The peer review of the California Air Resources Board’s 2007 report on the economic impact of the law included criticism from a UCLA professor and other academics who faulted the air board for failing to acknowledge the law’s likely eventual impact on manufacturing, in particular. The air board has been more candid about the AB32 economic fallout since then. In 2009, officials warned of what is known as “leakage”:

Producers that face compliance costs may not be able to pass costs through to consumers because their competitors that do not face similar costs do not have to increase prices. … Industries in this category may include non-ferrous metals smelting, iron and steel-making, cement, and other energy and/or emissions intensive activities.

But the typical California coverage of AB32 rarely discusses this prospect. Instead, it often uncritically accepts the idea that green jobs created directly and indirectly by AB32 will be its primary economic effect.

‘Manufacturers are the canaries’

But the national media generally look at the law differently. Bloomberg news service offered the latest example with a Feb. 5 story:

California manufacturers from food processors to apparel makers are warning costs will skyrocket if state regulators proceed with a plan to reduce their allocations of free greenhouse gas emission credits.

Starting in 2018, some companies California considers to be at risk of losing business to competitors outside the state’s landmark emissions cap and trade market will receive up to 50 percent fewer free pollution credits. That means they will either have to buy more allowances at auction or invest in ways to cut carbon pollution even more.

California has the toughest greenhouse gas curbs in the U.S., seeking to cut discharges to 1990 levels by 2020. The pushback from industry comes as Governor Jerry Brown and other state Democratic leaders are looking to advance those climate change policies further even as business leaders warn that lack of a national and global carbon-emission market puts companies in the state at a competitive disadvantage.

“Manufacturers are the canaries,” said Dorothy Rothrock, president of the California Manufacturers & Technology Association. “All of the costs in this system are radiating up and concentrate in manufacturing. It’s cumulative and it’s not happening anywhere else like this. California is doing it to its manufacturers in a way that no other state is contemplating.”

NYT: ‘Risks for CA are enormous’

In 2012, The New York Times offered a similar take about California’s “grand experiment”:

 The outsize goals of California’s new law, known as A.B. 32, are to lower California’s emissions to what they were in 1990 by 2020 — a reduction of roughly 30 percent — and, more broadly, to show that the [cap and trade system of selling emission rights] works and can be replicated.

The risks for California are enormous … the program could hurt the state’s fragile economy by driving out refineries, cement makers, glass factories and other businesses. Some are concerned that companies will find a way to outmaneuver the system, causing the state to fall short of its emission reduction targets.

“The worst possible thing to happen is if it fails,” said Robert N. Stavins, a Harvard economist.

The contrast with California media is pronounced. A Los Angeles Times editorial about AB 32 from last summer, for example, doesn’t even mention the law’s economic risks. Nor does this story from November about how an Indian tribe is taking advantage of one of the law’s provisions.

But the Times did acknowledge concerns that AB 32 would force the cost of gasoline higher for motorists. The effects of higher energy costs on business were not mentioned, however.

“A former CalPERS employee who alleged she was fired for challenging a cover up of insider trades by fund staff settled her wrongful termination case this morning.

“Jeannine Carter, who worked in a watchdog unit that makes sure CalPERS’ investments comply with the law, accepted a payment of $57,200 and her ‘rejected on probation’ status will be changed to show that she voluntarily resigned, said CalPERS’ staff attorney Christopher C. Phillips.

“The money equals 13 months of Carter’s pay, Phillips said. The official change in her separation status removes a stain on her record that eases her return to state service.

“CalPERS made ‘an economic decision’ to settle with Carter, Phillips said, rather than incur the expense of a protracted hearing before the State Personnel Board, which decides employee termination disputes.”

The context the Sac Bee left out

Anyone who reads this story is likely to think this is a bad employee using whistleblower protections to shake down CalPERS. But if you knew CalPERS’ history, that wouldn’t be your conclusion. And if you have been a regular CalWatchdog reader, you’d know that history. This is from my January 2013 CWD piece, “Being CalPERS means never having to say you’re sorry”:

“If CalPERS wouldn’t apologize for the propaganda  it put out to get SB 400 passed in 1999, starting the retroactive pension spiking that is now destroying local governments, why would it apologize for shady behavior now?

“If CalPERS’ upper ranks for years engaged in gross corruption even as CalPERS offered itself up as a moral force for socially conscious investing, why would it notice the dissonance between the high opinion the agency has of itself and the way it looks to the rest of the world now?

“If CalPERS thought it was an appropriate use of public funds to build itself a 560,000-square-foot, $153 million tribute to its glory and importance, why would it be expected to behave prudently with taxpayer money now?

“If CalPERS reacted to a factual analysis questioning its investment history by having its high-paid lead flack engage in a juvenile tirade against the Bloomberg reporter who wrote the analysis, why would it be classy now?

“If CalPERS spent years denying the pension crisis was real, why would it show any common sense now?”

Best bet with pension giant: Always believe the worst

As I wrote last year …

“CalPERS’ massive headquarters is probably visible from outer space. But so is its bizarre combination of self-congratulation, incompetence and obliviousness.

“The California Public Employees’ Retirement System: Always assume the worst.”

By John Seiler

Now is the time for moderate Democrats to step forward. Controlling every statewide office and with supermajorities in both houses of the California Legislature, Dems rule the roost. But unchecked power devours itself.

Steven Greenhut writes on Bloomberg about the problem for the Donkey Party:

“California taxpayers have nothing to fear from the new Democratic supermajorities in the state Assembly and Senate. That’s the assurance we keep hearing from the political class and interest groups in the Golden State, where Republican legislators are now reduced to irrelevancy and Democrats control two-thirds majorities to pass anything they want….

“The deadline for filing new bills for the next state legislative session is a week away, so we will soon see how restrained the Democrats will be. Yet a look at the background of these moderate lawmakers shouldn’t ease high-earners’ concern about rising tax bills in California.

“For instance, Henry Perea, a Fresno Democrat who leads the Assembly Moderate Caucus, has written a bill to increase or extend $2.3 billion in automotive-related fees. This is one of the Democratic majority’s first big maneuvers for the year, with committee hearings expedited….

“At a recent Democratic retreat in Sacramento, the leadership urged a moderate, or at least measured, course, warning legislators that they will be held responsible for anything that goes wrong in California, according to Correa. Reach for the stars, legislators were told, but do so slowly and carefully.

“Republicans would complain that Democratic legislators rushed back to the Capitol and began assembling plans for raising taxes and changing the state constitution. Many of those who will join this session’s new taxing, spending and government-building efforts will call themselves moderates.

“Assembly Republican leader Connie Conway told me that, as she called the new Democrats to welcome them to the Capitol, they all told her they were fiscal moderates. Conservatives won’t hold their breath.”

We’ll soon find out. And if the economy tanks and revenues drop because of all the federal and state tax increases already imposed, as I expect, there likely will be a reflexive action among the supermajority Democrats to increase taxes wherever they can. Their spending constituencies will demand it.

By Chris Reed

So CalPERS is found to allow ridiculous, outrageous double-dipping by salaried employees that boosts their pay (and probably their pensions), and faces sharp criticism. So when the giant pension fund responds, does it do so with an apology? Of course not, according to the Sacramento Bee:

“CalPERS has decided to immediately suspend a program that allowed some salaried managers to moonlight in-house and take hourly pay, saying that the controversy surrounding the practice has become a ‘significant distraction’ to its work.”

If CalPERS wouldn’t apologize for the propaganda it put out to get SB 400 passed in 1999, starting the retroactive pension spiking that is now destroying local governments, why would it apologize for shady behavior now?

If CalPERS’ upper ranks for years engaged in gross corruption even as CalPERS offered itself up as a moral force for socially conscious investing, why would it notice the dissonance between the high opinion the agency has of itself and the way it looks to the rest of the world now?

If CalPERS thought it was an appropriate use of public funds to build itself a 560,000-square-foot, $153 million tribute to its glory and importance, why would it be expected to behave prudently with taxpayer money now?

If CalPERS reacted to a factual analysis questioning its investment history by having its high-paid lead flack engage in a juvenile tirade against the Bloomberg reporter who wrote the analysis, why would it be classy now?

If CalPERS spent years denying the pension crisis was real, why would it show any common sense now?

CalPERS’ massive headquarters is probably visible from outer space. But so is its bizarre combination of self-congratulation, incompetence and obliviousness.

The California Public Employees’ Retirement System: Always assume the worst. Don’t let any “significant distraction” prevent you from understanding that it’s the CalPERS way.

By Steven Greenhut

When you talk to business owners who are considering a move out of state, their main complaint is not typically California’s sky-high tax rates or the myriad regulations they face. Their main frustration is the attitude of the state’s bureaucrats and Democratic majority toward them. They are treated like enemies and frequently harassed and fined for minuscule regulatory transgressions.

For example, in Texas the officials welcome businesses, but in California the state government sends out press releases celebrating the massive fines they impose on private enterprise.

Check out this press release from the California Air Resources Board. Here is a snippet:

“The San Bernardino County Superior Court has fined Foster Enterprises, an Ontario-based refrigerated transportation and cold storage business, $300,000 after an Air Resources Board investigation revealed that the company failed to upgrade older diesel engines in its refrigerated trailer fleet as required to meet current emissions standards.

“The case is noteworthy in that it resulted in the first court-imposed fine issued under ARB’s 2004 Transport Refrigeration Unit (TRU) regulation. The company owners will pay $200,000 and the balance of the fine will be stayed, as long as they comply with the terms in the judgment handed down by the San Bernardino County Superior Court, and keep their fleet updated as required. The company is not connected to Foster Farms.

“‘All business owners should pay attention to this case,’ said ARB Enforcement Chief Jim Ryden. ‘This company actually had to pay twice — once to comply with the law, and then again as a penalty. Had the owners complied originally, they would have saved us and themselves significant time and money, and helped to keep a level playing field for their colleagues and competitors.'”

The most telling line is from CARB’s chief enforcement bureaucrat: “All business owners should pay attention to this case.” Here’s a Web site devoted to ending CARB.

Obviously, businesses need to follow regulations, but there’s a nasty, gloating, threatening tone to this quotation. CARB issues reams of hard-to-understand, inconsistently imposed air regulations — yet the agency celebrates a fine imposed on a company that didn’t comply with one of them. I listened to a CARB board member as farmers complained about cap-and-trade regs and the officious bureaucratic attitudes and arrogance she displayed were astounding.

I find it strange how much Jim Ryden sounds like a villain from an Ayn Rand novel. But I do agree with him that all California businesses ought to pay attention to CARB and to the attitudes possessed by the growing ranks of state government officials.

By Chris Reed

There are so many killer facts in the Bloomberg News story from Tuesday on how California went to hell that I barely know where to start. So many have never been exposed by the state’s mainstream media. (John Seiler blogged earlier on one of those killer findings from Bloomberg’s investigation.) I urge everyone to read the whole thing. Here is the striking opening:

“Nine years ago, California Democrat Gray Davis became the first U.S. governor in 82 years to be recalled by voters. The state’s 20 million taxpayers still bear the cost of his four years and 10 months on the job.

“Davis escalated salaries and benefits for 164,000 state workers, including a 34 percent raise for prison guards, the first of a series of steps in which he and successors saddled California with a legacy of dysfunction. Today, the state’s highest-paid employees make far more than comparable workers elsewhere in almost all job and wage categories, from public safety to health care, base pay to overtime.”

Pulitzers usually go to much flashier work than exposing government profligacy, but this is Pulitzer-worthy journalism, for sure.

By Chriss Street

Support for Proposition 30, the income and sales tax increase touted by Gov. Jerry Brown, has fallen below the critical 50 percent needed for passage for the first time in the California Field Poll. With just two days to go before the election and polls showing support for Prop. 30 fading, the teachers and other public employees unions are desperately spending fortunes trying to get voters to rescue their lifestyles.

Unfettered by the risk of the initiative failing, Brown and state politicians have increased deficit spending this year by more than the $6 billion Prop. 30 might bring in. “Taxifornia” is already suffering from wealth and business flight as the third worst tax burden in the U.S, but California politicians love to tax like the French.

The California Teachers Association is independently spending $1 million a day in advertising for passage of Prop. 30 in the Los Angeles media market, on top of the $8.8 million it gave to the official Yes on Prop. 30 campaign. No one is surprised that the largest official contributor group supporting the initiative would be unions, but it is perplexing that the second largest contributor class is multinational beverage companies.  Coca-Cola donated $1.9 million, PepsiCo furnished $1.5 million, Dr. Pepper-Snapple gave $0.7 million and assorted other beverage folks chipped in $0.6 million. Undoubtedly, the sugary soda folks are in for some serious crony payback.

The No on Prop. 30 push is being led by the Howard Jarvis Taxpayers Association. The largest contributor is Charles Thomas Munger Jr., who has given over $55 million.  Other large donators are Americans for Responsible Leadership, which gave $11 million, and the Small Business Action Committee PAC, which gave $9 million.

A disaster — or inconsequential?

The Field Poll found:

“Californians divide into two approximately equal size camps when asked whether they believe the state can continue to provide roughly the same level of services it now does if its budget had to be reduced by $6 billion. Statewide 48 percent think that it can, while 44 percent disagree.  Of those who foresee little impact on public services most are voting No on Prop. 30.”

In a brilliant political shakedown move, Brown and the California Legislature passed a budget that would give school districts a way to deal with “trigger” cuts that would result if Prop. 30 fails: legal clearance to cut the school year by up to 14 days.  The Field Poll determined that …

“58 percent of voters are very concerned about the potential impact that the automatic spending cuts that would be imposed should Prop. 30 be defeated.  Among this group, support for Prop. 30 is running greater than three to one (68 percent to 20 percent).”

The doomsday threat seems to have been effective motivating certain target groups:

* Women support Prop. 30 by a 17-point advantage of 50 percent versus to 33 percent;

* Independents supported the tax increase by 18 percent at 52 percent to 34 percent;

* Renters back the initiative by nearly two to one.

Men are split within the poll’s margin of error at 46 percent “Yes” and 43 percent  “No.”  Homeowners are also divided equally in their views of Prop. 30. Geographic support is predominantly the Bay Area and Northern California versus Central and suburban Southern California.

The lying-to-pollsters factor

Historically, about 5 percentage points of people interviewed in a telephone poll falsely indicate their support for government and taxes, which means the “real” poll numbers are 43 percent  “Yes” and 38 percent  “No.”  Voters who are undecided on tax initiatives by Election Day tend to be people who have not been persuaded by the dog-and-pony show in support of picking their pocket.  Consequently, it appears Prop. 30 is headed for a close defeat.

California politicians are desperate to avoid the reality that the state is deeply insolvent and becoming more so every day.  In the first two months of the budget year through September, California’s budget is already upside down by $1.2 billion and the state had to increase barrowing by $2 billion to an obscene $22 billion to just keep the lights on.  If you multiply the first quarter shortfall by four, it is obvious that the $6 billion Prop. 30 tax increase will only go to paying for the current deficit and do nothing to improve schools.

With credit rating agencies threatening a downgrade California’s debt to “junk bond” status and a slew of cities headed for bankruptcy court, passage of the Prop. 30 tax increases will accelerate the persistent state budget deficits caused by the flood of the wealthy and small businesses abandoning California for the lower tax rates of Texas and Nevada.  New York City Mayor Michael Bloomberg summed up what happens when the wealthy are walloped by government: “You saw in France people moving out when they raised the tax rates,” the mayor said. “Whether you like it or not, the wealthy are mobile.”

Chriss Street appears on “THE AMERICAN EXCEPTIONALISM RADIO TALK SHOW.”
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By John Seiler

Our colleague Steven Greenhut writes in Bloomberg on how many California businesses are selling out the state on taxes:

“While the proposition’s Lincoln Club backers are conservative, most corporate political players in California have hardly been associated with conservative causes, even on the tax, regulatory and economic issues where one would expect them to tilt right. Instead, business leaders have tried to play ball with the Democrats, who control every constitutional office and have an ironclad grip on the state Legislature.

“The game seems rigged, and the calls go against the capitalist cause. Yet the private sector keeps on playing. While this dynamic is common in some other states as well, business interests in California seem less willing to put up a spirited fight than in most other places.”

Read the rest here.

CalPERS, whose main goal is to defend the most absurdly generous pension plans, now insists that excess pension benefits are not the cause of bankruptcy in Stockton, San Bernardino and elsewhere. Officials there insist that the pension situation is just hype, just as union spokespeople such as Treasurer Bill Lockyer insist that those of us who criticize the growing list of $100,000 pension club members are merely showing our “pension envy.” Apparently, the rest of us should be good subjects and simply agree to hand over more tax money to the state officials who created this mess and silently accept the slashes in public services that are taking place so that government workers can retire at age 50 with pensions worth $2 million or more.

But now we really see what CalPERS is all about. After a Bermuda-based bond-insurance company named Assured Guaranty complained about Stockton’s plan to stiff bond holders rather than trim the outsized pensions enjoyed by the city’s current workers and retirees, CalPERS said, in essence, “tough luck.”

Wrote Assured Guaranty: “Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another. Among the small number of municipalities to file for bankruptcy (43 since 1981), none of the cases resulted in implementing cuts to principal owed bondholders.  Stockton’s attempt to transfer the cost of lucrative, above-market employee wages and benefits granted when tax revenues were flush to capital markets creditors by haircutting bond principal is unprecedented, a contortion of the bankruptcy process and will foreclose Stockton’s access to the capital markets for the foreseeable future.”

Here’s CalPERS’ response:” The obligations owed to the public workers of the City have priority over those of general unsecured creditors including bondholders. Unlike insurance companies, policemen, firefighters and other public employees are not in a position to evaluate credit risk of their employers. Assured Guaranty is in the business of evaluating these risks. CalPERS is committed to working within the legal system to reach resolution of these difficult issues.”

Here is my Bloomberg column from yesterday about this situation. CalPERS shouldn’t be so arrogant given that its rate of returns were barely over 1 percent last year and it continues to insist that a 7.5 percent rate of return is perfectly reasonable. Then again, whether CalPERS predicts a 29,000 Dow Jones or even 20 percent rates of return are irrelevant. Taxpayers are on the hook to make up for any missed predictions and foolish investments. And, CalPERS believes, bondholders can be stiffed when cities go bankrupt.

Aren’t there any adults in California state government to provide some supervision?

AUGUST 10, 2012

Putting its investment projections slightly more in line with reality, yesterday CalSTRS downgraded its fund forecast. According to its own announcement, “The governing board of the California State Teachers’ Retirement System (CalSTRS) today adopted a new set of actuarial assumptions, including lowering the investment return assumption from 7.75 percent to 7.5 percent. The change is part of a four-year experience analysis that sets the parameters for determining the financial health of the system.

“The assumptions update the actuarial experience analysis covering 2006 through 2010 and are used to evaluate the impact of both demographic and economic factors on the long-range financial health of CalSTRS. These assumptions, in turn, have a significant impact on the valuation of the plan, a snapshot of its financial health, scheduled to come before the Teachers’ Retirement Board in April.

“The most recent past valuation, presented in April 2011, showed a $56 billion funding shortfall, meaning that available assets fell $56 billion short of the system’s long-term obligations.”

That means California taxpayers are on the hook for making up that $56 billion.

But at least some reality has crept into the CalSTRS projections.

By contrast, sister fund CalPERS, the California Public Employees’ Retirement System, has refused to change its assumptions. Reported Bloomberg, “Last March, the CalPERS board voted to maintain its 7.75 percent assumed rate, rejecting its actuaries’ recommendation to lower it to 7.5 percent.

“Of the 11 U.S. pension funds with assets of more than $50 billion, CalSTRS and systems in Wisconsin and New York reduced their assumptions since 2007-08, according to the staff report to the CalSTRS board.

“New York City owes its pensions more than previously anticipated because officials have been too optimistic in assuming an 8 percent return on the $115.2 billion that the five funds hold in assets, Chief Actuary Robert North has said.

“A more realistic expectation would be 7 percent, which would increase the city’s liability by about $2 billion if paid in one year, North said in a telephone interview.”

Actually, a Stanford study found that even CalSTRS’ 7.5 percent assumption is too optimistic — that 6 percent or lower is more realistic.

These state pension funds still don’t acknowledge that the 2007-09 Great Recession, and the tepid recovery since, scrambled all their calculations of fund gains. Taxpayers increasingly will be dinged to pay for the shortfalls.

Reform is more needed than ever.

Feb. 3, 2012