By Wayne Lusvardi

In his absurdist play, “Endgame,” about a chess game where there are few pieces left on the board, Irish playwright Samuel Beckett wrote: “The end is in the beginning and yet you go on.”

And so it may be with the City of Stockton’s — and California’s — absurd public pension and municipal bankruptcy endgame.  The beginning will cast the mold for the end.

It’s only a few days after the ruling by Christopher Klein, the U.S. bankruptcy judge, allowing the Stockton bankruptcy to proceed. So it’s difficult to tell what California’s public pension and municipal bankruptcy end game might look like.  But what does California history tell us?  We may be able to tell something about the future in the legacy of former Gov. Gray Davis and how the California Electricity Crisis of 2000-01 ended up.

The Wall Street Journal says that bond investors will take a loss.  Walter Russell Mead writes that pensions are also likely to be cut. Steven Greenhut sees that “pensions will be protected above all else.” Who knows what will happen?

According to Klein, the “day of reckoning” for the bankrupt City of Stockton will come on the “day of plan confirmation.”

Many are predicting that cities allowed to leave lucrative pension plans untouched — and bondholders wiped out — will face either no credit or ultra-high bond interest rates.  But the bankrupt cities may not care that much.  Here’s plausibly why.

Bigger bond pool on the horizon?

Financially distressed California cities may be hoping that the initial bankruptcy court “day of plan confirmation” in Stockton will leave pension obligations untouched. They may be counting on the state eventually creating a statewide borrowing entity to provide debt financing for public works projects for bankrupt cities.  Instead of the “full faith and credit” of each city, the credit rating of the state would back these bonds.

If California should create a bigger bond pool to aid distressed cities, the federal government also might be pressured to create similar bond pools for struggling states to continue to borrow in the bond markets.

In California, this is likely to mean that wealthier suburbs with good credit ratings are more likely to end up paying higher bond interest rates partly to pay for the unmet pension gap in struggling California cities.  This might be called indirect tax sharing.  Or in this case it might result in a premium on all California cities’ bond interest rates.

By analogy, the solution to your family’s unpayable credit card debt would be raising interest rates on the credit cards of those with good credit reatings.

Gray Davis’ legacy

Something like this happened with the California Electricity Crisis of 2000-01, after Gov. Gray Davis botched the management of the crisis just two years after he signed the pension-spiking bills that now are leading to the municipal bankruptcies. Although Davis’ recall was followed by the disastrous Schwarzenegger administration, it’s worth remembering that voters had good reason to give Gray the boot.

The electricity crisis ended up with Gray Davis panicking and signing long-term contracts at the height of market prices for energy. The state then imposed electricity rate premiums on customers to pay for 58 long-term power contracts totaling $42 billion to essentially amortize the losses from that crisis over some 15 years.

In recent years, California Democratic legislators have been eager to create regional governments to supplant Red-controlled cities and counties.  Proposition 31, which would have created unelected regional Strategic Action Councils to overrule local government, was defeated at the polls last November.  Prop. 31 would have authorized the governor to intervene in the event of a “fiscal emergency” to create such regionalized government entities.

The bond market may take losses now in bankruptcy court only to see bond interest rate premiums paid to bond investors in the future.  This may be why bond insurance companies refused to negotiate with Stockton “in good faith,” according to Judge Klein.

In other words, the end game may be that the cost of bloated city public pension plans will be socialized to all cities in the state through higher bond interest rates.   Should this result, wealthier coastal suburbs might end up disproportionately picking up the tabs for distressed cities.

History repeats

If history repeats itself, look for there to be some mild, mostly symbolic reductions in pension benefits, but with the remaining unmet pension gap to be reflected in higher long-term bond interest rates.

Back in 2010, bond expert Meredith Whitney predicted a wave of municipal bond defaults.  What she could not have foreseen was that, in the moves of a grand chess master, the bond market might end up with losses today for higher interest rates tomorrow.

In Samuel Beckett’s play, one of the characters asks another with a telescope what can he tell of the future from what is on the horizon of the sea.  The lead waves don’t signal much and the sinking sun looks like nothing but a big zero.  Instead of the black of night coming, all that the man with the telescope can see is, as he exclaims, “Gray…Gray!…GRRAY!!”

Look for California’s pension and municipal banking crises to end up with a very Gray outcome for California’s future.

By Wayne Lusvardi

The voters spoke. Now the California Legislature is working to defy them.

Proposition 31 was the only ballot initiative involving government reform that was defeated at the polls on Nov. 6, 2012.  Now it’s coming back from the dead, zombie-like, in the state Legislature in a package of three bills: SB 1, SB 11 and SB 33.

Proposition 31 was presented as a good-government reform. But on CalWatchdog.com last August, I was the first to report that it really was a proposal to get around local city councils and county boards of supervisors by creating unelected regional councils. The councils then would decide where to spend state revenues that are shared with local governments: school funds, state road funds and vehicle license fees.

The Legislature would have taken over some of the functions of local governments with unelected, quasi-government councils.

When the facts came out, Proposition 31 was opposed by the political Left because it could have authorized the Legislature to take over the California Coastal Commission, the Lake Tahoe Regional Planning Agency and local unified school districts. It was opposed by the political Right because local city councils in conservative cities would no longer have had any say on where state revenue sharing funds were spent in their cities.

Three bills

SB 1 is by Senate President Pro Tem Darrell Steinberg, D-Sacramento. It proposes an unelected regional government called “Sustainable Communities Investment Authorities.”  There would be no way that taxpayers could elect, recall or replace any of the members of these authorities.  In essence, they would become an unaccountable and duplicative layer of sovereign government that would do the bidding of the Legislature. SB 1 is pending a public hearing in the State Senate Governance and Finance Committees.

SB 11 is by state Sen. Fran Pavley, D-Agoura Hills. It calls for a state emergency to promote hydrogen fuel vehicles, fueling stations and networks by a state-created commission funded with increased smog abatement fees, vehicle registration fees and tire disposal fees. Once again, this commission would be appointed by the Legislature and could usurp local control of where such stations would be located.  The Senate Transportation and Housing Committee will be hearing this bill soon.

SB 33 is by state Sen. Lois Wolk, D-Davis and is the worst of all three. It would establish infrastructure-financing districts that could approve bonds without any voter approval. Redevelopment would be reincarnated at the local level, this time run by the Legislature. Home rule would be lost. The number one priority of SB 33 would be to further sustainable communities strategies to reduce greenhouse emissions. SB 33 will be heard by the State Senate Governance and Finance Committees.

Destroying local control

The goal of all these bills is to partly replace local government with regional government.  Such unelected regional government councils would force wealthy suburbs to give up some of their state revenues to disadvantaged cities and school districts or face revenue reductions from the state.

Another function of these bills would be vote buying: Democratic state legislators would be able to buy votes in local Republican districts. The result might be what is called “fusion government,” where the Democratic Party exercises power in unelected districts without any legitimate consent of the governed.

The Roman Republic fell when a Triumvirate of three powerful leaders, Julius Caesar, Pompey and Marcus Crassus, grabbed power in a coup without any legal status. The California republic — representative government — might be weakened to the point of nonexistence by these three bills.

Thank the California Federation of Republican Women for alerting voters to this “sneaky” package of bills.

By Wayne Lusvardi

Gov. Jerry Brown’s proposed re-engineering of the California public school finance system takes a chapter out of President Obama’s urban policy playbook to covertly fund big city school districts with suburban money. We could see more of that tonight in the president’s State of the Union address.

The playbook was described in Stanley Kurtz’s book,  “Spreading the Wealth: Robbing the Suburbs to Pay for the Cities.”

When politically Blue coastal suburban California counties voted for Brown’s Proposition 30 tax increase last November, they were told the ultra-rich would pay to plug deficits in public school funding.  But it turned out Brown wants to take public school taxes away from those districts. Instead of getting more money, the suburban districts could get less.

Then Brown, if his proposed budget is enacted, would transfer those funds to large city school districts with impoverished students. On top of that, Brown’s school financing reforms intentionally would underfund suburban school districts, meaning they would have to pass local parcel taxes if they want adequate school funding. The suburban middle class mostly would have to pay more local school taxes after they thought they were voting to shift added school taxes onto the very rich.

This is why the California Legislature is eager to make it easier to pass local parcel taxes to fund local school operating costs including such basic necessities as school books. According to EdSource:

“Sen. Mark Leno of San Francisco announced he would introduce a constitutional amendment that would allow voters to pass parcel taxes for school districts and community colleges by 55 percent instead of the current two-thirds majority.”

But Prop. 30 didn’t disclose any of these reforms.  Where does it say this redistribution of school taxes is authorized?

The vehicle authorizing Brown to shift the money from suburban to poor schools is the 165-page education budget trailer bill to his 2013-14 Budget, dated Jan. 10, 2013. The key component is a “Local Control Funding Formula.” 

Intentionally underfunding suburban school districts

School finance expert Bob Blattner wrote on EdSource.com:

“The proposal claims to be restoring basic school funding level for core programs serving all students at the 2007-08 levels, but it actually eliminates about $2 billion in funding for basic educational necessities: money to buy schoolbooks, train teachers, repair buildings, stock libraries, hire counselors, hold smaller class sizes in high school.  While some districts with large numbers of high-needs students will get this money back as supplemental aid, districts without those (impoverished) students will forever lose funding for fundamental services to which all students are entitled.” 

In other words, if suburban school districts want schoolbooks or smaller high school class sizes, they are going to have to raise local taxes to pay for them.

Brown’s reforms would dissolve Proposition 13

Brown’s school financing reforms go beyond those attempted through the courts in the infamous Serrano vs. Priest court cases in 1971 and 1976 that mandated “equity” in local school funding. These court reforms were eventually constrained by Proposition 13 in 1978, which forced a shift from local school funding to the mostly statewide financing of public schools.

Brown’s reforms would go beyond court-mandated “equitable” school funding to the redistribution of money from suburbs to big-city school districts by underfunding suburban school districts. The particular policy for doing this is something called a “Concentration Grant” contained in Brown’s new school-funding formula.

According Kurtz, a senior fellow at the Ethics and Public Policy Center in Washington, D.C., the goal of such policies promoted by Obama and now implemented by Brown is effectively to dissolve the barriers between the cities and the suburbs. California state government would become one giant wealth redistribution machine. Kurtz explains that Obama’s policies are meant to reverse the income and real estate wealth disparities.

No debate

There basically has been no public debate in California about the implementation of these redistribution policies.  For the most part the policies are being implemented without explicit public disclosure and discussion by burying the details in hard to understand budget trailer bills.

The only voter initiative or legislation that explicitly attempted to regionalize school and public service financing, Proposition 31 last November, failed at the ballot box with 60.5 percent voter opposition by both conservatives and liberal voters.

Undeterred by the voters, Brown would covertly regionalize school financing in his 2013-14 budget proposal.  And he has used the 55 percent voter approval for his Prop. 30 tax hike as a purported public endorsement for such school financing reforms.

But nobody explicitly endorsed or voted for such radical school-financing reforms as part of his tax hike. It’s just something Brown put into his budget proposal.

We will see if the voters will sustain these reforms in the long run once they become aware of their implications.