The state Legislative Analyst’s Office, which produces nonpartisan studies of ballot initiatives, has unveiled a new report considering the fiscal impact of marijuana decriminalization in the Golden State. Although partly mixed, its conclusion offered the possibility of a fresh line of argument in favor of freer pot laws.

“The report says California could add millions of dollars to state coffers if it legalized marijuana by reducing the number of marijuana offenders in prisons and jails, reducing probation supervision costs, reducing criminal court cases, and increased sales-tax revenue,” according to CBS Sacramento.

The Legislative Analyst’s Office did warn, however, that legalization would likely incur substantial trade-offs  that were harder to quantify or predict. The study, CBS noted, “could bring unexpected costs, with a potential increase in state-funded rehabilitation programs.”

Spiking support

The findings came at a potentially significant time in the run-up to activists’ push for statewide legalization in 2016. Public opinion has made a sustained shift toward support for such a measure, as the most recent round of polling from the Public Policy Institute of California underscored. “A record-high 54 percent of residents favor legalizing marijuana, while 44 percent are opposed,” PPIC reported.

The PPIC results proved notable for several reasons. Traditionally, restricting polling to likely voters results in a more conservative outlook. But in this case, the situation was reversed. “Among California likely voters, 56 percent favor legalization and 41 percent are opposed,” PPIC observed.

Although Republicans tend to oppose looser drug laws more than Democrats, California Democrats’ traditional strength among minority voters has not translated directly into more substantial support among those groups for marijuana legalization. “A majority of whites (60 percent) favor legalization,” said PPIC, “while a similar proportion of Latinos (60 percent) oppose it.”

Economic arguments

The legislative analyst’s report also promised to feed into broader economic arguments now being made by legal marijuana advocates. Already, some 100,000 California residents have found work in the medical marijuana industry, California Cannabis Industry Association Executive Director Nate Bradley told ABC Sacramento.

Reflecting a growing perception that the industry was here to stay, a new piece of legislation designed to bring order to the industry has attracted bipartisan support — with police and labor lining up behind the bill. “Assembly Bill 266 would create what’s called a dual-licensure system, with cannabis entrepreneurs needing to secure permits both from local authorities and from one of a few state agencies,” according to the Sacramento Bee. “The Department of Public Health would oversee testing, the Department of Food and Agriculture would deal with cultivation and the Board of Equalization would handle sales and transportation — all under the auspices of a new Governor’s Office of Marijuana Regulation.”

At the same time, it would mandate that businesses employing 20 or more persons must establish a so-called “labor peace agreement,” while allowing municipal officials some discretion in curbing medical pot.

For pot advocates, the sudden alignment of interest groups indicated an upcoming boom time for the marijuana business. Activists such as Bradley haven’t hesitated to build that prediction into their case for a legalization vote. “With recreational marijuana expected to go on the ballot in 2016, the industry is primed for rapid expansion,” ABC Sacramento continued. “Bradley said the market could produce as many as 1 million jobs in eight years.”

“As the cannabis market matures, it’s beginning to see more innovation, creating jobs that would have been unimaginable just a few years ago. Nestdrop, a Los Angeles-based startup, has a smartphone app facilitating medical marijuana orders and deliveries between patients and dispensaries. Since its launch in late April, the company has gained roughly 30,000 users in cities such as San Francisco, Seattle, Stockton and Pasadena, as well as areas like Orange County.”

As pro-pot forces have increased their legitimacy, Californians have also grown more skeptical toward excessive policing of marijuana businesses. Most recently, Santa Ana cops who raided an allegedly unlicensed dispensary were caught on videotape ridiculing a disabled volunteer working at the shop. One officer could be seen eating something from a countertop — alleged by the volunteer’s lawyer to be a marijuana edible.

However, there are concerns that the funds are being diverted either to broad programs that don’t specifically benefit these struggling students or to teacher compensation.

In January, the Legislative Analyst’s Office released a study that found none of the 50 school districts it surveyed, including the state’s 11 largest, had adequate safeguards in place for LCFF dollars. Two of its main findings:

Districts Rarely Differentiate Between New and Ongoing Actions. In most LCAPs, we found that districts are not distinguishing between actions that are a continuation of efforts from the prior year and those that are new for the upcoming school year. Without such differentiation, we could not determine whether districts were using the new funding generated under LCFF to pursue new actions to improve performance or to continue or expand prior activities.

Districts Often Fail To Provide Sufficient Information on EL/LI Student Services. Often, districts’ descriptions of services for EL/LI students consist only of recapping the actions they will pursue on behalf of all students and indicating those actions also will benefit EL/LI students. In addition, few districts provide clear or compelling rationales for using their supplemental and concentration funds on a districtwide and schoolwide basis.

That same month, the California Legislative Black Caucus presented testimony to the State Board of Education on rules governing how the funds were spent. Assemblywoman Shirley Weber, D-San Diego, expressed concern that vague guidelines would make it easy to divert the money meant expressly for struggling students. Her key point:

Any authority for the use of supplemental or concentration grants to schoolwide and districtwide expenditures must clearly link the services to demonstrated effectiveness in increasing student achievement and closing achievement gaps, and demonstrate that the expenditures are proven effective for “concentrations” of unduplicated children in schools in the district where concentrations exist.

Weber, a former San Diego school board president and San Diego State University professor, has already taken on the California Teachers Association and the education establishment this year over tenure reform. Her proposal was rejected by the Assembly Education Committee last month, but only after she had stern words for defenders of the tenure status quo.

Brown also called it “truly revolutionary. We are bringing government closer to the people, to the classroom where real decisions are made, and directing the money where the need and the challenge is greatest. This is a good day for California, it’s a good day for school kids and it’s a good day for our future.”

But nearly two years and $7 billion later (with another $4 billion in Brown’s proposed 2015-16 budget), state officials are not sure the intended targets of the Local Control Funding Formula – English learners, students in low-income families and foster-care youth – are actually benefiting.

School districts are required to file a Local Control and Accountability Plan with the state that specifies how they are using the extra LCFF funding to benefit those three categories of students. But many districts’ plans have failed to provide clarity.

That lack of clarity was confirmed in a recent study of the LCAPs from 50 school districts by the Legislative Analyst’s Office.

Carolyn Chu, a senior fiscal and policy analyst at the LAO, testified on the study before the Assembly Budget Subcommittee on Education Finance. “It was difficult to determine how districts were increasing or improving services for English learners, low-income and foster youth students in accordance with the regulations,” she said. “Districts are required to increase or improve services in proportion to the funding that they receive. And it was difficult for us to determine how districts were doing that through reading their LCAP.”

General programs

The study itself concluded, “In most LCAPs, we found that districts are not distinguishing between actions that are a continuation of efforts from the prior year and those that are new for the upcoming school year. Without such differentiation, we could not determine whether districts were using the new funding generated under LCFF to pursue new actions to improve performance or to continue or expand prior activities.”

Instead of targeting the funds at English learners, low-income and foster-care students, many school districts are using the money for general programs with the understanding that those three subgroups are also benefiting, according to the LAO. “[F]ew districts provide clear or compelling rationales for using their … funds on a districtwide and schoolwide basis,” the study said.

Among the study’s findings, few districts provide specifics on how they are implementing the state’s Common Core and English language development standards, how they are increasing parental involvement and how they are ensuring student enrollment in all required areas of study.

No information

Some provide no information at all on supplemental services for English learner, low-income and foster care students.

“Often, districts’ justifications of districtwide and schoolwide services consist only of recapping the actions they will pursue on behalf of all students and indicating those actions also will benefit EL/LI students,” the study said.

“Though few districts provided clear or compelling rationales for using their supplemental and concentration funds on a districtwide and schoolwide basis, this lack of clarity seems most problematic for districts with relatively low proportions of EL/LI students — districts for whom targeted services generally would be more appropriate.”

Complexity

Part of the problem is the complexity of the new regulations.

“One of our most significant findings relates to the overarching design of the LCAP,” the LAO study said. “The statute governing the components of the LCAP requires districts to set goals in eight state priority areas, identify and describe actions to reach those goals, and track progress using 24 state-identified metrics (plus any local metrics). In addition, the statute instructs districts to set specific goals and identify actions for 12 student subgroups and each of the districts’ schools for all the priority areas.

“Fulfilling all of these requirements is a challenging undertaking for districts to accomplish and accomplish well. Though most of the LCAPs we reviewed attempted to comply with many of the statutory LCAP requirements, none complied with every statutory requirement.”

The complexity of the LCFF is ironic because the regulation was touted as a simplification of the state’s previous supplemental school funding program, which imposed myriad restrictions on how money could be spent in 40 state categorical programs.

“The legislation … replaces California’s overly complex, inefficient and inequitable finance system for K-12 schools,” Brown’s 2013 press release said. “By shifting funds from ‘categorical’ grants – money tied to complex state mandates that limit how schools can use the funds – to the new per-pupil base, supplemental and concentration grants, the legislation increases local control while enhancing transparency and accountability.”

Incentives

Another irony is that the LCFF may actually provide a perverse incentive for cash-hungry school districts to maintain, or perhaps even increase, their percentage of English-learner, low-income and foster-care students. The school funding formula is based on three categories:

• Every school gets a base rate that varies by grade level, ranging from a low of $7,116 per pupil in grades 4-6 to a high of $8,711 in grades 9-12.
• Supplemental funding is provided for every English-learner, low-income and foster-care student, ranging from a low of $1,423 for grades 4-6 to a high of $1,742 for grades 9-12.
• Concentration funding is provided to districts that have at least 55 percent of their students classified as English-learners or low-income. For every student above that threshold, the district receives (at the low end) an extra $3,558 for grades 4-6 and (at the high end) $4,356 for grades 9-12.

This has resulted in some districts receiving millions of dollars in extra funding, some of which they would lose as their English-learner students become English-proficient or income levels in the district increase.

Reductions?

Assemblyman Rocky Chavez, R-Oceanside, asked several officials when school districts might be expected to start achieving success and relinquish the extra funding.

“If we are going to approve this, what’s your anticipation of reduction in concentration funding?” Chavez said. “Systemically, if we’re going to be improving the performance of our schools, then is there anticipated that there will be a reduction in funding years from now since they’ll be getting better?”

Brooks Allen, deputy policy director for the California Department of Education, responded that it’s too early in the process to know. The evaluation rubrics to measure each district’s effectiveness in improving student performance are still being developed and are scheduled to be adopted this fall.

Chavez took that to mean, “No reduction in funding?” So he asked the question again to CDE representative Monique Ramos. “What is the anticipation that we will be able to reduce the funds in this program?” Chavez asked. “Because if we reduce it, it helps everybody because there will be money spread throughout all districts helping all children.”

Ramos echoed Allen, and indicated that, even if districts are successful in helping English-learners, low-income and foster-care students, the funding may still need to continue. “We agree that it’s early in the process, and we would actually need to see data that these populations have decreased the achievement gap,” she said.

“The question would be at that time: how did we get there? Part of the reason is we provided supplemental and concentration grants because we know these students are more expensive to educate. Once we start closing that achievement gap, we have to evaluate how we got there, why and re-evaluate at that time. But I have a feeling that’s quite a ways out.”

Among other points, “The 2015-16 Budget: Rethinking How the State Funds School Facilities” pushes the idea that facilities funding should more closely follow each student. Doing so would change the system from its current dependence on local variations largely based on community wealth and support for more school funding.

The report is claiming that reforms need “to get schools out from under Sacramento-related oversight and redundancy,” Bill Lucia told CalWatchdog.com; he’s the president and CEO of EdVoice, a nonprofit reform group, and served as executive director of the State Board of Education.

Lucia said the report works to address Gov. Jerry Brown’s Local Funding Formula reform from 2013, which shifted overall state funding more to schools from low-income families. However, Lucia added, neither Brown nor the LAO report “addresses head on” Proposition 98, the 1988 initiative that mandates about 40 percent of general-fund spending must go to K-14 education.

The LAO, he said, “has put some interesting ideas on the table,” but ultimately “still doesn’t address where the money comes from.”

LAO details

The LAO report said the existing program:

• “fails to treat school facility costs as an ongoing expense despite the recurring nature of facility needs”;
• “allows disparities based on school district property wealth”;
• “fails to target funding according to greatest need”;
• “results in excessive administrative complexity”;
• “lacks adequate accountability mechanisms.”

It notes “the governor indicates a strong interest in changing how the state funds school facilities, though he has not introduced a specific proposal to date.”

And the LAO makes several recommendations for new legislation:

• “establish an annual per–student facility grant”;
• “base the grant on the replacement value of existing school buildings and an estimate of their average useful life”;
• “adjust the grant to reflect local resources, with larger grants for districts with lower property wealth”;
• “adjust the grant during the transition to account for existing state debt service incurred on the district’s behalf”;
• “provide one-time funds to address the existing backlog of facility projects”;
• “require school districts that receive grant funds to adopt five-year facility accountability plans.”

Charter schools

Lucia said the LAO report is “thin” on dealing with charter schools, which are public schools that mostly work outside the state and local schools bureaucracies. According to the California Charter Schools Association, the state now includes more than 1,063 charter schools, teaching more than 484,000 students.

The LAO report explained that in 2001 the state established the Charter School Facility Grant Program “to provide facility funding for charter schools serving low-income students. Charter schools are eligible if they enroll or are located in the attendance of an elementary school where at least 70 percent of students qualify for free or reduced-price meals.”

But for the 2013-14 school year, the state appropriated only $70 million for the program. The money went to 300 charter schools. So the average was $233,333 for each school receiving the money. The amount was increased to $92 million for the current school year, 2014-15.

Bonds

The LAO also warned the state’s bond authority is almost exhausted. The two core programs, new construction and modernization, have been empty since 2012. But $286 million remains in the four bond measures passed earlier: Mainly the money is in three categories:

• seismic repair, $142 million remaining;
• charter school construction and modernization, $99 million remaining;
• energy-efficient schools, $32 million remaining.

Schools still can pass local bonds.

And according to Ballotpedia, a $9 billion school bond has been submitted to Attorney General Kamala Harris for the Nov. 2016 ballot. It is awaiting her title and summary before being circulated for signatures.

A Dec. 2014 poll by Fairbank, Maslin, Maullin, Metz & Associates found such a bond nabbed 63 percent support to 33 percent opposition, with 4 percent undecided. But that’s before any actual campaigning by anti-tax groups worried the bond would lead to tax increases.

Bucks to buildings

A key issue is local control. Currently, wealthy areas generally are more likely than poor districts to approve local bonds or direct taxes to improve school facilities. That’s a problem Brown’s reform has been addressing.

“I agree with the governor on that point,” Lucia said.

Lucia added that, despite the importance of local control, the California Constitution actually guarantees a decent education for every child in the state. He believes the LAO report can help spur reforms that, in particular “streamline” state funding of schools, “eliminate redundancy and bureaucracy” and ultimately “bring more bucks to buildings.”

If it were a movie, it might be called “Revenge of the JEDI: the Redevelopment Empire Strikes Back.” It’s the California Jobs and Education Development Initiative (JEDI), which would enable the revival of the 425 redevelopment agencies eliminated in 2011 by Gov. Jerry Brown and the California Legislature.

The initiative liberalizes the definition of “blight” to include areas where the unemployment rate exceeds the national or statewide rate. That could result in 85 percent of California’s counties being declared blighted and eligible for redevelopment.

The initiative is spearheaded by Californians for Jobs and Economic Development. The group incorporated a year ago, according to corporationwiki, but it does not have a website.

Its president is Santa Ana’s mayor for the past 20 years, Miguel Pulido. He also happens to be under investigation by the state Fair Political Practices Commission for allegedly profiting $197,000 from a real estate transaction in exchange for giving an auto parts store an exclusive city contract, according to the Los Angeles Times.

Cities donate $110,000

Several California cities donated a combined $110,000 to research the initiative. They include Ontario ($50,000), San Jose ($25,000), Anaheim ($25,000) and Pittsburg ($10,000), according to public records compiled by The California Alliance to Protect Private Property Rights, which is opposed to the initiative.

Some of the contributions never appeared on a city council or redevelopment successor agency agenda, said Nick Mirman, CAPPPR grassroots coordinator.

“Californians will be shocked to learn that taxpayer dollars that would otherwise go to public safety, parks and roads are being used to qualify a statewide initiative,” he said. “What’s more, the initiative is designed to make it easier for government to seize homes and small businesses by eminent domain so that it can be given to politically connected developers on the cheap … to build luxury hotels, golf courses and strip malls.”

Pittsburg Assistant City Manager Garrett Evans said that the city’s donation was not agendized because the city manager has the discretion to spend more than that amount, and that a council subcommittee had approved it.

Redevelopment ‘an incredible tool’

“Redevelopment was an incredible tool for Pittsburg,” said Evans. “Our community used redevelopment to build school facilities, fire stations, library improvements, parks, renovate historic structures, rebuild roads and infrastructure, and build affordable housing. Pittsburg’s crime rate is at its lowest point in 50 years because redevelopment was used to eliminate blight and unsafe buildings.

“Through redevelopment, the City worked with industrial corporations to locate and expand in our community, meaning our job base and wages increased. Our downtown was vacant and empty when I began working here 17 years ago. Now it is vibrant and full with pedestrians and restaurants. Redevelopment is a local, community-based program. Local residents decide what they want to accomplish in their neighborhood through a public process and a redevelopment plan.”

Cash cows

Redevelopment agencies had been cash cows for cities, giving them an extra $5 billion from the $50 billion that Californians pay in property taxes annually, according to an LAO analysis of the initiative. Much of the $5 billion would have gone to other governmental agencies, including fire departments, libraries and schools.

Passage of the redevelopment initiative would result in “increased resources for local redevelopment activities, growing to several billion dollars more per year, resulting in decreased resources for state and other local government activities of the same amount,” the LAO study concludes.

California’s unemployment rate has dropped to 8.5 percent from the 11.3 percent it was at when redevelopment agencies began to be dissolved in February 2012. Despite that, the initiative touts job creation as one of redevelopment’s main benefits.

Initiative findings

The initiative makes the following assumptions:

• “California has one of the highest unemployment rates in the nation and is struggling to recover from the Great Recession.
• “High unemployment is the new blight, which quickly becomes the old blight – poverty, neighborhood deterioration and crime.
• “High unemployment reduces tax revenue to state and local governments and negatively impacts funding for our cash-strapped schools.
• “Tax-increment financing [provided through redevelopment agencies] allows local governments to use locally generated property tax revenues to create jobs, build affordable housing and rebuild neighborhoods.
• “Tax-increment financing originated in California more than 50 years ago, and most other states have since adopted this powerful tool for creating jobs and rebuilding neighborhoods.
• “In 2012, California eliminated tax-increment financing for local housing and development projects, resulting in the considerable loss of 300,000 jobs, including 170,000 construction jobs, and more than $41 billion in economic activity.
• “JEDI will allow cities throughout California to use locally generated property tax revenues to create jobs, building affordable housing, rebuild neighborhoods and fund public schools.
• “JEDI will put thousands of Californians back to work and generate billions of dollars in new tax revenue for public schools without raising taxes or increasing state debt.”

Jobs claim in dispute

A study commissioned by the California Redevelopment Association concluded that redevelopment was responsible for the creation of about 304,000 jobs in 2006-07.

The LAO disputed that claim in a 2011 study titled, “Should California End Redevelopment Agencies?” (The LAO’s answer was “yes.”)

“While redevelopment leads to economic development within project areas, there is no reliable evidence that it attracts businesses to the state or increases overall regional economic development,” the study found. “[R]edevelopment may cause some geographic shifts in economic development, but does not increase the overall amount of economic activity in a region.

“The independent research we reviewed found little evidence that redevelopment increases jobs. Studies in Illinois and Texas, for example, found that their redevelopment programs did little more than displace commercial activity that would have occurred elsewhere in the region.”

The LAO said that the CRA study “vastly overstates the employment effects of redevelopment areas” due to three flaws:

• “It assumes that redevelopment agencies participate in all project area construction – even if the redevelopment agency was not a participant. “We find implausible the report’s implicit assumption that no construction with solely private financing would have occurred within a redevelopment area in the absence of the redevelopment agency.”
• “It assumes that private and public entities participating in redevelopment agency projects would not invest in other projects. Most redevelopment agency projects include significant financing from private investors or other public agencies. The CRA implicitly assumes that these private and public partners would not invest in other economic activities in the state.
• “It assumes other local agencies’ use of property tax revenues would not yield economic benefits. The property tax revenues that currently support redevelopment would flow over time to schools and other local agencies in the county. The CRA implicitly assumes that these other local agencies’ use of property tax revenues would not result in any economic activity.”

Time Structures, the research firm that performed the CRA study, wrote a point-by-point rebuttal to the LAO’s contentions:

• “The construction expenditures included in the impact analysis were limited to those that involved agency participation. The study actually includes 32 percent of the total construction activity that occurred within the project areas during the 2006-07 fiscal year. Had the LAO exercised due diligence prior to offering their conclusion on this point, they would have been obligated to take a very different position.
• “Redevelopment projects do leverage a significant amount of private capital – in our study we found that for each public dollar invested in a project, six private dollars are invested. The LAO seems to imply that this private capital is just sitting there awaiting a project; however, construction involves a good deal of borrowed capital. Construction loans are difficult to get for what are perceived as risky projects in blighted areas.
• “The economic benefits estimated in the study were limited to those arising from the redevelopment-assisted construction activity only. No benefits were calculated for the direct employment and income of agency employees or the multiplier effect arising from that income. We make no assumptions about any economic activity of other local agencies since we didn’t study such a transfer.”

Effect on education

There is also a debate on whether the Jobs and Education Development Initiative would help education.

The LAO analysis of the initiative states that there would be no effect on schools in the short term because the schools’ funding deficit due to shifting fund back to redevelopment would be made up from the state general fund. “Therefore, the measure likely would increase state education costs by around $1 billion per year, but would have little or no net effect on nonbasic aid districts,” according to the LAO.

Over the long term, funding for some school and community college districts “could be reduced potentially by a few hundred million dollars to a few billion dollars per year,” the LAO states.

Responded the initiative’s campaign spokesman, Stu Mollrich, “We believe that the initiative will increase funding for education by stimulating job creation, which increases revenues for the state’s general fund.”

The League of California Cities has not taken a position on the initiative, according to Executive Director Chris McKenzie. But if it passed, few organizations would be happier.

“We were big supporters of the former redevelopment program, which studies showed provided 300,000 private sector jobs and $2 billion in state and local tax revenue each year,” McKenzie said. “But it no longer exists, and most cities have had to devote countless hours and resources to the unfortunate dissolution process.”

‘Significant expansion of government power’

The Institute for Justice, a pro-property rights law firm, released an analysis that called the redevelopment initiative “one of the most significant expansions of government power in decades.”

“Redevelopment in California had nothing to do with creating jobs or improving education,” said IJ attorney Bill Maurer in a statement. “Resurrecting it would endanger private property and undermine the state’s fiscal stability. … It would divert money from schools and community colleges and give it to unelected governmental agencies and their politically connected business allies. The governor and the state legislature were right to end this system in 2011.”

State Sen. Jim Nielsen, R-Gerber, agreed. “California property owners were finally able to rest easy once the governor did away with redevelopment agencies in 2011,” he said. “Reviving this system again exposes homes, small businesses and places of worship to eminent domain abuse.”

“Prior to being dissolved in 2011, redevelopment agencies turned California into one of the worst states in the nation for eminent domain abuse,” according to the IJ. “Tens of thousands of acres of property were declared blighted and subject to condemnation. Those displaced were often poor minorities and the elderly.”

The initiative needs 504,760 valid signatures to qualify for the ballot. Supporters have until July 21, 2014 to collect the signatures.

Gov. Jerry Brown’s plan to spend the lion’s share of cap-and-trade auction revenue on the high-speed rail project won’t help the state meet its goal of reducing greenhouse-gas emissions by 2020, according to a recent Legislative Analyst’s Office report. It could actually make things worse during construction.

Brown wants to spend $250 million of the $850 million cap-and-trade revenue expected in the 2014-15 fiscal year on high-speed rail construction. After that he wants one-third of all cap-and-trade revenue to be spent on high-speed rail.

The revenue could total around $15 billion by 2020, according to the LAO, citing economists’ estimates. That would provide about $5 billion for high-speed rail by 2020 with funding continuing until the project is done.

Construction creates at least 30,000 metric tons of GHG

AB32, the California Global Warming Solutions Act of 2006, requires California to reduce its greenhouse-gas emissions to 1990 levels by 2020.

But spending $5 billion of cap-and-trade money on the bullet train won’t do anything to meet that target, because the train won’t be operational until 2022. In the meantime, its construction is expected to produce 30,000 metric tons of greenhouse-gas emissions, according to the LAO.

Thousands of trees will be planted in the Central Valley to offset those emissions. But that might not be enough, according to the LAO.

The official estimate of high-speed rail construction emissions does “not include emissions associated with the production of construction materials, which suggests that the amount of emissions requiring mitigation could be much higher than currently planned,” the report states.

“Therefore, it is possible that the construction of the IOS [initial operating segment] may result in a net increase in greenhouse-gas emissions, even when accounting for proposed offsets.”

Legislators concerned

State legislators, including some Democrats, are concerned that Brown’s cap-and-trade spending plan shortchanges other programs that could actually help the state meet its 2020 greenhouse-gas target. Many are concerned that the cap-and-trade revenue will not be spent cost-effectively.

And some are concerned that California’s struggling residents and businesses will be hit hard as cap-and-trade ratchets up the cost of energy in coming years.

“I’m from the Inland Empire. Many businesses are having a tough time getting permits to expand and grow their business,” said Sen. Norma Torres, D-Pomona, at the Feb. 13 Senate Budget and Fiscal Review Committee hearing. “We have double-digit unemployment. So I know that my community is paying into this program to fund all of these feel-good, look-good, long-term issues.”

Administration defends bullet train spending

California Transportation Agency Secretary Brian Kelly defended the prioritization of high-speed rail in Brown’s spending plan, saying it will pay off in the long run. He cited a high-speed rail line from Madrid to Seville in Spain that accounts for 90 percent of the trips in that route.

“The investment of cap-and-trade funds in the development of high-speed rail in California is, in our view, an appropriate use of these funds due to the transformative nature of the project and the corresponding reduction in greenhouse-gas emissions from operating a high-speed rail system,” Kelly said.

“Greenhouse-gas benefits of this mode shift are dramatic. On a per-passenger, per-mile basis, high-speed rail emits a fraction of the greenhouse gas compared to more carbon-intensive bus, automobile and air travel.”

Spending cap-and-trade revenue on high-speed rail does present a risk of a legal challenge, said Cara Horowitz, executive director of the Emmett Center on Climate Change and the Environment at UCLA Law School. But she doesn’t consider it a significant risk.

“The touchstone legal question is: Do the funds facilitate the reduction in greenhouse-gas emissions?” Horowitz said. “And projects are generally riskier if it’s harder to show that they will in fact result in greenhouse-gas emission reductions. So [for example] if there’s a project that only has marginal greenhouse-gas reductions benefit or they occur far, far out in the future.

“In the budget today, the risk is probably greatest for high-speed rail. But the risk is not so great. I think high-speed rail is not a risky project to spend funds on legally speaking. It will reduce greenhouse-gas emissions in the medium term if not the short term, and those reductions will be significant.”

Horowitz added that the state isn’t obligated to spend AB32 revenue cost-effectively or in ways that it would maximize greenhouse-gas reductions.

“The state has a significant amount of legal flexibility in choosing how to spend the funds,” she said.

An ‘art’ to the spending

State officials have apparently taken advantage of that flexibility in carving up how the money would be spent.

“Admittedly there was a little bit of an art to it,” said Department of Finance Assistant Program Budget Manager Matt Almy. “There were a lot of different factors and lenses and considerations. This art was informed by science.”

But the scientific method might not have been rigorously adhered to. There is little information on how much each cap-and-trade-funded program is expected to reduce greenhouse-gas emissions.

There was a desire “to get funding out the door for projects on the ground quickly,” said Almy. “One of the reasons we are funding a lot of existing programs was for that reason. Some programs have methodologies in place. The budget includes positions for ARB [Air Resources Board] to develop and refine those. And then there’s a reporting mechanism.”

But waiting a year to report the results of the cost-effectiveness of the programs concerns both the LAO and nearly every member on the Senate budget committee, including Chairman Mark Leno, D-San Francisco.

“It might make sense to have metrics developed before funds are actually distributed,” Leno said. “It’s important to maximize the greenhouse-gas emission reductions. It would seem logical to make sure that those metrics are in place before we even determine how they should be spent. And then use metrics to measure the success of those programs.”

Any GHG benefit for $250M?

Sen. Tom Berryhill, R-Modesto, sought to pin down Kelly on the benefit of spending $250 million in the next year on high-speed rail construction.

“It is my concern, and the concern of our [Republican] caucus, that the cap-and-trade program is going to be extracting billions of dollars out of our economy,” Berryhill said. “It’s an economy that is still struggling to recover, certainly in the Central Valley for sure. All of this in order to implement a plan that contains actually very little information on actual greenhouse-gas emission reductions that will be achieved.

“So my question is: Is the $250 million for high-speed rail, for environmental planning, right-of-way acquisition and construction, are the benefits of this $250 million as they relate to reducing greenhouse-gas emissions, are they actually quantified anywhere in this program? Have you got a best guess as to exactly what those emission reductions are going to be?”

Kelly responded, “On a dollar-per-dollar basis with the first $250 million, I do not.”

There is a similar lack of cost-benefit information for much of the rest of the $600 billion in cap-and-trade revenue that Brown plans to spend in the next year. It divides into three areas:

• Transportation and sustainable communities – $600 million, including: $250 million — high-speed rail; $200 million — low-emission vehicle rebates; $100 million — transit oriented development; $50 million — intercity rail.
• Clean energy and energy efficiency – $140 million, including: $80 million — weatherization in low-income communities; $20 million — energy efficiency upgrades in state buildings; $20 million — reducing agricultural waste; $20 million — water efficiency.
• Natural resources and waste diversion – $110 million, including: $50 million — fire prevention and urban forestry; $30 million — wetlands restoration; $30 million — waste diversion.

Who gets the bill?

While state officials are anticipating the cash infusion coming their way, Berryhill is worried about the forgotten man who gets stuck with the tab. He asked analyst Tiffany Roberts, “Do you have any concerns for the impacts on small businesses what this AB 32 is going to have with the fees and fines and revenue loss?”

Roberts responded that the LAO has not analyzed the impact on small businesses, but she guaranteed that there will be an impact.

“We would just say that as you move forward, you would want to think about the impact of the program as a whole in terms of economy wide impact,” Roberts said. “To the extent that you put a price on carbon, you are by design increasing the cost of energy.

“So the intent of the program is to send a price signal. So to the extent that you are doing that, entities will feel that, whether they are consumers, ratepayers, businesses or the economy as a whole.”

Berryhill said, “Oh, they are definitely going to feel it. I mean, there’s many different small businesses that are going to get hurt by this thing, if not ruined. But one in specific, the trucking industry, what this AB32 is basically doing to our trucking industry – there will be no small truckers. Because no one can afford the retrofits and everything else that’s going on.

“So I think you’re going to see, instead of us trying to help the small business sectors, we are killing the small business sectors. And it’s going to make everything big, corporate America before this thing is said and done.”

The best use of cap-and-trade funds would be to return them to the state’s largest greenhouse-gas producing companies and agencies that are paying into it, said Dorothy Rothrock representing the California Manufacturers and Technology Association.

“The monies are coming to you from manufacturers who are already struggling in this state to maintain very competitive operations,” she said. “It’s not clear that they can pass those costs onto customers. So they are often having to absorb those costs in their operations.

“We don’t believe that AB32 grants authority to auction allowances to ARB. If it is allowed, there may be constraints on the use of those funds to get the benefit back to the source of those monies. We think that sending those monies back to manufacturers to use to reduce their emissions to meet the AB32 goals would be the tightest nexus between the source of the money and a good use in AB32. It will minimize your litigation risk.”

Senate Budget Subcommittee No. 2 has scheduled a hearing for April 3 to consider Brown’s cap-and-trade spending plan in more detail.

By Wayne Lusvardi

A little known new accounting rule buried in the fiscal 2012-13 California state budget now will make it virtually impossible for the public to track where and when the tax revenues from Propositions 30 and 39 will be spent. Prop. 30 is Gov. Jerry Brown’s $6 billion tax increase. And Prop. 39 is hedge fund manager Thomas Steyer’s $1 billion tax increase. Both propositions were passed by voters on Nov. 6.

The new budget rule is Section 35.50 of the Budget Act of 2011-12, also known as Assembly Bill 1495.  The new rule authorizes a shift from cash (actual) accounting to an accrual (projected) accounting method. What this murky rule means is that budget revenues from two years can be applied to one year’s worth of expenses.  The result will be an inflated and non-transparent budget.

The key part of the new rule vaguely says: “The net final payment accrual methodology shall be implemented with regard to any change in state law which is enacted during 2012.”  The changes to state tax law in 2012 are Props. 30 and 39.

LAO Says Budget Forecasts Will Now Be Error Prone

The newly-released report prepared by the state Legislative Analyst’s Office, “The 2013-14 Budget: California’s Fiscal Outlook,” contains the following description of the new rule:

“Section 35.50 of the 2012–13 Budget Act institutes a new accrual method for the tax revenues generated by Propositions 30 and 39. A portion of final income tax payments paid in, say, April of one year will be accrued all the way back to the prior fiscal year (which ended ten months in the past). One effect of the change is that we will no longer have a good idea of a fiscal year’s revenues until one or two years after that fiscal year’s conclusion. Because the volatile capital gains-related revenues from Proposition 30 are the subject of the accrual changes, the late adjustments to revenues could total billions of dollars—much more than in the past. As a result, the chances of large forecast errors by us and the administration will increase.”

The Legislative Analyst’s Office also elaborated on the problems involved with this new rule:

“We are now convinced that the problems that this new accrual method will introduce to the budgetary process outweigh its benefits. We recommend that the Legislature direct the administration to develop a simpler, logical budgetary revenue accrual system by 2015. Alternatively, to help ensure the accuracy of our forecasts and improve transparency, we recommend that the Legislature require the administration to document accruals regularly online.”

In other words, the LAO is saying that even its impartial budget numbers will be unreliable because it will be impossible to track budget accruals and compare them with the actual cash status of the budget.

Cash Versus Accrual Accounting

The new rule involves what is called the accrual basis of accounting. According to the glossary contained in the 2012-13 State Budget, the accrual basis of accounting is defined:

“The basis of accounting in which revenue is recorded when earned and expenditures are recorded when obligated, regardless of when the cash is received or paid.” 

In cash-based accounting, the record of expenses is recorded when the cash is actually laid out.  In contrast, under accrual based accounting, revenue or expenses are recorded when the transaction is completed, not when it receives the cash or when it pays for supplies.

For example, even though the customer may not have paid the final bill yet, a carpenter records receiving payment when the job is completed. Or a carpenter buys materials on his account at Home Depot, not when he actually pays cash for the lumber maybe a month afterward.

“Trust Us” Budget Accounting

In other words, from now until 2019, when Prop. 30 expires, it will be impossible to know whether the budget figures released by the state are the actual numbers.  California’s budget accountability to the public will turn into a secretive game of “trust us.”

This new budget rule signals that it is unlikely the taxes generated from Prop. 30 will be spent on public schools, as advertised by Brown. And the revenues from Prop. 39 likely will be siphoned into CalPERS’s pension fund.

How do we know this?  We don’t know for sure because where the funds are eventually to be spent is intentionally left open-ended and vague.  But it can now be surmised that Brown will use Prop. 30’s tax revenues to patch shortfalls in other items in the general fund budget, such as Medi-Cal.  And an educated guess is that the tax revenues from Prop. 39 will go to CalPERS’ pension fund.

The effect of the new budget accounting method will be to count two years’ worth of revenue and only one year’s worth of expenses to create an appearance of a balanced budget and rising revenues.  Based on an inflated assumption of rising revenues, it follows that legislators can then plan on higher spending as well.

Surplus Forecast Counts Two Birds in a Bush

The Legislative Analyst’s new budget outlook for 2013-2018 forecasts budget surpluses of $1 billion or more starting in 2014, up to nearly $10 billion in 2018. Some newspapers are already reporting these surpluses without disclosing the risky and rigged assumptions on which they are based.

But Californians need to understand that budget estimates are no more reliable than their assumptions. And a key assumption the Legislative Analyst is forced to use is presuming the availability of two years’ worth revenues to apply to one year’s worth of expenses.

In other words the budget is based on counting the proverbial two birds in the bush rather than the one bird in hand. This results in an inflated forecast of budget surpluses.

This new budget rule is the result of one-party rule in California. Redistricting and supermajority rule by Democrats in the Legislature may result in more moderate candidates who are more favorable to increasing taxes.  But an unintended consequence of one party rule is that the status of the state general fund budget is more likely to be inflated and partly hidden.

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.

By Steven Greenhut

SACRAMENTO — California’s public schools continue to lay off teachers, in a process that is as convoluted and illogical as one would expect in a bureaucratic system in which the needs of the students falls fairly low on the list of priorities. That’s my takeaway from a new report by the state’s Legislative Analyst’s Office detailing the teacher layoff process as districts struggle with declining revenue in the face of shrinking budgets.

The big issue, however, isn’t the arcane process for shedding teachers, but what the process says about the inefficient way that most Americans have decided to educate their kids. As the LAO reports, decisions about who stays and who goes are based on which teachers have showed up to work for the most years — i.e., seniority — rather than which ones are most effective and energetic. The hearing and appeals process, by which every laid-off teacher gets an automatic hearing, adds enormous costs to a system that always claims to lack enough resources.

The LAO report only looked at one small, technical aspect of the public-school behemoth, and it was meant to offer a little advice for tweaking the layoff process. It wasn’t meant to provide a thorough analysis of school systems. But in some ways, that’s what is so frightening about the report. Americans don’t think twice about the way schools are designed. Few things are more important than educating children, yet we accept this current system the way Soviet citizens accepted long bread lines. No doubt, auditors in that system issued reports discussing ways to shorten the lines.

‘Underfunded’?

Don’t include me in the chorus of those who claim that the schools are somehow “underfunded,” even as K-14 education consumes more than 40 percent of California’s general-fund budget — not to mention all the local bond measures and federal funding. School-district budget “cuts” usually refer to a reduced rate of spending growth, not actual cuts.

One of the nation’s worst-performing systems, Los Angeles Unified School District, yearly spends more than $29,000 per student, when all funding sources are included, according to a Cato Institute report. Its graduation rate of 40 percent is appalling.

LAUSD is particularly bad, but it isn’t run that differently than your average suburban district.

Consider the LAO’s chart of a declining teacher workforce over the past few years against this report in the Los Angeles Daily News from 2008: “[A] Daily News review of salaries and staffing shows LAUSD’s bureaucracy ballooned by nearly 20 percent from 2001 to 2007. Over the same period, 500 teaching positions were cut and enrollment dropped by 6 percent. The district has approximately 4,000 administrators, managers and other nonschool-based employees — not including clerks and office workers — whose average annual salary is about $95,000.”

Now consider this tidbit in June 2011 from the Sacramento Bee: “The number of educators receiving $100,000-plus annual pensions jumped 650 percent from 2005-11, going from 700 to 5,400, according to a Bee review of data from the California State Teachers’ Retirement System.”

Here’s a Los Angeles Times headline from October: “California teachers lack the resources and time to teach science.”

Is this an issue of money or spending priorities?

Instead of focusing on the little things, Californians ought to be thinking big thoughts about education. We can start by asking: Is the public education system one that best serves the students? The answer, even for people whose kids attend decent schools is, “Obviously not.”

There’s an endless call for reform. Some ideas are useful. For instance, tuition vouchers, which let people take a portion of their school tax dollars and spend them at the school of their choice, or charter schools, which are government-controlled schools freed from some of the government-imposed red tape, offer some hope because they provide some level of competition.

Thought Experiment

I’m not calling for specific reforms here but arguing, instead, for readers to conduct a thought experiment.

If we were tasked with providing an important service, how would we provide it? If, say, we were asked to create the best possible chain of restaurants to serve hungry customers, would we buy a huge building, hire scores of extremely well-paid administrators and then impose a tax on local residents to fund the chain? Would we let a board of directors, elected from the community, choose the décor, the menu and the locations?

Would we empower a union to make hiring decisions and allow it to grant tenure to waiters and kitchen help, so that we could not fire them even if they were lazy and incompetent? Would we pay the most money to people who worked there the longest rather than to those who were the best workers?

When customers complained that we served too much meat and not enough pizza, would we shrug and ask them to elect board members who preferred pepperoni to cheeseburgers?

Would we pass laws mandating that people who live in neighborhoods near our restaurants eat only there — allowing them to eat elsewhere only if they spend additional money or move to the neighborhood where the restaurant more closely meets their taste? Would we ignore the pleas of people who live near filthy restaurants that serve lousy food just because we live near one that at least keeps a clean kitchen and offers adequate meal choices?

Other observers have made similar analogies, and school officials always claim that schooling somehow is different. But it isn’t.

Instead of tinkering around the edges and endlessly fighting for reforms that offer little hope of transforming the system, we need to redesign it from the ground up. Perhaps we should, in the words of the lateschool  reformer Marshall Fritz, “separate school and state” and allow the market to provide schools just as we allow it to provide food and other vital services.

By CHRISS STREET

The California state government’s general fund is running a staggering cash deficit of $21 billion on an $88.5 billion budget. The number comes from Controller John Chaing just-released financial statement for December 2011. The bad news came in the face of strong national consumer spending and private-sector employment gains

This imploding financial condition is a reflection of how California’s high business taxes and excessive regulations are accelerating the trend of businesses abandoning the state.  According to Chaing, “While we saw positive numbers in November, December’s totals failed to meet even the latest revenue projections.  Coupled with higher spending tied to unrealized cost savings, these latest revenue figures create growing concern that legislative action may be needed in the near future to ensure that the State can meet its payment obligations.”

The above are “code words” that the state is in financially dysfunctional and it’s getting worse.  Compared to the previous year, California revenue of $39.4 billion for is down by 11.2 percent for the fiscal year to date (July – Dec. 2011). That’s due mostly to a 26.4 percent nose dive in sales tax collection. And state spending of $52.3 billion is currently running 33 percent higher than the state’s revenue.

Tax Increases

The controller does not seem impressed that Gov. Jerry Brown and the Legislature’s only solution to fix this budget mess is to relying on voter willingness to approve an initiative to raise the already hefty sales tax they pay by 13 percent and add another surtax on the wealthy to generate $6.9 billion in revenue.

Even if the public shocks pollsters and actually passes the tax increase, the non-partisan Legislative Analyst’s Office calculated the initiative would only generate $4.8 billion per year.  Prior to the Controller’s grim report of a $5.2 billion budget miss, the LAO had already estimated that state’s revenue would be $3.7 billion below forecast and “trigger” $2 billion of automatic budget cuts to K-14 education.  The LAO’s estimate of a $13 billion deficit next year, due mostly to constitutionally required “settle up” payments for short-checking public schools in prior years, now looks like a $20 billion deficit.

California’s budget projections are so consistently whacky that the Governor closed the California Recovery website this summer to avoid ridicule regarding its ludicrously optimistic recovery projections.  Despite creating one of the most unfriendly business climates in the nation, for 20 years California’s socialist politicians were able to do the “la vida loca” spending on the back of an epic real estate boom.  With the real estate bust now in its fourth year, California ranks third in the nation in foreclosures. And according to the Foreclosure Radar Report, it is one of only two states in the nation where foreclosures increased in December.

Credit Ratings

The credit rating agencies will undoubtedly take a very hard look at downgrading California’s municipal bond debt, which is already the worst rated in the nation at only two notches above junk.  But the budget disaster also spells bad news for the credit ratings of California local governments.  Last year the Legislature passed a law striping $1.7 billion per year from state’s 400 redevelopment agencies to augment its own budget shortfall.  Moody’s Investor Services immediately put $11.6 billion of California tax allocation bonds on review for a possible downgrade.  Moody’s stated, “If left unchanged, this law would be significantly negative for bondholder credit.  This legislation could result in multi-notch downgrades on bonds of the dissolved redevelopment agencies.”

Perhaps California’s budget problems can be best understood from a Fox Television interview of Joseph Vranich, president of the Business Relocation Coach. He makes his living moving companies out of California. (See video below.) He said businesses leave to avoid “high businesses taxes and excessive regulations imposed on commercial enterprises of all types.  Costs are illustrated by the fact that a business leaving the city of Los Angeles for a nearby county can save up to 20 percent in costs while moving to another state can save up to 40 percent in costs.”

Vranich pointed out that, in the first half of 2011, there were 129 companies with 100 or more employees that moved out of the state.  This averages 5.4 larger companies leaving for “greener pastures” per week, versus 3.9 per week in 2010 and only 1 per week in 2009.  The top relocation destination is not China, but  the neighboring business-friendly states of Texas, Arizona, Colorado, Nevada and Utah.

Other People’s Money

British Prime Minister Margaret Thatcher, in a TV interview in 1976, famously said, “Socialist governments traditionally do make a financial mess.  They always run out of other people’s money.  It’s quite a characteristic of them.”  If she were to move to California 35 years later, she would add, “Or else the other people will take their money and just leave!”

Feel free to forward this Op Ed and or follow our Blog at www.ecoservativenews.com or www.chrissstreetandcompany.com  Thank you also for the success of Chriss Street’s latest book, The Third Way, available in hard copy or for Kindle at: www.amazon.com

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Joseph Vranich video:

Why Businesses Move Out of California: MyFoxLA.com