$500,000 A Year Civil Servant Pensions - Only In California

Today's Matier and Ross column does an excellent job of exposing what lies at the heart of the budget messes at the city, county and state levels in California.

Key points from the article -- 246 former San Francisco employees receive pensions in excess of $100,000 a year. Fifteen are above $150,000.

I don't have the equivalent numbers for Oakland, Alameda County, Bart and all the other agencies which are sticking it to us. I welcome a reader to contribute the numbers.

But, I feel confident they look the same, and from the sound of it, the numbers will just continue to get worse, courtesy of longer lifespans and the ridiculous union contracts put into place over the last 10 years.

I don't know of there's any way to shed these payouts, short of a bankruptcy. But these civil-servant salaries like at the heart of the budget mess. Closing every park in the state and euthanizing stray kittens more quickly -- both of which have been proposed at the state level -- would do far less than reforming these pensions to improve our budget picture.

There is one element of the problem which Matier and Ross did not discuss. That is the rate of return expectation used in computing the amount of money we need in the retirement system now to pay projected future benefits.

Setting the rate of return number higher has the effect of lowering how much must be contributed to the plan, since more is expected to come in through investment income. Apparently, for the past decade this expectation has been set at something like 8 percent a year.

Sadly, investment returns for the past decade have been more like zero percent. And, there's every indication that they will continue to be anemic in coming years.

So, not only are we faced with a tidal wave on the "demand" side of the equation, with retirees now routinely commanding six-figure salaries in retirement. We also are looking at a "supply" side disaster, with insufficient investment returns to pay for what has been promised.

Personally, I think the state and numerous cities and counties all need to go bankrupt to get out from under these contracts. I see no other way to reduce promised pension benefits, since the unions obviously won't agree to concessions.

Bart's Union Negotiation Website

I usually pay relatively close attention to the ins and outs of local politics, but I complete missed the website that Bart has set up to inform riders and taxpayers about the excesses of its current union contracts.

Bart announced today that it will hike fares in the face of the recession, essentially increasing the fare to ride to SFO so high that I doubt many people will continue to use the service. The high cost of riding Bart is directly related to its union pay and benefits. And, it might surprise many readers of this blog to find out that the Bart station agents and train "drivers" frequently make more than $100k a year when counting pay, benefits and overtime.

I realize that union-bashing is out of vogue with the rise of the Obama administration, but Bart is a prime example of how unions hurt pretty much everyone in the society except their own membership.

Unions even nonunionized poor people, because they make it more difficult for companies and governments to hire new employees. Sure, that's great for those who are already in the door, but for the rest of us it's terrible.

I applaud Bart management's effort to push back against the unions, and I encourage readers to look at that website and provide encouragement to management wherever possible.

I for one would like to see Bart demand real reductions in pay and benefits in the next contract, and I would be more than willing to suffer service interruptions during a strike to get there.

And, needless to say I would be overjoyed to ride a train driven by "scabs." If Bart got rid of its unions, I'd throw a party with all the money I'd save on my tickets.

Tax Policy And The Poor

In the wake of the defeat of last week's propositions, the LA Times ran a column on the front page of its website essentially arguing that California's problem is that it doesn't tax the rich enough.

There are so many problems with this column that it's hard to know where to begin, but allow me to start with a bit of levity. In reading pieces like this, and those written about impending public-employee layoffs, it occurs to me that California may eventually wind up with just a single rich taxpayer paying for a single very well paid public employee.

This seems possible because the Leftists appear intent on shrinking both the number of people paying taxes in the state as well as constantly increasing public-employee pay and benefits, even if that means we can't afford as many of them.

The Times column makes a few points in this vein, each of which deserves a response.

The Times author points out that those in the top 1 percent of California earners paid 7.4 percent of their income in state taxes, while those earning under $20k per year paid 10.2 percent. The budget deal widens that gap to 7.8 and 11.1 percent.

I'm not going to argue with the author's facts, but I do not think that such a disparity is concerning or should be a cause for alarm. In fact, I view it as a pretty reasonable situation. And, if you net out the amount people pay into the system against the amount they get out of it, the situation would obviously look far more skewed in favor of the poor. I don't know the exact numbers, but it's a decent bet that people who make under $20k per year pay negative net taxes.

So why tax the poor at all? About 20 percent of Californians make under $20k per year. If, on average, they earn $15k and pay 10.2 percent in taxes, that's about $12B in annual taxes, which is enough to make a difference in state budgeting. Furthermore, taxing them provides some linkage between taxation and spending, meaning that they have some disincentive to vote for higher spending, as that spending will actually cost them something. Finally, the poor pay zero or negative federal taxes, so 10.2 percent is all they pay.

But why allow the rich to pay only 7 or 8 percent of their incomes in taxes? The answer is simply that states compete with one another to woo capital, and capital means wealthy people. California is doing a terrible job in this competition, regularly losing millionaire families to less tax-heavy states. And, lest we forget, when one includes federal taxes, the rich pay far, far more as a percentage of income than the poor.

The Times goes on to argue that the solutions to this "problem" include changing the percentage of legislators required to pass a budget to a majority, repealing term limits and changing Prop 13. In other words, we should do everything we can to make it easier to raise taxes.

And, by the way, if that were to happen, the increased taxes would hit the poor more than the rich.  This is because legislators know from prior experience with an 11 percent tax bracket that raising income taxes significantly will trigger capital flight. That's why the recent budget deal focuses mostly on sales taxes, which hit the poor more than the rich.

I'm not one of those conservatives who argues that California's tax system can't be rationalized. I just don't trust the current crop of legislators to get that done. And I surely don't trust the constitutional convention some have proposed. Both mechanisms are guaranteed to be overrun by those who have the most to gain, and lose: public employee unions and their backers.

My suggestion would be to keep revenue around current levels, but to move from the boom-and-bust of income taxes to more stable revenue sources. In particular, I agree with the Times author that there is no rational reason to allow Prop 13 to protect commercial property owners. I feel the same way about second homes and houses owned by corporations. And, I disagree with provisions such as the one that allows those who inherit property to keep their parents' Prop 13 cost basis. The point of Prop 13 is to enable families to budget rationally when they buy their primary home, not to produce a random windfall for people.

Even worse, there are families who cannot afford to buy a home because Prop 13 disadvantages families when they first purchase homes, by setting the millage rate so high. While Californians on average pay only around 0.5 percent of their homes' values in property taxes every year, a family buying a new home in Oakland must pay 1.35 percent!

So, my advice to California is a straightforward revision of the taxation system:

• Enact a flat, relatively low income tax rate of 6 percent, which is around the national average.


• Create a lower tax rate for long-term capital gains, as does the federal government.


• Set the corporate income tax similarly.


• Set a relatively low sales tax rate of 6 percent.


• Modify Prop 13 as described above.

Such a change would create a more stable revenue stream and make the state a more compelling place for capital to be invested.

Time To Vote No Again

Like Oakland, California continues to stumble toward some kind of reckoning with profligate governmental policies.

By voting no today, or simply failing to vote at all, voters can help bring a dose of reality to our "leaders."



Those who do plan to vote today should take a look at a couple articles published yesterday in the Wall Street Journal. Here is a link to the first article. It does a good job of explaining the basic facts underlying the current situation.

Even more importantly, voters should read this article, appropriately entitled "Soak The Rich, Lose The Rich."

Of interest are quotes like this one: "California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores."

No one likes to talk about it, but the truth is that extra spending on education has virtually no impact on student achievement. The factors that actually matter include things like parental involvement and whether the parents went to college or not.

Liberals like to say that they support higher government spending and taxation because they want to give the poor and downtrodden an equal shot at success. In and of itself, this is not too problematic of a goal.

The problem is that, in California, government policies have not pursued these ends. Rather, the Democrats run the government exclusively for the benefit of the public-employee unions. That's why, from firefighters and police to teachers, our public employees receive far more in pay and benefits than the average nationwide.

Even worse, the state's constant pursuit of high-income taxpayers has finally begun to push us irredeemably into the red. Consider this: Rush Limbaugh famously announced that he would no longer work in New York state because of the state's planned income tax increase. And, just yesterday the owner of the Buffalo Sabres made a similar announcement.

In the latter case, the lost revenue to New York will total $13,000 a day, or nearly $5 million a year. How many high-income exits like this does it take for a state to see a significant deterioration of revenue?

And, more importantly, consider the fact that New York is only planning to raise its income tax rate to about 9 percent. California's tax currently stands at nearly 10.5 percent! And, public employee unions continue to agitate that taxes aren't high enough.

Put another way, how many people making $100 million a year, and thus paying $10 million in state taxes, need to move to Nevada or Washington state, where the tax rate is zero, before it puts a big hurt in California's ability to pay the bills.

The truth is this is already happening, big time. And no amount of Leftism is going to change that. That is why the legislative compromise earlier this year focused mostly on sales taxes. They know that income taxes are pushing people to leave. So, they're doing what they always do -- soak the poor and middle class once there are no more rich to hit up.

California needs to lower its spending and lower its taxes. And until it starts down that path, I see no reason for voters to go along with any proposals. If it requires a bankruptcy to get out from under whatever ridiculous pension agreements we've made with the public employees, then I'm fine with that.

The reckoning is coming, and voting no on these propositions brings it still closer. And that is good for all of us who don't want to see sales taxes at 15 percent.

Oakland Chrysler Dealer To Close

I've obviously been offline quite a bit lately tending to some things, but I wanted to let readers know that our local Chrysler dealer on Broadway will be closing as part of Chrysler's round of dealership closings.

Here is a link to the full list of closures. Apparently Oakland's is one of five or so in the Bay Area, including one in Livermore.

I can't imagine this will be good for Oakland, and I would guess that the GM dealership is going to close too. We'll see...

Liberalism And The Danger Of First-Order Thinking

There are two basic ways to look at the spending priorities of a government institution.

The first is to examine the public's underserved needs to determine where money should be allocated. The second is to consider where the money comes from to pay for it all.

Both perspectives are critical, and both perspectives help to shape the impacts of government policy. But few who analyze policy spend much time on the latter view.

Spending time only on the first part of the equation is the basic flaw in liberalsm. I call it first-order thinking.

To a first-order thinker, the obvious way to meet a need is through spending money on it. This applies to everything -- health coverage, education and pensions to name a few.

Sadly, economics follows its own thermodynamic principal. And, aside from recent actions by the Federal Reserve, the government lacks the power to simply invent money out of thin air and then spend it. By and large, governments must raise money they want to spend through taxation, borrowing or both.

Both taxation and borrowing involve taking money from one set of people and allocating it to the government's spending priorities. Those whose money is taken or borrowed must then adjust their priorities accordingly. This is a second-order effect, and it is not one a liberal is likely to consider.

This effect is the basic reason why the New Deal did little to fix the Great Depression, and Obama's stimulus package will do little to help the present national economy.

In fact, most economists view the negative second-order effect of government spending as more harmful than any benefits derived from the spending itself. This is because those whose money was taken or borrowed probably would have invested it in projects aimed at profitability.

Such for-profit projects are the engine of a capitalist economy. When the government substitutes its judgment for that of the invisible hand of the market, a less efficient outcome is nearly always the case.

So, the stimulus package will probably delay the economy's recovery.

But this is a local blog, so I want to address another second-order effect that is unique to the layers of government below the federal level.

Few probably remember Prop 63, the Mental Health Services tax which passed some years ago. This initiative imposed a 1 percent tax surcharge on Californians whose incomes exceed $1 million per year. It raised the top income tax bracket to 10.3 percent -- by far the highest in the country.

While my income means I have not been burdened with this tax, I opposed it because I suspected its second-order effects would mean more harm than good would come out of it.

My reasoning was based partly on the concept of the Laffer curve -- which says that there is a point in taxation where raising the rate actually nets the government less in revenue. This is because high taxation crowds out profitable investment opportunities. This then lowers the total income of the society, thus lowering the amount of tax to be found.

For Prop 63, the effect is even more pronounced, because these "millionaire households" need only to move to another state to avoid this tax.

And move they have. Since the tax passed, more than 7,000 such households left Los Angeles County. This flight hurts government revenue at every level. It means these people probably sold their houses, depressing property tax revenue. The same kind of thing goes for sales tax revenue.

Worse yet, it means they now pay zero income tax to California. At least $100k in taxes per year per family is gone from the state revenue base. That's $700 million per year, assuming each household makes around $1 million a year, which is a conservative estimate.

What does this analysis mean for places like Oakland, where all three of property, sales and income taxes are at the highest levels in the country?

Well, it probably means tax revenue will continue to fall, in spite of efforts to pass tax after tax. And it means the blight will grow. Why would anyone in their right mind relocate to Oakland or start a business here, knowing the level of taxation they're likely to encounter?

What should the state and local governments do? Lower taxes, and accept the short-term consequences to spending priorities. Doing so will actually increase the long term revenue to the government by drawing in individuals and businesses seeking more reasonable taxation.

It's clear as day to me that if Oakland lowered its ridiculous business taxation, reduced its property tax level to a more normal 1.1 percent (from 1.35 percent) and declared itself willing to do whatever it takes to attract businesses and wealthier residents, every aspect of the city would fare much better over the next decade than it will under the present course.

The problem, of course, is there is no clear constituency to advocate for such policies. The public employee unions will always advocate for higher spending. The anti-gentrification and socialist elements will always clamor for taxing the rich (until they all leave). But who is left to advocate for the right course of action when the second-order effects dictate that higher spending will only leave us with less to spend in the future?

I encourage my readers always to think about second-order effects in any government policy. Don't just consider where the money goes. Consider also where it comes from.

Consider how people's behavior changes when the government takes a larger share of the economy. Don't just consider one side of the equation, because doing so leads to the sort of short-sighted policies which have sunk Oakland and are slowly drowning California.

To Drain The Cesspool, Legalize Drugs

An interesting phenomenon took place over the past two weeks, as our new president was pressed on the question of legalizing marijuana.

To his credit, his administration has reversed the policy of pursuing local pot clubs because they are violating federal law. To his discredit, he indicated that he did not favor legalizing drugs, as he did not expect it would assist the economy.



Sadly, nothing could be further from the truth. Keeping drugs illegal has been the single most effective policy in keeping inner cities poor and ensuring that ethnic minorities in America fail to rise to their full potential.

Nowhere is this phenomenon more obvious than in Oakland, where "cash crops" such as pot, meth, crack and heroin make up a significant portion of the local economy.

My understanding is that those who support keeping drugs illegal fear that legalizing them might cause a catastrophe, as millions of Americans who never touched drugs before start using them and become unproductive.

There's a simple solution to this fear -- change the law incrementally. That approach is exactly the one our president inscrutably rejected last week. One can only presume he did so because he knows that solution doesn't poll well.

In my opinion, prohibition has several effects, all of which are negative.

First, it spreads policing manpower too thinly, forcing them to arrest people for owning or consuming certain substances. Targeting these victimless crimes prevents the cops from enforcing laws which have a greater impact on the public at large -- those against burglary and murder, for example. It is well known that Oakland's police don't even really investigate burglary cases. Our "war on drugs" is a major reason.

Second, it discourages addicts from seeking treatment, and it decreases the amount of money allocated for treatment by funneling that money to police and prisons instead. Obviously, if someone knows he can be arrested for what he is doing, he is far less likely to seek treatment.

Third, it does little or nothing to decrease drug use. My evidence here is empirical. Drugs are trivial to obtain in the East Bay, despite heavy enforcement.

Finally, and most importantly, it ensures a large steady stream of money toward the least desirable types of people in society, including the drug cartels in northern Mexico which are carrying on a war against Mexican authorities at this very moment. Closer to home, most of the slayings in Oakland each year are drug related, and it is well documented that the profitability of drug dealing is what draws most young black men away from honest lifestyles and toward a life of imprisonment and violence.

Legalizing drugs would eliminate the money going to these gangsters. Ever noticed how you don't hear much any more from the gangs which ran alcohol during prohibition in the 1930s? The same thing would happen to our current crop of inner-city gangs.

Furthermore, drugs could be taxed, with that money applied toward treatment and education programs. I think it's quite likely that this diversion of resources could decrease the number of drug users below current levels.

But most importantly, doing so would change the face of poverty in America, providing people with a real incentive toward honest lifestyles rather than drug dealing and violence.