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.

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. 

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.

Why the Tobacco Tax Defeat Does Not Bode Well for Gov. Brown

The last time California voters voted in favor of a tax increase was in 2004--the 1% tax increase on millionaires to fund mental health programs.  Since then, every other ballot measure proposing to raise taxes has failed.

Since only 14% of Californians smoke, and public smoking is already banned throughout most of California, you would think that a $1 per pack tax to fund cancer research would not have been a hard sell.  The reason it did fail is not because Californians are against cancer research, but because of a strong distrust of how proceeds would ultimately be used.  So reads the LA Times:

Many voters bought the idea that Proposition 29 was more of a tax than a strategy to reduce smoking and cure disease. ... The money it generated, the tobacco industry said, would go to a financially inept state government that for many years running has had a multibillion-dollar budget deficit.

"Californians are not anti-government," [Jon Coupal, president of the Howard Jarvis Taxpayers Assn.] said. "But they want value for their tax dollars, and they perceive correctly that they are not getting that in Sacramento."

Taxpayers have soured on expensive new ventures that promise economic windfalls and easier daily lives, he said. They remember, he said, approving a $3-billion bond measure for stem-cell research, only to hear that outsized salaries were being collected by executives running the program. He said they remember passing a $9-billion state bond measure in 2008 to build a high-speed rail network, a project that has seen costs and roadblocks multiply.

Of course, the big question is in light of Prop 29s defeat, what chance will Gov. Browns initiative have at the polls as his initiative is much broader--including both a broad based sales tax increase and increased income taxes on those making $250K or more. 

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. 

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.

How will the "Buffet rule" reduce the deficit?

The "Buffett rule" (a minimum 30% tax on people making over $1 million per year) has been suggested and raised these past few months as a possible cure to national deficits.

The projected revenue increases range from between $30 billion and $40 billion over 10 years.

Below is a chart (courtesy of political math) which demonstrates the impact the "Buffet rule" will have on government finances, in particular, the deficit. Make sure to scroll all the way down to the bottom of the chart to see the impact.

Do we have a revenue problem, or a spending problem?

One of the never ending debates regarding the national deficit is whether we have a spending problem or whether we have a revenue problem.  Each side has dug in their heels.  In reality, mathematically speaking, no side is inherently correct.  To cure deficits you either have to decrease spending, increase tax revenues or both.

William Voegili argues over the last 40 years, tax revenues have kept pace with economic growth, whereas spending has increased dramatically.  His article includes this handy graphic below.  His article also delves into where we are now spending our tax revenue and how that has changed over the years.