March 31, 2011

The Pension Suspension Is Killing Us!

Hatched by Dafydd

Budget negotiations between California Democrat-retread Gov. Jerry Brown and the legislative Republicans have collapsed. (Surprise, surprise on the Jungle River Boat ride tonight.)

Brown recognizes (or claims to recognize) that the biggest problem in the Leaden State (formerly the Golden State) is too darned much spending; yet for political reasons -- mainly because his own Democratic Party would never accept such a solution -- he doesn't want to close the "$26 billion abyss" in the budget on spending cuts alone. So in addition to proposing some cuts ($11.2 billion, or 43% of the deficit), Brown also seeks to extend a series of "temporary taxes" due to expire this year.

And therein lies the dilemma: Under California's constitution, raising taxes requires a 2/3rds vote in both chambers. But despite Democratic gains in the 2010 elections, the current party mix is as follows:

Lead-in paragraph:

California State Legislature party division
Chamber Democrats Republicans Votes needed for
Democrats to raise taxes
State Senate 25 (62.5%) 15 (38.5%) 2 more votes
State Assembly 52 (65.8%) 27 (38.5%) 1 more vote (or 2, if vacancy filled)

In other words, Democrats alone do not have enough votes to extend those taxes; and so far, the Republicans have held firm, casting not a single vote for the extensions. Besides, again for political cover, Gov. Brown wants the state's voters to approve the tax extension (that is, the tax increase from what current law mandates starting in July). Thus, what the Democrats actually want to pass is a bill that would place on the June 7th, 2011 state ballot an initiative to extend the temporary, two-year tax increases imposed in 2009 for an additional five years. That ballot currently has only local issues; but the legislature can put statewide legislative initiatives onto the ballot if they act by tomorrow, Friday, April 1st, I believe.

(Does anybody doubt that in 2016, Jerry Brown, if he's still governor, or any other Democrat will demand that we "extend" the tax increases for an additional five or ten or twenty years? "With such a whopping huge deficit in 2016," he or she will wail, "we mustn't even think about tax cuts for California fat cats!")

However, at the moment, the Cal-GOP legislators won't give Brown his initiative, either. Nor is it even likely to pass, even if Democrats find a way to shoehorn it onto the June ballot:

The bigger problem is whether Democrats could drum up enough votes among a cash-strapped electorate to pass a tax increase, especially without the backing of any Republican lawmakers.

A Public Policy Institute of California poll released March 23 showed voter support for the proposal waning. While 66 percent of likely voters agreed with the plan in January, only 51 percent still thought it was a good idea by March.

The survey also showed likely voters divided on how to balance the budget, with 41 percent saying they preferred a mixture of cuts and tax increases, and 40 percent favoring the so-called “all-cuts” solution.

“They seem to be convinced it will not pass,” said Tony Quinn, co-editor of the California Target Book in Sacramento. “They’ve probably got internal polling data saying that if they don’t have Republican votes, voters won’t pass it.”

That's a fifteen-point drop in support for the tax extensions in just two months. Most Californios understand that there are three proximate causes for the reality-warping state deficit... and "undertaxation" is not among them:

  • The refusal by Democrats to rein in spending on so-called "entitlements," most especially including unfunded public-employee pension plans.
  • A stifling regulatory regime, still expanding, that is tying down California businesses like the Lilliputians tying down Lemuel Gulliver with a million regulatory threads... to the point where, as Robert Anton Wilson put it, "Everything not compulsory is forbidden; everything not forbidden is compulsory." And in fact, some forbidden things are nevertheless compulsory, as regulatory worlds collide.
  • One of the most business-hating tort environments in the United States suing more and more local companies out of California and into Oregon, Nevada, and other nearby states.

By an amazing coincidence, the three most potent, greedy, and narcissistic special interests within the California Democratic Party are public-employee labor unions, who demand that all pensions and benefits be sacrosanct, no matter how big a hole they blow in the state budget; ultra-liberal government regulators, appropriators, and other rent-seekers, who think Capitalism is out of control and needs to be under the thumb of the State; and plaintiff civil trial-lawyers, who loot the state to the tune of billions of dollars by filing bogus class-action lawsuits and ridiculous personal injury, medical malpractice, and consumer product safety claims (the only lawsuits they seem to have no interest filing are claims of legal malpractice).

And by a second amazing coincidence, those issues are precisely the Rubicon that the Democrats in the state legislature will not cross: public-employee pensions and benefits, regulation and welfare entitlements, and tort reform. Hence the "unexpected" collapse of budget negotiations.

Long term, the biggest problem is probably pensions; in February of last year, the American Enterprise Institute published a detailed calculation of just how much unfunded liability public pensions have dumped on the states, and specifically on California in the present case:

As the largest state, California not surprisingly has the largest absolute public pension funding shortfall at $454 billion, followed by New York with $284 billion and Illinois with $208 billion. Figure 4 shows the market value of unfunded pension liabilities by state.

In case you're interested, here's "figure 4":

Unfunded public pension liabilities by state

Republicans have specifically targeted out-of-control public pension plans, and that is one of the shoals upon which negotiations foundered:

The GOP had pushed for pension reform for public employees, a hard cap on state spending, and a loosening of the state’s regulatory climate. Democrats said the Republican demands were unreasonable, while Republicans blamed the state’s public-employee unions and trial attorneys for sinking the negotiations.

“As a result of these groups’ refusal to challenge the status quo, it has become clear the governor and legislative Democrats are not in a position to work with us to pass the measures necessary to move California forward,” said Republican state Sen. Anthony Cannella in a statement.

So there we are. The California budget is shattered by a budget chasm the size of the Valles Marineris on Mars. The deficit is primarily fueled by public pensions, overregulation, and a trial-lawyer's wet dream of a tort system. But the Democrats utterly refuse to touch any of those three causes, because they would have to defy the most powerful and aggressive special interests within their own party.

The Democrats' solution? Balance the budget on the backs of California taxpayers: When liberals are in charge, Econ. 101 is invariably trumped by Politics 101.

In the end, California voters will have their say; and Gov. Jerry Brown will very likely have to find a way to close the gap without raising taxes that are already unconscionably high. But how long will those same voters who reject tax increases and endless spending nevertheless keep reflexively reelecting the party that is completely and impulsively defined by the mantra "tax, borrow, and spend?"

Hatched by Dafydd on this day, March 31, 2011, at the time of 7:33 PM


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