The project is being backed by Silicon Valley titan Chris Hughes, whose Economic Security Project gave $1 million toward the effort.

The goal, supporters say, is to ensure that the embattled city’s residents can stay out of poverty and the experiment is designed to assess whether or not the program could be rolled out on a wider scale.

“We’ve overspent on things like arenas and marinas and things of that sort to try to lure in tourism and dollars that way,” Stockton Mayor Michael Tubbs explained, according to Fox News, believing that the model can be used to bolster quality of life in the struggling city – and others like it.

Stockton in recent years has been known as the “foreclosure capital” of the country and drew headlines in 2012 when it declared bankruptcy, becoming a flashpoint for Americans suffering during the Great Recession.

The concept of a universal basic income has gained traction in the Bay Area amid concerns that automation will increasingly displace workers. It’s been propelled by major CEOs like Mark Zuckerberg and Elon Musk, who argue that so-called “free money” may be a necessity as technological advances alter the labor landscape.

“We should explore ideas like universal basic income to make sure that everyone has a cushion to try new ideas,” Zuckerberg said in his Harvard commencement address in May 2017.

Other similar efforts have been rolled out in places like Finland, which announced in April that it was ending its trial run to explore alternative welfare programs instead. The full results will be disclosed next year.

While some experts argue that universal basic income can be a way to lessen poverty by creating a guaranteed income floor, others explain that such a framework is impractical given the current entitlement and welfare state.

“I would be in favor of this if it meant eliminating all other welfare programs and requiring work,” economist and Heritage Foundation fellow Steve Moore told CalWatchdog via email. “The only way out of poverty is a job not a government handout.”

Overall, the experiment will look at how the residents spend the money and the potential economic impact it could have on the city, something that the young 27-year-old mayor is optimistic about.

“We trust that people are smart and resilient to make the best decision for them and their families with the money,” Tubbs said in a CBS News interview back in February. 

Stockton’s effort is expected to begin in early 2019.

Assembly challenger tries to make campaign issue of unreleased tax returns

Good morning and TGIF.

The Democratic challenger in an Orange County Assembly race is going after the incumbent, Republican Young Kim, for not releasing her tax returns — just like Hillary Clinton, the Democratic presidential nominee, is doing to Donald Trump, the billionaire Republican presidential nominee.

But there’s two differences: While releasing tax returns is a time-honored tradition in presidential elections (as is fighting over them), it’s not common for legislative candidates. And unlike Trump, both candidates’ salary information is mostly available online.

The campaign of Sharon Quirk-Silva — the Democrat who Kim knocked out of office in 2014 — said Kim’s refusal to release her tax returns raises questions about her commitment to transparency: What is she hiding?

Of course, the campaign also concedes it doesn’t necessarily believe Kim’s hiding anything. Matthew Reilly, a Quirk-Silva spokesman, told CalWatchdog that “our politics are being dragged down by people who aren’t on the up and up,” but said he didn’t have much reason to believe Kim isn’t on the “up and up.”

“I don’t know,” Reilly said. “I assume that she is, but I don’t know.”

CalWatchdog has more. 

In other news:

• The headline says it all: “Mayor of Stockton arrested for playing strip poker with teens and secretly recording it.” The Washington Post has more.
• Legislators and law enforcement have reached a deal on a bill that would curb abuses of civil asset forfeiture — a practice where law enforcement can take citizens’ possessions without a conviction or even an arrest. The Los Angeles Times has more. 
• With efforts to extend climate change policies stalling in the Legislature, Gov. Jerry Brown is considering moving the fight to the 2018 ballot, according to the Los Angeles Times.
• “Assemblyman Roger Hernández, who was booted from his committee posts this summer after a judge issued a domestic violence restraining order against him, continues to draw per diem payments for travel-related expenses to Sacramento despite being absent from work and on medical leave,” reports the Los Angeles Times. 

Assembly:

• Gone ’til Monday. 

Senate:

• Gone ’til Monday. 

Gov. Brown: 

• In El Cajon at 11 a.m. attending the memorial service of SDPD officer Jonathan de Guzman. 

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New followers: @BIG_ASS_FANS

Reported the Detroit News:

Detroit Public Schools is $53 million behind in pension payments, costing the cash-strapped district $7,600 a day in interest penalties — or the equivalent of one child’s annual state funding grant.

Based on its minimal payments, the Detroit school district would be $81 million behind in mandatory pension contributions by July 1, state records show. The cost is exacerbated by $78,000 in fees for each month DPS remains delinquent — depriving the city schools of the equivalent of one teacher’s annual salary and benefits.

The sporadic pension payments, which date to October 2010, are the latest sign of worsening finances for Michigan’s largest school system as it continues to rack up debts and hemorrhage students and cash. Forgoing required contributions for pension payments mirrors a cash-hoarding tactic the city of Detroit pursued in November 2012 — nine months before declaring bankruptcy.

Detroit itself used to be the “Paris of the West.” Its booming auto industry was like Silicon Valley today — highly prosperous, lifting the tide of the state and country. Then general political mismanagement, including unbearable public pension costs, brought hard times, and eventually bankruptcy.

Detroit is less a pattern California will follow than a cautionary tale that public finances matter, and mismanagement can lead to federal bankruptcy court.

This week, Franklin Templeton filed vigorous objections to Stockton’s recovery plan, saying “no bondholder has ever received so little in the history of municipal bankruptcy.”

This is from Reuters:

The creditor, two funds managed by Franklin Templeton Investments, said Stockton’s plan to exit Chapter 9 bankruptcy was discriminatory and punitive.

Franklin said it would receive less than 1 percent of its $30.5 million unsecured claim in the case, now before the U.S. Bankruptcy Appellate Panel of the Ninth Circuit.

The brief claimed that by confirming a plan providing such a small distribution, compared with recoveries of 52 percent to 100 percent for other unsecured claims, U.S. Bankruptcy Judge Christopher Klein erred in backing Stockton’s exit plan. …

The Franklin team argued that Stockton would leave its two funds with little while leaving the city’s pension fund, the California Public Employees’ Retirement System, untouched.

CalPERS also made whole in San Bernardino

San Bernardino’s bankruptcy saga has key similarities. More from Reuters:

The bankrupt California city of San Bernardino revealed on Thursday details of its deal with the state’s public pension system CalPERS, in which the retirement fund will be paid in full under the city’s bankruptcy exit plan.

San Bernardino announced last year it intended to pay the powerful California Public Employees’ Retirement System in full under its bankruptcy plan, while cutting its bondholder debt. …

The CalPERS deal has angered other creditors, including holders of $50 million in pension obligation bonds, who face cuts to their debt. They are suing the city over the CalPERS deal. …

Luxembourg-based EEPK, holders of the pension bonds, and Ambac Assurance Corp, which insures a portion of them, sued San Bernardino in January, claiming the bonds are part of a single pension obligation, so that any payment to CalPERS requires equivalent payment to the bondholders.

Initial arguments on that lawsuit will be heard on May 11.

Bond companies likely to be wary of struggling cities

Analysts said this disparate treatment was likely to make bond companies — and Wall Street in general — wary of dealing with financially stressed cities in California.

CalPERS appears to have something of a home-court advantage in dealing with bankrupt cities. As attorneys for Franklin Templeton have laid out, bankruptcy laws generally are structured to ensure “everyone takes a haircut” in recovery plans.

That’s not happening in Stockton and San Bernardino — so far, at least.

As attorney Mark Cabaniss wrote on this news site in Sept. 2012:

“Even if politicians’ pensions are contracts protected by the Constitution, they are still breakable.  In pretending otherwise, the politicians are lying.  In other words, merely noting that pensions are contracts protected by the Constitution is not the end of analysis, but only the beginning, for all contracts are breakable, and all constitutional rights are subject to limits.”

Now the Los Angeles Times reports:

As millions of private employees lost their pension benefits in recent years, government workers rested easy, believing that their promised retirements couldn’t be touched.

Now the safety of a government pension in California may be fading fast.

It cited Stockton’s bankruptcy:

In his written opinion, U.S. Bankruptcy Court Judge Christopher M. Klein blasted CalPERS as “a bully” for weighing in on the proceeding to insist — wrongly — that the city had no choice but to pay workers their promised pensions.

Karol Denniston, a public finance lawyer at Squire Patton Boggs, said Klein’s ruling was “critical for every municipality in California.”

“Next time we see a Chapter 9 bankruptcy filing,” she said, “pensions will be up for negotiation just like every other creditor.”

The skyrocketing bill for pensions is a problem for cities across the state. Californians now owe nearly $200 billion for pensions promised to state and local government workers, according to an analysis by Adam Tatum, research director at California Common Sense, a nonprofit think tank.

The key event will be the next recession, when more may go bankrupt and face: a) eliminating key services, such as police and fire, that are the reason governments exist in the first place; b) raising taxes to unsustainable levels that drive out business and personal taxpayers; c) cutting pensions, despite what the California Constitution supposedly says; or d) some combination of the above.

When there’s no money, there’s no money.

The New Year is going to bring increasing difficulties for some California cities because of the 2014 settlement of Stockton’s bankruptcy. The reason: because all cities are linked under California municipal laws, especially for pension costs, borrowing costs are going up across the state.

Involved are what’s called “certificates of participation,” which Investopedia defines as:

“A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur.”

COPs do this by creating a fiction that they are leasing a newly built administration facility, rather than having to borrow to build it.  Investors can participate by purchasing a share of the rental revenues, rather than buy bonds that pay interest.

Contrast these “COP’s” with a general obligation bond that has to be paid back by all taxpayers. A true revenue bond pays back debt by the fees, tolls or ticket prices of a municipal facility, such as a municipal golf course, tollway or stadium.

COPs are one of the ways cash-strapped cities got themselves into fiscal insolvency and sometimes bankruptcy, while also over-promising to pay lucrative pensions to public employees. COPs tap city General Fund expenditures to pay rent. The problem is the General Fund is the same pot of money that pays for pension obligations, retiree health care benefits and salaries of police and fire.

Bubble

As long as the Real Estate Mortgage Bubble of 2003 to 2008 was inflating, there were revenues in the city of Stockton operating budget to meet all its obligations.  Once the bubble popped, there weren’t enough revenues to meet all these obligations.

The only way to induce investors wary of getting repaid on future lease back deals is to offer higher interest rates.

One of the risks in COPs is that cities have the right to divert the rental revenue from investors to make payroll obligations in a cash crunch.

William Bonawitz of PNC Capital Advisors told Bloomberg, “It is not so much the probability of default is any different.  It’s really the severity of loss would differ greatly.” Recoveries to investors ranged from 100 cents on the dollar for lease-back financing of administrative buildings, to less than 15 cents on the dollar for municipal golf-course securities.

Vulnerable

While golf courses generate self-sufficient revenues, they nonetheless are vulnerable to having to pay premium borrowing rates to offset the losses on lease-back financing of city administrative facilities. Moreover, investors are going to want collateral to do any future lease-back deals and that collateral may be a golf course, airport, sewer plant, power plant or toll bridge.

In Stockton’s case, National Public Finance Guarantee Corporation and Assured Guaranty Corporation insured the Stockton debt and settled with creditors.  But that insurance premium is surely going to be much higher next time not only for Stockton, but for all cities in California.

Indeed, Franklin Templeton Fixed Income Group’s Municipal Department announced it no longer will be investing in COPs. Even worse, cities may be at risk of losing a revenue-producing facility in the event of insolvency of an administrative building built by lease-back financing.

Bottom line: Stockton’s bankruptcy may end up with cities not only going bankrupt, but losing their municipal infrastructure.

Also stiffed will be bondholders. That puts at risk other municipal bonds throughout California. And it will mean higher costs to service future bonds, such as the $7.5 billion in water bonds on the Nov. 4 ballot as Proposition 1. Investors understandably will demand higher interest rates for any bonds emanating from the Pyrite State.

Which means taxpayers again will pick up the tab.

The city sensibly argued that Klein’s action also puts it at risk for another bankruptcy. “But Klein said Thursday that Stockton’s plan for paying creditors over the years was adequate and passed all legal tests,” reported the Los Angeles Times.

But that’s just what has happened to Vallejo after its 2008 bankruptcy also left it forced to pay full pension benefits. As CNN reported in March:

“The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills. The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.”

Meanwhile, the California Public Employees Retirement System has been spiking pensions again.

Next up: San Bernardino’s bankruptcy. In September, Judge Meredith Jury ruled the city unilaterally could cut firefighter pensions. We’ll soon see if her ruling sticks.

Meanwhile, as James Poulos reported on our website, the state is spending so much on pensions its roads are crumbling to dust.

Well, I guess it’s ok to make sure state pensioners, more than 16,000 of whom now pull down $100,000 or more a year, can enjoy their retirements in Lucullan luxury on their Idaho ranches.

For years, the state has lavished money on other projects — especially public pensions. Despite a flurry of bad press surrounding the crushing burdens those pensions place on cities and municipalities, the trend is set to continue.

When voters go to the polls next week, they’ll face a dizzying array of proposed tax increases. All told, Californians must contend with 140 different ballot proposals, largely because of pension-imposed budgetary pressure.

Competing priorities

Pensions have climbed steadily upward while infrastructure has crumbled away, according to findings published in the Sacramento Bee. “Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions,” wrote Mark Blucher. In 1994, he noted, the figure reached just one in 16 tax dollars. “Tax increases now do not increase government services, but simply service government pensions.”

The Golden State’s infrastructure needs have become critical. To repair its local roads, California must make up a budgetary shortfall of $1 billion annually — amounting to $78.3 billion in total, according to the new California Statewide Local Streets and Roads Needs Assessment Report.

And although some 40 percent of state bridges need repair, as the American Society of Civil Engineers estimated, about one-fourth of California’s pensions are still unfunded, Blucher observed. To reverse the tide of funds ebbing away from infrastructure, he suggested, cities faced with bankruptcy and debt restructuring would need the authority to renegotiate contracts with public employee unions.

Setbacks in Stockton

The quest for that kind of authority, which reformers have urged for years, has been stopped short in the days before November’s election. Recently, creditors affected by the city of Stockton’s bankruptcy challenged the so-called “California rule” that has long protected public union contracts from renegotiation in times of fiscal trouble.

Franklin Resources refused to take a haircut that yielded pennies on the dollar while Stockton’s public pensions remained completely protected. Initially, the bankruptcy judge hearing the case, Christopher Klein, seemed to side in principle with Franklin. He ruled that the California Public Employees Retirement System was not constitutionally immune from the kind of cuts imposed by cities entering into bankruptcy.

But Klein reserved himself on the right to rule in favor of a deal in which CalPERS was spared anyway. In fact, that is precisely what Klein did in his final holding. Deciding that “workers would be the real victims” if CalPERS were not shielded from liability, yesterday Klein authorized Stockton to simply reduce public workers’ pay, affecting pensions only indirectly.

Although Franklin has vowed to consider its next steps, policymakers have already concluded that the lid has not been blown off of the legal prejudice in favor of public pensions.

No end in sight

With the Stockton case tipping in CalPERS’ direction, pension reform in California has been thrown into doubt.

New reports recently revealed that ever-increasing sums of money have flowed from Sacramento into the fund’s coffers. Last year alone, according to the Los Angeles Times, CalPERS received more than $8 billion in government cash, quadrupling its haul over the course of the past 10 years.

CalPERS, the Times reported, voted in August to adopt 99 new types of pension bonuses.  Meanwhile, its gap between current resources and pension promises has hit an estimated $100 million.

Gov. Jerry Brown, whose administration tried and failed this summer to prevent pension spiking by the fund, has ordered another round of investigations into whether the perks are “legal and appropriate,” according to the Times.

Meanwhile, as anyone who recently has driven on California’s once world-class roads has found out, the asphalt keeps crumbling.

Races have attracted attention for offices that exercise direct influence over the institutions that set pension policy. Cities and municipalities, meanwhile, have taken this election year as an opportunity to change laws placing restrictions on their ability to renegotiate certain pension contracts.

Rising GOP star Ashley Swearengin has wound up at the center of the statewide controversy over pension policy. As the mayor of Fresno, she shielded her city from bankruptcy — by braving the kinds of reductions in city staff and services that raise alarms among defenders of unchanged public pension plans. Instead of throwing Fresno into chaos, however, Swearengin’s moves traded short-term pain for longer-term stability, including a balanced budget for the current fiscal year.

The experience lent Swearengin credibility in her candidacy for the state controller’s office. She is running against Democrat Betty Yee, a member of the state Board of Equalization.

Hopes

That has buoyed Republican hopes for a high-profile win this election season. But a Swearengin win could have a substantial impact on policy, not just politics.

Although the controller typically has been seen as an official with oversight over California’s balance sheet, the position includes another responsibility with increased significance: a seat on “dozens of boards that oversee public pensions,” as the Bakersfield Californian recently stressed. “Swearengin says as controller, she would advocate for reducing the state’s long-term liabilities, roughly $300 billion by official estimates, and for improving the business climate with an annual ‘competitiveness audit.'”

The issue of pension oversight was sharpened recently when Gov. Jerry Brown ordered the incumbent controller, John Chiang, to launch an inquiry into how to prevent future instances of “pension spiking.” That’s a practice where union members game the benefits system in order to maximize eligible work hours that count when calculating pension sizes.

Chiang’s office had failed to detect pension spiking earlier in the year, leading the California Public Employees Retirement System to deny it had done anything wrong. Now running for state treasurer, Chiang’s campaign has touted his efforts to bring pensions to heel. His Republican opponent, Greg Conlon, also has outlined a pension-reform plan.

Showdown in San Jose

At the municipal level, voters themselves now have a chance to impact pension policy. On this front, San Jose has emerged as the ground zero of high-stakes initiatives.

Measure G has attracted attention as a model for what a California city can do to renegotiate pension contracts without running afoul of the state’s embattled but stubborn interpretive framework shielding those contracts by law. Supported by outgoing Democratic Mayor Chuck Reed, Measure G would reform San Jose’s two pension boards by enabling them to hire their own executives — presumably cutting down on patronage appointments and insider dealing.

Although Reed has developed a reputation among union supporters as a “nemesis,” the San Jose Mercury News explained Measure G also has the backing of the San Jose City Council.

Meanwhile, re-entering the debate is Measure B, a pension reform city voters passed in 2012. If Reed and his allies fail to ensure that pension-reform candidates secure office in November, Reed’s opponents, including labor-supported mayoral candidate Dave Cortese, likely would settle union suits against Measure B.

Unions alleged Measure B skirted California’s pension-shielding approach in a way that threatened the basic public safety of San Jose. In echoes of the debate that swirled around Ashley Swearengin’s efforts to evade Fresno bankruptcy, unions maintained pension cuts caused San Jose’s cash-strapped police force to plummet from 1,400 street-ready officers to 900.

With the election just three weeks away, pension reform is the issue that, even when not immediately noticed, is the part of the iceberg under the surface of state and municipal finance.

However, with Democrats in California, you see even worse canards. The worst is the idea that stricter regulations and government-imposed costs — AB 32, minimum-wage hikes and more — are somehow good for the economy.

Just as laughable is the claim that without good-to-great pay and ridiculously generous benefits, there will be an exodus of wonderful workers from government jobs. We’re hearing lots of this in the aftermath of the federal bankruptcy judge’s ruling that the city of Stockton can invalidate and renegotiate pensions for current and retired employees. Example:

Dave Low, the chairman of Californians for Retirement Security, a coalition of state public employees, said the decision could hurt not only workers but also residents of cities across the state.

“We are disappointed,” he said, “that the judge has sided with Wall Street in a decision that has the potential of devastating citizens, employees and making bad situations worse.”

If cities are forced to break promises made to employees, Low said, “it will result in a mass exodus of police, firefighters and other public employees who will have no incentive to rebuild bankrupt cities.”

That’s from the L.A. Times.

No market demand for public employees at all — except cops

What a load of hooey. As I wrote for City Journal a while ago ….

With the exception of law enforcement and some niche categories, no evidence exists of substantial market demand in any area of public employment. Public-sector compensation is so much higher than private-sector pay because of pay practices — including automatic raises negotiated by bureaucrats who often stand to benefit from the policies — and because of the political clout of public-employee unions.

What’s happened this year in L.A. with firefighter vacancies illustrates this. See my account here; there were 10,000 applicants for a 300-job fire recruit class.

And here’s what I wrote a decade ago for the Orange County Register. I can’t find it online, but Nexis comes to the rescue:

After the 1994 bankruptcy, it was plain that the biggest enemy of Orange County taxpayers was reckless Treasurer Robert Citron, who gambled vast sums on risky investments with the aid of his Ouija board and ended up $1.6 billion in the red.

A decade later, our worst enemy is something much more abstract: a theory advocated by county personnel managers. Leaving out the jargon, it boils down to the notion that wages and benefits must go up on a regular basis so as to keep the county’s uniformly competent workers happy and stop them from fleeing to better jobs elsewhere.

The latest example of bureaucrats’ devotion to this theory came last month when a plan surfaced that would push the top salary range for about 100 county bosses to nearly $250,000 a year and the range for another 850 executives to nearly $200,000.

The problem with this theory is basic: It’s a crock.

“It’s the bureaucratic equivalent of an urban myth. With the exception of police officers, there’s no data that indicates [competition for public-sector employees] at all,” says Steve Frates, a senior fellow with the Rose Institute of State and Local Government in Claremont.

No turnover shows job satisfaction is high

What does the data indicate? You guessed it.

How often an organization loses employees is far and away the best indicator of relative satisfaction with pay and benefits. County officials I spoke with last week said overall figures on employee turnover were not available, but they didn’t dispute that it was low compared with the private sector.

This job satisfaction isn’t surprising. As economist Paul Craig Roberts has documented, public employees have higher average annual pay, better benefits and more paid days off than private-sector workers. This gap has widened over the past 20 years, during which the private sector has undergone a productivity revolution while government manifestly has not.

I’m still waiting on that government productivity revolution.