State of California

For those who do not believe that pension reform is quickly becoming inevitable, the proposal by Democratic Governor Candidate Jerry Brown probably makes it exactly that.  And while his opponent Meg Whitman was quick to attack the proposal, it has always been my hope that more moderate forces would get out in front on this issue.

From my perspective, the fiscal problems that cities face with pensions have little to do with the average worker’s pension and far more to do with the 3% at 50 safety enhancement, early retirement ages, pension spiking, and the large pensions earned by those in top managerial positions.  The average state worker will earn roughly $27,000 upon retirement.  My hope is to protect that average state worker while reforming the excess at the top.

On Friday a Sacramento County Superior Court Judge denied Governor Arnold Schwarzenegger’s request to pay state employees minimum wage.  Judge instead is asking for a full hearing in August, which means that state workers will get at least two more months of full pay checks.

On July 2, the 3rd District Court of Appeals upheld a nearly year-and-a-half old ruling that would allow the Governor to order state  workers’ pay reduced to minimum wage until a new budget can be signed into law.  However, Controller John Chiang refused to pay it, and argued that he had legal room to maneuver.

The 3rd District Court of Appeals on Friday upheld a nearly year-and-a-half old ruling that would allow the Governor to order state  workers’ pay reduced to minimum wage until a new budget can be signed into law.  The timing cannot be mere coincidence, only a day after the governor ordered the Controller to pay all state workers 7.25 in wages until a budget is passed.

However, this fight is far from over.  On Friday, Controller John Chiang argued that while he lost the appeal he still has legal room to maneuver.

In a move that will have stark implications for the city of Davis if it gets enacted Governor Arnold Schwarzenegger has order Controller John Chiang to pay most state employees a minimum wage – the federal minimum wage – $7.25 an hour.  Controller Chiang has already said that he will not follow that directive unless a court tells him to.

In a letter from the Department of Personnel Administration Director Debbie Endsley, Controller Chiang is told, “Today is July 1,2010, and there is no state budget. Regrettably, we must take the steps outlined in the attached pay letter to adjust wages and salaries during this budget impasse. The six Bargaining Units with tentative agreements are not included because we are seeking and expect the Legislature to approve a continuous appropriation for these six units. We anticipate passage of a continuous appropriation for these bargaining units before the end of the month.”

One of the key differences that people need to understand is that the composition of the state budget is very different from the local budget.  Locally, employees make up over 70% of the city’s costs.  The result is that increases in compensation both in terms of salaries but also in terms of promises for pensions put a huge strain on the budget.

The city of Davis managed to survive first through the collection of a half-cent sales tax that produced around three million per year in revenue and also because property tax revenue was increasing at a very robust rate during the last decade.  However once the real estate market flatlined in Davis and busted in the rest of the state, revenues could no longer keep pace with increases in employee salaries.

According to the Legislative Analyst’s Office (LAO) report that we released this year, showing state spending at a record low while the recession is the primary cause of California’s Budget deficit.  In addition, the California Budget Project’s report shows a huge growth, not surprisingly in state spending on corrections over the past two decades.

According to the Department of Finance, state spending per $100 of personal income is at its lowest level in nearly 40 years.  Under the Governor’s May Revision, General Fund spending, adjusted for inflation would at the lowest per capita level since 1993-94.  And as a percentage of personal income, state spending in 09/10 is at its lowest level in more than a decade.

Given the state of California’s economy and cutbacks to education, perhaps it is not surprising that several different groups are threatening to sue.  On Thursday a lawsuit was filed in Alameda County by the California School Boards Association, the Association of California School Administrators, and the California State PTA.

The suit calls for the courts to get rid of the current financing system and to direct the governor and Legislature to create one that is sound, stable and sufficient.  They argued it prevents six million students from receiving the education that they are entitled to under the state’s constitution.

Just about everyone understands that there is a problem with the structure of the current pension system in California right now.  It is a problem that was brought to the fore by the recent economic and market collapse that put a strain on a tenuous CalPERS investment system.

The problem is the solution is elusive at best.  Recently the word came down that neither Governor Arnold Schwarzenneger nor Republican candidate for Governor Meg Whitman will back an initiative that would have reduced pension payments and extend retirement ages for new state and local government hires.  Would have is the operative word because the initiative has been suspended in part because they were counting on major funding from Ms. Whitman.

Overall one has to say the news could have been far worse when the Pew Center on the State puts California’s state retirement system into the “needs improvement” category as opposed to the lower category of “serious concerns.”  Moreover, the study show the impact on the public pension system due to the collapse of the financial markets, however it does not include the rebound that occurred at least on Wall Street after mid-2009.

Overall the numbers look like this: California’s state retirement systems have promised current and retired workers around $3.35 trillion in pension, health care, and other post-employment befits as of 2008 but have $2.35 trillion on hand to pay for them.  Strictly looking at the retirement system, there were $454 billion in pension and benefits on the book in 2008, $59 billion was unfunded liability, that means that the fund had the assets to cover 87 percent of its obligations.

As we face yet another round of cuts to education in Davis that could result in the loss of an additional 30 to 50 teachers depending on how the math falls out and how the legislature and governor end up passing a budget.  The situation with higher education is becoming increasingly dire with furloughs, cuts in classes, and massive fee increases.  In a lot of ways the very fabric of California’s existence is coming apart at the seems.  We have cut programs and funding to the bone but any even hint of a discussion of taxation is DOA.

To give this discussion a Davis flavor, Lenny Goldberg from the California Tax Reform Association is a Davis resident.  Last week he had an interesting article in the Capitol Weekly that followed the CTRA’s proposals for finding $20 billion in tax revenues that can help us balance the budget without further cuts to schools and other programs.