CalSTRS’s Underperformance

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).

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Verdict On Prop 30 Tax Increase — Part II

<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.

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More Pension Math: Investment Earnings

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.

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An Open Letter To CA Legislators

Dear California State Legislators,

July 18 marked Nelson Mandela International Day. There is so much to celebrate about Mandela but of particular relevance to your job is one of his most famous quotes: “Education is the most powerful weapon which you can use to change the world.”

You and the governor run K-12 education in California. You write the Education Code, which governs schools run by government employees. No other government-operated enterprise in California receives more money.

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Jerry Brown Goes To Court For Kids

Seeks to level playing field against self-dealing adults.

According to the Sacramento Bee, California Governor Jerry Brown has asked the California Supreme Court to accelerate consideration of a lawsuit the outcome of which is existential for California classroom funding.

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Disrupt CA’s State-Operated Enterprises!

California has two state-operated enterprises (SOE’s), each with annual revenues of ~$100 billion: K-12 education, which serves six million students, and Medi-Cal, a single-payer health insurer covering 13.5 million low-income Californians. K-12 services are largely provided by public employees while Medi-Cal pays for services largely provided by private sector employees.

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The Verdict On Prop 30 — Part I

>100% of schools’ share went to increased retirement spending.

In January 2012 California Governor Jerry Brown announced he would ask California voters “to approve a temporary tax increase on the wealthy, a modest and temporary increase in the sales tax, and to guarantee that the new revenues be spent only on education.” Later that year his proposal was embodied in Proposition 30, a temporary tax increase projected by the Legislative Analysts Office to raise $6 billion per year for four years and smaller amounts for three years. Marketed as “Temporary Taxes to Fund Education,” P30 passed. Seven budget years later, the results are now known…

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Reforming California Health Care

Start with $1,815.

Via a budget trailer bill signed into law last month, California has budgeted $5 million to establish a “Council on Health Care Delivery Systems” charged with developing a plan “for advancing progress toward achieving a health care delivery system that provides coverage and access through a unified financing system for all Californians.” Made up of five members, three chosen by the governor, one by the Senate Rules Committee, and one by the Speaker of the Assembly, the Council will start meeting in 2019 and must submit a plan to the legislature and governor on or before October 1, 2021.

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Good News In A San Francisco School

But scalable only with action by state legislature.

EdSource reports that heavy investment in teacher preparation doubled math scores in a low-income, mostly African-American and Latino San Francisco school.

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Thank You, CA Assembly Democrats!

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.

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Reducing OPEB Debt In California

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.

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The Wall Street Journal: Why California Is Losing Teachers and Laying Off Secretaries

Sacramento is flush, but cities and school districts can’t keep up with rising public pension costs.

Nine years into a bull market, housing prices in California have reached record highs. Investors are enjoying soaring capital gains, which in turn has created a windfall for the state budget. California is now sitting on $16 billion in budget reserves while many states struggle to balance their budgets. But beneath this patina of prosperity, many cities are careening toward bankruptcy. Schools are laying off employees and slashing programs. Some districts complain they are having trouble retaining teachers. What gives?

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Bad Philanthropy

Enabling a cancer to grow.

Sometimes political philanthropy produces bad outcomes. One example is the latest parcel tax increase for San Francisco Unified School District, the campaign for which was financed by political philanthropists and approved by voters June 5. Using a loophole to lower the threshold for voter approval and sold falsely as a sustainable solution to inadequate teacher salaries, the regressive tax covers up a growing financial cancer, reduces pressure to address that cancer, and burdens SF’s shrinking middle class.

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One Small Step By Palo Alto

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.

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Oppressing Oakland’s Schoolchildren

Where is the outrage?

Spending on California schools is nearing $100 billion per year, more than $16,000 per student. School revenues have never been higher. Yet some school districts are making cuts. Imagine you are the parent of a child in the Oakland Unified School District, which serves nearly 50,000 children.

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You Can't Always Get What You Want

As much as we wish it otherwise, two recent bills illustrate how far our state legislature still has to travel to be fully liberated from special interests.

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The Liberation of California’s Legislature

Most political reporters know that the California Legislature is a co-equal branch of government but few know much about the legislators themselves. As a result, all too often they place legislators in traditional categories — eg, “pro-business, “pro-labor,” “pro-environment” — when California’s political world has moved well past those old and uninformative designations.

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Burying The Lede In California

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.

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