Of the several California cities where pension reform emerged as the sharpest political issue, San Jose faced some of the most pointed combat. Pension reform drove this month’s close election for mayor, which pitted Supervisor Dave Cortese — the union-backed candidate — against Councilman Sam Liccardo, who was allied to outgoing Mayor Chuck Reed.

The lines were the city’s pension reforms in Measure B, approved by over two-thirds of San Jose voters in 2012. As The Wall Street Journal observed, however, Liccardo’s Democratic pedigree was 德州扑克在线游戏 enough to help turn back Cortese’s challenges to the Reed legacy.

According to the Journal, “San Jose’s pension reforms are among the boldest in the country because they modify benefits for current workers in addition to future hires.” In the world of pension policy, that approach has sparked a virtual panic among defenders of the status quo. Wherever such changes have been proposed, critics have warned that public-sector employees would essentially abandon their jobs; in San Jose, reported the Journal, “the city’s police union faulted the pension reforms for a putative ‘exodus’ of officers and a crime wave,” even though “property and violent crime rates have fallen since 2012.”

Liccardo recently put an optimistic face on his goal of fully funding annual health care obligations for retirees. He saw “plenty of common ground,” he told KQED. “We have new opportunities going forward, and I’ll be talking with the heads of our police union and certainly with the rank and file about how we can find common ground.” But Reed cautioned  he expects more union-driven legal challenges ahead.

A tug of war in Stockton

Although smaller in size than San Jose, Stockton’s battles over pensions have also been closely watched, on account of the city’s struggle through bankruptcy proceedings. A recent pair of rulings by bankruptcy judge Christopher Klein heightened the drama surrounding Stockton’s attempts to meet its pension obligations with a minimum of fuss.

First, Klein held that it would be unconstitutional should pension funds go completely untouched against a city’s will. But then he ruled  Stockton’s planned agreement on the bankruptcy was properly structured, despite leaving pensions largely intact.

The careful decision left reform opponents with half a loaf: on the one hand, cities had the right to touch pensions, violating the unofficial so-called “California Rule” that traditionally kept them sacrosanct; but on the other, the California Public Employee Retirement System, which filed legal objections to any pension changes, was basically free and clear.

Stockton’s private creditors, by contrast, took a big haircut — a setback all of them accepted, with one exception. Upsetting Stockton’s delicate balance of interests, Franklin Templeton Investments has filed an appeal of Klein’s second ruling. With a total of $36 million in loans sunken into Stockton — which has paid CalPERS $29 million a year and counting — Franklin was set to receive just 12 cents per dollar on its investments, according to the city’s bankruptcy plan, according to the Sacramento Bee.

Echoing the dire predictions made in San Jose, the Bee reported, Stockton city officials and CalPERS warned that cutting pensions would touch off a “mass exodus by police officers and other city workers.” Franklin, however, argued  there simply wasn’t adequate proof that pension revisions would collapse key public services — and that basic fairness required its share of the bankruptcy burden be lessened. Now, that argument will go to the 9th Circuit Bankruptcy Appellate Panel in Pasadena.

New transparency

Meanwhile, overarching the city-by-city conflict, a potentially game-changing development has emerged from Sacramento, where incoming Treasurer John Chiang announced a new website designed to supply citizens with the gory details of California’s accumulated pension obligations.

Available at ByTheNumbers.sco.ca.gov, the data has given Californians sudden access to about a million items of pension information, from fiscal years 2002-03 to 2012-13, according to the Los Angeles Times.

Announcing the site, the Times reported, Chiang expressed his hope the research would “empower greater citizen participation in how government handles a policy matter which is central to California’s long-term prosperity.”

By Wayne Lusvardi

The mere mention of the words Cap and Trade in California and people just tune out because it sounds too complicated to understand.   While it is complicated, it is nevertheless understandable.

What we’re learning about the California’s Cap and Trade program is that it is ending up as a giant government program to socialize the extraordinarily high rates that will be added to your electricity, natural gas and water bills from shifting to 33 percent green power in California by 2020.

Plans are in the works to include some form of rebate in your water and power bills for the higher cost of green power.  But it will be politically determined who gets larger or smaller rebates.  According to a report by the think tank Next 10, low-income and low-volume energy users are insulated by law against any energy increases in their utility bills due to the high cost of Green Power.  So it will be the middle class that ends up bearing the higher costs for green power for lower-income communities.

By socialized electricity rates is not meant the placing of power companies under government ownership or control.   What is meant is the spreading of higher energy costs from rebates by a formula to be politically determined.  Assembly Bill 32, the Global Warming Solutions Act of 2006, did not nationalize or socialize the means of producing electric power.  But it will be socializing or spreading the higher cost of green power to the middle class.

Usurping Supermajority Democracy for Taxes?

But this raises an issue: Who brought to the voters a bill or ballot proposition to socialize electricity rates resulting from expensive green power?   Answer: No elected legislator has publicly stated that the intent of Cap and Trade was to socialize power rates.  But that is the apparent end result.

For any “tax, charge, levy, or tax allocation,” didn’t Proposition 26, passed in 2010,  require a two-thirds vote of the electorate?

The problem is that AB 32 was passed not by the people, but by a majority vote of the state legislature and signed by the governor in 2006.

AB 32 authorized the California Air Resources Board to adopt rules for what is called a Cap and Trade program at a later date.  Cap and Trade is a program that requires industrial and utilities to buy pollution credits in an auction.  The proceeds of that auction would be collected by CARB.

The Strategic Growth Council, authorized under AB 732, in 2008 would reallocate the proceeds of the Cap and Trade auctions to reduce high utility bills and fund anti-pollution projects.  The Strategic Growth Council was originally funded by $500,000 from Prop. 84 — the Water Bond Act of 2006.

CARB adopted the Cap and Trade portion of AB 32 on Dec. 17, 2010.

Usurping Democracy?

But Prop. 26, limiting any new “taxes, charges, levies or tax allocations,” passed by a vote of 52.5 percent on Nov. 10, 2010.

So there has been no vote about either Green Power or Cap and Trade.

But does Prop. 26 restrict CARB and the Strategic Growth Council from collecting pollution taxes under the guise of an auction and then redistributing the proceeds to reduce the high cost of Green Power?

To answer this question, we contacted reputable legal experts. An agency which “implements” a fee under an existing law passed in 2006 does not probably require a supermajority vote under Prop 26.

Cap & Trade Energy Rebates Could Backfire

However, this may not mean that any piece of subsequent legislation adopted by the Legislature can go beyond the intent of AB 32 and Cap and Trade.  There are several bills in the legislature queuing up to tap Cap and Trade proceeds to fund “schools, hospitals, affordable housing,” etc.  Gov. Brown has also proposed tapping Cap and Trade funds to finance the California High-Speed Rail. Neither of these is likely to be considered a legal use of Cap and Trade funds at this time.

But what is being considered a legal use of the $6.25 to $12.5 billion per year in Cap and Trade taxes is energy rebates to “customers” and funding for a stimulus program of home energy efficiency projects. Ratepayers would get rebates to reduce the shock of high Green Power costs; or they would get home insulation grants or loans.

The California Energy Commission estimates 40 percent of the state’s housing stock already is energy efficient due to Title 24 Building Energy Efficiency regulations adopted in 1978 under AB 758.  The 60 percent of older housing, commercial and industrial building stock built prior to 1978 would be the likely target for Cap and Trade building energy improvement projects.

Assembly Bill 1103, authored by Assemblywomen Lori Saldana, D-San Diego, and passed in 2007, would require owners and operators of non-residential buildings to disclose a building’s energy performance ratings to any prospective buyers, tenants, or even lenders financing any building sale.  AB 1103 would assign “benchmark” energy ratings to buildings and would encourage building owners to “upload” their rating to the U.S. Environmental Protection Agency’s Energy Star Portfolio Manager each year.  Electric and gas utility companies would be required to upload all energy consumption data on each building into the same database.  There is no exemption provided in this bill for historical properties, churches or “as-is” real estate transactions.

The California Public Utilities Commission has been requiring regulated public utilities to offer home and commercial energy efficiency rebate programs since the oil embargo and resulting energy crisis of the mid-1970’s.   California’s Statewide Multi-family Housing Energy Efficiency Rebate Program completed retrofits on 330,437 apartment units alone from 2005 to 2006 at a cost of about $50 million.

According to the U.S. Census, there are 4,199,785 apartment units in California.  Almost 8 percent of those were retrofitted with energy efficiency improvements from just 2004 to 2006.  How California could suck up $6.25 to $12.5 billion per year in more building energy improvements, as recommended by the University of California, Berkeley and Next-10, is questionable.

Of the 18 spending options for Cap and Trade proceeds recommended by the think tank Next 10, five of them involve building energy efficiency improvements.  As already stated, these have been undertaken by public utilities for decades and would be redundant to their ongoing programs.

Offsetting general gund expenditures is probably legally excluded at this time.

The State Legislative Office has already recommended against using Cap and Trade taxes to fund high-speed rail.

Establishing a green bank could lead to a repeat of another bubble like the mortgage sub-prime loan program.

If energy bill rebates are implemented ratepayers may believe that energy costs are lower and use more energy.  Or ratepayers may believe that if they use more energy that they will receive more rebate.  Thus, Cap and Trade could backfire.

Sending monthly rebates to energy customers separately might raise public perception problems of why utility rates were raised in the first place and then absurdly rebated back to them.

In short, California evidently doesn’t yet know what to do with huge amount of taxes that will be collected from industries and utilities under Cap and Trade.  As with all complex public policies, there is still a large amount of uncertainty as to the outcome of California’s Cap and Trade program.  And the unintended negative consequences that could arise from such a program are a growing concern.

By Wayne Lusvardi

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

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

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

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

Cap and Trade Fund Distribution Bills

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

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

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

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

What is the Strategic Growth Council? 

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

Who is on the Strategic Growth Council? 

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

Current Council members include:

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

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

Cap and Trade Auction Monies Hit Prop. 13 Snag

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

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

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

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

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

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

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

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

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

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

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

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

Cap and Trade Prone to Government Gaming of System

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

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

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

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

Cap and Trade Won’t Cure Budget Deficit

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

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

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

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

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