The June 30, 2020, deadline for Pacific Gas & Electric to emerge from bankruptcy if the giant utility wants to be eligible for a $21 billion wildfire relief fund set up by Gov. Gavin Newsom and the Legislature earlier this year may end up an unofficial deadline of another sort: for the parties interested in taking over all or part of PG&E to put forward their best plans to win over Newsom, the Legislature, Wall Street and the public.

That’s because Newsom’s announcement of his opposition to PG&E’s plan to come out of bankruptcy contains such fundamental objections that it is hard to see a possible compromise. While the governor cannot single-handedly prevent the plan from being approved by regulators and a U.S. bankruptcy judge, his opinion is sure to carry weight. Without his support, PG&E’s path out of bankruptcy is sharply complicated.

Newsom described PG&E’s proposal as being “woefully short” of the commitments needs to ensure the scandal-plagued utility is able “to provide safe, reliable and affordable service to its customers.” His critique included what seemed akin to one of the “poison pills” that the corporate world uses to make sure deals are rejected: a demand that the utility replace every member of its board of directors.

The governor’s position appears encouraging to the coalition of Northern California cities that announced in early November that they were working together to craft a plan take over PG&E operations. Those cities: San Jose, Oakland, Berkeley, Sacramento, Hayward, Sunnyvale, Richmond, Redwood City, Petaluma, Sonoma, Windsor, Cotati, Elk Grove, Clovis, Chico, Redding, Davis, Santa Cruz, Scotts Valley and San Luis Obispo. Supervisors from San Mateo, Santa Cruz, Marin, Yolo and San Benito counties also endorsed the effort. The coalition includes local governments with about one-third of PG&E’s 16 million customers in the utility’s 70,000-square-mile service area.

Cities push for power provider run like credit union

San Jose Mayor Sam Liccardo – de facto leader of the coalition – told the San Francisco Chronicle that he envisioned a electricity supplier run more like a nonprofit credit union than a government-run utility. Backers cited the Georgia Electric Membership Corp., a 501(c)(6) nonprofit that distributes energy from three power providers to 41 not-for-profit local utilities with a total of 4.4 million customers.

But another approach has the strong backing of one of the richest cities in America: San Francisco. Mayor London Breed has long been on record as saying local power infrastructure should be under local control and in September joined with City Attorney Dennis Herrera to offer PG&E $2.5 billion to buy local power lines. 

The measure was quickly rejected by PG&E and appears to have little support beyond city limits. In October, the editorial page of the San Francisco Chronicle called the plan unlikely to be approved by state regulators for a basic reason: Utilities use big-city profits to keep power affordable in rural communities, and any break-up of PG&E means “the state would almost certainly have to help provide power to rural areas — likely at taxpayer expense.”

Newsom has not explained his view of what a PG&E takeover might look like, but he appears to agree with the Chronicle about the need to keep intact the basic framework of a large utility. 

Gov. Newsom wants Warren Buffett to buy utility

In October, he made headlines when he said he hoped that Warren Buffett’s Berkshire Hathaway holding group considered buying the utility.

“We would love to see that interest materialize, in a more proactive, public effort,” Newsom told Bloomberg News.

While Buffett has shown no public interest in the idea of acquiring a controlling interest in California’s largest power utility, several hedge funds have been plain with their interest in taking over PG&E for nearly a year. They have drawn little support from lawmakers because of the perception they would be as indifferent to safety as the owners they hope to replace.

PG&E entered into bankruptcy in January, citing potential liabilities of $30 billion because of massive recent wildfires in recent years that have often been blamed on the utility’s poorly maintained infrastructure. 

The utility believed it had crossed a huge hurdle to emerging from bankruptcy on Dec. 6 when it announced a $13.5 billion settlement of damage claims from four of the largest blazes, sending its stock price higher. Seven days later, Newsom announced his opposition to the utility’s overall plan to emerge from bankruptcy, sending the stock price down to near 52-week lows.

As the New York Times opined in a full-throated editorial, the hike “challenges Congress and other states, particularly New York. In Congress, the latest Democratic proposal calls for a federal minimum wage of $12 an hour by 2020. That would be adequate, if a bit on the low side, and a huge improvement from the current $7.25 an hour, the level since 2009.”

Regulating the future

Yet pro-hike analysts have already begun to make the case for further increases by downplaying the relative significance of the $15 benchmark. According to FiveThirtyEight, for instance, “$10 is a more accurate reflection of what low-wage Angelenos will actually experience,” thanks to inflation and cost of living.

“Los Angeles’s minimum wage won’t go up to $15 tomorrow,” FiveThirtyEight observed. “Instead, the hike will be phased in over the next five years. Assuming inflation holds more or less steady, $15 an hour in 2020 will be worth the equivalent of about $13.75 today.”

“But the bigger issue is that $15 doesn’t go as far in Los Angeles as it does in most of the rest of the country. Not even close. According to data from the Council for Community and Economic Research, it costs workers about 40 percent more to live in Los Angeles than in the average American community. That means that $15 in L.A. is the equivalent of less than $11 in the U.S. overall.”

In fact, however, the City Council’s vote has made such waves because it ratchets up the minimum wage “not just once but forever, with automatic annual hikes starting in 2022,” according to the Los Angeles Times.

That has city business owners on edge, the Times added. “The requirement aims to ensure that wages keep pace with cost-of-living increases, but business advocates say it could cripple entrepreneurs’ ability to adjust wages to unpredictable economic conditions — effectively enshrining automatic annual layoffs when times get tough.”

Going national

For labor advocates, however, the L.A. vote represented a capstone achievement in California, where minimum wage increases were recently passed at the municipal level throughout the Bay Area. Well aware that the $15 mark was first established by activists on the other side of the country, labor organizations quickly set their sights on the rest of the U.S., as one official told the Washington Post:

“How L.A. got to that number is rooted in the activity generating from the East Coast, where New York fast-food workers raised this as a demand, starting their first strikes two years ago,” says Laphonza Butler, president of the Service Employees International Union’s home care workers unit in Los Angeles. “It has just become the vernacular of the workers movement. And when Mayor Garcetti introduced his proposal at $13.25, we all knew that wasn’t enough.”

To begin consolidating the California gains that could launch a nationwide effort, local activists have turned their sights on the L.A. metro area as a whole.

“Campaigners for a $15 minimum wage are targeting Los Angeles County and a cluster of nearby cities to swiftly cement and expand their victory,” the Guardian noted. “The coalition of organised labour, civic activists, religious leaders and ordinary workers hopes to create a domino effect by persuading L.A. County and incorporated cities such as Long Beach, Santa Monica, Pasadena and West Hollywood to follow the city of L.A. and increase their minimum wages to $15 an hour too.”

Political alternatives

Under pressure to offer up a constructive option, as opposed to simply digging in against the hikes, business leaders have begun to consider pushing an increase in the so-called earned income tax credit. “The process is simple: You file a tax return, and the government sends you a check,” wrote Warren Buffett in the Wall Street Journal. “In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.” As wage-hiking activism continues, however, one question will be whether Americans wind up supporting both higher mandated wages and bigger tax credits.

Analysis

Nov. 28, 2012

By John Seiler

During the recent campaign, Gov. Jerry Brown insisted that people would not try to avoid his Proposition 30 tax increase by halting investments and “hiding” their money. Prop 30 boosts the top state income tax rate on millionaires to 13.3 percent from 10.3 percent.

Warren Buffett just wrote the same thing in a New York Times op-ed, insisting that the wealthy don’t react when their taxes go up. “So let’s forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if — gasp — capital gains rates and ordinary income rates are increased,” he wrote. “The ultrarich, including me, will forever pursue investment opportunities.”

The evidence, including Buffett’s own investment history, indicate otherwise.

The London Telegraph reported yesterday:

“In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

Aug. 27, 2012

By Troy Anderson

During Vallejo’s bankruptcy, which began in 2008, the city cut the number of police in half rather than deal with the “pension problem.”

Now, a somewhat similar scenario is playing out in Stockton, a city of 292,000 east of San Francisco that recently displaced Vallejo as the nation’s largest city to declare bankruptcy.

Rather than trim generous pension benefits, the city is proposing to fully fund its pension system while defaulting on $124 million in pension bonds floated in 2007.

Assured Guaranty Ltd., a Bermuda-based bond insurance company, says Chapter 9 bankruptcy is not intended to be used as a “sword to prefer one class of similarly situated creditor over another.” In a prepared statement, the company described Stockton’s attempt to default on the bonds as “unprecedented, a contortion of the bankruptcy process and will foreclose Stockton’s access to the capital markets for the foreseeable future.”

As a growing number of cities in California are contemplating or filing bankruptcy, some pension experts say they are disappointed that the cities are choosing to default on their debts and cut public services instead of dealing with the exploding costs of public pensions.

“They won’t touch pensions,” says Joe Nation, a professor of the practice of public policy at Stanford University. “In the case of Vallejo, they literally reduced the number of police officers by about one-half. It’s horrible. They don’t want to even take modest steps to deal with the pension problem.”

To be fair, Nation says Vallejo officials contemplated the possibility of attempting to scale back generous pension benefits as part of the bankruptcy, but backed off under pressure from the California Public Employee Retirement system.

“CalPERS made it clear that if they tried to reduce those pension benefits that it would litigate,” Nation says. “These cities know CalPERS has deep pockets and is politically strong. Instead of taking on CalPERS, they took on a much easier target — their own citizens.”

CalPERS spokesman Brad Pacheco says CalPERS did not make any threat to the city of Vallejo.

“We did inform the city that any attempt to reduce pension benefits in the bankruptcy case would go to the core of CalPERS’ mission and that CalPERS would respond accordingly,” Pacheco says. “However, the city of Vallejo never seriously contemplated cutting benefits and it quickly affirmed its contract with CalPERS.”

Bankrupt cities

In recent months, Stockton, San Bernardino and Mammoth Lakes have filed bankruptcy, raising questions of whether local governments can reduce pension benefits as part of the bankruptcy process. Compton could be next. City officials say they are on pace to run out of funds by the end of summer. These bankruptcies occurred just months after Vallejo completed its three-year Chapter 9 process.

The filings come as public pensions are consuming a growing proportion of public payrolls throughout the state and nation. Last year, the Little Hoover Commission called on the governor and Legislature to freeze pension benefits for current workers and enact other reforms, noting city councils, county supervisors and school boards face the prospect of increasing contributions into pension funds by “40 to 80 percent of their payroll costs for decades to come.”

These skyrocketing costs follow decades in which public officials bestowed generous pension and retiree health benefits upon public servants. As a result, taxpayers are now on the hook for trillions of dollars in unfunded liabilities.

In California alone, Nation estimates the liabilities range from $265 billion to $737 billion. In a June report, the Pew Center on the States found the shortfall has grown to at least $1.38 trillion nationwide, up 9 percent over last year.

But a July report by the American Enterprise Institute found the true state of public sector pension funding is far worse.  The so-called “fair market valuation” reveals the average public employee pension plan in the United States is only 41 percent funded and unfunded liabilities total $4.6 trillion.

National reforms

In response, elected officials throughout the nation have undertaken pension reforms to reduce the costs, though most reforms have been incremental, such as increasing contributions or retirement ages. The most significant changes have been aimed only at newly hired employees, wrote Andrew G. Biggs, a resident scholar at the AEI, in the report.

“Unfortunately, these reforms won’t come close to restoring plans to true full funding, because current accounting conventions systematically understate pensions’ benefit liabilities and thereby overstate their financial health,” Biggs wrote.

Last October, Gov. Jerry Brown unveiled a 12-point pension reform plan for state and local pension systems designed to end “system-wide abuses and reduce taxpayer costs by billions of dollars over the long term.” Voters in San Diego and San Jose recently approved ballot measures to reduce pension benefits for current employees, although public employee unions are challenging the initiatives in court.

Jon Coupal, president of the Howard Jarvis Taxpayers Association, recently wrote:

“Compounding the problem, of course, is the fact that any suggestion that government employees help out and pay their fair share toward their own guaranteed pensions is rejected out of hand by the union brass who are accustomed — because of their ability to distribute campaign cash and  deliver members’ votes to favored candidates — to being the de facto bosses of the California Democratic Party, the Legislature, and, with their chosen candidate elected governor, the entire state. 

“Now, partially to meet this mammoth pension burden, Jerry Brown wants to increase sales and income taxes. And, in an attempt to show the public that the state deserves more money, he has proposed some reforms to deal with the radically out-of-balance pension system. But proposing is one thing, actually expanding political capital to see it through is another.”          

Modify existing pensions?

As this battle intensifies, a growing number of public officials are asking whether governments can modify existing pension plans. Once a taboo topic, some legal experts say public agencies may have far more latitude to change retirement benefits than once commonly believed.

The recent spate of bankruptcies in California has only magnified this debate.

“Modifying pensions for these cities may be part of the solution,” says Lisa Hill Fenning, a Los Angeles attorney and former U.S. bankruptcy court judge. “If you look at the movable pieces in any bankruptcy case, you have to consider that from an economic standpoint.

“The problem in California is the uncertainty of the degree to which pensions can be modified. The case law has been scattered over the years. It’s most developed in state court, not bankruptcy court. We are just going to see how that body of case law is interpreted in the bankruptcy context.”

In a new report, “Local Government Bankruptcy in California: Questions and Answers,” Brian Uhler, a fiscal and policy analyst in the Legislative Analyst’s Office, addresses common questions about the Chapter 9 process for local governments, including what types of obligations can be changed or eliminated through bankruptcy.

In its case, Vallejo became the first and so far only California city to use a plan of adjustment to significantly reduce health benefits for its retirees by decreasing its payments to a flat rate of $300 per month, Uhler wrote. So far, no city has used Chapter 9 to change pension benefits for current retirees. However, pension benefits were changed in a case in Central Falls, Rhode Island.

Due to the lack of case law regarding the treatment of retiree benefits in Chapter 9, it is not clear if and under what circumstances local governments would be permitted to reduce retiree benefits in future filings, Uhler wrote.

“So, the upshot is that it’s still pretty unclear right now — especially with pensions — because no city in California has tried to modify pensions,” Uhler says. “There is only one city nationwide that has successfully modified pensions, but because of differing state laws and differing pension systems, we just don’t know how applicable that is to California.

“But, in theory, pension agreements are a contract and are just like other obligations that can be restructured or rejected through the Chapter 9 process. So, it’s fair to say that there is at least some reason to believe pensions could be considered — that they are not completely protected from the Chapter 9 process. It’s just that no city has tried it yet.”

In a prepared response to the report, Pacheco wrote CalPERS remains committed to safeguarding the constitutionally protected pension benefits of public employees and retirees.

“The obligations owed to public workers have priority over those of general unsecured creditors including bondholders,” Pacheco wrote. “We don’t agree with all of the characterizations and explanations of Chapter 9 proceedings in the LAO report.”

Taking on pensions

John Moorlach, chairman of the Orange County Board of Supervisors, says elected officials in California are waiting for a city or county “to take on pensions to find out if we can in fact make dramatic changes in pension contracts.”

“When that happens, the city councils in this state are going to have to rally around that city and give CalPERS a good punch in the nose,” Moorlach says. “We have to do something with current employees. That’s the only solution to this mess.”

Former Los Angeles Mayor Richard Riordan and Alexander Rubalcava, president of Rubalcava Capital Management, an investment advisory firm in Los Angeles, warned as early as 2006 that rising pension costs would result in government bankruptcies, massive cuts in public services and calls for a taxpayer bailout.

As a result, Stockton’s attempt to default on its pension bonds is “entirely predictable,” Rubalcava says.

“California cities have been and continue to be run for their employees, not for the people who invest in or live in them,” Rubalcava says. “Whether they can get away with that, whether they can ring-fence pensions and cut everything else to the bone, including bondholders, remains to be seen and only the courts will be able to decide that.”

If local governments won’t attempt to reduce pension benefits as part of the bankruptcy process and agencies like CalPERS maintain unrealistic discount rates, Rubalcava says this first wave of municipal bankruptcies is only the beginning.

Last month, CalPERS reported a 1 percent annual return on its $233 billion portfolio — well below the fund’s discount rate of 7.5 percent. CalPERS’ 20-year investment return is 7.7 percent.

“Some of the world’s smartest investors like Warren Buffett of Berkshire Hathaway and Larry Fink of BlackRock, which is the world’s largest asset management firm, have said they will be lucky to make 5-6 percent going forward,” Rubalcava says.

“If that’s the case, the handful of bankruptcies we’ve had in 2012 will be just a taste of what’s to come. There will be dozens or hundreds of municipalities in California filing Chapter 9 in the decades to come.”

By John Seiler

Los Angeles Times business writer Michael Hiltzik is an excellent reporter. But when he gets to policy, his leftist perspective comes to the fore. That can be seen in today’s article on Paul Ryan’s budget proposal. Ryan was just picked by Mitt Romney as the Republicans’ presidential nominee.

In any budget article, the first thing to look for is this: The $16 trillion — and counting — debt the U.S. government has run up. If that isn’t mentioned, then the article isn’t serious. That’s the equivalent of one year’s total U.S. GDP. Not mentioning the national debt is like a person discussing his family finances without mentioning that he’s run up credit card debt equal to yearly family income.

Hiltzik doesn’t mention the debt, nor the $1 trillion-plus additions to the debt from the continuing annual deficits. Instead, it’s all about how Ryan’s proposed cuts would hurt the middle class:

“The more insidious assault on the middle class comes from program cuts. Most of the commentary on Ryan’s budget has focused on his master plan for Medicare and Medicaid, both of which he would gut. But it’s a mistake to think the burden would be shouldered exclusively, or even chiefly, by the poor.”

The Romney-Ryan camp disputes that Ryan would “gut” these programs. And in any case, they are campaigning on Romney’s somewhat different plan because he’s on the top of the ticket, not Ryan’s plan.

Hiltzik also advances the canard that the Ryan Plan would increase taxes on the middle-class. Hiltzik bases his contention on calculations by “the nonpartisan Tax Policy Center” — really a left wing, high-tax group. But that’s not really in the plan. However, it is true that all these numbers, including Ryan’s and President Obama’s, have an air of unreality about them in light of the $16 trillion debt.

Hiltzik doesn’t note that what’s really going to “gut” the middle class — and in fact has for six years now — is interest rates that are kept artificially low by the Federal Reserve Board so the payments on the $16 trillion debt don’t get too high and produce even higher annual deficits. The federal government currently is borrowing money at essentially zero interest.

That hurts the middle class, which is suffering inflation of at least 3 percent, but getting zero percent on its bank and savings and loan savings accounts. An effective decline in value of 3 percent a year for six or more years is a sure way to “gut” the middle class. The poor don’t have much savings and the rich can use sophisticated financial instruments to still make money; you don’t see Warren Buffett suffering.

Eroding wealth

If this zero-interest rate policy continues, the middle class will continue to see its wealth — what’s left of it — eroded. Eventually, the Fed will have to boost interest rates. But then that will boost the federal deficit even higher, raising the debt even faster. Which will lead even deeper cuts in current programs — for the middle class, the poor, the rich, everybody.

Inevitably in a Hiltzik column, there’s a defense of high taxes:

“Ryan advocates cutting the top income tax rate to 25% (from 39.6%, the pre-Bush top marginal rate scheduled to take effect Jan. 1).

“The only way to do so while keeping overall tax revenues at 19% of gross domestic product, Ryan’s stated goal, is to eliminate a wide range of tax breaks. On the surface, this might look palatable to a middle-class taxpayer convinced that the fat cats get all the breaks anyway. In fact, the most popular breaks save billions for the middle class.

“More than 70% of the mortgage interest payments claimed as deductions ($240 billion) appear on returns filed by people in the income range of $60,000 to $200,000, according to the IRS. Many of these middle-class homeowners base their annual financial planning on tax breaks such as the mortgage deduction. Only about 1.4% of the total is claimed by taxpayers earning $1 million or more.”

Actually, this is a fantasy. There’s no way the mortgage deduction ever will be eliminated. Moreover, since World War II ended, the amounting of taxing by the federal government never has exceeded 20 percent of GDP, even when the top tax rate was 91 percent.

So Ryan’s 19 percent threshold is close to the maximum. Hiltzik’s idea that it could go higher is a an illusion. The most that can be wrung from the economy is 20 percent for federal taxation. Try to get more, and people just quit working and investing, or move their money overseas.

100 percent tax?

Moreover, as economist Walter Williams notes:

“All told, households earning $250,000 and above account for 25 percent, or $1.97 trillion, of the nearly $8 trillion of total household income. If Congress imposed a 100 percent tax, taking all earnings above $250,000 per year, it would yield the princely sum of $1.4 trillion. That would keep the government running for 141 days, but there’s a problem because there are 224 more days left in the year.”

That is, even if the top income tax rate were 100 percent — and people actually paid it — the money would fund only 38 percent of the federal budget.

And of course, if the government seized 100 percent of the income of “the rich,” they would just stop working. The businesses and factories they own would close, or be taken over by the government as socialist enterprises.

So, “taxing the rich” isn’t the answer.

Ryan Plan

The real problem with the Ryan Plan is that it doesn’t go nearly far enough. It doesn’t balance the budget for 30 years — which practically means never. In every one of those 30 years, Congress can change whatever it did before.

The fact people don’t want to face, for understandable reasons, is that the whole welfare state now is bankrupt. It’s the result of 80 years of profligacy, and especially of the last 11 years of blowing out the budget that began under President George W. Bush. He inherited deficits from President Clinton. With a little prudence, he might have helped us grapple with the difficulties of paying for the existing entitlement programs. Instead, he goosed the budget with his No Child Left Behind education scheme that has shown zero results; and especially with his Bushcare Medicare expansion, a precursor to Obamacare — not to mention the expensive wars.

So what’s the solution? Massive cuts. Or inflation to burn off the value of that $16 trillion national debt. Either way, there’s massive pain for the middle class, the poor — and for many of the rich, too, if they don’t get their affairs in order (or move to a country with more freedom).

Humans, especially Americans, like to think there always are solutions, preferably instant ones. But this time there aren’t any — any, at least, that people want to advance.

The problem with democracy is that, eventually, 51 percent of the people realize they can vote to rob the other 49 percent, as well as borrow money on the credit card of the 49 percent. That lasts a while until the whole thing falls apart.

Which is where we are now.

Unlike some journalists, make sure you keep in mind that debt of $16 trillion — and counting.