By Chriss Street

Over the weekend, the White House released a report detailing some of the programs and services in California that would be impacted beginning on March 1.  The Obama Administration has threatened that the cuts will result in a massive contraction of the national economy.

The breakdown of the effects on California was politically structured as an emotional call for Republicans to commit hara-kiri by compromising the demands of their base for fiscal discipline.  With sequester only amounting to 2 percent of spending, the cuts do not seem to be as earth shattering as the media has predicted.   

Sequester is defined as the act of removing, separating or seizing anything from the possession of its owner under the process of law for the benefit of creditors or the state. The term “budget sequestration” was first used to describe a section of Gramm-Rudman-Hollings Deficit Reduction Act of 1985 under President Ronald Reagan. It set hard caps on spending.

The sequestration was abandoned under President George H.W. Bush and replaced by a required PAYGO under the Budget Enforcement Act of 1990 that lasted until 2002, when President George W. Bush abandoned budget discipline.

California will suffer the following cuts, according to the Obama Administration:

Teachers and Schools:  Loss of approximately $87.6 million in funding for primary and secondary education, equivalent to the cost of 1,210 of the 310,000 teachers in the state.  In addition, California also will lose approximately $62.9 million in funds for about 760 special education teachers, aides and staff who help children with disabilities.

Work-Study Jobs: Approximately 9,600 fewer low-income students in California would receive aid to help them finance the costs of college and around 3,690 would lose federal grants for work-study jobs that help them pay for college.

Head Start: Head Start and Early Head Start services would be eliminated for approximately 8,200 children in California.

Funding for Clean Air and Water: California would lose about $12.4 million in environmental funding for clean water and air quality.  In addition, it may lose another $1.9 million in grants for fish and wildlife protection.

Military Readiness: Approximately 64,000 civilian Department of Defense employees would be furloughed, reducing gross pay by around $399.4 million.  Army base operation funding would be cut by about $54 million.  Air Force operation funding would decrease by about $15 million.  Navy maintenance to repair five ships in San Diego and aircraft depot maintenance in North Island could be delayed or canceled.

Funds for Law Enforcement and Public Safety: California would lose about $1.6 million in Justice Assistance Grants for law enforcement, prosecution and courts, crime prevention and education, corrections and community corrections, drug treatment and enforcement and crime victim and witness initiatives.

Job-Search Assistance: California would lose about $3.3 million in funding for job search assistance, referral and placement.

Child Care: Up to 2,000 children deemed disadvantaged and vulnerable could lose access to child care.

Vaccines for Children: Around 15,810 fewer children would receive vaccines for diseases such as measles, mumps, rubella, tetanus, whooping cough, influenza and Hepatitis B due to reduced funding for vaccinations of about $1.1 million.

Public Health: California would lose approximately $2.6 million in funds to help upgrade its ability to respond to public health threats including infectious diseases, natural disasters and biological, chemical, nuclear and radiological events.  In addition, California would lose about $12.4 million in grants to help prevent and treat substance abuse.  The California State Department of Health Services would lose about $2 million that would have paid for 49,300 HIV tests.

STOP Violence Against Women Program: California could lose up to $795,000 in funds that provide services to victims of domestic violence.

Nutrition Assistance for Seniors: California would lose approximately $5.4 million in funds that provide meals for seniors.

I do not want to understate that any cuts to a group of Californians receiving federal benefits will be painful.  But in my recent report, California Admits Higher Taxes Kill Tax Collection, the Not-So-Golden-State is proving that raising taxes to pay for deficit spending destroys economic growth and results in lower tax collection.

Even with the sequester, the Congressional Budget Office projects that over his eight years in office, President Obama will have engaged in $7.5 trillion in deficit spending and the national debt will have almost doubled.  The burden of this federal debt will be painful to all Californians.

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

Stay Connected on our Websites:  www.aexnn.com and www.agenda21radio.com

By Chriss Street

The  “Misery Index” is inflation plus the unemployment rate. For example, today the U.S. unemployment rate is 7.9 percent and inflation is 1.7 percent. So the “Misery Index” (rounding off) is 10 points.

Anything above 10 points is considered a tough time for the economy.

This measure of national pain peaked at 21 points in 1980, the last year of the disastrous administration of President Jimmy Carter, then trended lower under the next four presidents: Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush.

But the downward trend was broken in President Obama’s first administration due to $5.3 trillion of deficit spending; $3 trillion in expanded bank lending and $1.3 trillion in Quantitative Easing by the Federal Reserve Board as economic stimulus; and rising commodity inflation.

However, a major counter-trend was housing, as home prices crashed beginning in 2007. Because housing actually dropped in price over the last four years, the Consumer Price Index measure of inflation has been substantially understated. That has been especially the case in California, the epicenter of the housing crash.

Misery rising

With housing now leading energy, food and health care inflation, consumer purchasing power is shrinking and employers will be laying off workers as sales drop.  The Misery Index during President Obama’s first term rose only to 10 points. And in California, with an unemployment rate 2 percentage points above the national average, the Misery Index rose to 12 points.

But with deficit-spending continuing and a recession looming, the Misery Index is about to soar.

The last time America engaged in this type of government “stimulus” followed President Lyndon Baines Johnson’s 1964 declaration of the War on Poverty.  What began with the passage of the Medicare expansion of Social Security and the Elementary and Secondary Education Act morphed over the next 16 years through the Johnson, Nixon, Ford and Carter administrations into a smorgasbord of bloated social spending for powerful political and corporate cronies.

The resulting build-up of inflationary pressures and job destruction drove the Misery Index from an average of 7 points under Johnson to 16 points under Carter.  The Industrial Heartland of Midwest America was transformed into the Rust Belt. The inflation, especially to home prices, sparked the 1978 tax revolt in California when voters enacted Proposition 13, limiting property tax increases to a maximum of 2 percent a year.

The tax revolt continued in 1980 as disillusioned voters swept Ronald Reagan into office with a tough-love mandate that steadily drove down inflation over the next 28 years.

President Obama successfully advocated for a huge expansion of deficit spending on education and healthcare as an economic stimulus.  The Congressional Budget Office projects that, when he leaves office in 2017, over his eight years in office his administration will have engaged in $7.5 trillion in deficit-spending and the national debt will almost have doubled.

Obama’s formula of deficit spending and money printing stimulus is being copied by governments around the world.  The McKinsey Global Instiutute Commodity Price Index for food, raw material, metals and energy prices has risen over the last four years to historic highs, and continues to climb. 

During the same period in the United States, the price of a gallon of gasoline rose by 132 percent and has continued to rise for the last 33 days in a row.  Over the last two years, the accelerating costs of food rose by 8.1 percent.

Raging inflation has not been reported by the media, because the Consumer Price Index over-weights the cost of housing as 41 percent of the Index.  The Obama Administration’s Misery Index is only up to 10 points, because housing costs actually fell by 3 percent.

New housing bubble

But cheap money from the Federal Reserve is beginning to fuel a new housing bubble.  The year-end CoreLogic Residential Property Report found: “December marked 10 consecutive months of year-over-year home price improvements, and the strongest growth since the height of the last housing boom more than six years ago.” CoreLogic predicts home price will rise by 8.6 percent this year.

That’s great for California homeowners happy to see lost equity be restored. But it’s not so happy for new homeowners or renters.

The last Federal Reserve Board Open Market Committee minutes demonstrate that several members are concerned that if the Fed had to push up interest rates by selling some of its bonds to stop inflation, there might be “significant capital losses” that “distort financial markets.”

Few Americans are aware that the Fed’s massive bond purchases not only drove interest rates down, but also pushed up the value of the Fed’s bond holdings.  The U.S. Treasury made an “$88.9 billion  Portfolio Profit” last year from the Fed.

If the Fed needs to push up interest rates by selling bonds, the U.S. Treasury will suffer hundreds of billions of dollars of “Portfolio Losses” and the financial market will panic.

With inflation about to force the Fed to raise rates, the Misery Index is about to soar well above 10 points. And it will be even higher in high-unemployment California.

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

Stay Connected on our Websites:  www.aexnn.com and www.agenda21radio.com

By Chriss Street

Gov. Jerry Brown was just forced to admit reality. His supposed $5 billion boost in January tax collection from Proposition 30, which increased sales and income taxes, was really just an early collection of taxes.

Two weeks ago, California state revenues were up by $4.3 billion in January over Brown’s proposed 2013-14 budget proposal.  At the time, I said the “strong performance” was due to two one-time events that took place by December: a delay in collecting $1 billion in Christmas season sales taxes and $3.3 billion of taxes on capital gains, dividends and bonuses paid in January from the prior year.

A week before my report, the supposedly independent Legislative Analyst’s Office said the state was on track to collect $5 billion more in tax revenue in January than estimated in the Governor’s budget.  I said that this revenue would come from high-income earners cashing out investments early to beat the Congressional fiscal cliff settlement that raised federal income taxes by 3 percent and capital gains taxes by 5 percent.

What Jerry Brown failed to admit was that sales taxes have crashed by 27 percent, or $582.7 million, as Prop. 30, Cap and Trade and other onerous regulations are finally beginning to convince the rich to take their businesses, income and shopping somewhere else. While at the same time, opportunists such as Texas Gov. Rick Perry have been attempting to lure corporations to leave the state.

And it now appears the sales tax collection crash in January is a precursor of an even bigger crash coming by April.  Brown made huge promises of payback for union bankrolling of Prop. 30.

The result: California is looking towards another crisis.

Reaganomics

During the Prop. 30 campaign, the Howard Jarvis Tax-Payers Association and other opponents had warned that, because of what is referred to as the Laffer Curve, there would be a direct inverse relationship between a rise in the rate of taxation and the resulting government revenue collected.

Ronald Reagan proved this phenomenon by cutting tax rates with the Tax Reform Act of 1986, which caused the higher economic growth that generated higher tax collections and eventually balanced federal budgets in the late 1990s.

Brown’s promised that, if voters approved the Prop. 30 tax increases and he cut spending, his 2013-14 state budget would achieve a budget surplus of $851 million — the first surplus in a decade.  I pointed out that Brown cited a mantra he performed every night before bed while studying at a Zen monastery in Japan in the 1980s, “Desires are endless, I vow to cut them down.”

But yesterday, Brown began negotiations for new contracts with the public-worker unions that represent 350,000 state workers — engineers, administrative staff, librarians, corrections officers and more. The contracts are due to expire this summer.

Even though the average state worker’s salary in California is $70,777, nearly $16,000 higher than the national average, these unions expect a big pay raise for providing the millions of dollars for campaign ads and thousands of campaign foot soldiers that caused the passage Prop. 30.  Brown has already promised to “restore” $817.6 million in pay in the current budget, offer $502.1 million of 2 percent to 5 percent pay raises next year and add coverage for higher health care costs.

He indicated executive branch salaries also will increase nearly 10 percent, to $15.7 billion.  None of these increases includes the $10 billion increase I estimate that is required to keep the current state pension system solvent.

The state of California is now facing an even bigger crisis than before the passage of Prop. 30.  It’s now feeling the economic impacts of the highest state sales tax at 7.5 (even higher in come counties), top income tax reate of 13.3 percent and second-highest gasoline tax at $.67 per gallon.

As was well publicized, Perry recently engaged in private meetings with business leaders in the San Francisco Bay Area and Los Angeles Basin to lure high-tech companies to the low-tax Lone Star State. In an interview with the San Jose Mercury-News, he criticized California’s regulatory environment, and said Austin, Texas, is poised to become the “next Silicon Valley.”  He told the paper, “Twelve years ago, California wasn’t looking over its shoulder.  They’re not looking over their shoulder now — they’re looking at our backside.”

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.ustream.tv/channel/american-eceptionalism-news

Stay Connected on our Websites:  www.aexnn.com and www.agenda21radio.com

By John Seiler

The office of Gov. Jerry Brown and the Los Angeles Times finally are catching up with what we reported earlier here on CalWatchDog.com. The Times reports today:

“SACRAMENTO — The surge of revenue that showed up unexpectedly in state coffers last month may well be offset by a revenue dip in coming months, according to Gov. Jerry Brown‘s administration.”

But here’s what Chriss Street wrote here on Feb. 11, eight days ago:

“In January, California state tax collection beat Gov. Jerry Brown’s 2013-14 budget projections by $4.3 billion, or 39.1 percent.  The out-performance was due to two expected one-time events that took place: $1 billion in delayed sales tax deposits and $3.3 billion of taxes on capital gains, dividends and bonuses collected in January for a prior period.

“But something should be very disturbing to giddy state politicians and lobbyists who are cranking up for a new spending spree: January sales taxes plunged by $582.7 million, or 27 percent.  It seems that Taxifornia finally raised taxes so high that affluent residents are moving their investments and spending elsewhere.”

April Come She Will

The Times writes:

“Taxpayers were paying a share of their bill early, getting income off their books in the hope of limiting exposure to the tax hikes that recently kicked in.

“The administration was expecting that money to arrive in April. Now, officials are saying it won’t, and that just as January’s receipts soared, they’ll be offset by a spring plunge.”

I had a little bit different take on what’s happening, but noted things were not going turn out as the Brown administration expected. I wrote on Jan. 17, more than a month ago:

“[April 12” is the last business day before Tax Day, which this year falls on a Monday, April 15.

“April 12 is important because that’s the date rich people will have to cash in some of their stocks and bonds to pay, on April 15, for their taxes for 2012. And this year, rich folks are going to be especially walloped by California. That’s because Prop. 30 was retroactive. It is paid not only on 2013 income, but on income for 2012 — last year.

“If it isn’t withheld from their paychecks, normally rich people make quarterly payments on such income. But because the election was late in the year, on Nov. 6, they haven’t had much chance to do so. So the bulk of the added taxes will be due on April 15. For example, if someone has $11 million of income, the new “millionaire’s tax” applies the extra 3 percentage points from Prop. 30 to the portion above $1 million; that is, it will apply to $10 million. Which means $300,000 will be due.

“That means the person will have to, say, sell $300,000 in stock on April 12. Now, tens of thousands of millionaires will be doing the same thing on April 12. California is a large state with a lot of rich people.

“If this sell off on April 12 is large enough — and it could be — it could hammer equities in California companies. Of course, Californians can own stock in other states and countries; and investors from other states and countries invest in California companies. But in general, rich Californians invest more here than elsewhere, if only because many top executives have large investments in their own companies.”

Tax increases hurt

The bottom line is that people react to tax increases. When he was plumping for the $6 billion Proposition 30 tax increase last fall, Gov. Jerry Brown touted a study by two Stanford sociologists that rich people supposedly don’t leave to avoid paying higher taxes. I debunked that study here and here. Wayne Lusvardi did so here.

In about two months we’ll know much more about how Prop. 30 — and the federal Obamacare and fiscal cliff — tax increases have affected tax receipts and employment.

Meanwhile, keep reading CalWatchDog.com, where we give you the heads up before anybody else.

By Chriss Street

President Obama’s expected naming of Ernest J. Moniz as the next secretary of energy is good news for energy producers and consumers, especially those in California. It represents the recognition that oil and gas development is the only potential revenue source available for the administration to avoid the type of austerity spending cuts sweeping Europe.

Moniz’s expected nomination, if confirmed, also could boost energy production in California, generating new tax revenue that could ease the state’s budget problems.

Moniz is a respected expert on electrical energy and currently serves as the director of MIT’s Energy Initiative, a research group that is heavily funded by the oil and gas industry. The outgoing energy secretary, Steven Chu, pushed hard for job-killing cap-and-trade legislation, and the prohibition of exploration on federal lands. And he wasted billions of dollars on sustainable energy boondoggles, such as the bankrupt Solyndra of Fremont, Calif. — a $535 million hit to taxpayers. Chu, a physicist at the University of California, Berkeley, failed to mention the Solyndra boondoggle in his farewell letter.

With public employees panicking over sequestration spending cuts scheduled to begin in early March, the Obama administration seems poised to triangulate away from its radical environmentalist friends to embrace oil and gas fracking in places like California’s massive Monterey Shale formation to protect union jobs.

Avoiding Greece

The European PIIGS (Portugal, Ireland, Italy, Greece and Spain) have been forced by the International Monetary Fund, dominated by the United States, into austerity programs that raise taxes, slash crony spending and eliminate union featherbedding.  But after four years of draconian austerity, the Greek Finance Ministry reported the tiny nation saw tax collections fall 15 percent over last year.

It seems that, if you raise taxes, businesses deplete their cash reserves, curtail reinvestment and postpone payments to their own vendors.  Economists refer to this phenomenon as austerity’s self-reinforcing “cycle of pain.”  As tax collection falls, governments raise tax rates further, perpetuating another cycle of pain.

The most recent Congressional Budget Office’s projections estimate the U.S. federal deficit will climb by $7 to $9 trillion over the next 10 years.  If these deficits actually happened, the United States eventually would suffer a monumental debt crisis.  But unlike tiny Greece, which can ask for aid from the IMF, there is no entity large enough that could or would bail out the United States.

To address America’s debt and spending crisis, Congress raised some taxes last month and set automatic spending cuts, known as the sequestration, that become effective next month.  The pain is structured to be shared equally between the military and the welfare state with 9.7 percent cut in defense, 7.3 percent in non-defense and 2 percent for Medicare spending.

Anticipating coming crunch, government spending fell at an annual 6.6 percent rate in the last quarter of 2012, driven by a 22.2 percent decline in defense spending.  This subtracted 1.33 percentage points from the economy.  Vendors to government cut their rate of inventory accumulation, slashing another 1.27 percentage points of GDP.  The combination of these factors slowed the economy by at a 2.5 percent annual rate, a small economic contraction.

President Obama is getting lots of grief from public sector unions regarding the potential size of the sequester layoffs.  Under the Executive Branch of the federal government, he controls 1,942,528 “permanent employees” and 167,675 “temporary employees.” The U.S. Postal Service is off-budget as self-funding, but it now is dumping Saturday services.

Unions could decide to share the sequestration pain to save jobs. But the Office of Personnel Management guidance calculates all federal employees then would be forced to take a 22 days of unpaid furlough a year to meet sequestration cuts.

The U.S. Army estimates that 78 percent of its combat brigades will be forced to skip training due to sequester.  Director Douglas Elmendorf of the bi-partisan Congressional Budget Office recently warned that too high spending cuts will undermine the already weak economic recovery.

Steven Chu was the tip of Obama’s spear to push “public investment” schemes in wind and solar energy, while fighting against fracking and other new petroleum drilling innovations.  When Chu was appointed four years ago, crude oil’s price hovered around $37 to $40 per barrel. Today it sits at around $95.  With the shale boom driving huge tax collections for certain states, federal unions looking to get in on the gravy train helped push Chu out.

Moniz

Moniz looks to be the ideal choice as Secretary of Energy.  He was confirmed by the U.S. Senate as undersecretary of energy during the Clinton Administration and his academic credentials at the Massachusetts Institute of Technology are stellar.  He strongly advocates that developing low-cost natural gas for electricity is a “bridge fuel” to lower carbon pollution.

In Meeting Energy Challenges: Technology and Policy, Moniz wrote:

“Adequate electricity supplies are central to economic growth and quality of life…. In the industrialized world, capacity needs to be increased in a manner consistent with the strict reliability requirements of the digital economy. In addition, outdated infrastructures need to be modernized, and suitable mechanisms for market deregulation need to be developed.

America is on the cusp of an energy independence that will drive prices down and spur a new manufacturing boom.  Obama may be appointing a pro-energy secretary of energy to drive tax revenue up to save public sector union jobs, including those in California.

CHRISS STREET & PAUL PRESTON

Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.mysytv.net/kmyclive.html
Go to their Websites:  www.aexnn.com and www.agenda21radio.com

By Chriss Street

Global cooling? New studies of tree rings show that it’s happening.

Yet California remains governed by AB 32, whose official title is the “Global Warming Solutions Act of 2006.” It’s seven years later. Gov. Arnold Schwarzenegger, who signed AB 32 into law, is long gone. And the environmental movement, sensing that “global warming” wasn’t selling any longer, now calls bad weather “climate change,” as President Obama did in his Inaugural Address.

The prestigious Nature Journal recently published a major climate change study, “Orbital Forcing Of Tree-Ring Data.” It provided a thorough analysis of more than 2000 years of tree-ring evidence that showed current climate models substantially underestimated ancient Northern Europe temperatures levels during the Roman and Medieval Periods.

That temperatures have trended downward for the last two centuries debunks theories that anthropogenic (man-made) global warming is caused by a rising CO2 gas levels associated with industrial burning of “fossil fuels.” The main part of AB 32 mandates the reduction by 25 percent of California greenhouse gases by 2020.

Researchers from Germany, Finland, Scotland and Switzerland examined tree-ring density profiles in trees from Finnish Lapland, way up North.  In this extremely cold environment, trees often collapse into one of the numerous lakes, where they remain well preserved for thousands of years.  The international team was able to conduct high reliability calculations of tree-ring density from the Scandinavian pine trees preserved in the cold water. The tree rings correlated very closely with annual summer temperature patterns.

The United Nations-endorsed Intergovernmental Panel on Climate Change won the 2007 Nobel Peace Prize with Al Gore for interpreting studies of ice cores and ocean sediments to “conclude” that Europe was about to suffer catastrophic anthropogenic global warming.

Cooling trend

But the new tree-ring data allow precise measurements of annual climate variability.   The results reveal there has been a cooling trend of -0.3°C (0.54°F) every thousand years “due to gradual changes to the position of the sun and an increase in the distance between the Earth and the sun.”

The high-resolution graph shown above demonstrates that temperatures during ancient periods were much warmer than predicted by the IPCC.  The study also documented the extreme temperature phases that occurred during Europe’s “Little Ice Age” that resulted in a general cooling trend between the 1150 and 1460 AD, and the extremely cold climate between 1560 and 1850 AD.  According to lead researcher Jan Esper:

“We found that previous estimates of historical temperatures during the Roman era and the Middle Ages were too low.… Such findings are also significant with regard to climate policy, as they will influence the way today’s climate changes are seen in context of historical warm periods.”

The results are a huge embarrassment to the IPCC, which has acknowledged it did not carry out its own original research to monitor climate and related phenomena.  But their extrapolated conclusions regarding a recent warming trend served as justification for the United Nations Framework Convention on Climate Change to demand Western industrialized nations implement the job-killing Kyoto Protocol treaty to achieve “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”

And the text of AB 32 itself maintained:

“Global warming poses a serious threat to the economic well-being, public health, natural resources, and the environment of California…. The program established by this division will continue this tradition of environmental leadership by placing California at the forefront of national and international efforts to reduce emissions of greenhouse gases.”

‘Cooling trend’

In a direct broadside against global-warming doomsday alarmists, Esper noted:

“This figure we calculated may not seem particularly significant.  However, it is also not negligible when compared to global warming, which up to now has been less than 1°C. Our results suggest that the large-scale climate reconstruction shown by the Intergovernmental Panel on Climate Change (IPCC) likely underestimate this long-term cooling trend over the past few millennia.”

The tree-ring study proves the recent warming trend we are experiencing is not exceptional, because current temperatures have been exceeded for at least two periods over the last 2000 years.

Paleoclimatologists describe the warming of the earth over the last 12,000 years as the Holocene inter-glacial of the current Ice Age.  The prior Eemian interglacial period, which began 130,000 years ago and ended 114,000 years ago, was much warmer.  At the time, the seas were 15 to 25 feet higher than today, Scandinavia was an island, hippos swam in the Thames River near the site of London and the raised beaches of Alaska and fossil reefs of the Bahamas were formed.

Just before the October 2011 unanimous vote by the the eight members of the California Air Resources Board  for California to be the first state in the United States to implement a cap-and-trade system to limit greenhouse gasses emissions, Board Chairwoman Mary D. Nichols proudly hailed, “ We are staking out new ground in the battle against global warming.” The cap-and-trade program was implemented with CARB’s first auction last November.

But given the new tree-ring science showing AB 32 was based on faulty science, it appears she declared war on Californians.

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.mysytv.net/kmyclive.html
Go to Our Website:  www.edtalkradio.com

By Chriss Street

When Moody’s Investors Services issued a “Request for Comment” last July about their plan to begin recalculating the effect of massive state and local unfunded pension liabilities on credit quality, I warned that this would eventually result in the across-the-board slashing of municipal bond credit ratings and numerous municipal bankruptcies in California.

It now appears that I may have understated the risk for California.  The California Public Policy Center released a report analyzing of the impact of the new Moody’s policy on six Northern California counties: Alameda, Contra Costa, Marin, Mendocino, San Mateo and Sonoma.  Their conclusion is that, when the new rules are applied, the annual cost of pensions will increase from the equivalent of about 50 percent to 100 percent of these counties’ net property tax income.

With the state is running new deficits after already raising state income taxes to the highest level in the nation, California homeowners should be prepared for their politicians to try to overturn Proposition 13, which for 35 years has limited California property tax rate increases to 2 percent per year of the assessed value, and reappraisals occurring only with the sale of the property.

Given that California has only 11 percent of the U.S. population, but issues 20 percent of all of the nationwide municipal bond volume, Moody’s warned it would be re-assessing the financial condition of all California counties and cities “to reflect the new fiscal realities and the governmental practices.”

More bankruptcies

Moody’s  said that a greater share of municipal bankruptcies are expected to come from California.  California Treasurer Bill Lockyer’s office tried to reassure the public by calling the Moody’s warning “a little hyperbolic” and stating, “No city’s going to blithely skip into bankruptcy court to avoid its obligations.”  But today, more than 50 of 482 California cities have declared a “Financial Crisis” and have considered filing for Chapter 9 municipal bankruptcy.

CPPC’s analysis used data from the most recent county Actuarial Valuations to produce four core restatements of solvency: total pension debt, unfunded pension debt, government normal yearly contributions and amortization payments of unfunded pension.  CPPC determined that, for the four adjustments Moody’s is expected to make, two would have very significant impact on county solvency:

* “First, pension debt would be adjusted using a high-grade long term corporate bond rate (5.5% for 2010-2011) instead of a Pension Fund’s target rate of return (7.75% more or less).

* “Second, government payments to Pension Funds would be adjusted to reflect the lower discount rate, the need to fully fund pensions by the time employees retire, and a 17 year level-dollar amortization of unfunded pensions.”

In their Actuarial Valuations, the counties claim they have conservatively banked 78 percent of their pension liabilities in cash and securities, leaving only $4 billion in under-funding.  But the Moody’s adjustments will increase the unfunded pension obligations by $6 billion, balloon the unfunded liability to $10.2 billion and the cash and securities funding down to a speculative level of 58 percent.

At a 78 percent funding level, the six counties are only required to contribute 29 percent of their payroll, or about $640 million, to fund their pension plans each year.  But under the new Moody’s formula that will drive down their funding level to 58 percent, the counties’ required annual pension cost will skyrocket to 63 percent of payroll, or $1.4 billion per year!

Deficits

California has run huge budget deficits for the last decade.  Recently voters passed Proposition 30 as a $6 billion state income tax increase on top earners in hopes of rescuing schools by balancing the state budget.  But, according to the California State Controller’s just released December financial statement, state spending is $900 million over budget and state tax revenue is at least $360 million under budget.

For the last 35 years, California politicians have been forbidden from jacking up property taxes by the because of Prop. 13.  The initiative has been so popular with homeowners that it has been referred to as the third rail of California politics.

But as the CPPC study demonstrates, the annual cost of pensions will soon increase from the equivalent of about 50 percent to 100 percent of these counties’ net property tax income.  With the state already running new deficits on top of the highest income taxes in the nation, it is my belief that California politicians will soon try to overturn Prop 13. 

CHRISS STREET & PAUL PRESTON
Present “The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.mysytv.net/kmyclive.html
Go to Our Website:  www.edtalkradio.com

Commentary

Dec. 21, 2012

By Chriss Street

With the California unemployment still well above the national average, the Golden State might look to the Auto State for how to spur job growth.

Last week, Michigan Gov. Rick Snyder signed legislation to enact Michigan’s first right-to-work law for both private and public-sector workers, although public safety workers were exempted.

The law makes it illegal to require workers to either join a union or pay union dues without their permission.  The law was heralded by conservatives as protecting workers’ right of free association, but was scorned by liberals as destroying jobs at good wages.  But as a reward for Michigan’s new pro-jobs environment, General Motors announced it will bring back production of the iconic Chevrolet Camaro to the Michigan from Canada.

Snyder had served as the chairman of the board of Irvine, Calif. computer maker Gateway, Inc. and Ann Arbor-based Ardesta Venture Capital.

He ran for governor in 2010 on the motto, “I’m pro worker,” and has lived up to that. Since taking office in Jan. 2011, Michigan unemployment has dropped from 10.9 percent to 9.1 percent in Oct. 2012.

Heckled

In his first public appearance after signing the historic legislation, Snyder was heckled as the keynote speaker for Michigan State University’s commencement ceremonies last Saturday as he encouraged students, “We want Michigan to be attractive to you so you stay here.” Inundated by news organizations that had been hoping for some wild protests and counter-demonstrations, Snyder tried to avoid controversy by saying, “I’ve talked enough about public policy this week…my preference is always to talk to the graduates.” But he did recognize, “There are some people here that don’t agree with me today.”

Speaking about his own post-college experiences, Snyder said he chose an accounting job in Detroit over a higher-paying offer in Houston, because the company helped foster his career and allowed him to stay closer to his family and friends.

Union supporters and protesters sneered at Snyder’s noble words as hypocritical rhetoric. “We are here to show our appreciation for the MSU students,” said Bill Reed, president of UAW Local 602 in Lansing. “The trouble is, the governor has not shown that same appreciation. This legislation harms these students’ future.”

The Camaro decision represents at least 1,000 union jobs and comes as a big win for Michigan’s hard-hit auto sector over foreign competition.  It seems that, after the GM bankruptcy, higher productivity at plants in the United States is reducing GM’s capital investment costs and improving profitability.

Kristin Dziczek, the director of labor and industry at the Center for Automotive Research, said labor costs for new hires in Michigan are now lower than the wage costs for veteran unionized peers in Canada. “There’s a considerable number of entry-level people and a lot of the older workers have already retired or taken retirement incentives,” she said.  Dziczek added that that the relatively strong Canadian currency, known as the loonie, is dragging down the Canadian manufacturing sector versus American competition.

Ontario plant

In an interesting twist of fate, the Michigan job gains will be taken from GM’s Ontario plant that was the scene of one of the most vicious strikes in labor history.  From April 8-23 1937, more than 4,000 workers struck for better wages, working conditions, a seniority system and the recognition of their new United Automobile Workers union.

The UAW was to be an affiliate of the recently created Congress of Industrial Organization that was organizing industrial workers throughout the United States.  Ontario Premier Mitchell Hepburn vigorously supported GM management’s efforts to try to keep the CIO out of Ontario.  To break the strike, Hepburn even created his own police force, known as “Hepburn’s Hussars” and “Sons-of-Mitches.”

Fellow unionists, neighbors and communist activists funded the GM Canada striking workers for two weeks. Eventually GM capitulated over fears of losing markets to its competitors.  In the April 23, 1937 agreement, GM accepted many of the union’s demands, without recognizing the union.  To gain recognition, the union leadership publicly repudiated the CIO connection.  But everyone knew it was a great CIO victory and the first major one in Canada.  The strike marked the birth of industrial unionism in Canada.

Michigan was hammered with a “D” rating in the 2009 Index of Worker Freedom, while Snyder’s predecessor, Democrat Jennifer Granholm, still was governor.

But the success in attracting the Camaro back after passing right-to-work legislation is motivating the Republican-controlled Legislature to adopt more pro-business legislation:

* HB 5024 would increase penalties for violation of Michigan’s mass picketing statute and allow employers to seek legal means to stop mass picketing;

* HB 5023 would increase penalties for illegal public-sector strikes;

* HB 5026 would allow employers to more easily hire new workers during labor union disputes.

With more GM jobs on the way, Snyder is proving that passing right-to-work laws is great for workers. It’s a lesson California should drive to prosperity.

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]]> https://calwatchdog.com/2012/12/21/ca-should-emulate-mi-jobs-creation/feed/ 11 35805 https://calwatchdog.com/2012/12/12/ca-state-budget-goes-off-the-cliff/ https://calwatchdog.com/2012/12/12/ca-state-budget-goes-off-the-cliff/#comments Wed, 12 Dec 2012 20:36:35 +0000 http://www.calwatchdog.com/?p=35500 Dec. 12, 2012

By Chriss Street

California State Controller John Chiang announced that total State revenue for the month of November 2012 fell $806.8 million, or 10.8 percent, below budget.  Democrats thought they could hammer “the rich” by convincing voters to pass Proposition 30 to create the highest state income tax in the nation.

But it now appears that high income earners have already “voted with their feet” by moving themselves and their businesses out of state, resulting in a shortfall of more than $1 billion in corporate and income taxes last month and the beginning of a new financial crisis.

Passage of Prop. 30 set off euphoria and expectations of higher spending for public employees.  The California Teachers’ Association trumpeted:

“California students and working families won a clear victory today as voters clearly demonstrated their willingness to invest in our public schools and colleges and also rejected a deceptive ballot measure aimed at silencing educators, other workers and their unions.” 

State bureaucrats immediately ramped up deficit spending far beyond the $6 billion annual tax increase, with the Departments of Health Services and Developmental Services increasing this month’s spending by more than $1 billion versus last year.  The lower tax collection and higher spending drove the state’s deficit after the tax increase to $2.7 billion for the first 5 months of the 2012-13 fiscal year, which began on July 1.  Chiang reported:

“November’s disappointing revenues stand in stark contrast to recent news that California is leading the nation in job growth, has significantly improved its cash liquidity to pay bills, and even long-distressed home values are starting to inch upward. This serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the State to exercise care and discipline in how its fiscal affairs are managed in the coming year.”

The improved “cash liquidity” Chaing referred to turns out to be $24.9 billion of debt!

Wealthy people fleeing?

During the election campaign, Gov. Jerry Brown and his pro-tax coalition had the California Board of Equalization request a report from the Stanford Center on Poverty and Inequality, which claimed to have looked at state tax records and found no risk of the super-rich leaving.  Based on their access to California state income tax records from 1992 to 2009, the researchers concluded that millionaire migration is a myth by anti-tax advocates and “other factors, such as personal and business contacts, seem to weigh more heavily in deciding where to live.”

The study’s authors, Stanford’s Cristobal Young, an assistant professor of sociology, and Princeton’s Charles Varner, a doctoral candidate in sociology, expounded that the temporary nature of high earnings may help explain why the additional taxes didn’t cause a noticeable flight of millionaires.  Top income tax payers seem to fall into and out of the millionaire income bracket as their income rises and falls across the million-dollar mark from year to year.

Personal connections weigh more heavily than tax rates in deciding where to live and “people are tied to states for different reasons,” Young said.  “They don’t want to take their kids out of school; they want to stay connected with friends, with families … with business contacts.  People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration.”  The findings dispel the “market metaphor,” in which states advertise low tax rates in a competition to woo high-income individuals. “This is a poor representation of how people decide where to live.”

Young added that looking at the tax flight issue only scratches the surface of state financial woes. “People need to think about the depth of California’s budget problems,” he said.  “I think there’s much, much bigger things to worry about than this issue of tax flight because it’s really hard to find any evidence of it…. I hope people hear, listen to and absorb what the evidence says on this issue,” Young said.

Following the tax increase victory, Reuters News Service published: “Super-rich flight from California? Not so fast” to reassure that there would be very little risk that wealthy Californians would depart for income tax free Nevada, Washington and Texas.  Although “some Silicon Valley business owners had expressed interest in a move after California’s top rate was raised by 29 percent to 13.3 percent…business groups from the Beverly Hills Chamber of Commerce to the tech industry policy group TechNet backed the tax, and the state Chamber of Commerce took no position.”

As panic is spreading that goosing taxes on the rich may have created enough “tax flight” that California will actually collect less from taxes, there was welcome news that a business had committed to opening in the state.  Executives of the 99 Cents Only Stores Inc. proclaimed they would be opening a new location in Beverly Hills on formerly posh Rodeo Drive.

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]]> https://calwatchdog.com/2012/12/12/ca-state-budget-goes-off-the-cliff/feed/ 52 35500 https://calwatchdog.com/2012/11/30/californians-fleeing-to-mexico/ https://calwatchdog.com/2012/11/30/californians-fleeing-to-mexico/#comments Fri, 30 Nov 2012 17:24:45 +0000 http://www.calwatchdog.com/?p=35031 Nov. 30, 2012

By Chriss Street

On Tuesday, President Obama met with the newly elected president of Mexico, Enrique Pena Nieto.  While the press focused on the Administration’s talking points for discussions on a wide range of issues from energy to climate change, the real concern is that the Mexican economy is far outperforming the U.S. economy and the new immigration concern is increasingly from Americans illegally moving to Mexico.

Nowhere is this trend more challenging than in California, which was just awarded the booby prize by 24/7 Wall Street survey, as the “Worst Run State” in the United States.  The state has:

* Unemployment: 10.1 percent (3rd highest);

* Budget deficit: 20.7 percent (17th largest);

* Debt per capita: $4,008 (18th highest);

* Median household income: $57,287 (10th highest);

* Percentage in poverty: 16.6 percent (18th highest);

* The worst credit ratings.

State politicians’ answer to get finances back on track was to convince voters to raise sales taxes and increase the income tax rates for people making more than $250,000 a year to the highest in the nation.  This wasn’t difficult, since 40 percent of Californians don’t pay any income tax and a quarter are on Medicaid.

Residents making $1 million per year saw their state tax burden rise to $96,189 from $87,459 last year.  For every dollar earned over $1 million, the California income tax rate jumps to 13.3 percent.

To complement California’s ludicrously high personal tax rates, the state is also rated as the third-worst business tax climate by the American Tax Foundation.  Forbes Magazine publishes a formula for states that measures how many “makers” (those gainfully employed in the private sector) are necessary to support takers (those drawing state dollars as employees, pensioners or welfare recipients).

A software entrepreneur with 100 employees in San Francisco must support 139 California takers.  The same entrepreneur with 100 employees in Austin only has to support 82 Texas takers.  This punishment of success explains why California’s share of the U.S. economy peaked in 1990 and has shrunk faster than all but three states over the last 12 years.

Goin’ South

California millionaires rebelling from Taxafornia tended to move to the income tax-free states of Texas, Washington and Nevada.  But increasingly, Californians are headed for Mexico.  A Google Internet search for “emigrate to the United States” generates 3.3 million hits. But “emigrate to Mexico” generates 1.3 million hits and the number is rising fast.

Beside low taxes, Mexico has six times the beachfront, half the food prices and a third the real estate costs versus California.

Because Mexico officially bans foreign ownership of land, disallows birthright citizenship and tries to make it difficult for foreigners to find work, there are only 150,000 Americans who live legally in the Empire of the Sun.  But more than one million Americans live in Mexico illegally.

These American expatriates can establish property trusts and take advantage of bank secrecy laws to hide assets from the prying eyes of the IRS and the California tax collectors.  American expats can roll over six month tourist visas for $25 and vehicle permits for $30.  Mexican businesses seldom ask for identification.

Mexican boom

While California’s economy is in the doldrums with 10.1 percent unemployment, Mexico’s economy is booming with only 5.0 percent unemployment.  The Mexican business climate is benefiting from strong production growth and increasing job opportunities.

More than 1.4 million Mexicans — including about 300,000 children born in the United States — returned to Mexico from the United States between 2005 and 2010.  Net immigration to the U.S. dropped to zero since 2008, while American immigration to Mexico is thriving.

UCLA predicts that California’s employment growth will average less than 2 percent for the next three years.  The Economist magazine expects the Mexican boom to continue; since manufacturing costs are more competitive in Mexico than in China:

“Mexico is already the world’s biggest exporter of flat-screen televisions, BlackBerrys and fridge-freezers, and is climbing up the rankings in cars, aerospace and more. On present trends, by 2018 America will import more from Mexico than from any other country. “Made in China” is giving way to ‘Hecho en México’.”

A key competitive factor, according to accounting research firm KPMG, is Mexico’s #1 international ranking as the best place to do business from a tax burden point of view.

President Peña Nieto told President Obama he hopes they can work together to create jobs.  The Mexican president also invited Obama to return to his country — he was last there in June for the G20 Summit in Los Cabos.  Obama said he looks for “any excuse to go to Mexico, I’m always game.”  When President Obama visits Mexico, he can wave to all the Taxifornians who have already escaped there.

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