1B allows poor prioritization to continue. State leaders and local MPOs have refused to make cutting congestion a priority. Officials hope to slow congestion’s rate of growth, but they fully expect conditions to grow much worse in the future. Policymakers claim they simply do not have the money to actually make conditions better, but that is not the case. The MPOs for our state’s three largest regions (Los Angeles, San Francisco, San Diego) plan to spend $265 billion over the next couple of decades, but the majority will go toward transit, not toward reducing congestion on our roads. Our MPOs do have the money necessary to actually reduce congestion by 2030.

Los Angeles plans to spend 58 percent of transportation funds on transit. Devoting the same percentage to expanding capacity would eliminate gridlock by 2030.

San Francisco plans to spend 64 percent of transportation funds on transit. Devoting just 25 percent of planned funds to expanding capacity would eliminate gridlock by 2030.

San Diego plans to spend 49 percent of transportation funds on transit. Devoting just 24 percent of planned funds to expanding capacity would eliminate gridlock by 2030.

California’s bonded indebtedness is already at record levels. The state issued 2.5 times as much debt in FY 2005-06 as it did in FY 1995-96, and over 10.5 times as much as in FY 1985-86. We have already authorized the state to go nearly $80 billion in debt. It is fiscally risky to increase the state’s level of debt by the amount proposed in this and the other bond measures on the November ballot.

There are three main parts to the way California ought to be approaching our transportation infrastructure needs.

First, make better use of current funds. Proposition 1B is a pork-laden mess and much less than half the money will go to projects that will relieve congestion. That is typical of our transportation spending. While transit is important and needs appropriate funding, current spending plans allocate very disproportionate funds to transit. The three largest metro areas plan to spend about $154 billion on transit over the next 25 years, vs. $109 billion on roads, and most of the road money will go to maintenance and upgrades, not new capacity. If even one-third of the money going to transit were shifted to roads we could get three to five times more congestion relief than Proposition 1B will accomplish.

Second, give transportation its share of the budget. We used to devote a reasonable share of the general fund to transportation infrastructure. Now, even though the state budget has grown considerably, we don't devote the same share of general fund revenue to infrastructure that we used to. If Proposition 1B passes, we will pay $38.9 billion to get less than $20 billion in current funds for projects, and we’ll be paying for that with about $1.33 billion each year out of the general fund. It makes more sense to take a responsible look at our bloated budget and cut less essential spending so that we could allocate about $4-5 billion per year out of the general fund for what is surely one of the most core functions of the state. Some bonding for large infrastructure investments might still be good policy, but prioritizing spending of the revenue we have should come first. We have plenty of good examples of such an approach. Nineteen counties in California have put in place local sales taxes for local transportation funding and used them to combine pay-as-you-go financing with bonding.

Third, California is falling far short of making full use of public-private partnerships for transportation projects. We are far behind states like Virginia, Massachusetts, and Florida in outsourcing highway maintenance, which would free up gas tax funds to help fund new road projects. More importantly, the private sector would happily invest capital in providing major new highway projects. If we aggressively pursued PPPs and tolled some of the new facilities and lanes added, private capital could fund at least 25 percent of what the bond could do if all the bond funds were spent on roads.

We recommend improving an existing public-private partnership law to incorporate state-of-the-art learning on this issue. The legislation would authorize both CalTrans and other levels of government (cities, counties, joint powers authorities, etc.) to initiate toll-funded transportation infrastructure projects, and permit them to partner with the private sector to carry out such projects, using both RFPs and procedures for dealing with unsolicited proposals. The appropriate approval process would occur within the responsible government entity (the MPO, or CalTrans, for example). This would enable California to enter the global capital markets, as well as tap worldclass expertise for modernizing its vitally important highway system. With the private sector to provide investment for these large-scale projects, scarce public money can be spent on things only the public sector can do.

Enabling Public-Private Partnerships for Transportation in California

george.passantino@reason.org (George Passantino) — Fri, 01 Sep 2006 00:00:00 EDT

Introduction

California does not currently have the policy tools necessary to finance and develop large-scale improvements to its highway system, on which we will continue to rely for more than 90 percent of passenger transportation and the large majority of all goods movement over the next 30 years. A growing number of other fast-growing states (as well as urban areas in Australia, Britain, Canada, France, and others) have developed effective means of tapping the private capital markets and drawing on the project-delivery skills of the private sector to make major improvements to their transportation systems. California needs to do likewise.

Most recent legislative efforts to authorize public-private partnerships in California (including AB 1467) focus on modifying California Streets & Highways Code Section 143, the statute established by Assembly Bill 680 in 1989. While it is reasonable to create statutory authorization in this code section, as written, the statute fails to draw upon the best practices developed over the past 17 years in other states. If California is to authorize a true 21st Century authorizing statute in this code section, a complete rewrite will be required. Yet, while the authority created in AB 1467 may be severely limited, it seems reasonable to at least offer the opportunity for this statute to be used before it is completely overwritten.

Fortunately, another statute was approved in 1996 through Assembly Bill 2660, Government Code 5956, which may provide an easier avenue to improve access to public-private partnerships without overwriting AB 1467 and without requiring a complete rewrite of law.

AB 2660 authorized the broad use of public-private partnerships in varying local infrastructure, with two notable limitations. First, it did not allow state entities such as CalTrans to utilize this approach to infrastructure. Second, it excluded toll-based transportation projects within the State highway system from consideration. If a road is not within the state highway system, it is unlikely to have sufficient traffic levels to be financially feasible as a public-private partnership. In other words, while AB 2660 opened the door to public-private partnerships in other areas of infrastructure such as the development of water and waste-water facilities, it has provided no benefit in tackling the transportation crisis.

Despite its limitations, the law is generally well constructed and could become a potentially valuable tool in addressing California’s transportation infrastructure crisis if two minor changes are made to the law:

Government Code 5956 should be amended to remove the exclusion for toll-funded projects within the state highway system.
The authority to enter into public-private partnerships through this statute should be extended to state entities as well (most notably CalTrans).

Infrastructure, Yes! Mega-debt, No!

george.passantino@reason.org (George Passantino) — Wed, 30 Nov 2005 00:00:00 EST

FlashPoint.org

There is no doubt that California's infrastructure is crumbling and in dire need of repair. In the latest analysis by the Texas Transportation Institute, Southland motorists waste more than 407 million gallons of gas because of traffic congestion. The levee failures in New Orleans remind us of vulnerability to flooding in the Central Valley and Sacramento. And California's existing water supplies and conveyance systems are insufficient for the state's rapidly growing population, which is expected to grow by about 16 million people over th! e next 25 years.

With these conditions, it is no surprise that Gov. Arnold Schwarzenegger and legislative leaders are talking about a massive infrastructure revitalization effort in 2006. Unfortunately, embedded in this discussion is chatter about a gargantuan general obligation bond to fund infrastructure improvements�a bond so large it would dwarf all others.

While there is no firm dollar figure for the bond proposal yet, many have pegged it at $50 billion and some have suggested that it may be as high as $100 billion in new borrowing. For a state still suffering under a structural deficit in the billions of dollars, this bond proposal is a bad deal for taxpayers, a bad deal for the infrastructure goals the Governor has set, and a bad deal for the Governor's hopes of reforming state government.

To taxpayers, the thought of shelling out $100 or more in principal and interest on new debt should be very troubling. California already spends more on debt service than it does on the state UC system or the courts. Adding more debt would be akin to the family that continues to fill out credit card applications that come in the mail, even as they are already upside down with other debt and expenses. Besides, having more credit cards means a lower credit rating and higher interest rates. The same holds true for California, which already has the lowest credit rating in the nation.

And while transportation stakeholders, water users, and other hopefuls line up to get their piece of the action, it is doubtful that a general obligation bond will deliver the most bang for the buck. The bond would violate a fundamental principle of infrastructure finance�the �user pays� principle. This principle isn't just a catch phrase of free market economists�it is a great protector of the taxpayer and state alike.

The Bay Area, with its political clout, will no doubt secure a generous portion of the bond funding, likely leaving other areas of the state on the giving end of the transaction.

In places like the Central Valley, where levee improvements are needed and could be funded through the bond, people that wisely built outside of flood plains will be paying for the flood protection of those that chose differently. Even in an effort to divvy up the resources fairly across the state (in what can be called the �manure strategy� of spreading it around) there will ultimately be winners and losers.

Fortunately, there are many ways to fund critical infrastructure improvements without burdening the entire state. For instance, rather than asking mountain residents to pay for levee protection in the lowlands, those protected by the levees should shoulder the costs. In the realm of transportation, a growing chorus of voices has called for public-private partnerships where motorists (such as long-haul truckers that could save significant time and money by avoiding traffic) pay to use privately financed facilities. The Governor was among these voices.

Taking such steps, rather than floating a general obligation bond, would dramatically improve the state's credit position and help ensure that infrastructure users actually get what they are paying for (and pay for what they are getting).

Finally, giving Sacramento politicians so much money to dole out without clear market signals or well-defined priorities would only invite the very reckless spending and pork-barrel politics the Governor pledged to "blow up."

If he thought it was difficult to reform Sacramento this year, give the capital crowd another $100 billion to play with, where they become everybody's best friend, and the task because virtually impossible.

Just as a grocery store owner wouldn't ask the alley-way drug addict to take the store's money bag to the bank, asking Sacramento to take this bag of money anywhere is a fiscal disaster waiting to happen. The Governor has become fond of speaking about Sacramento's spending addiction. How does giving them another $100 billion help?

No doubt, California faces an infrastructure crisis that is only growing with time. And the Governor should be applauded for recognizing the need for action. Even still, taxpayers should look skeptically on this latest proposal to pile more debt on the shoulders of taxpayers.

Given his desire to restore fiscal discipline, Governor Schwarzenegger should lead the charge to replace this proposal with more market-friendly proposals like public-private partnerships, user-pays strategies, and localized approaches. Doing so would not deliver the governor a Pat Brown legacy�it would create a more modern legacy that tackles the growing infrastructure crisis without soaking the taxpayers.

George Passantino is a Senior Fellow at Reason Foundation. In 2004, Passantino served as a director of Governor Arnold Schwarzenegger's California Performance Review.

Schwarzenegger Needs to Refocus

george.passantino@reason.org (George Passantino) — Fri, 11 Nov 2005 00:00:00 EST

San Diego Union Tribune

Gov. Arnold Schwarzenegger's critics are proudly interpreting the across-the-board failure of all eight ballot initiatives in Tuesday's special election as a resounding defeat of his reform agenda, while Schwarzenegger's allies are hanging the defeat on other reasons, like being outspent by their opponents or being victims of deceptive ads. Both sides are wrong.

The special election was not a case of "liberal" California reasserting its political will over its Republican governor. In fact, liberal California voted down a return to regulated electricity and state-subsidized drug programs � both core priorities of the "left."

The special election was a case of Schwarzenegger — and anyone else pushing for a "yes" vote on an initiative � completely failing to connect critical political reform issues to real people's lives.

While teacher tenure and redistricting are needed reforms, they don't resonate with people like other issues that were dumped earlier in Schwarzenegger's "year of reform" and need to be resurrected soon.

We all care about traffic � and the time we waste sitting in it — but the governor's transportation reform agenda, dubbed "GoCalifornia" was shelved because public-private partnerships — like those currently being used to build roads in several other states and around the world — might threaten some union jobs in California. If there's an issue that is tailor made for Arnold to butt heads with unions on — traffic congestion is it. Do Californians want to protect a few union jobs or less gridlock? Traffic solutions win in a landslide. But the Schwarzenegger administration let transportation reform quietly drift off the radar screen with an attitude that they could pick it up "after the election."

As the political upheaval in San Diego shows, taxpayers care about being on the hook for multibillion dollar pension bailouts. But this spring, Schwarzenegger scuttled plans to change the extravagant public employee pension system, which even he described as a "financial train on another track to disaster." By dropping the issue, he lost the ability to talk about $40 billion in public liabilities — taxpayer liabilities — that special interests and their legislative allies helped create in the state's two largest pension funds.

Most people thought "blowing up the boxes" of government, as Schwarzenegger once promised to do, was a good idea. We recalled a sitting governor, didn't we? The vast majority of the opposition to Schwarzenegger's proposal to blow up the boxes came from inside the Sacramento bureaucracy. Staying committed to that reform package by trying to roll back the more than 300 different state boards and commissions identified by the California Performance Review would have shown voters he's sticking to his end of the recall bargain.

Though Schwarzenegger has undoubtedly missed a golden opportunity, real government reform remains achievable if the governor can regroup, honestly digest where things went wrong and proceed differently. It's not his first loss � he didn't win every single bodybuilding event he ever entered, after all.

Democrats shouldn't boast too much about the "No, No, No, No" streaming from voters. The election was not a broad mandate against the governor. The Democrat-controlled Legislature's favorability ratings are, after all, even lower than those of the bruised Schwarzenegger.

In fact, the election conjures up images of the popular credit card commercial featuring comedian David Spade, where customer service agents are pre-programmed to say "no" to anything and everything.

Voters didn't say "no" to everything because California is perfect. This is still a state with a multibillion-dollar structural budget deficit, and there are plenty of real changes needed. Now, the real question is who is going to offer the solutions and accountability the electorate has demanded?

George Passantino is senior fellow in government reform at Reason Foundation and served as a director of Gov. Schwarzenegger's California Performance Review.

Plan Districts to Safeguard Democracy

george.passantino@reason.org (George Passantino) — Thu, 03 Nov 2005 00:00:00 EST

Los Angeles Daily News

The big USC-UCLA showdown is on the horizon, but imagine if there was a twist, and UCLA was allowed to choose USC's lineup. To maximize its own chances, UCLA would likely pick a lineup that would bench Trojan All-Americans like Matt Leinart and Reggie Bush.

While the concept seems absurd, that is pretty much how we let the political party in power pick and choose our legislative and congressional districts in California.

Proposition 77 would create a more competitive climate in elections by removing the ability of elected officials to essentially draw their own districts, handing the process over to a panel of retired judges. But unlike tilting the rules in college football, which would create a huge advantage for one team, redistricting does not guarantee the dominance of either major political party.

Consider the Republicans' fate following the contentious redistricting battle of 1991. Legislative Democrats submitted their favored maps to then-Republican Gov. Pete Wilson, who subsequently vetoed them. The California Supreme Court stepped in, appointing three special masters to craft a redistricting plan. And the fairness of that new plan would be seen in the following several election cycles.

By 1994, with the new districts in place, Republicans gained a slim 41-39 majority in the California State Assembly for the first time in more than 20 years, ending the long reign of Speaker Willie Brown.

But between 1994 and 2000, Republicans promptly lost 11 Assembly seats back to Democrats, actually placing them in a worse balance of power than before the fair redistricting plan. Many Republicans rightly blame the troubles of that period not on flawed district maps, but on a misguided and dysfunctional state party that lacked a cohesive vision.

Politics should be about serving your constituents, not computer-drawn maps that ensure success. It is now well known that in California's 2004 election cycle, every single congressional, Assembly and state Senate seat up for grabs stayed with the party that held it. It's hard to believe not a single seat changed parties at a time when voters were less than thrilled with the direction of the state.

But for many, politics has become about protecting power.

Republicans are supporting redistricting here in California, where they hope to pick up seats in the state Legislature, but are fighting the same concept in other states, like Ohio, where they are currently in a better position. Reform-minded California Assemblyman Joe Canciamilla, D-Pittsburg, is bucking many in his party by supporting the plan. "If we fail in this effort, we are providing a mandate for those who want to keep the status quo," he said.

Canciamilla knows that fair districts give voters a real chance to influence policy. And he knows the current hopes of an independent Mr. Smith going to Sacramento are a long shot, unless of course, Mr. Smith has millions of his own money to spend.

A neutral redistricting plan will help independent candidates by reducing the political dominance of special interests and party apparatchiks during the primary season.

In primaries, candidates do not need to appeal to cross-over voters or independents. Successful primary candidates focus on making a strong pitch to the political base within their party and its biggest supporters - usually powerful special interests groups. Candidates emerging from labor unions, for instance, tend to fare quite well in Democratic primaries because they bring a ready-made "base" with them to the polls.

In a more competitive system, without tailor-made district boundaries, candidates and platforms reflecting the diversity of our actual neighborhoods would be more successful.

The fact that partisans in both parties claim that changing the rules of redistricting will hamper their party's political fortunes reflects how the current system of drawing political boundaries has morphed into an exercise of political power. Meanwhile, most voters would agree that political boundaries should be drawn to protect democracy, not circumvent it for special interests and a few politicians.

George Passantino is a senior fellow in government reform at the Reason Foundation and served as a director of Gov. Arnold Schwarzenegger's California Performance Review.

California Needs Better Laws, Not More Government

george.passantino@reason.org (George Passantino) — Sun, 23 Oct 2005 00:00:00 EDT

Antelope Valley Press

What would the Vegas odds be on a "tough on crime" Republican governor vetoing a bill that is billed as stopping dangerous sex offenders from preying upon kids — a bill that passed the state legislature without a single "no" vote and is overwhelmingly supported by the victim's rights community?

No one with any political instincts would take that parlay, but if you did, enjoy your early retirement.

Gov. Arnold Schwarzenegger just vetoed a bill to create a new Sex Offender Management Board that would recommend how to manage, treat, and track more than 100,000 registered sex offenders in California.

Vetoing the bill seems like political suicide. But in a year filled with high political drama, Schwarzenegger finally took the kind of independent action that Californians thought they were getting when they chose him in the recall election.

The Terminator hasn't gone soft on crime; he's vetoed the very type of legislation that has enabled our state government to spiral and grow out of control in recent years.

The Sex Offender Board bill shows first hand that when our state politicians identify a problem, they often aren't out to actually solve the challenge. Instead, they prefer monument building — symbolic gestures to show they are serious.

In this case, a $1.5 million per year symbolic gesture — that's what the legislature's own fiscal estimates say the annual price tag of the Sex Offender Board could be.

"Until we take real action, the creation of just another government board may make some feel better but will not result in protecting our neighborhoods," Schwarzenegger said in his strongly worded statement vetoing the Board. He correctly pointed out the bill wouldn't help a single child or a single parent.

Instead of implementing tough on crime laws like Jessica's Law, proposed by Sen. George Runner and Assemblywoman Sharon Runner, most politicians want to hand out political appointments to their well-connected allies that will further weigh down the already deficit-riddled state budget. Californians don't need more government, we need better government.

The California Performance Review, Schwarzenegger's attempt to "blow up the boxes" of state government identified more than 320 unnecessary or duplicative boards, commissions, task forces, and other appointed bodies. In fact, the report could not even give a precise number of state boards or political appointees because there is no central inventory of these political bodies that oversee everything from boxing matches and hair salons to guide dog trainers and TV repair technicians.

For example, rather than having a single medical board in California that oversees medical practices, there are dozens of needless specialty boards - one for chiropractors, acupuncturists, hearing aid dispensers, occupational therapists and on and on. Each of these boards requires its own staff, overhead and other administrative costs.

The Performance Review proposed eliminating more than 100 boards, like the completely unnecessary California Athletic Commission that regulates boxing, even as every other sport is self-regulated.

Despite its merit, that bid seemed dead on arrival in the halls of state government, as was a separate Schwarzenegger-sponsored effort to eliminate 88 boards and commissions (including many that the Performance Review proposed keeping) that failed miserably earlier this year.

The wide range of special interests sitting on these boards called the reform efforts a �gubernatorial power grab', when in fact they were the ones desperately clinging to pieces of power they've grabbed over the years.

With many pundits questioning Schwarzenegger's chances in the looming special election, many proponents are clinging to the hope that the governor's Sex Offender Board veto means the promises of a smaller, more efficient government made during the recall campaign may come to fruition after all. The question now is - should they take that bet? Here's hoping they do.

George Passantino is a Senior Fellow with the Reason Foundation and served as a director on Gov. Schwarzenegger's California Performance Review. In 1996, Passantino served as the legislative director of California's version of Megan's Law�Public Notification about Dangerous Sex Offenders.

San Diego Pension Proposals Don't Do Enough

george.passantino@reason.org (George Passantino) — Tue, 23 Aug 2005 00:00:00 EDT

San Diego Union Tribune

San Diego's staggering pension shortfall of at least $1.3 billion — plus another $1 billion in unfunded retiree health benefits — should be in forefront of voters' minds when they cast their ballots for mayor. Pension reform is so critical that both Donna Frye and Jerry Sanders have made solving the mess a central plank in their mayoral campaigns. And while any positive steps on the pension disaster are good news for taxpayers, neither plan does enough, given the gravity of the crisis.

Both candidates' plans would have some helpful effects on the city's pension woes, but there are few reforms in either proposal that would actually produce the structural changes needed to prevent the crisis from re-emerging.

Candidate Frye has centered her pension proposal on the notion of putting the plan into receivership which would be overseen by an independent receiver who would then suggest a reorganization plan. Unfortunately, Frye doesn't offer any details on why type of reform she has in mind through this reorganization.

Sanders proposal has more meat, such as increasing the retirement age of city employees to make them more consistent with the private sector, negotiating with government employee unions to fund a larger share of the benefits through employee contributions and eliminating the so-called 13th check (a pension giveaway whereby the system writes checks to retirees if there are "extra" returns).

The severity of San Diego's fiscal crisis clearly calls for the mayoral candidates to push for changes that fundamentally alter the way that future employee benefits are managed, but both plans lack structural reforms and ignore the elephant in the room. Neither candidate addresses the obvious � shifting all new employees to individualized 401(k)-style plans would go a tremendously long way in preventing future pension disasters. The 401(k) plans still offer attractive retirement benefits to government workers, but they prevent lawmakers from making pension promises and deals they can't pay for.

While the powerful government unions will surely oppose a shift to 401(k)-style plans, taxpayers must remember the significant role that the unions' meddling played in creating the pension problem. Intentional underfunding, excessive — arguably illegal — benefit increases, and general mismanagement seemed to have union blessing throughout the crisis' build-up. And union complaints that a 401(k) plan is unfair or insufficient will likely fall on deaf ears with voters. After all, those voters likely have 401(k) retirement accounts. And it is appalling to taxpayers when they are asked to fund excessive guaranteed benefit plans for government workers, while being told that their own 401(k) retirement is not good enough for city employees.

The second fundamental problem is that current retirees and employees already in the system cannot be shifted involuntarily out of the defined-benefit system. Here, neither candidate proposes adequate protections against future benefit increases for existing city employees. Sanders proposed a limit on pension benefits as a fixed percentage of their salary that will offer little comfort to taxpayers because pension benefits are still subject to "spiking" (such as cashing in vacation or filing false disability claims). Frye's plan does even less. Under both plans, some city employees will still be able to earn pensions of more than $100,000 per year.

Fortunately, last week City Attorney Michael Aguirre offered a sensible idea to prevent this abuse by recommending that any future benefit increases require voter approval. San Francisco does the same. It is the height of irony that more conservative areas like Orange County and San Diego have massive deficits in their pension systems, but ultra-liberal San Francisco is fully funded because voters must approve pension benefit increases. Even San Francisco voters know excessive benefits when they see them.

The California Constitution says government officials must receive permission from taxpayers before borrowing large sums of money. Because pension commitments are basically ironclad, they effectively carry the same long-term legal obligations as general obligation debt and should be subject to the same requirements. Requiring voter approval of pension benefits would also help keep benefits at reasonable levels in the eyes of the San Diego taxpayer, who, after all, are paying the government employees' salaries and will ultimately foot the bill for their retirement.

If Sanders and Frye wish to offer genuine protections to taxpayers they should propose a shift to 401(k) retirement plans and push for Aguirre's San Francisco-style charter amendment demanding public approval of union pension increases. That one-two punch would put San Diego back on the road to fiscal health.

George Passantino is a senior fellow at Reason Foundation and co-author of the recent study How Government Pension Plans are Breaking the Bank and Strategies for Reform.

Reviving the Reform

george.passantino@reason.org (George Passantino) — Wed, 03 Aug 2005 00:00:00 EDT

Orange County Register

From seven Mr. Olympia titles to his role as "Conan the Barbarian" to his fleet of Humvees, Arnold Schwarzenegger has always been larger than life. This grand persona was even evident as he unveiled his massive California Performance Review plan a year ago today. Sadly, his follow-through on government reform has been less than Herculean.

To advocates of reform, the California Performance Review - Schwarzenegger's centerpiece effort to reform state government - was to be a watershed moment in state history. The performance review proposed a top-to-bottom reorganization of government, eliminating more than 1,100 political appointees, and recommended more than 1,400 policy reforms to improve and streamline how government operates. The plan was so ambitious that conventional wisdom said a special election would be needed to enact many of the reforms.

As months passed, talk of a special election grew but the governor's focus shifted to other reforms - redistricting, fixing the state's hemorrhaging taxpayer-guaranteed pensions for government employees, merit pay for teachers and a water-tight spending limit. California Performance Review reforms seemed, in comparison to these common-sense reforms, relatively insignificant and too "inside baseball." When the performance review's reforms didn't make the cut for the special election, many supporters still happily focused on the administration's new priorities.

But more and more holes quickly appeared in Schwarzenegger's "year of reform" election package. The water-tight spending limit that was promised morphed into a milquetoast plan that, while offering important mid-year budget-cutting authority to the governor, does not adequately confront the state's spending addiction. The desperately needed reform of taxpayer-backed pensions for government employees shifted from a publicly supported winner into a political fireball due to a drafting ambiguity. The promise to enact merit pay for teachers disappeared. And now, it is possible that the cornerstone of Schwarzenegger's reform agenda, his effort to reform how state political maps are drawn, may also fall off the ballot because of a drafting error.

It seems the "year of reform" offers little reform at all. Many are wondering, what, if anything, is Gov. Schwarzenegger willing to really fight for? If he is serious about reforming government and restoring the luster to his dulled political persona, Schwarzenegger must do two things.

First, he must resist the calls of critics, and some political allies, to dump the special election. While the momentum of the special election has diminished, there is still one mega-issue on the ballot that deserves Schwarzenegger's complete support. Paycheck protection, which would require government employee unions to get the affirmative permission of members to collect and spend dues for political purposes, now moves to center stage in the reform battle. The governor needs to be right there with it.

Second, Gov. Schwarzenegger is most effective when he acts like Arnold the bodybuilder - big, bold and committed to results. So he should dust off the performance review and select a few key reforms to move forward when the legislature returns in August.

California still owns golf courses, stadiums, beach houses and prime commercial real estate. An aggressive effort to sell off these properties could, according to California Performance Review estimates, generate as much as $4 billion.

There are still more than 220 boards and commissions in the executive branch with little accountability to the public. Some of the most egregious boards, such as the Integrated Waste Management Board, still pay more than $100,000 to their politically appointed members.

And the state still inexplicably has four tax collecting entities: the Franchise Tax Board collects personal income tax; the Board of Equalization collects sales tax, the Employment Development Department collects payroll taxes; and the Department of Motor Vehicle collects the car tax. Consolidating these functions would save money and improve service to the public.

Billions of dollars in reachable reforms exist for Gov. Schwarzenegger to pluck if he so chooses. Not only would it deliver real reform to California but it would serve as a call to his supporters, and the public at large, that he will follow through on his promises and fight for the reform he has talked about since his historic election. That is the Arnold we are looking for and the one we elected in 2003.

George Passantino is a senior fellow at Reason Foundation and served as a director of the California Performance Review in 2004.

How to Keep Pension Promises on the Road to Solvency

george.passantino@reason.org (George Passantino) — Tue, 21 Jun 2005 00:00:00 EDT

San Francisco Chronicle

The California State Teachers' Retirement System is facing a $24 billion deficit. Los Angeles County's pension shortfall is over $5 billion. Contra Costa and Orange counties and the city of San Diego are all facing unfunded liabilities of more than $1 billion each. Across the country and the state, the list of governments in the midst of pension woes is seemingly endless. The state's pension share has soared from $160 million in 2000 to an estimated $2.6 billion this year. Contra Costa's has grown from $70 million in 2001 to an estimated $177 million next year. The desire to provide retirement security for public employees has been transformed from a proud civic tradition to an anchor around taxpayers' necks. How did we get here?

While the goal of stable retirement income is certainly honorable, the system used to achieve it for government employees is a minefield of flawed incentives that encourages irresponsible behavior.

Lawmakers are free to dole out unnecessary, excessive benefit giveaways to score political points and curry favor with unions because taxpayers will shoulder the financial burden many years down the road, when the elected official has likely moved on. Similarly, union bargaining teams are fighting for increased retirement benefits for their members, regardless of the costs taxpayers will pay for those extravagant promises.

This is not an attack on unions or elected officials. It is a matter of fundamental human behavior: When people are allowed to make decisions without consequences, they inevitably make poor decisions. The state's traditional pension plans are particularly vulnerable to pandering and campaign promises that lead to foolish benefit increases. Perhaps the worst example of this occurred in 1999, when then-Gov. Gray Davis signed Senate Bill 400, ushering in huge benefit increases for many state employees. That one piece of legislation created an estimated $10 billion obligation over 20 years that the state, and taxpayers, clearly can't afford.

The increases cemented California's reputation for lavish pensions. In comparison to the retirement benefits that state employees in 15 other states receive, the nonpartisan Legislative Analyst's Office found California offers the highest retirement benefits and is "comparatively generous."

We need two key fundamental reforms to prevent these giveaways from happening again:

-- First, state and local governments should follow the lead of the private sector and shift all new workers to a defined-contribution, 401(k)- style plan that we are all familiar with. Under the switch, employees and employers (the government) would both contribute to an individual investment account. Upon retirement, the size of each public employee's pension would depend on the contributions made (including the employer match) and the personalized investment strategy the employee used. This way, the state could still offer attractive retirement plans, but lawmakers couldn't make promises they can't pay for.

-- Second, because shifting new hires to a 401(k) retirement plan is only a part of the answer (it doesn't prevent politicians and unions from racking up new debt through further, reckless retirement-benefit increases for existing employees), from here forward, all government employee pension benefit increases should require voter approval. The California Constitution says government officials must receive permission from taxpayers before borrowing large sums of money. Because pension commitments are ironclad, they effectively carry the same long-term legal obligations as general obligation debt and should be subject to the same requirements. San Francisco has such a requirement, and that's one of the big reasons it is not on the pension debt list with Contra Costa County, which lacks the measure. Voter approval of pension benefits would also help keep benefits at reasonable levels in the eyes of the taxpayers, who, after all, are paying the employees' salaries and will ultimately foot the bill for their retirement.

Until fundamental reform of the government pension system is achieved, our state and local governments will continue to rack up billions of dollars in pension debt that will crowd out investment in other quality-of-life priorities such as schools, roads and law enforcement. A 401(k) plan for new hires would still allow governments to attract bright workers, but it would force politicians to fund it now, not on the credit card. And asking voters to OK benefit increases would discourage political giveaways.

It is time to return retirement policy to the status of worthwhile civic investments, rather than a shopping spree of political handouts.

George Passantino is a senior fellow of government reform at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.

The Gathering Pension Storm

Thu, 16 Jun 2005 18:00:00 EDT

Executive Summary

An ominous storm cloud is gathering across the horizon as American governments try to pay for the lucrative pension promises made to their employees. And these clouds are not just over a few skies. They are virtually everywhere. Government employee pension systems across the nation are in crisis.

The city of San Diego is now embroiled in its worst financial crisis ever with more than $2 billion in unfunded pensions and retiree healthcare costs. The financial mismanagement led TIME Magazine to name Mayor Dick Murphy one of the nation’s three worst mayors, and eventually resulted in Murphy’s resignation less than five months into his second term. In Illinois, taxpayers face a $35 billion pension deficit—the worst in the nation. The state of West Virginia faces a $5.5 billion pension deficit and an additional $3.3 billion in unfunded workers’ compensation liabilities—a deficit nearly three times the state’s annual $3.1 billion general fund budget. And in California, where government pension funds have become synonymous with investment activism, the California teachers’ retirement system faces a $24 billion shortfall and the state pays more than $3 billion each year to keep its retirement funds afloat.

For each government pension system in crisis, another dozen could be listed, as this is clearly a national, systemic problem. Combined, taxpayers are exposed to more than $350 billion in unfunded pension liabilities.

The recent downturn in the stock market is often blamed for these shortfalls. After all, the market suffered a sharp decline beginning in 2000. But is this a fair defense or is it an incomplete answer provided by government officials hoping to rationalize the major run-up of government debt? This report will explore that question.

While market losses certainly played a role, the declines only unveiled the weaknesses in government pension systems—weaknesses previously masked by the historic investment gains of the late 1990s. The fact that a retirement system could turn so quickly from investment nirvana to debt nightmares should give taxpayers and lawmakers cause for major concern. Moreover, blaming the market ignores the many policy decisions that have created the crisis.

At the heart of the pension crisis is a set of incentives that encourages policymakers to make decisions for which they do not have to bear the consequences. Since corporate executives, lawmakers, and union officials will not bear the costs of the benefit increases they preside over, there is no incentive for them to show fiscal restraint.

The “defined-benefit” pension plan, also referred to as the “traditional” plan, guarantees employees a pre-set benefit upon retirement that can easily be changed by lawmakers. The amount of the benefit is calculated by multiplying a fixed percentage by the number of years that the employee worked for the firm or government agency by the employee’s final compensation (or some average of the employee’s highest earnings). The employer invests money to ensure that these promises can be kept. If the investment returns do not match up, taxpayers are obligated to make up the difference. Alarmingly, once benefits are bestowed via a definedbenefit plan, the courts have ruled they cannot be taken away.

Because of this reality, taxpayers have been abused to promote political agendas that promise extravagant retirement benefits to government workers—even as the taxpayers themselves must work longer to prepare for their own retirement. Significant benefit increases, such as “3 percent at 50” plans, have proven themselves unsustainable. These excessive benefit levels and a variety of government policies have encouraged premature retirement and pension spiking, driving up costs even further. And as courts have ruled, they cannot be rescinded.

The mistake of offering greater benefits that governments cannot afford is regularly compounded by poor financial planning. The lack of long-term averaging of investment returns leaves governments susceptible to volatile swings in pension contribution payments. The issuance of pension obligation bonds is little more than an expensive gamble that will saddle taxpayers for years to come. And the very assumptions on which these pension promises are theoretically built can easily be manipulated to the taxpayers’ demise. For instance, if a pension fund assumes an overly generous rate of return on its investments or understates the full actuarial costs of benefits, the taxpayers are exposed to a significantly greater risk.

Over the past several decades, the private sector has rapidly shifted away from defined-benefit plans and toward defined-contribution plans for good reason—traditional plans are expensive, unpredictable, and unsustainable in the long run.

The government has been slow to follow the private sector’s lead. But this is not only a reasonable course of action for governments—it also represents significant benefits to workers too.

As the name implies, the main difference between defined-contribution pension plans and defined-benefit plans is that defined-contribution plans spell out the level of contributions employers and employees will make to the retirement system—not the level of benefit they will receive at retirement. Instead, the level of benefit the employee receives upon retirement depends on the performance of his or her investment portfolio, as well as his or her level of participation. Employees bear the risk of their investments but also get to maintain control of these investments.

One of the greatest benefits of a defined-contribution plan, from a government employer’s perspective, is that it provides a great deal of stability since contribution levels are known in advance and do not change much from year to year. This is a sharp contrast to the volatility in contribution levels experienced under defined-benefit plans.

While the stability/predictability argument offers one of the strongest practical benefits of definedcontribution plans, perhaps the greatest moral benefit is that it allows employees the freedom to manage their own retirement accounts and invest their own money as they see fit.

Defined-contribution participants have the freedom to invest their money as they choose and the critical ability to take that entire investment with them from job to job—something defined-benefit plans lack. This portability is extremely appealing to employees in an age where the average worker switches jobs numerous times during his or her career.

Moreover, risk levels and investment strategies change with age and defined-benefit plans allow for that. Defined-contribution plans allow employees to choose more aggressive investments when they are young and switch to more conservative investments as they approach retirement.

Under a defined-contribution plan, lawmakers can still make very appealing retirement packages, including attractive matching options. The defined-contribution plan structure simply requires that these costs be recognized and dealt with in the current year as one of the government’s many priorities. Definedcontribution plans prevent lawmakers from creating actuarial liabilities by pushing hidden costs off into the future. This should be reason enough for taxpayers to embrace such a reform.

In addition, there are numerous other steps governments must take to address the pension deficit problem and improve overall financial management of the state to ensure that the current pension crisis does not have a spillover effect. This study presents opportunities for reform within the current pension fund environment.

It is time that governments learn what the private sector concluded decades ago: that defined-benefit plans, typified by exorbitant benefit levels, are simply unsustainable. They should adopt the private-sector model and switch to defined-contribution systems for all future government workers to ensure more responsible fiscal management that rightly places a focus on providing high quality services. While few governments have made the leap, a number are moving in that direction. This report explores that shift and offers new insights on how it can benefit taxpayers, government agencies, and government employees alike.

The Role of Public-Private Partnerships in California's Transportation Future

george.passantino@reason.org (George Passantino) — Tue, 17 May 2005 15:19:00 EDT

Mr. Chairman and Members,

I thank you for the opportunity to be here today.

My name is George Passantino and I am Director of Government Reform for the Reason Foundation. I am here today to speak about public-private partnerships in transportation and the role that they may play in California’s transportation future.

Before I make a couple of brief points I wanted to put the challenge we face as a state into clearer context.

Everybody realizes the severity of the transportation crisis we face now though few realize how much worse it is likely to get.

Between now and 2030, the rough equivalent of the population of the state of Florida in the last Census—around 16 million people—will move to California. If you think things are bad now, imagine how bad things will be in 25 years when the state has 50 million people. Our only hope is to start working toward realistic solutions today.

Now, just last week, Governor Arnold Schwarzenegger announced his intentions to restore Proposition 42 funding to the state budget. While this is to be applauded, because these monies can fund desperately needed improvements to existing roads, reconfigure some intersections, and the like, restoring Prop. 42 should not be mistaken for a long-range transportation solution.

When you look around California, you can see critical “mega projects”—desperately needed capacity expansions beyond what traditional means can deliver—across the state.

This is important because whenever we talk about public-private partnerships, people get hung up on “toll roads” as though those are the only kinds of facilities we are talking about. Let me try to broaden your operating definition a bit.

A variety of projects become possible through public-private partnerships—projects that might otherwise never be built:

Dedicated goods movement facilities from the twin ports of Los Angeles and Long Beach, up through the Inland Empire and on to the Nevada Border—or across the Antelope Valley. These facilities would not only facilitate goods movement but make our roads safer by getting big rigs into dedicated lanes.
Networks of congestion-free lanes in major urban areas, following on the heels of what Gary Gallegos and SANDAG are doing down in San Diego. We have calculated that a public-private partnership could quadruple the size of their plan for the same amount of taxpayer money.
Desperately needed alternate routes from the Inland Empire into Orange County or from the Antelope Valley into the Los Angeles Basin. Given their multi-billion-dollar price tags, they will likely never be built using traditional financing mechanisms.

California is clearly beyond tinkering—we need major work! Though not a panacea, public-private partnerships are a critical component of that effort.

There is a global market awash in capital eager to invest in these large-scale transportation projects. Billions upon billions of dollars are going all around the world and into other states—high growth states that we are competing with for jobs and economic development—but not California because we have no authority to enter into these agreements.

I also want to address one likely area of concern. Some groups, particularly public employee unions, will attack public-private partnerships because they see them as taking their “piece of the pie.” This is shortsighted and wrong.

Public-private partnerships fund a GROWING PIE—and in the process can bring more money to the table for public sector transportation projects too.

The best illustration of this can be found in Texas where the Spanish firm Cintra has entered into an agreement to construct the first segment of the Trans-Texas Corridor for $6 billion in private funding. But on top of that, they are also paying the Texas Department of Transportation $1.2 billion in franchise fees, which will be used by TxDOT to do additional highway construction. In other words, the state department will have more money in house to build roads than they otherwise would have.

If California had the same kind of legislation, CalTrans could also see new monies for new projects that otherwise might never be available. These new monies would be available because of partnerships, not in spite of them.

With those brief remarks, I strongly encourage you to look closely at the role public-private partnerships can play in California’s transportation future and I am happy to answer any questions you may have.

Thank you.

Billions of Reasons to Reform Pensions

george.passantino@reason.org (George Passantino) — Sun, 17 Apr 2005 00:00:00 EDT

Orange County Register

Just five years ago, California paid $160 million to support the retirement costs of state workers. This year, the state will kick in more than $2.6 billion, more than a 1,500 percent increase in five years. And by 2009, the taxpayer bill for state retirement costs is projected to hit $3.5 billion per year.

Despite the obvious fiscal dangers of this explosive growth, Gov. Arnold Schwarzenegger's efforts to reform the pension system have run into a buzzsaw of opposition from angry public employee unions.

The governor's critics claim lucrative pension plans for government workers are needed because government jobs pay less than private sector jobs, and without these high-paying pensions, the state would have to significantly raise salaries in order to attract a high-quality work force.

But according to the U.S. Bureau of Labor Statistics, the average wage for state and local government employees is $23.52 per hour, easily topping the $16.71 private-sector employees earn per hour. When you include benefits in the equation, state and local government employee compensation jumps to $34.13 an hour. In fact, a government employee - without benefits calculated - earns more ($23.52) than a private-sector employee with benefits included in their compensation ($23.41).

In comparison to the retirement benefits that state employees in 15 other states receive, the nonpartisan Legislative Analysts Office found California offers the highest retirement benefits and is "comparatively generous."

But let's set these facts aside for a moment. Even if new strategies are needed to recruit the future state work force, relying on pension promises to lure them in is arguably the most irresponsible way of doing it. When government pension promises are made, they are carved in stone. Unlike salaries which can be frozen or otherwise adjusted to cope with budget shortfalls, pension benefits are forever. That's because courts have repeatedly ruled that once enhanced benefits are bestowed upon state employees, they can never be reduced.

Equally troubling, the state's traditional pension plans are vulnerable to election-year pandering and campaign promises that lead to irresponsible benefit increases that taxpayers are forced to finance without any say in the decisions.

Perhaps the worst example of this occurred in 1999, when then- Gov. Gray Davis signed Senate Bill 400, ushering in massive benefit increases for many state employees. That one piece of legislation created an estimated $10 billion obligation over 20 years that the state, and taxpayers, clearly can't afford. However, unlike a state-issued bond, the taxpayers didn't get to vote on it - they were just handed the bill while Davis handed out gifts.

Over the past several decades private companies have increasingly concluded that "paycheck for life" pension guarantees are too risky and unsustainable. Businesses have shifted to the defined-contribution 401(k) plans that we are all familiar with. California needs to learn that lesson too and move to a system that prevents lawmakers from running up new unfunded liabilities.

Shifting new state workers to a 401(k) plan would stabilize the state's skyrocketing pension costs, while still allowing state workers to retire with dignity. Schwarzenegger's proposal would put newly hired state workers in 401(k)-style accounts that the employee contributes to, with the state also contributing a portion. Upon retirement, the size of each employee's pension would depend on the contributions made and the personalized investment strategy the employee used — unlike today's guaranteed pensions that can pay many state workers 80 percent to 90 percent of their annual salaries for life.

This way, the state could still offer attractive retirement plans, but lawmakers couldn't make promises they can't pay for.

Last spring, Schwarzenegger pledged to tear up California's credit cards, and most of the Legislature actually said that was a good idea. If lawmakers are sincere in their effort to restore fiscal stability, they need to tear up the defined-benefit pension credit card as well - it's the one hidden in the back of the wallet that continues to wreak billions of dollars of havoc on the budget.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.

Ending CA Gridlock Requires Compromise

george.passantino@reason.org (George Passantino) — Fri, 01 Apr 2005 00:00:00 EST

Los Angeles Daily News

Imagine all of the residents of Florida piling into moving vans and relocating to California. Over the next 25 years, California's population is expected to increase by 16 million -- roughly Florida's population in 2000.

In 2002, the average Los Angeles motorist wasted 93 hours sitting in congestion, up from 47 hours in 1982, according to the Texas Transportation Institute. And now the Daily News reports new census-data estimates that Los Angeles residents spend 240 hours a year — or 10 full days — commuting.

If we think we sit in traffic now, just wait until all of Florida joins us.

Gov. Arnold Schwarzenegger and legislative Democrats have recently offered answers to the problem. Schwarzenegger is focused on the state's long-term needs, building new highways and adding new capacity through public-private partnerships and tolls. But the governor also continues to raid much-needed Proposition 42 transportation funds.

Passed in 2002, Proposition 42 was supposed to ensure that the state's portion of gasoline sales taxes actually goes to transportation projects. Instead, the money continues to plug other holes in the budget. Many Democrats in the Legislature argue that if they can just fix Proposition 42, everything will be OK.

They should fix it, but Proposition 42 shouldn't be mistaken for a long-term transportation solution. Yes, billons of dollars have foolishly been siphoned away from transportation. The money Proposition 42 generates might rebuild congested interchanges, but it will not add the major new capacity California needs to cope with future growth.

With 16 million people on the way, the reality is that new toll roads are infinitely better than no new roads at all. Some key Democrats have seen the big picture and realize that the state simply cannot afford to build the new highways needed in coming years. Working with Schwarzenegger, Democratic Assemblyman Joe Canciamilla, D-Pittsburg, introduced a bill that would allow public-private partnerships to build new roads, with the financing recouped through tolls.

As a result, the standard, tired argument against tolls — that they're "Lexus lanes," exclusively for rich drivers — is re-emerging. The data from the San Diego and Orange County high-occupancy toll lanes, however, show that most drivers are ordinary, middle-income people who use the toll lanes occasionally, when they really need to get somewhere on time and it's worth it to them to pay the toll. As for those few drivers who use the lanes every day, they are paying a significant amount of the cost of valuable public infrastructure that everyone benefits from and that would otherwise not get built.

High-occupancy toll lanes, with variable tolls that guarantee the lane is always moving at the speed limit, offer several benefits: Every driver has "congestion insurance," the peace of mind of knowing that when you absolutely, positively have to get somewhere on time — to catch a flight, to pick up your child at day care, etc. — you can pay to get into an uncongested lane. Emergency vehicles always have a way to get through traffic quickly, and transit agencies have an uncongested system for regionwide express bus service far superior to today's mix of congested freeway lanes and car-pool lanes.

Consider the possibilities: A lane that always moves at 65 miles per hour on U.S. 101 from Woodland Hills to downtown Los Angeles, or a free-flowing lane on Interstate 405 from Van Nuys to Los Angeles International Airport, or a toll tunnel to complete the missing link on Interstate 710 beneath South Pasadena.

If ever an opportunity for a compromise between Schwarzenegger and the Legislature existed, this is it. Schwarzenegger should work with Democrats to protect Proposition 42 now. Instead of continuing to loot transportation funds, the governor could fill that budget gap with savings from the policy recommendations of the California Performance Review. Even the Legislative Analyst's Office, which thought the plan's cost-savings were overstated, believed that the recommendations could save the state $10 billion to $15 billion.

With the transportation funds protected, Democrats should get behind Canciamilla's bill and Schwarzenegger's plan by acknowledging that the state simply cannot afford to add the new highways that will be needed in the coming decades — unless it turns to the private sector for financing. World-class cities like Paris and Sydney are already using this approach to great success.

By compromising, both sides could declare victory, and California would actually have a shot at building a transportation system that deals with both the short- and long-term funding challenges.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.

Priority Colorado

Tue, 01 Feb 2005 00:00:00 EST

...

The Bodybuilder's Guide to Government Reform

george.passantino@reason.org (George Passantino) — Fri, 19 Nov 2004 00:00:00 EST

California Political Review

November 19, 2004 — Arnold Schwarzenegger's best-selling New Encyclopedia of Modern Bodybuilding has inspired up-and-coming body builders the world over — providing practical advice on everything from nutrition and workout regimens to psyching out your opponents and effective posing. Who would have thought that it would also inspire me as I served as a director of Governor Schwarzenegger's historic California Performance Review, a project aimed at cutting the flab of state government?

In the Encyclopedia, Schwarzenegger describes how, if you apply a 15-horsepower load to a 10-horsepower motor, the motor will eventually burn out. In contrast, over time the human body will change from a 10-horsepower motor into a 15-horsepower motor, getting stronger to achieve greater results.

We should think of government the same way, which is why the California Performance Review is so important.

In recent years, state expenditures have routinely outpaced state revenues. We are told that our only choices in confronting this imbalance are to raise taxes or cut vital services and watch our quality of life erode. This mindset treats government like a motor that is static and can only produce X amount of services for Y amount of taxes.

The bodybuilding philosophy of state finance, by contrast, sees government like the human body: dynamic, resilient, and able to become more efficient, doing more with less. Using this framework, the California Performance Review is a tour de force directly confronting business as usual, and offering up a healthy lifestyle change to the Sacramento status quo. The report identified $32 billion in savings that can be achieved over five years.

As with bodybuilding, the worst pain of government reform comes with getting rid of the initial flab, and there is plenty of that in California. And this difficult process of change is the reason that many special interests in Sacramento are concerned about CPR. Getting on the treadmill is uncomfortable — particularly when you are so comfy on the couch. But by applying the key lessons of bodybuilding, we can build a leaner, healthier, more efficient state government.

Accountability I: Everyone's In Charge; No One's In Charge

One of the most important steps in bodybuilding is accepting responsibility for your lifestyle and diet, closely monitoring what you do, and then changing it. There is an old saying "what gets measured gets done." That is why so many bodybuilders write down everything they eat in the course of a day and track their workouts with equal detail.

The old saying is true for government as well. Ensuring the greatest bang for the taxpayers' buck requires that government decisions and actions be transparent and that actual performance brings consequences and rewards. Several CPR proposals incorporate this vision and are intended to increase accountability in government.

Currently, state government's executive branch consists of 11 agencies, 79 departments, and more than 300 independent boards and commissions. This structure scatters accountability and confuses lines of authority. Take the state entities responsible for critical infrastructure (roads, water, power) as an example. More than 30 of them are directly involved in this function, yet no single person can be held accountable for ensuring long-term planning and management of infrastructure. Lots of people are responsible: so many, in fact, that nobody is accountable. CPR identified situations where overlapping responsibilities and duplication of authority has resulted in two state entities spending thousands of legal hours suing one another. The idea of state agencies suing each other is appalling. No matter who wins in court, the taxpayer is certain to lose.

Confronting these challenges head on, the CPR proposal collapses the existing structure into 11 departments aligned along quality-of-life priorities. Each department is given a clear mission and areas of responsibility. Under the CPR model, infrastructure would be consolidated into a single entity led by a secretary directly accountable to the governor. Public Safety would be similarly consolidated, and so on. As the CPR report notes, "If a program is failing Californians, good government demands that blame be easy to affix and hard to deflect."

Accountability II: Justifiable budgets

CPR also proposes fundamental changes in how California government budgets its tax dollars. The process currently could be characterized as "baseline" budgeting: previous years' spending levels are used as the baseline and hence, assumed to be good investments. CPR proposes shifting to "performance-based budgeting" whereby programs are measured each year for what they achieve. That performance information, in turn, informs the level of spending. Under this approach, programs that fail to achieve their goals and, hence, contribute little to the state's quality of life, much like fatty foods and empty calories, can be more easily targeted for elimination or reduction.

Similarly, CPR proposes bringing more accountability to the way the state manages and motivates its public employees. Shockingly, under current practice, more than 99 percent of state employees eligible for consideration for a "merit raise" receive it. Whenever this merit raise is denied (which happens rarely), employees may appeal the decision, which, in most cases, is overturned. State managers complain that it takes as much documentation to deny a merit raise as it does to demote an employee.

Competition

In his Encyclopedia, Schwarzenegger emphasizes competition as a powerful force that anyone can use (as he uses on himself) to bring out the very best effort possible. Similarly, in the delivery of public services competition can lead to improved performance and lower costs. The CPR report includes several proposals to do just that. Among them is creation of a Competitive Government Panel to identify opportunities and barriers to competition and then implement and oversee competitive efforts.

The report also recommends ending the monopoly that has been granted to the Prison Industry Authority over state purchases. As it stands, all state agencies are mandated to purchase from the PIA all products that they provide. Waivers to this monopoly are only granted by the PIA themselves and the desire to attain a lower price is not a valid reason for such a waiver. As a result, state agencies overpay for products they could purchase for much less on the competitive market. In a 1993 report, the Little Hoover Commission, the state watchdog agency, declared that the Prison Industry Authority was "holding state departments hostage to high prices and delayed deliveries."

Much like the bodybuilder that gets a better pump and performs better because of competition, state government can pump up by breaking down artificial barriers to competition.

Innovation

Bodybuilders also routinely try new, innovative workout strategies to build the strongest bodies and target muscle groups in different ways. California needs a similar workout routine that uses new approaches to delivering services to the public. Bodybuilding technology and science has changed dramatically since the days of legendary bodybuilder Bill Pearl. Competitors that relied on the old approaches of the 1950s could not compete in the modern world. The same holds true for government. The world around us has developed while government has changed very little for decades.

For instance, while Californians can renew their vehicle registration online, they are unable to renew driver's licenses that way. As a result, approximately 1 million drivers will stand in line at a DMV field office to renew their drivers' licenses this year. Not only does this add to the expense of the renewal process, it is also a backward model for serving DMV customers: the citizens of the state.

Similarly, CPR proposes a unified connection with the public for state information. Rather than wading through hundreds of toll-free numbers, CPR envisions a single number, a single web portal.

Thirty-four percent of the California state workforce is eligible to retire within the next five years. To help cope with this new reality, CPR recommends leveraging technology and improving customer service as the pool of state workers may decline in coming years.

The Time is Now

For many years, California has lurched from crisis to crisis — electricity, budget, workers' compensation. Sadly, elected leaders have not focused on fundamental state government reforms the past several years, instead doing little more than attempting to put off problems while the state's health has declined steadily.

Seeing this trend, Schwarzenegger embarked on a comprehensive review of state government when he launched the California Performance Review. The report that resulted from that effort now sits on his desk.

In many ways, CPR is like a membership to a gym, complete with a comprehensive nutritional discipline and workout plan. But like all bodybuilding strategies, they only work if you develop the discipline to stick with them.

Now we wait to see if Sacramento has that discipline to reform itself. Even "Girlie Men" couldn't ask for a better trainer.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.

What Schwarzenegger Didn't Do

george.passantino@reason.org (George Passantino) — Fri, 08 Oct 2004 00:00:00 EDT

Los Angeles Times

One year ago Thursday, amid record-setting budget woes, California voters did the unthinkable and recalled a sitting governor with extensive public experience, replacing him with a celebrity. So how do things look now?

Clearly, Gov. Arnold Schwarzenegger has fought hard to attract jobs and economic development to the state. He has traveled to other states, recruiting businesses to come to — or return to — California. He also vetoed a number of bills that would have further undermined the state's still-recovering economy, including a minimum-wage increase. Perhaps most important, he resisted tax increases.

Moreover, Schwarzenegger demonstrated how his popularity and celebrity can help shape policy. By threatening to run a ballot initiative that would dramatically alter the workers' compensation system, he cajoled the Legislature to compromise and adopt a number of needed reforms.

However, efforts to restore the state's fiscal stability have not been as successful. The legislative analyst's office still estimates the state budget deficit to be at least $6 billion for each of the next two years. And although the Wall Street credit agencies have increased the state's credit rating (something that wouldn't have happened without the recall), California's ratings are still among the lowest in the nation.

Adding to the downside, Schwarzenegger's attempts to implement a watertight limit on spending died in the Legislature, though voters did approve important limits on borrowing.

Schwarzenegger's "to do" list for the coming year must make terminating the state's ongoing fiscal crisis his No. 1 priority. For starters, he should focus on overhauling the state's organizational structure and reeling in an out-of-control state personnel system.

You don't have to dig very deep to understand why the state's structure needs to change: California maintains four separate tax-collecting entities — a job that could be done by one.

In another illustration of the state's wasteful duplication, the Department of Personnel Administration and the State Personnel Board have spent taxpayer dollars and several thousand legal hours over the last few years battling one another in court over which entity has authority for various aspects of the personnel process.

The recent 2,500-page California Performance Review identified $32 billion in potential savings over five years, including eliminating more than 100 boards and phasing out 12,000 government jobs through attrition and retirements. Now that the plan has been evaluated at public hearings across the state, the review commission will meet Oct. 20 to assess the suggestions. Once the report is in, the governor should quickly implement a comprehensive reorganization plan.

Schwarzenegger will also need to focus on fixing a personnel system that grew rapidly under Gov. Gray Davis and continues to reward everyone. The California Performance Review panel found that more than 99% of state employees eligible for a "merit raise" received one — meaning actual merit is not rewarded. The governor should pioneer new ways to motivate public employees through actual merit-based pay systems, empowering them to cut bureaucratic red tape.

The city of San Diego's underfunded pension plan has grabbed national headlines recently. To avoid a similar crisis in the state's pension system, Schwarzenegger can revamp it by following the lead of the private sector and shifting away from expensive and risky "defined benefit" plans that pay a guaranteed, formula-driven wage to retirees.

Moreover, Schwarzenegger should make it clear that he will veto any new pension benefit increases until the system is on stable footing.

To ensure the state's future, Schwarzenegger may need to continually leverage his broad public appeal to pressure the reform-phobic Legislature into action. For now, he needs to set his sights on long-term solutions to the state's continuing budget deficit and fiscal crisis. After all, that's what the recall was all about.

George Passantino is director of government affairs at Reason Foundation. He served as a director on Gov. Arnold Schwarzenegger's California Performance Review.