This is important for California because something around half of the state budget — the total amount — comes from the federal government. When the feds begin cutting back spending sharply, as inevitably they will, then California will see sharp cuts in Medicaid/Medical, AFDC, SNAP/food stamps (more than the recent cuts), education/No Child Left Behind/Race to the Top, etc.

Kotlikoff recently was interviewed by Financial Sense Newshour. And Bob Wenzel provides a transcript of some of it:

Officially, the federal deficit is $17 trillion. Where is it really more than $205 trillion?

Kotlikoff:

The liabilities the government owes are mostly off the books. We have a true debt picture which is about $205 trillion. This is recording all the future obligations the government has, whether they are official obligations or not, such as paying for your social security benefits, mine, or your mother’s Medicare benefits, defense spending, etc. All of these things are really obligations that aren’t recorded on the books as debt, whereas paying off future principal and interest payments on Treasury bills and bonds are recorded. So, anyway, if you take the value of all of those commitments and subtract all the taxes coming to pay those commitments, the difference is what’s called the fiscal gap; and that fiscal gap in the U.S. is now $205 trillion. So, the true debt is $205 trillion; the official debt is only $17 trillion. So, most of the problems we’re facing, most of the debt we have, the vast majority of it is off the books and Congress has done bookkeeping to make sure the public doesn’t see it.

Why is that not well known?

Kotlikoff:

The Clinton administration—we put out the fiscal gap studies for a couple of years on the President’s budget. The Clinton administration then censored it. The guys who’s now head of the National Economic Council, the Chief Economic Advisor to President Obama, was the one who did the censorship back in 1994. President Bush’s Treasury Secretary O’Neil wanted us to do a fiscal gap accounting for the President’s budget in 2003 and he was fired in December 7, 2002, and that study was censored two days after he was fired. So, this is not accidental. This is more or less a conspiracy to hide the truth to keep ourselves and our kids in the dark about what the politicians are really doing, which is trying to garner the votes of older people and then get reelected and leave a bigger mess for our kids to handle.

But the bills are starting to come due as the Baby Boomers keep retiring.

By Chris Reed

Legislative Analyst Mac Taylor’s unhinged decision to project budget surpluses in coming years in California could turn out to be the defining moment of his career. The decision of state voters to back temporary sales and income tax hikes last month did little to nothing to resolve the enormous financial headaches ahead from unfunded retiree pensions and health care, from Obamacare, from the bullet-train debacle, and so much more. Incredibly, Taylor would have us believe otherwise — leading directly to goofiness such as Senate President Darrell Steinberg projecting a new era of free spending:

“‘I really believe this is the end of one very difficult era in California and the beginning of a new and better era,’ he said at the Capitol after the Legislature gaveled in its new two-year session.

“There is a chance that the state will begin to see budget surpluses in a few years, and Steinberg proposed that one-third of any surplus go to a rainy-day fund, one-third to paying down the state’s debt and a like amount to restoring social service and education programs cut during the last five years. ‘There is a lot of need out there,’ he said.”

As Dick Enberg would say, oh my. We haven’t gotten out of our present fiscal debacle, and, with Mac Taylor’s encouragement, the leader of the Senate is already planning to spend billions that are not, repeat not, in hand.

What could go wrong? Here’s the short list from my analysis last month:

• The likelihood of major cuts in defense spending in coming years as the federal government strives to end trillion-dollar annual deficits [which] would have a harsh effect on [much] of the state.

• The prospect that bankruptcy of one or more struggling nations in Europe could trigger another global recession, with terrible implications for California’s economy – and for its revenue collection, which is so dependent on the capital gains of the investor class.

• The prospect that the broad switch to cleaner-but-costlier energy mandated by AB 32 will drive heavy industries from the state and make California’s exports less cost-competitive.

• The heavy costs of implementing President Obama’s health care overhaul going forward as federal subsidies diminish and as Medi-Cal patients explode in number – just as many of the state’s family doctors near retirement. The California Academy of Family Physicians says 30 percent of primary-care physicians are 60 or older, the highest percentage of any state.

• The cost of paying for pensions and health care for a steadily growing army of public employee retirees. A 2010 Stanford study that avoided rosy return scenarios puts the total unfunded pension liability at $500 billion; LAO accepts the rosy scenarios.

• The possibility that the federal government will demand repayment of the nearly $10 billion it has loaned California to pay unemployment benefits since the state’s jobless fund went broke in 2009. Presently, Washington only requires that Sacramento pay for the interest on the loan.

Did Mac Taylor even consider these factors? Cursorily, at best. He owes taxpayers — and his respected predecessors — an apology.

By Wayne Lusvardi

You probably have seen the photograph of the Casino Pier Roller Coaster on the New Jersey shore inundated by the ocean and in shambles from the impact of Hurricane Sandy.

In Sacramento, Calif. on the same day, the weather was described as a “beautiful fall day…on mostly sunny skies with highs in the middle 70’s.”   But a different type of storm — a budget cyclone — is about to hit the California capitol.

The pending California storm would send Gov. Jerry Brown’s roller coaster budget into a nosedive.  Recent opinion polls show support for Brown’s Proposition 30 tax rate increase has dropped to 48 percent.  And there are good reasons why.

The way California’s general fund budget is managed is to rely on giant upswings in unpredictable capital gains taxes every year.  Alternatively, a voter-approved tax increase is factored into budget revenue predictions if an economic recession indicates that capital gains tax revenues will be small.   Once a new higher revenue level has been established, then the budget is “balanced” high.  But the budget can be balanced low just as well as high.

This is California’s tax-and-spend roller coaster budget.  It creates artificial structural budget deficits each year that have to be met by higher and higher tax revenues. Gov. Brown already included revenues from his proposed tax hikes from Prop. 30 in this year’s budget.

How the Public School Budget Deficit is Contrived

When financial and real estate markets or voter-approved tax increases don’t deliver the projected revenues, then California declares a budget crisis.  Declaring that K-12 public school budgets would have to be cut is the way the state socially constructs and manages a budget crisis.  It is never portrayed that it is the Medi-Cal or public pension funds that are running a deficit. Public school children are used as poster children every year for any revenue shortfalls in health and welfare programs, pensions, or bond debts.

Annual public school budget deficits are a public ritual. School budget deficits are also the preferred choice of liberal policy makers, not a reflection of the stinginess of the taxpayers or conservative lawmakers. A “structural budget deficit” is always a public school budget deficit. But there is another apparent reason why the public schools are portrayed as the line item in the state budget that is running a deficit: the voter-mandated funding formula from Proposition 98 over-funds public schools.

How do we know public schools are over-funded?  Well, the California Teacher’s Association is suing the state to get paid back $3 billion that the state borrowed from the state education fund in 2004-05 to plug the general fund deficit in return for jobs protections for core teachers.  In other words, in the last seven years, public schools have lost up to $3 billion without having to lay off any core classroom teachers.

Additionally, in the past five years, total enrollment in state public schools has declined 1 percent and is projected to decline even further. But the budget formula for funding public schools is mostly based on a percentage of the state general fund budget, not on the overall attendance level.

Prop. 98 guarantees public schools about 43 percent of the state general fund budget.  What was cut out of the public school budget since 2009 is all the fluff of political earmarks — artificial jobs programs — that saved local school budgets but didn’t hurt the academic performance of the poor.

California’s General Fund budget was $102.98 billion in fiscal year 2006-2007.  Forty three percent of that for public schools was $44.2 billion.  In 2012-13, the General Fund budget is $92.55 billion, of which roughly $39.8 billion is guaranteed for public schools.  This deceivingly indicates that public schools have lost $4.4 billion in funding.

Indicated Change in Base of General Fund on School Spending

General fund

The only way for the state to manage general fund budget deficits with 43 percent of funds locked in for public schools has been to lower the base or floor of the general fund.  The apparent way the state has managed this has been to shift monies from the General Fund to Special Funds. If you can’t reform the budget beast, the only apparent alternative has been to starve it.

In the last five years, the General Fund budget revenues have decreased by $10.4 billion.  But the Special Fund budget has increased by $13.15 billion.  Many programs have been shifted into the Special Fund to make it appear the General Fund is running a shortfall in funding for schools.

Looking at the entire state budget picture, Federal Funds have increased $16.57 billion from 5 years ago.  And the total of all expenditures in the General, Special, Federal, and Bond Funds has increased $15.8 billion over the past 5 years.

Change In State Budget Levels Per Fund from 2007 to 2013

In the above table, it appears that the hole in the state budget is in the Bond Fund. This would include the liability for public pensions. Retirement benefit costs have increased from $1.4 billion in 1999 to $6.5 billion this fiscal year.

Tax cliff

As the Wall Street Journal editorial “Jerry Brown’s Tax Cliff” succinctly states it:

“The most important single vote in America next Tuesday, after the Presidential race, is Governor Brown’s attempt to stick Californians with another giant tax increase.  Mr. Brown and his labor allies say Proposition 30 will fix the state’s budget deficit and ward off education cuts.  But the real choice before voters is whether to issue Sacramento’s incorrigible spendthrifts another blank check.”

The problem is not a lack of funds, but budget management policies that intentionally shift guaranteed funds away from public schools. These funding shifts may be used not only to plug intentionally created school budget deficits, but to backfill unfunded pension liabilities or gaps in Medicaid caused by Federal Social Security Disability policies.

California’s voters are being taken on a roller coaster ride without a seat belt. They should be prepared to hold on for their life and their wallets.  The state “structural” budget deficit is not bad fate from uncontrollable market downturns, but a choice.

Voters also have a choice at the ballot box on Nov. 6.

By John Seiler

Denying California voters an opportunity to see the two in action, Sen. Dianne Feinstein, D-Calif., refuses to debate her Republican opponent, Elizabeth Emken. This is what happens when one party takes over a state

Yet Feinstein needs to be confronted on her disastrous 20 years in the U.S. Senate. During the last 17 years, there has been no increase at all in household incomes. True, Republican Congresses of those years, as well as President George W. Bush, bear a great deal of responsibility.

And in the last four years of President Obama’s presidency, during which Feinstein and her fellow Democrats also controlled the U.S. Senate, U.S. household incomes crashed by 8.3 percent.

But consider this: Since DiFi went to the U.S. Senate 20 years ago, Democrats have controlled the White House 12 years (1993-2000; 2009-2012), Republicans eight years (2001-08).

Democrats have controlled DiFi’s U.S. Senate nine years (2003-04; 2002 — after the Jeffords defection; and 2007-12). Republicans have controlled the Senate 11 years (1995-2001; counting 2001 as Republican before the Jeffords defection; and 2003-06).

And Democrats have controlled the U.S. House of Representatives six years (1993-94; 2007-2010); while Republicans have controlled the U.S. House 14 years (1995-2006; 2011-12).

So, Democrats have had plenty of opportunity to fix the economy. In particular, in 2009-10, they controlled the whole kit and kaboodle: the presidency, the House and the Senate with a filibuster-proof supermajority of 60.

Democrats could have done anything they wanted. They could have cut the deficit to zero; instead we’ve had four years of $1 trillion-plus deficits. They could have reduced the national debt; instead they zoomed it up to $16 trillion. That’s $16,000,000,000,000.00.

Blaming Bush

The Democrats keep blaming Bush. Fine. He was a disaster. But he’s been gone four years.

Ronald Reagan inherited an economy worse in many ways. If you’re old enough, remember 13 percent annual inflation and 20 percent interest rates? The “misery index” — inflation plus unemployment — was way over 20 percent. Yet within two years of the Gipper’s inauguration, the economy was humming with growth above 5 percent.

And Democrats keep demanding that “the rich” pay more in taxes. They don’t tell you that, for them, “the rich” are those making $250,000 a year, including S-corporation businesses. These are the small businesses that are the engine of jobs growth. Due to the vagaries of the tax code, these corporations are charged at the personal tax rate. So jack up the “personal” rate and you take away the profits small businesses use to expand and create jobs.

I’m not a fan of Mitt Romney at all. And his tax cut plan doesn’t make any sense now that he says it will be “revenue neutral.” But one way he scored big time in last week’s debate with President Obama was by emphasizing that America needs to cut taxes to stimulate growth.

Feinstein probably figures that, in a debate with Emken, the same topics would come up. And DiFi might do as badly as the president — or worse. The president can’t avoid debates. DiFi apparently can. Maybe we need an initiative mandating debate participation.

So it’s left to me to analyze Emken’s economic plan. It’s actually pretty good, with some caveats. At least there’s no way it could make things worse than the past 20 years.

Tax cuts

The key to economic growth right now is tax cuts — with no offsetting increases like Romney wants (for now). Tax cuts increase economic activity, boosting investments and jobs creation. President Kennedy explained this in the early 1960s, back when Democrats still understood something about economics.

His tax cuts were enacted in 1964 after he was killed, producing a massive economic boom that only ended when his fool successor, President Johnson, imposed a surtax in 1968.

And unlike Bush’s stupid 2001 and 2003 tax cuts, which keep expiring and casting uncertainty over the economy, JFK’s tax cuts were permanent.

DiFi, of course, like Obama backs jacking up taxes on “the rich.” Under “Issues” on her Web site, I couldn’t find anything on economics. But she has a strong record in the Senate of increasing taxes.

By contrast, Emken says:

“I believe tax rates are already too high in this country. And, with the weakened economy, we cannot ask American families to pay more in taxes. I believe we need tax reform that makes our tax structure more competitive against overseas sources. By lowering the tax rates for businesses, corporate investment and capital will return to the country. That will stimulate growth and provide greater tax revenues.”

That’s pretty good. Her policy paper on tax reform goes further:

“For example, Dianne Feinstein joined her fellow Democrats in voting for the “Buffett Rule.” The Buffett Rule is a political gimmick. It promotes “fairness” by making an unfair comparison between income taxes and capital gains taxes. It also distracts from the truth that capital investment is actually taxed at least four separate times under our tax code….It’s no wonder that it seems like the only ones investing in America are the Chinese.”

I would add that Feinstein herself is immensely wealthy. Socking us with higher taxes just keeps the rest of us down, unable to rise up economically and politically.

Emken provides specifics:

* Simplify the tax code and make it flatter and fairer.

* Broaden the tax base by repealing loopholes and shelters.

* Make the 2001 tax cuts and the death tax repeal permanent.

* Reduce the corporate tax rate to make it competitive.

* Provide strong incentives to repatriate foreign earnings by adopting a territorial tax system.

* Create a domestic system that encourages savings and investment in America.

That’s all OK. Except it’s to complicated to close “loopholes and shelters,” and takes up to much political capital. If you reduce rates enough, then the “loopholes and shelters” don’t mean as much.

Tax reform is important, but can wait until a better time. For now, the country needs to get moving again — through simple tax cuts.

Tax rates

What tax rates does Emken want? Right now, the top U.S. tax rate is 35 percent; but that would rise to 39 percent should the Bush tax hikes expire in January, as Obama and DiFi want.

Emken says:

“The international average is 26 percent. The U.S. tax code should not contain any rate higher than 25 percent, with lowest rates reserved for domestic business.”

Excellent. But won’t that increase the deficit? Romney’s problem is that he wants his tax cuts to be “revenue neutral.” Meaning tax cuts for some would be offset by tax cuts for others.

Emken takes a different approach:

“Everything I’ve proposed adds to economic opportunity and market stability, two important factors in job creation and economic growth.  Any loss in revenue from the current tax base should be more than offset by the increase in job creation, which provides a greater number of taxpayers. Again, we’re not fighting over small slices of pie; we’re making a bigger pie. I’ve also called for a thorough review of every federal department and agency to see where we can save money. I will work relentlessly to reduce government spending.”

That’s exactly how things would work.

Cuts

And she’s right, of course, that cuts to government must be made. Anybody who’s ever been in government knows that every department is larded with massive waste.

What agencies would Emken eliminate? Unfortunately, she’s vague here:

“My approach is different. I want a top to bottom review of every agency, requiring metrics that measure results and value for invested tax dollars. Those programs that aren’t producing need to be made to produce. And those that have no possibility of returning value for invested tax dollars should be discontinued. As a cost efficiency expert, I spent a good portion of my career implementing these practices in the private sector.”

But the private sector isn’t the government sector. Government exists to waste.

The best thing to do is to eliminate whole agencies. Otherwise, like cockroaches, the bureaus and their inhabitants just swarm back.

She should start by calling for eliminating the two agencies that Ronald Reagan promised to get rid of in 1980, but didn’t get around to doing because he was busy reviving the economy and winning the Cold War: the Department of Energy and De-Ed, the Department of de-Education. The free market provides us plenty of energy at a fair price; recent increases and distortions in oil and gas prices are caused by government interference.

And ever since the feds took over education policy in the late 1950s, test scores have fallen nationally, the kids becoming dumber by the minute. Programs like Bush’s No Child Left Behind and Obama’s Race to the Top only have made matters worse, with more government bureaucratic strings tied to every dollar “given” to local schools.

Conclusion: A decent plan

Emken’s economic plan is fundamentally sound, favoring pro-growth tax policies that would get the country moving again. As with most office seekers and holders, she doesn’t want to offend constituencies whose federal largess would be cut. But because of the massive deficits and debt, cuts will be coming no matter what.

If taxes are increased, as DiFi and Obama want, the economy would be smashed into another recession, perhaps worse than the last one. The deficits and debt would get even worse. A Greater Depression could hit, as businesses and jobs fled America for China, India and other countries that believe in caring and feeding businesses, instead of stepping on them.

Emken has close to zero chance of winning in November. That’s just the reality of California. But it’s unfortunate that her ideas on the economy, at least, aren’t being heard as part of the policy mix because a U.S. Senator in office too long refuses to step up to the podium and debate.

By Brian Calle

Here’s my interview with Investor’s Business Daily financial writer Andrew Malcolm. It’s on America’s staggering debt and the economic situation.

By John Seiler

I’ve been warning about California’s looming fiscal disaster for more than a decade now. While researching another article, I dug out some quotes from articles I wrote for the Orange County Regisgter, where I wrote editorials from 1987 to 2006, and for which I still freelance.

If you remember, back in the late 1990s America, and especially California, enjoyed the dot-com boom. People were talking about a New Economy that didn’t suffer recessions. In his last two years in office, 1997 and 1998, Gov. Pete Wilson enjoyed surging revenues, which he splurge on by signing budgets that increased spending 8 percent each year.

Then Gray Davis became governor in 1999. His first two budgets enjoyed even greater revenue growth as the dot-com boom kept zooming. And he spent all of it, increasing spending an incredible 15 percent in each of those first two years.

Davis also signed the pension-spiking bills. Pension “experts,” giddy with the skyrocketing stock market, promised pension returns would keep going up and up and up. Recessions had been banned!

I didn’t buy it. In a Register editorial, I warned at the time, “The business cycle has not been repealed. Unless California makes its tax rates more friendly to businesses and citizens, the next recession again could hit like an 8-point Richter earthquake.” That was on January 26, 1998, when Wilson was in charge.

June 14, 1998: “The business cycle has not been repealed.”

Aug. 2, 1998: “In fact, the business cycle has not been repealed…. If California doesn’t get its economic house in order, assuring strong growth through tax cuts that help stimulate the private sector, the next recession could hit as hard as the last.”

Feb. 18, 2001, under Gov. Gray Davis: “We’ve long been warning that the business cycle has not been repealed.”

Of course, the dot-com boom turned into the dot-com bust. In 2003, Gray Davis was recalled in part for his profligacy. The recall election catapulted Arnold Schwarzenegger into the governor’s throne on his promises to “terminate” the “crazy deficit spending.” He was so-so his first two years in office. Then on spending he became the Governor Gone Wild. Spending rose 15 percent in 2005, then 11 percent in 2006. Arnold said, “Jawohl! Hasta la vista recession! Real estate boom ist für immer und ewig! Ach du lieber!”

On Nov. 28, 2006, in a Register editorial, I quoted Esmael Adibi, the director of the Center for Economic Research at Chapman University, who warned, “But the business cycle has not been repealed.”

The spending continued until everything crashed again and the state has suffered deficits ever since. Having “terminated” not California’s problems, but California itself, Arnold left office in disgrace and divorce.

I told you so.

By Wayne Lusvardi

Imagine a teeter-totter with a chubby boy on one end and a thin boy on the other.  The teeter-totter can be balanced either by two chubby boys or two thin boys.  It can be balanced heavy or balanced light — either way will work.

Under Proposition 58, California is required to balance its budget.  California Gov. Jerry Brown wants you to believe that the California budget needs to be balanced heavy or high. That is apparently how he is coming up with his $16 billion state budget deficit. It is not a lie to say the budget needs $16 billion to be balanced — however, it is possible that the budget could be balanced without the $16 billion.

Even the State Legislative Analyst now acknowledges there is no need to cut $5.5 billion from the K-12 school budget.  This statement essentially undermines the need for Brown’s $8.5 billion tax increase on the November ballot.

Composition of the General Fund

There are several pots that make up the state budget. Brown wants you to look at the pot of the state operating-budget — called the general fund — shown in Column 1 in the table below.  The general fund has declined only about 10 percent, or a total of $10 billion, since the peak of the Mortgage Bubble in 2007.  The prior reported state budget deficit was estimated to be just about ten billion dollars. But Brown now says the falling tax revenues have made the general fund budget deficit increase to $16 billion.

Sales and income tax receipts have reportedly declined.  But total expenditures including Federal fund transfers have increased 8.1 percent, or a total of $15.84 billion, from 2007 to 2012 (see Column 7 below).

Overall state spending in California is up, even though some components of the budget have decreased.

The “general fund” (Column 1 in table below) can be gamed to the point where it is meaningless.  As writer Alyssia Finley of the Wall Street Journal writes in her article “Will California Ever Learn”:

“For the past several years legislators have been using special funds [fees earmarked for special purposes –- see Column 2 below] to pay for programs that are usually financed by general fund spending.”  This is what the term “fungible” means –- the funds can be applied to several categories.

The best number to look at is Gross Spending Minus Federal Funds (Column 5 below).  Based on that, the state budget is running less than a $1 billion –- or 0.5 percent –- shortfall.  That is without considering President Obama’s and California Attorney General Kamela Harris’s $18 billion foreclosure bailout for California.  Brown is diverting about $410 million of that bailout into the general fund.

Moreover, according to the state Department of Finance website, 85 percent of the $749.5 billion in General Fund Deficiencies – or $635.1 million – are in Medi-Cal.

Public education is not shown as running a deficiency. The apparent reason is that public schools “sell well” with middle-class taxpayers while Medi-Cal can’t be sold to the public as convincingly.

The California budget is teetering — but Its imbalance is caused by chubby-boy spending, not skinny tax receipts.

Historical Budget Expenditures

By Wayne Lusvardi

California voters may soon ask themselves: “Why vote for an $8.5 billion sales and income tax increase in November 2012 if Cap and Trade is going to raise $50 billion to $100 billion for state discretionary spending? That’s $6.25 billion to $12.5 billion per year from 2012 to 2020.

But will Cap and Trade generate enough revenues, and can those revenues be used to bailout the state general fund deficit? That is the proverbial $16 billion deficit question.

Cap and Trade is a program authorized in 2010 under Assembly Bill 32, the Global Warming Solutions Act of 2006.  AB 32 requires excessive air polluters to buy emission permits in an auction from those industries and utilities that pollute less than their pollution quota. The rules of Cap and Trade apply first to large industries; and by 2015 to utilities, including local municipal water and power departments. Eventually, 360 industries and utilities will be subject to Cap and Trade rules.  Where the proceeds of these auctioned permits are to be spent is still to be determined.

California legislators have already started floating up a flurry of bills to divvy up the estimated $50 to $100 billion windfall from 2012 to 2020 from Cap and Trade auctions. This is addition to Gov. Jerry Brown’s notion to fund the cost of the California High-Speed Rail Project with Cap and Trade funds. The California Legislative Analyst’s Office has recommended against this proposal because the funding is too speculative.

Cap and Trade Fund Distribution Bills

Assembly Bill 1532, sponsored by Assembly Speaker John Perez, D-Los Angeles, would deposit Cap and Trade pollution permit monies into a new Greenhouse Gas Reduction Account to be controlled by the California Air Resources Board.

Senate Bill 535, sponsored by State Sen. Kevin de Leon, D-Los Angeles, would divert some of the Cap and Trade auction funds to disadvantaged communities, affordable housing, hospitals and schools.

Senate Bill 1572, the AB 32 Revenue Investment Plan, sponsored by State Sen. Fran Pavley, D-Los Angeles, devises a strategic investment plant to distribute Cap and Trade proceeds.

AB 2404, the Local Emissions Reduction Fund, sponsored by Assemblyman Felipe Fuentes. D-Arleta, would delegate the award of Cap and Trade monies to the Strategic Growth Council — a six person cabinet level committee under the Governor’s Office.

What is the Strategic Growth Council? 

The Strategic Growth Council was authorized under Senate Bill 732 in 2008, sponsored by State Sen. Darrell Steinberg, D-Sacramento. It creates a cabinet-level committee to serve as a clearinghouse for the distribution of Cap and Trade funds.  According to the Strategic Growth Council website, a laundry list of activities can be funded: “to improve air quality, protect natural resources, increase the availability of affordable housing, promote public health, improve transportation, encourage greater infill and compact development, revitalize community and urban centers, and assist state and local entities in the planning of sustainable communities.”  But this may be a wish list more than what Cap and Trade auction proceeds can be legally spent on.

Who is on the Strategic Growth Council? 

The Strategic Growth Council is composed of six members. Five are the heads of state agencies and a sixth member is from the public.

Current Council members include:

Ken Alex, secretary of the Office of Planning and Research;
John Laird, secretary of California Natural Resources Agency;
Diana Dooley, secretaru of California Health and Human Services;
Brian Kelly, acting secretary of the Business, Transportation and Housing Agency;
Matt Rodriguez, secretary of the Department of Environmental Protection;
Bob Fisher, public member, president of the Mendocino Redwood Corporation and a member of the National Resources Defense Council, an environmentalist group.

The Strategic Plan of the Growth Council for 2012 can be found here.

Cap and Trade Auction Monies Hit Prop. 13 Snag

California’s Proposition 13, passed in 1978, mandates that any tax must be approved by two-thirds of the voters. Proposition 26, passed in 2010, added fees, charges, levies or tax revenue allocations as prohibited without a supermajority vote.

AB 32 authorized the California Air Resources Board to devise a Cap and Trade emission program. But it was only passed by the Legislature. It was never put to an election.  So we don’t know if all the bills for spending Cap and Trade proceeds are legal yet.

A number of liberal non-profit and advocacy organizations have leapt into the void and have issued quasi-legal opinions as to whether California can divert Cap and Trade funds to its operating budget, to fund the proposed bullet train project, and to a number of other programs.

Next10, a liberal non-profit public policy organization, has issued four reports on “Using the Allowance Value from California’s Carbon Trading System: Legal Risk Factors, Impacts to Ratepayers and the Economy.”

The liberal environmental policy think tank Resources for the Future has issued a report, “The Variability of Potential Revenue from a Carbon Tax.”

Both reports tend to concur that Cap and Trade auction revenues cannot be used for unrelated programs or reduced tax rates.  If California used Cap and Trade proceeds for ineligible activities. it would be vulnerable to a legal challenge under Prop. 13 and Prop. 26.

Some Cap and Trade proponents claim that pollution credits or allowances are not taxes, but a fee. But Prop. 26 forbids imposing fees without a supermajority vote.

The University of California Berkeley’s Center for Law, Energy and the Environment, which prepared one of the four reports for Next 10, concluded that channeling Cap and Trade funds to projects that reduce or lessen greenhouse gas emissions is the least legally risky option. The center made four conclusions: 1) re-directing Cap and Trade proceeds back to electricity ratepayers could offset all the costs imposed by Cap and Trade; 2) the way in which Cap and Trade proceeds are re-directed back to ratepayers will affect the efficiency of the program; 3) if electricity bills are reduced by Cap and Trade credits, that may affect the political perception of the program; and 4) electric rate increases will result from other AB 32 policies — namely, the 33 percent renewable power requirement — and these costs may be substantial and occur independently of the Cap and Trade portion of AB 32.

A flaw in this report is to assume that there will be no transaction costs for administrating and monitoring Cap and Trade.  Not all costs will be returned to ratepayers. And if they were, ratepayers might ask: Why implement the program in the first place?

In a 2009 report, David Roland-Holst, a professor of resource economics at the Berkeley center, said Cap and Trade revenues must be returned to utility customers either in the form of rebates or subsidized electricity bills.  Holst said that home energy efficiency projects generate more Gross Domestic Product and employment growth.

There are several problems with this proposal.  Newer homes have been built to Title 24 Building Energy Efficiency Standards and would likely not require any energy efficiency work.  And large numbers of older housing stock have been retrofitted with energy efficiency improvements either as a condition of home remodeling permits, or have been retrofitted with state, federal, and public utility energy efficiency programs that started around the mid-1970’s.  Another problem is that any subsidized home energy efficiency loans would likely end up creating another sub-prime loan and a financial bubble.

Anything that substantially deviates from reducing greenhouse gases will no doubt be tested by a legal challenge under Prop. 13 and Prop. 26.

Cap and Trade Prone to Government Gaming of System

The California Air Resources Boardhas been spending a lot of money on retaining consultants and monitors to prevent the gaming of the Cap and Trade auctions by third-party speculative traders.  But it may not be traders that would be of the most concern if the activities that can be funded under Cap and Trade are expanded beyond reducing pollution.

The California Public Utilities Commission and CARB have estimated that the proceeds from Cap and Trade auctions could total $50 billion from 2012 to 2020.  But Robert Lucas, a consultant with the California Council for Environmental and Economic Balance, is quoted in Forbes.com that if pollution allowances are held in reserve by CARB for any year, the unit price per ton of reduced carbon pollution could spike to $40 or $50 per ton.  Lucas said, “we could be talking about $100 billion between now and 2020.”

This would provide a perverse incentive for CARB to intentionally withhold pollution allowances to generate revenues for greedy bureaucratic agencies seeking to perpetuate themselves with Cap and Trade revenues. California could see a return to skyrocketing electricity prices, as experienced in the 2000-01 Electricity Crisis. And where would the check and balance be for voters and electricity ratepayers if the only referees to appeal to have a stake in the system?

If Cap and Trade were allowed to directly or indirectly plug the state operating fund budget deficit, gaming bureaucrats could hide behind a “veil of the carbon market” to jack up electricity rates and inflate the price of nearly all goods.

Cap and Trade Won’t Cure Budget Deficit

It is highly unlikely that proceeds from Cap and Trade auctions can be used to reduce or cure the state budget deficit.  Politicians may be queuing up with bills full of funding wish lists.  But any effort to liberalize the eligible funding activities under Cap and Trade will be met with lawsuits as well as a possible voter revolt.

A 2010 study by T2 Associates for the AB 32 Implementation Group raised concerns about Cap and Trade taking in eight years more than 120 percent of the single year 2009-10 state budget.

But the gnawing questions remain: Why impose Cap and Trade charges at all if they just have to be re-circulated back to electricity ratepayers?  If electricity ratepayers are given home energy efficiency rebates, isn’t this just another stimulus program? And hasn’t home energy efficiency been accomplished much more cost effectively by Title 24 Building Energy Efficiency Regulations and utility company rebates since the mid-1970’s?

Neither California politicians nor bureaucrats apparently know today what to spend Cap and Trade taxes on.  The transaction costs to implement the Cap and Trade program were estimated at $8 billion by the Congressional Budget Office.  And when you factor in the complexity that Cap and Trade will add to the economy, is a tax the best solution to reducing pollution?

The experience with the California Energy Crisis of 2001 is that things won’t turn out as expected and are often much worse than leaving them alone.

By Wayne Lusvardi

Has California’s legendary structural budget deficit evolved into an overworked and obsolescent cliche?

This is a question to be asked of Gov. Jerry Brown announcement yesterday that the state general fund budget deficit has ballooned to $16 billion from the previously reported $9 to $10 billion.

However, the website for the independent state Legislative Analyst’s Office indicates the state ran a $3.3 billion surplus in 2011 and is running a $2.5 billion surplus for 2012.  What gives?

Moreover, the LAO indicates that the cumulative net budget deficit amassed over the past 5 years is only about $3 billion. This reflects only a 3.3 percent deficit that could soon disappear if the $90 billion growth in state Gross Domestic Product for 2011 reported by Gov. Brown in March starts showing up in greater tax revenues.

Here’s the summarized data from the State Legislative Analyst’s Office:

Is Brown, like the proverbial Chicken Little, crying that the sky is falling to get his tax increase proposition passed when in reality the clear sky is peeking out from the clouds?  Who knows?  And who is to be believed? Or more importantly, should we be informed only by cliches in making voting decisions about his proposed tax increases on the November 2012 ballot?

Apparently what Brown is angling for is a restoration of the $9.2 billion in taxation lost from the expiration of the temporary 1 percent sales tax surcharge on July 1, 2011.

But is the governor’s deficit number real?  Is it a deficit that needs to be fixed or a spending addiction that needs to be stopped cold turkey without any substitute stimulus?   Has Gov. Jerry Brown’s so-called $16 billion budget deficit become a worn-out cliche?

Cliches Avoid Facts and Arguments

Jonah Goldberg, in his new book “The Tryanny of Cliches” says cliches are “ways to avoid arguments, not make them.”  Dutch sociologist Anton Zijderveld, in his book “On Cliches,” says that journalists, political pundits and comedians fill voids created by the absence of early knowledge of uncertain situations with cliches.  Most dictionaries define a cliche as a trite and over-simplified expression that has become obsolescent.  A clue to detecting a cliche is that it often functions to arouse hate toward some outgroup.

Let’s take California’s K-12 school line item in the state operating budget, for example.  It comprises the largest part of the state operating budget — about 43 percent — as mandated by Proposition 98.

School districts and the newspaper media around the state have been hysterical about teacher layoff notices over the past five years.   The state K-12 budget has been cut $8 billion, or about 19 percent, over the past five years.  But it has mostly resulted in cutting “fluff” and “earmarks” out of the education budget.  Hardly a core teacher around the state was laid off.  Ending some earmarks saved California’s schools.  The state LAO even suggested that there was nearly $7.4 billion more in “categorical” programs — make-work jobs — that still could be cut back beyond what already has been cut.

One Democratic legislator called for rolling “categorical” funding into a block grant.  Block grants would leave it up to each school district, instead of Sacramento, flexibly to decide what would be funded or cut.  But this wouldn’t allow state legislators to buy votes from unions by doling out “categorical” jobs, so it was dropped.

Parcel taxes

From 2010 to 2012, wealthy school districts around the state put a double school property tax on the ballot — called a parcel tax — to add more local tax revenues to their schools to avoid so-called budget deficits.

But there was no need to save core teacher jobs, despite claims that teachers would be laid off.   School districts without added funding from parcel taxes ended up not having to cut core teachers.  Why would those with added parcel tax revenue have to lay off teachers?

What the parcel taxes paid for was mostly ancillary make-work jobs programs — called “categorical positions” — and luxury services such as school busing or more school librarians.  The people who voted for parcel taxes were mostly snookered into believing there was a state budget deficit crisis that would result in core teacher layoffs.

Those school districts that voted for parcel taxes merely freed up state funding to allow poorer school districts to retain “categorical” jobs programs like school busing, dental checkups, extra librarians, physical education teachers, American Indian education centers, etc.  One man’s public school deficit is another’s luxury public school service or make work jobs program.   Budget deficits are relative to who is in power to define them as such.

Deficit or spending problem?

Once again, we must ask: Were the schools actually running budget deficits or did they have a spending problem?  Was the budget cup half full or half empty?  Or has the state and local budget deficit crisis become a cliche meant to stifle opposition?

One Man’s Budget Deficit is Another’s Spending Problem

Once it is established in the minds of a group of people, it is very difficult to dislodge a cliche even by clear empirical evidence.  It becomes a taken-for-granted truth.  As sociologist W.I. Thomas once said, “A situation that is defined as real is real in its consequences.”

People do not like to be confronted with what social psychologists call “cognitive dissonance.” When later confronted by contrary evidence, one’s early emotional perceptions of a situation are bolstered by resistance.  In fact, one’s emotional perceptions become stronger, not weaker, as evidence of the true situation becomes known. As the saying goes: “I have made up my mind, don’t bother me with the facts.”

Cliches are made plausible and convincing not by the amount or quality of evidence for them but by the way they meet the social and psychological needs of a particular situation.

Who benefits?

We have to ask, “Who benefits from the ideological distortions of cliches about the state and public school budget deficits?” My guess is that unions and state legislators desiring to protect political earmarks and political pork that buy votes are the main beneficiaries of the state budget deficit cliche.

Sometimes even conservative writers consume the same cliche by claiming the state is going bankrupt due to huge budget deficits.  But it is mainly cities, counties and special enterprise districts that are more prone to bankruptcy.

State Senate President Pro Tem Darrell Steinberg, D-Sacramento, recently said that funding for health and welfare programs was going to have to be cut due to continuing tax shortfalls.  Steinberg added that, unless health and welfare programs were funded, $1.5 billion in affordable housing funds lefto ver from defunct redevelopment agencies would have to be tapped.  Should people’s health and welfare suffer so that luxury affordable housing programs can continue?   In other words, money is available to plug the funding gap for health and welfare programs.  So is this to be construed as part of Brown’s $16 billion “budget deficit”?

If the above data from the state LAO are reliable, perhaps the cliche about the state budget deficit more accurately reflected the early reality the state wanted us to believe from 2007 to 2010.  There wasn’t much information available during that period from which to define what the state meant by a “budget deficit.”  Cliches plugged that information gap.

But are we now running deficits, or avoiding cuts to luxury goods, programs and services from the state budget? If wages, both public and private, were allowed to adjust to their market levels instead of propping them up with stimulus programs and prolonged unemployment benefits the state’s pension liability might become more manageable and not require a tax increase.

How can California have a budget deficit crisis?  It has spent $18.7 billion on five “waterless” water bonds since 2000 that mostly went for acquiring open space without any substantial new water supplies to show for it?

How can it have a health and welfare budget deficit crisis when it is spending $3 billion on mostly redundant stem cell research that has now been found to be obsolescent science?

The lesson to be learned from California’s infamous budget deficit is to beware of relying on cliches early on about ambiguous situations to be dealt with by public policies or programs.

In informing oneself on how to vote in the upcoming election on tax increase proposals, one should not rely on cliches but on facts and disinterested opinion wherever possible.

As such, the old saying to “avoid cliches like the plague” may offer the best advice in informing oneself how to vote on tax increase proposals to plug the so-called state budget “deficit” in November 2012.