A California Republican

There was an education reform bill paced recently that was passed in order to bring California in line with standards to receive federal funds from the “Race to the Top” program. Part of the requirements is that California adopt the “common core” standards set out by the federal government or join with other states in a set of more rigorous academic standards.

The idea of having a common core of standards for the nation, that is set by international standards and experts, is a good idea - in theory. In practice the common core standards have not been released, and the only draft standard circulating regards career-technical education for high school students. While common core standards can be good in theory, committing to them without ever seeing them is a bad idea.

California’s academic standards are among the most complex and rigourous in the nation (which doesn’t say much since California high schoolers still cannot pass the Exit Exam which is based on 8th and 9th grade information). However, they are complex. They range across a huge variety of subjects, and are sometime too in-depth or too complicated for the lower grade levels. But they are standards that have been developed by people deemed “experts” - college professors in math have helped develop California’s math standards. To completely abandon them for a set of standards that are unknown seem ridiculous.

This is especially true when you think about the cost involved. Currently California has a list of textbooks approved to meet its core standards. There are assessment tests developed on the basis of those standards. All this will have to be redone with the adoption of new standards. This will cost millions of dollars - and that is money the federal government is not providing.

Additionally, there is the question of how these new common core standards will affect teachers, the materials they already have versus what they might need to buy, the students, the software and computers schools use and the electronic textbooks the schools can currently use. All of this will, maybe, change under new standards.

Why commit California to something that simply demands more spending? The $4.8 billion dollars that California might - possibly - receive under the Race to the Top program is not enough incentive. Every time California receives federal money, it has ended up restricting California’s option for state governance and finance.

There needs to be a change in attitude among the state legislators - the federal government’s money is not a god-send. The strings that come attached need to be carefully evaluated, and the consequences need to be weighed and measured. This is not being done currently. Instead the promise of some money for education - and $4.8 billion is not a lot for California’s education spending - seems to make legislators jump to make decisions that have lasting, and unknown, impacts.

This is not a good idea for California.

The Governor is getting ready to release his budget on January 10th. It must be a balanced budget - meaning on paper the budget cannot spend more than the revenues it brings in. There are various ways of creating this work of fiction. One of them is to “borrow” from special funds and say that they will be paid back later. Another way is to have “savings” for various programs that are not scheduled out, but are simply a large “savings” number. Still another, a favored one, is to have federal “asks.”

A federal ask is when the state includes, in the budget, a line item for additional federal funds. Sometimes these funds materialize, like when some came through with the stimulus package. But sometimes these federal asks are simply a line that says: We are asking the federal government for more funds for this program. There may, or may not, be federal money coming in. However, since the federal dollars are assumed as revenue, it looks good on paper.

If you are wondering why there is always a deficit in California, you don’t have to look any further than these budget tricks. Federal asks do not always materialize - in fact they hardly every materialize. Transferring funds is always challenged in court. Sometimes the state gets blocked from transferring funds, and sometimes they do not. However, those funds must be paid back, creating a budget problem in later years. There are years when expected savings do not materialize. All of these things combine to create a deficit.

These are mirages. They are tricks to make the budget look “good” on paper. If there isn’t any money and the Governor wants an all-cuts budget, then he should have the cajones to stand up and make the cuts. Instead, these accounting tricks are going to be present in the budget he presents on January 10th, making it look like the budget is balanced, but instead it really creates a problem for next year.

The Controller’s office released the latest cash balance numbers for California.

The good news is that revenue receipts were only $40.8 million below expected levels. This is a 0.7% difference from the estimated levels.

However, the Controller, as well as common sense, says to take this news with a bit of salt. The problem is that these were the revenue numbers from October and November - and have nothing to do with December. These numbers include the biggest shopping day of the year - Black Friday. This is not good news for California.

Unemployment is rising. Demands for state services are growing. These two things, combined, are going to lower the actual revenue California receives. Personal income tax - where California gets the bulk of its General Fund money - is not reported until April, when taxes are due. The true state of the economy, and the lack of cash in the state, will hit when those numbers are far below the expected levels. Overall, the state revenues are running approximately $835 million below expected levels - and this is just through November, 5 months of a 12 month fiscal year.

However, California currently has a $610 million cash surplus. This is due, not to good planning and good estimates, but it is due to the fact that California had $1 billion in borrowing to help the state. This is equivalent to saying that you, as an individual, have surplus cash because you have been buying everything on credit. It’s not really a surplus, it is illusory, because you are going to have to pay that credit card balance back in the future. So while, for the moment, you might have more cash, you are creating a problem for yourself in the future, perhaps as early as the next month.

This isn’t good news for California. It is bad, and the news is only going to get worse.

There is a lot of noise in the climate change arena these days. There are people upset that the emails have been released from the scientists in England. Those emails showed, among other things, that the scientists manipulated the data to show a warming trend. Recently NASA released a report that detailed how the other planets in our solar system are undergoing similar heating and cooling trends; is this also the fault of humans on Earth? Recently the EPA started reviewing regulations for a cap-and-trade system; CalEPA is also reviewing such regulations in consultation with the CARB (California Air Resources Board).

 What Cap And Trade Is

There are many versions of cap and trade. Essentially what makes a program a cap and trade program is that (1) the government puts a limit on how many tons of CO2 gasses can be emitted by various companies/industries - a “cap”-  and (2) companies who come in under their allotted levels can “trade” away their remaining balances to other companies who might be going over their limits. How this works varies.

One of the problems with this is that most cap and trade programs are based on (1) having individual companies pay for their allotment and (2) the caps decline as the years go on. While environmentalists would say this is necessary, it begs a few questions; Why do the companies have to pay in order to get an allotment when if they go over their allotment they have to pay a fine? Why does the government get to regulate how much a company gets, and by how much the cap has to decline? Will this apply to other emissions as new energy sources will also have potentially damaging environmental side effects? How are companies going to pay? What is the price level?

Cap And Trade Is A New Tax

Cap and trade is essentially a new tax. As it is now being reviewed by the EPA, the companies would pay billions of dollars for their cap allowances. This revenue then goes to the federal government….to do what with it? Does it go to pay down the debt? Does it go to the general funds to pay for other things? Unless that money goes to benefit, directly, those who pay the money - it is a tax. The money paid is a tax.

When new taxes are imposed on companies, what do they do? They pass it along to the consumer. So the power plant which now has an extra $10 billion in expenses for their “cap” allowance now has to find a way to recoup those costs. They are going to raise prices on the consumer. Not everyone can afford to live off energy they generate by solar panels, or use a wood burning stove to heat their house. People are not self-reliant for energy - which is why there are power plants. Now the consumers - families - are going to end up paying more for their energy. This results in an increase in basic expenditures which means less spending, which means less economic growth.

What the government fails to understand is that there are some other solutions, there isn’t just cap and trade. Nuclear power is a solution. The nuclear waste has to be disposed of, but in all energy production there is waste and by-products that have to be disposed of. Why not look at other options before instituting a cap and trade system that will raise taxes on companies and consumers?

Economic of Climate Change

Climate change is a big industry. The government recently gave over $450 million to a Sacramento-based company to work on developing diesel fuel from wood cuttings and algae. To work on developing the fuel - not to produce the fuel. What does this mean? There is a huge industry built around alternative energy that is being subsidized by government because those alternative energies are not yet viable. Does this mean that they won’t be viable? No. But for now, tax money is going to private companies to pay for research and development of something that may not even work. There is a whole industry built up over this.

That industry wants cap and trade. They want the government money to flow to their labs and development funds. Then they can work on developing something that is going to be more expensive than traditional fuels, and people are going to have to buy it from them because the cap and trade system requires a decline in total CO2 emissions over the years. Companies are not going to have any choice but to buy from these alternative energy sources. There is no provision in the grant of monies that makes them pay back the R&D money when they become profitable. Instead, they simply get the money and then, because of cap and trade, will get business too.

Ridiculous.

Fact of Climate Change In Doubt

It doesn’t help that more and more people are doubting the true nature of climate change. The scientists in England, or their emails, have shown how they manipulated the data, and have given fuel to a doubt in climate change. Reports that the Earth has gone through similar periods in the past show that this cycle isn’t abnormal for the Earth. NASA’s new report that other planets are also changing means it may have its basis in something that humans cannot control.

This isn’t to say that humans don’t have a responsibility to maintain the environment, to stop doing so much damage, and to fix what they can. Fish are found in oceans that have both male and female reproductive systems because people flush medications into the water system. Forests are dying and being chopped down. Waste is found in huge piles in the ocean, and dead zones are piling up. But our reaction to this shouldn’t be a new tax. It should be an individual response because we feel an individual responsibility to the environment.

For a lot of people, high school is something they would rather forget. This applies to social situations, embarrassing happenings, and high school education. When the train from Boston will run into the train from Chicago is not something that most people use in their daily lives. Neither is the knowledge about the book A Red Badge of Courage. It is nice if you remember these things, they can hold important lessons and information. But it is not crucial.

What is crucial to remember is the basics of economics. This is especially true if you want to have anything to do with the economy. If you want to be an economist, an estimator, a budget/policy analyst or, say, a legislator, you need to remember basic economics.

The basic rule of supply and demand is this: The more expensive something is, the less in demand it will be. This is why when the sales taxes were raised, demand went down. It shouldn’t be a shock to anyone that the sales tax receipts declines when sales taxes were raised. In 1991, when California raised taxes, revenues dropped. If the legislators don’t remember high school economics, surely they (and their advisers) should have remembered what happened the last time this was done: there was a drop in revenue for the two years following the increase.

It doesn’t help that California is anti-business. If you are going to dispute me on that point, you have to find something to pick on. California has very high employment taxes, lower deductions, more regulation, higher corporate income taxes and business taxes than any other state. It is harder to form a company here than anywhere else in America- which is why most corporations are formed in Delaware, not here. When you are facing a 12.5% unemployment rate - that’s’ 3.7 million people - it makes sense to be more business friendly so that the business will hire people to drop the unemployment rate.

As unemployment rises, income tax revenues will drop. This means that tax increase on income - which amounts to $1200 for a family of four - won’t produce nearly as much revenue as estimated because there are less people working, which means lest people paying the tax. 

When income tax rises, people’s ability to spend drops. This includes such spending as paying a mortgage. With banks increasingly unwilling to modify the mortgages of anyone, it means more people defaulting on their mortgage. The real estate drop may have hit its bottom, and maybe not. If unemployment goes higher, and starts affecting different sectors of the economy, it is likely that more people will default as their income levels drop and taxes rise.

What does this mean? It means the Legislature needs to stop picking the pockets of Californians. We are not the ones causing the problems. There are some simple solutions that have been offered to the problem, none of which are given serous consideration by the Legislature.

But remember this: as taxes rise, everything else - including state revenues - drop. Economics 101.

The federal stimulus money was supposed to be spent quickly to boost the economy and reduce unemployment. That’s the line that was fed by the government to the states, the press, and the voters. Stimulus funds were going to be spent quickly on projects that would hire more people and reduce unemployment. This would help boost the economy out of a recession. It is this rationale that allowed many people to agree with the stimulus plan, even though it drastically increased the national deficit.

But what’s quick about this spending?

All kinds of figures are being released by various news outlets about the effect of the stimulus spending and the job-saving benefits. In California alone there have been instances where various agencies - the CSU system and CDCR to name a few - have reported jobs saved because of stimulus funds that were never in danger. There has been money handed out to the education system that hasn’t prevented drastic cuts and increased class sizes. And the money isn’t being spent that quickly.

It is now the end of 2009, almost one year in President Obama’s presidency, and he hasn’t been keeping the promise that he made with the stimulus funds; he has been increasing the deficit which simply passes on our responsibilities to our children.

In California, this is a huge problem. What happened to the $226 million given to California for renewable energy and programs is simply an example of this.

The California Energy Resources Conservation and Development Commission hasn’t awarded the money or spent it, according to the State Auditor. The money was given to the Commission to aid in renewable energy programs and jobs, to help create the “green” industry in the state. But where has the money gone? And why hasn’t it been spent quickly?

The Commission says that they have signed a contract with the Employment Development Department - $15 million - for a renewable energy jobs program. However, that money hasn’t been spent and the program hasn’t been set up.

What is stimulating about money that is sitting on the books and not being spent? Nothing.

The stimulus package was a joke. A year later and the money handed out is not being spent, is not being kept track of (by the federal government or the state) and is doing nothing to pull this economy out of a recession. Why call it a stimulus package? Call it what it truely is - a way for the federal government to run the states. If it was anything else, the money wouldn’t have come with all the strings attached.

There is a projected $6.3 billion deficit at the end of this fiscal year for California. This assumes no actions are taken. Why this hole? Several savings mechanisms have not worked, or have saved less than expected, and revenue is lower than estimated.

This is the black hole of California’s budget. No one can really tell where the money goes, but everyone knows it is going somewhere. The savings mechanisms were put into place with spotty knowledge of how they would affect the budget or whether they would be effective. Furloughs were put into place only to have them cost the state money. Some departments and agencies don’t even furlough their workers because they are exempt - but those savings were included in the budget.

In late, backroom deals, savings estimates are made for various suggestions. They don’t have to be real estimates and don’t have to consider side-effects (like how furloughs reduce income tax payments). Instead, they simply estimate savings from one isolated instance, and put that into the budget. The same goes for revenue figures. The revenue figures arrive at to “balance” the 2009-10 budget showed an increase in state revenue over the 2008-09 budget. A common-sense test of these options would have shown there were mistakes.

Now the LAO says there are big mistakes. In the savings mechanism the furloughs are not working as planned, CDCR has a $1.4 billion spending problem (which they say is because of the federal Receiver), $900 million is being overspent in Medi-Cal because the state couldn’t obtain as much federal funds as they thought, $800 million cannot be transferred from the gas-tax money into the General Fund, and the $1 billion General Fund revenue for sale of the SCIF never materialized (and won’t). There are other problems as well: The state is paying out more in uninsurance than they thought, more people are qualifying for unemployment and other social programs. These are all expenses the state didn’t assume when working out the budget, or savings mechanisms they assumed on faulty recommendations.

It doesn’t help that revenues are expected to be $496 million less than expected for the 2008-09 year and $1.5 billion out of balance for the 2009-10 budget year.

All this means a huge black hole. Money goes in and never comes out. If taxpayers are asked to pay more, will the government guarantee that the schools are going to get better? That the roads will be fixed? That police will come stop crimes, not just react to the very violent ones? Will only people who are trying to find jobs and not able to be able to gather unemployment, instead of people who are working just under the $500 amount so they can collect unemployment? How are the extra taxes going to be spent?

Without a guarantee that there will be no more black holes, that the gravity produced by the mass of spinning bodies in the Legislature won’t simply suck more money away into no where, should there be a tax increase? No. The state needs to prioritize its spending and make tough choices. Does the state continue funding summer camps, science centers and museum? Or should those be self-funded? Should there be grants for Cesar Chavez day  given to schools, or should those be cut? What types of health care does the state have to offer to people? These are tough choices that need to be made by the Legislature. They simply cannot just sit there and spin, hoping gravity collects them more money that they can shove into nowhere.

How many people live in California? Do you know? There are, according to the US Census Bureau in 2008, 36,756,666 people in California. Want to know how many of those account for 75% of the income tax - which accounts for a large part of the General Fund? Half? You would be wrong.

Approximately 247,000 multi-millionaires pay 75% of the income taxes in California. That is less than 1% of the population paying most of the money into the General Fund. In exchange for this they do not receive any extra say in where the money goes. In fact, in exchange for this they get taxed at higher rates as the California public decides that they should pay more. Just because a person has money and can pay higher taxes doesn’t mean that is what should be asked of them.

There are several famous political philosophers - like Aristotle and Locke  - who America’s Founding Fathers knew well. These theorists said that in order to maintain the balance in a democracy, you have to balance the rich and the poor. There needs to be a large middle class so that the rich don’t revolt because the poor want to take all their property. However, the rich also need to pay some to the poor because the rich don’t want the poor to revolt because the poor think that the rich have all the property. Californians should listen to this advice.

The people who have the wealth don’t need to live in California. There are other places that are, very easily, nicer to businesses and companies than California. There are other states where income tax is not such a burden; come states don’t even have income taxes. The rich don’t need to be here. The state needs the rich to be here, otherwise 75% of the income tax revenue disappears too. This means the state should not place more burdens on the rich.

Yes, people need to pay taxes. It is the price you pay for having police, fire and ambulance services. It is the price we pay for having roads, public schools, and prisons. However, there is a tax burden that becomes too much, and people start fleeing the state.

It won’t take many of those 247,000 tax-paying individuals leaving the state for the state to feel a difference.

Maybe if they all leave, the state will finally have to restructure its tax laws to have a balanced, fair tax system that doesn’t cycle with the economy. Tax structures that are more evenly balanced between income and property/business taxes fair better in bad economies. Tax structures, like California’s, that rely so heavily on a small percentage of people to pay high levels of income tax fair badly in economic downturns - like now. Revenue drops sharply and there are no reserves to balance the budget.

Take note of philosophers from a long time ago - stop asking the rich to shoulder the burdens of the state. They don’t need to be here.

 On an interesting side note - if the Governor paid his taxes, it would be nice. First there were all the tax problems of President Obama’s nominees, now the Governor of California has tax problems. Million, hundreds of million, of people file taxes every year without problems. yet these men, who have accountants and lawyers, cannot manage? What does that say?

California is a liberal state. Those of us who are conservative know this, and still we choose to live here for other reasons. Maybe we are tied here because of jobs, family, or economic situations. Possibly we like the freedoms we are provided here, the environment, the weather, and the options we have in California. However, we all know California is liberal.

The environment is an issue that has extreme costs, and has polarized the parties. However, this is a large percentage of the population - conservative and liberal - who know that the environment needs some help. We are stewards of the environment. It was not put here for us to destroy, but it was placed here so we can live. It was placed to aid us in our quest to be better humans, in our quests to discover new things, and in our quest to explore. What is more majestic that standing on a pristine beach and seeing the waves crash? Have you found more peace than can be found hiking in a forest where there are no sounds of cars, and the only thing you smell is nature? All of these things require that we, as humans, work together to find solutions for issues that are destroying the environment and causing changes. Yes, the world goes through weather cycles, but we have an obligation to limit our impact.

Where people diverge is the extent to which this should be an individual choice and the extent to which the government should interfere. Californians have chosen, or their representatives have, to let the government do a lot of interference. AB 32 puts certain reporting requirements on various companies, and one of the requirements is to report how much greenhouse gases they are emitting.  Any industrial facilities that emit more than 25,000 metric tons a year of carbon dioxide or related greenhouse gases are required to report what they are emitting. In California last year, 605 facilities passed that threshold.

The ARB has issued a report (it can be found at http://www.arb.ca.gov/cc/reporting/ghg-rep/ghg-reports.htm). The largest emitters were refineries and two non-nuclear power plants. The ARB says this report is necessary to help them focus their attention on how to get these emitters to emit less. In fact, this report forms the basis for the cap-and-trade system that will be put into place in 2012. If you don’t know what a cap-and-trade system looks like, examine Europe. They have a cap-and-trade system. But no where else does, and the ARB hasn’t published their plans for what a cap-and-trade system will look like.

If these are the largest emitters, why is the ARB looking at preventing black cars from being sold in California because their drives use more gas because they use more air conditioning because the black color of the car absorbs more heat? Why not focus on the refineries and power plants? Nuclear power is a lot cleaner than what is currently being used, why not allow nuclear? The ARB is a decidedly liberal institution with liberal lobbyists and would never consider nuclear power as a viable alternative. That’s why. That simply isn’t good enough.

If we, as environmentalists and humans, want to decrease our impact, we need to look at all options - nuclear included.

However, this report is simply stating what common sense already knew. Now the ARB is going to waste state resources developing their own cap-and-trade program, rather than using one that is effective (see Europe as an example) and one that has tons of loop-holes based on who is lobbying the ARB.

What a waste of state resources this project is.

California’s unemployment fund deficit faces a $7.4 billion dollar deficit by the end of the year. This means that the state has to borrow money from the federal goverment, and pay the money back by 2011 or the interest payments will be huge - hundreds of millions of dollars per year.

The Legislature recently voted to raise unemployment benefits, but did not raise the employer contributions to match the higher level of benefits paid to employees. Why does this matter? California’ unemployment fund is paid by employers, who must pay a certain percentage of the first $7000 an employee earns into the fund. When the demand on the fund goes up, as it does during a recession, the amount paid by employers remains the same. When the Legislature voted to raise unemployment benefits earlier this decade, they did not raise the amount employers contribute. This has caused a structural deficit in the unemplyment fund.

The fund has to borrow from the federal government to stay afloat. The interest rate on those fund is at 5% per year. The federal government has waived the interest until 2011. If the loans are not paid back by then, the state must start paying the interest amounts. This is a debt, which counts as debt service, and must be paid before schools and any other social programs are given money from the General Fund.

Labor and business are fighting the various proposals to fix the problem. One of the proposals that Democrats like is to raise the taxes on employers. Business, and Republicans, are fighting this proposal because they think that in a recession the last thing you want to do is tax the people who might be providing jobs. More taxes means less money available to hire and pay employees, which might mean a rise in umemployment. Other parties are floating a re-examination of benefits and tightening eligibility requirements. Labor is figthing both aspects of this proposals.

However, tightening eligibility requirements shouldn’t be fought. Currently, you have to show that you did work, that you are looking for work, and that you are eligible to work. There are very few other requirements to gain access to unemployment payments. To verify that you are looking for work, you simply self-verify. There have been cases of people who take their unemployment benefits, move out of the country to somewhere cheaper, and “look” for work there. These people have not been required to pay back benefits because they meet the criteria? What is wrong with requiring a listing of place that you looked, when you applied, telephone numbers and such? This is informatin any good job hunter is going to have on hand. Why does labor not want this? Because they represent people who are maing unemployment claims and this simply makes it more  difficult. Not impossible, and not even hard, just more difficult.

The positions of both parties on benefit reductions and raising taxes is simply where they have always stood.

But it is clear, higher benefit payments without more revenue result in the same sort of structural problems California’s budget has. Unless this is fixed, there will continue to be a deficit in the unemployment fund.