Party Like It's 1999

California Party Time

Sacramento spends its tax revenue gusher like there’s no tomorrow.

WSJ Opinion, May 31, 2015

These are hard times for the blue-state governing model of high taxes and public unions—see Illinois, Connecticut and Maryland. But our friends on the left ignore these states and tout California as their real model, as Sacramento celebrates record tax revenue. So it’s worth noting that the Golden State may be repeating the fiscal mistakes it made before its last economic bust.

There’s no doubt the state government is on a high, with Governor Jerry Brown forecasting $6.7 billion in additional revenue beyond his January projections due to growth in capital gains and incomes among high earners. Over four years general fund revenues have risen by 40% to $117.3 billion as income-tax collections surged 55%.

This follows what has turned out to be one of the most fortuitously timed tax increases in history. Mr. Brown’s 2012 ballot measure retroactively raised taxes on individuals earning more than $250,000 and increased the top rate to 13.3% from 10.3% for those making more than $1 million. The measure passed amid the Internet boom and stock market rise.

No one wants to mention, however, that the tax hike doubled down on the state’s top-heavy tax structure that produces huge revenue swings. The top 1% of taxpayers—those earning more than $525,000—paid over 50% of all California income taxes in 2012 while the bottom four quintiles earning less than $90,000 paid a mere 10%. The Golden State has lost middle-income jobs in manufacturing to other lower-taxing Western states, but it has assets like Silicon Valley that other blue states don’t.

The resulting revenue boom has politicians partying like it’s 1999, the height of the dot-com bubble. The boom has been especially sweet for teachers unions because under the state constitution schools are entitled to most of the haul. Over the past four years state spending on K-12 and community colleges has grown by 45% to $68 billion this year.

But now other liberal interest groups want to join the party. So Mr. Brown is proposing to extend Medicaid to illegal immigrants granted permanent residency by President Obama. California’s Medicaid expansion under ObamaCare has already added four million beneficiaries at a cost of $17 billion. National taxpayers are picking up $15.5 billion of the tab for now, but California’s share will grow after 2016.

Mr. Brown also wants to create another entitlement by inaugurating a state version of the earned-income tax credit for two million low-income Californians. That comes on top of next year’s increase in the minimum wage to $10 an hour, and $15 an hour by 2020 in Los Angeles.

Yet despite the government’s efforts to help the poor, California has the nation’s highest poverty rate at 23.4%. And nowhere in the U.S. save perhaps New York City is income inequality greater than San Francisco, which has been a hothouse for progressive policies such as a $15 minimum wage and mandated paid sick leave. All that income redistribution doesn’t seem to be the secret to equality.

Meantime, projected revenues from California’s cap-and-trade auctions have swelled by 150% in the last year to $2.2 billion. Mr. Brown wants to spend $400 million of that windfall on affordable housing; $350 million on low-carbon transportation (i.e., electric car subsidies that go mainly to the well off); $365 million on public transit and intercity rail; and $500 million on the L.A. to San Francisco bullet train that is already short of funding.

***

The danger is that this gusher of new spending will set up the state for another budget bust. Last November voters did approve a ballot referendum aimed at imposing some spending discipline, strengthening the porous rainy day fund. Under the new law’s formula, the state must spend $1.9 billion this year to pay down “debts and liabilities.”

But Mr. Brown has construed it broadly to include payments to schools and special funds that politicians had previously raided. He’d also create a new liability by proposing to seize $96 million from the rainy day fund to shore up University of California pensions. Yet Mr. Brown’s budget doesn’t even begin paying down the $191 billion unfunded liability for state worker and teacher retirement benefits.

At the end of 2015 the rainy day fund will have a meager $3.5 billion, and the Governor cautions that the “budget remains precariously balanced and faces the prospect of deficits in succeeding years.” Last year the state Legislative Analyst’s Office warned that a modest dip in income growth could trigger multibillion-dollar deficits due to built-in spending increases, particularly in education.

The paradox of Jerry Brown has always been that he’s smart enough to recognize the severity of the state’s fiscal problems, yet he can’t seem to restrain his prodigal legislature or even help himself. The revenue boom is making California’s economy and budget look better than they are. The reckoning will arrive when the next economic downturn does.

Money for the Children?

Voters Keep Falling for Bond Issues Because They Are  
The Pension Sink Is Gulping Billions in Tax Raises
Remember that ‘temporary’ tax hike for California schools? Most is now going to public worker retirements.

By: Steve Malanga, WSJ Opinion, Jan 12, 2015

California Gov. Jerry Brown sold a $6 billion tax increase to voters in 2012 by promising that nearly half of the money would go to bolster public schools. Critics argued that much of the new revenue would wind up in California’s severely underfunded teacher pension system. They were right.

Last June Mr. Brown signed legislation that will require school districts to increase funding for teachers’ pensions from less than $1 billion this year in school year 2014-15, which started in September, to $3.7 billion by 2021, gobbling up much of the new tax money. With the state’s general government pension fund, Calpers, also demanding more money, California taxpayer advocate Joel Fox recently observed that no matter what local politicians tell voters, when you see tax increases, “think pensions.”

Californians are not alone. Although fiscal experts have warned about the worsening condition of government pension systems for years, many taxpayers felt little impact from the rising debt—until now.

Decades of rising retirement benefits for workers—some of which politicians awarded to employees without setting aside adequate funding—and the 2008 financial meltdown have left American cities and states with somewhere between $1.5 trillion and $4 trillion in retirement debt. Even with the stock market’s rebound, the assets of America’s biggest government pension funds are only 1% above their peak in 2007, according to a recent study by Governing magazine.

Under growing pressure to erase some of this debt, governments have increased pension contributions to about $100 billion in 2014 from $63 billion in 2007, according to the Census Bureau’s quarterly survey of state and local pension systems. But the tab keeps growing, and now it is forcing taxes higher in many places.

A report last June by the Pennsylvania Association of School Administrators found that nearly every school district in that state anticipated higher pension costs for the new fiscal year, with three-quarters calculating their pension bills would rise by 25% or more. Subsequently, 164 school districts received state permission to raise property taxes above the 2.1% state tax cap. Every one of the districts cited rising pension costs.

Meanwhile, the deeply troubled Philadelphia school system’s pension tab increased to $159 million in the current school year, which started in 2014 and goes to mid-2015, from $55 million in 2011. To bail it out, the Pennsylvania legislature crafted a special deal to increase cigarette taxes in the city by about $60 million annually.

In West Virginia, where local governments also face big pension debts, the legislature recently expanded the state’s home rule law—which governs how municipalities can raise revenues—to allow cities to impose their own sales taxes. The state’s biggest city, Charleston, with $287 million in unfunded pension liabilities, has already instituted a $6 million-a-year local sales tax devoted solely to pensions, on top of the $10 million the city already contributes annually to its retirement system. At least five more cities applying to raise local sales taxes, including Wheeling, also cited pension costs.

In April two-dozen Illinois mayors gathered to urge the state to reform police and fire pensions, which are on average 55% funded. The effort failed, and municipalities subsequently moved to raise taxes and fees. The city of Peoria’s budget illustrates the squeeze. In the early 1990s it spent 18% of the property-tax money it collected on pensions. This year it will devote 57% of its property tax to pension costs. Reluctant to raise the property levy any more, last year the city increased fees and charges to residents by 8%, or $1.2 million, for such items as garbage collection and sewer services.

Taxpayers in Chicago saw the first of what promises to be a blizzard of new taxes. The city’s public-safety retirement plans are only about 35% funded, though pension costs already consume nearly half of Chicago’s property-tax collections. Strong opposition forced Mayor Rahm Emanuel to temporarily table a proposed a $250 million property-tax increase to help pay off pension debt. Instead, as a stopgap measure Chicago instituted a series of smaller tax and fee hikes, including a boost in cellphone taxes, to raise $62 million. But the city’s pension bill will double next year to more than $1 billion, so a massive property tax hike is still on the table.

Chicago residents also face an enormous state retirement bill. The Civic Committee of Chicago recently estimated that if the Illinois Supreme Court sustains a lower-court decision overturning 2013 pension reforms, Illinois taxpayers will pay $145 billion in higher state taxes over the next three decades.

Burdened by so much debt, taxpayers in some places are unlikely to see relief soon. When California passed its 2012 tax increases, Gov. Brown and legislators promised voters the new rates would expire in 2018. But school pension costs will keep increasing through 2021 and then remain at that elevated level for another 25 years to pay off $74 billion in unfunded teacher liabilities. Public union leaders and sympathetic legislators are already trying to figure out how to convince voters to extend the 2012 tax increases and approve “who knows what else” in new levies, says taxpayer advocate Mr. Fox. It’s a reminder that in some places the long struggle to pay off massive government pension debt is just starting.

Mr. Malanga is a senior fellow at the Manhattan Institute.

California Dreamin' (the continuing saga)

California's Green Reality Check

A new Energy Department study shows the state's carbon emissions goals are unattainable.

WSJ Editorial, Nov. 11, 2013

Governor Jerry Brown ought to be canonized as the patron saint of hopeless environmental causes. Consider a new U.S. Department of Energy study that finds that California will fall far short of its 2050 emissions goal even under the most ambitious (i.e., unrealistic) policies.

The California Air Resources Board asked the Energy Department's Lawrence Berkeley National Laboratory to analyze how various environmental policies help achieve the state's goal of reducing statewide emissions to 80% below 1990 levels by 2050. The lab's conclusion: Dream on.

Assuming California's implausible and economically damaging policies were implemented in totality—cap and trade, low carbon fuel and renewable electricity standards, zero-emissions-vehicle mandate, and more—emissions in 2050 would be virtually unchanged from today. Even if the state were to adopt more aggressive measures, emissions would exceed the state's target by 100%.

For example, the state could obtain 50% of its electricity from wind, solar, geothermal and biomass; grow its fleet of zero-emission vehicles to 17 million from 50,000 today; increase fuel efficiency to 78 miles per gallon, and expand rooftop solar generation by 800%. It would still miss its target by a green mile.

According to the study's lead researcher, Jeffery Greenblatt, California would in effect have to squeeze 90% of emissions out of every corner of its economy to meet its goal. That can't be done purely with more renewable energy, electric cars or high-speed rail. Demand for energy must also significantly be reduced. But demand is primarily driven by population and economic growth, which Sacramento can't control, try as the politicians might to reduce both.

Meantime, California is spending billions every year on electric car and rooftop solar subsidies, energy efficiency upgrades and alternative fuel development to achieve its pie-in-the-sky emissions goal. And don't forget the Governor's $100 billion bullet train, which during its first few decades will increase emissions. All of which underscores how modern environmental policies are less about solving problems than they are about indulging faith-based dreams.

Course On How Great Nations Decline

Bay Area Shutdown 
Unions are striking so they can maintain work inefficiency.

WSJ Editorial, October 21, 2013

President Obama keeps saying that government needs to spend more to improve the country's aging roads and mass transit. But as the San Francisco Bay Area transit strike is showing, the real problem isn't too little spending but a lack of productive investment.

About 2,300 Bay Area Rapid Transit (BART) workers walked out on Oct. 18 after negotiations stalled over a new contract. The strike has snarled traffic throughout the region, causing more than one-hour delays on some highways and stranding low- and middle-income commuters.

The two big unions involved, the SEIU and Amalgamated Transit Union, say they've already retreated from their initial demand for a 21.5% raise over three years and to pay no more than 3% of wages to pensions. They contribute nothing now and can retire at age 55 with annuities equalling 60% of their salary plus nearly free medical benefits. The agency also contributes 6.65% of wages to a defined-contribution retirement account.

The latest union offer is to pay 4% of wages to pensions (phased in over four years) and 9.5% of medical premiums, up from about 6% today. In return, they want a 15.9% raise over four years. BART President Tom Radulovich says the agency can't afford more than a 12% raise over four years—the average worker already grosses $78,000 and about $130,000 with benefits—and that a pay increase must be coupled with a more flexible contract.

The union's 470-page work-rule book ought to be required reading in a course on how great nations decline. Workers receive overtime if they call in sick one day and report for duty on a later day that week that they're scheduled to have off. They also get overtime if they skip any of their two 15-minute breaks and 30-minute lunch break. Birthdays are paid holidays.

Meantime, the transit system relies on faxes and manual records because the contract gives unions a veto over any changes in labor practices including technological upgrades. So BART employees hand-deliver pay stubs to workers.

Mr. Radulovich says the agency needs labor efficiencies to maintain and improve its system. Its 30-year-old train fleet is the oldest among the major mass transit networks. He also calls the work rules pure "waste," but an employer's waste is a union's gravy train. The unions oppose productivity improvements because inefficiencies increase the demand for labor (including overtime) and yield more dues.

BART's union work rules aren't unique. New York City's MTA bus drivers can't be assigned shifts in two different boroughs in one day. An Inspector General report last year found that MTA Long Island Rail Road workers took more than twice the estimated required time to replace a staircase in Great Neck because they were using inefficient tools.

The problem is that unions and their political allies, President Obama included, view mass transit as a public jobs program and government stimulus rather than a means to enhance productivity in the private economy. Hence, Davis-Bacon rules that require union wages for all construction and the Federal Transit Act, which prohibits public-transit agencies that receive federal cash (almost all of them) from unilaterally changing work rules and benefits.


The upshot is that taxpayers must spend more on public works but get less in return for their investment. Maybe taxpayers should go on strike.

Distracting Moonbeams

Jerry Brown, So Far

Even California Liberals Should Reject Jerry Brown

By, Lanhee J. Chen, a research fellow at the Hoover Institution who also teaches public policy at Stanford University, July 25, 2013, Bloomberg News

The mainstream media here inCalifornia and across the country have fallen in love (all over again) with Jerry Brown. According to the popular narrative, Brown has brought California back from the precipice of disaster, balanced its budget and jump-started the state’s job-creating engine.

All of these feats would merit his re-election -- if, in fact, they were true. Unfortunately, Brown’s record as governor reflects more failure than actual accomplishment. He won election in 2010 by promising to be a no-nonsense problem-solver who was pragmatic, not ideological. But a closer look at Brown’s record reveals a string of missed opportunities and broken promises that ought to disappoint conservatives and liberals alike.

The first problem Brown promised to tackle was the state’s broken budget. He boldly claimed that he would cut discretionary spending, engage in much-needed pension reform and fix the budget process. All of these promises were on top of the claim that he would balance the budget free of the smoke and mirrors that have accompanied past efforts.

While Brown and his Democratic colleagues in the Legislature claim they’ve kept their promise to balance California’s budget, the facts tell a different story. As usual, lawmakers have resorted to some questionable accounting, blissful ignorance and outright gimmickry to reach their conclusion.

Accounting Gimmicks

To get to what Brown calls “balance,” California’s 2013-2014 budget relies on almost $6 billion in revenues from voter-approved tax increases, which are intended to fund the state’s education system. But those revenues are temporary and may not be extended. The budget also ignores unfunded pension and retiree health-care liabilities. These liabilities are substantial: The California Department of Finance estimated there are more than $100 billion in unfunded state employee pension and retiree health-care obligations, while other analysts have produced estimates that are far higher.

And the California budget continues to be balanced with the help of garden-variety accounting gimmicks, which have become all too common in Sacramento and other state capitals. For example, the budget is balanced by “borrowing” money from a number of special funds that are earmarked for specific uses. For one, it takes about half a billion dollars dedicated to reducing the state’s carbon emissions to cover budget increases for state Medicaid and welfare benefits. Rather than changing the way Sacramento does business, Brown has perpetuated California’s profligate ways.

Second, Brown has insisted on hyping the state’s chimerical and high-priced high-speed rail project over other important priorities -- including some critical infrastructure needs such as road and bridge repair and dam replacement. The project began when California voters in 2008 approved the issuance of $10 billion in bonds to fund construction of a $45 billion high-speed rail system connecting the state’s major urban areas. Voters were promised high-speed trains that would connect Los Angeles with San Francisco in less than three hours.

But the project has been besieged by cost overruns, delays and mismanaged expectations. The project is now expected to cost $68 billion, and that price tag was only made possible when plans to construct high-speed rail lines leading into Los Angeles and San Francisco were scrapped in favor of a plan to have high-speed trains share track with slower trains. But this means that a nonstop journey from the Bay Area to Southern California will take almost four hours, and as long as six hours if intermediate stops are included.

Worst yet, a recent study by the Reason Foundation concluded that taxpayers could be on the hook for up to $373 million a year in operating costs and financial losses once the high-speed rail system is up and running.

Ineffective Actions

Rather than direct his affections (and taxpayer dollars) in a more productive direction, such as funding pension liabilities or more urgent infrastructure projects, Jerry Brown has stuck with the high-speed rail project. He proposed a 3,000 percent increase in funding for the state’s high-speed rail authority in his 2013-2014 budget, primarily so the agency could hire more than 40 new staff, pay existing staff more and secure extra office space. And he signed into law $3 billion in construction financing for the first part of the project, a 130-mile stretch of track -- not between major urban areas but from Bakersfield to Madera, two towns in California’s more sparsely populated Central Valley.

Finally, Brown campaigned on the promise that he would get California working again, with job creation as his top policy priority. While the unemployment rate has declined during his term, to 8.5 percent from 12.1 percent, it remains the country’s eighth-highest, well above the national average of 7.6 percent. And the percentage of people who are unemployed, who have stopped looking for work or who work part time but want full-time work, is the second highest-in the country, at nearly 19 percent.

Examine the data more closely to see what’s happening in some of California’s communities, and the picture looks even more grim. Nine of the 15 metropolitan areas with the country’s highest unemployment rates are in California. El Centro, in southeastern California, is the metro area with the country’s second-highest level of joblessness at nearly 23 percent. And unemployment rates remain in the double digits in 10 of the state’s 26 metropolitan areas.

Brown’s actions on jobs have not been effective enough. His efforts have focused primarily on stimulating the creation of green jobs, as well as incentivizing business formation and growth through a combination of minor tax breaks. But he’s ignored the big-ticket reforms that could actually get the entire state’s economy going.

Missed Opportunities

Despite campaign promises to cut regulations, Brown has failed to engage in any meaningful reform of the state’s Byzantine regulatory framework. He’s evinced no interest in reforming California’s broken tax code, which continues to result in massive revenue volatility and discourages growth and investment. And Brown has refused to open up more of the state’s vast oil and gas reserves to responsible exploration, a policy change that could unleash a flood of job creation in the parts of the state that have been hit hardest by the economic recession.

Brown’s record should be of concern not just to conservatives -- who naturally support fiscal restraint, regulatory relief and pro-growth tax reform -- but to liberals as well. By obsessively focusing on high-speed rail, ignoring the state’s continuing budget problems and failing to more aggressively focus on jobs, Brown is jeopardizing the very priorities Democrats hold dear. Whether it’s providing more affordable higher education, facilitating a generous social safety net or growing the middle class, Brown has let some of his staunchest supporters down.

Should Jerry Brown choose to stand for re-election next year (and there is nothing to suggest that he won’t), he is sure to present a litany of “accomplishments” to convince Californians that he deserves a second term in office. Voters shouldn’t be fooled. Brown’s governorship, which started with the promise of real reform, has become a series of missed opportunities that voters should hold him accountable for at the ballot box. 

California's New 'Balanced' Budget

California's Cap-and-Tax Grab

Democrats raid carbon-emissions auction revenue to finance more welfare spending.

WSJ Editorial, June 18, 2013

Democrats in Sacramento are taking a victory lap for balancing this year's budget without raising taxes (not counting the $6 billion retroactive hike voters approved at political gunpoint in November). The dirty little secret is they're instead tapping California's new cap-and-trade program.

California expects to generate $500 million this year from auctioning off permits to emit carbon, and between $2 billion and $14 billion annually by 2015. This rich new vein of revenues was supposed to flow to green programs (e.g., solar subsidies), but Governor Jerry Brown cut a deal with Democrats in the legislature to seize this year's proceeds to finance more generous welfare and Medicaid benefits. Environmentalists are suddenly stunned to discover that they're not exempt from Sacramento's generally accepted accounting principle of raiding internal accounts to backfill the budget.

Mr. Brown has vowed to repay the $500 million cap-and-trade "loan" in short order. But as a matter of law, he has until the California Air Resources Board (CARB) says it needs the cash to administer the cap-and-trade program. That may be never since CARB's expenditures are discretionary, and the quarterly auctions will produce gushers of revenues that guarantee the cap-and-trade fund never runs dry.

The board's chairwoman Mary Nichols, who's endorsing the raid, has tried to quell enraged environmentalists by reminding them that "the part about the cap-and-trade program that is reducing greenhouse gas emissions, it's the cap," and "not the revenue that we get from the allowances."

Good point, and one which businesses are making in a lawsuit that contends the state is levying an unconstitutional tax under the guise of a "regulatory fee." California's Prop. 13 (1978) requires a supermajority vote of the legislature to raise taxes. CARB circumvented this requirement in 2011 by setting up a state-run auction to sell permits and calling the profits "regulatory fees" that would be used to mitigate emissions.

But as the state Supreme Court underscored in its 1997 Sinclair Paint Co. opinion, regulatory fees cannot "exceed in amount the reasonable cost of providing the protective services for which the fees are charged" or be imposed for "unrelated revenue purposes."

California has never quantified the "reasonable cost" to protect the public from carbon emissions, and it's hard to argue that spending cap-and-trade dollars on welfare checks advances environmental objectives. The state doesn't need to auction off permits to reduce greenhouse gas emissions. It could achieve its emissions targets by giving away permits for free and ratcheting the cap down over time.

In short, California Democrats are proving that the real point of cap and trade is to give politicians another revenue stream for income redistribution while dodging accountability for raising taxes. That's worth keeping in mind when liberals resurrect the scheme for the entire U.S. 

Stupid Voters + Unions + Global Warming Industry = California Bullet Train Fiasco

We've Only Just Begun

Can California Taxpayers Dodge the Bullet Train?

A lawsuit may derail a project that was suppposed to cost $45 billion and is now $70 billion and counting.

By ALLYSIA FINLEY

California's bullet train was conceived 20 years ago from Quentin Kopp's infatuation with European high-speed rail. His beautiful brainchild, however, has since morphed into a monstrosity. Mr. Kopp seems more and more like the protagonist Victor Frankenstein of literary lore, disillusioned by what his ambitions have wrought. 

Testifying in a lawsuit filed by Kings County, the 84-year-old retired judge of San Mateo County Superior Court says that California's present high-speed rail plan violates the ballot measure that he helped craft and voters approved in November 2008. In essence, he argues, the state pulled a bait-and-switch on voters.

Kings County wants the court to enjoin the release of state bond funds until the rail authority's plan adheres to the letter of the initiative. The lawsuit is scheduled for trial in May. If it succeeds, state taxpayers may finally dodge the bullet train. Without state bond money, the rail authority has no fuel to burn. So the good news for California—finally—is that compliance with the initiative's original terms is unlikely if not impossible.

Still, killing the project outright is not Mr. Kopp's desire. "I have not changed my position or enthusiasm for high-speed rail in California," he tells me. On the contrary, the San Franciscan bursts with paternal pride. In 1994 he sponsored legislation in the state Senate to study high-speed rail's "desirability and feasibility." Two years later he introduced the bill establishing the California High-Speed Rail Authority to design an 800-mile, zigzagging bullet-train route from San Diego to Sacramento.

From 2006 to 2011, the judge served on the authority's board of directors, during which time he helped lead the campaign for the ballot measure that authorized $9 billion in bonds to build the train project. The initiative mandated that electric trains run every five minutes at peak speeds that exceed 200 miles per hour; zip between Los Angeles and San Francisco in 2 hours and 40 minutes; and operate without a subsidy.

The rail authority's campaign literature promised that the train would cost $45 billion and be financed primarily by the feds and private investors. Mr. Kopp insists that the rail authority rigorously studied the plan before presenting it to voters. The initiative passed by a five-point margin in November 2008.

Over the next two years, the Obama administration gave California $3.5 billion in grants tied to matching state funds on the condition that the state build the first segment in the sparsely populated Central Valley.

Mr. Kopp says the Central Valley was chosen because the flat, open expanse was the best place to test trains to ensure they were "technologically sufficient." The Central Valley also happens to be represented by Democratic Rep. Jim Costa, whose vote was crucial for passing ObamaCare in March 2010. Mr. Costa campaigned for re-election later that year by trumpeting the thousands of jobs high-speed rail would create in his district, where the unemployment rate exceeded 17%.

Meanwhile—in response to mounting criticism from the state legislative analyst's office and others that the business plan was unrealistic—the rail authority produced a revised plan in November 2011 that raised the train's price tag to $100 billion.

Golden State voters were incensed. To mollify them, Gov. Jerry Brown instructed the authority to whittle the cost down to roughly $70 billion by developing a plan for a "blended system." This new plan, adopted in April 2012, would electrify commuter rail in the Bay Area—which had long been on the wish-list of local politicians and transit agencies—in lieu of building dedicated tracks for high-speed trains.

Mr. Kopp says that such a system "bastardizes" high-speed rail. Passengers traveling between San Francisco and Anaheim would have to change trains twice—once in San Jose and again in Los Angeles—which violates the letter of the ballot initiative. Trains would also run at most every 15 minutes, not every five minutes as required by the initiative.

According to Mr. Kopp, 10 trains must run per hour during peak times to support the authority's ridership forecasts and operate without a subsidy. He insists that "the money will come," but only if the train is built according to the original plan.

Right now, however, the state doesn't have enough money on hand even to electrify the first 130 miles of tracks from Madera to Bakersfield. Private firms have refused to invest in the project without a subsidy or revenue guarantee, both prohibited by the initiative.

There's also some not trivial concerns about safety. To meet the law's required 2 hours and 40 minutes travel time, the rail authority intends for the train to barrel through the Central Valley and Tehachapi Mountains, which are transversed by a fault line, at 220 mph.

Mr. Kopp believes that these speeds are feasible. But the fastest train in the world, which runs between Paris and Strasbourg, France, tops out at just under 200 mph. The Chinese reduced their bullet trains' maximum speeds to about 190 mph after a train going 217 mph crashed in Wenzhou two years ago. Forty passengers were killed, and hundreds were injured.

According to a recent study by the Reason Foundation, if the California authority assumed top speeds of 200 mph, averaging 150 mph through rural areas—as is consistent with the National Research Council's safety recommendations—the bullet train's travel time would increase to between 3 hours and 50 minutes and 6 hours. It takes about six hours to drive and an hour to fly from Los Angeles to San Francisco.

Even so, Mr. Kopp insists that the bullet train could make the L.A. to San Francisco trip in 2 hours and 40 minutes and operate without a subsidy—but only if the state sticks to the plan approved by voters in November 2008. And what about studies that have found only two high-speed rail lines in the world break even?

"I've heard that," he says. "But I don't believe it."

California Nightmare

Jerry Brown's Tax Cliff

The second most important election next Tuesday.

WSJ Editorial, November 1, 2012

The most important single vote in America next Tuesday, after the Presidential race, is Governor Jerry Brown's attempt to stick Californians with another giant tax increase. Mr. Brown and his labor allies say Proposition 30 will fix the state's budget deficit and ward off education cuts. But the real choice before voters is whether to issue Sacramento's incorrigible spendthrifts another blank check.

Two years ago the Governor staged a bow to democracy by pledging that he wouldn't raise taxes without a vote of the people. The truth is he couldn't pick off enough Republicans in the legislature for a tax increase without delivering significant pension reforms, which government unions won't allow. Thus the last-ditch resort to the ballot box.

The Brown-union plan includes a "millionaire's tax" that kicks in at $250,000, three new income brackets for high earners and an increase in the top rate to 13.3% from 10.3% for individuals and many small business owners making more than $1 million. This would give California the highest income tax in the country, leaping over Hawaii's 11%. Oh, and by the way, these higher rates would be retroactive to this year.

Mr. Brown's initiative would also increase the state sales tax by a quarter-of-a-cent to 7.5%, though this is principally to foster the illusion of "balance," to quote the Zen-master Governor. The sales tax would generate only about $1 billion of the $6 billion in new revenue that the Legislative Analyst's Office projects for the tax increase.

As the Analyst cautions, due to huge swings in the investment incomes of top earners and "the uncertainty of their responses to the rate increases, the revenues raised by this measure are difficult to estimate."

No kidding.

Nearly everyone who has examined California's chronically unbalanced budget has recommended flattening its steeply progressive tax code to create a more stable revenue stream. 

Mr. Brown himself campaigned for President in 1992 as a flat-taxer. But Democrats in the legislature won't lower tax rates because they love the revenue windfalls they get when times are good and they can boost spending.

Then when markets crash, they can cry havoc and lobby for still-higher taxes. That's what the teachers unions did as recently as 2008, claiming that cuts that would have merely returned education spending to pre-bubble levels would cripple schools. Caving to the union pressure, a handful of Republican legislators in 2009 walked Governor Arnold Schwarzenegger's plank and voted for a $13 billion sales and income tax increase. Schools received less money over the next two years anyway—while spending on entitlements and union retirement benefits grew.

Democrats are now back at the same stand. Mr. Brown has threatened to "trigger" $5.9 billion in education cuts if his initiative fails, but he'd make less than $100 million in other trims. How's that for balance?

Such "trigger cuts" could easily be re-configured with a modicum of political will in Sacramento. Instead of slashing $500 million from higher education, Democrats could kill their quixotic bullet train, which will cost about $360 million this year alone in debt service, and chop $100 million in tax credits to their Hollywood friends (who are bankrolling the tax campaign).

Or they could restructure retirement benefits, which cost $6.5 billion this year—up from about $1.4 billion in 1999. There's millions more to be found in modifying current workers' pensions and retirees' cost-of-living adjustments as nearly a dozen states have done. In Rhode Island such reforms have cut the state's pension liability by half.

Barring such reforms, pension costs will continue to balloon and eat up all new revenues. The California State Teachers' Retirement System has projected that it will need between $3.5 billion to $10 billion annually over the next 30 years to stay solvent. So any money allocated to schools will merely backfill the teachers' pension fund.

Illinois's laboratory of kleptocracy provides an instructive lesson. In January 2011 Democrats in Springfield raised the state's income tax by 67% and corporate rate by 46%. Over the next eight months unemployment surged to 10.2% from 9.4%. So in December lawmakers handed out tax breaks to their corporate friends who were threatening to flee to more business-friendly states.

Springfield last year spent all $7 billion in new revenues on retirement benefits and closed out the last fiscal year with another $8 billion deficit. Lawmakers increased the cigarette tax in May to raise an additional $400 million for Medicaid. Meanwhile, Governor Pat Quinn is wondering why lawmakers haven't moved on his pension reform plan.

The only way California can escape its recurring fiscal Frankenstorms is through reform and economic growth. The former would stimulate the latter while the Governor's tax initiative would squelch both. Raising taxes on small business owners when one in five Californians is out of work or employed part-time because he can't find a full-time job is the definition of insanity.

Once more cash starts flowing to Sacramento, taxpayers can forget about budget and regulatory reforms that the Governor has suggested are on his agenda after the election. The only thing Democrats in Sacramento have planned after November is more spending. 

Goolsbee: Government Has Cooked the Books

I Was Right About That Strange Jobs Report

The economy would need to be growing at breakneck speed for unemployment to drop to 7.8% from 8.3% in the course of two months.

By: Jack Welch, WSJ Opinion, October 9, 2012

Imagine a country where challenging the ruling authorities—questioning, say, a piece of data released by central headquarters—would result in mobs of administration sympathizers claiming you should feel "embarrassed" and labeling you a fool, or worse.

Soviet Russia perhaps? Communist China? Nope, that would be the United States right now, when a person (like me, for instance) suggests that a certain government datum (like the September unemployment rate of 7.8%) doesn't make sense.

Unfortunately for those who would like me to pipe down, the 7.8% unemployment figure released by the Bureau of Labor Statistics (BLS) last week is downright implausible. And that's why I made a stink about it.

Before I explain why the number is questionable, though, a few words about where I'm coming from. Contrary to some of the sound-and-fury last week, I do not work for the Mitt Romney campaign. I am definitely not a surrogate. My wife, Suzy, is not associated with the campaign, either. She worked at Bain Consulting (not Bain Capital) right after business school, in 1988 and 1989, and had no contact with Mr. Romney.

The Obama campaign and its supporters, including bigwigs like David Axelrod and Robert Gibbs, along with several cable TV anchors, would like you to believe that BLS data are handled like the gold in Fort Knox, with gun-carrying guards watching their every move, and highly trained, white-gloved super-agents counting and recounting hourly.

Let's get real. The unemployment data reported each month are gathered over a one-week period by census workers, by phone in 70% of the cases, and the rest through home visits. In sum, they try to contact 60,000 households, asking a list of questions and recording the responses.

Some questions allow for unambiguous answers, but others less so. For instance, the range for part-time work falls between one hour and 34 hours a week. So, if an out-of-work accountant tells a census worker, "I got one baby-sitting job this week just to cover my kid's bus fare, but I haven't been able to find anything else," that could be recorded as being employed part-time.

The possibility of subjectivity creeping into the process is so pervasive that the BLS's own "Handbook of Methods" has a full page explaining the limitations of its data, including how non-sampling errors get made, from "misinterpretation of the questions" to "errors made in the estimations of missing data."

Bottom line: To suggest that the input to the BLS data-collection system is precise and bias-free is—well, let's just say, overstated.

Even if the BLS had a perfect process, the context surrounding the 7.8% figure still bears serious skepticism. Consider the following:

In August, the labor-force participation rate in the U.S. dropped to 63.5%, the lowest since September 1981. By definition, fewer people in the workforce leads to better unemployment numbers. That's why the unemployment rate dropped to 8.1% in August from 8.3% in July.

Meanwhile, we're told in the BLS report that in the months of August and September, federal, state and local governments added 602,000 workers to their payrolls, the largest two-month increase in more than 20 years. And the BLS tells us that, overall, 873,000 workers were added in September, the largest one-month increase since 1983, during the booming Reagan recovery.

These three statistics—the labor-force participation rate, the growth in government workers, and overall job growth, all multidecade records achieved over the past two months—have to raise some eyebrows. There were no economists, liberal or conservative, predicting that unemployment in September would drop below 8%.

I know I'm not the only person hearing these numbers and saying, "Really? If all that's true, why are so many people I know still having such a hard time finding work? Why do I keep hearing about local, state and federal cutbacks?"

I sat through business reviews of a dozen companies last week as part of my work in the private sector, and not one reported better results in the third quarter compared with the second quarter. Several stayed about the same, the rest were down slightly.

The economy is not in a free-fall. Oil and gas are strong, automotive is doing well and we seem to be seeing the beginning of a housing comeback. But I doubt many of us know any businessperson who believes the economy is growing at breakneck speed, as it would have to be for unemployment to drop to 7.8% from 8.3% over the course of two months.

The reality is the economy is experiencing a weak recovery. Everything points to that, particularly the overall employment level, which is 143 million people today, compared with 146 million people in 2007.

Now, I realize my tweets about this matter have been somewhat incendiary. In my first tweet, sent the night before the unemployment figure was released, I wrote: "Tomorrow unemployment numbers for Sept. with all the assumptions Labor Department can make..wonder about participation assumption??" The response was a big yawn.

My next tweet, on Oct. 5, the one that got the attention of the Obama campaign and its supporters, read: "Unbelievable jobs numbers..these Chicago guys will do anything..can't debate so change numbers."

As I said that same evening in an interview on CNN, if I could write that tweet again, I would have added a few question marks at the end, as with my earlier tweet, to make it clear I was raising a question.

But I'm not sorry for the heated debate that ensued. I'm not the first person to question government numbers, and hopefully I won't be the last. Take, for example, one of my chief critics in this go-round, Austan Goolsbee, former chairman of the Obama administration's Council of Economic Advisers. Back in 2003, Mr. Goolsbee himself, commenting on a Bush-era unemployment figure, wrote in a New York Times op-ed: "the government has cooked the books."

The good news is that the current debate has resulted in people giving the whole issue of unemployment data more thought. Moreover, it led to some of the campaign's biggest supporters admitting that the number merited a closer look—and even expressing skepticism. The New York Times in a Sunday editorial, for instance, acknowledged the 7.8% figure is "partly due to a statistical fluke."

The coming election is too important to be decided on a number. Especially when that number seems so wrong.

Mr. Welch was the CEO of General Electric for 21 years and is the founder of the Jack Welch Management Institute at Strayer University.

Never-Never Land of Apple, Facebook, Google, Hollywood & Wine

There Is No California

By Victor Davis Hanson - August 16, 2012

Driving across California is like going from Mississippi to Massachusetts without ever crossing a state line.

Consider the disconnects: California's combined income and sales taxes are among the nation's highest, but the state's deficit is still about $16 billion. It's estimated that more than 2,000 upper-income Californians are leaving per week to flee high taxes and costly regulations, yet California wants to raise taxes even higher; its business climate already ranks near the bottom of most surveys. Its teachers are among the highest paid on average in the nation, but its public school students consistently test near the bottom of the nation in both math and science.

The state's public employees enjoy some of the nation's most generous pensions and benefits, but California's retirement systems are underfunded by about $300 billion. The state's gas taxes -- at over 49 cents per gallon -- are among the highest in the nation, but its once unmatched freeways, like 101 and 99, for long stretches have degenerated into potholed, clogged nightmares unchanged since the early 1960s.

The state wishes to borrow billions of dollars to develop high-speed rail, beginning with a little-traveled link between Fresno and Corcoran -- a corridor already served by money-losing Amtrak. Apparently, coastal residents like the idea of European high-speed rail -- as long as noisy and dirty construction does not begin in their backyards.

As gasoline prices soar, California chooses not to develop millions of barrels of untapped oil and even more natural gas off its shores and beneath its interior. Home to bankrupt green companies like Solyndra, California has mandated that a third of all the energy provided by state utilities soon must come from renewable energy sources -- largely wind and solar, which presently provide about 11 percent of its electricity and almost none of its transportation fuel.

How to explain the seemingly inexplicable? There is no California, which is a misnomer. There is no such state. Instead there are two radically different cultures and landscapes with little in common, each equally dysfunctional in quite different ways. Apart they are unworldly, together a disaster.

A postmodern narrow coastal corridor runs from San Diego to Berkeley, where the weather is ideal, the gentrified affluent make good money, and values are green and left-wing. This Shangri-La is juxtaposed to a vast impoverished interior, from the southern desert to the northern Central Valley, where life is becoming premodern.

On the coast, blue-chip universities like Cal Tech, Berkeley, Stanford and UCLA in pastoral landscapes train the world's doctors, lawyers, engineers and businesspeople. In the hot interior of blue-collar Sacramento, Turlock, Fresno and Bakersfield, well over half the incoming freshman in the California State University system must take remedial math and science classes.

In postmodern Palo Alto or Santa Monica, a small cottage costs more than $1 million. Two hours away, in premodern and now-bankrupt Stockton, a bungalow the same size goes for less than $100,000.

In the interior, unemployment in many areas peaks at over 15 percent. The theft of copper wire is reaching epidemic proportions. Thousands of the shrinking middle class flee the interior for the coast or nearby no-income-tax states. To fathom the state's nearly unbelievable statistics -- as the state population grew by 10 million from the mid-1980s to 2005, its number of Medicaid recipients increased by 7 million during that period; one-third of the nation's welfare recipients now reside in California -- visit the state's hinterlands.

But in the Never-Never Land of Apple, Facebook, Google, Hollywood and the wine country, millions live in an idyllic paradise. Coastal Californians can afford to worry about the state's trivia -- as their legislators seek to outlaw foie gras, shut down irrigation projects to save the 3-inch delta smelt, and allow children to have legally recognized multiple parents.

But in the less feel-good interior, crippling regulations curb timber, gas and oil, and farm production. For the most part, the rules are mandated by coastal utopians who have little idea where the gas for their imported cars comes from, or how the redwood is cut for their decks, or who grows the ingredients for their Mediterranean lunches of arugula, olive oil and pasta.

On the coast, it's politically incorrect to talk of illegal immigration. In the interior, residents see first-hand the bankrupting effects on schools, courts and health care when millions arrive illegally without English-language fluency or a high school diploma -- and send back billions of dollars in remittances to Mexico and other Latin American countries.

The drive from Fresno to Palo Alto takes three hours, but you might as well be rocketing from Earth to the moon. 

Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and author, most recently, of "A War Like No Other: How the Athenians and Spartans Fought the Peloponnesian War." You can reach him by e-mailing author@victorhanson.com.

Brown's Progressive Banality

A Golden State train wreck

By George F. Will, August 8, 2012

State Sen. Joe Simitian’s district office near Stanford’s campus is nestled among shops sporting excruciatingly cute names (A Street Bike Named Desire,Mom’s the Word maternity wear) intended to make the progressive gentry comfortable with upscale consumption by presenting it as whimsical. This community surely has its share of advanced thinkers who think trains are wonderful because they are not cars (rampant individualism; people going wherever and whenever they want, unsupervised).

Nevertheless, Simitian was one of just four Democratic state senators who recently voted — in vain — to derail plans that eventually may involve spending more than $100 billion on a 500-mile bullet train from San Francisco to Los Angeles. Simitian makes the obligatory genuflection: He favors high-speed rail “done right.” But having passed sixth-grade arithmetic, he has doubts. At one point, an estimate of 44 million riders a year — subsequently revised downward, substantially — assumed gasoline costing $40 a gallon.

Democracy, said H.L. Mencken, is the theory that people know what they want and deserve to get it good and hard. In 2008, Californians passed an initiative authorizing $9.95 billion in bonds to build what they were told would be a $33 billion high-speed rail system. California, constantly lurching from one budget crisis to a worse one, could not nearly afford even that, and soon the price was re-estimated at about $100 billion. Not to worry, said Gov. Jerry Brown — the real price will be only $68.5 billion. Why? Partly because it will be less than bullet-like, not requiring extra-expensive roadbed.

Note Brown’s hilarious “.5.” Such is his precision that in May his projection of a $15.7 billion state budget deficit was 70 percent higher than his January estimate.

Eager to hook states on higher spending, especially for high-speed rail, the Obama administration wants California to quickly spend $3.3 billion of federal funding (much of it borrowed from China, one source of President Obama’s train envy). Simitian says the $3.3 billion is about 5 percent of the cost “if the project stays on budget.” If. The $3.3 billion and $2.7 billion of state money would finance 130 miles of track in the Central Valley — a train from, and to, nowhere.

Simitian notes that the 130 miles would not be high-speed rail and would not be electrified, and that there are no commitments for more federal funds, or for any dedicated funding source, or for private funding. And the 2008 ballot measure that launched this folly forbids tax money for operating subsidies.

California’s voters evidently understand that Washington’s $3.3 billion is spending for the purpose of committing Sacramento to much greater spending: Polls show that 59 percent would now reject the project they authorized. But Democrats will not allow reconsideration. They like direct democracy but love spending.

Wisconsin Gov. Scott Walker (R) rejected $810 million in federal money for a 78-mile high-speed rail project paralleling Interstate 94 between Milwaukee and Madison. Ohio Gov. John Kasich (R) rejected $400 million for a high-speed (well, about automobile speed) train paralleling Interstate 71 between Cleveland and Cincinnati. Florida Gov. Rick Scott (R) rejected $2.4 billion for 90 miles of high-speed rail paralleling Interstate 4 between Tampa and Orlando. In faith-based transportation policy, rail worshipers think people will park their cars in Tampa and then rent cars in Orlando.

Brown’s reverence for his rail bauble is fanaticism. Or perhaps filial piety: His father, governor from 1959 to 1967, built much of the freeway and water infrastructure for postwar California. When the son was first elected governor 38 years ago, he seemed exotic; now he embodies progressivism’s banality. Then he wanted a California space program; now he is fixated on railroads, a 19th-century technology. His prescription for California’s ailments is higher taxes and expensive trains. Fortunately, the latter obsession may stymie the former.

Come November, Californians will vote on Brown’s recipe for reviving this slow-growth, high-tax state: Raise income taxes “temporarily” on the rich and on everybody with a “temporary” sales tax increase. But with public services being slashed — some communities have lopped a week off the school year, with other contractions perhaps still to come — voters may reject more revenue for Sacramento while it is showering scores of billions on trains.

The 21st century may end before Brown’s sort-of-high-speed rail service begins. Coagulated California is so clotted with environmental regulations and lawyers that turning a spade of earth — Spare that endangered toad! — invites decades of litigation. Regarding high-speed rail, this is the good news. 

Binge, Baby!

How Stockton went broke: A 15-year spending binge

By Jim Christie, July 3, 2012

SAN FRANCISCO (Reuters) - The man in charge of the biggest U.S. city ever to file for bankruptcy is clear about the root of the crisis.

It was a decision that gave firefighters full healthcare in retirement starting on January 1, 1996, said Bob Deis, the city manager of Stockton, California.

At the time, the move seemed cheaper than giving pay raises sought by unions, officials involved in the decision said. When other Stockton employees demanded the same healthcare deal in following years, the city agreed.

Deis, who signed Stockton's bankruptcy filing last Thursday, slammed the decision to provide free healthcare to retirees as a "Ponzi scheme" that eventually left the city with a whopping $417 million liability.

Before the turn of the millennium, things looked very different in California.

The U.S. stock market was booming, bolstering Stockton's pension funds. Real estate values were about to soar, too, bringing a flood of new tax revenue to the once quiet farming town of about 300,000 people - about 85 miles east of San Francisco - in California's Central Valley.

THE TRADE-OFF

To counter demands for wage hikes from city workers in the 1990s, Stockton offered to extend their health insurance in retirement past age 65 - a benefit they embraced and assumed to be rock solid until the insolvent city's officials put it on the chopping block in a bankruptcy plan last week.

"It was a balancing act," said Dwane Milnes, Stockton's city manager at the time. "The unions wanted retiree medical ... We said if you want to continue your medical for current employees and retirees, you'll have to do it through wage containment."

Milnes, who represented Stockton's retirees in recent talks with City Hall, said the strategy was sound at the time.

"We were satisfied that based on a conservative view of the economy and based on the medical inflation rate we were experiencing in the 1990s, the city could adequately fund retiree medical."

Detective Mark McLaughlin said Stockton's labor unions embraced the trade-off, which in the police department's case helped with recruiting and retention.

"It was an easy sell," he said, adding that city workers believed the money they gave up in pay increases would be able to pay for the health benefit.

SPEND, SPEND, SPEND

Other U.S. cities have also experienced boom and bust like Stockton.

But analysts and investors generally see Stockton as an extreme case of fiscal mismanagement over the past two decades.

Daniel Berger, a senior market analyst at Municipal Market Data, a unit of Thomson Reuters, said last week, before the bankruptcy filing, that the municipal bond market had viewed Stockton's fiscal problems as "a slow-moving train wreck." The possible bankruptcy filing, he said at the time, was seen as an "isolated occurrence."

As the 2000s advanced, Stockton continued to spend freely with the support of voters, politicians from both parties, employees and bondholders. Rating agencies were quiet about any risks and only started to downgrade the city's creditworthiness two years ago.

Generous pension deals were offered in the early 2000s.

City officials, looking to transform their sleepy downtown, approved spending on large projects to raise Stockton's profile and turn it into a bedroom community for San Francisco and the Bay Area.

Homebuilding went into overdrive. Home prices skyrocketed to a median of nearly $400,000 in 2006 from a median of $110,000 in 2000.

Stockton's revenues jumped, too. Its general fund, which pays the city's operating costs, swelled to $186.4 million in 2007 from $139.1 million in the 2001 fiscal year.

ROYAL PENSIONS

Like other cities in California, Stockton chose to offer many public safety workers the same benefits as those mandated by a state law for highway patrol officers. The change allowed police officers to retire at 50 with pensions based on 3 percent of final pay for each year in service, up from 2 percent before.

City employees in other unions also received more generous pensions with eligibility to retire at age 55 - with 2 percent of final pay multiplied by the number of years of service.

This is in contrast to the vast majority of private-sector workers who cannot receive Social Security payments before they are at least 62.

By the 2000s, Stockton's full-time employees were also entitled to free healthcare for life.

Still, there seemed little cause for concern.

With huge stock market gains from the 1990s, city officials were confident about meeting pension costs. After all, the Standard & Poor's 500 Index index quadrupled between early January 1990 and late March 2000.

Police and firefighters continued to win further concessions. Generous allowances were offered to police officers to buy their uniforms, bonuses were introduced based on years of service, and retiring officers claimed cash payments for unused vacation days - accumulated over years in some cases.

Warning signs grew that retiree healthcare costs were rising fast. The city miscalculated the rate of inflation for medical costs during the 2000s.

But Stockton's leaders burned through their reserves and began planning new construction projects to make the city more appealing to new residents.

A $47 million bond issue in 2004 was meant to finance construction of a sports and concert arena to revitalize the city's downtown. The arena was built, but it ended up losing money.

A downtown high-rise building was acquired for a new City Hall. A revamp of Stockton's downtown riverfront was financed, along with other projects, by more than $100 million in debt between 2004 and 2006 by the city's redevelopment agency.

Stockton ended up absorbing that debt after California's governor eliminated local redevelopment agencies last year.

It seems unlikely that Stockton will be able to sell those real estate assets at a gain.

"Most of the assets that look nice are under water," said Deis, the city manager.

A $125 million pension obligation bond sold by Stockton in 2007 also backfired. Stockton passed the proceeds to the California Public Employees' Retirement System, or Calpers, to pay down unfunded liabilities at the pension fund. Then the fund suffered steep losses when financial markets plunged in 2008 and early 2009 and left Stockton with a 23 percent loss on its invested proceeds and in debt to investors who bought the bonds.

HOUSING BUST'S TRAIL OF PAIN

The worst damage was done by the housing crash. Median home prices in Stockton slumped to $110,000 in 2009, erasing nearly a decade's gains. General fund revenues in the current fiscal year are projected at $155 million, just above their level in 2001.

The real estate bust made Stockton one of the foreclosure capitals of the United States. Property-tax revenues tumbled. The city began its new fiscal year on July 1 with its 1,420-strong workforce down by a quarter from three years earlier.

Debt service has ballooned to $17.2 million a year from $3 million just six years ago.

Stockton has already defaulted on about $2 million in bond payments since February.

Recriminations about Stockton's budget need to be set aside to avoid the kind of lengthy bankruptcy suffered by Vallejo, another California casualty of the boom-to-bust cycle. It emerged from bankruptcy last year after three years in Chapter 9 that cost it $10 million in legal fees.

Stockton has earmarked $3.5 million for bankruptcy court expenses because it hopes for a quick exit from Chapter 9.

Bondholders, employees and retirees will be hurt in the process. Axing retiree medical benefits is now central to efforts to restructure Stockton's finances, Deis said.

Many retirees are in a state of shock about that.

"I believed the city would honor its commitments," said Geri Ridge, 56.

The former clerk retired last year after 26 years with Stockton's police following a second heart attack.

Ridge lives off a monthly pension of $1,895. She learned on Friday that she now faces a $576 monthly premium for her health coverage - or $1,277 a month if she keeps her daughter on her plan.

She has no idea of how to pay for the coverage, which the city will fully eliminate in a year. And she has harsh words for Deis.

"I want him gone. I'm hoping whoever gets elected into office fires him, bankruptcy or not," Ridge said.

(Reporting by Jim Christie; Additional reporting by Hilary Russ; Editing by Tiziana Barghini and Jan Paschal)

Loco Motion

5 Reasons the California High-Speed Rail Project Shouldn’t Get More Money

from Reason Magazine by Wendell Cox, July 1, 2012

Despite California’s budget deficit rising to $16 billionrecently, Gov. Jerry Brown is asking state legislators for $6 billion in bonds to launch construction on the proposed high-speed rail system. Voters approved a $9.95 billion bond package for the “bullet train” in 2008, but just about everything about the rail system has changed since then.

The California High-Speed Rail Authority (HSRA) issued a revised business plan in April that calls for a 130-mile segment running from Bakersfield to Madera in the state’s Central Valley. If the Central Valley leg is built, the plan says the system would eventually share tracks with commuter trains in the Bay Area and Los Angeles, in what it is calling a “blended” approach. Not exactly the bullet train from San Diego to Los Angeles to the Bay Area and Sacramento that voters were sold back in 2008.
The last thing California should do right now is add billions more in bond debt. Beyond the most obvious—the state simply cannot afford it—there are at least five major reasons California shouldn’t move forward on this rail project.

1. Broken Proposition 1A Promises: The Costs Look Nothing Like What Voters Approved
The text of Proposition 1A asking California voters to approve $9.95 billion in bonds for the project in 2008 said: “The total cost to develop and construct the entire high-speed train system would be about $45 billion.”

Now the High-Speed Rail Authority says the price tag for a scaled down system will be $68.4 billion. Last year, the HSRA actually estimated the costs would be over $98 billion but to lower the sticker shock by $30 billion they’ve shifted to a “blended” plan that uses slower, existing rail tracks instead of building the exclusive tracks capable of handling high-speed trains that they originally planned on.

The official proponent's argument in the Proposition 1A ballot pamphlet also promised voters that ticket prices would be “about $50 a person.” Now, they are saying tickets would cost an average of $81 each way, with “express” tickets for the fastest trips costing $123 one-way.

The costs have changed so much from what voters were promised that funding should be halted until the HSRA fulfills its 2008 promises to voters, or until voters get to approve the changes. Several groups, including popular KFI radio talk show hosts John and Ken in Los Angeles, are starting to get the signatures needed to put a re-vote of the high-speed rail initiative on the ballot.


2. There’s Still No Legitimate Funding Plan
The California High-Speed Rail Authority says it will need $53 to $62 billion to build the Phase 1 Blended System, which would run from Los Angeles to San Francisco. Sacramento and San Diego appear to have been dropped from the plan. The state currently has the $9.95 billion in taxpayer-backed bonds originally approved by Proposition 1A plus an additional $3.5 billion in federal grants. But where is the remaining $40-$50 billion going to come from?

In April, the nonpartisan Legislative Analyst’s Office wrote, “We find that HSRA has not provided sufficient detail and justification to the Legislature regarding its plan to build a high–speed train system. Specifically, funding for the project remains highly speculative and important details have not been sorted out. We recommend the Legislature not approve the Governor's various budget proposals to provide additional funding for the project.”

If the state starts building a high-speed train system somewhere between Bakersfield and Fresno it will run out of money well before the system is finished. That’s okay with many train advocates, who figure once construction begins the government will be forced to find the rest of the money to avoid having a partially built $10 billion train to nowhere sitting in the Central Valley. But the legislature can’t afford to be so fiscally reckless. It needs to demand a detailed plan showing how the full rail system will be funded before approving the bond money to start construction.


3. The Train Trip That Keeps Getting Longer
When voters approved the bonds in 2008 they were promised a train trip from Los Angeles to San Francisco in 2 hours and 40 minutes or less. The new business plan is surprisingly silent on travel times but an HSRA document circulated to the board of directors says the fastest “express” trip will take three hours.

Even that time is highly unlikely because it depends on trains operating at a peak speed of 220 mph, faster than any train in the world, and an average speed of 198 mph. Such average speeds are going to be next to impossible to reach because trains won’t always be running on dedicated tracks designed for high speeds and, as the plan admits, they would be forced to slow down to 100-150 mph in Los Angeles and the Bay Area for safety reasons. Hence, it’s likely that non-stop express trains will take three hours and 40 minutes.

Travelers will also find that most of the trains will make local stops and be slower than that. The business plan doesn’t provide times but it’s likely that San Francisco-Los Angeles travel times would be between four and six hours, depending upon the number of stops made.


4. Shrinking Ridership Numbers
The estimated costs have gone way up since 2008 but the HSRA keeps lowering the number of people it claims will ride the trains.

As the Legislative Analyst’s report notes, “Specifically, the HSRA estimates that the projected ridership would be about 30 percent lower than estimated in the November 2011 draft business plan.” For example, the earlier plan projected between 29.6 million and 43.9 million one–way trips per year in 2040 while the latest plan assumes between 20.1 million and 32.6 million one–way trips per year.”

The Institute of Transportation Studies at the University of California at Berkeley says the HSRA ridership estimates are way off the mark. “We found that the model that the rail authority relied upon to create average ridership projections was flawed at key decision-making junctures,” said study principal investigator Samer Madanat, director of ITS Berkeley and UC Berkeley professor of civil and environmental engineering. “This means that the forecast of ridership is unlikely to be very close to the ridership that would actually materialize if the system were built.”

The current plan claims people will choose the trains over driving. It makes this assertion by arbitrarily doubling the real costs of driving from Northern to Southern California. But the new rail plan’s reliance on blended tracks would mean slower travel speeds. Add in the time it will take getting to and from train stations and to final destinations, and it’s clear that the trains would not offer a significant time or cost savings for people driving.

Similarly, even factoring in airport security hassles and the time it takes to get to and from airports, air travel will continue to offer most travelers a faster trip from LA to San Francisco—and there won’t be a major cost difference. The rail system would find it difficult to attract large numbers of people who would normally fly between Northern and Southern California.

5. The Train Won't Reduce Greenhouse Gases
Proponents often say the high-speed rail system is needed to reduce the state’s greenhouse gas emissions. The United Nations has estimated that effective greenhouse gas reduction efforts should cost $20 to $50 per ton. The California high-speed rail system’s emission reductions would come at a monstrous cost of $1,800 a ton.

Just as troubling, research at UC Berkeley concluded that if rail ridership met HSRA’s mid-level estimates, it would take 70 years for the rail system just to negate the emissions created by its own construction. If rail suffers lower ridership the system would “never” negate its construction emissions.

California is drowning in debt and deficits. State leaders like Gov. Brown are calling for major tax increases. The California High-Speed Rail Authority keeps raising costs, lowering rider estimates, and lengthening travel times. Its current business plan reneges on promises made to voters in Proposition 1A. It would be a major mistake for California legislators to borrow billions of dollars to start building a train system that is far inferior and far more expensive than the one voters were promised when they approved Proposition 1A in November 2008.


Adrian T. Moore is vice president of research at Reason Foundation. Wendell Cox is the principal of Wendell Cox Consultancy/Demographia. Joseph Vranich is an Irvine, Calif.-based business consultant. They are co-authors of "California High-Speed Rail Proposal: A Due Diligence Report."