By JOHN SEILER

This week, Gov. Jerry Brown unveiled his new proposal to increase taxes $7 billion to support higher state spending. The Think Long group of the rich and famous is proposing $10 billion in higher taxes to back more spending. Other tax increases are on being cooked up. Voters would have to pass one more of these tax increases in November 2012.

But a new chart I’ve devised shows the state just does not have the economic foundation to support higher spending, and the taxes to pay for it. The chart follows. It is a “combination chart” showing two different things along the same timeline.

Close Correlation

Note how closely the data correlate, especially in recent years. (All data are adjusted with the Consumer Price Index to reflect 2010 dollars. For 2010 expenditures, I’m using the 2010-11 budget number, $91,480 billion, from the governor’s enacted Budget Summary. All other budget data are from his January 2011 Budget Proposal, Appendix Section 8.)

The left vertical axis, which tracks the red line, scores Californians’ median household income from 1995-2010. That’s how much money our people make, per capita. It’s how much can be tapped to support state spending.

Notice how it has risen and fallen depending on the booms and busts in the California economy.

Next, notice the right vertical axis, which tracks the blue line, and which scores state general-fund expenditures per capita. That’s how much, on average, the state spends of the taxpayers’ money. (Median household income data come from the U.S. Census Bureau, and are not yet available for 2011.)

The one anomaly is on the far right, in which expenditures are much higher than median income. This may indicate that the state still is spending more than Californians can support. But it might be that the data need to be revised. When Gov. Brown presents his next budget proposal in January, I’ll re-do this analysis to reflect fresher numbers.

Seiler’s Second Law

But for most years, especially recently, the ratio is that the state general fund spends approximately 1/25th of median household income.

I call this “Seiler’s Second Law of the California Budget”: The California state general fund can’t spend more than 1/25th of median household income.

(Seiler’s First Law is that the state general fund can’t spend more for the general fund than 6.2 percent of personal income. I plan updating this, too, when the January budget numbers come out.)

There’s also a corollary to Seiler’s Second Law: If the state wants to increase general-fund expenditures, it must enact policies that foster increases in median income.

Increasing tax rates, which will suppress median income, thus would be counterproductive. The tax rate increases would chase away businesses that create high median-income jobs, and well could decrease tax revenues.

Already, California’s median income has been hammered by the recession. From 2006 to 2010, median incomes in California crashed by 9 percent, almost double the 5 percent national rate.

Put another way, if California’s recession had struck at the national rate, our median income would have dropped only 5 percent, instead of 9 percent. Thus, our median income would be about 4 percentage points higher, or about $2,000 more.

Not the 1970s

In his “An Open Letter to the People of California,” calling for his $7 billion tax increase, Gov. Brown wrote, “Spending is now at levels not seen since the 1970s,” during his first stint as governor. He’s living in the past.

The real numbers are shown in the chart above, indicating that median income has crashed to the levels of the mid-1990s. The numbers show that, except for population growth, the California economy hasn’t grown since about 1998, when Pete Wilson was governor. We’ve suffered a “lost decade” — and are working on a second.

In his letter, Brown lamented cuts he made to schools, public safety and aid to the poor. But you can’t spend what you don’t have, and can’t get.

In his first stint as governor in the 1970s, Gov. Jerry Brown spoke of an “era of limits.” He was wrong. The economy, especially median income, kept growing through the 1970s, 1980s and up to about 1998. On the foundation of median income growth, the state general fund could expand. But the foundation first had to be laid.

The era of limits is now.

And the only way out of this new era of limits is to increase median household income through pro-business, pro-jobs and pro-taxpayer policies.

The chart shows there’s no other way.

————————————————————————

If you want to play with the numbers yourself in an Excel spreadsheet, I’ve included them below.

DATA APPENDIX

Median Income source: http://www.sacbee.com/2011/09/13/3906899/california-incomes-plummet-poverty.html

General Fund source for 1995-2009: http://www.ebudget.ca.gov/BudgetSummary/BSS/BSS.html

General Fund source for 2010: http://www.ebudget.ca.gov/pdf/Enacted/BudgetSummary/FullBudgetSummary.pdf

For the CPI adjusted numbers in Column D, I plugged the numbers in Column C into the Bureau of Labor Statistics’ CPI Calculator:  http://www.bls.gov/data/inflation_calculator.htm

Finally, California’s fiscal years begin on July 1. For the years in column A, I used the first half of the year.  Thus, in column A, “2009″ means “fiscal year 2009-10″

By WAYNE LUSVARDI

That pounding headache in California’s head is from chugging too many municipal bonds.

The newest financial crisis afflicting the state could be the most serious, threatening the easy-money financing of such boondoggles as the California High-Speed Rail Authority and stem-cell research.

And forced restraint on bonds means the Legislature and Gov. Jerry Brown will have to make even more drastic cuts in what it funds.

In 2010, bond buyers picked up 80 percent of California’s general-obligation bond issues. But they bought only 22 percent of a $1.8 billion bond issue in October 2011.  The reason, according to state Treasurer Bill Lockyer? “Paltry yields.”

He’s wrong. The real problem behind the low rate of return is that, since 2007, stocks have become more secure investments than municipal bonds. That has occurred even though yields on stocks are lower (albeit some stocks yield attractive dividends that bonds don’t).

Greater Risk

Following the rule that “the greater the risk, the higher the rate of return,” government bonds historically have yielded lower interest rates because they have been safer investments.  But since the 2007 economic crisis struck, that truism no longer always is true.

Unable to attract enough of the big institutional investors to buy all of California municipal bond issues, this past year Lockyer rolled out a program to market bonds to the little investor. Instead of selling muni bonds in denominations of $1,000 each, the state would sell 40 bonds priced at $25 each. But marketing municipal bonds to small investors hasn’t been enough to plug the gap.

Exchange Traded Municipal Bond Funds — dubbed ETFs — are traded instantaneously like a stocks to small investors. The ETFs are trying to also create more demand by offering higher yields but thus far haven’t attracted enough investors.

Nationally, municipal-bond ETFs grew to about $7.7 billion in assets in the last quarter of 2010 before bond buyers got spooked and fled conventional muni bonds due to the continual state budget deficits and a forecast by bond expert Meredith Whitney of a wave of municipal-bond defaults.  Whitney’s prophecy was fulfilled, not by defaults of general obligation bonds, but by revenue bonds, such as those used for redevelopment.

By October 2011, however, municipal-bond ETFs had recovered to about $7.6 billion, still small potatoes for the $492 billion municipal-bond industry.  California ETFs totaled about $292 million in assets as of Dec. 1, according to Yahoo Finance.com (see table below). 

Those “Paltry Yields”

Municipal bonds have been in less demand this past year because of the drop in U.S. Treasury bond yields, which act as the standard for other interest rates.  However, with the inversion of stocks as safer than previously stable municipal bonds, the use of U.S. T-Bond yields as a benchmark for muni bond rates has become problematic.

In its latest sale, the state of California offered a 2.28 percent tax-free return on five-year bonds.  Five-year U. S. Treasury Notes only offered 1.04 percent.

By comparison, an Exchange Traded Municipal Bond called iShares California Municipal Fund (CM) had a 3.73 percent pre-tax yield on a five-year mutual fund and was rated A in credit quality as of Dec. 1.  The Consumer Price Index of All Items was running 3.5 percent as of October 2011, which means the net pre-tax yield would be a minuscule 0.23 percent on a California ETF.

A problem with ETF municipal bonds is that they track a stock index that typically has to be adjusted daily, so the yields may not be what they seem. Also, ETFs are like “day trading,” with the potential for greater volatility, as well as the risks of speculation. Municipal bonds conventionally sell at the end of each day, which restrains speculation.

“Investors can achieve transparency, and so sleep at night about their investments, but in order to do so they must demand it for themselves.  No regulator can provide it,” wrote Kevin Dowd and Martin Hutchinson specifically about the greater potential risk of muni bond ETFs and regulation. Their book is, “Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System.”

According to Yahoo Finance, some of the better-known California state-specific municipal bond ETF’s are:

.

The Los Angeles Times reported on Oct. 20, “Small Investors Shun California Tax Free Bonds.” It noted that bond buyers are concerned about the “roller coaster” rates and tiny yields of municipal bonds and thus are avoiding them.

Lockyer wants to take advantage of historically low rates to help fund a backlog of $35 billion of voter-approved general obligation bonds that are expected to be offered for sale again in the first half of 2012. But will there be enough buyers? 

Limited Government Imposed by Bond Market

What this shift from investment banking to trading portends for state and local governments is a greater volatility of bond prices and interest rates and the infusion of speculation — called arbitraging — into government bonds.  As you may recall, the shift from investment banking to trading is part of what facilitated the Mortgage Meltdown and Bank Panic of late 2008.

While there are many who are still calling for reforms and the criminal prosecution of those who allegedly caused the current U.S. banking system crisis, California is being compelled to expand into high-risk trading in order to finance the construction of schools, water systems and other public-works projects.  In other words, if we re-regulated the bond market and, say, banned muni bond ETFs, we would be doing so at the expense of halting some capital projects or deferring projects until they might just be cancelled.

Some would hail the halting of “waterless” water bonds, stem cell research that only grows cancerous bureaucracies and constructing oxymoronic luxury “affordable” housing — all funded with municipal bonds. Nonetheless, the decline of market demand for municipal bonds would place an unplanned financing limit on what government would be able to afford without any re-regulation, legislative reforms or ballot initiatives. Voters may pass all the ballot-initiatives to raise taxes they want, but it would still take the ratification of bond-market buyers or the state government would have to shift to a “pay-as-you-go” financing system.

Bond-Market Threat

It isn’t bond guru Meredith Whitney’s prophecy of hundreds of bond defaults that is threatening state and local governments. Neither is it a debt default by the state on its long-term bond obligations. Nor is it a lack of taxes due to Proposition 13, the lack of a split-roll property tax for increased taxes on commercial properties or the failure of a proposed ballot proposition for a $10 billion tax increase for even greater taxation on the already highly taxed rich.

Rather the threat is the pull-back of the bond market that is threatening to impose more limited government on California. Put more prosaically, neither the municipal bond market nor California is likely going to die with a bang, but with a bond-market whimper.

Right now the bond markets are putting a check on California’s largesse government.  Lockyer can uncheck the bond market by starting to offer much, much higher yields on municipal bonds, thus attracting buyers back to bonds.  But then, he won’t get much financed and he runs the risk of triggering inflation.

Maybe California bond investors have wised up.  They no longer appear eager to fund waterless water bonds, stem cell research that metastasizes bureaucracy and luxury “affordable” housing that most benefits the government — while getting effectively a zero rate of return.

The California bond party is over. The hangover will be long and painful.

NOV. 22, 2011

By WAYNE LUSVARDI

On May 4, 2011, the Los Angeles Times reported that the California Stem Cell Institute (aka California Institute for Regenerative Medicine – CIRM) loaned $25 million to the Geron Corp. in Menlo Park to conduct a clinical trial of embryonic stem cells to cure spinal cord injuries.  It was heralded as the first use of public funds from the California Stem Cell Institute – funded under Prop 71 – to conduct a human clinical trial for a cure.

Robert Klein, a low-income housing real estate developer, father of Prop 71, and the founding president of the board of the California Stem Cell Institute – said: “Supporting the Geron trial is a landmark step.”

By the middle of November 2011, Geron announced it was abandoning all stem cell research – for which it was the pioneer – to pursue cancer research instead.   The press headlines of Geron’s move were damning of stem cell research:

“Geron Move Shows Embryonic Stem Cell Research Not Successful”

“Scientists Rethinking Embryonic Stem Cell Research”

“Geron’s Exit Symbolic Ding for Stem Cell Research”

Geron had spent 15 years and $150 million developing its treatment for spinal injuries.  The Food and Drug Administration had approved human testing in July 2010.  Geron stated it would have had to spend $25 million per year to maintain its stem cell research.

On Jan. 23, 2009, Geron and University of California had previously conducted the initial study that led to the first-ever clinical trial using stem cells to cure spinal cord injuries.

Mini-Solyndra?

The Geron loan of public monies by a quasi-government agency using public funds smacks of the Solyndra Scandal.

The Solyndra scandal involved the U.S. Department of Energy (DOE) grant of a $535 million loan guarantee to Solyndra – a manufacturer of cutting edge solar panel technology – on Sept. 3, 2009..

But by September 2011 Solyndra had filed for bankruptcy and had laundered some of the loan money to operatives in the Democratic Party through George Kaiser, an Obama fund raiser and major investor in Solyndra.

Solyndra also received a $25.1 million tax break from the state of California.

There is no evidence in the Geron case of any political money laundering.   Presumably, the Geron Corp. is still on the hook to repay the $25 million loan and is still in business.  Terms and conditions of the Geron loan, and whether the loan was forgiveable, were not available, however.

Political Symbolism

Voters using public monies passed Prop 71 in 2004, which authorized $3 billion in stem cell research funding.   The ballot initiative was sold to the public as promising cures for paralysis, heart disease and cancer.

Prop 71 was also touted as urgently needed at the time due to the issuance of an executive order by former President George W. Bush in 2001 banning research using embryonic stem cells, although not adult stem cells.  Part of the appeal of Prop 71 was the anti-Bush vote.  President Barack Obama rescinded Bush’s ban on stem cell research in March 2009.

In 2008, researchers reported they had found a way to extract embryonic stem cells without damaging the human embryo.  In the same year researchers discovered that adult stem cells had the same regenerative potential and that embryos need not be used in research.

Whither California’s Stem Cell Research?

Discontinuance of stem cell research by Geron does not mean that all stem cell research will be affected.  Stem cell research will still be conducted by the National Institute of Health (NIH), including embryonic stem cell research.

Probably more damning to any continued state funding of stem cell reserach than Geron’s pull out is Geron’s statement that any cures for paralysis are uncertain and that payoff for any cure was over 10 years away, if ever.

The California Stem Cell Institute was desperate to show that it had finally funded a clinical trial for a cure after seven years of no payoffs from their research financing efforts.  This may explain why the California Stem Cell Institute loaned $25 million to Geron in a quickly aborted effort.

The Mysterious Cancer Research Ballot Initiative

Perhaps this is why a ballot initiative has been mysteriously placed on the November 2012 state ballot to tack a $1 tax on cigarettes to fund cancer research.

It would be no surprise that these funds would end up funding a new effort by the California Stem Cell Institute to finance cancer research now that stem cell research has been shown to yield highly uncertain results with no near-term cures.

Given anti-tax mood of the public, renewing Prop 71 for another $3 billion of funding may be a hard sell.  Morphing into cancer research might offer a better prospect of voter approval now that the Geron Corp. – the poster child of the Stem Cell Institute – has abandoned its stem cell research activities.

Neither would it be a surprise if the American Cancer Society and American Lung Association, both endorsers of the new proposed cigarette tax, end up with a portion of the tax finds for “public education.”

Despite their potential, stem cells haven’t been proven to extend the life of anyone yet with cancer or heart disease or reverse paralysis.  But public stem cell funding is proving you can establish so-called medical research bureaucracies in California with public funding and they are virtually immortal. Moreover, once public funding for such highly symbolic agencies is established it becomes cancerous, as the number of other non-profit agencies depending on the same funding tends to grow.

The question with publicly funded stem cell research is not how to cure cancer but how do you reverse the bureaucratic cancer that public funding for such efforts creates?

By JOHN SEILER

Due to the pension crisis, the California state budget is bleeding profusely from a gut wound. Yet in his pension-reform proposal announced today, Gov. Jerry Brown applied a Band-Aid.

The 12-point plan does include some worthy components, such as increasing retirement ages; moving new employees into a hybrid retirement plan that includes contributions to 401(k) plans and Social Security; and an end to pension spiking at the end of an employee’s career.

That would have been an adequate reform 12 years ago, but now is too little too late, Carl DeMaio told me; the San Diego councilman is running for mayor of America’s Finest City on a pension-reform platform. A longtime government reform activist, he headed the California Performance Review early in Gov. Arnold Schwarzenegger’s administration, an excellent cluster of reforms which the governor ignored.

“It takes some baby steps forward,” DeMaio said of Brown’s new plan. “But in the end, it’s completely inadequate for protecting taxpayers. It’s deja vu because it’s not reforming existing pensions,” only those of new hires in government. DeMaio was referring to earlier reform efforts, including one Brown himself proposed earlier this year.

Of Brown’s March pension reform proposal, my CalWatchDog.com colleague Steven Greenhut wrote at the time, “So these are good, simple measures that would — if the plan goes forward — halt some of the most corrupt pension practices. But these items will not fix the bulk of the problem, although they will save some money. They do not address oversized pensions or promote anything that will save the kind of money needed to get the system under control. ”

In the intervening seven months, as the pension wound has continued to suppurate, Brown has come with no more substantial cure.

Real Reform — or Insolvency

DeMaio said Brown’s proposal is the same as that which has been offered by local officials and seeming reformers in San Diego for many years, but which is totally inadequate. Opponents always say of substantial reforms for existing workers, DeMaio observed, “that the unions will resist the reform plan, and we don’t know if this can be done legally. But they’re not aware or aren’t willing to see that it is legal and possible. If you don’t reform existing pensions, the state will not be able to function — it will become insolvent.”

California’s pension crisis is so immense that the numbers boggle the mind. Several independent reports indicate that the state’s pension liability could go as high as $500 billion — or even $884 billion. The state pension funds simply have not recovered from the major hits they suffered during the recent recession.

“You can eliminate new pensions entirely and you still couldn’t pay for the pensions of existing workers and those already retired,” DeMaio calculated. So any reform that doesn’t deeply engage existing workers’ pensions — and even the pensions of those already retired — is irrelevant.

DeMaio also charged that it is “patently unfair” for government workers to get pensions that are so much more generous than the pensions earned by the private-sector workers who pay the taxes.

For the sustainability of the pensions, he said, the key is “contribution rates. I was harping on that 12 years ago.” The government employees just aren’t contributing enough to their own pensions to prevent insolvency.

Despite that, the unions have been carping at even Brown’s modest new reforms. “The governor has indicated that labor will not like many of his proposals. He’s right,” said Dave Low, chairman of the union coalition Californians for Retirement Security. “Unions across California have negotiated major retirement concessions, including increased payments by employees and two-tier benefits. These concessions have already saved the state, cities, counties and other entities hundreds of millions of dollars. We are strongly opposed to imposing additional retirement rollbacks without bargaining.”

And of course, in bargaining, they never will agree to any substantial reforms.

Real Reform

DeMaio said that, if California ever gets serious about pension reform, it will follow the model he is advancing in San Diego with his Comprehensive Pension Reform Initiative for his city, which will be on the local ballot next year. Its major features include:

* It shifts new hires from taxpayer-guaranteed defined benefit plans, which have seen costs run up so high, to 401(k) style defined-contribution plans;

* For existing employees, it “imposes a cap for five years on individual pensionable compensation.  An individual pensionable compensation cap produces bona-fide savings by reforming pensions for existing employees.”

Brown’s proposal really is “a political strategy to delay reform,” DeMaio said. “It’s fig-leaf reform. We already tried all that in San Diego, and it failed. If the governor only advances his new proposal, it won’t be successful.”

Public Demands Reform

DeMaio observed that “the need for fundamental reform is understood by the public. There’s widespread support not only by Republicans, but by Democrats and independents as well. The governor and his allies in the labor movement don’t understand that.”

DeMaio also said it’s unclear how the governor’s proposal affects public safety workers, whose members belong to the powerful police and prison guards unions. “The original discussion was that it wasn’t going to include them. I doubt he includes them.”

The actual Brown proposal, which of course is just a tentative plan put before the public, says this on public-safety workers: “The hybrid plan will combine those two components with Social Security and envisions payment of an annual retirement benefit that replaces 75 percent of an employee’s salary. That 75 percent target will be based on a full career of 30 years for safety employees, and 35 years for non-safety employees….

“The State Department of Finance will study and design hybrid plans for safety and non-safety employees, and will fashion a cap on the defined benefit portion of the plans to ensure that employers do not bear an unreasonable liability for high-income earners.”

Who knows what the “study” will turn up.

By contrast, DeMaio said of his reform initiative, “In San Diego, our reform treats everyone the same. Public safety, blue collar, white collar — all public-sector employees are treated the same.”

Unless the public safety employees are included in a state reform, “you can’t sustain it,” he said. “Math is math.”

Existing Retirees’ Benefits Cut, Too?

DeMaio even broached a taboo subject that I have covered before: Cutting the benefits not only of new hires and existing employees — but of those already retired and receiving benefits.

“If the governor were bold, he would seek a constitutional amendment applying pension reforms retroactively,” DeMaio said. “The unions never would go along,” but such a reform might be needed if ongoing reforms prove inadequate.

For example, California could cut the pay going to the 9,111 workers belonging to the state’s “$100K Pension Club” — those receiving pensions of more than $100,000 a year. If their pensions were cut, say, to $80,000, they wouldn’t end up using CalFresh EBT cards to buy caviar. They still would enjoy a comfortable retirement, just not a lavish one.

As DeMaio says, major reforms are coming, sooner or later. And the longer Brown and others delay reform, the further the pension amputations will cut.

By KATY GRIMES

The California Legislature’s last-minute bill binge upended the state. The battle in the Legislature wasn’t just about improving California’s financial stability. It was about establishing Democratic dominance and control over nearly every aspect of Californians’ lives.

The way this dominance was accomplished was using massive redistribution tactics.

But even with total Democratic control since Gov. Jerry Brown took office in January, Democrats still could not pass a sincere budget. Instead Brown and the Democrats rushed a questionable budget, claiming it was balanced, but using the same old bookkeeping tricks, gimmicks and hinky accounting ploys. This budget is predicted to last less than one year, and is already beginning to crumble.

On Friday, the final day of legislative session, members of the Assembly played a silly little word game when giving floor speeches, while they approved more spending instead of cutting waste.

The bills passed by the Legislature in the last three weeks of session should cause embarrassment. They are ugly bills, nanny laws, more regulations and cost increases. Many are absolutely worthless.

Noticeably, the only jobs Democrats have been promoting are labor-union jobs and highly subsidized green jobs. With the Democrats in charge, the Legislature has not been doing business as usual — it been business worse than usual.

‘Productive Session’

Senate President Pro Tem Darrell Steinberg, D-Sacramento, called it “one of the most productive sessions the Legislature has had in years,” the Sacramento Bee reported, and lamented the failure of the tax plan and energy surcharge bills as “both very unfortunate outcomes.”

“The message could not be any clearer,” Steinberg said. “The majority party going forward has to plan its agenda in ways that don’t depend on the two-thirds vote.” He meant that Democrats are still two votes shy in each house of gaining the two-thirds majority to pass tax increases. On everything else, they dominate with a mere majority.

And while Steinberg may feel proud of this session, Sacramento Bee columnist Dan Walters called most of the bills “junk.” He even was critical of Gov. Jerry Brown’s attempt to shove a last-minute economic stimulus bill through, writing, “Brown’s largely symbolic stab at economic stimulus through a corporate tax shuffle died.”

Several Republican legislators complained about how many of the bills in the last session were sponsored by unions. The last two days in the Assembly, it seemed that nearly every bill debated on the floor was sponsored by one or more unions. This did not go unnoticed and will lead to investigations.

The Assembly passed SB 116 by Steinberg and Sen. Kevin de Leon, D-Los Angeles, the legislation implementing the Single Sales Factor Element of the  Gov. Jerry Brown’s California Jobs First Plan, which would provide small businesses a $4,000 tax credit for each new in-state hire, and offer companies a tax exemption for purchases of new manufacturing equipment. Brown said, “The California Jobs First Plan closes a toxic loophole that rewards out-of-state job creation. The plan instead uses $1 billion in savings to support job creation right here at home.”

But the honeymoon glow did not last for long. After the Senate failed to pass the plan this week, Brown said, “It’s unbelievable that so many politicians in Sacramento would choose to protect cigarette makers and out-of-state corporations to the detriment of California jobs.”

Brown suffered another big failure. Legislators also shot down AB 724, another late bill by Assemblyman Steven Bradford, D-Los Angeles. AB 724 was the Governor’s attempt to continue a 1.5 percent tax on utility bills for renewable energy projects. The tax would have cost ratepayers $3.2 billion over eight years. The high cost of clean technology research and energy-efficiency programs was evidently too much for :egislators, including four Democrats, even though it was a key component of Brown’s job generation plans.

What Did Pass?

The Legislature passed AB 1069, by Assemblyman Felipe Fuentes, D-Los Angeles, a one-year extension of a film credit, worth $100 million, designed to keep Hollywood productions in the state. Opponents criticized the Legislature for wooing Hollywood while the state was laying off teachers and cutting social services.

Hollywood must be happy because so far, the state has allocated a total of $300 million in film credits, according to the California Film Commission, a state agency.

A last-minute bill described by some Republicans as “a danger to democracy” passed both the Assembly and Senate and is headed to the governor. SB 202 by Sen. Loni Hancock, D-Berkeley, calls for moving ballot initiative elections from June primaries to November general elections, when there is a higher voter turnout. With the higher turnout, voters tend to be more liberal than during June primaries.

But many Republicans say this is just an attempt to steal elections. Specifically, this time Republicans say that it’s a ploy to stop two measures opposed by unions, from being on the June 2012 ballot.

One measure, a paycheck protection measure, would prevent unions from using members’ dues for political donations. The other measure, filed by the Howard Jarvis Taxpayers Association, the California Deficit Prevention Act, is a spending limit measure designed to curb increasing state spending. Both potentially would greatly effect state unions.

The other criticism from several Assembly members during debate was the gross attempt to change the rules on voters midstream in the election cycle. The potential June ballot is just nine months away.

SB 202 was written on Friday, the last day of the legislative session, and one-week past the bill deadline. It was presented in the Senate well after midnight later the same day. “We’re not satisfied with stealing bills,” said Senate Minority Leader Bob Dutton, R-Rancho Cucamonga. “Now we’re going to steal elections.”

Perhaps the bill most exemplifying the union-sponsored legislative session was called the “babysitter bill,” which was the fifth version of this bill. The bill would encourage the unionization of nearly 100,000 child-care workers in the state. Passage of the bill could greatly impact and expand the numbers of dues-paying union members in the state, notably also the primary financial support of the Democratic party.

Republicans vehemently criticized AB 101, by Assembly Speaker John Perez, D-Los Angeles, and accused Democrats of going after an entirely private care industry. “Let me get this straight. In order to get more access to babysitters, we are going to unionize babysitters?” asked Assemblyman Tim Donnelly, R-Hesperia. “We’re going after babysitters now?”

Democrats tried to argue that the bill was about the right to organize, while Republicans said that it was merely another way to gain more donations from labor unions. “The right to organize is as American as apple pie,” Assemblyman Warren Furutani, D-Long Beach, said.

“Why shouldn’t they have the ability to organize, to benefit?” asked Assemblyman Sandre Swanson, D-Oakland.

While disagreement was registered on the faces of many Assembly Democrats during the debate, the bill easily passed, 48-23.

“This bill has been and will be the most ridiculed bill of the year,” Assemblyman Jim Nielsen, R-Biggs, said.

All previous versions of the bill were vetoed by former Gov. Arnold Schwarzenegger, a Republican.

‘Scattergun Approach’

Perhaps one of the most poignant moments during the last day of the Assembly session was a plea for relevance and a focus on priorities from Assemblywoman Diane Harkey, R-Dana Point. Harkey criticized leadership for allowing a “scattergun approach” to the legislation process, instead of sticking to priorities important to the state. “I am not seeing a reduction in the debt. More spending is not going to get us out of it,” Harkey said. “There is no money.”

Harkey was critical of the number of spending bills and increasing regulations. “The regulations passed in this building the last few days leave me very confused. And now, unionized day care!”

Harkey asked colleagues to stop producing garbage bills. She suggested that at least while on recess, they can’t do any more damage to the state.

A bill facilitating a compromise between Amazon.com, the large Internet retailer, and the state of California, was passed by both houses. AB 155 by Assemblyman Charles Calderon, D-Whittier, would allow Amazon to wait until September 2012 to begin to collect state sales tax on online purchases by California residents, while the retailer pursues federal legislation.

Last week Amazon announced its intent to create two large distribution centers in the state, estimated to create 7,000 new jobs. Many also hope that this compromise leads to a win-win between the retailer and the 25,000 affiliate businesses affected by the passage of the sales tax.

Proving that special interest is thriving in the state, legislators approved changes in California’s environmental law in order to speed construction of a proposed “green” football stadium in downtown Los Angeles.

After  passage of SB 292 by Sen. Alex Padilla, D-Pacioma, the governor endorsed a similar measure, AB 900,  granting California Environmental Quality Act (CEQA) exemptions to other large construction projects certified as environmentally friendly. While relief from the state’s constricting environmental laws can only be considered good, many Republicans asked why this would not apply to small and medium businesses since legislators openly acknowledged that the CEQA regulations are business-killers.

“The CEQA reforms are an effort to improve the jobs climate,” Brown said referring to the 40-year-old California Environmental Quality Act, which the new proposal would amend. “I think that will be good.”

There is no denying the relationship between Democratic legislators and labor unions. The SEIU, AFSCME and the CTA benefit greatly whenever another industry is taken over through legislation.  Because, as Democrats vote as they did last week to expand the size of unions by taking over another industry, union membership and dues increase in value.

As the membership and dues employees are required to pay the unions continue to grow, unions gain more power and significance to Democratic lawmakers. Finally, that significance is manifested during elections when unions mobilize the membership to vote in elections.

What Gov. Brown does now is anyone’s best guess. My bet “at this stage in his life” is that he will sign more legislation hurtful to private sector job creators, resulting in legislation bad for the entire state.

By JOHN SEILER

California’s “Jobs Gap” with the rest of America jumped to a record high, according to new calculations. In 2010, I devised the “Jobs Gap” to measure how much worse unemployment is in California that the rest of America.

The Jobs Gap is calculated by subtracting the national unemployment level from California’s.   Of course, the major factor affecting California’s economy is national economic policy. What the Jobs Gap calculation does is filter out the “noise” of the performance of the national economy. What’s left is the affect of California policy on state jobs.

Below is the latest yearly chart. (The 2011 number is an average through July.)

Notice the green line at the bottom. That’s the “Jobs Gap” number. It shows that, as recently as 2006, the Jobs Gap was small — just 0.3 percentage points above the national average.

Then it increases rapidly, until it reaches a record level of 3.0 percentage points in 2011.

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Causes

What caused the increase? More study needs to be done. One culprit was the housing boom-bust, which hit California especially hard in 2007-08. But Arizona also was hit. Yet its current unemployment rate was 9.4 percent for July, just 0.3 percentage points above the national rate.

Another factor for California was that, after Gov. Arnold Schwarzenegger lost his 2005 reform election, he shifted to the Left on economic policy. In particular, he signed into law AB 32, the Global Warming Solutions Act of 2006. It mandates reductions in greenhouse gas emissions in California of 25 percent by 2020.

Just to show how fast things have changed in five years, “Global Warming” now is called “Climate Change” because of rising skepticism of a human role in the earth supposedly getting hotter.

From 2003 to 2005, Schwarzenegger played the “goal tender” role of vetoing most jobs-killer bills. Hence, the state’s economy performed fairly well, as the Jobs Gap numbers show.

Put his signing of AB 32 in 2006 indicated he not only had fallen down as the “goal tender,” but was actively helping the other side — the jobs-killing side — score points. There was no one left with any power in California to defend jobs.

Gov. Jerry Brown, in office since Jan. 3, 2011, has only made matters worse. Here is the monthly Jobs Gap chart for 2010-11:

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It’s Getting Worse

Again, notice the green line. It soared to 3.4 percentage points earlier this year, but then started declining as the national economy improved. California exports also have been strong.

But in July, the Jobs Gap began increasing again. It’s too early to say why this is happening. But Brown has been as relentless as Schwarzenegger in attacking jobs. In particular, Brown signed a law mandating that one-third of California’s electricity must be generated by renewables by 2020. It likely will sharply raise energy costs.

Moreover, the average Jobs Gap for 2011, from January to July, was 3.0 percentage points — the highest yearly average so far. The average for 2010 was 2.8 percentage points. And as recently as 2009, it was 2.3 percentage points.

And with the Jobs Gap increasing again, it looks like there’s no respite in sight for Californians still standing in job lines.

Dismal Jobs Creation

“Jobs creation was dismal in July, when only 4,500 more jobs were created than in June” for California, Esmael Adibi told me; he’s director of the A. Gary Anderson Center for Economic Research and Anderson Chair of Economic Analysis at Chapman University. “In the summer months, high school kids and college graduates join the work force. My concern is: What happens in August with the jobs numbers? Lots of things are going wrong. The stock market has been declining. Then there are the problems with the European banking system.”

He said that, earlier in 2011, five immediate economic problems threatened the California economy. Two have been resolved.

1. First was the Japanese earthquake and tsunami, which cut exports from California. “The worst is over, they’re in recovery,” Adibi said.

2. Second was that oil prices were soaring. They since have receded.

But the other three problems remain:

3. The state budget in June was resolved with “a solution that is no solution,” he warned. The budget was “balanced” by anticipating $4 billion in extra revenues that just aren’t going to happen. Indeed, earlier this month Controller John Chiang and Brown’s own Department of Finance reported that revenues were declining.

Next January, Adibi said, major adjustments will need to be made to push the budget back into balance.

4. The European banking situation continues to get worse.

5. The federal government’s continuing problem with debts and deficits. “These are government, man-made problems,” Adibi said. ”Unless we get a solution on the debt and deficit, the market might act as it is now. This is not good news for the economy.”

He said that the Federal Reserve Board, having propped up the economy with record low interest rates and money printing, now is “out of options. The real problem is a lack of certainty in government. In Europe, they’re acting like a bunch of children. Government is incapable of realizing what is going on. Improvement can only come with fundamental changes.”

California Solutions

The American states, including California, are at the mercy of faulty federal policy. But Adibi said the the California Legislature and Brown still can “get their acts together and fix the budget. They can reduce the bureaucracy and streamline the permitting.”

Only in the last few weeks has Brown noticed that California just isn’t creating enough jobs. He appointed as his new Jobs Czar Michael Rossi. In my article, “Brown’s ‘Jobs Czar’ Really a Bailout King,” I broke the story that Rossi’s was a banker whose main accomplishment was grabbing federal bailout money, not creating real jobs.

And last week Brown released a gimmicky jobs plan that won’t help at all.

If Brown really were serious about reducing California’s Jobs Gap, he would immediately take two steps:

1. Announce that he no longer supports any tax increases. Instead, he’s reviving the flat-tax reform he once championed.

2. Suspend AB 32 for one year, as the law allows.

Otherwise, there’s no reason why anyone should believe he’s serious about closing the Jobs Gap. And jobs and businesses will continue fleeing the state in record numbers.

By JOHN SEILER

So much for record gains in California state and local pension funds. The stock market crash of the past week worsened the funds’ crisis, putting taxpayers further on the hook for funds guaranteed by law.

Less than two months ago, CalPERS boasted that its fund had gained 20.7 percent in the previous calendar year, July 2010 to June 2011. The California Public Employees Retirement System is the largest pension fund in the nation.

“This is a great one-year achievement that powerfully affirms our strategy and the skills of our investment team,” said Chief Investment Officer Joseph Dear, as reported by CalPERS. “While we can’t assume that we’ll sustain this high level of earnings, we have averaged a net return on investments of 8.4 percent for 20 years.”

“These strong returns are a testament to our commitment to our long-term investing principles,” said Anne Stausboll, CalPERS Chief Executive Officer. “Our members, employers and California taxpayers all benefit from our disciplined approach to investing.” On June 30, 2011, the fund’s balance stood at $237.5 billion.

Since then, the fund declined to $226 billion on August 5. Then it crashed again to about $220 billion on yesterday, August 6, based on preliminary estimates. Combined, that’s a loss of about $17.5 billion in just five weeks, or 7.4 percent.

So practically half the gain from last year was wiped away. And there’s no gain for the new fiscal year. Yet the fund has to make at least 7.75 percent a year, on average, to keep its funding levels high enough to avoid further forced taxpayer contributions.

“We’re a long-term investor and have a long-term investing horizon,” CalPERS spokesman Wayne Davis told me. “We’re able to ride the waves — when it goes up or when it goes down.” As to the crash in the market, he quoted Joseph Dear as saying, “There’s fear out there.”

Back on July 19, the Fresno Bee reported, “Steve Maviglio, spokesman for the union-backed Californians for Retirement Security, said the solid returns should stall the movement toward overhauling the pension system.

” ‘When you have these kinds of numbers with the economy struggling, it shows the funds will be healthy in the long term,” he said.”

Yesterday I asked Maviglio about his statement of three weeks ago. “The 30 year average return for CalPERS averages 7.5 percent,” he replied. “My point was that the pension-bashing crowd used the depths of the recession as the reference point to sound an alarm about pensions instead of the long term returns actuaries use. And given the last two days on the market [August 5 and 8], the alternative that reformers are pushing — 401(k)s — are looking even worse than before.”

CalPERS Is the Market

Worse for public employees expecting pensions at current levels, perhaps, but not for taxpayers. The problem with the 401(k) comparison is that “CalPERS is so big it basically tracks the market,” Dan Pellissier told me; he’s president of California Pension Reform, which is pushing to put a pension-reform initiative on the November 2012 ballot. “It’ just can’t beat the market. Fundamentally, they are the market.”

The smaller funds may be able to do better because they are more nimble. But as Wayne Lusvardi reported on CalWatchDog.com on July 19, “The public stock component of Cal-PERS’ investment portfolio had a 30 percent return, while the Standard & Poor’s 500 Index had about a 31 percent return over the same time interval.  So in public stocks, at least, the CalPERS fund slightly under-performed a plain-vanilla index fund.  Politicians couldn’t help make public union pensioners any windfall profits over investing in index funds invested in a 401(k).

“An index fund is a passively managed fund designed to match the performance of the whole market or mix of funds.  So whatever commissions CalPERS paid all its external fund managers to invest in public stocks apparently could have been saved just by passively investing in the S&P 500 Index.”

Peter Pan Portfolio

John Moorlach told me that CalPERS’ fund is similar to the “Peter Pan Portfolio” that led to Orange County’s bankruptcy in 1994. The meaning: If you just believe, the fund will be all right. In Orange County’s case, Treasurer-Tax Collector Bob Citron kept saying low interest rates would make the portfolio perform. But then interest rates soared and the county went bankrupt.

Back then Moorlach was an accountant warning of the county’s severe fiscal problems. Reporter Andrew Bary of Barron’s called Moorlach and wrote a story with the title, “Peter Pan Portfolio:  Orange County bet that interest rates would stay low forever.” Moorlach later was appointed to replace Citron as treasurer-tax collector. And in 2006, he was elected as an Orange County Supervisor.

This time, he said about CalPERS’ Peter Pan Portfolio that fund managers are saying, “We’ve got to hope and pray that the Dow goes up,” meaning the Dow Jones Industrial Average.

“To have the market determine the pensions is scary, because you can’t control the investment arena,” he warned. “The pension spokespeople say, ‘We don’t have to fear,’ sort of like that’s half the story” because pensions go up in many years. “But don’t patronize me. Some years it goes up 20 percent, but the next year it will go down. If you lose 50 percent, you have to make 100 percent the next year to break even.

“It’s pretty risky to put it on taxpayers,” who have to make up for any market shortfalls because of legal guarantees in union contracts, as well as in the California Constitution. “They’re doing badly on their portfolios, too. And they’re supposed to pay more in taxes.”

Reform Initiative

Pellissier concurred. “The real point here is taxpayers should not see 5 percent daily swings” in the pension funds guaranteed by their tax dollars, he said. “Taxpayers need for public employees’ retirement programs to get off the stock market roller-coaster. Stop making pension promises to employees based on the stock market.”

His initiative would get replace the current defined benefits plan, in which the taxpayers are on the hook, no matter what happens in the market, with a defined contribution plan. In the words of the current reform draft, “All government employees hired on or after January 1, 2013 will receive an employer match into their defined contribution plan of up to 6 percent of salary, 9 percent for new safety employees.”

Employees could contribute more on their own if they wished. “It is a very simple approach,” he concluded. “Cap the government employer cost for new pension benefits at the private sector level and then let employees decide how much more of their money they want to pay.  Give folks who do not have Social Security an equivalent benefit.  Require a majority of pension board members be independent and experts.”

Default Next?

One thing I’ve always warned is that, if reforms aren’t made soon, even the pensions of current employees could be reduced — despite laws, union contracts and the California Constitution.

I put that question to John Bury, an independent actuary and author of a popular blog on pensions. “Default to retirees is probable, first by decreasing or eliminating COLAs and, down the road, direct reductions, possibly through taxing pensions,” he told me. So, it might already be too late to fix the system. “The reason this pension crisis isn’t being effectively addressed is that nobody dares to cut benefits or pay for the benefits already promised so there will be more Central Falls solutions.”

Bury was referring to the city of Central Falls, Rhode Island, which is in bankruptcy. Unlike the Orange County bankruptcy of 1994 or the Vallejo bankruptcy of 2008, Central Falls is trying to cut its payments to those already retired. The Providence Journal has reported on the matter.

Bury was even more pessimistic on his pension blog, where he wrote, “What will this precipitous drop in asset values do to public pensions across this country?

“Doom them.

“Most of these plans are using ridiculously high interest assumptions to justify keeping required contributions low.”

What’s Next?

“This crash simply reaffirms the need for serious statewide pension reform in California,” Jack Dean told me. He is vice-president of California Pension Reform and publishes the Pension Tsunami Web site, which chronicles state and national pension problems. “The system was unsustainable seven years ago when I started tracking the problem. The financial meltdown in 2008 didn’t cause the underfunding, it merely exposed the enormity of it.”

Dean added that the market crash of recent weeks “increased taxpayers’ liabilities for overly-generous public-employee pensions even as their own pensions and 401(k) accounts lost even more value. Not only is this path unsustainable, it’s also unfair, and taxpayers are eager to do something about it.”

How the stock market performs in coming weeks and months will determine what further steps will be taken by fund managers, taxpayers and voters. Unless the market makes a remarkable recovery, cuts seem to be inevitable. A market decline, or even stagnation, will spark chaos.

by WAYNE LUSVARDI

To California redevelopment advocates, the policy brings the Midas touch to cities, turning everything into gold for the Golden State. Redevelopment fans point to all the beautiful new malls, restored Old Town business districts, industrial parks and mixed-use developments with trendy condos and apartments as self-evident proof that King Midas has visited them.

To cash-strapped cities, redevelopment has been a purported savior.  Taking it away, as proposed by Gov. Jerry Brown and the state legislature, is perceived as stabbing King Midas’ hand.

But why would so many liberal, Democratic legislators vote to end redevelopment if it truly gave cities the power of the Midas touch?  Because it robs public schools and public services of about $1.7 billion in revenues each year that have to be backfilled with other funds.  Redevelopment is like the lyrics to the Hollies British pop and rock group song “King Midas In Reverse”:

“I’m not the guy to run with ‘cause,
“I’ll throw you off the line
“I’ll break you and destroy you given time”

He’s King Midas with a curse,
He’s King Midas in reverse

All he touches turns to dust
All he touches turns to dust

Reversing Prop. 13

But there is another underside to redevelopment that is rarely, if ever, discussed. Not only does redevelopment rob schools and first-responder services of revenues, it subverts California’s Proposition 13, the tax-limitation measure passed in 1978.  Behind the more than 400 glossy redevelopment agency websites in California marketing the advantages of redevelopment with photos of beautiful new real estate developments is the reality that redevelopment neutralizes Prop 13.  Redevelopment condemns properties with low tax revenues, then up-zones them to achieve a higher property and sales tax base.

Redevelopment proponents say that Prop. 13 is the cause of the expansion of redevelopment in California and the cause of the lack of revenue to balance the state budget. No. It isn’t Prop. 13 itself, but the irrefutable reaction to Prop 13 — the expansion of redevelopment — that has caused a $1.7 billion hole in the state budget.  Otherwise, why would state officials vote to repeal redevelopment?

Banking on Blight

According to a 1999 report, “Banking on Blight,” the City of Long Beach had 54 percent of its land area within designated redevelopment project areas.  The City of Lancaster had 49 percent, Compton 40 percent and Burbank 17 percent.

The percentage of the property value of redevelopment areas of all city properties was 46 percent for Lancaster, 32 percent for Compton, 19 percent for Burbank and 17 percent for Long Beach.  The City of Lancaster had a whopping 27,702 acres — more than 43 square miles — under redevelopment. In the City of Long Beach, 17,153 acres — more than 26 square miles — was so designated.

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As of June 30, 2010, the net “assets” of the Redevelopment Agency of the City of Lancaster were a whopping $218,101,533 in the red! That’s what they owed. (Inside the link, download the June 30, 2010 document. The number is on page 6.) That happened even as the The Lancaster School District was closing old school facilities amid declining attendance and trying to plug a $12 million budget deficit as of March 2010.  As the song says, “All he touches turns to dust.”

The City of Compton has a $25 million general-fund budget deficit out of a total $58 billion budget and no reserves, as of 2011. The Compton School District has been facing budget shortfalls since the 1990’s, despite forming its redevelopment agency in 1967. Again, “All he touches turns to dust.”

The City of Burbank has a balanced budget as of 2011, but this is mainly due to an economic base in the entertainment and media industry, a regional airport and lack of reliance on new auto sales, which fluctuate. “All he touches turns to dust.”

The City of Long Beach is facing an $18.5 million budget deficit and rotating fire station closures.  The Long Beach School District is facing $60 million in budget cuts.  ”All he touches turns to dust.”

It’s clear that the latent or covert function of redevelopment in California is to undo the property tax reassessment protections of Prop 13.

The remainder of the lyrics to “King Midas in Reverse” put it well:

It’s plain to see it’s hopeless
Going on the way we are
So even though I’d lose you
You’d be better off by far

He’s not the man to hold your trust
Everything he touches turns to dust
In his hands
Nothing he can do is right
He’d even like to sleep at night
But he can’t

All he touches turns to dust
All he touches turns to dust
All he touches turns to dust
All he touches turns to dust

I wish someone would find me
And help me gain control
Before I lose my reason
And my soul

Here’s a YouTube of the song:

By WAYNE LUSVARDI and CHARLES B. WARREN

Democrats in the California Legislature want to repeal the property tax reassessment protections of Proposition 13 for commercial properties under the dubious notion that there is a pot of California 49er gold at the end of the rainbow. Prop. 13′s existing protections for homeowners would remain the same.

If the commercial protections are removed, this would create what’s called a “split roll”: different tax rates would apply to home and commercial property.

The vehicle being used to create split roll is  AB 448. But Democrats, to twist a phrase from Mark Twain when he was in California, may find that “there’s no gold in them thar hills.”

The current system of property taxation in California under Prop. 13 is based on reassessing all properties in the state only when there is a valid sales transaction, just as capital gains taxes are paid only when stock is sold.

Under AB 448, all 494,693 commercial properties in the state would be reassessed annually, while residential properties would still be reassessed only upon resale. It is uncertain if the existing 1 percent base tax rate and 2 percent annual maximum inflation adjustment under Prop. 13 would stay the same.

Proponents of increased taxation as a solution to California’s structural budget deficit have clamored for years for adoption of a more “equitable” split commercial-residential property roll tax. They say it would raise the assessed value of all non-residential property to the property’s market value. To such taxation advocates, “rich” commercial property owners are being granted an unfair subsidy that is robbing public schools and the medically needy.

However, the recent real estate market crash has seen commercial property values falling to levels that now are generally at the same level with assessed value ratios.

The problem with the proposal currently being floated about the state legislature is that no one seems to have done some simple arithmetic.

In 2008 economists William Hamm and Jose Alberro completed a study, “The Economic Effects of Adopting a Split Roll Property Tax.” It concluded that, as of 2007, commercial properties were assessed at 60 percent of their market value and residential properties at about 53 percent of market value.

We asked Co-Star Real Estate Market Data service to trend commercial real estate values in California from 2007, which was near the peak of the Real Estate Bubble, and coincident with the market data that Hamm and Alberro relied on in their study.

35 Percent Commercial Property Decline

The results of Co-Star’s analysis of 11,145 sold properties indicate that average unit values for all commercial properties have declined about 35 percent from 2007 to the end of 2010. This is generally consistent with other national commercial property value indexes, such as Moody’s Commercial Property Index.

Co-Star reported that the average unit price of all sold commercial properties dropped from about $185 in 2007 to $117 per square foot (36 percent) by the end of 2010. Smaller owner-user properties declined from $142 to $100 per square foot (30 percent).

California Commercial Property Unit Price Trend

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If commercial property values have declined about 35 percent since 2007, their market value today would be about 65 percent of the value at that time.

We additionally contacted the California State Board of Equalization for the commercial property tax assessment ratio they used for the years 2006 to 2010, which were:

2006 — 65.6 percent
2007 — 61.0 percent
2008 — 59.9 percent
2009 — 58.0 percent
2010 — 65.1 percent

Change in Commercial Market Values and Assessment Ratios

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Split-Roll: No New Revenues

Thus, extinguishing Prop. 13 reassessment protections for commercial properties would be a non-starter. It would not yield any large increase in tax revenue, as shown in the table above.  It would be another California Gold Rush, but for fool’s gold.

From 1850 to 2011, California has gone from “gold country” to “tax country.” The Party of Government in California is like the opposite of Rumpelstiltskin — they know how to turn gold into straw.

Perhaps poet John Greenleaf Whittier, one of the early founders of the Republican Party, said it best:

Give fools their gold, and knaves their power;
let fortune’s bubbles rise and fall;
who sows a field, or trains a flower,
or plants a tree, is more than all.

Note: This is the first in a series of stories on California’s proposal to eliminate the protections of Proposition 13 for commercial properties.  We won’t be responding to comments until subsequent articles are also posted expanding and clarifying the above.  However, please leave comments.

Next: Part 2 – “Dunning Commercial Prop 13 is King Midas in Reverse.”

Wayne Lusvardi is former chief appraiser for a large water district in Southern California and writer at Calwatchdog.com.  Charles B. Warren, ASA, MRICS (Urban-Real Property), is a former county assessor and currently an appraiser in San Francisco.

By JOHN SEILER

The NBA season is over. But a full-court press is on by Gov. Jerry Brown and the tax-increase forces in the Legislature and government-employee unions to increase taxes $9 billion. In his video address Sunday, Brown talked about the state’s budget problems, including budget cuts and ongoing reforms that would “put the budget on a firm footing.”

He called on four Republicans in the Legislature to join the majority Democrats for the 2/3 supermajority necessary to pass the tax increases. Here’s the YouTube, 2:30 minutes long:
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But he only talked about the government’s budget problems, not the problems facing the businesses and workers of the state as the economy again may be tipping into a recession. For him, the state’s high jobless rate of 11.9 percent — second highest of the states after Nevada’s — just isn’t a priority. He cares about jobs in the government sector, but not those in the private sector that pay for the government sector.

The attitude was a little different today in a 30-minute press conference he held with state leaders.

He spoke of budget cuts and a realignment already under way, but that there still remains a need for “tax extensions.” He insisted that the budget should not be crafted by “talk show hosts,” meaning John & Ken on KFI 640 in Los Angeles, “theorists in Washington,” meaning Grover Norquist of Americans for Tax Reform, and “bloggers,” meaning many offenders, perhaps including our site’s blog.

He called on everyone to get together and “work for California.” Which isn’t the same thing as creating private-sector jobs.

At the press conference, he introduced Bill Dombrowski, the head of the California Retailers Association, which recently backed the tax extensions-increases. Dombrowski spoke of ending the uncertainty concerning California’s level of taxation as a way to promote state businesses.

But the numbers don’t bear him out. The problem is that the whole of the United States, not just California, is tumbling from prosperity back into recession.

Consumer Confidence Low

Also today, Chapman University’s A. Gary Anderson Center for Economic Research released its latest California Composite Index of Consumer Confidence. The school will unveil its latest economic forecast, for 2011, on Thursday.

The findings indicate that the economy already is being hit hard, and a tax increase would make business and jobs retention and creation even more difficult.

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The chart shows that consumer sentiment has risen slightly in recent months — but still remains below 100. Anything below 100 means that consumers are not optimistic.

It’s also noteworthy that California’s consumer sentiment remains significantly higher than the national sentiment. That means that the national situation, if such pessimism is borne out, could sink California’s relative optimism.

Esmael Adibi, director of the Anderson Center, told me that California state income taxes now “are back to where they were” before then-Gov. Arnold Schwarzenegger’s increases were imposed in 2009 because the increases expired in January. However, the sales tax and income tax increases remain in effect until July 1 — unless they are extended.

“Clearly, if the taxes are extended, nothing fundamentally will change from last year” — 2010, when the tax increases were in full force. “But if they eliminate the taxes, that should boost consumer spending, such as on cars and other items, which would be good news.”

He said, for example, that if the sales tax goes back to the pre-2009 level, then a car buyer might use the savings to upgrade to a more expensive model. Or someone who might have avoided purchasing a new car could change his mind and head over to the car lot.

Factors Influencing Consumer Spending

Adibi said that several factors will influence consumer spending in the coming months:

1. Low stock prices. The Dow Jones average rose just 1 point today, after six weeks of declines.

2. Higher gas prices. “When people spend more on gas, they spend less on everything else,” Adibi warned.

3. Tax increases. “Adding taxes to the above would dent spending, which is a source of sales tax. That’s not good news for the state as a whole, or for the state government in terms of tax collection.”

4. Depressed consumer sentiment, as outlined above.

5. Declining home prices. The state, and America, are now in a “double dip” drop in home prices.

6. Jobs. Adibi expects “no decline in the unemployment rate any time soon.” The Bureau of Labor Statistics will release its latest state unemployment numbers for May, on June 17, this Friday. The national numbers, released June 3, showed a slight increase of 0.1 percentage point in May, to 9.1 percent.

What About the Workers?

The following graph also shows U.S. non-farm business workers’ decreasing share of of the overall economic pie, especially after the recession hit in 2007. These are non-governmental workers. Although the numbers are for the nation as a whole, California’s numbers would be similar. Essentially, the private sector that pays the taxes to support the government sector has shrunk, and along with it the tax base.

No wonder federal, state and local deficits are so high: There just aren’t enough workers to support all that government spending. Gov. Brown’s tax extensions-increases would shrink the productive business sector even further, to prop up the expanding government sector.

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The upshot of all this is that California’s economy, as with the overall U.S. economy, is stagnating at best — and well could turn downward quickly. If that happens, unemployment would increase, putting even greater pressure on state social services. The unemployed are more likely to need Medi-Cal, unemployment, food stamps and other services.

In turn, the added need for these services would increase state spending, and thus increase the state budget deficit, even if taxes are increased.

As with his predecessors, Gov. Gray Davis and Gov. Arnold Schwarzenegger, Gov. Brown has failed to prepare the state for the return of hard times that is inevitable, perhaps as early as later this year. The business cycle has not been repealed.

Neither has the importance of cultivating jobs creation through reasonable government taxation and regulation policies.