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.

43 comments

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  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 15 November, 2012, 10:44

    The wake up call isthat we STILL hve a $7 BILLION deficit even with porp 30…..hehehhehehehe…wait until we have a double dip recession/fiscal cliff…BTW Teddy, what is teh DJIA at today?????…what was it at this time last year????…hehehehehehehehe 🙂

    The sky just fell on Teddy and his Sock Puppets

    Reply this comment
  2. Wayne Lusvardi
    Wayne Lusvardi 15 November, 2012, 10:56

    Whatever “deficit” is being touted is a spending deficit created by moving the goal posts upward. The real deficit is the future pension liability for which there never will be enough tax revenues.

    I contend the state has had no “deficits” even during the recession – it has had a cash flow timing problem. More on this in due course.

    Reply this comment
  3. Dyspeptic
    Dyspeptic 15 November, 2012, 11:21

    There you go again Wayne, confusing the issue with pertinent facts and figures. As you know, the nitwit denizens of Crazyfornia don’t need no stinking facts and figures. They have their prejudices, preconceptions and infantile emotions to lead them.

    Most people in this Idiots Republic will never figure out that increasing the cost of doing business will always adversely affect shareholders, employees or customers, and sometimes all three. Government education has dumbed down the masses to the point where they have no critical faculties and don’t even realize the depth of their ignorance.

    Reality bites, and in Crazyfornia it will chomp down harder than a great white shark on a tender, juicy surfer dude.

    Reply this comment
  4. Ted
    Ted 15 November, 2012, 12:02

    Fellas– r e l a x—- we have a super majority– we’ll take it from here…..pls try not to get sour grapes stains on your gym clothes—- now—– back to your cubicles little trolls!

    0 for 14 ™!

    It just never gets old!

    Reply this comment
  5. Rex the Wonder Dog!
    Rex the Wonder Dog! 15 November, 2012, 12:20

    Call it whatever you want to Wayne, there is a LACK OF MONEY, stop splitting hairs.

    Reply this comment
  6. Queeg
    Queeg 15 November, 2012, 12:29

    Poodle be respectful of your masters!

    Reply this comment
  7. CalWatchdog
    CalWatchdog Author 15 November, 2012, 12:33

    Ted: Just wait till the whole state collapses and Dems get the blame.

    Not that Reps will know what to do then.

    — John Seiler

    Reply this comment
  8. Queeg
    Queeg 15 November, 2012, 12:42

    Dems are coated in Teflon…..Illinois, New Jersey, New York keep on taxing and investing….redistribution is considered “devine”…..how dare CWD posters object to their
    predetermined destiny….the train left the station!

    Reply this comment
  9. SeeSaw
    SeeSaw 15 November, 2012, 13:09

    Te-he,he,he,he,–Rex got his ass kicked on Nov. 6, and doesn’t know how to take it like a man–still he imagines that the sky just fell on everyone else. I think it just fell on his brain.

    Reply this comment
  10. Wayne Lusvardi
    Wayne Lusvardi 15 November, 2012, 13:14

    Apparently someone didn’t read the article or has a reading comprehension problem. Even if the state gets every tax increase they want the reality is the pension liability gap is too large to close unless growth is much higher (say 5% per year) over a sustained number of years. The Democrat platform has no agenda to actually increase growth. Instead they are just protecting their client classes.

    Reply this comment
  11. Ted
    Ted 15 November, 2012, 13:40

    John– you raise a good point— If we Dems don’t sort this out now— Even I will stop voting Dem in Calif.

    Reply this comment
  12. Ted
    Ted 15 November, 2012, 13:42

    Seesaw– You are correct—- But many repubs still show no signs of humility in this staggering defeat. If they don’t retool effectively, it will insure another decade of repub exile.

    Reply this comment
  13. Ted
    Ted 15 November, 2012, 14:22

    El Waynisimo—- That was a curious piece. In your view is this real or fuzzy math?

    Reply this comment
  14. Rex the Wonder Dog!
    Rex the Wonder Dog! 15 November, 2012, 14:45

    Poodle be respectful of your masters!

    Can’t Teddy, Rex is still PO’d (and very depressed) about Nov 6 😉

    Reply this comment
  15. Rex the Wonder Dog!
    Rex the Wonder Dog! 15 November, 2012, 14:47

    Te-he,he,he,he,–Rex got his ass kicked on Nov. 6, and doesn’t know how to take it like a man–still he imagines that the sky just fell on everyone else. I think it just fell on his brain.

    seesaw, I am going to wash that mouth of yours out with soap 😉

    Reply this comment
  16. Queeg
    Queeg 15 November, 2012, 15:05

    Poodle got whacked so bad…..he was told….but he road his Red Ryder wagon down the hill too fast again and got his knees and buns scraped real good…

    Reply this comment
  17. a frequent reader
    a frequent reader 15 November, 2012, 15:39

    November 15, 2012 at 3:05 pm

    Poodle got whacked so bad…..he was told….but he road his Red Ryder wagon down the hill too fast again and got his knees and buns scraped real good…

    Queeg, you aint got no good english either 😉 …just saying.

    Reply this comment
  18. TrainLeavingStation
    TrainLeavingStation 15 November, 2012, 16:20

    Thankfully we do have freedom of choice. My wife and I have chosen to leave. Our daughter graduates from college in fours years. We get to graduate to retirement in a low-tax, fiscally conservative state. We have amassed a very nice nest egg and look forward to spending our money on ourselves, not to prop up the salaries and defined benefit retirement plans for the ruling government worker elite union leeches.

    Reply this comment
  19. Skippingdog
    Skippingdog 15 November, 2012, 16:32

    Why is it that the evil Blue States with high taxes also have the highest per capita state GPD’s? California’s may be “only” around $52k, but that puts it nearly 10% ahead of that conservative Mecca Texas.

    BTW, Wayne, what was the actual return of CalPERS for the 2010-2011 fiscal year? I seem to recall something better than 21%. How about you?

    Reply this comment
  20. Pedicabo Vos
    Pedicabo Vos 15 November, 2012, 16:45

    Skippy,
    GDP figures aren’t adjusted for cost-of-living. By way of illustration, the Census Bureau reports the “official” California poverty rate at 15.8%, but reports an adjusted poverty rate of 26%.

    So, adjusted for cost of living, the poverty rate nearly doubles – but includes only housing costs (not food or energy). Adjusted for cost of living (set only to soar, here), that $52K looks might measly.

    In fact, I took a trip to Portland, recently, and ate at a fine restaurant. When I saw the prices and the bill, I was filled with the urge to bolt for the door before they caught their mistake – only there was no mistake. Our cost of living is ghastly.

    Reply this comment
  21. Wayne Lusvardi
    Wayne Lusvardi 15 November, 2012, 16:55

    The 21% Cal-PERS return was two years ago and was based on some bubble investments.

    Now we are in a ZIRP – Zero Interest Rate Policy environment — per Obama administration.

    Actual returns are negative after inflation.

    Reply this comment
  22. Skippingdog
    Skippingdog 15 November, 2012, 17:22

    It’s still hard to see the proof of your doomsday scenario for California. We’re in the middle of a worldwide economic contraction and bottom of the business cycle right now, but California’s GDP is outpacing that of the U.S. and of many other G20 member nations.

    I suppose if you’re betting that the economic world is coming to an end and things are never going to improve your conclusions might seem acceptable, but history is not on your side.

    Take a look at how the U.S. compares to the other G20 nations in the most recent data. Things may not be great, but they’re a lot worse elsewhere and China is on track to join in that decline.

    http://www.bbc.co.uk/news/business-19589501

    Reply this comment
  23. Dyspeptic
    Dyspeptic 15 November, 2012, 17:45

    Skippy said “BTW, Wayne, what was the actual return of CalPERS for the 2010-2011 fiscal year? I seem to recall something better than 21%.”

    So Skippy, if the investment geniuses at CalPERPS are so good at there jobs why do the taxpayers need to be exploited as a pension backstop?

    Why can’t you tax feeders take responsibility for your own investments like we ordinary citizens with our defined contribution plans?

    Why should the servant (tax feeders) get a better pension than the master (taxpayers)?

    Reply this comment
  24. Queeg
    Queeg 15 November, 2012, 17:52

    Dys….your attitude is very thretening…why attack messengers trying to inform CWD with pithy facts. Skippy is a fine person like Teddy and Ulysses.

    Reply this comment
  25. Rex the Wonder Dog!
    Rex the Wonder Dog! 15 November, 2012, 18:53

    Poodle got whacked so bad…..he was told….but he road his Red Ryder wagon down the hill too fast again and got his knees and buns scraped real good…

    Burned and scraped??? The wheels CAME OFF and I have road rash all over my furball body……….

    Reply this comment
  26. Hondo
    Hondo 15 November, 2012, 20:14

    This last election was a classic case of ‘be careful what you hope for, you just might get it’. Congrats to the libs on their stunning wipe out victory. Now you have to fix the problems. No excuses. The republicans have no power. You can get rid of the hated prop. 13. Lets see what happens when you do.
    On Tuesday the 6th the voters spoke. On Wednesday the 7th the investors spoke with a stock market crash. The market is down 6% since the election. Apple is crashing. It and Facebook were supposed to balance the Kalifornia budget.
    The fiscal cliff looms. Obama is hell bent on a huge tax increase and the stock market is reacting. Europe is in another recession, our biggest customer. Hostess is going down due to Obama’s wife’s campaign against fun food and the unions striking during a recession.
    The massive tax increases at all levels of govt. in Kali will stifle any hope of an economic recovery. You can raise taxes all you want, but without the economic engine to fund it, watch out. The above author of this piece is right when he states your gonna need a several year 4% growth to keep pace with the entitlements growth rate. But that’s only for a few years. Then the entitlements explode and Kali will need a sustained growth rate of between 5% and 10% a year, into infinity.
    Great piece and good comments after wards.
    Hondo……

    Reply this comment
  27. SeeSaw
    SeeSaw 15 November, 2012, 22:11

    Prop. 13 is not hated and it is not a “liberal” issue. It had been mentioned by Brown and others that perhaps they should take a look at the loopholes that have allowed the commercial interests to escape higher property taxes, even when the titles changed hands. Nobody is talking about taking Prop. 13 away from the homeowners. The only people who resent Prop. 13 are those who bought homes recently and find that they pay a lot more in property taxes than their neighbors, who owned their homes when the prop. was passed. They don’t realize what even their property taxes would be much higher than they are now, if they weren’t covered by Prop. 13.

    The crash on the 7th would have occured, regardless of who won the Presidency. It crashed because of fear over the approaching Fiscal Cliff. Romney was no miracle man.

    Reply this comment
  28. Skippingdog
    Skippingdog 16 November, 2012, 00:01

    You may need to bone up on how CalPERS and other pension systems operate, Dyspeptic. Once you do that you’ll know the taxpayers have been far from exploited as a pension backstop. The ARC for each agency rises and falls with the market returns, age of its employees, etc. For many years, the financial markets were so good that the taxpayers never had to pay a penny of their ARC requirement, although every employee continued to be responsible for their side of the pension contributions (Yes, I know at some agencies the employee portion was paid by the employer, but that was a benefit in lieu of salary).

    Now that markets have declined, you and the others who disdain your public employees have had to actually pay the ARC like you should have been doing all along. That’s not backstopping; it’s what the deal was in the first place.

    These facts get us to your question, which was why taxpayers are legally obligated to “back up” government pensions. The simple and correct answer is because that was the deal you made when we all started working for you. If you want to change it for new people, go ahead and give it a try. For the rest of us, you’ve already skated on your ARC payments for years and are now whining because the bill isn’t being covered for you anymore. The markets will eventually recover, so all you have to do is wait for the business cycle to do its magic once more.

    Reply this comment
  29. Rex the Wonder Dog!
    Rex the Wonder Dog! 16 November, 2012, 00:10

    Gov pensions will take a haircut, Mr Math will prove that up in time.

    Ponzi schemes always fail, eventually 🙂

    Reply this comment
  30. Ted Steele, The Decider
    Ted Steele, The Decider 16 November, 2012, 06:44

    Skipping Dog– Your post is 100% accurate— they hate the truth…..should have the trolls spinning…..mmmmmm

    0 for 14 ™ !

    Reply this comment
  31. Queeg
    Queeg 16 November, 2012, 08:11

    Dys is all foot in mouth….irrelevent at CWD. Another Poodle of the righty kooks.

    Reply this comment
  32. Rex the Wonder Dog!
    Rex the Wonder Dog! 16 November, 2012, 08:39

    Wow, Teddy has TWO comments before 8:15 AM……..must have gone to bed early 😉

    Reply this comment
  33. Ted
    Ted 16 November, 2012, 09:09

    shun him

    Reply this comment
  34. Tough Love
    Tough Love 16 November, 2012, 09:36

    Wayne, Nice commentary. I particularly like this succinct summary of the issue:

    “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.”

    Reply this comment
  35. Wayne Lusvardi
    Wayne Lusvardi 16 November, 2012, 09:41

    Once again readers seem to have a reading comprehension problem.

    Slow growth is not “doomsday” nor is the word doomsday mentioned in the article.

    Please stop reading something into the article that plainly is not there.

    Thank you all for your comments.

    Reply this comment
  36. Tough Love
    Tough Love 16 November, 2012, 09:52

    Quoting Skippingdog …”For many years, the financial markets were so good that the taxpayers never had to pay a penny of their ARC requirement, although every employee continued to be responsible for their side of the pension contributions”

    Interesting (or intentional ?) that you omitted that “their side” (meaning the employees contributions), even INCLUDING all the investment earnings throughout their careers, RARELY accumulates to a sum sufficient at retirement to buy more that 10-20% of the grossly excessive pensions that have been promised (with Taxpayers on the hook for the 80-90% balance).

    I say “promised”, because I’m quite certain the day will come whereupon Taxpayers will rise up (likely with the politicians having switched sides to support THEM) and renege on a good portion of that excessive “promise”.

    Reply this comment
  37. jimmydeeoc
    jimmydeeoc 16 November, 2012, 13:05

    Amidst the schoolyard antics…..

    Let me bring you back to something mentioned earlier re: Blue state vs. Red state wealth.

    Looking at a snapshot does not give a true account of the dynamics. Newgeography.com covered this is detail a while back, and the upshot showed that disparities have been closing for decades. (It’s easy to forget how truly backward much of the South was even just 50 years ago.)

    And as to California’s ranking (12th)……I seem to recall not long ago (1980s and 90s) California was in the Top 5, and easily held the highest ranking among large states.

    Take the nation’s basket case (Mississippi). California’s State Per Capita is less than 50% higher than Mississippi. 40 years ago the same measure showed California was TWICE that of Mississippi.

    Reply this comment
  38. eatingdogfood
    eatingdogfood 17 November, 2012, 10:08

    Democrats + Unions = Bankruptcy AKA Hostess !!!

    Reply this comment
  39. CalWatchdog Isn't Journalism
    CalWatchdog Isn't Journalism 17 November, 2012, 10:32

    At the risk of inserting facts into a pretty familiar CalWatchdog rant… Prop 13 does not act as a circuit breaker in a recession. Far from it. Had the law not been amended by Prop 8 in November 1978, property tax rates established in boom times would have stayed there. Prop 13 offered nothing for a decline, only a limitation on increases.

    Prop 8, on the other hand, gave county assessors and property owners (!) the power to temporarily lower property tax rates when values dropped, with the understanding that rates would go back to Prop 13-limited levels once the market & economy recovered.

    Before we yet again beatify Howard Jarvis and Paul Gann, let’s try to have a factual argument on the merits/demerits of a split roll, etc. Of course, a factual argument is a rare thing on this website.

    Reply this comment
  40. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 November, 2012, 11:26

    I dont know if I can go a week without a Hostess fix 😉

    Reply this comment
  41. CalWatchdog
    CalWatchdog Author 18 November, 2012, 07:31

    No. 40: Thank you for praising our journalism.

    Actually, given the recent run-up in home prices in the mid-2000s, then the subsequent crash in property values of up to 80 percent, there’s no way the higher tax rates would have been sustained no matter what. Even people who were not “underwater” in their mortgage payments would have just walked away from their homes to avoid the high tax. If Prop. 13 and Prop. 8 would not have been in place, something else would have.

    — John Seiler

    Reply this comment
  42. Wayne Lusvardi
    Wayne Lusvardi 18 November, 2012, 15:08

    Reply to Calwatchdog Isn’t (LEFTIST) Journalism

    FOR THE PROPOSITION 13 ILLITERATI:

    An often neglected aspect of Proposition 13 needs to be pointed out – contrary to popular misconceptions Prop 13 leads to more stable tax revenue streams for state and local governments. Let me give you an example.

    Without Prop. 13 the current tax assessments on a property would go up and down as the market changes. As the value goes up, the reassessments would drive up taxes. The state gets used to the new amount of taxes and buys 10 widgets with the money. When the market goes down, the building value goes down and the owner gets another reassessment. The taxes decrease and the government no longer has the tax money to pay for 10 widgets. It can only buy 5 widgets. A ‘shortage’ of 5 widgets is created.

    On the other hand, with Prop 13, the current value of a building goes up by 2% annually as long as the owner does not change. The state buys 3 widgets with the money. (The amount gradually increases but is fairly constant.) When the market goes down, the building value goes down and the owner gets another reassessment. The taxes decrease and the government no longer has the tax money to pay for 3 widgets. It can only buy 2 widgets. A ‘shortage’ of 1 widget is created. This may be much more easily handled than a 5 widget ‘shortage’.

    The difference is that in the first case the state government spent the higher amount and expected it. When the market downturn came around, there was a huge deficit. In the second case under Prop. 13, the government does not experience a severe shortage. This second way is the way to more stable government funding, not raising taxes through the roof by a split tax roll.

    Reply this comment

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