Voters Approve Over $3.0 Billion Per Year in New Local Taxes

When state ballot initiatives propose new taxes, it’s big news. This past November, voters rejected Proposition 30, which would have added another 1.75 percent tax on personal income above $2.0 million. The arguments for and against Prop. 30 were litigated in saturation level television campaigns waged by both sides; total expenditures were nearly $70 million.

But while every election features a handful of state tax and bond proposals that get statewide attention, additional hundreds of local state and bond proposals fly under the radar. Fortunately, after each election cycle and once all the votes are certified – something that in California doesn’t occur until 30 days after election day – the California Taxpayers Association puts out a report that shows the outcome of every local tax and bond proposal.

The impact of these hundreds of bids to raise taxes and increase borrowing, as documented by CalTax, in sum can exceed the amounts of the statewide initiatives.

We saw this demonstrated yet again this past November, when 131 bond proposals were placed on local ballots up and down the state, along with 234 local tax proposals. Of the proposed local bonds, 86 percent of them were approved by voters, dumping another $23.2 billion in debt onto Californians. In terms of budget impact, based on a 5 percent interest rate and a 30 year term, this new borrowing is going to cost taxpayers another $1.5 billion per year in principal and interest payments.

The fate of local tax proposals tells a similar story. 65 percent of them were approved by voters, adding another $1.6 billion annual burden onto California’s taxpayers.

These local increases in taxes and borrowing, which are almost exclusively regressive and will cost taxpayers at least another $3.1 billion per year, are comparable to the impact of Prop. 30, had it passed. Prop. 30, which would have affected California’s already overtaxed wealthy households, was estimated to bring in between $3.0 and $5.0 billion per year.

It’s interesting to see the categories of new local taxes. Note the projected big earner categories: “Documentary Transfer Tax,” “Gross Receipts Tax,” and “Transactions and Use Tax” (sales tax). The first two of these three are relatively recent innovations in a system that for decades relied primarily on sales tax. Expect more innovative tax schemes, such as “Vacancy Tax,” presumably designed to discourage people from owning real estate unless they plan for it to be occupied.

The propensity for voters to approve local taxes is well documented, as the next chart proves. The only category that has not performed extraordinarily well over the past ten years are General Obligation Bonds, which, still while more likely than not to pass, rarely deliver supermajority rate of approval. This is because School Bonds only require a 55 percent majority in order to pass, whereas General Obligation Bonds require a two-thirds majority.

When proponents only have to get 55 percent of voters to approve a bond, it does pretty well. Measured by the amount of proposed borrowing, school bonds consistently log over 90 percent approval by California’s local voters. The payments to service these bonds typically appear on the property tax bills of homeowners, and the amounts are not trivial. Most Californians can expect to pay considerably more than the legislated maximum of 1 percent of their home’s value, mostly thanks to local school bonds that are exempt from these limits.

As for local taxes, 2022 was a below average year for proponents, passing “only” 65 percent of them by number, and 59 percent by amount. While highly favoring proponents, this rate of approval is considerably lower than in previous elections, and may indicate voter fatigue with new taxes.

Compared to other elections in the past decade, 2022 was not bad. While California taxpayers added over $3.0 billion to their annual tax burden, voters did not approve a single statewide tax or bond proposal.

It’s a little early to look ahead to 2024, but three initiatives have already qualified for the November 2024 ballot. One of them aims to “increase personal income taxes to fund pandemic detection and prevention.” Expect additional statewide proposals to increase taxes, since California’s much vaunted budget surplus has evaporated. Voters may also count on hundreds of local tax and bond proposals, and if history is any guide, shall approve the vast majority of them.

This article originally appeared in the California Globe.

Increased Supply Lowers Prices More Than Gas Tax Repeal

California Assemblyman James Gallagher is one of the architects of The California Promise, a six point set of political priorities unveiled by the state’s Republican Party in October. First among these is “An Affordable California,” and first in that category is “Repeal Gas Tax.”

To emphasize this priority even further, on the top of the Assemblyman Gallagher’s home page a counter has been installed, showing how long it’s been “Since Newsom & Democrats Promised Gas Tax Relief.” As of this moment on the afternoon of December 8, that’s 274 days, 19 hours, 25 minutes, and 15 seconds.”

It would be great to have a gas tax holiday in California. It is a regressive tax that adds, per gallon, 54 cents in state excise tax, 23 cents for California’s cap-and-trade program, 18 cents for the state’s low-carbon fuel program, 2 cents for underground gas storage fees, plus state and local sales taxes. Altogether this equals, not including another 18.4 cents in federal excise tax, and give or take a few cents depending on local sales tax rates, $1.20 to the price of every gallon of gasoline you buy.

Nonetheless it is a mistake to put so much emphasis on a gas tax repeal. At a time when California’s much vaunted budget surplus has suddenly morphed into an estimated deficit of at least $25 billion in the next fiscal year, what was already a hard sell becomes impossible. Try to stop taxes from going up even further. For now, that will do.

Meanwhile, instead of focusing on eliminating taxes, why not focus on lowering the cost of goods that are being taxed?

For example, in 2017, when state gas taxes and fees already amounted to nearly $1.00 per gallon, you could purchase gasoline in Los Angeles for $2.86 per gallon. In 2015, gasoline prices were down as low as $2.58 per gallon in California. Instead of repealing the “gas tax,” which even if repealed would only apply to the state excise tax of $.54 cents per gallon, and would not take away the rest – the cap-and-trade fee, the low-carbon fee, the underground storage fee, or the sales taxes – why not focus on increasing production and thus increasing competition? Wouldn’t that lower prices?

Put another way, if lowering the cost-of-living, starting with gasoline, is a priority, why not fix the economic conditions that have in only five years accounted for over $2.50 per gallon of increased cost per gallon to the consumer, instead of the gas tax, which at best might take $.54 cents out of the cost per gallon?

Even more to the point, if this is all symbolic posturing on the part of the California GOP, which it most certainly is, and if the purpose for all this posturing is to expose the elitist disregard California’s Democrats have for normal hardworking Californians, then why not advance broader principles that voters, everywhere, might not only connect to why their gas is so expensive, but to why everything is so expensive?

California is not unaffordable because taxes are too high. The high taxes, and they are too high, only add insult to injury. The economic factors breaking Californians, however, are that Democrats have regulated the economy to a standstill, creating scarcity and driving up costs.

The real reason housing is unaffordable in California, to cite an example even more painful than the cost of gasoline, is because of California’s neglected water, energy, and transportation infrastructure, its decimated timber industry, its offshoring of the sources for every necessary building material, its punitive policies of urban containment, its protracted, capricious, and extortionate process to obtain building permits, and its ridiculously overwrought building codes.

All of this was engineered by Democrats. Unaffordable housing, along with unaffordable gasoline, is the result of political choices made in a one-party, Democrat ruled state. That is the message Gallagher and his fellow republicans need to send to voters.

California, of all states, is literally floating atop stupendous reserves of oil and gas. In the 1980s, California field production of crude oil per day stood at over 1.0 million barrels. Today, production is down to 330 thousand barrels per day. This despite the fact that onshore and offshore reserves of oil in California total an estimated 15 billion barrels. If there is any place on earth where these resources could be responsibly extracted, it’s here in California. But instead we send jobs and dollars to petro-dictatorships around the world.

There’s no good reason for this. In 2021, foreign suppliers accounted for 56 percent of the oil refined in California. The entire energy strategy of California’s state legislature is flawed. Simply mandating a phase in of increasingly advanced hybrid vehicles could allow the state to maintain its desired downward trend in oil consumption. This would take pressure off the state’s utilities to double production of electricity – something they have absolutely no idea how to accomplish while conforming to “renewables” mandates.

California’s Republican state legislators, who as of 2023 will account for a mere 27 out of 120 seats, cannot possibly expect to push through legislation opposed by Democrats. But they do have an opportunity to make a lot of noise, and they have very little to lose. They should be demanding, if anything, that California’s refineries apply their windfall profits to increasing capacity. They should be demanding and defining policies that will offer a roadmap to energy companies once again drilling here in California for more oil and gas. When supply rises, prices fall.

Publicly challenging fundamental premises of the Democrats, starting with their faith-based, utterly irrational belief that we can precipitously eliminate consumption of oil and gas, should be the mission of Republicans in Sacramento. GOP politicians should be openly defying the absurd premises that Democrats pass off as gospel, instead of trying to creatively navigate within their parameters.

At the same time, California’s GOP politicians should be espousing the principle of competition through deregulation as the only way to make California affordable again, because that’s the unassailable truth. Lowering one tax, temporarily, merely invites accusations – not entirely unfounded – of indifference to deficits. Lower spending, then lower taxes. But since you can’t do either, shout louder, hit harder, and aim for the heart, not the hair.

This article originally appeared in Epoch Times.

Looming Deficits Present Opportunity to Find Solutions for California

Less than six months ago, California’s state legislature approved a record breaking $300 billion state budget. Within that total, and to finance most of the state’s ongoing operations, was a general fund allocation of $235 billion for the fiscal year ending June 30, 2023.

Record breaking budgets are nothing new. Only ten years ago, California’s general fund was $93 billion, which adjusted for inflation would be $118 billion in today’s dollars. Meanwhile, California’s population over the past ten years has only grown from 38 million to 39 million. This means that inflation adjusted per capita general fund spending in California has increased from $3,124 back in 2013, to $6,023 today. California’s state government is spending twice as much money today per resident as it did just ten years ago.

This explosion in spending has yielded dubious benefits. By nearly every measure, things are worse off today in California. Obvious examples include expensive and unreliable energy and water, failing schools, rising crime, unaffordable housing and college tuition, and an exploding homeless population, but that’s hardly the entirety of the worsening challenges facing Californians. The decade-long run of record tax revenue spawned an avalanche of new regulations, driving up prices, discouraging expansion of big business and driving small businesses under. Through its spending priorities California attracts the dependent and repels anyone striving for independence. It’s grotesquely inequitable.

This is the context in which to view the latest revenue projections coming from the nonpartisan Office of Legislative Analyst. The concern here should not be that our state budget for 2023-24 now faces a potential $24 billion deficit. The concern should focus on why there has been an explosion of state spending, yielding nothing but growing dysfunction.

As it is, LAO’s projection of a $24 billion deficit is a baseline case, relying on several assumptions that could go sideways, tumbling the actual deficit into much more troubling territory. For example, LAO acknowledges the likelihood of a deepening economic recession, but does not factor the impact of a recession into their tax revenue estimate. They write, “Were a recession to occur soon, revenue declines in the budget window very likely would be more severe than our outlook.” In the section of their analysis where LAO projects worst case scenarios, they project general fund revenue dropping as low as $180 billion in 2024-25, which based on merely maintaining the current general fund budget reflects a deficit of $55 billion.

If the events of the past three years have taught us anything, it’s that consequences of pivotal events are often only obvious in hindsight. In June of 2020, did anyone really think that COVID shutting down half the economy would lead to a boom in tech company valuations? Did anyone at that time realize how uniquely beneficial the tech stock boom would be to California’s state general fund tax revenue? It’s easy today to look back and recognize the chain of causes, but it wasn’t easy to predict them when the COVID ordeal first began. It’s also easy, and probably accurate, to say that over this time period, the state legislature’s blithe ambition to make sure spending kept pace with revenue growth was blissfully unaware of just how improbable and fleeting the gift was that they were squandering.

Another lesson from the past three years, however, is to be wary of excessive pessimism. Unsustainable economic models work until they don’t work, and as long as the US Dollar is the least afflicted currency in the world and the US is the most secure investment haven in the world, and as long as inflation continues to reliably erode the principal value of a nominally exploding federal debt, massive deficit spending to stimulate economic activity may remain a viable strategy. If only more of that spending would be invested in practical infrastructure. Nonetheless, this could go on for decades. It could take forms we can only imagine. We simply don’t know.

The question therefore isn’t how to cut spending and raise taxes in order to balance the budget. The likely truth is that California’s state legislature is going to muddle through one way or another. The prevailing question should be how does California’s state legislature start to do the right thing instead of the wrong thing with all that money? They’ve doubled per capita spending in the last ten years, and ordinary hard working Californians can’t afford to live here any more. Clearly, so far they’re doing everything wrong.

LAO warnings of an impending general fund deficit are a good time to not only talk about how California’s state legislature is on the wrong course, but exactly how it can change its course. If you want to realign the state’s politics, it isn’t enough to say taxes, crime, and prices for everything are too high, and educational achievement and the supply of housing are too low. Propose concrete solutions. Very few Californians would mind paying their taxes if the state was affordable and effectively addressing the challenges of crime, homelessness, education, housing, water, transportation, energy, and education.

Solutions exist, but lack politicians with the courage to promote them and the charisma to effectively convince voters of their efficacy.

Offer state vouchers to parents to use to send their children to any accredited school, public or private.

Rescue public education by replacing woke curricula with classical education would save billions and rescue a generation from a failing system.

Fast track approval of nuclear power plants, natural gas fracking, and refinery expansions to force competition for energy and lower the prices for fuel and electricity.

Fund more water supply projects and practical freeway improvements, using tax and bond funds to yield long term economic dividends.

Approve housing developments in weeks instead of decades and reduce California’s absurdly overwritten building codes to lower the cost of housing.

Turn the timber industry loose again to thin California’s dangerously overgrown forests.

Build inexpensive minimum security facilities to incarcerate drug addicts and petty thieves to curb crime and end unsheltered homelessness. Use these facilities to teach inmates vocational skills so upon release they can fill hundreds of thousands of high paying construction jobs.

New solutions. An entire new alternative vision. This is the real discussion that California needs. Not just how to balance the budget. Rather, how to allocate the budget, and how to deregulate the economy. Where are politicians who are ready to step up with more than criticism of the failures of California’s one-party state, and offer solutions?

This article originally appeared in the California Globe.

Parasitic Architecture is Not What it Seems

The concept is attractive. Taking advantage of an existing superstructure and utility conduits, developers can simply add new units on the sides and top of a residential building. In theory, this can save money, preserve the original building and create new housing in areas where housing tends to be in short supply and high demand.

In practice, parasitic architecture often ends up being a controversial aesthetic experiment, wherein buildings of historic value have their exterior facades debased – or enhanced, depending on who you ask – with odd protuberances. Or it finds expression in “adaptive reuse” projects that rely on public subsidies to create overly expensive additional housing units.

A classic example of parasitic architecture blazing a path into the aesthetic frontier of urban design is the Museum of Military History in Dresden, Germany. In this case, a 135-year-old stone building had grafted onto its square, classical façade a massive steel and glass triangle that juts skyward like the prow of a ship. It’s not everyone’s cup of tea. A Wall Street Journal architecture critic compared the new section to “a piece of shrapnel freshly fallen from the sky.”

Enthusiasts proclaim the beauty is in the incongruity, but the practice has many detractors. During the 1980s, architects saved the facades of many historic Washington, D.C. downtown offices and built superstructures behind them – spurring critics to refer to them as “facade-omies.”

There are plentiful examples of historic public buildings expanded with ultra-modern structures. The Pablo Serrano Museum was tripled in size in 2011, when a massive, Tetris-like conglomeration of irregular black cubes was grafted onto the top of an existing, much older building in Zaragoza, Spain. In Moscow, a luminous, futuristic bubble of translucent polygons was grafted into the space between two much older buildings, creating offices while leaving clear the road underneath.

These expansions dramatically increase square footage without increasing the footprint of the original building. But they’re not cheap. How a residential project in Beirut added 13 luxury units to a 1920s mansion exemplifies what architects encounter. As reported on the architectural website InHabitat, “The SOMA team created a plan to cantilever BOBO’s steel exoskeleton and concrete core over the protected home by excavating six floors below the gutted home, leaving the historic façade intact.”

Steel exoskeletons. Six story excavations. These buildings are high-end, avant-garde statements. But to the challenge of cost-effectively increasing the available housing in densely populated cities, they’re more like thought experiments than solutions.

If one steps back from the artistic exercise and instead prioritizes function, it seems that adaptive reuse might offer more affordable options. Why not add a few floors to an existing building and create new housing without having to start from scratch? Wouldn’t that save money?

Unfortunately, no. In California, the state and local governments have granted billions of dollars in subsidies to developers to convert aging urban structures into modern residences, but the per-unit price for these projects has consistently exceeded the construction cost of new homes and apartments. A newspaper investigation provides comprehensive evidence to support this.

“Last year, Sacramento officials announced an extreme makeover for the Capitol Park Hotel, the century-old building just a few blocks from the Golden 1 Center and K Street restaurant scene, that would bring life to a dilapidated building with newly renovated rooms for the homeless,” the Sacramento Bee reported in September 2020.

“The project has been hailed as an important step to house Sacramento’s homeless population. But transforming the Capitol Park Hotel will come at an extraordinarily high price to taxpayers and the nonprofit groups involved in the project,” the Bee continued. “The cost to redevelop the Capitol Park Hotel is more than $445,000 per unit for apartments that will be tiny – about 250 square feet. … If it stays on budget, the project will come to $1,100 per square foot — more than double the square-foot price to build a luxury home … .”

This is not an isolated case. Across California, a confluence of factors have made housing unaffordable, with adaptive reuse perhaps the most unaffordable housing of all. These factors include excessive building codes imposed by a state Legislature convinced that if they mandate enough solar panels, smart meters, appliances, faucets and electric fixtures, R-60 insulation, triple paned windows, and so on, California will turn into a green utopia.

They include punitive permit fees, and approvals delayed for years, from myriad agencies whose requirements conflict with each other and change constantly. They include endless litigation from well-funded environment pressure groups that exploit the California Environmental Quality Act (CEQA).

And, sadly, they include an opportunistic complex of politically connected developers, public bureaucracies, and powerful “nonprofits” that have sprung up to milk this dysfunctional system for tens of billions of dollars of public funds with almost nothing to show for it apart from more homelessness.

As a solution to the housing shortage, parasitic architecture has an obvious appeal. But as a cost-effective solution, reality intrudes in the form of a regulatory environment that imposes a suite of restrictions that double or triple the cost of construction, especially for adaptive reuse projects.

As an aesthetic adventure, however, parasitic architecture is a vibrant new category of modernism, with provocative installations all over the world. Western cities should explore its potential.

This article was originally published by the Pacific Research Institute.

Pension Costs Are Still Eating Government Budgets

About 20 years ago, I read an ad in a local Sacramento newspaper that said “Get a government job and become an instant millionaire.” The ad went on to describe how public bureaucrats in California enjoyed benefits private sector employees can only dream of, including a guaranteed retirement pension worth the equivalent of millions of dollars in a private 401K plan. I’d had no idea. Most people still don’t.

Pension finance, and how pension obligations affect government budgets, remains one of the most consequential elements of public policy that nobody has ever heard of. Until someone is elected to a city council, or a county board of supervisors, and sees first-hand how pension payments crowd out other budget items, the typical response to pension policy debates is one of befuddlement or indifference.

But as they say, even if you are indifferent to pensions, pensions are not indifferent to you. Also about 20 years ago, a series of pension benefit enhancements enacted by gullible elected officials, egged on by aggressive pension system managers and public employee unions, led to pension payments moving from a negligible portion of civic budgets to ravenous monsters that threatened to drive into insolvency every government agency in the state. The result has been higher taxes and fewer services, and everyone feels that.

To begin to cope with out of control pension costs, in 2013 the California State Legislature enacted PEPRA, the Public Employee Pension Reform Act, which reduced the pension benefit formulas for new government hires, and phased in a cost sharing whereby all active employees would contribute more to their pension systems via payroll withholding.

The PEPRA reform, while incremental, has helped to financially stabilize California’s public sector pension systems. But because the PEPRA reforms were primarily restricted to new hires, the savings generates will happen slowly and will take decades to be fully realized. Meanwhile, the cost to California’s cities and counties to pay their pensions has reached record highs.

To more thoroughly illustrate what California’s government agencies are up against, the following chart depicts the financial status of three representative entities, each of them a rough order of magnitude apart in size. All three are clients of CalPERS, the largest of California’s state and local pension systems, with nearly 1,700 active clients and assets that have exceeded $500 billion.

The statistics depicted below, although mind numbingly opaque to the uninitiated, nonetheless distill the financial obligation represented by pensions to a few key variables. With the exception of “Total Civic Budget” the context providing denominator offered in the final block of numbers on the chart, all of these figures come directly from CalPERS itself. For each of their clients, CalPERS provides a “Public Agency Actuarial Valuation Report.” They are highly reliable since they disclose exactly how much CalPERS intends to charge each of its clients. The data shown on the chart pertains to the 2023-2024 fiscal year, which begins in July 2023.

The first three rows of data on the above chart report (1) how much CalPERS has invested on behalf of each client, (2) the present value of how much CalPERS expects at this point in time to eventually pay out in pensions to each client’s retirees, and (3) the difference between these two values, which is the unfunded pension liability.

As can be seen (4), Santa Clara County and the City of Sacramento have only 77 percent funded pension accounts, and the City of Costa Mesa’s pension account is only 70 percent funded. Because of this, in addition to their regular ongoing payments to the pensions system to fund pension benefits as they are earned, these employers have to make catch-up payments to reduce their unfunded pension liability.

The next section of the chart depicts and quantifies these two types of contributions that agencies must make to their pension system. The so-called “Normal Contribution” (5) is how much money has to be paid to the pension system and invested each year to yield sufficient funds to eventually pay the additional pension benefits earned by active employees in that year. As can be seen (7), the employers – i.e., the taxpayers – pay about two thirds of the normal contribution. The PEPRA reform requires employees to pay half of the pension cost through payroll withholding, but, again, PEPRA only affects those hired after 2013. This means that in a few decades the taxpayer share of the normal contribution will come down to 50 percent.

The “unfunded contribution,” next on the chart (8), is what cities and counties have to pay to reduce their unfunded liability. For that amount, no employee contribution is required. The employer has to pay 100 percent of it. As can be seen, in all cases the unfunded contribution is far more than the normal contribution (row 8 compared to row 6). This means the employer share of the total contribution to CalPERS (normal and unfunded payments combined) is 79 percent of Santa Clara County’s total pension payment obligation, 82 percent of Sacramento’s, and 88 percent of Costa Mesa’s (row 10).

The impact of this burden can be put in context when considering how much these costs add to an agency payroll. The total employer payment for their pensions adds 29 percent to payroll costs in Santa Clara County, 38 percent in Sacramento, and a whopping 67 percent in Costa Mesa (11).

The Opportunity Cost

Another useful perspective from which to evaluate just how much pensions are costing taxpayers would be to consider the impact of transitioning every public employee to Social Security. At a cost to the employer of 6.2 percent of payroll, Santa Clara County would save 543 million per year, Sacramento would save $128 million, and the City of Costa Mesa would save $32 million. Why is this a far fetched scenario? Isn’t Social Security what private sector taxpayers must rely upon for their retirement security?

To take this one step further, even if along with the Social Security payment, you added an additional 6.2 percent of salary to be the employer’s contribution to each employee’s 401K – a level of generosity rarely found in the private sector – taxpayers would still save, per year, $399 million in Santa Clara County, $103 million in Sacramento, and $29 million in Costa Mesa.

It is fair to wonder how far $399 million would go towards repairing the roads in Santa Clara County, which are ranked, using data from the Federal Highway Administration, among the roughest in the nation. One might also consider how that money could be invested in more law enforcement, when violent crime has increased for the past two years in a row in Santa Clara County.

In the City of Sacramento, investing another $103 million in basic law enforcement would go a long way towards curbing violent crime in that city, where homicides were up over 30 percent in 2021 compared to 2021, and are on track in 2022 to exceed that. How many shelter beds could $103 million buy, as the homeless count in Sacramento County – most of them concentrated in the City of Sacramento – nearly doubled between 2019 and 2022? As it is, Sacramento’s projected $153 million outlay for pension contributions to CalPERS is more than they will spend on all of their capital improvement programs this year.

Costa Mesa might only save $29 million by replacing defined benefit pensions with a combination of Social Security and an exceedingly generous 401K plan, but with only 110,000 residents, Costa Mesa isn’t a very big city. The city’s general fund budget for 2022-23 is only $163 million. Saving $29 million would add 17 percent back to the city’s budget to tackle other challenges.

It is easy enough to criticize how California’s public agencies would spend the money they could save by adopting more equitable and financially sustainable retirement benefits. Current homeless policies tend to make the problem worse when more money is spent. More spending on law enforcement is wasted if criminals aren’t held accountable. Scandalous waste of public funds on road improvement projects is a perennial problem. But these examples of waste don’t obviate the fact that pension commitments have swamped civic budgets. While we’re fighting waste at city hall, we can give the savings on pensions back to the taxpayers.

Pension systems in California’s state and local government agencies today have achieved a precarious stability, thanks in part to PEPRA, and for the most part thanks to dramatically higher contributions demanded, and gotten, from taxpayers. But this stability has come at a terrific price in the form of lost opportunities for these agencies to better serve the public.

An edited version of this article was published by the Pacific Research Institute.

How the Scarcity Agenda Benefits Oligopolies

AUDIO: How financial speculators benefit from politics designed to create scarcity, and how environmentalism is used as the moral justification for scarcity policies. Edward Ring with Kara McKinney on OANN’s Tipping Point.

Tracking Political Spending by Government Unions

With a rough top-down analysis, it’s easy enough to estimate how much government unions collect and spend every year in California. They have roughly a million members, paying roughly $1,000 per year in dues. That would be one billion dollars per year. They spend about a third of that on politics. That’s equal to over a half billion dollars, every two year election cycle, that these unions can use to influence if not decide the outcome of every contest from the top to the bottom of the ticket.

If you want to know who is paying for those ubiquitous yard signs promoting some complete unknown to become the next member of the local school board, however, it gets a lot harder. If you think it’s a government union local, buying the office for a compliant candidate, you’re probably right. They’ve got the money, and they’re everywhere. But compiling a detailed assessment of government union spending at the local level in California is nearly impossible.

This matters because public agencies are relatively decentralized in California, with local government expenditures accounting for over 60 percent of total state and local spending. The only organizations that wield sufficient resources to select and support tens of thousands of local candidates every election are government employee unions. For obvious reasons these unions also have a strong incentive to find candidates they know they’ll be able to “negotiate” with for more staff, more pay, and more benefits.

Reform candidates willing to stand up to government unions quickly learn that the rules favor big money and big institutions. To begin with, there are limits to how much anyone can donate to an individual campaign. This means a candidate cannot find a political patron to back their campaign, but instead has to raise money from hundreds of donors. That’s much harder, especially at the local level. The political patron that is ever present, in every race, is the union whose members staff the agencies these elected officials will supposedly oversee.

The practical impact of contribution limits is that most viable candidacies are backed by “independent expenditure campaigns” for which there are no contribution limits. And if the candidate coordinates their individual campaign efforts with an independent expenditure campaign, they go to jail.

Contribution limits, contrary to their intent, have made it easier for big money – i.e., government unions – to dominate every small race. When a government union pours money, without limit, into an independent expenditure campaign, they exercise more influence on a candidate they support, because with independent expenditure campaigns it is the donor, instead of the candidate, who creates and defines the candidate’s identity to voters.

Another pernicious consequence of contribution limits is that by necessitating the proliferation of independent expenditure campaigns that can accept big money, it’s a lot easer to hide union money. To begin to get an idea of how difficult it is to track government union political spending in California from the ground up, monitoring every campaign, go to the California Secretary of State’s Campaign Finance website, select “Committees, Parties, Major Donors & Slate Mailers,” and enter the search term “teachers.” After you’ve eliminated the ones that are inactive and terminated, you will be staring down a list of 461 active recipient committees funded by state and local teachers unions.

Examining the reports from these 461 committees formed by teachers unions quickly reveals how little you really know. Many of the incoming contributions come from other committees; many of the outgoing donations are to other committees. It is almost impossible to track the money coming in or going out to its ultimate source or destination. Making matters much worse is the fact that only “state political campaigns and lobbying individuals and entities are required to file financial information with the Secretary of State.” Committees that restrict their activity to local candidates – and there are thousands of them – do not have to file reports on the state’s campaign finance website.

So who paid for those yard signs?

To answer this, California’s counties have stepped up to provide campaign finance information for local elections. The same challenges, however, are multiplied on these websites. Trying to decipher what donors are behind what candidates is an exercise in futility. The many transparency resources created by California’s state and county election officials are rendered nearly opaque by virtue of their complexity.

For starters, the website interfaces used by these counties are not uniform. Have a look at the campaign finance “public search” websites for San Diego, Los Angeles, Santa Clara and Sacramento counties. They’re all different. If you’re looking for information all over the state, you’ll need to learn each interface separately. In most cases, finding data on candidate controlled committees is relatively easy. But that’s not where the big money gets spent.

When it comes to independent expenditures, the complexity can become overwhelming. There is no limit on the number of independent expenditure campaigns that can be set up to influence a single race, and the contributions are reported in several different ways. For example, independent expenditures against a candidate are not reported in the same place as independent expenditures in support of that candidate’s opponent. Making matters still worse, if there is a campaign effort – a mailer, an online ad, a text or robocall campaign, a door hanger, whatever – that communicates support or opposition to multiple candidates, those expenses can show up in one place but have to be apportioned to each of the candidates mentioned.

It’s interesting to wonder what possibilities might exist to algorithmically mine California’s 58 county election reporting systems and Secretary of State Campaign Finance database to search by each candidate’s name and develop a report that identifies every donor to every committee that is either for the candidate or against their opponent. That would not be a terrifically challenging project, if California’s 58 counties used standardized campaign finance portals, and if they required candidates and committees to submit their information into a database instead of merely requiring them to upload PDF files of paper reports.

It would probably come as a surprise to many voters on the sidelines, and no surprise at all to those who have participated in state and local politics, that the vast majority of elected positions, especially at the local level, are bought and paid for by government unions. But don’t expect a comprehensive report on exactly how much was spent, in every local contest, despite that transparency residing well within the capacity of existing technology.

Without better information on the sources of campaign contributions, it is still informative to simply visit a candidate’s website and see who is endorsing them. If a candidate is endorsed by government unions, you can be pretty sure who bought those lawn signs.

This article originally appeared in the California Globe.

The Ideological Centrality of Infrastructure

The word infrastructure requires careful definition these days. Leftists have recently repositioned the word to describe not pipelines and power grids, and the like, but social services and public education. Where Leftists trod, moderate Democrats and RINOs have followed, muddying the meaning by imposing a broad concept onto what ought to be straightforward and tangible. This isn’t a trivial problem, because infrastructure, traditionally defined, demands painful clarity from ideologues committed to limited government.

For example, if you are going to build a pipeline to transport natural gas from wells to refineries, and thence to end users, you have to lay the pipe in a route that minimizes material waste. The same reality holds true for high voltage power lines, or freeways, or railroads. Without the ability of government to exercise eminent domain, it would be impossible to secure easements to build these necessary assets.

Even infrastructure that is built with private funding, such as toll roads, can’t be constructed without eminent domain. Without that legal authority, one private landowner, occupying a small parcel in the path of a project, could stop the project cold.

The moral worth of eminent domain falls along a continuum, and where the line is drawn between justified vs unjustified use is subjective. Necessary pipelines, aqueducts, and power lines are to one end, sports stadiums and urban renewal to the other. And even in those less justifiable categories, history is filled with examples of glorious rebuilt cities arising atop decaying slums, and only the arbitrary use of power made them possible. But we don’t have to go that far. We’re just trying to keep the lights on.

Regardless of your ideology, if you want your nation and the civilization it represents to endure, you have to make infrastructure a focal point of your philosophical deliberations and your political agenda, not a boring afterthought. Green ideology, now morphed into climate change extremism, backed by the most powerful institutions on Earth, has corrupted the infrastructure discussion in dangerous ways. They have stigmatized the upgrading or construction of virtually every conventional version of traditional infrastructure. New natural gas and oil pipelines, new refineries or reservoirs, aqueducts, power plants and freeways are all off the table, and we can’t even fix the old ones. Meanwhile, the infrastructure they’re building, oriented towards “renewables,” is extremely expensive and obviously inadequate.

If you’re a Democrat or a RINO, you don’t challenge green ideology. You don’t dare. Conventional infrastructure is not only environmentally incorrect, it’s also racist. The logic goes something like this: Low income neighborhoods are near infrastructure that pollutes because the pollution makes the area less desirable, lowering home values. People of color are disproportionately in low income households, therefore pollution disproportionately harms them, therefore infrastructure is racist.

That branch of libertarian ideology one might dub “Libertarianism Inc.,” pays close attention to these pieties. I recall attending a conference sponsored by libertarian mega donors a few years ago, where one of the sessions was striving to find common ground between libertarians and progressives on the issue of housing. The room was filled with earnest libertarians who seemed desperate to curry favor with the progressives on the panel. One of the popular refrains heard that day, and many times since, was that single family homes must be abolished because we must not subsidize the car. Home equals car equals road equals subsidies.

This again is pretzel logic, but now you’re playing defense on several fronts. Single family homes are “exclusionary” (translation, racist), they are unsustainable, and the infrastructure to support them drains public funds. If that isn’t enough, those public funds are now, and now more than ever, coveted by powerful public employee unions who want that money to increase their pay and shore up their pensions.

The Case for Cost-Effective Infrastructure

The argument in favor of government investment in infrastructure is not subtle. If you don’t subsidize enabling infrastructure, you will instead subsidize every household that can’t afford the higher prices that come with scarcity. In the 1950s and 1960s California was a magnet for working families (today it’s a magnet for drug addicts, vagrants and criminals) because the state government spent up to 40 percent of its general fund to build freeways, reservoirs and aqueducts.

At the same time, a deregulated private sector did its part. Energy companies were permitted to drill and refine oil and gas. Utility companies were encouraged to build natural gas and nuclear power plants. Timber companies maintained fire roads and kept high voltage transmission line corridors cleared, while harvesting and milling lumber for construction. This was a highly functional interplay between public and private interests, and the result was an environment where every basic necessity of civilization was abundant and affordable. Homes went up along with schools and parks, companies poured in to offer jobs, and everyone in California prospered.

Today the entire equation is inverted. Forty years of neglected infrastructure has led to clogged freeways, rationed water, expensive and unreliable energy, and needlessly expensive building materials. The policy response to these shortages is to zone high density multi-family “infill,” hoping to cram new residents into the footprint of existing power, water and transportation assets. Every basic necessity is now unaffordable to normal working families in California. Even food prices are rising and it’s going to get much worse, because irrigation water and fertilizer require forbidden infrastructure. Instead of fixing these mistakes, “infrastructure” is redefined as government subsidized “affordable housing,” school lunch programs, and other expensive social services that would not be necessary if genuine infrastructure were delivering affordable abundance.

The special interests that benefit from scarcity are hiding in plain sight. Public entities collect higher property tax revenue as assessments rise. Public utilities earn higher absolute profits as their regulated fixed profit percentage is calculated on far higher unit prices. High tech firms sell mandated chip sets and software that are built into “smart” appliances, and appliance manufacturers find a whole new market as existing and very durable legacy appliances are deemed obsolete before their time. Renewable energy companies sell mandated EVs, solar panels, wind turbines and batteries, nearly all of it them sourced from China. But even all this is overshadowed by how contrived scarcity creates new frontiers for financialization.

As interest rates go up, the amount any buyer can afford to borrow goes down, but the price of housing remains stable. Why? Because this time, hedge funds, sovereign wealth funds, pension funds, and institutional investors are buying everything in sight. In some cases they’re buying entire subdivisions. Cash rich, these corporate investors don’t finance their purchases, and therefore are indifferent to high interest rates.

In an era of practical investment in enabling infrastructure and reasonable instead of punitive, prohibitive regulations, the cost to build homes would drop, artificial scarcity would not exist, prices would drop, normal people could still afford homes, and America’s last great avenue for ordinary households to build generational wealth would remain intact.

Infrastructure that enables affordable abundance also benefits small businesses because it makes it easier for them to compete with larger firms. Companies that are part of an oligopoly don’t care how much their inputs cost, or how onerous regulations may become. This is one of the biggest misconceptions spread by leftists. Businesses that dominate their sectors will just pass higher costs on to their captive customers, and they welcome more regulations. They’ve realized that more regulations will help them crush emerging competitors. That’s why they’ve moved their support to the Democratic party and embraced the Green New Deal.

What a paradox. Subsidized infrastructure – along with deregulation – helps small companies compete with big companies, fostering decentralization of private wealth and a higher percentage of financially independent individuals.

Do libertarians really want to offer cover for plutocrats and the oligopolies they control? Is that the version of capitalism and competitive enterprise they embrace? Whenever a common sense infrastructure project is proposed, the green team is out to stop it. Backed by leftist billionaires and every major media property, the greens will smear the project and litigate in court. And if the outcome is nonetheless uncertain, since a lot of people recognize the need and are willing to fight for, say, more water, more energy, more roads, libertarians come in and tilt the balance to kill the project. On principle, they’ll object to any element requiring eminent domain, or use of public funds.

It’s hard to frame the ideological case for infrastructure in a seductive way. But its presence, and its absence, is felt everywhere. If principled libertarians supported infrastructure, that certainly would not preclude them from participating in revealing audits to compel more efficient use of public funds. If they reject the projects on principle, fewer get built, and those that do will lack another layer of public scrutiny.

Ultimately, libertarians have a choice: They can cozy up to progressives, exploiting the superficial synergy that finds green ideologues and small government ideologues united in stopping infrastructure projects. But then they’ll confront instead an even bigger government, funding an even more expensive, more expansive, more exploitative “infrastructure,” requiring even more subsidies. Instead of helping to fund practical conventional solutions to deliver abundant water, energy and transportation, the government will pay for smart water meters and smart appliance rebates, a renewable energy grid with all that will require, mass transit, affordable housing and housing subsidies, and social programs for the many who are economically disenfranchised by this unaffordable new world. It’s going to be one or the other.

This article originally appeared in American Greatness.

Can’t Afford California? Thank an Environmentalist

The world that we invented, from an environmental perspective, is now getting in the way of moving these projects forward.
– California Governor Gavin Newsom, August 11, 2022

This moment of candor, coming from a man who seems determined to be the most environmentally correct politician in the world, was with reference to water projects. But Newsom, and anyone else paying attention to California politics, knows that for every major project, of whatever type, environmental regulations and litigation are getting in the way of moving them forward.

That’s life in California, and when even Governor Newsom starts to complain, you can bet the problem is real. Environmentalism run amok isn’t just stopping infrastructure projects and destroying economic opportunities for millions, it’s even harming the environment.

That isn’t hard to miss, if you look around. Notice the dead or dying trees in front of homes, businesses, or in the traffic medians on the boulevards of major cities? Thank environmentalists, who for decades have successfully blocked any projects that might have drought proofed our water supply and eliminated the need to triage urban water use.

Are you sweltering in neighborhoods adjacent to fields turned into heat islands, where toxic plastic rugs have replaced natural turf, supposedly to save water and hence save the planet? Are your kids coming home with torn ligaments and synthetic particles embedded in their skin and clothes, because they competed on these fake lawns? Thank an environmentalist.

Have you been forced to burn LED lights, all of them equipped with cheap transformers, and noticed the unhealthy impact of spending half your life exposed to their oscillating flicker? Wouldn’t you prefer to have access to the newest warm, safe energy-efficient incandescent bulbs instead of having them banned? Thank an environmentalist.

Are you using battery powered blowers, mowers, pruners and weed whackers that are clearly not ready for prime time? Do you enjoy having to obsessively charge and discharge them and store them according to demanding specifications so they don’t burn out after six months? How’s that working out for you? Thank an environmentalist.

Have you been stranded in your EV, waiting for an hour or more to get to a charger and get recharged? What do you do when it rains so hard it’s hazardous to charge an EV, or when you can’t find a charging station, or you don’t have hours to wait to add range to your car?  Someday, EVs may be practical, safe and affordable. But why are they being forced upon the public today? Thank an environmentalist.

None of this stuff helps the planet. There ought to be plenty of water and energy to allow Californians to live with comfort and dignity, but instead of building enabling water and energy infrastructure, sue-happy environmentalists stop every project in its tracks, while their cronies profit from sales of marginal products that use far more resources and ultimately leave a bigger environmental footprint.

Does anyone really think astroturf, or LED lights, or lithium batteries, can be “sustainably” manufactured and recycled? What about thousands of square miles being smothered with photovoltaic cells, wind turbines, and battery farms? What about electric vehicles? In most cases, the manufacture, impact, and maintenance and replacement requirements of “renewables” consume orders of magnitude more resources than conventional energy.

In California, the entire economy is critically damaged thanks to extreme environmentalism, starting with housing. In the old days, homes were built with lumber that was logged and milled in California. Water heaters, cooktops and space heaters used natural gas extracted from California wells, and electricity came from an in-state mixture of hydroelectric, natural gas and nuclear sources. Water came from a system of reservoir storage and interbasin transfers via aqueducts and pumping stations that remains a marvel of the world. The new roads and freeways were constructed out of a combination of government operating budgets and bonds. The land homes were built on was rezoned without litigation or onerous delays and fees.

On this foundation of government funded enabling infrastructure and less regulations, homes were affordable. Back then, California worked for ordinary people. It became a magnet for people from all over America and the world. Those days are gone. Thank an environmentalist.

There’s a reason homes cost almost twice as much in California as they do in the rest of the nation. Getting land approved for development takes years if not decades, during which at any point the permit can be denied by any number of agencies or deterred by endless environmentalist litigation. On top of land scarcity is water scarcity, also politically contrived, which prevents many housing developments from even being proposed.

Then there is the cost of lumber and concrete, products that used to come from local sources that competed for customers. But with California’s lumber harvest down to a quarter of what it was only 30 years ago, and the virtual impossibility of opening new quarries, home builders have to import their materials from other states and nations, driving costs way up.

Adding to the cost of homes as well are the environmentally-correct appliances now required, that are energy and water efficient to a fault. Equipped with sensors, software that requires updates, and connected to the internet, these hyper-efficient machines cost twice as much as they otherwise would, don’t last very long, and do a poor job. And what about those “low flow” faucets and shower heads that barely release water, and turn off automatically before you’re done with them?

There’s nothing wrong with designing greater efficiency into appliances. But these appliances go well beyond the point of diminishing returns, and the only beneficiaries are crony manufacturers and tech companies. Thank an environmentalist.

The counterproductive impact of environmentalism defies reason. It’s not just the colossal, destructive footprint of supposedly renewable products or sources of energy. It’s land management. Thanks to environmentalists, in California’s forests and woodlands , in order to log, graze livestock, do controlled burns or mechanical thinning, property owners confront an obstacle course of regulations and permit requirements coming from several agencies at once. Many of the regulations are in conflict with others; it is an expensive and protracted process that very few can navigate. And so the overcrowded forests burn.

This is perhaps the most egregious example of counter-productive environmentalism. Bigger than their war on nuclear power and natural gas. Maybe even bigger than their success in making California unaffordable and inconvenient for all but the super rich. For the last 30 years, as CalFire snuffed out every small fire they possibly could, every practical means of thinning the forests to compensate for fire suppression was made nearly impossible. Thank an environmentalist.

California’s forests are approximately seven times as dense as they have historically been for millennia prior to these atrocious circumstances. In previous centuries, because they weren’t overcrowded, the forests survived droughts more prolonged than the ones we experience in this century. But today, the rain we get can’t even percolate into the ground. The crowded trees desperately absorb every drop, and it still isn’t enough, because where one tree used to grow, seven trees are competing for the same nutrients and moisture. This is why the trees are dying. This is why we have superfires.

When California’s forests have burnt down to the dirt, and ash laden silt is eroding into every stream and river in the state, thank an environmentalist.

It should go without saying that environmentalism is an important value to incorporate into public policy. We may thank environmentalists for getting the lead out of gasoline, and saving the majestic Condor, to name two noteworthy achievements that happened right here in California. But environmentalism becomes a negative value when its primary benefit is only to line the pockets of environmentalist litigants or pad government bureaucracies or enrich crony businessmen.

Today there is no balance. Environmentalism in California is out of control because it empowers a powerful coalition of special interests. The interests of the planet, as well as the interests of California’s striving humans, have become secondary. Newsom’s criticisms are helpful. Now they need to be followed up with action.

This article originally appeared in The Epoch Times.

Are Government Pensions Funds in Crisis Again?

If ever there were a case of Chicken Little, it’s the endless squawking over the imminent implosion of public employee pension funds. In California, ever since pension benefits were enhanced, retroactively, starting in 1999, critics have been claiming a pension apocalypse was imminent. But no matter what happens, pension funds muddle through.

The modern era of pensions began in the 1984, when pension system guidelines were revised to permit them to purchase equities without limit. By 1999, on the strength of a nearly 15 year run of unbroken equities growth, California’s pension systems were fully funded with surpluses. With their confidence undiminished after the internet bubble popped and stocks tanked, pension system managers blithely continued to advocate pension benefit enhancements. By 2005 those benefit enhancements had rolled through every agency in California, and by then the markets were recovering as well. Then came the crash in the fall of 2008. To cope, the pension systems began to use creative accounting. Collectively these gimmicks obscured growing problems.

For example, asset “smoothing” made it possible to hide recent drops in the value of invested assets by reporting the average value of those assets over previous years. As the funded status – the difference between total invested assets and the amount the fund actually needs to pay current and future pensions – worsened, pension systems began to require so-called “unfunded contributions,” which were catch up payments necessary to reduce the growing amount of underfunding. But by negotiating repayment terms analogous to negative amortization mortgages, agencies were allowed to make low payments in the early years of the amortization term, which frequently meant the underfunded amount wasn’t even being reduced. Then when those payments become burdensome, agencies would refinance the new, now even larger unfunded liability, to get that unfunded payment down again.

Gimmicks abounded. Pension funds in the early 2000s used an estimated rate-of-return per year of around 7.0 percent, which was obviously too high, since the funding status of pension systems continued to worsen. But by maintaining the fiction of a higher than realistic rate-of-return, pension systems could underestimate the size of their pension liability, and claim there was enough money in the system. If they acknowledged that returns might be lower, they would need more assets to make up the difference.

The consequence of this was pension systems quietly ended up with an unfunded payment that came to dwarf the “normal” payment. If a pension system is fully funded, the only contribution required each year is the “normal” payment, which is the amount of money that has to be invested in order to pay whatever amount of future pension benefits were earned in that year. This is the essence of pension finance. You estimate the present value of future pension benefits, and make sure you have that amount invested today. When you don’t do that, you end up with an unfunded liability. In California today, in almost every one of the pension systems set up for government retirees, the unfunded payment that agencies have to make to the pension systems is now more than the normal payment. But guess what? The only portion that public employees have to themselves help pay through payroll withholding is the normal payment. Taxpayers pick up everything else.

If all this complexity is tedious, join the club. An innumerate legislature, a powerful public employee union lobby, and inadequate pension system oversight has put us where we are today. Pension systems that remain only 70 percent funded, with taxpayers footing far more than their share.

So are we today at just another Chicken Little moment? After all, the pension systems have bent but they never broke. This is thanks to the PEPRA reforms of 2013, the GASB reforms of 2015, along with agencies picking up unfunded contributions that slowly grew into the monster they are today, which allowed them time to raise taxes and cut services so they could make those higher payments.

Taking all this into account, it is not unreasonable to consider government pensions resilient enough to take whatever is coming next. Nonetheless, with today’s uncertain outlook for stocks, bonds, and real estate, it is timely to have another look at the financial health of California’s pension systems. Since CalPERS is the 800 pound gorilla in California’s pension jungle, a look at its finances may be illustrative.

The first chart shows the funding status of CalPERS by year, starting with the fiscal year ended 6/30/2007 and continuing through 6/30/2020, the most recent year for which financial statements are available. As can be seen, CalPERS has only been around 70 percent funded for over six years. It is also evident that 2013 was a pivotal year for the fund, because in that year, the value of the total invested assets actually declined, from $283 billion on 6/30/2012 down to $281 billion on 6/30/2013. The funded ratio prior to 2013 had stayed over 80 percent, but subsequently fell down into the 70s and still has not recovered.Something else that should be noted from this first chart is the relentless growth of the pension liability. Between 2012 and 2013, as total investment assets shrunk in value, the present value of future pensions increased by over 10 percent, from $340 billion to $375 billion. Overall, during the 14 years reported here, while assets increased in value by 181 percent, liabilities increased by 223 percent. The combination of absolute growth in the total pension liability and a diminishing funded ratio has a compounding impact on the amount of the unfunded liability. As of 6/30/2020, CalPERS was facing an unfunded liability of $163 billion. Taxpayers are on the hook for 100 percent of this debt.

While complete financial statements for CalPERS – and most public employee pension systems – lag about 18 months behind their close dates, every month CalPERS offers an update on the value of their invested assets. Reviewing the latest available report reveals the risks they have begun to take in order to prevent their funded ratio from further deteriorating.

The next chart, below, provides a snapshot of CalPERS investments as of August 31, 2022. Their total assets have swollen to $446 billion. That’s good performance, implying an annualized return over the 14 months since 6/30/2020 of over 9 percent. But what’s in these numbers?Here is where CalPERS position may be more precarious than ever. Consider each category of assets, including some you would not have spotted ten years ago. Public equity refers to listed stocks, and with the market in turmoil, the direction of these investments is uncertain. “Income” refers mostly to bonds with fixed yields, and as interest rates go up, the value of previously purchased bonds must fall, since for them to remain marketable the yield from their fixed payment has to rise to a competitive level. “Real assets” refers to real estate investments, which, like publicly traded stocks, is in uncertain territory. But what about the other categories?

Here is where even greater risk to the CalPERS investments may reside. Private equity and private debt refer to investments in companies that are not yet listed. These investments lack the liquidity of publicly traded stocks and bonds, and the financials of these companies are not as transparent. Private equity may also include hedge fund investments which are even more volatile.

And then there is “Other Trust Level” investments, where CalPERS has deigned to commit over $16 billion. In the footnotes to CalPERS Trust Level Quarterly Update, decipher this description: “Trust Level Financing reflects derivatives financing and repo borrowing in trust level Synthetic Cap Weighted and Synthetic Treasury portfolios.” Good luck with that. This is pre-financial crisis speculative behavior, the sort that almost brought down the entire financial system. To further put this in context, “Leverage” refers to money CalPERS borrowed in order to make additional investments, hoping those investments would earn more than they paid to borrow the money.

A financial blogger operating under the pseudonym “QTR” (Quoth the Raven), with thousands of subscribers on Substack, warned last week what could happen to U.S. pension funds, writing “The fact that these funds were unable to post the returns that they needed during arguably the most euphoric bull market in history is extremely concerning.”

If CalPERS is any example, indeed they could not. During the period from 2007 t0 2020, CalPERS went from 87 percent funded to 70 percent funded. Because annual pension benefit payments to government retirees in California are required to match inflation once the purchasing value of a pension falls to within 75-80 percent of its purchasing power upon retirement, inflation is going to drive the amount of the total pension liability up faster than the 6.4 percent it averaged over the past 14 years. CalPERS, and the other pension plans, are chasing a greyhound, and the engine is overheating.

California’s pension systems, to the extent they have matched CalPERS in diverting billions of dollars into private debt and equity, hedge funds, derivatives, and other highly speculative financial instruments, and financed these adventures with borrowed money, are stretched as far as they can go. California’s legislature needs to investigate the asset mix of state and local government pension systems and honestly appraise the exposure. Are they facing margin calls? Do they face liquidity risk?

As for the financial experts running California’s pension systems, they need to back away from speculative investments, deleverage, and tell the union lobbyists and their captive legislators the truth: We can no longer use creative accounting and high-risk investment strategies to perpetuate the perception of system stability.

This article originally appeared in the California Globe.