The law has several provisions protecting the state (and employers, which are required to enroll employees into Secure Choice) against liability, including this one: 

“The state shall not have any liability for the payment of the retirement savings benefit earned by program participants pursuant to this title. The state, and any of the funds of the state, shall have no obligation for payment of the benefits arising from this title.”

To protect against losses, the state plans to invest in low-risk securities, like treasury bonds or the federal MyRA program, while another section in the law allows for the state to adopt recommendations that address “risk-sharing and smoothing of market losses and gains.”

“Investment option recommendations may include, but are not limited to, the creation of a reserve fund or the establishment of customized investment products. Implementation of an investment option recommendation pursuant to this subparagraph shall be contingent upon subsequent approval by the Legislature.”

What does that mean?

If enacted, a reserve fund could protect investments during years of low returns, according to a Secure Choice official. In years the market performs well, the board could pay out less than the actual realized return. The remainder would be used to fill a reserve fund, which in turn could increase payouts in years the market performs poorly.

“Any reserve fund would have to be funded by participants themselves and not by the state,” according to Grant Boyken, deputy treasurer for retirement security and health care with the state Treasurer’s office. “The state can have no liability.”

Boyken reiterated that the Secure Choice Board has not made any decisions yet and is still considering many options. But it’s the ambiguity that leaves some observers concerned. 

Devil in the details

“Enabling more people to engage in retirement planning benefits them, society and government budgets,” said Carson Bruno, a research fellow with the Hoover Institution at Stanford University. “The devil, however, is in the details and how it is implemented.”

Bruno referenced the state’s pension crisis, where taxpayers are on the hook for $5.4 billion this year alone. Over the years, one big tweak, SB400, plus many minor tweaks, exacerbated the funding gap, despite claims that taxpayers would be protected.

“Secure Choice today isn’t a financial threat to taxpayers, but that doesn’t necessarily mean that future (lawmakers) won’t make it one tomorrow,” Bruno said. “Sacramento should work to ensure Secure Choice has strong protections built in – that can’t be tampered with by future lawmakers – to prevent it from becoming the next CalPERS or CalSTRS.”  

Heard this before

Those concerns have been most consistently echoed by Sen. John Moorlach, R-Costa Mesa, who notably predicted Orange County’s 1994 bankruptcy, which was largely prompted by risky investments made by the then-treasurer-tax collector.

Moorlach, a trained certified public account and certified financial planner, has repeatedly argued that it’s not a core mission of government to encourage savings by requiring employers to automatically enroll employees and set aside their wages.

Moorlach told CalWatchdog in a recent interview that whenever future economic downturns hit, producing low returns or worse, lawmakers may not be able to resist the temptation to try to fix the problem.

“They have this funny sense of guilt that if they don’t make up losses they’re somehow responsible for this,” Moorlach said.

Actually, nearly half of the state’s personal income tax revenue comes from the top 1 percent of earners — 150,000 individual tax returns. And personal income tax revenue is 65 percent of total revenue, which means the One Percent provides 33 percent of the state’s total revenue. 

Besides volatility of the revenue stream — the One Percent’s personal income comes largely from capital gains, which are generally tied to the stock market — what happens if a Mark Zuckerberg or a Larry Ellison — #6 and #7 on Forbes’ list of wealthiest people in the world — leaves the state?

In New Jersey, another top-heavy state, one billionaire relocated to Florida, leaving as much a $140 million hole in the budget. 

Few in California dispute the over-reliance on top earners is an issue. It’s in Gov. Jerry Brown’s budget summary and even the credit rating agencies Moody’s and Standard & Poor’s have warned against it. However, there is conflicting opinions of what needs to be done. 

There could be tax reform, but is that a flattening of the tax code? Or a shift to sales tax on services? Higher property taxes? Would the solution be revenue neutral, meaning tax increases in one area are offset with decreases elsewhere? And what are the new consequences that might come with new tax dependencies? 

What requires a frank discussion has so far drawn only whispers. Many on the left feel that while this is a problem, the state is on a good path, with reduced debt, a growing reserve fund, increased education spending and moves to address the state’s unfunded liabilities.

Republicans, on the other hand, lose sleep over the more than $400 billion in debt (including unfunded liabilities), the warnings from credit agencies and outside groups saying the state will falter in an economic downturn and a proposed 12-year extension of a “temporary” tax imposed on the wealthiest of residents that they see as only perpetuating the problem. 

“I’m very concerned about where we’re at today,” said Assembly Republican Leader Chad Mayes of Yucca Valley. “You’ve got a very few people paying a vast majority of the revenue collected by the state. That doesn’t put us in a very good spot.”

A downturn is coming likely sooner than later

It’s a question of when, not if, an economic downturn will occur. In Gov. Jerry Brown’s budget introduction released earlier this year, it warned that California is in “its seventh year of expansion, already two years longer than the average recovery.”

“While the timing is uncertain, the next recession is getting closer, and the state must begin to plan for it,” the introduction continued. “If new ongoing commitments are made now, then the severity of cuts will be far greater — even devastating — when the recession begins.”

Tax reform

As a starting point, both sides agree some kind of tax-code overhaul is necessary. However, that’s about where the agreement ends. 

Senate Budget Chairman Mark Leno told CalWatchdog the state is “to a certain degree overly dependent on the highest wage earners,” and suggested increasing the vehicle licensing fee (the “car tax”) because it’s more stable, although he conceded the toxicity of the issue makes it difficult. For example, Congressman Ted Lieu, when he was in the state Senate in 2012, pitched the idea of increasing the car tax, but relented only five days later after backlash from hundreds of constituents, including his wife.

Another idea Leno, the San Francisco Democrat, pitched was extending sales tax to services, to reflect a shift in the state’s economy away from manufacturing, which he again agreed was “a difficult conversation to have.” He lauded the efforts of Sen. Robert Hertzberg, D-Van Nuys, who is sponsoring legislation to do just that. 

David Wolfe, legislative director for the right-leaning Howard Jarvis Taxpayers Association, suggested a simplified tax code — not quite a flat tax rate, but close. Wolfe said with the proper analysis sales tax on services is an idea “worth considering,” but it would require cuts elsewhere for their support.

“Of course, the overall sales tax rate would need to be lowered in order to make it revenue neutral because the base is being broadened,” Wolfe said.

Additional burdens

There are a few programs that limit the state’s flexibility, even though the individual programs may be beneficial:

• Prop. 13 capped the rate property taxes could increase annually at two percent.  
• Prop. 98 requires that a large percentage of the state’s general fund be spent on education. 
• Prop. 2, also known as the Rainy Day Fund, sets aside a certain amount of money annually to buffer the budgetary effects of an economic downturn. However, even if fully funded it would only reserve 10 percent of the general fund tax revenues.

“While a full Rainy Day Fund might not eliminate the need for some spending reductions in case of a recession, saving now would allow the state to spend from its Rainy Day Fund later to soften the magnitude and length of any necessary cuts,” according to Brown’s budget explanation. 

Prop. 30 extension

It’s likely that voters will consider a 12-year extension to Prop. 30, which is a “temporary” tax on top earners and a quarter-cent sales tax increase.

It was approved during the last downturn primarily to avoid deep cuts in education. It is set to expire in two years, but proponents saw this campaign cycle as more favorable. 

The Prop. 30 extension only perpetuates the state’s over-reliance on personal income tax, said Carson Bruno, a research fellow at Stanford University’s Hoover Institution. 

“Prop. 30 doubles down on this problem by making the income taxes even more reliant on the highest earners,” Bruno said. 

Bruno agreed Prop. 30 expiring would leave a hole in the budget, but said legislators should have been preparing for this, as it was “temporary.”

“If they haven’t been doing that then that’s kind of irresponsible,” Bruno said.

Previously, a CalWatchdog.com story covered Carson Bruno’s research showing that the state of California has far surpassed its 2020 goal of having 33 percent of electricity coming from renewable sources. So why isn’t this big news? Because according to state laws establishing the 33 percent goal, some renewable energy doesn’t count as renewable energy.

Bruno also makes a provocative point about Gov. Jerry Brown’s goals on another energy front:

California may be the greenest state in the nation. The Golden State’s renewable portfolio standard is among the nation’s most aggressive, the state’s cap-and-trade program is likely the most developed, and each legislative session lawmakers grapple over dozens of new environmental-based bills. … So it didn’t come as any surprise that during his 4th (and final) State of the State address, Jerry Brown focused heavily on taking California’s already aggressive climate change action to the next level. …

Brown [said the state would] double the energy efficiency of California’s buildings. …

This proposal is the most straightforward, but also may be the most difficult to achieve. Here’s why: California is already the national leader – coincidentally, since Jerry Brown was first governor – in energy conservation.

Conserving more would be akin to squeezing out more lemon juice from an already squeezed lemon: you’ll get a little, but not that much. Californians use approximately the same amount of energy they did 40 years ago as the rest of the nation has increased its use by roughly half. This is despite California’s population and economic output steadily increasing. California’s Mediterranean-like climate helps reduce energy use, but that can’t explain the full difference.

Here’s where the paradox comes in, however. We know how to get to the next step: technology. Smart metering enables consumers and providers to better understand their behavior to encourage conservation; new lighting technology and new advances in heating and cooling systems better reduce waste. But even with new technology, doubling efficiency while California continues to grow and after California has already squeezed a lot out of consumers won’t be easy.

‘Build it and they will come’ regulatory approach

There’s always been an element of “build it and they will come” to California environmental regulators’ habit of establishing goals that seem unrealistic but that the private sector manages to meet. More than a few engineers were skeptical that cars averaging 35 MPG was a realistic goal, but that’s now the federal mandate for coming years, as the Obama administration follows the California example of demanding change that seems daunting. As Car & Driver wrote, “as goes California, so goes the country.”

But there are two recent examples of California regulators going too far and retreating in embarrassment. In 2010, they backed down from a proposal to criminalize having under-inflated tires after I wrote about it on my U-T San Diego blog and John & Ken took up the cause on KFI AM 640. This was the informal analysis of the proposal from the California New Car Dealers Association:

(The) regs. CARB’s pushing through (released this week and subject to a 15 day comment period) … provides that the only times that consumers may decline a check and inflate service — they can never decline the service if it’s offered for free — is when they are charged for services AND if they can PROVE (with DOCUMENTATION!) that they’ve had their tires checked and inflated in the last 30 days, or if they WILL do so within the next week. It is unclear, but possible, that CARB could take enforcement action against the consumer if they don’t follow through with their promise?!

In 2009, California regulators also backed down from a tentative proposal to ban black paint on cars after facing incredulity from U.S. and Japanese automakers. Snopes treats this as a “mostly false” story. But I spoke with an executive for an auto paint company in 2009, and she said California air board staffers were absolutely serious about the idea in meetings early that year. That’s how it was treated by an auto-industry website.

This link — http://www.arb.ca.gov/cc/cool-paints/cool-paints.htm — used to show the air board’s proposal, but now it only shows an error message.

That’s the conclusion of an article in the March-April issue of Eureka, a new periodical by the Hoover Institution at Stanford University. The word Eureka, of course, is the state motto of California.

The article is titled “The Politics of Governor Brown’s Climate Change Proposals,” by Carson Bruno, a research fellow on California at Hoover. “In fact, in 2011, allowed renewables plus nuclear and large hydro-electric accounted for 53.1 percent of California’s in-state electricity generation, easily surpassing Brown’s new target,” he wrote.

Bruno clarified in an email to CalWatchdog.com that he only looked at in-state power generation, which included allowed renewables, nuclear and large hydro generation.

And the discrepancy with the official state tally of renewables as not even 33 percent so far is because of the state’s official definition of “allowed renewables.” According to Bruno, California does not include hydro and nuclear power as “allowed renewables” even though they are non-polluting. It also hides its reliance on “dirty” imported power from other states by categorizing it as “unspecified power.”

Bruno said that, if nuclear and hydro power are included, California exceeded the 50 percent green-power threshold in 2011 when the San Onofre Nuclear Power Plant was decommissioned and a substantial amount of green solar power mainly took its place.

Moreover, adding new hydro and nuclear power would be just as clean an alternative as less steady and more expensive solar, wind or geothermal power, according to Bruno. Wind power stops on calm days; and solar power stops at dusk.

Of course, building more hydro means more dams, which is opposed by environmentalists; and more nuclear power is close to impossible after the Fukushima accident in Japan four years ago.

Electricity mix

To fact check Bruno’s numbers, CalWatchdog.com conducted its own investigation into California’s mix of electricity sources since the enactment of AB32, the Global Warming Solutions Act of 2006. Using its authority under AB32, in 2010 the California Air Resources Board mandated 33 percent renewables by 2020.

California not only does not consider hydroelectric and nuclear power as renewable but hides that the state still partly depends on imported coal power from other states that it has re-categorized as “unspecified power.” In 2013, California got 7.82 percent of its power from coal-fired power plants and 12.49 percent from murky “unspecified power,” totaling 20.31 percent.

The California Energy Commission uses this definition: “Unspecified Sources of Power generally include spot market purchases, wholesale power marketing, purchases from pools of electricity where the original source of fuel is undetermined, and null power.”

According to the CEC, “Null power refers to power that was originally renewable power but from which the renewable energy credits have been unbundled and sold separately. Null power is not attributable to any technology or fuel type.”

Renewable Energy Credits

Renewable Energy Credits are also known as Green Tags.  Instead of trading tons of carbon, REC’s trade kilowatt-hours of wholesale electricity from untrackable sources because electrons from coal and green power are all the same.

RECs are a way for municipal power departments and new municipal Community Choice power buying cooperatives to “green wash” their purchases of imported power from outside California. It is a way of allowing imported coal power, that technically doesn’t add to California’s air pollution, to count as “green” and “clean.”

Yet entirely clean nuclear and hydropower are not considered clean.

When RECs are considered in the state green power mix for both in-state and imported power, California already nearly met or exceeded its 50 percent green power goal in 2009 (49.89 percent), 2010 (50.37 percent) and in 2011 (56.55 percent).

Conversely, when RECs are considered as fossil-fueled power instead of “greenwashed,” the proportion of California’s power from fossil fuel sources has shown no substantial reduction.

Percentage of California Power from Fossil Fuels — 2007 to 2013

In-State and Imported Power

California is meeting its current 33 percent green power goal by including solar, wind and geothermal power as green, excluding hydro and nuclear power as green, reducing nuclear power output and “greenwashing” imported coal power from other states.

Finding the above numbers buried in the CEC’s database may be a Eureka moment. But learning that California hasn’t much reduced its proportion of fossil-fueled power after spending billions of dollars on green energy validates Bruno’s conclusion that California’s green energy policy is “not about climate change, it’s about politics.”