King Chiang, Dethroned

Because I suspect almost no one else will, let me congratulate three associate justices of California's Third District Court of Appeal—M. Kathleen Butz, Cole Blease, William J. Murray, Jr.—for knowing an unconstitutional abuse of executive power when they see it. On January 24 they affirmed an earlier trial court decision declaring that state Controller John Chiang has no authority to dock the Legislature's pay for failing to pass a budget he judges to be unbalanced, as he did in 2011.

"Where the Legislature is the entity acting indisputably within its fundamental constitutional jurisdiction to enact what it designates as a balanced budget, the Controller does not have audit authority to determine whether the budget bill is in fact balanced..." Justice Butz wrote for the court. "As a result, the Controller is not a party to the enactment of the budget bill."

The decision should come as no surprise. Anyone who bothered to look at the state constitution could see it did not give Chiang the monarchal authority he asserted in 2011 (a category that excludes, alas, most of the state's pundits, who cheered the controller's abuse of power).

The appeals court ruling echoes the analysis I offered at the time: that Proposition 25, which provides for docking legislators' pay if they fail to pass a timely budget, does not give the controller any power to second-guess whether a passed budget is balanced; that the constitution grants the Legislature sole authority for determining projected budget revenues; that the governor's line-item veto power on spending is the executive check on legislative fiscal irresponsibility.

By clarifying the law today, the court has spared California much future anguish. Had it affirmed Chiang's claim of power, it would have added more opportunity for political mischief and grandstanding by future controllers to an already absurd system of budgeting. In California, it counts as a victory for good government whenever a court knocks down an attempt to make things worse.

An Arena? Let the Grandkids Pay

After looking over Sacramento’s plan to go deep into debt to fund a giveaway to National Basketball Association, the editors of the Sacramento Bee proclaim it “doable.” The city, they assure their readers, has “the numbers to back it up.”

This conclusion can only mean those editors didn’t read or understand the numbers, because the numbers themselves shout, “Don’t do this!” The numbers describe a city that, despite imposing the highest and most regressive taxes in its region, still suffers from depleted reserves, large unfunded liabilities, and reduced levels of public services.

So how, in the face of that fiscal mess, does Sacramento buy an arena it can’t afford? The numbers say city leaders and the Bee want to make the grandkids pay.

Because city officials aren’t interested in helping citizens understand what they are up to and what the numbers mean, I’ve turned them into this picture:

Click to enlarge

The city wants to sell bonds to fund $212.5 million of its subsidy to a new arena for the Sacramento Kings. That’s the red-shaded arena on the graph. It plans to repay the debt with future revenues from parking in the central city.

But there’s a big problem here. The parking revenues are already spoken for. They are used to pay for parking operations and the mortgages on the city’s garages, with the balance going to the general fund for police and other services. There aren’t enough of those dollars to pay for all those things and the arena debt too.

To solve the problem of having more wants than wallet, the city takes the low road: borrow a lot more and delay the obligation to repay far into the future. It plans to take out an extra $91.5 million in debt (the yellow-shaded area in the picture) and use some of that extra borrowed money to pay the interest on the bonds for the first four years. A $212.5 million subsidy to the arena thus becomes $304 million in debt to be paid off over 36 years.

Is this “doable?” Yes. There’s a whole industry of investment banks, financial advisors, and consultants who, for a price, will show how to put together and sell, at very high prices, “doable” debt for cities that want to live beyond their means. (There’s also an industry of people who, for a price, will tell you how sexy you are.)

But it’s doable in the same way that you could take out a home equity loan to add an extra room on your house, then pay the interest on the equity loan by stopping your contributions to your retirement account and pulling a cash advance out of the Visa card until you’ve paid off the car loan and have a few extra dollars. What’s “doable” is often the way to end up poor and bankrupt.

The black line on the graph shows the remaining debt from the deal over time. The city won’t begin making principal payments on that debt until 2022, and full principal payments won’t begin until 2034. The whole debt won’t be repaid until 2050. And repayment of the $212.5 million portion of the debt taken out to subsidize the Kings (the red-shaded area) won’t start until 2038, 22 years after the arena is supposed to open. The grandkids will pay all of it.

If that debt were buying something likely to make Sacramento a better place for them in 2040 or 2050—flood control, schools, bridges, parks, housing—pushing the repayment obligation deep into the future would be one thing. But arenas are more like cars than houses. They begin losing value the day they open. Team owners drive them for 10 or 15 years, then declare them “obsolete.” They demand taxpayers buy them a new one, or at least a complete and expensive overhaul. And cities rarely have the courage to refuse them.

So let’s be clear about what the numbers mean. The city and the Bee want the largest burden of paying for an arena in the present to fall on people in the future who will likely never buy a ticket there because it’s already gone or “obsolete.” (And if you doubt that, go count the number of today’s arenas that were around 30 years ago and never substantially overhauled. It’s zero.)

Instead of being able to use their own resources to pay for the public services and projects they need in their own time, our grandchildren will be paying for a subsidy a previous generation cheered but then put on the credit card—to go along with the unfunded liabilities for pensions and retiree health benefits of city workers.

Isn't that the kind of government irresponsibility we pay newspapers to warn us against? Apparently Bee bigwigs Cheryl Dell, Joyce Terhaar, and Dan Morain are so busy waving pompoms for the owners of the Kings they don't have time to watch out for the future of their community.

Prop 13 as Original Sin

Give credit to David Crane. Unlike the pundits and would-be tax reformers who moan about California state government's boom-and-bust revenues, Crane, who was economic advisor to former Gov. Schwarzenegger, is brave enough to state the obvious: Prop 13 is the original sin.

Why are state revenues volatile? Because over the last 35 years California voters and policymakers cut the taxes that vary least with economic conditions, leaving governments increasingly dependent on the ones that vary the most.

The first and biggest whack, as Crane notes, was the 1978 Jarvis-Gann Prop 13, which cut and capped the property tax, a revenue source that declines only in the most dire economic moments, such as the Great Depression and the bursting of the housing bubble in the Great Recession. It was followed by the 1982 initiative eliminating state gift and inheritance tax and Schwarzenegger's 2003 cut in the vehicle license fee (which, perhaps not surprisingly, Crane fails to mention). Even more than the property tax, these were stable revenue sources, death and driving being inevitable features of the California scene.

But when they cut taxes, Californians didn't mean they wanted fewer public services. They have filled the void, partly by raising sales tax rates (since Prop 13 the combined uniform state-local rate has gone from 6% to 7.5% plus locally approved add-on levies for transportation or general city services); and partly from the rising yield of the personal income tax, which delivered more and more dollars because of the enormous shift of income to the wealthy that has taken place over the past several decades. Now, with the higher rates on the rich enacted last year in Prop 30, the yield will be even greater.

But it will also be episodic. Income tax collections swing with capital gains in the markets, and taxable sales swing with the economy (they fell 18 percent from 2007 to 2010).

As Crane argues, the right cure for this volatility would also be good for the state's economy. I think he exaggerates the risk that California's current taxes will cause the rich to flee, but he's right that our current tax balance—high taxes on work and investment, low or no taxes on property and oil—is "crazy." From an economic perspective, property taxes are, in the words of conservative economist Milton Friedman, "the least bad tax there is." If you tax land, you don't have to worry that you will cause people to produce less of it. If California imposes an oil severance tax, as every other oil-producing jurisdiction in the world does, you don't have to worry about the oil disappearing or oil prices rising, because oil prices are set by a global market, in which California tax policy is but a blip. Shifting taxes toward land, oil, and carbon and reducing them on work and investment would strengthen the economy while providing a more stable base for public services.

Crane cautions that, before changing Prop 13, "governments would first need to reduce pension and health-care liabilities." But here he has it backward. As we show in California Crackup, it was Prop 13 and the governing system it created that made the out-sized pay and pensions of local government workers possible and perhaps inevitable. Getting rid of them is the necessary condition for creating a local taxpayer counterweight to public employee power in city and county politics.

Expensive Cops = More Crime

The New York Times has a new story linking rising crime in Sacramento to cuts in the local police force. I doubt any reader finds this particularly surprising. Most people assume that putting police on the streets helps deter some crime and results in the arrest of criminals who aren’t deterred, thereby preventing them from offending again.

What the Times doesn’t explain is why Sacramento’s leaders would choose to inflict such a policy on their community. Are they just nuts?

You have probably guessed at least part of the answer. Like the rest of the nation, Sacramento was hit hard by the recession. It was one of the cities at the epicenter of the bursting of the housing bubble. The combination of the two economic blows depressed the city’s property and sales tax revenues, forcing budget cuts.

But another part of the answer is the extravagant level of pay and benefits for police and fire employees.

According to the California State Controller’s database, 168 police employees in Sacramento received in excess of $100,000 in reportable wages in 2010. Most of these also received more than $20,000 in city contributions to health insurance premiums and employer’s assumption of the employee’s share of pension contributions. In addition, 225 of the 446 fire department employees were paid more than $100,000 in wages.

The “why” here is clear. It is difficult for any community to provide adequate levels of police and fire protection when it pays cops and firefighters twice the average wage of full-time workers in the community.

The puzzled readers of the nation’s paper of record would have been well served by this added context.

Molly Munger Unmasks the Impostors

My co-author Joe Mathews has brilliantly skewered all those politicians and journalists who don’t want California voters to compare and contrast Propositions 30 and 38. Their attitude, as he writes, is both “nuts, and profoundly anti-democratic.”

It is also, I would add, self-serving. A robust and honest debate over those two measures threatens to expose the big secret about California’s leaders, media, and voters, a secret that has been sitting in plain sight for anyone willing to see it: as much as they say they care about schools, the reality is that almost everything else is more important to them.

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California's shrinking public workforce

If you’re one of those people who likes to blame California’s public workers for the state’s problems, Stephen Levy of the Center for the Continuing Study of the California Economy has good news for you. California’s public workforce, which has long ranked among the smallest in the nation relative to population, shrank even further from 2007 to 2011.

The ratio of California state and local employees per 10,000 residents fell by 7 percent in that period; the ratio of K-12 school employers fell by 11 percent. These numbers are Census Bureau estimates for March 2011. Given the continuing budget cuts and workforce reductions by the state government, cities, and school districts over the last 18 months, the current numbers are far lower.

Which means that if you are one of those people who’d like the police to investigate and capture car thieves or who’d like the fire truck to arrive quickly in an emergency or who’d like your child’s school to have a library where she can research her homework or a counselor to guide her through applying to college—well, chances are that you are out of luck.

A Pension Dialogue

Scribbler: As someone who has written a paper about pensions, you must be tremendously disappointed by the pension bill just passed. As our fellow scribblers at the Los Angeles Times said, “Brown’s plan to stem pension costs is no panacea.”

Curmudgeon: Panaceas are as hard to find as unicorns and Mitt Romney tax returns.

Scribbler: But surely you agree with Dan Walters that the “Pension overhaul plan falls short.”

Curmudgeon: That headline is also going to be on Walters’ column the day after the Second Coming. He will fault Jesus for not having returned hundreds of years ago to spare millions from hellfire and damnation, and he’ll scoff that salvation is just a promise, easily revoked when Yahweh throws one of his Old Testament fits of temper, or needs a contribution from the prison guards.

Scribbler: So you think it’s real reform?

Curmudgeon: What is “real reform?”

Scribbler: Don’t go all Socratic on me. Even under AB 340, most public workers in California will have pensions better than most people in the private sector.

Curmudgeon: True. Public workers will still enjoy more security than the huge numbers of private-sector workers who have totally inadequate retirement plans, or none at all. But as Micah Weinberg and I wrote in our paper, taking away retirement security from public workers doesn’t add to the sum of well-being in society. Envy is not reform, it’s one of the seven deadly sins, best cured by repentance and prayer.

Scribbler: Okay, but you agree that pensions are way too expensive, right?

Curmudgeon: If pension costs are your measure, then the bill certainly counts as reform. It reduces the pension formula for new workers, requires employees to pay half the normal cost of pension contributions, caps the size of pensions, and curbs lots of abuses. That will save a lot of money.

Scribbler: But former legislator Joe Nation, now at Stanford and a pension critic, says that “No one should believe that this is going to have an appreciable impact on the public pension problem.”

Curmudgeon: CalPERS actuaries estimate that AB 340 will save the public between $43 billion and $56 billion over the next 30 years. The present value of that savings is between $12 billion and $15 billion, roughly equivalent to what the state spends each year to run the prisons and support the two university systems, UC and CSU. (If CalPERS’s estimates used the low discount rate that critics like Nation trot out to puff up their estimates of the system’s unfunded liability, the present value of the savings would be much larger.) Hobnobbing with the billionaires in Silicon Valley may have warped Nation’s sense of proportion, but like most folks, I still count saving $12 billion as “an appreciable impact.”

Scribbler: So you do, in fact, think this is real reform. How can you say that when the large pensions promised to current workers haven’t been curtailed?

Curmudgeon: And just how might you go about curtailing those pensions? The courts have been firm in ruling that pensions are a contractual obligation that can’t be retroactively taken away.

Scribbler: Pension hawks like David Crane and Joe Nation say that the law isn’t as clear as it appears and that local governments ought to try to convince the courts that reducing future pension accrual by current workers is permissible because the only alternative is deep cuts to parks, libraries, and public safety.

Curmudgeon: If they want to mount a full frontal attack on the machine gun nest, I wish them all the luck in the world. Just remember, though: Judges have pensions too.

Scribbler: What a cynic. So we just give up now?

Curmudgeon: No, not at all. But we ought to try to think more clearly about the real issue here. It’s not pensions. What matters is total compensation for public employees. The public needs to hire people to teach our children, guard our streets, put out our fires. In return for their work, we pay them with a package of compensation, some of it providing them current income, some of it future income: a wage, a health insurance plan, a pension, employer contributions to Social Security and Medicare, and, in some cases, retiree health benefits. As a taxpayer, I don’t care how public workers want to divide that bundle of compensation between current pay and retirement income. I care about the total cost to the public employer.

Scribbler: What’s your point?

Curmudgeon: The point is, if you understand the real issue, it becomes obvious that there may be more promising strategies than attacking the machine gun nest, with its protective legal bulwarks. We can achieve lower total costs more easily by reducing or containing other parts of the package.

Scribbler: Such as?

Curmudgeon: Nation has suggested that California recoup some of those overly generous pensions with a surtax on the pensions of “double-dippers,” public retirees who collect a pension while they continue to work.

Scribbler: That’s all?

Curmudgeon: For years there has been growing concern among budget wonks about the growing cost of, and unfunded liability for, retiree health benefits. Now we have a real opportunity to act. Retiree health benefits are a relic, first authorized in 1961, before the passage of Medicare. Even after Medicare came into being, its benefit package was incomplete, and workers who retired before Medicare age had no assurance that they would be able to qualify for, or afford, coverage in the individual market. The passage of the Affordable Care Act has changed all that. In 2014 every retiree, early or not, will be able to buy health insurance regardless of pre-existing conditions. Obamacare has solved the problem retiree health care benefits were created to address. We can, in good conscience, eliminate them and harvest for state and local budgets the savings made possible by our historic move to universal health insurance.

Scribbler: Doesn’t that create legal issues, too?

Curmudgeon: For people already retired, yes. But there’s no bar to eliminating retiree health benefits for new workers and those for whom they have not vested, either because of insufficient years of service or contractual language.

Scribbler: That’s your panacea?

Curmudgeon: No, you haven’t been listening. There are no panaceas—never are, never will be. Over the last generation, the combination of a broken governance system and public inattention has allowed the total compensation of public employees—and most particularly that of police, firefighters, and prison guards, which is far out of line with national standards—to soar. It will take years of hard bargaining and sustained attention to the issue to bring that compensation back in line. For example, my calculations suggest that the considerable savings achieved in AB 340 would be totally wiped out by a 7 percent pay increase. If we don’t keep watching, the gains will disappear.

Scribbler: Do you really think that the media, politicians, and public in California are capable of that sustained attention?

Curmudgeon: Hey, how about those Athletics and Giants!

Mandated Craziness

Over at Zócalo Public Square, Rick Cole, city manager of Ventura and one of the smartest people in California local government, offers a calming counterpoint to media worries about open government. The state budget decision to suspend some parts of the open meeting law won’t lead to city council meetings in basement rathskellers and other secret nasties, he writes—or at least not to any more of them than we’d see (or not see) even when the law’s in full effect. Most reporters won’t agree, but Cole writes about the issue with more nuance and complexity than you’ll see from many journalists, who rarely acknowledge that rules governing openness in government come with tradeoffs.

What Cole doesn’t convey is the pure nuttiness behind the whole discussion. If open government has “become part of California’s civic DNA,” why must we suspend the law that guarantees what everyone says we want?

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Cops Versus the Schools

In an excellent analysis over at EdSource, Robert Manwaring, a veteran California school policy wonk, asks a deceptively simple question: “If K-12 matters most, why doesn’t state budget reflect this?” Unfortunately, as newspaper folk put it, he buries the lede.

Having been guilty of the same crime here in the past, let me remedy that error for both of us:

California is 47th in school spending because cops, fire fighters, and prison guards have sucked up all the money.

California elected officials say that schools are their highest priority. So do the voters in polls. But that’s not how they act.

And until, as Joe Mathews nicely puts it, “you walk into a police station, and all the cops at the desks are 65,” all that political talk about schools being our highest priority is just hot air.

High-speed rail: A green light for Molly Munger

The morning after the California Senate approved funding for high-speed rail, the Sacramento Bee carried a front-page photo of Senate president Darrell Steinberg giving a double fist pump of victory. As glad as Steinberg appeared to be, though, it’s hard to imagine that Molly Munger, the Pasadena civil rights attorney, wasn’t even happier. By approving high-speed rail, legislative Democrats and Jerry Brown have just given away their best argument against her school-funding measure on the November ballot.

To understand why, you have to get beyond the media’s careless habit of lumping Munger’s proposal with Jerry Brown’s rival budget measure as competing “tax measures.”

Yes, both measures do temporarily raise taxes — Brown’s on everyone, Munger’s on households in the upper half of incomes, both with the heaviest increase put on the very wealthy. But the measures differ sharply in purpose and aspiration.

Brown’s measure is about eating your spinach. It raises taxes temporarily in the hopes of stabilizing the budget at the current austerity levels of state spending. It aims at keeping things from getting worse.

Munger’s measure, on the other hand, injects only a part of the revenue it raises into Sacramento — to help pay down debt and relieve some of the pressure of interest payments on the state budget. Mostly it aims to work a revolution in school funding for the purpose of closing the achievement and opportunity gap that is California’s most pressing challenge.

Munger’s measure would route the new money around state and district bureaucracies, keeping it off the bargaining table, and give it directly to schools, where parents would be given a larger role in deciding how to spend it to benefit their own children. Munger is inviting California, after years of austerity and muddling, to think big.

For months Brown and his union allies have been bashing Munger for irresponsibility. California needed to put first things first, they said. New tax dollars should go to putting the state’s budget house in order, not tackling problems in big and bold ways. Munger’s measure came at the wrong time, they charged, threatening confusion and the defeat of Brown’s more responsible approach.

And now, after the high-speed rail vote, Californians understand they didn’t mean a word of it.

By any reasonable reckoning, the high-speed rail plan approved by the Legislature is not ready for prime time. As both the Legislative Analyst and independent observers have pointed out, the state doesn’t have a clue about how to finance the project. High-speed rail, which will raise greenhouse gas emissions over the next several decades, will compete for funding with the urban transit projects of greater economic and environmental value that California so badly needs to deal both with congestion and its climate goals. It tells you all you need to know about the viability of the plan that the senators most knowledgeable about high speed rail (and among its biggest boosters for years) voted against it.

But reasonable reckoning did not win out. Nor did Brown’s previous call for “a modicum of stoicism.” What carried the day, at least rhetorically, was the injunction to think big.

“I think what we did today,” Steinberg declaimed, “is going to be seen over many years, and many decades, as a turning point in California, a time when we decided to say ’yes’ to hope, ’yes’ to progress, ’yes’ to the future.”

If California can put aside caution and budget restraint to pursue a big and expensive frill like high-speed rail, can there be any doubt about the message the state’s leaders are implicitly sending when it comes to dealing with schools, the state’s (and voters’) highest priority, and to Munger’s call to revitalize them?

To the future! they are saying. Go, Molly, go.

How to Fix Prop 29

Proposition 29, the tobacco tax measure on the June 5 ballot, makes for a hard choice. I have no problem with raising tobacco taxes. California needs the revenue, and higher tobacco taxes would save lives by discouraging smoking. But using the new revenue for cancer research makes no sense at all. America already spends billions on that research, and California has higher priorities.

What to do? Here is where the Legislature could help us out, and at the same time show a bit bipartisanship.

Lawmakers may disagree about taxes, but I doubt a single member of the Assembly or the Senate believes that cancer research is a higher priority than funding schools and colleges. After all, what is the sense of funding cancer research in a state where you can't even educate children about science or produce the next generation of scientists?

So let the Legislature put a new measure on the November ballot. Call it the Tobacco Tax Recovery and Education Restoration Act of 2012. Let it provide for shifting all of the tobacco taxes enacted in the three initiatives of the last several decades—Props 88, 10, and 29—to the general fund. Let it state the Legislature’s intent to use the money to restore funding for schools and colleges cut over the last several years.

Such a measure would have several important effects.

First, it would let voters have the choice Prop 29 doesn’t provide: of raising tobacco taxes but sending the money to their most important priority.

Second, it would send a cautionary message to potential sponsors of ballot-box budgeting initiatives. It would tell them that they cannot loot the California revenue base with impunity, that the Legislature will fight back to assure the voters have a choice about how new revenues should be used. That’s a message that should appeal to Republicans and Democrats alike.

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.

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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.

Redevelopment Greed Backfires

The best thing about the California Supreme Court redevelopment decision isn’t that the justices upheld the power of the Legislature to abolish the agencies that suck up and waste billions of tax dollars. No, the best thing was how the court did it: by picking up Proposition 22—the 2010 measure the redevelopment agencies wrote to exempt themselves from California’s budget crisis—and shooting the agencies with their own gun.

For those who haven’t been scoring at home, here’s the two-minute recap of the issue:

• Redevelopment agencies are devices for grabbing property tax dollars that would otherwise go to schools, colleges, and other useful public services. The agencies instead use them to subsidize development that voters would be unlikely to support if they had to pay for the projects with new tax dollars.

• Faced with diminished revenue and the prospect of deep cuts in essential programs, state lawmakers decide schools are a higher priority than downtown hotels, convention centers, and ornamental street lights. They shift the money grabbed by redevelopment agencies back to education.

• Redevelopment agencies fight back by writing and passing Prop 22, which bars the Legislature from taking away from redevelopment agencies the money they are taking away from schools.

• New Gov. Jerry Brown responds by proposing, in his 2011-12 budget, to abolish redevelopment agencies in their current form and reclaim, once and for all, the money for schools. He proposes a constitutional amendment to allow communities to pursue future redevelopment projects, but using their own money.

• Legislature enacts a two-bill compromise. One bill abolishes redevelopment agencies; a second bill hands them a lifeline, rescinding the death sentence of redevelopment agencies that agree to shift their tax booty to schools.

• Redevelopment agencies sue, arguing that Prop 22 prevents the lawmakers from mucking with their money or their fate.

Not so, the Supreme Court has now decided. The Legislature had the constitutional authority to create redevelopment agencies and likewise has the authority to end what it created. Prop 22 did not change that. But what Prop 22 did change, the justices found, was the Legislature’s power to shift redevelopment property tax dollars to higher priority uses. It therefore found that, under Prop 22, the Legislature no longer has the power to offer them a conditional lifeline.

“The irony of these circumstances concerning Proposition 22 should not be ignored — the very measure that was crafted to protect financing for new redevelopment projects has been broadly interpreted in a manner that effectively ends all financing for new redevelopment projects,” Chief Justice Cantil-Sakauye wrote. “This cannot be a necessary result intended by the proponents of Proposition 22 concerning redevelopment.”

Not the intended result, perhaps. But certainly the result they deserved.

Cal-Access: Let the Users Pay

Some of California’s editorial writers and political consultants have worked themselves into a tizzy over the crash and lengthy outage of the California Automated Lobbying and Campaign Contribution and Expenditure Search System (Cal-Access to its friends.)

As Joe Mathews explained yesterday at Prop Zero, Cal-Access, a database of campaign/lobbying contributions and expenditures, is powered, as is much of the state government’s information infrastructure, by aging 2oth-century technology. When the system crashed a few weeks ago, the Secretary of State’s office found itself with an expensive and technically tricky repair job on its hands.

There seems little disagreement that the state needs to buy a new system to run Cal-Access. But California, with a broken system of government that leaves it in perpetual budget crisis, has no money sitting around to invest in such things. And at a time when the state is making cuts that jeopardize the public safety, health, and education of its citizens, no sane person would suggest that buying a new Cal-Access system would have a high claim on any new general fund revenue that might become available.

That makes Cal-Access a perfect candidate for user financing.

Although it is offered as a general public service, it is used most heavily by a small and selective group of inside political players: media companies, political consultants, lobbyists, special interest donors, vendors of political services, non-profit organizations. It is how they keep track of the political money game, monitor the moves of rivals, and check the prevailing prices and wages in the political game. You can tell how much the inside players value the service Cal-Access provides by the volume of their complaints over its absence. Here is a market opportunity for government.

So, by all means, let’s get Cal-Access up and running, and then invest in a modern system. And let’s do it by having the users pay.

People who want to use the system would set up accounts. As at many media sites, there would be tiered pricing. Users would get a small amount of access free, enough to meet the needs of ordinary voters. Heavy users would pay according to their usage. Nonprofit organizations that repackage and interpret the information in forms freely available to the public would get free access. The money paid by users would support both the capital and operating costs of the site.

This is a solution everyone should love. Liberals will get political transparency. Inside political players will get a modern and reliable Cal-Access system. Conservatives will get an example of government's operating like a business and responding to the demands of the market. Policy wonks will move closer to their goal of having user-financing for non-general services, reserving general revenue for general needs.

And California will have made an important point: You can’t have something for nothing, even if you’re an editorial writer or a political consultant.

California is not Greece

California is not Greece

One of the most common, and most facile, journalistic takes on California’s governing crisis is to compare the state to Greece. This is simply wrong. As Harvard University economist Dani Rodrik explains on his blog, Greece stands in an entirely different, and more perilous, institutional relationship with Europe than California does with the United States.

But Rodrik leaves out something even more important in the comparison. For all its woes, California is nothing like Greece either fiscally or economically.


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The Two States of South Cal

The Two States of South Cal

Although some in California seem not to know it, one of the major effects of state government is to transfer tax dollars from the coast, where California generates most of its wealth and income, to the less affluent interior of the state. Splitting California to create a new South California would be the beginning of an unprosperous and unhappy marriage.

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Some Day We'll Say Go Away

Jeff Stone, a Riverside County supervisor, is basking a moment in the media sun by resurrecting that hoariest of notions, that California be split in two. He wants to free his constituents of their bonds to the high-taxing, big-spending, business-regulating, gay-marrying folks of the Bay Area, northern California, and Los Angeles and break off a new state of South California, comprising 13 inland counties from Mariposa and Mono on the north to Imperial and San Diego on the south. His proposal will quickly go the way of all such gimmicks. And for that the people of his proposed South California should be very glad. Because one of these days the rest of California might very well take them up on the offer of divorce.

Like other recent would-be state splitters, Stone seems unaware of the big fact of California’s political-economic geography. In California, water flows south and west from the mountains to the valley and coast, but money flows west to east, from the coast toward inland areas. The big money in California is earned and the big ideas are hatched within reach of the summertime Pacific fog. Hollywood, Silicon Valley, the premium vineyards, the most productive marijuana plantings, and seven of ten University of California campuses: All are within 40 miles of the surf. And a disproportionate share of the taxes paid by the robust economy on the coast ends up financing public services for people living in the less affluent interior.

The chart below shows how Stone’s proposed SouthCal would stack up on spending and taxes compared to California as a whole.

Out of Balance

State government educates, medicates, and incarcerates. Public education, health care, and criminal justice account for more than 80 percent of the state budget. The counties that Stone would turn into SouthCal receive at or above their proportional share of those key three functions. (And an even higher share of social welfare benefits.) But as the table shows, they fall far below their share in generating income or revenue. As it’s now constituted, state government is a machine that raises money on the coast and ships a lot of it inland to Stone and his fellow South Californians. His proposal would break that conveyor belt and leave SouthCal (which already has an unemployment rate higher than the state as a whole) much worse off.

But notice that Stone doesn’t propose to divorce the entire coast. Like former Assemblyman Bill Maze, who proposed a similar split a few years back, he wants to include Orange and San Diego counties in his new paradise. He didn’t ask their permission to include them in his breakaway state, and if you look at the third column of the table, which shows how SouthCal would fare without Orange and San Diego, you can see why. Even more than the current state, SouthCal would be dependent on its coastal higher earners to pay for services for people in the inland areas. It is hard to understand why Orange and San Diego residents would want to sign up for that duty.

In fact, they and the rest of the California that Stone wants to divorce may begin to see some merit in his offer to walk away from the rest of us. Shorn of SouthCal, the remainder of California would find itself without a budget deficit. There would be many more places for California children at UC and CSU campuses, where the sons and daughters of Fresno and Riverside would now be paying out-of-state tuition. And there would be a lot fewer elected Republicans screaming about high taxes but then complaining when the Legislature cuts spending for their redevelopment agencies, cities, and local schools. Right about now, a lot of Californians might see that as a very good outcome.