Fiscal Affairs - Archive

Earlier this week the Legislative Analyst’s Office (LAO) issued its annual Fiscal Outlook. This year’s edition is the gloomiest I’ve read during an economic expansion.

No sooner had Gov. Gavin Newsom spearheaded Proposition 50, the congressional redistricting measure that defuses the bomb tossed by President Donald Trump and Texas Gov. Greg Abbott, than he found himself dealing with two other explosive devices.

Yesterday was the deadline for CA Governor Gavin Newsom to take final action on bills passed by the 2025 Legislature. He signed 794 and vetoed 123. Since taking office in 2019, Newsom has now signed 5,710 bills and $1.942 trillion of budgets. How has California performed since he took office?

The 2025-26 budget Governor Newsom signed into law last Friday takes a terrible toll on the future by issuing debt and draining reserves to close deficits caused by overspending.

GFC President David Crane recently sat down with the State of Gold podcast to discuss the state of California’s governance.

Tomorrow, the California Legislature is expected to pass a 2025-26 budget bill that will take even more from the future than the budget proposed by Governor Newsom.

Last week the news was all about the US House of Representatives passing another budget-busting bill that extends a streak of extraordinary federal spending growth since the pandemic. But California’s spending grew even more —  much more.

While it’s good news that two pension expansion measures (AB 569 and AB 1383) that we opposed will not advance, the bad news is that new unfunded liabilities are still being manufactured every year…

Yesterday I published a note on Substack about a footnote in California’s state budget that cost taxpayers $26 billion. I don’t want to burden your emails with too much technical information so if you’re interested please click on that link.

When the stock market fell earlier this year, some reporters wrote that the decline could lead to higher pension costs. Now that the stock market is rising will we see stories about pension costs not increasing? The answer is that neither story would be on point. Pension costs fall or rise depending on whether pension funds earn less or more than they expected to earn.

As part of an effort to close a $12 billion deficit, on page 67 of his revised budget issued earlier today Governor Newsom proposes to negotiate $767 million of savings on salaries for state employees.

A CA lawmaker under the influence of government unions has proposed yet another bill to expand retirement benefits. AB 1383 would boost pensions for safety employees without requiring sufficient funds to be set aside to meet those promises.

AB 569 would allow California cities to boost pension promises to public employees without requiring sufficient funds to be contributed upfront to guarantee payment of those promises. If it becomes law, AB 569 would set the table for another explosion in unfunded retirement obligations, the costs of which are already crushing California governments.

Governor Newsom’s proposed budget for the next fiscal year includes $45 billion of spending on salaries and benefits for 255,000 state employees, which translates into $177,000 per employee. Questions legislators should be asking include the following…

Earlier this week, a journalist asked me how a stock market decline this year would affect pension spending by California’s cities, schools and the state. He wondered if it “would produce a big or small hit.” The answer is that any decline this year would produce neither.

The California Constitution prohibits the Legislature from creating any debt or liability exceeding $300,000 without a two-thirds vote from both legislative houses and voter approval, except in times of war. However, the Legislature routinely creates millions of dollars in new liabilities without public vote.

Last June, Governor Newsom signed a state budget requiring $4.3 billion in annual efficiencies from State departments, CSU and UC. But in January, Newsom reported that the departments under his control and funded by the General Fund expect to achieve just one quarter of the savings expected from them:

13 years ago voters approved a seven-year increase in the top income tax rate. Sold as an education measure, the real reason was to cover up a tripling in annual school pension costs:

Believe it or not, California’s top income tax rate is scheduled to decrease by three percentage points after 2030 upon the expiration of a temporary tax increase, which started as a seven-year increase passed by voters in 2012 via a ballot measure entitled “Temporary Taxes to Fund Education” and was extended to 2030 by a subsequent ballot measure.

Last year, Governor Newsom and the California Legislature took nearly $5 billion from the Rainy Day Fund to cover excessive spending.

Last week we pointed out that, contrary to his claims, Governor Newsom’s proposed budget is not balanced. Today we examine his claim on page 85 to “government efficiency and cost saving measures” that produce a savings of $618 million from eliminating vacant positions.

Governor Newsom’s proposed budget includes a paragraph entitled “GOVERNMENT EFFICIENCY AND COST SAVING MEASURES” but the measures mentioned there are a tiny fraction of the inefficiencies and costs added under Newsom.

Last Monday Governor Newsom issued a press release previewing a “balanced” budget for 2025-26 so imagine our surprise when his proposed budget released today disclosed that balance was achieved by transferring $7.1 billion from the Rainy Day Fund.

When we wrote to you last month about our priorities we described the 2026 race for governor as “wide open,” but since then we’ve heard that Kamala Harris may run and that if she does, some candidates would make way for her. We hope the rumors aren’t true.

In early January Governor Newsom will present the Legislature with a proposed budget for the next fiscal year. The last budget dealt with a large deficit caused by excessive spending. To address that deficit, Newsom and the Legislature raided the Rainy Day Fund, borrowed money, shifted funds and deferred spending, steps that should be reserved for deficits caused by recessions, not by excessive spending.

Yesterday marked the 25th anniversary of the California Legislature’s passage of SB 400, a retroactive pension increase for public employees that constituted the largest single issuance of public debt in California history.

Everyone knows the truth. In California it is serious drug addiction that drives homelessness, overdose deaths and retail theft. The solution is mass treatment. Voters took a step in that direction in March by approving Proposition 1, which authorizes Bonds for Mental Health Treatment Facilities. The next step must be taken in November with voter approval of Proposition 36, The Homelessness, Drug Addiction, and Theft Reduction Act that will give judges the tools to require treatment.

The good news is that a tax increase measure has been pulled from the November ballot. The bad news is that Governor Newsom and legislative leaders announced a budget deal that draws from taxpayer reserves and thereby boosts pressure for a tax increase down the road.

Earlier this week a reporter asked me to comment about a bond under discussion in the Legislature. I responded that the costs of past obligations already crowd out spending on current programs…

One of the first things I learned after Governor Schwarzenegger appointed me to the board of the California State Teachers’ Retirement System (CalSTRS) in 2005 is that public employees only contribute to their pensions upfront but taxpayers contribute upfront and are on the hook for 100 percent of any funding deficiencies.

Yesterday the Los Angeles Times published an article entitled Newsom called it a ‘gimmick.’ Now he’s using the trick to lower California’s massive deficit in which the Governor’s spokesperson defends the proposed budget and challenges readers to come up with their own solutions to the deficit. I have five such solutions to propose, all of which pertain to reeling in extraordinary patronage spending on public employees:

SACRAMENTO — With a windfall of cash five years ago, Gov. Gavin Newsom said he was doing away with a state budget “gimmick” one of his predecessors relied on to shave about $800 million off a deficit during the Great Recession.

Yesterday Governor Newsom, Senate President pro Tempore McGuire and Assembly Speaker Rivas confirmed they still intend to close the budget deficit in part by drawing half of the state’s budget reserves when they finalize the budget in June.

I’ve been trying to understand why Governor Newsom has proposed such a reckless budget. The only answer I can come up with is that he hopes to escape California before the consequences of that budget are suffered by being appointed to President Biden’s Cabinet should Mr. Biden be re-elected in November.

Despite a healthy national economy, California has a budget deficit that Governor Newsom proposes to close in the main by drawing on budget reserves, borrowing money, shifting funds, and deferring spending — ie, steps normally taken only during recessions.

Governor Newsom postponed the annual State of the State address scheduled for today, apparently (according to Politico) until the final results of Proposition 1 are known.

State taxpayers got more bad news this week when the State Senate released its proposed early action plan for addressing California’s budget shortfall in which we can find nothing of substance that differs from Governor Newsom’s plan.

Why have corporations, unions and associations put up more than $10 million that Gov. Gavin Newsom is using for state and national advertisements featuring him? The answer is that Newsom has delivered billions of state dollars to them.

Shohei Ohtani is the only major league baseball player who can hit and pitch at an elite level.

Perhaps he should manage California’s state budget, too.

The Newsom Administration is circulating a rebuttal to my criticism of the Governor’s Proposed 2024-25 Budget. As a reminder, that criticism is that Mr. Newsom proposes to draw on the Rainy Day Fund even though the country is not in a recession and doing so would seriously impair the state’s ability to preserve public services in a recession.

It’s election season. Citizens looking for questions to ask of candidates or state officials might consider the following two.

Lieutenant Governor Eleni Kounalakis and every other candidate for governor in 2026 should be paying very close attention to the Multiyear Forecast in Governor Newsom’s Proposed Budget.

Next week my students will start reading through Governor Newsom’s proposed state budget for the next fiscal year, which was released today. Before they do, I’ll be sending them a 2019 column from the LA Times entitled, “The one-day, $1-billion California budget gimmick that has lasted for almost a decade,” which is about a budgetary maneuver employed in 2009.

Last month, I wrote about the unique opportunity Governor Newsom has with his next budget to “reinvent government” as he called for in his 2014 book, Citizenville. Next week we will learn if he plans to do so.

Last week the Orange County Register published a lengthy article about California’s skyrocketing spending and budget deficit that included some comments from the Department of Finance and Legislative Analyst’s Office that might lead readers to conclude incorrectly that the governor and legislators don’t have authority over much spending. Some of the comments are non-controversial but some incorrectly imply a lack of authority over statutory spending, some are imprecise about funding sources, and some are striking in their omissions.

In 2013, then-Lieutenant-Governor Gavin Newsom published a book entitled “Citizenville” in which he argued for a government that kept pace with changes elsewhere in society. Asserting that “we must inject a more innovative, entrepreneurial mind-set into government,” Mr. Newsom wrote that “we simply cannot have a government that relies on bureaucracy and maintaining the status quo.” I hoped his vision would be realized. But a decade later, half of which Mr. Newsom has presided over as governor, California’s bureaucracy is bigger than ever, residents would be hard-pressed to point to a single innovation, and the status quo is still the status quo.

General Fund Expenditures Per Capita have climbed 63.9% since Governor Newsom took office, growing at more than twice the annual rate at which those expenditures grew under Governor Brown (10.4% vs. 4.7%):

Last Wednesday, the Commerce Department reported U.S. GDP grew at a 5.2% clip in the third quarter. The next day, Governor Newsom told a debate audience that the economy is “booming.” But Friday, California’s Legislative Analyst’s Office said that state tax revenues are falling far short of forecasts. When combined with General Fund spending that has grown more than 50 percent over the last five years, the drop in revenues portends another large budget deficit for California.

When launching GFC in 2011 it was my hope that we would see meaningful pension reform by 2020, but we have failed to achieve that objective and the negative consequences for public services and taxpayers have been enormous. As evidence, just look at the four-fold explosion in annual pension spending by the Los Angeles Unified School District this year compared to ten years ago:

Govern For California issues statement on proposed CCPOA Contract (Bargaining Unit 6)

As of June 30, 2018, California’s prisons (CDCR) incarcerated 130,317 inmates supervised by 56,538 correctional employees paid $4,985,455,000 in salaries.

The OC Register cited Govern For California in a recent editorial about cynical games being played by the Legislature and Governor in awarding excessive compensation to state prison guards.

In 2015 the City of Glendale took advantage of Obamacare to dramatically reduce its spending on health insurance for retired employees and free up funds for spending on active employees and public services.

Dear Legislators,

This week the Biden Administration announced that personal income rose 0.4% in April, consumers increased spending sharply, U.S. economic activity is at its highest pace in more than a year, and the unemployment rate is at an envious 3.4 percent.

Yesterday the Legislative Analyst’s Office (LAO) released its Multiyear Budget Outlook through fiscal year 2026-27, forecasting $52 billion of deficits over that period.

Dear State Legislators,

Last year we wrote to you about the alarming $500 million per year salary increase you granted to state prison guards under a contract extension executed in June 2021 and the state’s failure to comply with Subsection (c) of Gov. Code Section 19826, which requires a study of salaries of employees in comparable occupations before awarding a new contract. Because you did not commission such a study, we did, and the results were shocking. In our note, we implored you to hold the line in the next contract, which will come into effect upon the expiration of the current contract on July 2 — just six weeks from now.

We couldn’t agree more with Legislative Analyst Gabe Petek that it’s best to solve the deficit without using reserves, which are already woefully short of the amounts needed to protect essential services in the event of a recession.

The Legislative Analyst’s Office (LAO) has forecast a budget shortfall of $25 billion for Fiscal 2023-24 even if a recession does not occur.

We scratched our heads Friday when — despite a steep fall-off in the stock market and a first quarter contraction of the US economy — we learned the May Revision of the Governor’s Proposed Budget expects rosy tax revenues for the 2022-23 fiscal year commencing July 1. After reading the document, we learned how that happened:

Earlier this week we virtually attended a State Senate hearing about SB 868, a bill to provide a retroactive pension increase to some long-retired public employees. This isn’t the first time lawmakers have considered a retroactive increase. As I explained in a Wall Street Journal op-ed in 2010, the last retroactive pension increase was the largest issuance of debt in state history.

West Contra Costa County Unified School District has received a “lack of going concern” determination from its county board of education. That means the district is unable to meet its financial obligations. But 60 percent of its deficit is accounted for by spending on an unnecessary insurance subsidy for retired employees known as “OPEB” (Other Post-Employment Benefits) that drains classrooms of resources while federal subsidies go unused.

Dear Legislators,

At $7.3 billion, current year salary spending on Corrections employees is 33% higher than forecast by last year’s budget and nearly 50% more than the prior year.

Earlier this week DOF released the Governor’s Proposed Budget for the fiscal year starting July 1. At 400 pages it takes time, a process we have now completed. Some initial thoughts follow:

Tomorrow the CA Department of Finance will release the “Governor’s Proposed Budget” for the 2022-23 fiscal year that commences July 1. At nearly 300 pages, it is one of two documents providing deep insight into the state government.* I’ve been reading them for nearly two decades now and offer a few tips:

This report examines the compensation of California state correctional officers relative to several other groups. It examines wages in detail because of the richness of available data. It examines benefits in less depth because available data are far less comparable and detailed.

Last June, the governor and legislature granted a $500 million salary increase to state correctional officers without complying with Subsection (c) of Gov. Code Section 19826, which requires the state to produce a study of salaries of employees in comparable occupations before awarding a new contract. So Govern For California commissioned such a study, an advance copy of which is being made available to you in your capacity as a member of a Budget or Public Safety Committee. Its conclusions are stark:

In January, the 2022-23 Governor’s Budget will be made public, after which public hearings will commence, followed by public distribution of the May Revision to the Governor’s Budget and public enactment of the budget by June 30. Guess what’s not public during that period? Political donations from beneficiaries of budget spending.

Dear Legislators,

We enjoyed reading the Senate Budget Plan and Assembly Budget Blueprint for 2022-23. These items stood out to us:

San Francisco Unified School District spends up to 250% more than the average CA school district on OPEB, which are insurance subsidies for retired employees.

Dear Legislators,

In January the Department Of Finance will issue the Governor’s Budget for 2022-23. No section will be more important than the Stress Test, which forecasts revenue losses in the event of a stock market decline such as in 2001-3 and 2008-9.

Dear Legislators,

The Legislative Analyst’s Office is filled with talented people who occasionally take on impossible tasks. Take LAO’s recent Fiscal Outlook for Schools in which it boldly predicts that “capital gains revenue [will be] strong in 2022‑23.” I can’t predict the stock market next week much less next year but unlike the state I’m not depending on it to finance schools that require stable annual funding. If I did, I’d keep loads of cash on hand. That’s because the annual performance of stock markets looks like this:

California needs at least $100 billion of reserves. Don’t take our word for it. See page 245 of the Governor’s Budget:

Last night the La Habra City Council was scheduled to approve the issuance of debt the proceeds of which would be deposited in the city’s pension fund. But that’s not what they disclosed. Instead, they said the city was seeking approval “to exchange higher cost variable rate debt with lower cost fixed rate debt.” But no such exchange is taking place. Even the name of the instrument — “pension obligation bond” — is a lie, as explained in POB = Wall Street Snake Oil. Worse, La Habra plans to invest the proceeds into a pension fund managed by CalPERS, which itself is adding debt leverage to a portfolio that’s boosting its allocation to private equity that uses additional debt leverage to acquire businesses that employ their own debt leverage.

From January through June last year, the California Legislature held hearings about a proposed budget for the 2021-22 fiscal year that allocated the majority of $300 billion of spending to healthcare corporations and government employees who — during that very same period — made political donations to lawmakers that weren’t disclosed until July 31, a month after the budget had been signed into law.

Under SEC rules, investment advisors who do work for state and local pension funds can be disqualified if they make political contributions at certain levels to elected officials or candidates for those offices who have a say in the public pension decisions to contract with investment advisors. That’s a good thing because public pension funds such as CalPERS and CalSTRS enter into money management contracts the objectives of which should be to protect pension beneficiaries and taxpayers, not to enrich Wall Street.

It was 22 years ago today that Senate Bill 400 granted a retroactive pension increase to CA state employees that amounted to the largest non-voter-approved issuance of debt in state history. One result has been a nearly 10-fold increase in pension contributions.

In June the governor and legislature quietly granted an unwarranted $500 million per year salary increase to state prison guards using a loophole inserted into state code in 1981.

CA Gov. Code Section 19826 deals with “Administration of Salaries” amounting to $20 billion per year.

Today marks the date by which third quarter estimated income tax payments are due in California. Some of the money will go to a $500 million per year salary increase awarded in June to prison guards by the Legislature and Governor without complying with state law.

When I made San Francisco my home in 1977, little did I know that the California Legislature and Governor Jerry Brown had just made prison guards lords over state politics and policy. That’s the year lawmakers enacted the Dills Act, which extended collective bargaining rights to state employees. Since then, CA lawmakers have worked hard to please them, especially prison employees.

The principal job of states in our federalist system is to provide domestic services such as education, health and public safety. California executes some services well (e.g., Covered California) but generally residents are served poorly, students are treated more like captives than customers, insufficient value for money is obtained from healthcare providers, and public safety employees are excessively compensated. All that is fixable.

Dear Elected Officials,

We keep hearing about cities considering a Wall Street proposal to issue debt to fund supplemental pension contributions to city pension funds. They should not do so.

In 1999, California’s Legislature and Governor enacted SB 400, a retroactive pension increase pushed by government employee unions. At that time, the state pension fund (CalPERS) based pension contributions from employees and employers upon an expected annual return of 8.25 percent. (The higher the expected return, the lower the required upfront contributions.) Advocates for the retroactive increase claimed that, because CalPERS could be expected to earn at that rate, the retroactive increase would not cost “a dime.”

Few California officials have tried harder than San Jose Mayors Chuck Reed and Sam Liccardo to rein in pension costs. Sadly, a recent report by a San Jose task force undermines those efforts and promises more problems for city residents.

Dear Legislators,

Wall Street specializes in fancy names for old fashioned financial schemes. Eg, as the Archegos scandal demonstrated, “Total Return Swaps” are nothing more than a way to exceed margin limits. In the government world, the most misleading phrase is “Pension Obligation Bond,” which has nothing to do with pension obligations. Here’s how they work:

Dear State Legislators,

Don’t do it. Don’t sign off on the new contract Governor Newsom has negotiated with Unit 6. It’s another giveaway to a powerful special interest — Corrections employees — that already collects gobs of money that could be used elsewhere. 55,000 employees already collecting more than $5 billion per year in salary and costing billions more in unfunded retirement costs for attending to just 100,000 inmates is bad enough.

In case you hadn’t noticed, we gave you a lengthy respite from our missives while the Legislature and Governor negotiated the budget for the fiscal year starting July 1. Through June 10 we had supplied legislators, you and reporters with several notes describing the need to dramatically boost budget reserves.

How its leaders plan to use the money says a lot about its politics

Recently California has been running a lottery to encourage vaccinations against covid-19. Those who have received their jabs can enter to win prizes, including holidays, gift cards and ten grand-prize cheques of $1.5m each. California has also recently won a windfall of its own. Instead of an expected $54bn budget deficit because of the covid-19-induced recession, a roaring stock market combined with a federal stimulus has produced a surplus of more than $100bn.

Wayne Morse was one of only two US Senators to vote against the Gulf of Tonkin Resolution in 1964 expanding military action in Vietnam. It takes guts to oppose party leadership. This week California saw similar courage when nearly a third of Democratic members of the California Legislature called for budget reserves greater than those proposed by the governor and legislative leadership.

If we are reading the laws about school reserves correctly, California’s K-12 schools are being set up for a fall of epic proportions unless schools or the state save much more from surging revenues.

Dear Legislators,

As you know, in nine days you must pass a budget. Based upon the Legislature’s Version of the State Budget submitted by Budget Committee chairs, as of now you are on track to make a big mistake.

Dear Legislators,

With your deliberations over the 2021-22 Budget, you are about to make a most consequential decision. Below is a chart of General Fund Revenues and Transfers from the beginning of the last decade. The blue columns are closed fiscal years. The green column is for the current fiscal year, which closes June 30. The yellow column is the amount projected by the Department of Finance for the next fiscal year, which starts July 1.

Dear Legislators,

The first sentence of LAO’s Multi-Year Budget Outlook published yesterday comes with an important disclaimer:

Dear Legislators,

The 2020 Budget Act you enacted 11 months ago forecast the S&P 500 to be at 2,060 in the first quarter of 2021. But because the S&P 500 closed the quarter at nearly twice that level and CA tax revenues are correlated with stock markets, revenues are way ahead of forecast. When it comes to revenue projections, no state flies more blindly than California.

Dear Legislators,

24 months ago, California’s Department of Finance forecast $151.8 billion of revenues in 2022-23 from the three largest sources:

Dear Legislators,

We have reviewed the May Revision to the Governor’s Proposed Budget for the 2021-22 fiscal year, which starts July 1. Our views are summarized below:

Several people have asked for our reactions to reports about the May Revised Budget. We won’t have a response until after we’ve read the official document to be released tomorrow. Meanwhile, two items should not come as a surprise to anyone familiar with California’s budgets. One is the projection of a large surplus, which reflects the tight relationship between capital gains and CA’s tax revenues. The other is the state’s anemic level of financial reserves, as demonstrated by the insufficient role they were able to play in solving the deficit a year ago when the state projected revenues to decline as a result of the pandemic. More than 80 percent of that solution had to come from cuts, borrowings, federal funds and other sources:

There’s a wolf knocking on San Jose’s door.

San Jose has $9.6 billion of un-prepayable pension obligations that require payments every year. To help fund those payments, the city uses investment earnings from $6.1 billion of stocks and other investments held in a pension fund. Because pension obligations exceed pension assets by $3.5 billion, the city also has to dip into its budget to make the payments, which crowds out funding for citizen services.

Dear Legislators,

As a shareholder, CalPERS has been pressing corporations for better disclosure of environmental sustainability risks, yet CalPERS has been a leader in not disclosing financial sustainability risks, as I explained a decade ago in Dow 28,000,000. The consequences have been terrible, especially for our state’s most vulnerable residents whose programs get crowded out whenever governments have to make up for CalPERS’s failures. Here’s what that looks like:

As usual, DOF’s latest Monthly Finance Bulletin is filled with data of relevance to your responsibilities:

We have a lot of friends in the CA State Senate but we take issue with their recent assessment that “a decade of responsible budgeting enabled California to endure the recession.” That isn’t factual. Here’s how the 2020–21 Budget they enacted last June closed a forecasted pandemic-related deficit…

Dear Legislators,

92 percent of Californians have insurance coverage. The eight percent who don’t are primarily undocumented residents. CA has sufficient ongoing resources to cover them.

Early GFC supporters will recall that I expected pension reform to happen by now. I was way off.

Dear Legislators,

Eight percent of California residents don’t have health insurance yet an elite population of less than one percent not only have access to Medicare, Affordable Care Act and employer coverage but also a special insurance system just for them that costs the state $5 billion per year.

Conventionally, Ronald Reagan is characterized as conservative. But as a first-term governor of California in 1968 (Reagan earned the job in 1966, denying Pat Brown a third gubernatorial term), he signed the Meyers-Milias-Brown Act, which endowed police and other local personnel with the power to bargain collectively with the governments that employed them, handing political power over local budgets to government employees who were the principal beneficiaries of those budgets.

At a cost of $4.9 billion per year, California provides more than Medicare to retired state employees and under terms far more generous than other states:

The internet has made it easier than ever to access primary sources. Eg, the CA Department of Finance issues a Monthly Finance Bulletin that’s packed with valuable data, such as:

The California Department of Finance’s latest Monthly Finance Bulletin is out and as usual packed with valuable data, including:

Dear Legislators,

Last week the City of Chula Vista paid big fees to Wall Street firms and lied about the consequences of the transaction.

The Governor’s Budget projects deficits down the road but that’s no reason not to enact worthy programs with savings from eliminating unworthy programs, and especially those contributing to the structural deficit to which Governor Newsom refers in his budget message.

As Congress debates the next Covid-19 relief package for state and local governments and schools, it should note that the Golden State is currently leaving billions of already-approved federal dollars on the table.

Last year we spent as much time blocking tax increase proposals as liberating nurse practitioners. This year will be the same. Reform efforts will focus on OPEB and tenure but at least as much time will be devoted to blocking tax increases, bills to extend collective bargaining rights to legislative staff, and more.

Dear Legislators,

Nearly half of San Diego’s $86 million budget deficit appears to be attributable to a failure to access federal and state dollars.

Dear Legislators,

Re yesterday’s post, some readers asked what Oakland should do. Maybe an analogy would help.

Dear Legislators,

Today′s SF Chronicle includes this frightening headline:

Dear Legislators,

We find ourselves amazed that few state legislators and their staffs know about CoveredCA. They should take a test spin, which takes less than a minute. Eg, say you are a 53 year old retired prison guard with a $90,000 annual pension who lives in Sacramento with a spouse age 53 and two kids ages 15 and 13. Input that info at the Shop and Compare page and after a few click you’ll be presented with 24 plans and estimated savings of $1,461.15 per month.

Dear Legislators,

Like most employers, the State provides health insurance to active employees. But unlike most employers, the State also provides health insurance to retired employees and their dependents. Believe it or not:

Earlier today, US Congressman Ro Khanna gave us an opportunity to point out something we’ve been waiting for some CA state legislators to discover:

Dear Legislators,

We are pleased that more and more of you are eager to address the billions you unnecessarily divert every year from services to extravagant insurance subsidies for retired state employees (“Retiree Health Subsidies,” or “RHS”). Following are some basic facts followed by a list of reform opportunities.

Here’s something Assembly Members Luz Rivas, David Chiu, Richard Bloom and Buffy Wicks don’t want their constituents to know:

Every January, governors in California are required to propose a budget (“Governor’s Budget”) for the next fiscal year commencing July 1. Governor’s Budgets provide detailed views of state finances but also are a mixture of fiction, facts and Kabuki. The principal fiction takes the form of projected General Fund revenues, about which planners have little idea since ~70 percent are from personal income taxes significantly dependent upon unpredictable capital gains from a tiny number of taxpayers during a 12-month period that doesn’t even start for nearly six months.* Projected expenditures are more factual but only on a cash basis. The Kabuki is that Governor’s Budgets are just political starting points. The budget will be revised in May, after which the Legislature will have until June 15 to pass a final budget that must be enacted by June 30.

At a time when criticism is leveled at CA’s government for poorly performing agencies such as the Employment Development Department, it’s important to point out excellently performing agencies such as Covered California. Now that I’m on Medicare I no longer need CC but my wife and daughter do and it is a marvel. Application and renewal are simple and this morning (just seven days into the new year) 1095-A forms have already been sent. In contrast, our son who lives in New York has to deal with New York State of Health, which turns every task into a heavy effort.

Dear Legislators,

In a world in which The Intercept is criticizing biotech firm Moderna for potentially collecting $10 billion for creating a life-saving COVID vaccine, how do you think you should be viewed for the $10 billion you shower on CA state prison employees every single year?

As 2020 comes to a close, we are pleased to report that GFC raised $7,152,548 during the 2019-20 legislative session. Launched in 2011 with seed funding from three donors (Ron Conway, Greg Penner and me), today GFC has nearly 900 donors plus 16 chapters that together are among the most powerful forces in Sacramento. Special interests have been there longer, but we are bigger and growing faster.

Dear Legislators,

We know how much you fear public employee unions but in 2021 you must finally address an expense in their favor — let’s call it “The Giveaway” — needlessly costing the state, local governments, transit agencies and schools more than $10 billion per year.

Dear Journalists,

We have a challenge for you: Try to find a single state or city that provides richer post-employment insurance to retired prison guards and police than CA, LA or SF, which supply unlimited health insurance to retired employees and their spouses even when they are on Medicare or entitled to Covered California.* Let us know if you do.

Dear Legislators,

As you prepare for the release in early January of Governor Newsom’s proposed 2021-22 budget, consider this: The University of California is incurring $1.7 billion of unnecessary expense each year. That’s about half of the amount you allocated to UC from the state’s General Fund in 2020-21. To understand how that’s happening and how UC can stop it, see here.

Dear CA State Legislators,

You lead the country in spending on prison employees. After granting them six salary increases since 2010, you are spending >$5 billion/yr on salaries for 57,000 state prison employees attending to ~115,000 inmates. But that’s not all. You also spend >$4 billion/yr on insurance subsidies for retired employees, the most expensive of whom are prison guards and CHP. These subsidies, known as “Other Post Employment Benefits” (“OPEB”), are in addition to pensions, which you allow prison guards and CHP to start collecting in their 50’s.

Dear Legislators,

Last night I posted a thread on Twitter explaining how CA unnecessarily spends a fortune on health subsidies for retired police, prison guards and other employees and the two steps required to fix that.

November General Fund tax revenues came in 30 percent above forecast. Through the first five months of the fiscal year, revenues now exceed forecast by $14 billion. Despite the pandemic, 2020 calendar year tax revenues are running ahead of 2019:

LA and SF face large budget deficits because their mayors won’t face up to police unions. The consequences for residents are terrible and there’s an easy solution. LA and SF spend hundreds of millions of dollars per year on extravagant subsidies for retired employees, the most expensive of which are retired police who can retire early. But those subsidies aren’t necessary. That’s because of Covered California, where even retired police with large pensions can get federal and state subsidies:

No sooner had the California Legislature convened yesterday than a bill was introduced to increase taxes again to raise $2.4 billion per year. But there’s already an extra $2.4 billion in the state budget.

Today’s LA Times reports the city is looking at layoffs of police officers because of a budget shortfall. But as we explain here, LA could save nearly $400 million per year by eliminating a rich subsidy for retired city employees that was rendered redundant by subsidies provided by the federally-funded Affordable Care Act in 2010 and state-funded Middle Class Subsidies in 2019. Active LA employees and public safety should not be sacrificed to unnecessarily subsidize retired LA employees.

Pension Obligation Bonds (POBs) do NOT reduce pension obligations. They increase pension assets, which produces an accounting benefit (more assets — the same liabilities = a lower unfunded liability).

Prison guards are the most expensive category of California’s state pension expenditures, which have exploded.

COVID has hit the transportation sector hard. Recently, Delta and its unions agreed to temporarily reduce pay. But last week BART agreed to increase pay. Such profligacy isn’t rare. Eg, BART also provides a redundant benefit known as “Retiree Medical Benefits” that annually costs $39 million, an amount equal to 21 percent of BART’s expected operating revenue this year.

Yesterday a GFCer wrote me to encourage immediate action on pension reform. In response I wrote,

We can’t help but notice all the press about Governor Newsom’s acknowledged mistake in attending a dinner that didn’t meet state guidelines for gathering during COVID-19. We tend to be forgiving about such personal mistakes that have little to no bearing on the daily lives of Californians, which are much more affected by policy and performance.

October General Fund tax revenues came in 37 percent above the 2020–21 Budget Act forecast, according to the latest Finance Bulletin from the California Department of Finance. Revenues through the first four months of the current fiscal year now exceed forecast revenues by $11 billion.

The San Francisco Chronicle reports that S.F. DA Chesa Boudin says his department is understaffed and overwhelmed by caseloads. There’s a fix, as we illustrated last June. That fix would eliminate an unnecessary subsidy and free up $120 million. Boudin’s entire budget is $74 million. The most expensive group of beneficiaries of the subsidy are retired police. Several elected officials, including Vice President-elect Harris and State Senator Wiener, are entitled to the subsidy as a result of their service as employees. They don’t need it, especially after the creation of Covered California.

We are starting to wonder if some journalists are viewing different state and local records than we are. Last week it was an article in the New York Times containing an unsupported assertion reported as fact, then the Los Angeles Times didn’t question an assertion by a LA Councilman about that city’s budget, then CALMatters omitted reference to state revenues running well above budgeted revenues in an article about school funding.

The internet has made it easier than ever to get to primary sources such as government budgets. That’s one reason we encourage members of the GFC Network to skip intermediaries and just go direct.

A recent article in the New York Times about election results in California included the following sentence (italics added by me): “A measure that would have raised taxes on commercial landlords to raise billions for a state that sorely needs revenue also seemed on track for defeat.” The reporters did not provide support for their assertion — which they expressed as a fact — that California “sorely needs revenue.” They should do so. Meanwhile, here are six potentially relevant facts (sources in parentheses).

Earlier today the State of California finally issued a Comprehensive Annual Financial Report for the June 30, 2019 fiscal year that ended 488 days ago, the last state to do so. The Securities and Exchange Commission requires big companies to file within 60 days. CAFR’s tell much more than government budgets; e.g., some California budgets have treated borrowings as revenues and ignored expenses through payment deferrals or debt issuances. Still, CAFRs aren’t perfect. Usually the pension and other post employment benefits (OPEB) liability measures in California’s CAFRs are from the prior fiscal year. If that’s also the case this year, that would mean those liability measures are from 853 days ago. Still, we’re glad to see the CAFR and eager to dive in.

Yesterday, LA’s City Administrative Officer announced the city’s budget deficit could reach $400 million to $600 million by the end of the current fiscal year.

Investment banks are encouraging cities to issue “Pension Obligation Bonds.” They should be avoided. POB’s are expensive and risky accounting schemes. It would be different if cash obtained from such a bond was used to reduce pension obligations. But POB’s are used to increase pension assets, which just produces an accounting benefit at the cost of interest and fees. They also boost risk. That’s because a POB issuer is renting cash with which to gamble on investment markets on which the issuer is already betting existing pension assets. Cities should avoid investment banks bearing expensive and risky accounting charades.

Annual cash spending by the City and County of San Francisco on pensions and other post-employment benefits increased 146 percent from 2010 to 2019, to $864 million per year.

In 2012 California raised the state’s top income tax rate nearly 30 percent to 13.3 percent to boost education funding. Proposition 98 spending on K-12 jumped accordingly:

I had several inquiries yesterday about the latest problem at CalPERS, this time the resignation of a CIO who allegedly wasn’t vetted for conflicts of interest.

For too long, California’s schools have operated on deficits.

As Congress considers a $100 billion Covid-related financial-support package to help states and localities gear up for the coming school year, California should act quickly to plug leaks that will cost its own schools their likely share of that aid. The San Francisco Unified School District (UFUSD), for example, which serves 60,000 students, received more than $1 billion in revenues last fiscal year. Even before the pandemic—and despite a 30 percent gain in revenues over the previous five years—SFUSD reported a deficit because spending on retirement costs rose more than 100 percent over the same five-year period. Indeed, the district now spends more than $100 million per year on retirement costs, equivalent to $1,750 per pupil. To make matters worse, that $100 million doesn’t even include accrued-but-unpaid retirement costs for which debt is issued—and the balance of which now exceeds $1 billion.

After we wrote about CalPERS’s plan to employ debt leverage to improve its chances of earning its investment return assumption of 7 percent per annum, some of you asked if earning that return would close the gap (“unfunded liability”) between the assets CalPERS manages to meet pension liabilities owed by the employers for whom CalPERS administers pension obligations.

Joel Black will succeed David Vaudt as chair of the Governmental Accounting Standards Board on July 1. He was appointed by the Financial Accounting Foundation six months ago and will be the first GASB chair without experience serving as a state auditor.

This is the most recent demographic breakdown of pupils attending the Sacramento City Unified School District:

To say we are disappointed in the 2020–21 budget passed on Friday by the State Legislature would be an understatement. It’s bad enough they did not use this moment to reform retirement spending that’s unnecessarily draining $25 billion per year from schools and state services and billions more from local services. Even worse was to include non-budgetary matters in the budget but leave off the table the elimination of Last In, First Out (LIFO) layoffs of teachers, especially for districts that struggle to recruit quality teachers.

Much less than meets the eye.

So far as we can tell, there’s much less than meets the eye to the side letter arrangements negotiated with CCPOA and SEIU in connection with furloughs. The CCPOA side letter agreement imposes a furlough day per month but a bit less than half of the savings is given back to employees via suspension of employee contributions to OPEB (Other Post Employment Benefits), and since OPEB is not being eliminated or reduced and thus the state is still on the hook for the future OPEB benefits to which the suspended contributions relate, the suspension of employee contributions is therefore a borrowing by the state, the interest cost on which equals the discount rate applied to OPEB obligations. The SEIU side letter agreementemploys the same sleight-of-hand with different parameters.

Yesterday we wrote about the multiple levels of leverage implied by CalPERS’s plan to borrow to invest more capital into private equity. We neglected to include a level (subscription line leverage) that the Financial Times illustrates in an article entitled “Financial wizardry breathes magic into private equity returns” linked here and attached here.

After we wrote last week about CalPERS’s plan to borrow to invest more capital into private equity, some readers asked how employers who issue Pension Obligation Bonds (POB) to make contributions to CalPERS would be affected. The answer is that POB issuers would then be employing four levels of leverage:

Unnecessary spending on retiree health care is crushing the Golden State.

California has asked Washington for $14 billion in Covid-related support, in addition to the $8 billion already provided by the CARES Act. But because the state, with an annual General Fund of $150 billion, incurs more than $24 billion of annual expenses for pensions and other post-employment benefits (OPEB)—including post-employment subsidies for health insurance—a big chunk of the federal disbursement won’t go to schools, hospitals, or roads.

On Sunday the Financial Times printed a disturbing article about a plan by California’s largest pension fund, CalPERS, to borrow to invest more into private equity. See Top US pension fund aims to juice returns via $80bn leverage plan.

Long time GFCers know of our disdain for people who whine about California’s political problems but sit on the sidelines and do nothing to help solve those problems. Among them are those who assess the state’s problems as the consequence of Democratic control of state governance and that efforts at reform are futile so long as Democrats remain in the majority. Both assessments are wrong.

Nearly five decades ago, elected officials in California started enacting sentencing laws that rapidly filled the state’s prisons. Only in the last decade did that process start to reverse. Effecting political change is not for people with short attention spans.

After our email last week encouraging US Senator Kamala Harris to help eliminate California’s extraordinary spending on unnecessary insurance subsidies for retired public employees (OPEB), some of you asked why we thought someone like Senator Harris with such a long history of support from public employee unions would be willing to help on that issue. We have several reasons:

Before running for office, US Senator Kamala Harris was employed for 13 years as an attorney by the counties of Alameda and San Francisco, which provide expensive insurance subsidies to retired employees such as herself. In the case of San Francisco during the years Ms. Harris worked there, those lifetime benefits extend to employees who worked only five years. Known as OPEB (Other Post Employment Benefits), the subsidies were rendered largely redundant after enactment of the Affordable Care Act and middle class subsidies by the State of California yet San Francisco continues to run an OPEB program that costs a fortune — SF spent $180 million last year — and the most expensive beneficiaries of which are public safety employees who can retire at age 50 with pensions equal to 90 percent of their final compensation.

Several members of the GFC Network have asked, “how can a state legislator get away with saying one thing but doing another?” Here’s how:

To assist deficit-reduction deliberations, Govern For California commissioned an actuarial analysis of an alternative plan design for the City and County of San Francisco Postretirement Health Plan, which is an other postemployment benefit (“OPEB”) for retired city employees.

The California Legislature is considering $2.5 billion of cuts to child care, adult dental care, hospitals, parks, courts, social services and preschools. Instead, lawmakers should cut $2.5 billion of unnecessary insurance subsidies for retired state employees. 

Teachers working for the San Francisco Unified School District could be paid more if the school district took advantage of federal and state subsidies. The district incurs annual expense of more than $70 million — more than $15,000 per active teacher — to provide unnecessary health insurance subsidies to retired employees. The district pays that expense with a combination of cash and debt, which is how the district has accumulated more than $700 million of extra debt. The subsidies are known as “OPEB” (“Other Post Employment Benefits”) and are provided on top of pension benefits.

Earlier this month Sacramento City Unified School District authorized 11 teacher layoffs to help address a $27 million deficit. But those layoffs are unnecessary. SCUSD should lay off an unnecessary expense instead.

Some of you have asked for an estimate of the savings California could realize from reforming OPEB (Other Post-Employment Benefits) subsidies of retired employee health insurance.

1. You have the power to change OPEB. See page 136 of the state’s Comprehensive Annual Financial Report:

The City of San Francisco spends more than $400 million per year — 14x the city’s spending on Children, Youth and Their Families, 4x Recreation and Parks, and 2x Homelessness and Supportive Housing — to unnecessarily subsidize health insurance for retired city employees. Referred to as “OPEB” (“Other Post Employment Benefits”), SF’s OPEB subsidies are multiples of those provided by cities in adjoining states:

Having served in California’s state government during two difficult budget periods (2003–4 and 2009–10) and on the Volcker-Ravitch State Budget Crisis Task Force in 2012, I have participated in and studied many bad and good state budget practices. Some takeaways:

Governor Newsom’s Revised Budget proposes cuts to programs in the event more federal COVID funds are not provided. We propose a solution that would free the 10 programs below and improve the state’s structural deficit without jeopardizing the financial security of retired state employees.

Many of you have asked for our view of Governor Newsom’s request for $14 billion of additional federal support.

Recently California joined with Colorado in asking the federal government for more COVID-related financial support for states but the two states have very different needs for the money.

Some legislators inquired about the legal and moral grounds for making the changes to pension and OPEB obligations I set out here.

Last year the University of California spent $1.3 billion unnecessarily to subsidize health insurance for retired employees (dollars in millions)…

School budgets will be a big issue facing legislators upon their return to Sacramento.

Yesterday, Los Angeles Mayor Eric Garcetti warned of employee furloughs to help meet an anticipated $600 million revenue shortfall. Before LA furloughs workers providing important services, the city should save up to $300 million per year by emulating the City of Glendale in reforming and means-testing a subsidy currently provided to retired employees.

The Washington Post’s masthead reads “Democracy Dies in Darkness” but sometimes democracy dies in plain sight in Sacramento, where unverified assertions are often employed to justify billions in spending, cover up accounting frauds, shift blame for undue political influence, and more.

San Francisco Unified School District’s revenues are 40 percent higher than five years ago yet the district just announced a $32 million deficit. That’s because spending on retirement costs went up more than 100 percent.

Last Friday, Governor Newsom released a budget proposal for the next fiscal year for the legislature’s consideration. Our comments on the principal spending items of interest to the GFC Network are below…

California’s constitution requires the governor to submit a proposed budget (the “Governor’s Budget”) for the next fiscal year to the state legislature by January 10. The Governor’s Budget sets the table for discussions with the legislature, which must pass a budget by June 15, and is must-reading for anyone who wants to dive deep into California’s governance, as is a review of past budgets that may be accessed here. Such a review would disclose a number of interesting items…

Some Americans yearn for what they believe were the good old days of journalism when — so it is believed — citizens could rely on journalists to uncover lies. But for every Watergate, multiple events went undiscovered.

Last night at the presidential debate in Atlanta more than one contender blamed political dysfunction on the political power of billionaires. But that’s a myth. Try finding a billionaire who earns anything close to the 10,000x return on political spending earned by California’s 57,000 public prison employees who collect $10 billion in annual compensation and benefits for $1 million in political spending. Political power is correlated more with focus than wealth.

University of California at Berkeley economist Emmanuel Saez knows something about economics but apparently not about politics.

Alfred Hitchcock often employed a technique in his films known as a “MacGuffin,” which is an object, device or event that draws attention from the real plot but is largely insignificant itself. MacGuffins are also employed in California politics, as the example below demonstrates.

Imagine you are a donor to a non-profit organization whose board members receive gifts from employees to whom the board, without your consent, promises retirement benefits. Now the organization is asking you for larger donations to cover surging retirement spending but not disclosing the real reason more money is needed.

Further to our recent opinion piece about state and local government accounting, a reader asked for an illustration of a state budget ignoring costs. California’s treatment of insurance subsidies provided to retired state employees (known as “Other Post-Employment Benefits,” or “OPEB”) provides one such illustration.

Accounting for state and local governments is determined by the Governmental Accounting Standards Board (GASB), which has a too-cozy relationship with the governments it is supposed to regulate. GASB doesn’t stop state and local governments from treating borrowings as revenues, avoiding cost recognition by simply not paying expenses, or claiming balanced budgets that often are nothing of the sort.

Imagine your business could treat borrowings as revenues, avoid cost recognition by not paying expenses and report less debt than actually owed.

Fortunately, accounting for private-sector enterprises doesn’t enable such activities. But accounting for state and local governments does, and with big consequences.

Here’s one way we look at General Fund spending in the context of what the legislature can and cannot do…

Today the legislature passed AB 74, the state budget for the 2019–20 fiscal year, which starts July 1. Governor Newsom is expected to sign it. Here’s our summary view.

New Haven Unified School District students finally returned to school this week after the district and teachers reached agreement on a new contract. But a close vote and angry words are signs no one is happy. The settlement is temporary, just as in LA and Oakland earlier this year. That’s because the district and the teachers want more money but the state already boosted school spending, already raised taxes, and already moved higher among US states in per pupil funding.

The New Haven Unified School District teachers’ strike has moved into its third week. We are troubled this subject is not dominating discussion in the legislature.

The New Haven Unified School District teachers’ strike has moved into its second week, surpassing the duration of the Oakland and Los Angeles teachers’ strikes earlier this year.

Last week Governor Gavin Newsom released the “May Revision” to the 2019–20 budget he initially proposed in January. The May Revision kicks off negotiation with the legislature over the budget for the next fiscal year, which commences July 1.

Last year, in his final budget as governor, Jerry Brown proudly proclaimed a new policy to encourage the state’s 114 community colleges to pay more attention to how their students are faring.

A number of you have asked for our view of a California Supreme Court decision announced earlier this week about a pension reform case entitled Cal Fire Local 2881 v. CalPERS.

Proposals to increase federal taxes are very much in the national news lately. Some of the proposals are designed to expand programs but many are about income or wealth redistribution. In contrast, tax increases at the state level of government are usually about expanding programs or addressing deficits. That’s because states provide ~90 percent of domestic government services and have balanced budget requirements while the federal government provides few services and isn’t required to balance its budget.

Rolling up big paper profits on stocks and other capital investments during 2017 and most of 2018 was very easy, and the California Public Employees Retirement System, the nation’s largest pension trust fund, took full advantage of the opportunity.

Its strong earnings, particularly in 2017, narrowed a yawning gap between its assets and future liabilities for pension payments to state and local government workers.

But it was short-lived and CalPERS has not only regressed but could actually be underwater because of a new way of calculating its liabilities.

Later this year California Governor Gavin Newsom will negotiate a new contract with state prison workers that must be approved by the legislature. The consequences are big, especially for discretionary programs supplied by the state’s General Fund.

Those of you interested in state, local and school district pension obligations should add an esoteric phrase to your vocabularies: “Accretion of Discount.”

Opinion  // Open Forum

Last month I turned 65 and became eligible for Medicare, the national health insurance program for people my age and older. Medicare is fantastic — and fantastically cheap — health insurance. But, believe it or not, if I were a retired California state employee, both I and my dependents would be entitled to health insurance subsidies.

LOS ANGELES (AP) — Strike or no strike, after a deal is ultimately reached on a contract for Los Angeles teachers, the school district will still be on a collision course with deficit spending because of pensions and other financial obligations.

School systems across California are experiencing burdensome payments to the state pension fund while struggling to improve schools.

The problem is especially acute for districts like Los Angeles Unified that will see a financial hit in part because of steadily declining enrollment.

In December I turned 65 and became eligible for Medicare, the national health insurance program for people my age and older. Medicare is fantastic — and fantastically cheap — insurance. But, believe it or not, if I was a retired California state employee, I would also be entitled to a state-provided health insurance subsidy that this fiscal year will cost taxpayers $2.6 billion — more than double the cost ten years ago.

If I had one wish for 2019 it would be that journalists and elected officials cite original sources of information about K-12 spending in California, a subject about which far too many too often cite unauthoritative sources.

Prevent a strike at LAUSD

On January 7, Gavin Newsom will be sworn in as governor of California. On January 10, a strike has been scheduled by the LA teachers’ union (UTLA) against LA’s school system (LAUSD). A strike will impact 600,000 students — including many who get health and nutrition services at school — and their families plus the members of other unions that, unlike UTLA, have reached agreement with LAUSD.

If ever you wanted a sense of the Kafkaesque world that often characterizes California politics, imagine yourself in the shoes of Austin Beutner, Superintendent of the Los Angeles Unified School District (LAUSD).

Los Angeles Unified School District collected $7.2 billion in revenues in its 2017–18 fiscal year. That translates into $298,000 per teacher, 42 percent more than four years earlier…

This year California’s governor and state legislature are choosing to spend $15 billion on the Department of Corrections and Rehabilitation (CDCR), which incarcerates 127,000 prisoners. 

On September 20 the Federal Reserve recognized a truth long covered up by California’s public pension funds.

In its latest quarterly Financial Accounts report the Fed revised its measure of unfunded pension liabilities owed by state and local governments to $4.1 trillion, more than double the amount previously reported.

The California Prison Guards Association (CCPOA) is spending $500,000 on TV ads against Marshall Tuck in the race for Superintendent of Public Instruction. Why would the largest recipient of state spending on California’s prison-industrial complex care about the identity of the state’s next SPI? 

For the 12 months ended June 30, 2018, the S&P500 returned >14 percent but California’s State Teachers’ Retirement System (CalSTRS) earned <9 percent. Some of the underperformance results from the difference in allocation to equities (the S&P500 is 100 percent invested in equities while CalSTRS is not), but CalSTRS’s underperformance (37 percent) is more than twice its allocation to non-equities (14 percent).

<20 percent went to citizen services.

In January 2012 California Governor Jerry Brown announced he would ask California voters to approve temporary sales and income tax increases. Later that year his proposal was embodied in Proposition 30, projected by the Legislative Analysts Office to raise $6 billion per year for four years and smaller amounts for three years (ie, $42 billion or less). 40 percent of P30 revenues were to be provided to schools and community colleges*, the balance to the state. Marketed as “Temporary Taxes to Fund Education,” P30 passed. Seven budget years later, the results are in.

Triggered by recent earnings reports from CalPERS and CalSTRS, some readers have asked why California’s pension funds are underperforming the overall stock market. Eg, for the fiscal year just ended June 30, 2018, CalSTRS and CalPERS earned only ~two-thirds the stock market. While the question is best asked of their Chief Investment Officers, one reason might be portfolio construction designed to minimize contribution volatility. CalSTRS’s most recent CAFR discusses volatility on page 29 here.

The Democratic Caucus in the California State Assembly has published a video praising the 2018–19 state budget and in particular the $16 billion in reserves the state now has set aside in preparation for the next downturn in state revenues. That praise is well deserved.

OPEB (“Other Post Employment Benefits”) debt largely consists of subsidies to retired employees for medical insurance premiums. OPEB debt owed by the state doubled in the last decade to more than $90 billion and state spending in the 2018–19 California state budget on OPEB will be >80 percent higher than a decade ago. The burden of that spending disproportionately falls on discretionary General Fund programs, as explained here.

Yesterday my political party (Democratic) incorrectly tweeted that California was “paying down debt.” Nothing could be further from the truth.

One giant leap for the next generation.

Earlier this year the City of Palo Alto’s Finance Committee hired an independent actuary to produce a budget scenario reflecting a more realistic return on pension assets than the unrealistically-high return assumed by CalPERS, the city’s pension fund manager. As explained here, unrealistically-high assumed rates of return allow governments to artificially suppress upfront (“Normal”) pension costs for current services at the expense of larger costs for citizens down the road who didn’t receive the benefit of those services. The independent actuary reported that a realistic assessment of Palo Alto’s Normal Cost is $8 million higher than CalPERS’s assessment.

Most everyone knows the names of the two people vying to be California’s next governor. Hardly anyone knows the names of the two people who more than anyone else will affect the success or failure of the next governor.

Governor Jerry Brown is negotiating yet another salary increase for state prison employees, the fourth in seven years.

On May 11 California Governor Jerry Brown released the May Revision to his proposed budget for the next fiscal year, which starts July 1. It’s a must-read for anyone who wants to understand California’s budgets.

Lunch isn’t free.

California’s General Fund operates like a waterfall. Programs protected by constitution (principally K-12, community colleges, and debt service on General Obligation Bonds), statute (principally Medi-Cal, the state single-payer health insurer for low-income Californians) and contract (principally pensions and subsidies for retired employee health insurance) get first dibs on tax revenues. Only after those programs are satisfied do funds become available for unprotected programs such as UC, CSU and courts.

Classrooms should be fully staffed with adequately compensated teachers. But that is not the case in California despite a >50 percent increase in spending since 2010. The principal reason is the diversion of school dollars to pensions and other retirement costs. Governor Brown reports annual spending of $16,000 per student but only about half reaches students.

CA’s governor negotiates compensation with 209,000 employees. This year Governor Brown proposes $19 billion in salaries for them…

Gov. Jerry Brown’s revised budget for 2018-19 predicts general fund revenues will be 30 percent greater than 10 years ago yet key services will receive less money than they did back then.

San Francisco Unified School District recently published its 2017 Financial Report and Second Interim Reports for 2017–18 here and here. The results are startling…

California school boards are prevented by the state legislature and governor from offering disproportionate pay to employees willing to work in high-poverty zones, cutting pension spending, altering permanent employment (tenure) rules or granting principals the power to fire poorly performing employees. The outcome: poor student performance, inadequate teacher salaries, and shaky finances despite a huge increase in spending.

The pro- and anti-reform houses of education land are prepping for the next big battle between charter schools and teachers unions. The great houses in philanthropic foundation land are deciding where to place their bets. But winter is coming, and no one can avoid it.

Everyone must chip in to solve pension and OPEB crises.

It’s not news that exploding spending on pensions and retiree health care is crushing public services in California. It’s a problem that didn’t have to happen, as explained here. But it did — and the result is $1 trillion being diverted from schools and other public services in CA.

A public university president in Oregon gives new meaning to the idea of a pensioner.

Joseph Robertson, an eye surgeon who retired as head of the Oregon Health & Science University last fall, receives the state’s largest government pension.

It is $76,111.

Per month.

That is considerably more than the average Oregon family earns in a year.

Retirees subsidized at expense of active teachers.

School funding in California is at record levels…

General Fund tax revenues in Governor Jerry Brown’s proposed budget for 2018–19 are expected to be 32 percent higher than ten years ago yet the same budget proposes only 9 percent more spending for California State University than ten years ago.

Inevitable unless the Big Diversion is ended.

Jerry Brown’s budget for 2018–19 predicts revenues will be 32 percent greater than ten years ago yet that same budget proposes 14 percent less for the Judicial Branch and only 8 percent more for the University of California.

Agonizingly slow progress in fast changing times.

In 1968 Latino students walked out of public high schools in East Los Angeles in protest of unequal educational conditions. 50 years later what has changed? CA’s Latino graduation rate has improved but unequal conditions and poor educational outcomes persist and graduating students are often unprepared for college. That’s in significant part because billions of dollars are being diverted from classrooms, too many under-performing teachers are spared from dismissal, and pay and support isn’t differentiated for teachers in high poverty schools.

California’s largest health care system is a state-run single-payer system (“Medi-Cal”) that covers the state’s 13 million poorest residents, a population greater than all but four states. Service is terrible. Despite spending of $100 billion per year, appointments are hard to get, emergency room visits are up, there’s little indication of greater healthiness, and there’s even evidence than uninsured patients do better in some cases. Yet the California Legislature has not seriously tried to fix it. Indeed, in a twist worthy of parody by George Orwell, a Select Committee in the legislature recently proposed changes to other and even better-performing parts of the health care system but, with a single exception, not to Medi-Cal! Meanwhile, all that unproductive Medi-Cal spending is also crowding out funding for the needy, courts, parks, the University of California and California State University.

CA pension funds didn’t “lose money” in the Great Recession

San Francisco has a $10 billion budget yet — until now — the only professional financial analysts covering the city have been rating agencies like Moody’s. But because rating agencies care only about San Francisco’s ability to service debt, the payment of which is senior to public services, that means no one has been looking out for the public.

Bernie Madoff used deceptive accounting to steal $50 billion. California’s pension funds used deceptive accounting to steal $1 trillion. How that deception occurs is explained here. The motive is explained here.

David Crane, a lecturer at Stanford and a former adviser to Gov. Arnold Schwarzenegger, is the bringer of bad news. For more than a decade, Mr. Crane, a San Francisco Democrat and former investment banker, has been forecasting a disaster in California’s pension system. He was removed from the board of directors that oversees benefits paid to California’s teachers after repeatedly warning that the fund’s investment assumptions were too rosy, and since then has continued to scream about a coming financial reckoning.

In June San Francisco’s school board wants voters to approve a new “parcel tax” of $298 per parcel of real property. They claim the money — $50 million per year — is needed to provide teachers with living wages. That’s a worthy objective but it’s not the real reason behind the proposed tax. The real reason is buried deep in SFUSD financial reports from 2012 and 2017:

City takes two steps towards transparency.

On February 26 the Palo Alto City Council voted 9–0 in favor of a proposal to uncloak negotiations with the city’s public employees. The next step is to meet and confer with public employee unions, which is required under current state law. (You read that right. As explained here, under current state law the taxpayers of Palo Alto are not permitted to observe negotiations about their largest expenditures without the consent of the recipients of those expenditures.) Stay tuned.

Still not walking his talk.

State Assembly Member Tony Thurmond has proposed legislation imposing a tax on private prisons in California to help fund early education. Early education is great but levying a tax on private prisons would generate next to no money for it. That’s because only 1.5% — less than $200 million — of California’s $12 billion of prison spending goes to private prison facility owners or operators.

Transparency gets a chance.

In 1968 California Governor Ronald Reagan signed legislation granting collective bargaining rights to local and county public employees and enabling confidentiality of collective bargaining negotiations. A decade later Governor Jerry Brown signed legislation extending those rights to K-12, state and higher education employees.

It’s the lie that gets you.

Recently the California Public Employees’ Retirement System (CalPERS) reported that its investments in 2017 outperformed its “benchmark” by 0.25 percent. But whether CalPERS beats or lags its benchmark has little impact on pension costs, which are exploding because of explosive growth in pension liabilities. See for yourself…

But who has hurt California kids more?

Apparently the board of the California State Teachers’ Retirement System (CalSTRS) worries that Apple’s smartphones negatively impact child development. Presumably there will now be a lot of research on that subject. But no research is needed to prove this point: Child development in California is being negatively impacted by exploding pension costs that prevent school districts from hiring enough teachers and paying them sufficient wages. Look what has happened to the San Francisco Unified School District…

Jerry Brown and Betty Yee aren’t telling you the whole story.

Everyone has heard about pension costs but few have heard about the other retirement cost that’s burdening California governments and schools. “OPEB” — “Other Post-Employment Benefits” — are a form of deferred compensation, just like pensions. The principal OPEB benefit is a promise to cover post-retirement health costs. Because government employees in California may retire before they are covered by Medicare and often receive benefits on top of Medicare, OPEB promises in California add up to hundreds of billions of dollars.

The 2018 Bipartisan Speaker Series, hosted by Assemblywoman Catharine Baker (R-San Ramon) and State Senator Steve Glazer (D-Orinda), kicked off with a full house in San Ramon on Monday night, as locals turned out for a discussion on pension reform.

Schools are open but shelves are barren.

Everyone can see the federal shutdown is reducing some public services but California legislators are turning a blind eye to their state’s own shutdown. Public schools in Los Angeles, Oakland, San Francisco, San Diego, San Jose and other urban centers are providing just a fraction of full services, resulting in understaffed classrooms, underpaid teachers, and fewer arts, science, math, and other classroom offerings. One result is that the poor and minority students that make up a large share of those urban districts underperform poor and minority students in other states that spend much less per student.

But California needs 500 percent.

Governor Jerry Brown’s 2018–19 budget proposal prudently calls for filling the state’s Rainy Day Fund to its constitutional capacity of $13.5 billion. Doing so will “soften the magnitude and length” of budget cuts occasioned by the next recession, of which Brown reminds us there have been ten since World War II.

This afternoon, I spotted a tweet from a San Diego parent: 

There’s something particularly wrenching about being asked what services should be cut at your kid’s school to pay for increased employee pension & healthcare costs, when most working parents don’t have pensions. https://t.co/Vs6uMojuSt cc @sdschools

— Ashley Lewis (@AshleyJPL) January 12, 2018

I followed the link to the survey, and a message from the San Diego Unified School District said it was seeking input on how to resolve a growing budget shortfall due to “increases in costs outside of the district’s immediate control, such as healthcare costs, utilities expenses, and state retirement contributions that are all expected to rise for the foreseeable future.” 

Actions speak louder than tweets.

Today California legislators are tweeting quotations from Martin Luther King. They should compare the objectives expressed in their tweets with the state of affairs for their constituents, starting with the six million children in California public schools and the 14 million customers of the state’s single-payer health care system.

LBJ, Trump and Nancy Skinner.

Viewers of Steven Spielberg’s new film The Post are being reminded of the murderous lies told by the Johnson Administration as it ramped up the war in Viet Nam. While today’s media is more capable of catching lies as they occur, most focus on high profile deceivers like Donald Trump. But deception isn’t limited to the Oval Office. There’s plenty in Sacramento too.

Five pro-citizen issues should be on the agenda when the California Legislature reconvenes tomorrow…

It goes well beyond sexual harassment.

Sexual harassment by elected officials in California is all over the news but less visible forms of political immorality are just as prevalent. One example is that of state legislators who sell students, families and vulnerable citizens down the river to boost prison guard compensation. Another is legislators protecting the profits and turfs of cronies while ignoring the healthiness and convenience of 14 million customers of the state’s sub-functional single-payer system, Medi-Cal. Other examples include state officials opposing student civil rights and legislators robbing K-12 students and young teachers of their futures out of fear of powerful commercial interests.

On January 10 Governor Jerry Brown will present his proposed budget for the 2018–19 fiscal year. That budget will not reflect financial reality. That’s because state and local governments operate under accounting rules that enable untruthful financial reporting. For example, Brown’s last proposed budget in January 2017 ignored expenses of $16 billion, as explained here, here, here and here. Those unreported expenses magically became debt, none of which was presented to citizens for their approval.

The real reason CalPERS hasn’t recovered.

Many legislators don’t understand why massive gains in the stock market have barely improved the Funded Ratio of California’s principal pension fund, CalPERS. The answer is simple: massive growth in liabilities.

But CalPERS lets down local government employees.

California Governor Jerry Brown has filed a legal brief with the state’s Supreme Court arguing that pensions for government employees should work no differently than pensions for non-government employees. Students, citizens, taxpayers and future government employees would be better off if the court agrees.

During the next five weeks, the CalPERS board, custodian of $326 billion in assets needed to fulfill retirement promises for 1.8 million California public employees and beneficiaries, will make decisions affecting government budgets for decades to come.

The problem is, despite their fiduciary duty under the state Constitution to “protect the competency of the assets” under their absolute control, CalPERS is roughly $153 billion short of fully funding the retirement promises earned to date.

CalPERS’ actuary says the nation’s largest pension system should stop kicking the proverbial can so far down the road.

California’s recent fires reminded citizens that robust fire and police staffing levels are critical for public safety, including the safety of the brave Californians willing to serve in those roles. Fortunately for our society, a good number of young people growing up today hope to become firefighters and police officers. But less fortunately for those young people and our society, some California officials are eroding the ability of future governments to hire enough police and fire personnel while also maintaining public spending on other services.

Colorado Gov. John Hickenlooper has proposed a budget calling on existing government employees and retirees to bear the costs of proposed pension reforms because citizens and taxpayers have already contributed enough to the retirement system. The proposed changes include higher contributions by employees and lower post-retirement increases for retirees.

Two public pension plans started off in the same spot before the Global Financial Crisis and went through the same investment markets since then but ended up in very different spots.

The plans — let’s call them “O“ and “C” for now — reported nearly equivalent “funding ratios” (the ratio of pension assets set aside to meet pension liabilities; the higher, the better) before the crisis, both lost big in the crisis, and both participated in the subsequent stock market boom. But their funding ratios diverged, with B’s plummeting 16 percent and O’s improving 10 percent as of their most recent published annual reports. The difference arises largely from two factors…

Same recession, same stock market, different outcomes. Two public pension plans started off in the same spot before the Global Financial Crisis and went through the same investment markets since then but ended up in very different spots. The plans — let’s call them “O“ and “C” for now — reported nearly equivalent “funding ratios” (the ratio of pension […]

FAIRFIELD — Pension costs could run school districts out of business, a superintendent said Thursday at the State of Education in Solano County forum.

Schools may first reach a point where they do less for students because of contributions to the Public Employees Retirement System and the California State Teachers Retirement System, said Brian Dolan, superintendent of the Dixon School District.

California’s wine country fires delivered a vivid demonstration of the critical importance of governments being able to assemble armies of public safety workers when needed. Citizens expect their governments to provide public safety — but they also expect parks, animal shelters, transportation, road, sidewalk and tree maintenance, housing for the homeless, libraries and much more. What citizens don’t know is that some of their elected officials are systematically reducing the ability of their governments to both field adequate numbers of public safety personnel and fund other services.That’s because those officials refuse to acknowledge or address the explosive growth in pension and other retirement costs crushing their budgets.

Governor Jerry Brown just signed a bill requiring pharmaceutical companies in California to issue notifications at least 60 days in advance of a price increase that would be at least 16 percent over a two-year period and explain the reasons behind the increase. According to the San Francisco Chronicle, supporters of the legislation say it will discourage significant price increases.

SCHOOLS in Pennsylvania ought to be celebrating. The state gave them a $125m budget increase for 2017-18—enough for plenty of extra books and equipment. But John Callahan of the Pennsylvania School Boards Association says all the increase and more will be eaten up by pension costs, which will rise by $164m this year. The same happened in each of the previous five years; cumulatively the shortfall adds up to $586m. The pupil-teacher ratio is higher than in 2010. Nearly 85% of the state’s school boards said pensions were their biggest source of budget pressure.

California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic.  As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.

The teachers’ pension fund in Puerto Rico looks very much like a legalized Ponzi scheme — one that might hold a warning for teachers across America.

Journalists and elected officials occasionally make the mistake of viewing budget problems in terms of size rather than where the budget item falls. For example, the costs of unfunded pensions and retiree healthcare in the current fiscal year (FYE16–17) add up to 6% of the state’s General Fund, a much smaller share than retirement spending in, say, Los Angeles where retirement spending consumes 20% of the local budget. But all the consequences of that 6% fall on a small portion of the General Fund. 

Who Really Bears The Burden Of Unfunded Retirement Costs Journalists and elected officials occasionally make the mistake of viewing budget problems in terms of size rather than where the budget item falls. For example, the costs of unfunded pensions and retiree healthcare in the current fiscal year (FYE16–17) add up to 6% of the state’s […]