Archive for Taxes and Fees

Sources for Claims That One-Party Control and Government Taking More Money Triggered a California Comeback

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Prominent “Progressives” identify a simple way for governments to ease economic and social problems: take more money from people as tax revenue and spend it on programs and projects. And in 2013 they can cite an example that seems to conform with their ideas.

Yes, it’s California.

Below is a fairly comprehensive list of sources for this claim. Notice that many of these sources are based on the East Coast.

Reporters and columnists for the New York Times seem to be particularly knowledgeable about the political and economic circumstances of California. They have even personified the claim through Governor Jerry Brown, as if one heroic, enlightened man alone engineered a “comeback” for the state. (Governor Brown doesn’t do much to dispel the myth.)

I’m guessing that the interest of the New York Times in California’s economy and budget is based primarily on needing to tout an example that the federal government should emulate. The nation’s intellectual elite continues to be frustrated that the “New New Deal” that Progressives were envisioning for America after the November 2008 election never came to fruition. The “Tea Party” has exploited outdated structural checks and balances of the republican model of government and permitted the thinking of the Reagan Era to linger, hindering Progress.

California Comeback:
One-Party Control and Higher Taxes as a Model for Success
  1. California Beaming – commentary by Tim Egan – New York Times – March 28, 2013
  2. Lessons From a Comeback – column by Paul Krugman – New York Times – March 31, 2013
  3. California Faces a New Quandary, Too Much MoneyNew York Times – May 25, 2013
  4. California’s New ‘Problem’: Jerry Brown on the Sudden Surplus, and the FilibusterThe Atlantic – May 26, 2013
  5. The California Comeback: How Progressives Stopped California’s Decline – video of panel discussion at 2013 Netroots Nation – June 22, 2013
  6. California Shows the Country How to Overcome GOP Dead-EndersNew Republic – July 1, 2013
  7. California Resurgent Under Brown, But Spending a Worry – Associated Press – July 5, 2013
  8. California Economy is on the Comeback Trail. Can America Follow?Christian Science Monitor – July 23, 2013
  9. Brown Cheered in Second Act, at Least So FarNew York Times – August 16, 2013
  10. Jerry Brown’s Tough-Love California Miracle: The 75-year-old governor rescued the Golden State from financial ruin – and is reshaping a national progressive agenda – Rolling Stone – August 29, 2013
  11. New Rule: Conservatives Who Love to Brag About American Exceptionalism Must Come Here to California – commentary by Bill Maher – Huffington Post – September 27 2013
  12. Jerry Brown Calls Washington Gridlock Dangerous, ‘Really Sick’Sacramento Bee – October 2, 2013
  13. Sacramento Not as Dysfunctional as Washington, D.C. – column by Tim Rutten – Los Angeles Daily News – October 11, 2013
  14. California Sees Gridlock Ease in GoverningNew York Times – October 18, 2013
  15. Gov. Jerry Brown’s Advice for WashingtonLos Angeles Times – October 24, 2013
  16. California, Jerry Brown Enjoying Rave Reviews, but Comparisons Are TrickySacramento Bee – October 25, 2013
  17. While Congress Stalls, the Golden State Moves Forward – commentary by Senator Hannah-Beth Jackson (D) – Santa Barbara Independent – November 5, 2013
  18. California Governor Brown: A Great Power Has To Find Some Unity – NPR – November 6, 2013
  19. California, Here We Come? – column by Paul Krugman – New York Times – November 24, 2013 (praise of Covered California)

After November 23, 2013

Jerry Brown’s Revenge – commentary by Tim Egan – New York Times – March 6, 2014

Palmy Days for Jerry – commentary by Maureen Dowd – New York Times – March 22, 2014

Jerry Brown’s 4th Act – Politico – October 28, 2014

 

Reality of Crushing Public Debt from Bond Sales Eclipses the Fantasy Vision of California High-Speed Rail

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Originally presented to Californians as a $45 billion statewide high-speed rail system to transport people between major metropolitan areas, the “Safe, Reliable California High-Speed Passenger Train for the 21st Century” has been distorted by the state’s leftist ideologues and corporate and union special interests into the California High Speed Rail Scam.

My article California High-Speed Rail: One-Way Ticket to Debt in www.FlashReport.org on March 25, 2013 described my experience speaking at the March 18, 2013 meetings of the California High-Speed Rail Authority and the California High-Speed Passenger Train Finance Committee. I asked pivotal questions about how the State of California planned to sell the $9.95 billion in bonds authorized by 52.7% of California voters through Proposition 1A in the November 2008 election.

My questions were reported throughout the state in a March 18, 2013 Associated Press article Board Seeks $8.6 Billion in California High-Speed Rail Bonds:

Several speakers challenged the timing of the authorization during the board’s public comment period, asking why the board was acting on the bulk of the bonds approved by voters now when it could be years before the money is needed. Kevin Dayton, a public policy consultant from Roseville, questioned whether the board was rushing to beat the outcome of the lawsuits attempting to block the railroad.

“That’s the obvious question that comes up,” Dayton said. “I think it’s reasonable to assume they’re very worried about it.”

TV viewers also saw (and read) my comments in Nannette Miranda’s story Board Seeks $8.6 Billion in California High-Speed Rail Bonds for various local news programs of ABC affiliates throughout the state:

“What’s your current estimate of the total amount of debt that will be assessed including the interest on this?” high speed rail opponent Kevin Dayton asked the board.

During media interviews after the board meeting, California High-Speed Rail Authority chairman Dan Richard claimed the cost of interest payments for the entire project could eventually reach $700 million per year. He also claimed that interest on the first $2.61 billion in bond sales authorized by Senate Bill 1029 (2012) would cost $175 million per year over 30 years.

As stated in this article California Bullet Train Clears One Obstacle; Land, Legalities Remain, “It all depends on Wall Street, but for estimation purposes, the state is using a 6.5 percent interest rate for 35 years.” This was the rate cited by Chairman Richard during the media interviews. According to California Municipal Bond Advisor, yields for State of California 30-year general obligation bonds were 4.80% on September 20, 2012 and 5.03% on October 19, 2012.

My Questions Reveal One Surprise: Truckers Will Pay for the Bond Interest

California High-Speed Rail Authority chairman Dan Richard responded to my comments by declaring that my questions should be addressed to the California State Treasurer, Bill Lockyer. But later in the meeting, he said that the state would pay interest on the bonds NOT from the general fund, but from vehicle weight fees paid by truckers.

Fox News 11 in Los Angeles reported on this revelation with its March 28 story Money Shell Game? Potholes or High Speed Rail. I was interviewed for the story, and an excerpt from the interview appears in the segment. I am also quoted in the associated article:

Those are fees paid when trucks are too heavy. And that money is supposed to go to highway construction projects. This is typical of the entire way the rail authority operates. Things change. You don’t know what’s going on, there’s very little transparency and openness. Essentially, all they’re doing is taking the money, transferring it into another fund and pretending the general fund is not paying for it. In reality, California taxpayers are still paying the interest.

Assembly Bill 105 (2011) authorized vehicle weight fees to pay interest on bonds for transportation projects. The March 13, 2013 California Legislative Analyst’s Office Overview of Transportation Funding explains how vehicle weight fees will pay interest in 2013-14 on transportation-related bonds:

In addition to ongoing revenues from fuel taxes, the state has issued general obligation bonds in order to pay for transportation projects. The largest such bond measure was Proposition 1B (2006), which authorized the state to sell $20 billion in bonds to finance transportation projects. The Governor’s budget estimates that the debt-service costs on Proposition 1B and other outstanding transportation bonds will be about $1.1 billion in 2013-14.

Vehicle weight fees are used to pay the debt-service cost on transportation bonds rather than the General Fund. For 2013-14, the Governor’s budget uses all $946 million in weight fees to benefit the General Fund. Of this amount, $907 million is to pay debt service and $39 million is loaned to the General Fund and set aside for future debt service.

In addition, the Governor’s budget proposes to use miscellaneous revenues in the SHA to pay transportation debt service on an ongoing basis.

I asked this question in a tweet during the California High-Speed Rail Authority meeting on March 18 after the Authority chairman talked about paying interest from vehicle weight fees:

Does California Trucking Association @Caltrux know truck weight fees to pay interest Prop 1A bond sales for high-speed rail? $10 billion.

This response came on March 28 after the Fox News 11 story aired:

@DaytonPubPolicy we are well aware that the weight fees we pay to maintain roads now go to non-road projects. Trucks pay their share.

(They certainly do, and more – trucks are a favorite target of the Left in California.)

What Were the 2008 Cost Estimates for Interest Paid on the Bonds?

The official legislative analysis of Proposition 1A provided voters with an estimated cost of selling bonds with a 30-year maturity:

If the bonds are sold at an average interest rate of 5 percent, and assuming a repayment period of 30 years, the General Fund cost would be about $19.4 billion to pay off both principal ($9.95 billion) and interest ($9.5 billion). The average repayment for principal and interest would be about $647 million per year.

A July 7, 2008 Senate Appropriations Committee analysis estimated the cost of selling bonds with a 40-year maturity:

AB 3034 would extend the maximum allowable bond maturity term from 30 years to 40 years. Assuming the same interest and inflation rates, this bill could result in an increase in total General Fund costs of $3.78 billion if the term of the bonds is extended to 40 years (to a total cost of $23.2 billion). Annual debt service payments would be $580 million for 40 years.

According to Section 5.02(b)(vii) of the resolutions passed on March 18, the Treasurer is now authorized to borrow the $8.6 billion by selling bonds with a maturity period of 35 years

So does the Governor’s proposed 2013-14 budget adequately account for interest to be paid after the state borrows money for California High-Speed Rail through bond sales? It depends on how the California State Treasurer intends to structure and market them.

Estimated Costs of the California High-Speed Rail 1996-2012, with Links to Sources

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It isn’t your imagination: cost estimates for the California High-Speed Rail have varied widely but generally have skyrocketed. The $9.95 billion that California voters authorized to borrow for the High-Speed Rail by selling bonds (through Proposition 1A in November 2008) isn’t going to get the job done, even if the Federal Railroad Administration does end up sending $38 billion to California. (Federal debt as of January 18, 2013 is $16,432,619,424,703.06 – $16.4 trillion.)

And don’t forget that money borrowed through bond sales has to be paid back, with interest and financial transaction fees. For the privilege of selling $9.95 billion in bonds, add another $19.4 billion to $23.2 billion for the cost of debt service, and hope that interest rates remain low and California stays out of bankruptcy.

While some experts blame inflation for the increase in the cost estimates, note that $16.5 billion in 1996 dollars should equal $24.1 billion in 2012 dollars, according to the Consumer Price Index (CPI) Inflation Calculator on the U.S. Bureau of Labor Statistics web site. In addition, the sharp decline in the prosperity of the California construction industry from 2007 to 2012 should have modified the market cost of construction services and labor. (Note that state-mandated wage rates – so-called “prevailing wages” – are determined for construction trades and certain professional services based on multi-year union collective bargaining agreements, and not wage surveys or statistics from the California Economic Development Department that might reflect actual market conditions.)

Cost Estimates for California High-Speed Rail 1996-2012
(if a range is given, the higher number is cited)
$16.5 billion 1996 September 1996 Final Report of the California Intercity High Speed Rail Commission
$25 billion 2000 2000 California High-Speed Train Business Plan
$37 billion 2005 August 2005 California High-Speed Train Final Program EIR/EIS 
$45 billion 2008 July 7, 2008 Senate Appropriations Committee Fiscal Study of Assembly Bill 3034
$45 billion 2008 Analysis by the Legislative Analyst in the Official Voter Information Guide for the November 4, 2008 Election – Prop 1A – Safe, Reliable High-Speed Passenger Train Bond Act “The authority estimated in 2006 that the total cost to develop and construct the entire high-speed train system would be about $45 billion.”
$33.6 billion 2008 November 2008 California High-Speed Train Business Plan
$43 billion 2011 May 2011 Report of the California Legislative Analyst’s Office
$98.1 billion 2011 November 1, 2011 California High-Speed Rail Program Draft 2012 Business Plan
$68.4 billion 2012 April 12, 2012 California High-Speed Rail Authority Revised 2012 Business Plan
$150 billion 2040 Common Sense! Huge infrastructure projects almost always end up costing a lot more than originally claimed.

The Union Quest for a Project Labor Agreement on a New Sacramento Kings Basketball Arena: Part One – 2006

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Looks like the Sacramento Kings professional basketball team is on its way to Seattle, ending the union dream in Sacramento of a monopoly on building a $500 million taxpayer-funded sports and entertainment complex. Here’s Part One of a two-part series on the history of labor issues concerning the construction of a proposed new arena for the Sacramento Kings.

In August 2006, Associated Builders and Contractors (ABC) of California, the Western Electrical Contractors Association (WECA), and the Coalition for Fair Employment in Construction learned from multiple sources that top construction union officials in Sacramento were anticipating a Project Labor Agreement (PLA) if Sacramento County voters approved a proposed $1.2 billion sales tax increase in the November 2006 election to pay for construction of a new $470 million arena for the Sacramento Kings basketball team, as well as other projects. A Joint Powers Authority comprised of elected officials from Sacramento County local governments would make sure the Project Labor Agreement was imposed, and arena supporters asked Sacramento union officials to keep their costly plan quiet until after voters approved the sales tax.

Supporters of fair and open competition didn’t keep it quiet. In October 2006, my former employer Associated Builders and Contractors of California and the Coalition for Fair Employment in Construction sent a mailer to 27,000 households in Sacramento County asking them to contact the Sacramento County Board of Supervisors and Maloof Sports and Entertainment in opposition to a Project Labor Agreement that unions wanted on the project.

Front of 2006 mailer urging Sacramento County residents to tell the Sacramento County Board of Supervisors and Maloof Sports and Entertainment to reject a union-only Project Labor Agreement for a new Sacramento Kings basketball arena.

Front of 2006 mailer urging Sacramento County residents to tell the Sacramento County Board of Supervisors and Maloof Sports and Entertainment to reject a union-only Project Labor Agreement for a new Sacramento Kings basketball arena.

Sacramento Kings New Arena - Project Labor Agreement Mailer Back 2006

In the end, a whopping 80.38% of voters rejected Measure R to pay additional taxes to fund a new $470 million arena for the Sacramento Kings professional basketball team. And 71.43% of voters rejected Measure Q, an advisory vote on authorizing the use of the new tax revenue in part for building a new arena.

Union leaders and their political allies weren’t done yet. A second chance for a Project Labor Agreement would come in 2011, but this time the opposition would go on the offense.

Part 2 to come…

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Bakersfield Becomes Latest of California’s 121 Charter Cities to Free Itself from Government-Mandated Construction Wage Rates (So-Called “Prevailing Wage”)

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As I anticipated in my July 2, 2012 article Prediction: An Explosion of California Cities Freeing Themselves from Costly State-Mandated Construction Wage Rate Laws, the past three months have seen a flood of California cities seeking voter approval for charters, as well as existing charter cities establishing their own policies concerning government-mandated construction wage rates (so-called “prevailing wages”) for purely municipal construction (or private projects that receive government assistance only from the city).

These recent www.CalWatchdogs.com articles summarize what’s happening in California: Push for Charter Cities Enrages Unions and Cities Vying for Local Control on November Ballot.

Through its July 2012 decision in State Building and Construction Trades Council of California, ALF-CIO v. City of Vista, the California Supreme Court affirmed the right of California’s 121 charter cities to set their own prevailing wage policies for municipal construction and thereby free themselves from the costly, complicated, and nonsensical way that the State of California calculates state-mandated construction wage rates and defines public works.

For comprehensive information, see the 92-page guidebook Are Charter Cities Taking Advantage of State-Mandated Construction Wage Rate (“Prevailing Wage”) Exemptions?

Bakersfield is the latest charter city to establish its own policy concerning government-mandated construction wage rates. Hoping to sustain its economic boom and resist union-backed public policies dragging down economic growth and job creation in the state and other cities, the Bakersfield City Council voted 4-2 (with one city council member recusing himself) on October 17, 2012 to set its own policy. Here is the city’s agenda item description: Resolution exempting the City from prevailing wage requirements for locally funded public works contracts except where required by law.

Here’s a July 17, 2009 video report on KBAK Channel 29 (CBS) news featuring a comment from me about the need for the City of Bakersfield to free itself from state-mandated construction wage rates set based on collective bargaining agreements for urban areas: Prevailing Wage Wastes Tax Dollars in Bakersfield.

It was reported to me that unions brought busloads of people from Los Angeles to pack the council chamber, but the city council majority was not fooled and not intimidated. Here’s news coverage, with excerpts (bold highlights are mine):

Council Shakes Off Prevailing Wage Requirement – Bakersfield Californian – October 17, 2012

City staff also informally surveyed local contractors and were told that without the prevailing wage requirement, project costs could be cut by 3.5 percent to 30 percent

But just as many people spoke in favor of the resolution as against it, saying it would result in more efficient use of taxpayer money and wouldn’t lead to unfair construction wages or lower quality in projects.

“As a city council member, I have a fiduciary responsibility to taxpayers and the community to utilize funds with care and strive to provide the best value possible,” Weir said in an email earlier Wednesday. “With the approval of tonight’s resolution, we will be able to build better parks with more amenities, increase the amount of street repaving, and provide other benefits without additional cost to the taxpayers. To not pursue this opportunity would be a breach of my responsibility.”

Councilmembers added a late amendment to the resolution as a step to better protect against unqualified contractors bidding for city work. Before the resolution passed, projects valued at $1 million or more required that contractors be “pre-qualified” for their suitability to do the type of project at hand before being allowed to submit a bid. With the resolution, that threshold was lowered to $250,000.

Contractors, Unions Object to City Prevailing Wage Proposal – Bakersfield Californian –  October 16, 2012

City Manager Alan Tandy said savings for the city means more work can be done. Taking an example of 20 percent savings, he said, “If we save 20 percent on resurfacing a street, we can resurface 20 percent more streets. We have more that need resurfacing than we have money to resurface.”

Council Members Tackle High Speed Rail, Prevailing Wages in Heated Debate – KGET Channel 17 (NBC) news – October 18, 2012

Congratulations to the Bakersfield City Council. Under pressure and threats, they refused to payoff the unionsCalifornia Political News and Views – October 19, 2012

Will This Charter City Movement Lead to Genuine (or Any?) Prevailing Wage Reform?

Perhaps union officials in Bakersfield are realizing that “prevailing wage” as calculated under state law and “public works” as defined under state law are so outrageous that cities are intent on escaping them. Bakersfield’s own Assemblywoman Shannon Grove introduced two thoughtful and reasonable prevailing wage reform bills (Assembly Bill 987 and Assembly Bill 988) to make state-mandated government wage rates only apply to legitimate government projects and be more reflective of actual local market rates, but union lobbyists opposed these bills and Democrats defeated them in committee in January 2012.

In fact, as I reported in my April 20, 2012 article State-Mandated Construction Wage Rate Requirements Remain on California Projects Worth $1001 to $2000, union lobbyists and Legislative Democrats wouldn’t even support Assemblywoman Grove’s Assembly Bill 1958, which made two very modest changes to the state’s prevailing wage laws. That bill increased the project cost threshold for coverage from $1000 to $2000 to match the $2000 threshold set by the federal prevailing wage law called the Davis-Bacon Act. It also indexed the threshold to the same measure of inflation that the Democrats want to use for indexing the state minimum wage.

There WILL be a day when unions no longer control the California State Legislature and the Governor’s office. In the meantime, charter cities are exercising their own right to determine their economic destiny, and many of them don’t want to follow the direction of the State of California to inevitable bankruptcy.

Bakersfield and Kern County Experience Economic Growth and Job Creation

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UPDATE: Here’s a December 29, 2012 Associated Press article Din of Hammers, Oil Wells Signal Bakersfield Boom. Excerpts from the article:

Bakersfield and surrounding Kern County find themselves in lofty positions on key national lists measuring economic vitality: No. 1 metro area for long-term private sector job growth, No. 1 county for construction gains and No. 1 large metro area for annual economic growth.

Cheap land, affordable housing, proximity to Los Angeles, a location that’s within a three-hour drive of 90 percent of the state’s population, and a planning department that doesn’t throw up roadblocks are driving the region’s economic revolution, business leaders say.


The Los Angeles Times had a September 10, 2012 article reporting that Many Signs Point to a Bakersfield Boom. It opens with the following:

This mid-size city has become the surprise star of the Central Valley.

The state’s economic recovery has largely been concentrated on the coast, leaving behind much of the hard-hit San Joaquin Valley. But Bakersfield, perhaps best known for oil, agriculture and country music, has reclaimed an old title: boomtown.

Bakersfield has been adding population and jobs at a brisk pace and is a few thousand jobs from matching its peak employment level of five years ago. A price-fueled energy bonanza, low corporate operating costs and an advantageous location are contributing to the area’s good fortune.

Employment has grown across many sectors, including manufacturing. Even construction, which suffered mightily statewide during the housing bust, has strengthened. And unlike many struggling municipalities, in Kern County officials have recommended a budget increase that would allow hiring of more than 150 people.

Signs of growth are obvious.

Actually, it isn’t surprising that Bakersfield and Kern County are prospering. Kern County’s economic activity focuses on commodities, such as oil, natural gas, mineral mining, agriculture, and energy production. The states of North Dakota and Alaska are prospering for the same reason.

Of course, economic prosperity attracts parasites, such as state legislators from coastal cities who want to tax Kern County’s commodities and send the money to the University of California at Berkeley. (See my May 22, 2011 article in www.FlashReport.org entitled Culture Clash: The “Bakersfield Oil Field to Berkeley Sports Field Tax.”) Bakersfield’s business and political leaders also need to remain wary of the union political agenda that is so dominant in other parts of California.

I was disappointed to see that the Los Angeles Times article turns to Bakersfield union officials to report on the current status of the local construction industry, even though the region’s construction workers overwhelmingly do not belong to a union. The reporter should have contacted the Bakersfield-based Central California Chapter of Associated Builders and Contractors (ABC) to get the status of construction in the region. Any major construction projects in Kern County monopolized by unions have to bring in numerous union workers from outside the Bakersfield area.

Even worse, the article omits some important context in these two union references:

“We have work in the oil fields,” said Danny Kane, business manager for the International Brotherhood of Electrical Workers, Local 428, based in downtown Bakersfield. “We have a lot of solar work. We have wind. We are just fortunate to have those opportunities in Kern County.”

John Spaulding, executive secretary of the Building Trades Council for Kern, Inyo and Mono Counties, said that although hiring has increased in the last year, larger and more long-term projects needed to get off the ground to see the recovery accelerate. Spaulding said he was looking forward to the start of construction on a hydrogen energy plant late next year, which is expected to be a multiyear project that would employ thousands. “I think it’s going to get better,” he said. “There’s some movement.”

Why are unions officials so confident about working on the proposed hydrogen energy plant and on proposed solar and wind projects in Kern County? It has nothing to do with union productivity, efficiency, or competitiveness – it has to do with their “greenmail.” A Sacramento-based group called California Unions for Reliable Energy (CURE) routinely uses the Bay Area law firm of Adams, Broadwell, Joseph & Cardozo to object to such projects using the California Environmental Quality Act (CEQA) until the developer agrees to sign a Project Labor Agreement giving unions monopoly control of the construction.

Through the legal work of Adams, Broadwell, Joseph & Cardozo, California Unions for Reliable Energy (CURE) intervened in the power plant licensing process at the California Energy Commission and won Project Labor Agreements in the late 1990s and early 2000s for natural gas power plants in Kern County, including the High Desert, Elk Hills, La Paloma, and Sunrise power plants. Six unions hired the same law firm and for two years (2007 and 2008) used CEQA to try to block the proposed (but later abandoned) expansion of the Big West/Flying J refinery in Bakersfield. And California Unions for Reliable Energy (CURE) is again active in Kern County, this finding environmental problems with solar and wind electrical generation facilities proposed by companies such as Recurrent Energy and getting a Project Labor Agreement for the proposed Hydrogen Energy California power plant.

Will unions and taxes slow this boomtown down? I wouldn’t be surprised.

Moody’s Suggests Greedy Taxpayers Clinging to Their Money and Too Much Local Government Authority Are Causes of Municipal Bankruptcies; Predict More to Come

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UPDATE: Inglewood Unified School District was indeed the next school district to be taken over by the state, as predicted below. On September 14, Governor Jerry Brown signed Senate Bill 533, a bill amended on August 15, 2012 to authorize emergency loan assistance to the school district of up to $55 million. Senate Bill 533 also requires the State Superintendent of Schools Tom Torlakson to assume all the rights, duties, and powers of the school board and appoint a state administrator for the district.

Note that the Inglewood Unified School District Superintendent Gary McHenry was the Superintendent of the Mt. Diablo Unified School District in the mid-2000s when the school board spent years arguing over requiring construction contractors to sign a Project Labor Agreement with unions to work on certain projects at the district.


ADDITIONAL THOUGHT: as I was writing about the Costa Mesa City Council’s derailed cost-efficiency plan on the morning of August 18, 2012 (Costa Mesa’s Bold and Meaningful Government Cost-Efficiency Plan on Hold Until November 6, When Citizens Vote on a Proposed Charter (Measure V) and for Three City Council Members), I realized that Moody’s looks at strong local government authority without considering all of the potential POSITIVE aspects of strong local governments and “home rule” under charters. A 4-1 majority on the Costa Mesa City Council is asking voters to enact a charter on November 6 through Measure V that would allow it more freedom and flexibility to save money for taxpayers by contracting out services and exempting local construction from state-mandated construction wage rates (so-called “prevailing wages”).

The people sending out the message from Moody’s about city bankruptcies in California apparently didn’t think much about wasteful government spending and the flexibility that comes with local control. They simply blame democratic obstacles to tax increases (“raising revenues is difficult for all California cities because tax hikes require voter approval”) and insufficient centralized government control (“unlike other states that are empowered to intervene in the financial affairs of stressed local governments, California’s strong ‘home rule’ means local governments get relatively little financial, technical, or oversight help from the state”).

If institutional investors are foolish enough to buy bonds issued by the City of Compton and the Inglewood Unified School District, why do California taxpayers need to bail out those investors with tax increases and costly state government interventions?


Imagine the constant pressure on the Howard Jarvis Taxpayers Association as it responds in bad times (as well as in good times) to the relentless claims that California would be so much better without those silly laws (especially Proposition 13) enacted by greedy, uncaring, ignorant voters who want to limit tax increases. When will people be more willing to share their bounty for the public good?

The latest subtle attack on the selfish taxpayer comes from Moody’s Investors Service. Today (August 17, 2012) Moody’s announced the release of a report entitled “Why Some California Cities Are Choosing Bankruptcy.” The announcement on the Moody’s web site hints of fundamental problems in California that include the following: (1) governments aren’t taking enough money in taxes and fees from their citizens to pay for services and other obligations; and (2) the state government isn’t strong enough to effectively meddle in municipal affairs. Here are some relevant excerpts:

[The report] details the economic, legal and policy environment that is helping to drive the increase in bankruptcy filings and defaults by California cities and concludes that the risk profile of California cities has increased across the board. Factors include the state’s boom-bust real estate economy, its hands-off policy with regard to the fiscal problems of local governments, and newly enacted legislation that … effectively lays out a path to bankruptcy court for stressed municipalities…

“Raising revenues is difficult for all California cities because tax hikes require voter approval,” said Moody’s Managing Director Gail Sussman. “And, unlike other states that are empowered to intervene in the financial affairs of stressed local governments, California’s strong “home rule” means local governments get relatively little financial, technical, or oversight help from the state.

“The inability and unwillingness to honor obligations to bondholders is relatively new in US public finance and still remains rare,” said Sussman. “The emergence in California of bankruptcy as a tool to extract bondholder concessions as part of a budgetary solution is a significant new risk for bondholders.”

“Stressed local governments” need a financial massage from the taxpayers through “raising revenues” and an “empowered” state government. A Reuters article about the report picks up on the theme:

The remedies California’s municipalities can employ are more limited than those of some other states, citing restrictions on property tax hikes and cities’ considerable independence from the state government, Moody’s said.

Get it? Local communities are too independent, and they selfishly want to keep their own money. They need to give away more money and more power to the wise in Sacramento, and then some of it will come back.

Here is a counter-perspective, which can be done by citing Moody’s own words:

Looking at the last couple of months of ratings issued by Moody’s for California local governments, it looks like the City of Compton might be the next city to file for Chapter 9 bankruptcy. On July 23, 2012, Moody’s announced that it had downgraded the rating for the City of Compton‘s $4.9 million in Sewer Enterprise revenue bonds from A2 to to Ba1 with the possibility of further downgrades. Apparently the city is collecting more than enough money from its sewer bills to make its payments on these bonds. Some other pesky issues have come up, such as “weak internal controls and management practices” and “severe General Fund overspending relative to budgeted amounts” and “waste, fraud and abuse.”

The downgrade is based primarily on the city’s severe liquidity crisis, the risk this raises that the city could seek bankruptcy protection, and the potential implications of such a development on timely debt service payments. The sewer enterprise currently generates more than sufficient net revenues to make debt service payments, and the Ba1 rating reflects our expectation of full, if not timely, debt service payment, assuming revenues have been allocated as legally required. The downgrade also reflects the city’s weak internal controls and management practices, highlighted by the depth of the liquidity crisis; recent, severe General Fund overspending relative to budgeted amounts; and allegations of waste, fraud and abuse of public monies by the city’s Mayor. These allegations undermine our expectation that the city will properly account for and transfer pledged enterprise revenues to bond trustees consistent with trust agreements to ensure timely debt service payments. Uncertainty also derives from the city’s inability to produce audited financial information on a timely basis.

The July 18, 2012 Los Angeles Times suggested that the City of Compton would be the next city to go bankrupt: see “Compton on Brink of Bankruptcy: The city is the latest to fall victim to questionable financial practices. It could run out of money by the end of the summer.” (The article hedged its bets by also mentioning Victorville and Montebello.)

At California school districts, it looks like the Inglewood Unified School District might be the next school district to be taken over by the state. On June 28, 2012, Moody’s announced that it had downgraded the rating for the Inglewood Unified School District‘s $113 million worth of outstanding general bond obligations from A3 to Baa1. It also assigned a “negative outlook” because of “the district’s continued fiscal crisis and the possibility it could be forced into state receivership to remain solvent.”

According to an April 20, 2012 announcement about the Inglewood Unified School District from Moody’s, this school district has been spending more while taking in less and educating fewer students:

The district’s financial position has eroded to a level of near insolvency that requires an immediate correction to maintain operations. The current financial position occurred due to growing expenditures during a period of acute revenue decline. Revenue decline has been driven by two main factors: declining enrollment averaging 4.8% annual decrease over a five year period, and reductions of state aid experienced by all California school districts beginning in fiscal year 2008. The district’s operational imbalance was funded during fiscal years 2009 and 2010 by Federal ARRA funds and the use of the district’s reserve funds. Fiscal year 2010 ended with a General Fund balance of $3.8 million, 3.4% of revenues, a significant drawdown since fiscal 2007’s balance of $17 million, or 12.8% of revenues.

Speaking of school bonds, notice all the wonderful things that happened after Californians voted in 2000 to reduce the voter approval threshold for school districts to sell general obligation bonds for school construction from two-thirds to 55%. School districts went wild borrowing money from bond investors, often by selling Capital Appreciation Bonds. Today the kids enjoy their new and renovated school facilities, and tomorrow their families will enjoy a lifetime of renting when property taxes shoot through the roof in 20-30 years to pay off the compound interest from those bonds. (Don’t worry, I’m sure the state government and local governments will institute laws to control the rent.)

Really, do you want to give more money to the City of Compton and the Inglewood Unified School District, the way they’re run today? The problem is not that Californians aren’t giving enough money to their government. The problem is the government itself.

News Media Beginning to Pick Up on Story about California School Districts Selling Insidious “Capital Appreciation Bonds” – Dayton Public Policy Institute an Early Informant to California Taxpayers

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Finally, the news media is discovering and reporting on how many California school districts are selling “Capital Appreciation Bonds” to investors, thus committing future generations of California property owners to staggering tax payments.

To summarize this obscure issue in two paragraphs, when California voters approve “bond measures” so that school districts or other government entities can borrow money for construction projects, voters are directing local governments to sell “General Obligation Bonds” to investors such as individuals, commercial banks, insurance companies, and money market funds. Investors make money through the interest paid by the municipal government during the time it borrows the money. “General Obligation Bonds” are backed by the “full faith and credit” of the government entities, meaning the investors are guaranteed to get the principal and interest on the investment.

Traditionally, school districts and other government entities have sold General Obligation Bonds that provide investors with a semi-annual interest payment throughout the term of the bond, with the principal returned to the investors when the bond matures. But a recent trend for California school districts is selling a different type of General Obligation Bond. These are called “Capital Appreciation Bonds” (CABs), also known as Zero-Coupon Bonds, in which interest is compounded over the life of the bond and then paid all at once with the principal to the investors when the bond matures. This means that the government entity can delay collecting property taxes and backload the tax burden to the later years of the term of the bond, which can be as long as 40 years. Compound interest (paying interest on the principal AND interest) can accumulate huge financial obligations over such a long time period.

A reporter for the Detroit Free Press newspaper named Joel Thurtell found this same racket going on at Michigan school districts in the early 1990s and wrote some comprehensive articles exposing it, starting with the April 5, 1993 story “Michigan Schools Load the Future With Debt.” His reporting was one of the catalysts leading to a provision in Michigan law prohibiting the sale of Capital Appreciation Bonds. It was added to a school finance bill on June 22, 1994 as an amendment offered by State Senator Joanne Emmons, and Governor John Engler subsequently signed the bill into law.

Now retired from the Detroit Free Press but continuing his journalism with a blog (Joel on the Road: Words Shot With a Loose Cannon), Mr. Thurtell discovered earlier this year that California school districts were now playing this game. The giveaway was an outrageous 2011 sale of Capital Appreciation Bonds by the Poway Unified School District (just north of San Diego) that allegedly will cost taxpayers a total of $981 million by 2051. That’s the price of borrowing $105 million in 2011!

As I say to Californians whenever I try to explain this:

School board members don’t care how much these Capital Appreciation Bonds cost after 30 or 40 years. By the time property owners are assessed with the staggering tax burden, the elected board members will be out of office and probably dead. They won’t be accountable for the consequences, but they’ll still have their names on rusty plaques next to the front doors of deteriorating schools.

I learned about Capital Appeciation Bonds at the California League of Bond Oversight Committees (CalBOC) annual conference on May 11, 2012. (I’m on the Board of Advisors for this group.) I was astonished at the lack of news coverage about this potentially disasterous practice for the state and posted an article about it that evening.

I was still thinking about the issue a few days later and wondering why so few Californians knew or cared. Looking through my notes from the conference, I saw that the feisty and determined Mt. Diablo Unified School District Measure C 2010 Citizens’ Bond Oversight Committee member Alicia Minyen (an unsung hero for fiscal responsibility in California) mentioned that a reporter in Michigan has exposed the racket there, which led to a state ban on school districts selling Capital Appreciation Bonds. Researching on the web, I identified the reporter and then found his blog. I discovered he had posted several articles in the previous two weeks on the threat of Capital Appreciation Bonds in California, starting on April 27, 2012:

Muni bomb ticks in California

Posted on April 27, 2012 by Joel

By Joel Thurtell I was sipping coffee and reflecting on the ignorance displayed for all the world to read in a New York Times article. It was January 9, 2009. The Times story claimed to offer “a rare glimpse into … Continue reading →

I posted a comment on his blog to let him know that a fiscally conservative policy consultant in California had noticed the issue and planned to spread the news. He then mentioned me in his blog:

See no evil: CABS and media

Posted on May 16, 2012 by Joel

By Joel Thurtell Thanks to Kevin Dayton of the Dayton Public Policy Institute for noticing my recent columns about the evils of Capital Appreciation Bonds. He covered the May 11, 2012 meeting of California’s League of Bond Oversight Committees annual … Continue reading →

Fast forward to August 2012, and people are giving as much attention to my May 2012 articles about Capital Appreciation Bonds (Please Read This, Even If You Think Municipal Bonds Are Really BORING: We’re Setting Up the Next Generation of Californians to Pay Staggering Property Taxes and Reporter Behind Michigan’s 1994 Prohibition of Capital Appreciation Bonds (CABs) Watches and Writes about the CAB Frenzy at California School Districts) as they are to my posted photo of the closest Chick-fil-A to San Francisco. The issue is now getting attention, perhaps in part because big urban school districts such as the Sacramento City Unified School District, the West Contra Costa Unified School District, and the San Diego Unified School District are asking voters on November 6, 2012 for approval to borrow hundreds of millions and even billions of dollars through bond sales to investors.

A big break for exposing the issue was a Voice of San Diego article on August 6, 2012:

Where Borrowing $105 Million Will Cost $1 Billion: Poway Schools

After putting together a bond that will cost taxpayers almost 10 times what they borrowed, the Poway Unified School District has become California’s poster child for a form of exotic financing.

I suspect that a key element in the successful spread of this article was the brightly-colored pie chart that put the astonishing news into graphic form for people to understand.

The Voice of San Diego then provided a nifty guide on August 8, 2012 to other school districts selling Capital Appreciation Bonds:

Find High-Interest School Bonds in Your District: A Five-Step Guide

Want to find out if your local school district has borrowed money using expensive capital appreciation bonds? Follow our guide.

Regrettably, as other news media outlets picked up on the story and circulated it nationwide, Mr. Thurtell and the Voice of San Diego received some attention for their dispute over proper attribution of sources and credit for the story. I’ll let them speak for themselves on their web sites, but I am pleased to see this issue brought to the attention of the public as more California local governments and the State of California itself careen toward bankruptcy. (For example, see The Right Way, the Wrong Way, and the Poway of School Bond Financingwww.CalWatchdog.com – August 9, 2012)

Something has to be done now to protect today’s California children from oppressive taxes in 20-40 years when they start families, buy a house or other residential property, and own small businesses with property. (I’m assuming there will still be private property in California in 2052 – am I being too optimistic?) I want to see someone in the California State Legislature introduce a bill banning the sale of Capital Appreciation Bonds and limiting all General Obligation Bonds to a maximum time period of 30 years. It can be modeled on the law in Michigan.

Will any California state legislator dare to challenge the many special interests that regard school bonds as “chasing after money…live for today and don’t worry ’bout tomorrow, hey, hey, hey” (Use the chorus of this song as the theme music for the effort.)

Also, I thank Joel Thurtell for mentioning my early attention to this story in his blog:

Credit

Posted on August 9, 2012 by Joel

By Joel Thurtell I appreciate the article by Andrew Donohue in the Voice of San Diego acknowledging my work in uncovering and reporting about the Capital Appreciation Bond scandal in California. Donohue responded to my complaint that reporter Will Carless of the … Continue reading →

I’m in Michigan. The first California reporter to write about California’s Cab scam was Kevin Dayton, on May 11 and May 14.

First Swipe at San Diego Unified School District’s Proposed $2.8 Billion Bond Measure Under a Project Labor Agreement: San Diego Union-Tribune Opinion Piece – A Bond Is Not Free Money

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Today’s San Diego Union-Tribune (August 3, 2012) includes a sharp opinion piece from Eric Christen, executive director of the Coalition for Fair Employment in Construction, entitled “School District’s Bond Measure Not ‘Free Money’.'”

He uses two arguments as a basis to oppose the proposed $2.8 billion bond measure for school construction that the San Diego Unified School District’s Board of Education placed on the November 6, 2012 ballot with a resolution at its July 24, 2012 meeting.

1. Bonds Are Not Free Money; They Are Borrowed Money. Property Owners Large and Small Pay Taxes So Investors Get Back the Principal Plus Interest and Transaction Fees.

Eric points out to uninformed and confused readers that voting for school bonds does NOT mean getting free money from the government. This is actually money obtained through arrangements with brokerage firms, borrowed from investment banks and insurance companies, and paid back through taxes assessed on property owners in the school district. People will pay back these bonds, along with the interest and transaction fees, when they pay their property tax bills to San Diego County.

Eric also points out that the dastardly “One Percent” invests in these bonds, and they want their money back, with interest and fees. They don’t do it for the children, either. They do it to get rich and stay rich.

How does this work in practice? As one example, the San Diego County Counsel’s Impartial Analysis of the $2.1 billion bond measure approved by voters as Proposition S in November 2008 for the San Diego Unified School District indicated that the interest rate for any bond authorized by Proposition S could be as high as 12 percent. In addition, the maturity period for any bond authorized by Proposition S could range from 25 years to 40 years.

In a future post, I will analyze the specific bond sales to date authorized by Proposition S.

Another interesting angle with the new proposed $2.8 billion bond is the possibility that the San Diego Unified School District may choose to sell Capital Appreciation Bonds (CABs), in which the investors get the principal plus compound interest in one lump sum at the end of the maturity period, rather than getting a regular interest payment. Meanwhile, the tax burden with these bonds is often backloaded to the end of the maturity period.

In other words, babies born in 2012 could be socked with huge property taxes if they own a house in San Diego from 2050 to 2060. (The current school board will probably be deceased and not accountable to the voters at that time for their decision in 2012.) I write about the growing, dangerous popularity of Capital Appreciation Bonds among California school districts in some of my earlier posts (here and here).

Unions Will Control the Construction with a Project Labor Agreement

While it’s future generations that may end up paying the bulk of this proposed new $2.8 billion school bond (costing perhaps $5 billion total, including the interest and transaction fees), the current generation of parents and students will see their construction program compromised by a government-mandated Project Labor Agreement that cuts bid competition and increases costs for the benefit of construction unions.

The Board of Education has already passed a resolution (also on July 24, 2012) indicating that contractors working on projects over $1 million under the proposed new bond will indeed be required by the school district to sign a Project Labor Agreement with unions as a condition of work. It is titled “Resolution Regarding Project Stabilization Agreement (PSA) for Future Local Bonds’ School Construction, Repairs, and Renovation and Addendum Three to PSA to Extend the PSA to Future Local Bonds.”

That can mean four schools for the price of five. For more information about measuring the cost of Project Labor Agreements, see the July 2011 study by the the National University System Institute for Policy Research about the costs of California school construction under Project Labor Agreements. By far the most comprehensive analysis of the cost of Project Labor Agreements on taxpayer-funded construction, the study had this conclusion:

Our research shows that PLAs are associated with higher construction costs. We found that costs are 13 to 15 percent higher when school districts construct a school under a PLA. In inflation-adjusted dollars, we found that the presence of a PLA is associated with costs that are $28.90 to $32.49 per square foot higher.

Will San Diego residents coming out to vote for President Barack Obama in the November election simply vote for another property tax increase for union-controlled construction at the San Diego Unified School District? The Board of Education is guessing they will.

Two California Urban School Districts Notorious for Project Labor Agreements Team Up With Construction Unions to Seek Voter Approval for Construction Bond Measures

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Two California urban school districts notorious for requiring their construction contractors to sign Project Labor Agreements (PLAs) will be asking voters to approve huge bond measures at the November 6, 2012 election. The elected board members of the San Diego Unified School District and the Sacramento City Unified School District expect that voters turning out to support President Barack Obama’s re-election will also vote for new taxes on property owners to fund school construction. Campaign support for these bond measures will come from construction unions, who will control the work because the school boards are requiring construction companies to sign Project Labor Agreements with unions as a condition of work.

Voters have overwhelmingly approved bond measures in these two districts in the past, but government-mandated Project Labor Agreements were not an issue in those elections. The big question now: will advocates of fiscal responsibility develop an organized and effective campaign to offset the campaign resources of the unions and the subtle support of the school districts?

SAN DIEGO UNIFIED SCHOOL DISTRICT

Last night (July 24, 2012), the Board of Education of the San Diego Unified School District approved a resolution to place a $2.8 billion bond measure on the November 6, 2012 ballot. This plot to get more taxpayer funding for construction has been in the works since the board’s November 1, 2011 meeting, at which the board directed staff to study the feasibility of a new capital facilities bond measure. The board received the results of the feasibility study on February 14, 2012, and of course the bond measure was highly feasible.

This is the third time in 15 years that the San Diego Unified School District has asked voters to approve billion-dollar bond measures. On November 3, 1998, 78% of voters approved the $1.51 billion Proposition MM, under which construction was awarded under fair and open bid competition, despite union lobbying for the school district to mandate that construction contractors sign a Project Labor Agreement.

Not knowing at the time that construction unions would be given control of the work, 69% of voters approved the $2.1 billion Proposition S on November 4, 2008. A Project Labor Agreement was sprung by the school board in January 2009 after union special interests won a seat in the same election and attained 3-2 majority control. The final version of the Project Labor Agreement was approved in July 2009 on a 3-2 vote, and the two board members who voted against it are no longer on the board.

In contrast to 2008, San Diego voters in the November 2012 election will be fully aware that the school board has given unions control of most of the work funded by the proposed $2.8 billion bond measure. To lock in the Project Labor Agreement for additional work funded by future bond measures, the school board voted 5-0 at the July 24, 2012 meeting for a resolution that expands the scope of the Project Labor Agreement for all projects that exceed $1 million and are paid for in whole or in part with future local bond funds.

Usually school boards are coy about their plans to mandate a Project Labor Agreement until after voters approve a bond measure. In this case, voters will be considering the wisdom of government-mandated Project Labor Agreements as well as the wisdom of taxing the citizens and businesses of San Diego an additional $2.8 billion (plus billions more in interest) for school construction.

SACRAMENTO CITY UNIFIED SCHOOL DISTRICT

On July 19, the Board of Trustees of the Sacramento City Unified School District approved a resolution to place a $346 million bond measure on the November 6, 2012 ballot. This plot to get more taxpayer funding for construction has been in the works since the board’s January 19, 2012 meeting, at which the board authorized the development of a Sustainable Facilities Master Plan. A feasibility study for this bond measure, including polling of voters, is ongoing, but you can bet that the bond measure will be found to be highly feasible.

This is the third time in 15 years that the Sacramento City Unified School District has asked voters to approve multi-million-dollar bond measures. On October 19, 1999, 79% voters approved the $195 million Measure E in a special election. On November 5, 2002, 67% of voters approved the $225 million Measure I.

The board of the Sacramento City Unified School District voted 5-1 on September 1, 2005 to require all contractors to sign a Project Labor Agreement with construction unions in order to work on projects worth $1 million or more funded by the remaining $170 million authorized by Measure E (1999) and Measure I (2002). On September 4, 2009, the board voted 5-0 to extend the district’s Project Labor Agreement on all Sacramento City Unified School District projects worth $1 million or more for another four years. International Brotherhood of Electrical Workers (IBEW) Local No. 340 union official and board member Patrick Kennedy did not vote, in order to avoid a conflict-of-interest. See the amended and extended Project Labor Agreement here.

The school board for the Sacramento City Unified School District has considered Project Labor Agreements three times since 2000.  The change in voting patterns symbolizes the change in the political climate of California over the past 15 years.

  • 2000          Board voted 4-3 to reject a PLA.
  • 2005          Board voted 5-1 to approve a PLA. (Actual vote count was 5-2.)
  • 2009          Board voted 5-0 to renew a PLA. (Actual vote count was 7-0.)