Radio Whisperer

For people within radio listening distance of San Jose, I’ll be talking about California’s various crises on Friday night, May 4, 7:00 p.m., as Russell Hancock, President and CEO of Joint Venture Silicon Valley, interviews me on Inside Silicon Valley on KLIV 1590. The show repeats at noon on Sunday, May 6.

Update on Monday, May 7, 2012 at 12:29PM by Mark Paul

The interview is now available as a podcast at Joint Venture Silicon Valley’s website.

Ann Ravel's Scarlet Letter

Ann Ravel, chair of the California Fair Political Practices Commission, recently announced that she wants to require bloggers to disclose whether they have received payments from political campaigns. The proposal to affix a scarlet letter on a class of political speakers raises a number of questions.

1. The Internet is global. The commission’s jurisdiction is limited to California. If campaigns find it useful to make payments to online sock puppets, won’t they funnel the dollars to bloggers living outside the state? Do we want to send jobs out of California?

2. Who is a blogger? Is it anyone who puts content online, including employees of corporate media outlets? Is columnist Dan Walters, who writes on the Sacramento Bee’s blog in addition to the newspaper, a blogger subject to disclosure? Or is it just independent writers like me when we post online? Would the disclosure rule apply to posts on Twitter? To videos posted on YouTube or Vimeo? Would someone on the payroll of a campaign have to disclose that relationship on her Facebook page before she could “like” a candidate?

3. Much online political speech is anonymous, part of a great American tradition that most famously includes The Federalist, signed by “Publius” but written by Madison, Hamilton, and Jay. The U.S. Supreme Court has ruled that anonymous campaign speech enjoys broad protection under the First Amendment. “[A]n author’s decision to remain anonymous, like other decisions concerning omissions or additions to the content of a publication, is an aspect of the freedom of speech protected by the First Amendment,” the court wrote in McIntyre v. Ohio Elections Commission. California’s own courts, citing the state constitution’s broader protections of free speech, voided a state law prohibiting anonymous campaign speech. To enforce a payment disclosure rule against bloggers, wouldn’t the state of California have to attempt to pierce the anonymity of any unsigned online commentary to determine if the speaker’s identity matched any person who has received payments from any campaign? Would online service providers violate the privacy of their customers to cooperate with the state’s efforts to pierce anonymity? And if the state is, as a practical or legal matter, unable to enforce its disclosure rule against anonymous political speech, wouldn’t campaigns that wished to use blogger payments to spread their messages concentrate their dollars on anonymous blogs, thereby defeating the rule and leading to less responsible and accountable campaign speech?

4. What kinds of content would trigger the disclosure? Any sort of favorable comment about a campaign or critical comment about a rival campaign? Links to news reports favorable or damaging to a campaign? Or only flat-out statements saying “Vote for candidate or Measure X?” Would the Indian-American campaign worker who recorded and posted the explosive video of 2006 Virginia Senate candidate George Allen calling him “macaca” have had to disclose his connection to the rival candidate? That worker was an unpaid volunteer. Would that have exempted him from disclosure? What rational basis is there for distinguishing between a paid and unpaid campaign worker?

5. Ravel says the disclosure requirement would apply to direct money payments, not payments received for market-rate advertising. But what is market rate? A campaign may be rationally willing to pay higher rates on a well-respected political website than another advertiser selling widgets might. Is the FPPC going to become not just the nanny of online political speech, but the arbiter of ad rates?

6. And why aren’t market rate ads a concern? The most important thing in advertising is not price but getting the sale. As Joe Mathews reveals, the Meg Whitman campaign offered to place ads on his blog in 2010 after he wrote a critical post. He regarded the offer as a “clumsy bribe,” and that was, no doubt, Whitman’s intent. If both a journalist and a campaign regard the placement of a market-rate ad as a potential influence on speech, why should Ravel ignore that evidence? It is a universal truth that advertisers influence the content of media businesses dependent on advertising revenue. Anybody who’s ever worked for a media business will tell you that news organizations do not dig as deeply into their advertisers’ affairs as they do for non-advertisers. How many newspaper editorials have you read questioning the state laws that inhibit competition in auto and real estate sales? If advertising revenue can affect the content of speech as readily as direct payments, is Ravel’s proposed loophole for market-rate ads her way to keep media companies from loosing their First Amendment lawyers on her proposal?

7. How would California justify a rule requiring bloggers, but not other political speakers, to disclose their financial entanglement with a campaign? It is not unusual for a politician to agree to throw his support to a candidate for governor because he has received a promise of some value for that endorsement, whether the promise is a position in the administration or the candidate’s support for a project, candidacy, or issue close to the endorser’s heart. What rational justification is there for requiring a lonely blogger to disclose a $50 payment while exempting the politician who offers his endorsement, online or elsewhere, in return for a quid pro quo worth far more?

8. Ravel’s proposed rule is a variety of compelled speech in campaigns. Such compelled speech raises major First Amendment issues. “There is certainly some difference between compelled speech and compelled silence, but in the context of protected speech, the difference is without constitutional significance, for the First Amendment guarantees “freedom of speech,” a term necessarily comprising the decision of both what to say and what not to say,” the U.S. Supreme Court wrote in Riley v. National Federation of the Blind of North Carolina, Inc., a case in which it struck down a law requiring professional charitable fundraisers to disclose how much they skimmed off charitable donations for their own operations. State restrictions on campaign speech are permissible only if they are “narrowly tailored to serve an overriding state interest,” the court has ruled. What “overriding state interest” justifies compelling some speakers in election campaigns to wear a scarlet letter?

Ravel says that the rule is needed “in order for people to really know whether they can have faith and trust in the independence of recommendations they are receiving” from online sources. But her rule cannot possibly accomplish that.

Where exactly does she find campaign recommendations in which voters can “have faith and trust?” For every campaign-paid sock puppet who posts online, there are multitudes of persons providing online content supporting or opposing candidates or measures who do so out of ideology or perceived economic interest. What evidence is there that the postings of the wingnuts and moonbats are more worthy of “faith and trust” than those of the sock puppets? I doubt that anybody who has spent any time with the Internet believes any such evidence exists. On what basis, then, can the state stigmatize some political speakers with a scarlet letter that says, in effect, don’t trust this person? Nothing in the Constitution or law says that people who venture online have a right to encounter only politic virgins there.

At the heart of the First Amendment is the idea that the truth arises out of a clash of argument and evidence and that the test of the validity of speech is its quality, not the identity or interests of the speaker. The core principle of free speech is that the state may not dictate the content of speech nor stigmatize particular speakers. Ravel’s proposal is a measure of how much so-called “good government” reformers hate democratic politics and the robust and rambunctious exercise of liberty.

thecaliforniafix

Clean Money = More Polarization

Can we fix the California Crackup using "clean money"?

That's one of the questions Joe Mathews and I have been asked most frequently as we've talked around the state in the last year. Our answer, based on anecdotal evidence from Arizona, has been "no." We tell them that Arizona's so-called Clean Money system, which provides public funding to candidates who can round up a threshold number of small donors, seems to have promoted the election of more ideologically extreme legislators.

Now there's evidence to back up our impressions. At his blog Enik Rising, political scientist Seth Masket reports on and links to a study he and Michael Miller have conducted to measure the effect of the Clean Money systems in Maine and Arizona, the two states to adopt the campaign finance scheme favored by many reformers.

Their findings? Clean Money systems result in the election of more extreme candidates leading to increased polarization in state legislatures, an effect that decreases as those candidates get socialized/disciplined by party leaders.

Once again, a "reform" touted as a solution to our problems turns out to make them worse. Surprise, surprise.

The Public Pension Trap

San Diego’s Independent Budget Analyst has released its projections of the fiscal impact of Proposition B, the pension reform initiative on the city’s June 2012 ballot. It finds that the pension reform provisions of the measure would save taxpayers exactly no money.

Let me repeat that.

Proposition B would close San Diego’s pension plan to all new city employees except police. Future hires would be enrolled instead into a new 401(k)-style defined contribution plan for retirement saving and a new disability benefit plan to replace the disability coverage now offered through the pension plan. This new plan would leave city workers exposed to the risks of investing and of outliving their retirement.

And what would taxpayers get in return? According to the city’s analyst, this change would actually cost the city a small amount more ($13 million over 30 years.).

There are potentially cost savings in Proposition B. In addition to eliminating San Diego’s defined benefit pension for employees other than police, the measure requires the city, in labor negotiations over the next five years, to start with an offer of no pay increase. Were the city to hold firm to that position, and give no pay increases over the next five years, it would save $581 million over 30 years, according to the analyst. But Proposition B provides no certainty on that score: the initiative cannot create a contract legally binding on city workers or future city councils.

These findings underline a point that I make here frequently, but that gets widely ignored: The key budget issue about public employees in California is not about their pensions, it’s about their total pay. And it’s not about all public workers equally, but particularly about police, firefighters, and prison guards.

Pensions are an easy target for media coverage and political talk. There’s a huge pension gap between public workers and private workers. Most public workers have secure defined benefit pensions; few private workers get them anymore, depending instead on inadequate substitutes like 401(k) plans or, in too many cases, no retirement plan at all. In California, some kinds of public workers have the most generous pensions in the country.

This is fuel for pension envy. Want to make someone angry? Just talk about what public workers have that you don’t.

But in this case, as so many others, talking about what’s easy can be a distraction from talking about what matters.

For one thing, there are big differences among public workers in their pensions. Teacher pensions, for example, are quite reasonable in California; those for police and firefighters are hugely out of line with private sector practice, except for fringe cases like CEOs and professional athletes. Pension envy obscures these complexities.

Another big problem with pension reform narrowly conceived is that, as in the case of San Diego, it’s not likely to save much money. By law, current retirees and employees have a vested right to current pensions for the years they have already worked. Savings are only available going forward.

But moving from defined benefit to defined contribution plans creates new costs. Negotiating two-tier plans with lower benefits for new hires saves little money in the short-term and, unless two-tier plans are sustained over many years, save no money in the long term, as California should have learned (but apparently hasn’t) from its experience in the 1990s.

But the biggest problem is forgetting that what matters, both to public budgets and to public workers, is total pay—the full value of the bundle of compensation, including wage, health insurance, disability, Social Security, unemployment, retiree health benefits, and pensions. If sustained over the long run, pension reform can lower the cost of the retirement piece of the total pay bundle. But that will be of no value to public budgets and taxpayers if the savings on the pension side of the ledger are offset by increases in worker pay.

This is not a theoretical concern. Just one example: In Sacramento last summer, elected leaders celebrated that they had cut city costs with a new labor contract with firefighters. The contract calls for workers to contribute 6 percent of pay to their own pensions beginning in 2013. But it also provides a 5 percent pay increase.

In the short run that pay increase offsets the negotiated pension concession. And in the long run it increases the size of the pension today’s workers will receive when they retiree, thereby raising future city pension contributions. The celebration was self-serving nonsense.

Looking at what really matters to public budgets—total pay—is a lot harder than spotlighting just pensions. It doesn’t lend itself as easily to the envy narrative; comparing total public pay with total private pay gives different results depending on the job involved (many low-skill public jobs pay better than their private counterparts, many high-skill jobs pay far worse, and there are few private comparables for public safety workers, although those in California do far better than their cousins in other states).

But unless Californians, as leaders and voters, begin to do the harder thing, efforts like San Diego’s Proposition B will only end in disappointment.

Talking Head

I’ll be joining David Watts Barton on Capital Public Radio’s Insight, Wednesday, February 29 at 10:00 a.m. and 8:00 p.m, 90.9 FM on the Sacramento area radio dial, to talk about the arena deal and Sacramento’s fiscal crisis.

UPDATE: They switched hosts on the show; Beth Ruyak took the microphone (you can hear the podcast here). And if we needed any evidence of the stakes as I explained them, take a look at what I ran across in the neighborhood on the way home.

The police wouldn’t come

The owner lost a couple of thousand worth of tools and some new, uninstalled appliances. When he reported the crime, the police told him it’s policy not to investigate unless guns or explosives were stolen. And remember, this is before a financially strapped city spends $250 million to subsidize the NBA.

Sacramento: Here’s the Arena, There’s the Cliff

The news of a deal struck between Sacramento and the NBA for a new arena for the Kings brought “elation” to City Hall, the Sacramento Bee reports. If so, it’s the kind of cartoon elation Wile E. Coyote feels in that moment when, having run off the edge of the cliff, The Road Runner hands him an anvil.

The anvil Mayor Kevin Johnson has handed Sacramento, if approved by the city council, would commit the city to subsidize a $387 million arena for the Kings with $250 million of public money (the exact amounts and details have yet to be worked out or made public).

How heavy is that anvil? The media rarely provide any context for big numbers. But here’s a scale:

• The cost of the arena, a single building, amounts to more than a year’s worth of general fund spending by the City of Sacramento—a whole year’s worth of police, fire, parks, recreation, libraries, streets, arts, etc.

• The proposed $250 million taxpayer subsidy to build the arena for the basketball millionaires and billionaires amounts to about a year’s worth of city general tax revenue.

The crisis

That would be the big lift even for a healthy city. But Sacramento is a community in crisis.

At the epicenter of the crash of the housing bubble, Sacramento has taken blow after blow since the Great Recession began five years ago: foreclosures, the collapse of housing construction, cuts in the number and pay of workers in state government, the capital city’s largest employer. Its unemployment rate is 10.9 percent, well above the state and national rates.

The distress in the economy has created budget havoc in the city. As the chart below shows, the loss of revenue opened up huge holes in the city’s budget, which it has closed through a combination of severe spending cuts and one-time fixes, including draining its reserves and selling off assets.

Source: City of Sacramento

No one disputes that these cuts have made Sacramento a less desirable place to live, work, and invest: If you have a fire or medical emergency, the fire truck arrives more slowly with fewer people on it. If you want a pool to swim in or a park with regular maintenance to relax in, forget it.

The most damaging cuts have fallen on the police, making an already dangerous city more dangerous.

“Sacramento is currently ranked the second most violent major California city and also ranks as the second worst in property crimes,” the city reports in its own budget. “The approved reductions will increase crime in both of these categories and have widespread impacts on community members and businesses.”

Do you want the police to go after gangs and drug dealers and car theft rings?

“Elimination of gang, narcotic, auto‐theft, financial crime, and high‐profile offender units… will result in no follow up investigations in these areas….” the city says. “Elimination of field reporting for cold property crimes, misdemeanors, and non‐serious injury accidents will result in increased wait times to file and obtain police reports. The anticipated result is an under reporting of crime as victims become frustrated with the reduced level of service.”

Just to be clear on the tradeoffs here, a mayor who faced a choice between higher crime and standing up to extortion by his old NBA employers (who owe him a pension worth more than $1 million), has chosen higher crime for his city.

A reckoning ahead

Unfortunately, there is worse ahead. According to the city’s projections, it faces a $26 million annual general fund deficit for the next five years, a deficit equal to about 10 percent of its annual tax revenue.

The current projection looks like a best-case scenario. It assumes no economic downturn in the next five years (this assumption—that the period between recessions will be at least nine years—flies in the face of the post-World War II experience, where business cycles have lasted an average of 5.5 years). It makes no provision for population growth. It does not include the likelihood that the California Public Employees Retirement System will reduce its expected rate of return, as its actuary has recommended, thus increasing required city pension contributions by upwards of $10 million a year.

And, of course, this deficit does not include the $250 million it will take to subsidize the proposed arena.

After you’ve already cut the park budget by 61 percent and the library-arts budget by 69 percent; after you’ve already spent down your reserve to the point where it covers only a couple of weeks of payroll and would leave the city helpless in the face of a flood emergency; after you’ve cut police and fire by more than a quarter: where do you go next? There is nothing left but the prospect of budget mayhem.

To avoid leaving Sacramento at the mercy of criminals, city management is hoping to negotiate deep cuts in the compensation of police and other employees. But a city that has looked under every rock to find $250 million for the arena will have a hard time explaining to its employees—and its voters—why it could come up with money to lavish subsidies on the Kings but not pay the people who protect and defend the community. Having caved first to the NBA, what are chances that City Hall will stand up to the public safety unions?

On the road to Stockton

It’s a useful coincidence for Sacramento that the announcement of the arena deal comes in the same week that Stockton will consider whether to default on its bond payments as a possible first step toward bankruptcy.

As a result of the recession, both cities are feeling the full effects of the Prop 13 operating system we describe in California Crackup. They are coming to grips with the reality that Prop 13 is now pinching in a way it never has before. “Every local elected official should be paying close attention to what is happening in the city of Stockton today,” my former colleagues at the Bee admonish.

They’re right. Sacramento may not yet be in as bad shape as its neighbor to the south; Stockton, after all, has already built its white elephant arena and now feels the full weight of the anvil Kevin Johnson wants to drop on his city.

But Sacramento is nearing the precipice. It may take only a fiscally reckless and morally bankrupt decision to subsidize the arena to push it over the edge.

Sports Extortion (Cont'd)

The Sacramento Bee asked me for my take on the question of whether Sacramento ought to spend $200 million to subsidize a new arena for the Sacramento Kings and the National Basketball Association. You can read my answer on the Bee’s site.

The Bee gave me only 800 words, so I wasn’t able to flesh out the argument as well as I would have liked. Fortunately, we have the web for that.

If you want to understand the economics better, you can check out the longer reporting piece I wrote for the Bee when I worked there. The most accessible book on the subject is Neil deMause and Joanna Cagan’s splendid Field of Schemes: How the Great Stadium Swindle Turns Public Money into Private Profit. Neil deMause also runs a companion web site, Field of Schemes, where he tracks and analyzes the money grabs of welfare-seeking sports owners around the country.

Given more space, I would have also repeated what I wrote here last spring: The best way to limit the extortion game is for the California Legislature to prevent the billionaire sports owners and their leagues from playing city against city. It should ban any local jurisdictions from using public funds to subsidize professional sports teams.

California is at a critical moment on this issue.

The extortionists are on the attack right now all over the state: Sacramento, San Diego, Santa Clara, Anaheim, Los Angeles. But as we all know, from the news and daily life, core California public services reducing the state’s quality of life. Every public dollar extorted today steals from California’s future.

Ideally, local politicians would do the right thing. But there’s something about sports that makes them go weak in the knees and soft in the head. (My wife blames it on testosterone poisoning.) They need to be saved from themselves with a law that protects them against their worst instincts.

That law would set budget priorities right at a time when we need to be putting first things first. But it would also send a bracing message to the rest of the country. If California cities, home to one in eight Americans, can no longer be used as leverage in the extortion game, other states will gain some protection, and perhaps even be encouraged to protect their taxpayers as well as California does.

Contrary to the moans of the extortionists, that wouldn’t mean the end of pro sports. As Scott Lewis points out, at Voice of San Diego, we would then be on track to replace sports socialism with true sports capitalism. And who can disagree with that?

The Facebook Effect?

Over at The Reality-Based Community Matthew Kahn has a post suggesting that the Facebook IPO and the minting of a thousand new millionaires will make property tax revenues “soar” in Silicon Valley and help local schools. Matthew Yglesias picks up the theme on his blog. They both seem to forget that, in California, public finance is, well, different.

Even if the demand created by Facebook employees were to raise housing prices in the Bay Area, the effect on property tax revenues would be small. Under Prop 13, increases in the assessed value of existing homes are limited to 2 percent a year. The Facebook effect would be limited to houses at the margin—either those newly built (which Kahn sees as unlikely under the Bay Area’s restrictive housing policies) or those existing homes whose sale would not have happened in the absence of the Facebook IPO and whose new and higher value would result in a higher tax on the property.

How big would that marginal effect be?

Let’s assume all thousand Facebook millionaires buy a house and each sale (both new construction and upward assessment of an existing house) results in an increase in assessed valuation of $500,000. The resulting annual increase in property tax paid would be 1 percent of $500 million, or $5 million. (There would be some extra in jurisdictions that have passed bonds that add an increment over the basic 1 percent rate.) Even if we assume that all the Facebook millionaires buy their houses in Santa Clara and San Mateo counties, the increased property tax revenue amounts to only one-tenth of 1 percent of the roughly $5 billion a year in property tax collected by those two counties, of which about 60 percent goes to schools.

But because this in California, not even that $3 million necessarily helps the local schools. Under its Prop 13 and Prop 98 school financing system, California imposes revenue limits on school districts. Changes in local property tax revenue collections for schools are offset by increasing or lowering general state aid to districts to maintain the revenue limit. In the typical district, the increase in property tax revenue from a Facebook millionaire will flow to back to the state budget, not the local school.

The exception is for what are called “basic aid districts,” those whose local property tax revenues for schools exceed the statewide revenue limit, permitting them to spend over the limit. Because many of the school districts in Silicon Valley are basic aid districts, they would receive some of that $3 million in new revenue. Their new revenue would be dwarfed, however, by the money they have lost from the state’s new policy of reducing categorical funding for basic aid districts.

If the Facebook IPO will make for “a neat event study,” it will not be for the reasons Kahn suggests. The more interesting story here is how, under California’s strange and radical system of public finance and governance, an event so large in economic terms can have so little effect on the public finances of the local communities in which it is happening.