California Looking for New Ways to Steal Worker's Money

Well, that's not what Jerry Brown and legislative Democrats claim their bill would do, but how can we doubt that wouldn't be the effect.  Here is what they are claiming, as reported in the SacBee:

The goal is to create a savings program in which workers who have no access to a pension can count on a guaranteed rate of return for contributing about 3 percent of their salary.

Sounds laudable? But who will control the money? Who will guarantee the rate of return?  According to the article, private insurers would, because:

Money would be pooled in a state-administered fund that would be professionally and conservatively managed and invested. 

So why should anyway be nervous. All those billions will be tucked away safely in the care of the state. The governor wants to make sure that the money is safely managed by his cronies appointees.

Before committing himself to the concept, Brown sought and received the requirements placed in SB 923 – that lawmakers take a final vote before implementation and that a board overseeing the program be increased from seven to nine members, five of whom would be gubernatorial appointees or officials of his administration. 

That reassures me. And the record of CalPers in managing pension benefits for state employees has been so sterling, with 99% of private funds outperforming it, I don't see why private businesses are having misgivings.

My immediate suspicion when I read this news is that the state intends to commingle these funds with the state pension monies.  The Appeal-Democrat reports that Kevin De Léon, the main sponsor of the bill, has previously gone on record for calling for all private sector workers to be folded into CalPers. Might this be step one, and the next step taken under the disguise of "efficiency?" Of course it will. The state Democrats are determined to drive every private business out of the state. I wonder who they think will pay the taxes to pay for their hare-brained schemes.

Bankruptcy - No Pension Panacea

In the 2010 San Diego City Council race, and in previous mayoral campaigns, the idea of bankruptcy for San Diego has been proffered. However, neither Vallejo, which survived bankruptcy, nor Stockton, now going through bankruptcy have demonstrated that public employee pensions can be discharged in bankruptcy court, at least in California. In California, after the Vallejo experience, the state passed laws requiring that cities contemplating bankruptcy enter into a mediation process. This requires that the city negotiate in good faith with creditors prior to entering bankruptcy proceedings. One group for whom there is no negotiation are the labor unions pensions. From Reuters:

Calpers and unions around the country have made it clear they see a pension as an iron-clad right, one that's legally protected even in a bankruptcy.

Whether pensions are contract rights, which can be changed, or property rights, which are protected under the U.S. Constitution, has never been tested in court.

My question is what happens when the pension costs exceed all other sources of revenue? Who pays then? In Providence, RI, the answer seems to be that if the money is really gone, then the city will have to go to court. From the New York Times:

. . . the Providence City Council signed off on a plan to end, for now, annual cost-of-living increases for about 3,000 retired police officers, firefighters and other employees getting city pensions. The change would save about $16 million in the 2013 fiscal year, the mayor said; cost-of-living increases would be reinstated once the retirement system is 70 percent financed, which could take well over a decade. The change would also apply to current city workers once they retire.

In an interview at City Hall last week, Mr. Taveras, a first-term Democrat, said he “absolutely” expected a lawsuit to delay the freeze on cost-of-living increases for pensioners. But he said he saw no alternative for the city of 178,000 short of receivership, which would allow for a bankruptcy filing.

“It could drag out,” the mayor said of the expected legal battle. “But if we can’t reform our pensions, I don’t see how we can move this city forward. You could raise taxes, but I don’t think you can raise taxes enough to cover the cost of this.”

This case might make it to the Supreme Court on the theory that the city, as an extension of the state is violating the 10th amendment of the constitution:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

I quoted the entire amendment, bu the key passage is "Law impairing the Obligation of Contracts." There are a number of counter-arguments, but I expect this to hit the Supreme Court sooner or later.

No Reforms, No Taxes Increases

As a matter of fact, if there was some real pension reform, there wouldn't be any need for tax increases. California is drowning under the burden of employee pension costs. Even the modest reforms offered by Jerry Brown are making no progress in the Democrat union controlled legislature. A couple of key parts of his proposal:

• Equal sharing of pension costs: Require all new and current employees to contribute at least 50 percent of their retirement costs, shifting the burden from public employers, some of whom currently make the entire contribution.
• Hybrid pension plan for future employees: Form a mandatory "hybrid" risk-sharing pension plan for new employees. New plan would include a reduced, guaranteed defined benefit, a defined contribution portion such as a 401(k)-style plan and Social Security.
• Cap for high-income public employees.
• Higher retirement age for future employees.

My personal belief is that this is a bait and switch. Brown knows that the legislature won't pass these reforms or would slowly repeal them in the future; but he wants tax increases. His November ballot initiative calls for:

• Increase the state income tax levied on annual earnings over $250,000 for five years.
• Increase the state's sales and use tax by 1/2 cent for four years.
• Allocate 89% of these temporary tax revenues to K-12 schools, and 11% to community colleges.

But of course this money will actually be funding teacher pension benefits not improving education. Meanwhile the state legislature is barely making a pretext of passing pension reforms proposed by their fellow Democrat, Governor Brown.

"It's not as fast as I would like, but it's complicated," Senate President Pro Tem Darrell Steinberg, D-Sacramento, said this week during an appearance before the Sacramento Press Club.

He said Democrats have an obligation to deliver pension reform, particularly as they will ask voters in November to approve hikes to the income and sales taxes. But he also said they have "a different take" on parts of the governor's plan.

A different take? Really? What take would that be? I'm not holding my breath for anything significant coming out of this legislature. Beating back tax increases is necessary to save California from even more businesses and wealthy individuals from leaving. Despite the Democrat lock on the state legislature, I firmly believe these tax increases will be defeated in November.

Brainstorming Reducing State Pension Obligations

I have been thinking for some time about legal ways to reduce state pension obligations for current retirees. This is important in California, because it is obvious that this Democrat controlled government won't do anything about the problem until the crisis is so immense as to be impossible to solve. The problem with just unilaterally reducing pension payouts and health care support for retirees is that the pension obligations are a form of contract, at least according to most legal readings I have reviewed. Further, the constitution appears to forbid action which would limit reduce pensions. There are prohibitions against bills of attainder and states may not pass a Law impairing the Obligation of Contracts. Finally, since state's have sovereignty, it is widely believed that they cannot discharge their obligations through bankruptcy. There has been some debate on Volokh on this, but this is my understanding of the consensus today. So it looks like all those pension benefits granted to state employees are a drain on the state's coffers forever, correct? Maybe not.

However, in the debate over Obamacare it became obvious to me that the federal government's power to tax is almost unlimited under the constitution. Ditto for the states. Everyone seems to agree that if the individual mandate had been passed as a tax, Obamacare wouldn't be on its way to the Supreme Court. So that got me to thinking about the state pensions. California could easily place a special tax on state pensions to reduce their burden. Further, the pensioners couldn't escape the tax because the California tax code treats retirement income earned while in the state as taxable by the state of California. State employee retirees could run but they couldn't hide, since the state could collect the tax revenue before they cut the checks.

Alternately, if this method was considered to be a bill of attainder, although I don't see how it differs from any other special taxes in the code, another approach suggests itself. The state could increase the marginal rates, but then exempt all sorts of income from the increase. Earned wages could be exempted for the purpose of job creation. Capital gains could be exempted on the basis of "encouraging investment." Social Security income on the basis of "fairness to the elderly" until all categories except state pensions were exempted from the tax increase. If necessary, the Tea Party should consider putting up such a measure on the ballot when the Governor and his Democrat cohort in the legislature fail to deal with the issue. Even if the measure were struck down by the courts, which I am hard pressed to see what reasoning they would use, it would have the salutary effect of showing that there is a limit on the capriciousness of the tax code.

Looking for input from fellow Tea Partyers or even lefties explaining how my plan might not pass constitutional muster.

Opposing Tax Increases on the California Ballot - UPDATE 2

Governor Jerry Brown's plan to combine tax increases with some spending reductions appears to be popular:

A Field Poll released this week showed that 61 percent of voters, including 56 percent of Republicans, want the state to have a special election on the budget. Fifty-eight percent of voters say they would favor extending the temporary taxes.

This poses a difficult question of principle for me. Normally, I am in favor of forcing tax increases to have a public vote. However, I don't think that the public understands that public pensions are not part of the package that the governor is offering. In a little reported upon survey, Californians overwhelmingly support pension reform. From Bloomberg:

California voters support limits on public-employee pensions by a 3-to-1 margin, according to the Field Poll.

Seventy-three percent of those surveyed favor a cap on the amount of salary used to calculate pension benefits, compared with 20 percent opposed, according to the statewide survey by Field and the University of California, Berkeley, released today. Forty-two percent said the pensions are “too generous,” up from 32 percent two years ago.

Right now, the Democrats need a few Republican votes to extend for five more years the one-cent increase in the state sales tax, the ½ percent increase in vehicle license fees and the ¼ percent increase in personal income taxes that the state enacted in 2009. That's quite a few extra taxes, that cost the average family $1000 per year.

I believe the Republicans should demand concessions on pensions before this goes to a vote of the public. But I would like to know what you think? What is the principled position here? Should Republicans use their limited power to push for pension reform as the price to be paid for putting tax increases on the ballot? Please take my poll.

UPDATE

I forgot to mention that I had cross posted this article sdrostra.com. In the rostra comments, the ever reliable tax-fighter, Richard Rider, provides some additional facts:

Previously, a family with two children received a state income tax credit of $638. Under the “temporary tax increase” package, that credit is slashed to $196 — an effective annual tax increase of $442. For a middle class family suffering in today’s economy, that $442 is a MAJOR tax increase.

Moreover, this 2009 increase, along with the income tax rate increase, EXPIRED on 1/1/2011. Brown’s proposal is not an EXTENSION of the old income tax increase — it is a NEW “temporary” tax. Hence if voters REIMPOSE this expired tax, all the withholding will have to be done in the last half of the year, which will hammer modest income families the worst.

UDPATE 2

Also, W.C. Varones let me know that the Income tax hike expired Jan 1, so that is a pure tax increase. The media and the governor continue to portray the measure as a tax extension, but that is obviously not true for the income tax.

Math Meets Political Power

Math is winning, what a surprise. (This is a recurring theme at The Scratching Post.) Today's U-T headline about the California budget dilemma is a case in point:

Democrats Confronted with the Limits of Power

In last November's election, voters removed the requirement for a two-thirds majority to pass California's budget. Democrats control both legislative houses and the governor's mansion, so their job should be easy, right? Just pass the budget for crying out loud. But wait: Democrats can pass a budget without Republican support. But they cannot pass tax increases.

And the Democrats don’t want to use their newfound clout to push through a budget that gets by only on the revenue projected for the coming fiscal year, especially after the expiration of $11 billion in temporary tax increases.

But shouldn't they be able to close the budget gap without tax increases as has been done in other states? Not if you lack the will to confront the unions.

But Brown and his allies have come under pressure from interest groups, especially the public employee unions, to oppose any spending limits or changes to the pension system. This has led to a recurrence of the same kind of partisan frustration that has marked past budget stalemates.

This is why I want the Republicans to prevent any ballot measure for tax increases to even come to a vote, Governor Brown refuses to deal with the main cause of our budget deficit, union pension promises. Don't believe me? Read Adam Summers' excellent summary at Reason. A snippet:

California’s public pension and retiree health and dental care expenditures have quintupled since fiscal year 1998-99, from about $1 billion to $5 billion this year. Retirement spending is expected to triple again - to $15 billion - within the next decade.

Since 1998, California’s state workforce has grown by 31 percent and taxpayers now pay for more than 356,000 state workers.

Since 2008, California has added over 13,000 employees to the state payroll during this recession.

California taxpayers are paying pensions that exceed $100,000 a year to over 12,000 former state and local government workers, including more than 9,000 state and local employees covered by the California Public Employees’ Retirement System (CalPERS) and over 3,000 former school administrators or teachers covered under the California State Teachers’ Retirement System (CalSTRS).

Without getting employees to contribute more to their retirement and medical plans and getting retirees to contribute to their medical, this will bankrupt the state no matter what cuts and tax increases are imposed. Unless Jerry Brown deals with the union pension mess, our state is doomed. The situation is little changed from the Schwarzenegger administration:


We should be contacting our Republican legislators to demand that they keep tax increases off the ballot until the unions negotiate on pension and medical care reform.

Cross posted to sdrostra.com.