Supermajority can’t legislate away reality

Nov. 15, 2012

By Wayne Lusvardi

Since the election, several acquaintances of mine have gone out of their way to taunt me about the emergence of the Democratic supermajority in the California Legislature. I have listened respectfully but sadly.  Achieving a supermajority seems like a collective psychological defense mechanism that denies the obvious reality at hand. The following is my considered response.

Reality is something you can’t wish away or vote out of power.  California’s new Democratic Party supermajority in the Legislature may delude itself into believing it can now legislate away municipal insolvencies or unmet pension liabilities.

The Democrats may have vanquished Republicans in California.  But they have not vanquished reality. The unelected California “Reality” Party has a way of eventually getting its revenge.

Reality of Slow Growth

California boasts it has the best weather in the country, a diverse economy and the ninth largest Gross Domestic Product in the world.  But this covers up the economic reality lurking below its high total GDP ranking.  Since 2002, California’s recent population growth of 1 percent per year has lagged behind U.S. population growth.

California may have 12 percent of the U.S. population, but it still has only 13.3 percent of national GDP.  As of 2010, California ranked 12th among the states in GDP per capita, at $51,914.  That’s not great shakes to gloat about, despite all the hype about having the top total GDP due to large population. And California’s high cost of living makes the comparison even worse.

Let’s take out federal, state and local government spending from the state GDP to isolate private GDP growth.  This way, the infusion of federal stimulus funds from 2009 to 2011 will not distort the results.  According to the U.S. Bureau of Economic Analysis, California has had a 1.94 percent per year Real GDP growth rate from 2002 to 2011.

This is growth. But it is slow growth. Most economists say economic recoveries need annual growth rates of 4 to 5 percent per year.

The needed annual return on CalPERS pension investments is 7.5 percent per year.  But CalPERS’ actual return for the 2011-12 fiscal year was 1 percent.  Money inflation has run 2.58 percent per year from 2002 to 2012.

Conversely, state and local government debt has increased from 15.1 percent of state GDP in 2002 to 20.02 percent in 2012.  Overall state and local government spending — not to be confused with the state general fund budget — has remained mostly flat from 2002 to 2012. California has been living on a credit card of bubbles, bonds and bailouts.

But the problem is not only “structural” budget deficits or debt as much as it is “structural” slow growth. This anemic growth is insufficient to address the rapidly approaching $884 billion unfunded pension liability wave of debt.

Reality and Unreality of a Split Property Tax Roll

The only political response to slow growth has been for the Party of Government to protect state and local governments, not businesses.  Now the Democratic supermajority in the Legislature is rumored to have its eyes on eliminating Proposition 13 for commercial property taxation, which would create a “split roll” property tax.

A split residential-commercial property tax is based on a misperception that tax reassessments are not current.  The belief is that significant tax revenues are being lost.

But what Prop. 13 really does is serve as a circuit breaker so that taxes don’t go up or down too far and too fast. If it had not been for Prop. 13, local government property tax revenues would have been in free fall after the Mortgage Market Meltdown in late 2008.

Once commercial property reassessments go back to being done annually, instead of upon re-sale of a property, the dependability of the state’s property tax revenues will be much more unpredictable for local governments.

Removing Prop. 13 for commercial properties would backfire because small businesses comprise 97 percent of total firms in California (857,167 small firms out of 878,120 total firms). A split commercial-residential property tax roll would likely worsen the slow growth problem. A reputable 2008 study indicated that the effects of a split-roll property tax would be:

* Higher rents paid by families and small businesses;

* Reduced investment and 152,400 fewer jobs;

* Reduced wages (-0.4 percent);

* Increased consumer prices;

* Out-migration of 48,700 families (-$7.3 billion GDP);

* Lower return on capital investment of 0.7 percent;

* Lower net private investment of $2 billion annually.

Election Reality Lasted Only Two Days

Desperate groups do desperate and sometimes even suicidal things. And California’s Government Class is in a full panic mode that its promised pensions and entitlements are not based in reality.

There are few ways to reason with desperate people. They want to impose more taxes on everything to save their pensions. They believe that their new supermajority lets them wish reality away and that tax increases will cure everything.  Eliminating commercial Prop.13 is just a beach head for ridding the state of residential Prop. 13 altogether.

In his essay “How to Build a Universe That Doesn’t Fall Apart Two Days Later,” Orange County writer Philip K. Dick wrote: “Reality is that which, when you stop believing in it, doesn’t go away.”

California’s election pseudo-reality didn’t last much past two days. California’s private sector middle class may flee, but reality isn’t going anywhere.