California Has A Negative Net Worth in the "Hundreds" of Billions of Dollars

The Sacramento Bee has a headline that reads: "State auditor: California's net worth at negative $127.2 billion".

As troubling as that headline is, the most startling material is buried in the last paragraph of the article:

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees' future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody's, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California's, it could push its negative net worth down by several hundred billion dollars.

A Depressing Look at the CA Sec. of State's Office: why it takes CA 43 days to do what TX does in 5

I've always wondered why it takes week for the CA Sec. of State's Office to process business filings. Often these delays prevent business owners from getting licenses and opening bank accounts.  I was surprised to learn (not really though) that it only takes New York seven days and Texas five days to process similar filings.

Recently, Debra Bowen, the Secretary of State was grilled in front of the CA legislature and it wasn't a pretty picture.  It revealed an office so out of date that it actually relies on 3 x 5 index cards as its filing system.

More from the OC Register:

"I almost needed smelling salts the first day I took a tour of the Secretary of State's office," said Bowen, a former Marina Del Rey legislator who was first elected California's chief elections officer and business records clerk in 2006. "It was just so incredibly paper-driven."
Bowen's office has taken heat in recent days after it was revealed that her staff was taking 43 days to process business filings. As Assembly Budget Committee staff reported, this backlog delays businesses from starting up or hiring employees and postpones business tax payments.
New York processes such documents in seven days, committee staff found. Texas, five days.
"There is a scoreboard," Daly said, referring to the other states' better turnaround times. "At some point, the time for excuses is over."
Bowen says her office needs $8.9 million in new money over the next fiscal year, and millions more after that, to fund dozens of new staff positions necessary to handle the workload and reduce the backlog until a new, digital filing system comes online in 2016.
That new system, known as California Business Connect, will create a central records database and put the Secretary of State's services on the Internet. But Bowen complained that the state's procurement process is needlessly protracted and requires her to spend "a ridiculous amount of money" just on the paperwork to "get the project on the docket to get done."
"We spend a year getting the feasibility report done. Then it takes a several months after that to hire a contractor to write the request for proposal. That's another three to four months – it could be even longer than that," Bowen told the subcommittee. "That one was approved by the Legislature in July of 2011. The request for proposal, the RFP, was released in August 2012. Draft bids from vendors were submitted in late January of this year and are currently being reviewed.
"So ... the normal processing time for a large IT project ... you get to 2016," she said. "That has to be changed."
Further complicating matters, Bowen said, is her office building's lack of outlets and her staff's requirement to use the state Department of General Services to procure rewiring services. She specifically asked the committee for authority to pursue the rewiring on her own, without the assistance of the department, which acts as the "business manager" for other state agencies.

Over-Hyped Sequestration Amounts to One Week's Worth of Spending Cuts

Given the amount of doom and gloom that is reported surrounding the impending sequestration cuts, one may be surprised to learn that the cuts will result in a decrease in projected spending by only 2.3%.  Hardly an unmanageable amount.

Put another way, it would be equivalent to having Federal spending take a week long holiday.

Despite these figures, sequestration has been presented by politicians and the media as the next "cliff" (didn't we just avert one a few weeks ago?).  For instance, just this weekend, the White House released a menacing 7 page memorandum listing all the programs, services and agencies that would be affected.  Obviously, the list is meant to incite emotion and evoke fear.  After all, the document tells us that their will be cuts to food safety inspectors, airport security, national parks, education, amongst many, many more.

As I read through the list, I couldn't help but remember a similar menacing list produced by Governor Jerry Brown in his campaign to pass Proposition 30.  Californians were told that if we didn't vote for increased taxes, key government services would be shut down.  In fact, the Governor even released the names of dozens of state parks that were to be "closed" in the event that Proposition 30 did not pass.  These scare tactics apparently worked and Proposition 30 ultimately passed.  Of course, its passage seemed to only wet the appetite of those who have always sought increased taxes--within weeks the democratic super majority was alluding to other ways to increase revenues.

The pattern is clear.  If you want create the perception that a small decrease in spending will have terrible consequences, you have to place on the chopping block those services that are most near and dear to taxpayers--public safety.  I am not saying that public safety will actually be cut, but the government will publicize "planned" cuts to public safety more than anything else.  I suspect though that sequestration will not result in a drastic drop in public safety as the politicians would lead us to believe.

Surprise, Surprise...Prop 30 Funds Steered Towards Salaries and Benefits--Less Than Half For Education

Governor Brown's budget proposal for the upcoming fiscal year has a big surprise for those who voted for its passage, believing that the bulk of the funds would be used for education.  Of the $6 billion raised by Prop 30, only $2.7 billion would go to K-14 eduction.  In addition, the budget has at least $1.3 billion for salaries and benefits to state employees who don't work in education and would generally cease the one furlough day a month policy.  The budget also includes $502 million for negotiated pay raises and health care benefit contribution hikes for state employees.

The OC Register points out that the advertising for Prop 30, however, led voters to believe that this wouldn't be the case:

Yet the Prop. 30 campaign led voters to believe that the majority of the money from higher sales and income taxes would go to schools. One TV ad run by Gov. Brown's official Prop. 30 campaign, "Teachers for 30," featured several teachers explaining the need for the money for schools. Then state Controller John Chiang was shown, assuring voters: "With strict accountability, money must go to the classrooms and can't be touched by Sacramento politicians." The spot ended with Gov. Brown positioned in the midst of 17 school kids about age 8, as he implored, "For the students, and for California's future, vote Yes on 30." The kids cheered.

Is the New $450,000 Threshold of "Increased" Taxes Political Fiction?

From the Wall Street Journal, The Stealth Tax Hike:

Anyone still need a reason to abandon "grand bargains" and deals negotiated between this President and GOP Congressional leaders? Here it is: The revival of two dormant provisions of the tax code means the much ballyhooed $450,000 income threshold for the highest tax rate is largely fake.

The two provisions are the infamous PEP and Pease, which aficionados of stealth tax increases will recognize immediately as relics of the 1990 tax increase. Those measures, which limit deductions and exemptions for higher-income taxpayers, expired in 2010. The Obama tax bill revived them this week. It isn't going to be pretty.

Under the new law, some of the steepest tax increases may fall on upper-middle class earners with incomes just above $250,000.

...

A store manager married to a dentist with a combined income of, say, $350,000 may pay a higher tax rate under the new law than if the tax code had simply reverted back to the Clinton-era rates that Mr. Obama championed. Those earning more than $450,000 would see their de facto tax rate rise to about 41% under the new law, not 39.6%. Add in the new ObamaCare investment taxes and the tax rate on interest income is close to 45%.

...

Democrats are advertising the higher $400,000-$450,000 threshold as a victory for affluent taxpayers in blue states. But with PEP and Pease these Democrats are hammering their own constituents via the backdoor.

If your wondering just how much your taxes will be affected in 2013 compared to 2012, the nonpartisan Tax Policy Center in Washington has updated an easy-to-use calculator that will help you estimate your 2013 tax bill. It offers results for typical taxpayers from the lowest to the highest incomes, and also has a feature allowing users to create their own example.  It’s available here.

Are Tax Hikes The Cure For CA Budget Woes?

One can only wait and see how the Passage of Prop 30 will affect California, but politcal cartoonist Michael Ramirez has his own take.

(Coutesy of National Review)

As Goes San Bernardino, So Goes CA?

There is an absolute must-read article from Reuters that examines San Bernardino's downward spiral in exhaustive detail.

Below are some of the tidbits that were shocking:

Yet on close examination, the city's decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America's largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers. 

Little by little, over many years, the salaries and retirement benefits of San Bernardino's city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.

...

In bankrupt San Bernardino, a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension.

 ...

San Bernardino's biggest creditor, by far, is Calpers, the public-employee pension fund. The city says it owes Calpers $143 million; using a different calculation, Calpers says the city would have to pay $320 million if it left the plan immediately.
Second on the city's list of creditors are holders of $46 million worth of pension bonds -- money borrowed in 2005 to pay off Calpers. The total pension-related debts are more than double the $92 million owed to the city's next 18 largest creditors combined.
Complicating matters were obscure budgeting procedures that left residents in the dark. The word "pension" doesn't appear once in the most recent 642-page budget, and retiree costs are buried in detailed departmental line items.

Yet even in bankruptcy, reducing pension costs by cutting benefits is not an option - at least according to Calpers.
The pension agency says the benefits are carved in stone, arguing that from the day a worker is hired, the pension plan in place on that day for that person can never be reduced in value under any circumstances, including municipal bankruptcy.
That argument has never been tested in court: When the Bay Area city of Vallejo went bankrupt in 2008, it declined to challenge the pension payments to Calpers, in part because of the daunting legal costs involved.
But the pension-bond insurers who are now on the hook for defaulted bonds in both Stockton and San Bernardino have signaled their intention to do battle with Calpers in bankruptcy court. San Bernardino, in an unprecedented move, has already stopped making payments to Calpers.

What the Passage of Prop 30 Means for You

Proposition 30 was passed on Tuesday carrying about 54% of the vote.  Here's what it means.

There will be an across the board sales tax increase from a base rate of 7.25% to 7.5% for the next four years.  This will have an impact on all consumers.

In addition, there was a significant increase in marginal rates for those making more than $250,000, which will be retroactive to the beginning of 2012 and last for seven years. 

Under Prop 30 the new brackets for single filers will look as follows:

             In excess of $250,000----10.3% (up from 9.3%)
             In excess of $300,000----11.3% (up from 9.3%)
             In excess of $500,000----12.3% (up from 9.3%)

Proposition 30 will keep California in first place for having the highest state sales tax in the nation and should move California from second (behind Hawaii) to first place in state income tax. 

The biggest question I have, however, is will this seven year "temporary" tax increase be enough or will Governor Brown and his new super-majority legislature push for additional tax increases. Also, is Proposition 13 also soon to be on the chopping block?  Time will only tell. 

So Did The Wall Street CEOs Actually Call For Tax Hikes to Fix the Deficit?

On Thursday, the Wall Street Journal published a letter from over 100 major CEOs apparently calling for tax hikes in an effort to reduce the deficit.

Almost immediately, the letter was cited as proof that any position which did not accept the idea of tax increases as a prime vehicle to decrease the debt was indefensible. 

The Wall Street Journal editorial board, has taken a different interpretation in its editorial:  CEOs to the Tax Rescue? Liberals Confuse a Pro-Growth Plea With a Tax-Rate Hike:

Two words: game, change. On Thursday a 100-strong group of major business leaders did a Warren Buffett and endorsed a big tax hike, even if it means they'll have to pay more themselves. The support of this CEO lobby could break the Republican dead-enders who oppose all taxes and finally clear the way for a glorious bargain of tax increases and spending cuts to reduce the deficit. 

If you've seen this news story, don't worry. It's all a fantasy, albeit one that appeals to certain political types, who are reading their own priorities into the latest CEO petition on debt and taxes. The reality is that the chief executives who this week signed on to a "core set of principles" on budget reform are more than anything else scorching President Obama's lack of leadership. ...

The CEOs favor a framework that would "stabilize the debt as a share of the economy, and put it on a downward path." ... The CEOs also want to "reform Medicare and Medicaid" and do more to control national health spending. ... Only then—as a condition of structural entitlement reform, including Social Security—do the CEOs back "comprehensive and pro-growth tax reform, which broadens the base, lowers the rates, raises revenues and reduces the deficit." Note that reference to tax reform and lower rates, not the standard Beltway trade of certain tax increases for the promise of spending cuts that never happen.

The folks who are treating this as an extraordinary political breakthrough have apparently come down with a case of Romnesia, to borrow the President's coinage: Mitt Romney has been running on exactly such a tax reform for nearly a year, using exactly those principles....

What the CEOs we know really want is faster economic growth, the policies to promote it, and a Washington political class that can pass those policies. The politicos claiming that this rather anodyne CEO debt proclamation will make it easier for Mr. Obama to "raise taxes" are the same ones who merely want him to raise taxes.

 Hat Tip (Tax Prof.)

Fresno County Keeps Williamson Act Tax Break...For Now

From the Fresno Bee: 

Fresno County supervisors agreed Tuesday to preserve a longtime tax benefit for farmers, even as the benefit is costing the county millions in lost revenue.
The state's 47-year-old Williamson Act, which provides property tax breaks for landowners who commit to keeping their land in agriculture, has been under scrutiny ever since state reimbursement for the program dried up.
But amid heavy lobbying from the Valley's powerful ag industry, the county Board of Supervisors narrowly voted to continue the tax-relief program and absorb the losses.
The 2-2 vote not to touch the Williamson Act pitted two rural supervisors, who were not in favor of changes, against two members from the county's urban core.
The decision was cheered by the farm community, many of whom turned out for Tuesday's hearing in downtown Fresno to deliver personal accounts of how they couldn't afford a tax hike. ...

The Williamson Act was passed by the Legislature in 1965 as a way to provide incentive for farmland conservation.
Because the state no longer provides reimbursement for the program, counties have the option of partially recouping losses by reducing tax breaks for farmers by 10% -- in exchange for shorter conservation commitments from farmers.

Brown's Plan to Stem CA Public Pension Costs Not Sufficient

From the LA Times regarding Gov. Jerry Brown's newly released plan to reduce public sector pension costs:

Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.
The governor's plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.
Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown's proposal — will be needed to get runaway retirement costs under control.
Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.
...[E]very California household may be on the hook for roughly $23,000 for public retirements over the coming decades. Brown's plan might whittle that tab to $18,000.
"It doesn't solve the problem," said Joe Nation, a former Democratic assemblyman and professor of the practice of public policy at Stanford University. "We still have many, many miles to go."
Brown's negotiations with lawmakers resulted in a more modest plan focused on raising the public retirement age, limiting the annual sums collected by retirees whose jobs paid them six-figure salaries and tinkering with the formulas on which pensions are based.
The leaders' decision not to take any benefits away from workers already on the payroll, however, limited their ability to confront the soaring debt.
"You can't address these problems unless you address the existing liability," said David Crane, who advised former Gov. Arnold Schwarzenegger on pension issues.
"The only way to do that is to go after benefits for existing employees."
An exhaustive study last year by the Little Hoover Commission, an independent oversight agency that reports to the Legislature, warned that pension debt will continue to overwhelm government budgets if benefits for existing workers are not scaled back.
Making changes that affect only new employees, the commission's report said, "will not deliver savings for a generation, while pension costs are swelling now as baby boomers retire.... The promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due."

CA School District Borrows $100M, Will Pay Back $1B.

In a transaction that makes a pay day loan look frugal, a California School district borrowed $105 million over 40 years by selling "a bond so unusual that the State of Michigan outlawed it years ago". Taxpayers in the Poway school district will be on the hook for $1 billion--10X the amount originally borrowed.

In the bond deal, taxpayers were told that there would be no tax increases for 40 years.  In fact, there is no interest or principal due for the first 20 years, which means that all the payments will be due on the back end.  On top of that. the bonds are not callable and cannot be paid off early or refinanced.

The "bond costs will go towards new classroom and library computers, state-of-the-art wireless data systems with increased bandwidth, new voice and video alarm systems, green 'recyclable building materials,' and landscaping" as well as "new storm water drainage systems to comply with the Federal Clean Water Act".

Poway has only 34,000 students in its district and school administrator and teacher compensation eats up 85% of its annual budget.

CA State Slush Funds Flush With Cash

As California politicians begin begging for increased tax revenues, new reports show that the state's 500-plus obscure special funds are raking in funds:

California now spends nearly $40 billion on special fund programs, more than every state except New York and Texas spends on its entire general fund. The special fund money pays for an amazing array of services, from major priorities such as mental health, hospital construction and highway repairs to obscure things like bingo halls, acupuncture and midwifery.   Fees like the cost to enter a state park or the 5-cent recycling fee on a soda can -- not your taxes -- fuel the state's special funds. Yet more and more, the state is borrowing billions of dollars from these special accounts to balance the general budget used to fund such things as education and prisons.

Usually out of the spotlight, special funds make up one-fourth of all state spending and are now receiving rare scrutiny and will be the focus of  legislative hearings after finance officials found $54 million in funds hidden in two state parks accounts. An analysis by this newspaper showed the state's books for all the special funds were off by $2.3 billion, a discrepancy finance officials are now investigating.

The discoveries could result in political headaches for Gov. Jerry Brown as he tries to convince voters in November that the state needs tax increases to avoid massive cuts to schools and social programs.

Gov. Brown Forces His Tax Initiative to Top of Ballot--Courts Uphold

Conventional wisdom holds that ballot initiatives listed at the top of the ballot are more likely to pass than those listed at the bottom (slothful voters get tired of reading or confused and tend to vote no).  Because Gov. Brown's tax initiative was certified late, it would have ended up on the bottom, below Molly Munger's competing tax initiative.

In order to finagle his initiative to the top and increase its chances of success, the legislature recently changed the law on how initiatives are ranked.  Now, initiatives dealing with bond measures and constitutional issues are given priority--which would place the Governor's initiative at the top of the ballot. 

This legal wrangling, which was decried by competing tax measures and anti-tax groups was recently upheld in court. 

Californa 9/11 Funds Raided By Politicians

In a move that is shocking, even by Sacramento standards, the Associated Press has revealed that a special account initially established to help fund scholarships for the California victims of 9/11 and their families has been raided for general government purposes.

After the 2001 terrorists attacked, Sacramento established a specialty memorial license plate emblazoned with the words, "We Will Never Forget."  Fifteen percent of funds raised were to fund scholarships for victims' families and the rest was to help fund anti-terrorism efforts. 

Since 2001, $15 million has been collected--of those funds raised, only $21,381 has reached the children and spouses of the three dozen California residents killed in the 9/11 attacks. 

On closer examination, it has been revealed that these funds are not being used to fund scholarships or anti-terrorism efforts but rather are being used as normal general funds dollars.  For instance, Gov. Schwarzenegger and Gov. Brown borrowed a combined $3 million dollars from the fund in order to fill budget deficits--loans which have yet to be repaid. 

California's Facebook Windfall Falters?

Before Facebook's IPO, many had speculated how the Facebook IPO could bring a tremendous amount of tax revenues to the state.  Gov. Brown even estimated that the IPO would generate between $1.4 billion and $1.9 billion  in income taxes over the next 13 months from sales of Facebook stock. 

This estimate was based on an IPO price of $35 per share.

On Friday when Facebook went public, it opened at $38, and then closed on Tuesday at $31. 

The Legislative Analyst's Office projected tax revenues of around $1.6 billion, but this was estimated at an IPO of $38, followed by a projected growth to $45 after six months. 

Regardless of Facebook's ultimate share price months from now, it is clear that one-time revenue increases or accounting tricks will not suffice to cure California's perennial budget woes. 

So CA Legislators Won't Have Their Pay Cut--Prop 25 Rendered Toothless

Anytime a ballot initiative is written and supported by the legislature and proposes to "cut" legislature pay if no balanced budget is reached, be skeptical.

Many of you may remember and likely voted for Proposition 25 back in 2010, which stated that if a balanced budget was not delivered on time, the legislature would not be paid.  Alas, this was the hook to convince the general public to vote for it.  The real meat of the proposition had to do with lowering the requirement to pass a budget from 2/3rds to a simple majority--in essence cutting out the already marginalized republicans.

In a classic case of bait-and-switch, a Superior Court Judge has ruled that it is up to the legislators themselves to determine whether the budget they passed was "balanced" or not.  When the legislature passed a phony budget last year just in time to get paid, state controller John Chiang stepped in and determined that the budget was not balanced and therefore, legislators would not get paid.  Chiang's actions were short-lived and now it appears the legislature can continue to pass unworkable budgets year after year.  Proposition 25 sounded nice, but again, voters were sold a bill of goods.

California's Tax Takers Await Day-by-Day Updates of Tax Proceeds

There's an interesting article in the L.A. Times about the hundreds of workers in Sacramento who are busy during tax season opening and sorting taxpayer checks.  The article had this gem of a paragraph:

Every afternoon for a few weeks in April, as Californians pay their state taxes, a courier ferries them [taxpayer checks] to eight banks to nourish the money-hungry government.  Meanwhile, lobbyists, lawmakers and activists — people whose jobs hinge on this seemingly mundane process — huddle by their computers and wait for the daily tally, which they'll tweet and email like the play-by-play of a championship game. By the end of the month, state accountants will add up the money and hope there's enough to cover expenses.

So far, the legislative analyst's office predicts the state will be about $2 billion short of projected revenues.

The Great California Exodus

Another great article in the weekend edition of the WSJ interviewing Joel Kotkin, who is an acclaimed demographer and self-professed "Truman Democrat".  Mr. Kotkin runs through a litany of California's ills that are driving away its middle class.

Here are just a few snippets:

[The] Golden State's fastest-growing entity is government and its biggest product is red tape. The first thing that comes to many American minds when you mention California isn't Hollywood or tanned girls on a beach, but Greece....

And things will only get worse in the coming years as Democratic Gov. Jerry Brown and his green cadre implement their "smart growth" plans to cram the proletariat into high-density housing. "What I find reprehensible beyond belief is that the people pushing [high-density housing] themselves live in single-family homes and often drive very fancy cars, but want everyone else to live like my grandmother did in Brownsville in Brooklyn in the 1920s," Mr. Kotkin declares....

Another is the cap-and-trade law AB32, which will raise the cost of energy and drive out manufacturing jobs without making even a dent in global carbon emissions. Then there are the renewable portfolio standards, which mandate that a third of the state's energy come from renewable sources like wind and the sun by 2020. California's electricity prices are already 50% higher than the national average.

Meanwhile, taxes are harming the private economy. According to the Tax Foundation, California has the 48th-worst business tax climate. Its income tax is steeply progressive. Millionaires pay a top rate of 10.3%, the third-highest in the country. But middle-class workers—those who earn more than $48,000—pay a top rate of 9.3%, which is higher than what millionaires pay in 47 states.

Interview with John Malos of MeTV Fresno: Tax Day

This morning I was a guest on the show "Connect With Me", which is a new show hosted by John Malos.  He invited me on on tax day, April 17th,  to discuss a whole host of tax related topics.  We even discussed Ron Paul's position to throw out the entire tax code!  John's a great host and is surrounded by a great crew.