beyond the wall of debt: detailing california’s debt and
TRANSCRIPT
Vol. VII, No. 33 September 27, 2013
IN THIS ISSUE
CalTax Research: Beyond the Wall of Debt: Detailing California’s debt and unfunded liabilities.
Governor: Minimum-wage increase signed into law.
Governor: Governor signs economic development plan cleanup legislation.
Initiative Update: Privacy initiative gets green light for signature gathering.
Assessors: Bob Musil appointed Mono County assessor, Dave Cogdill leaving Stanislaus County post.
Unemployment Insurance: Brown administration orders payment of claims without checking eligibility.
Waste, Fraud & Mismanagement: Your Tax Dollars at Work: Los Angeles city officials investigating whereabouts of $41.1 million in public funds.
Tax Trivia: What is the tax significance of these cows?
Blast From the Past: Consumers remember Governor Rolph’s signing sales tax legislation.
CALTAX RESEARCH: Beyond the Wall of Debt: Detailing California’s Debt and Unfunded Liabilities
California state and local governments face more than $443 billion in outstanding liabilities from borrowing, deferrals, and other unfunded financial obligations.
Using the most recent reports published by the state controller, state treasurer, the California Department of Finance and the Employment Development Department, CalTax tabulated state and local debt and unfunded liabilities to determine the size of the financial obligation that California faces.
CalTax found:
• California has $443 billion in total quantifiable state and local debt and unfunded liabilities.
• Local governments owe more than $144 billion on borrowing and unfunded liabilities, not including K-12 school districts and total unfunded liabilities for local retiree benefits.
• The financial obligation equates to more than $11,600 per Californian (U.S. Census Bureau, Quick Facts).
Note from CalTax: We hope you are enjoying this publication. If there are others in your office who should receive this publication, please let us know at [email protected].
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The total liabilities may be much higher than the amount tabulated by CalTax but information is not available to identify a significant amount of California’s other debt and unfunded liabilities. Our calculations do not account for interest accrued after the cited reports were issued, as much of this is dependent on market forces that dramatically affect how much California state and local governments owe on bonds and loans. Extended payment schedules may significantly increase the size of state and local debt. In addition, due to a lack of information available, our calculations do not incorporate any data on school districts’ outstanding debt from school bonds.
The following graphs and data table detail the components and magnitude of the debt and unfunded liabilities facing Californians.i
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Beyond the Wall of Debt September 2013
Jurisdiction Subject Description Amountii Total
State
Borrowing and Deferrals
Deferred Payments to Schools and Community Colleges $6,400,000,000
$298,673,100,432
Loans From Special Funds $4,600,000,000
Unpaid Costs to Local Governments, Schools and Community Colleges for State Mandates $4,900,000,000
Suspension of Proposition 98 Funding $2,400,000,000
Deferred Medi-Cal Costs $2,000,000,000
Deferral of State Payroll Costs From June to July $700,000,000
Deferred Payments to CalPERSiii $400,000,000
Borrowing From Transportation Funds (Proposition 42) $300,000,000
Unemployment Insurance
Loan From the Federal Government $8,671,409,432
Loans From State Disability Insurance Fund to Pay Interest on Federal Loaniv $611,700,000
Bondsv
General Obligation Bonds $73,060,000,000
Lease Revenue Bonds $11,330,000,000
California Water Resources Development General Obligation Bonds $360,000,000
Economic Recovery Bonds $5,200,000,000
Pensionvi
Public Employees' Retirement Fund $27,196,000,000
State Teachers' Retirement System $63,840,000,000
University of California Retirement System $6,308,991,000
Retiree Health
Benefits
State Government Administered OPEB $63,837,000,000
Trial Courts OPEB $1,368,000,000
University of California OPEB $15,190,000,000
Local School Bonds
Elementary
Unknownvii High School
Unified
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City
Bonds
General Obligation Bonds $2,841,379,000
$81,637,547,000
Revenue Bonds $27,420,946,000
Pension Obligation Bonds $1,556,214,000
Certificates of Participation $107,599,000
Other Special Debt - Includes Community Facility District Bonds, Mello-Roos Bonds and Marks-Roos Bonds
$4,300,000,000
Special Assessment Act Bonds
1911 Improvement Act Bonds $1,037,000
1915 Improvement Act Bonds $2,193,628,000
Other Improvement Act Bonds $195,265,000
Other
Lease Obligations (Principal and Interest) $25,521,269,000
Construction Financed by State and/or Federal Governments $2,183,873,000
Notes $871,993,000
Loans $482,119,000
Notes, Loans and Other Payables $424,233,000
Pensions $13,537,992,000
County
Bonds
General Obligation Bonds $365,563,589
$48,166,608,943
Revenue Bonds $1,287,646,363
Pension Obligation Bonds $6,305,044,234
Special Assessment Act Bonds $368,783,338
Improvement Districts Bonds $746,008
Other
Federal Construction Loans $4,432,077
State Construction Loans $20,635,418
Other Long-Term Debt Schedule $3,562,374,742
Lease Obligations $10,138,222,174
Pensions $26,113,161,000
Successors to Redevelopment
Agencies
Bonds Tax Allocation Bonds $20,771,561
$30,255,065 Revenue Bonds $1,261,680
Other City/County Loans/Advances $3,994,525
All Other Debt $4,227,299
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Special Districts
Bonds General Obligation Bonds $4,204,158
$1,650,479,842
Revenue Bonds $51,376,755
Other
Certificates of Participation $16,344,065
Federal Contracts $423,490
State Contracts $1,579,993
Time Warrants $337,279
Miscellaneous $6,369,102
Special Districts Pensions $1,569,845,000
Other Unfunded Liabilities
Local Government OPEB Unknownviii
School District Pensions $2,566,000
$4,577,000
County of San Diego In-Home Supportive Services (IHSS) Public Authority Pension Plan, the Housing Authority of the County of Tulare Defined Contribution Pension Plan, the Public Agency Retirement System (PARS) Participant Directed Investment Program Trust, the Public Agency Retirement System (PARS) Defined Benefit Plans, the Public Agency Retirement System (PARS) Defined Contribution Plan, the San Diego Housing Commission Money Purchase Pension Plan and the San Diego Housing Commission Pension Plan
$2,011,000
City and County of
San Francisco
Bonds
Revenue Bonds $9,124,807,000
$12,366,592,000
General Obligation Bonds $1,606,170,000
Lease Revenue Bonds $274,467,000
Other
Certificates of Participation $895,892,000
Loans $13,878,000
Capital Leases $26,033,000
Commercial Paper and Others $381,284,000
State of California - Revolving Fund Loans $36,898,000
Notes, Loans and Other Payables $7,163,000
Total Debt and Unfunded Liabilities: $442,529,160,281
Sources:
California Department of Finance, California State Budget 2013-14, June 27, 2013.ix
Employment Development Department, May 2013 Disability Insurance Fund Forecast.
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United States Department of Labor: Employment & Training Administration, Trust Fund Loans: Outstanding Loans from the Federal Unemployment Account as of August 16, 2013.
California State Controller’s Office, Comprehensive Annual Financial Report, March 26, 2013; Cities Annual Report, September 11, 2012; Public Retirement Systems Annual Report, May 22, 2013; Counties Annual Report, August 1, 2012; Community Redevelopment Agencies Annual Report, May 1, 2012; Special Districts Annual Report, May 22, 2013.
California State Treasurer’s Office, Debt Affordability Report, October 2012.
City and County of San Francisco Controller’s Office, Comprehensive Annual Financial Report, June 30, 2012.
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i. Amounts reported do not include interest accruals, nor changes to unfunded liabilities due to legislative action or fluctuations in investment returns. Estimates were taken from the most current date available, causing time periods to differ for some subjects.
ii. When state agencies offered different numbers for the same subject, CalTax used the more conservative estimate.
iii. Represents the state’s delay in paying the fourth quarter employer contributions for employee retirement. It is unknown if this amount includes a contribution toward the unfunded pension liability.
iv. Interest paid on the federal loan was borrowed from the state disability fund: $303.5 million for the interest payment made on September 30, 2011, and $308.2 million loan for the interest payment made on September 30, 2012. The Employment Development Department expects that California will owe $261.5 million on September 30, 2013, which is scheduled to come from the state's general fund, pursuant to the state's 2013-14 state budget.
v. This report accounts only for the total dollar amount of bonds that have been issued. While the state has received authorization from the voters to issue additional bonds, it has yet to act on this authorization. In the event that the state does issue all currently authorized bonds, the state would incur an additional $40.26 billion in debt.
vi. Unfunded pension and retiree benefit liabilities reported here are based on the agency’s estimate of its rate of return on investment (ROI). Both the California Public Employees’ Retirement System and the California State Teachers’ Retirement System assumed a 7.5 percent ROI. However, studies conducted by independent organizations report a higher unfunded liability based on a lower ROI estimate. Also, retirement fund liabilities exclude retiree healthcare benefits, which are separately stated.
vii. This number is unknown because no government agency tracks the cumulative amount of outstanding debt for local school districts.
viii. No comprehensive report of current local governments’ unfunded retiree healthcare liabilities is available.
ix. The numbers from the governor's budget are a projection of the amount outstanding at the end of fiscal year 2012-13, as of the 2013 Budget Act.
GOVERNOR: Minimum-Wage Increase Signed Into Law
Governor Jerry Brown signed legislation September 25 that will increase the state minimum wage from the current $8 an hour to $9 per hour beginning July 1, 2014, and will raise it again on January 1, 2016, to $10 an hour (AB 10, Alejo).
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The minimum-wage increase legislation, which was passed by both houses of the Legislature just one day after being heavily amended, was opposed by CalTax and is labeled a “job-killer” by CalChamber.
At a signing ceremony in Los Angeles, Governor Brown focused on the additional money that the minimum-wage increase will provide to employees, without reflecting on how the increase is likely to drive up the costs of goods and services for the same employees and others, nor the impact on California’s competiveness with other states and countries when it comes to attracting and retaining employers.
“It’s a special day to stand with workers who are laboring for all of us and laboring at a very low wage,” the governor said. “Turning that wage into a $10 an hour wage is a wonderful thing. It’s my goal and it’s my moral responsibility to do what I can to make our society more harmonious, to make our social fabric tighter and closer and to work toward a solidarity that every day appears to become more distant.”
John Kabateck, executive director of the California branch of the National Federation of Independent Business, provided another view during a September 26 appearance on CNN.
“Look at California right now – we already have the highest sales, income and gas taxes in the nation, the most frivolous lawsuits and regulations, and now we have the highest minimum wage in the nation?” Mr. Kabateck said. “I mean we're nothing if not pioneers in California. Unfortunately, we’re pioneers of high cost, and that’s ultimately going to hurt … the entry level workers, because small businesses are most of the minimum-wage payers. This is actually going to hurt small business. Where do you think this money comes from? They don't have a magic wand, so ultimately, they are either going to be forced to raise their prices or more commonly, they’re going to be laying people off or paring back shifts.”
The Tax Credit Company stated in its EZ Policy Blog that the minimum wage increase has caused an “unintended consequence,” with respect to the governor’s new economic development package. It also will cause “an increase in the amount of Enterprise Zone tax credits qualified employers will be able to claim,” the blog noted, adding: “Employers may still claim credits for qualified employees hired through Dec. 31, 2013, for up to five years of employment. [However, employees hired in 2013 who are not eligible for the EZ hiring credit will not become eligible for the EZ credit in future years.] The credit is calculated as a function of the hourly wage with a limit of 150 percent of the minimum wage per hour. Currently, the maximum credit an employer can claim is $12 for an hour of qualified work; starting in July of next year that cap will increase to $13.50.”
GOVERNOR: Governor Signs Economic Development Plan Cleanup Legislation
Governor Jerry Brown announced September 26 that he has signed legislation (AB 106, Assembly Budget Committee, and SB 100, Senate Budget and Fiscal Review Committee) to make cleanup changes to his already enacted economic development plan. (CalTax:
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Click here to read CalTax’s detailed policy brief on the governor’s economic development plan.)
Among other things, AB 106 provides for an extension of the enterprise zone (EZ) vouchering program. Specifically, the new law:
• Authorizes local agencies to continue accepting applications and issuing certifications for qualified hires in EZs (including enterprise zones, local agency military base recovery areas, manufacturing enhancement areas, and targeted tax areas) until January 1, 2015. This ensures that taxpayers making qualified hires prior to January 1, 2014, will be able to claim the EZ hiring credit.
• Provides that hires in enterprise zones and local agency military base recovery areas made on or after January 1, 2014, would be ineligible for the EZ hiring credit, regardless of whether the taxpayer files on a fiscal- or calendar-year basis.
• Clarifies that the 10-year carry forward for unused EZ sales and use tax credits and hiring credits commences with the first taxable year beginning on or after January 1, 2014.
Economic development cleanup provisions also were incorporated into SB 100, an omnibus budget trailer cleanup measure that, among other things:
• Allows a sales and use tax credit for qualified equipment in former enterprise zones and targeted tax areas, if the qualified equipment is purchased prior to repeal of the credit, and placed into service prior to January 1, 2015. Previously, equipment that was purchased before the repeal of the credit, but was not placed into service before the repeal date, was ineligible for the credit.
• Modifies the criteria for how the state’s Department of Finance will determine the geographic areas that will be eligible for a hiring credit. It is unknown at this time how these changes will affect eligible areas.
• Designates the director of the Governor’s Office of Business and Economic Development (GO-Biz) as the chair of the newly created California Competes Tax Credit Committee. This committee will determine which applicants will be awarded tax credits for investment in California. Additionally, the legislation provides that lawmakers cannot serve on the committee.
INITIATIVE UPDATE: Privacy Initiative Gets Green Light for Signature Gathering
An initiative (13-008) that would limit the ability of individuals, businesses and government to collect “personally identifying information” from the public was cleared for signature gathering this week. Proponents of the initiative, spearheaded by former Democratic legislator Steve Peace, have until February 24 to submit at least 807,615 signatures to qualify the measure for the November 2014 ballot.
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A number of business groups, including the Direct Marketing Association, have raised concerns about the initiative. In an article posted on DMA’s website, the trade organization writes that the initiative would “dampen our digital lifestyles, stifle innovation and restrict the responsible collection and use of consumer data by marketers.”
An analysis by the DMA notes: “The amendment would apply broadly to natural persons, corporations and government bodies or subdivisions. Personally identifiable information is defined to cover ‘any information which can be used to distinguish or trace a natural person’s identity, including but not limited to financial and/or health information, whether taken alone, or when combined with other personal or identifying information which is linked or linkable to a specific natural person.’ The initiative would establish a presumption of ‘harm’ for any disclosure by a commercial or governmental entity that does not meet these narrow criteria.”
On September 25, the Attorney General’s Office released the following title and summary that will appear before voters if the initiative qualifies for the ballot: “PERSONALLY IDENTIFYING INFORMATION. CONFIDENTIALITY. INITIATIVE CONSTITUTIONAL AMENDMENT. Creates presumption that an individual’s personally identifying information, including financial or health information, is confidential when collected for a commercial or governmental purpose. Requires collector of personally identifying information to use all reasonably available means to protect it from unauthorized disclosure. Creates presumption of harm when personally identifying information is disclosed without the subject’s authorization. Permits disclosure of personally identifying information without authorization if it is publicly available from government records or there is a countervailing compelling interest in disclosure and no other reasonable way to accomplish that interest.”
Capitol observers believe the proponents of the measure likely have the funds needed to pay for signature gatherers and qualify the measure.
In other initiative news:
Marijuana Legalization Measure Cleared for Signature Gathering. Proponents of an initiative (13-0013) that would decriminalize the recreational use of marijuana, and additionally would require the Legislature to impose licensing and excise taxes on marijuana, were given the green light this week to begin collecting signatures. To qualify the initiative for the ballot, proponents must collect 504,760 signatures by February 24.
Santa Ana Mayor Working on Redevelopment Initiative. Santa Ana Mayor Miguel Pulido is spearheading an effort to bring redevelopment agencies back to life.
In 2011, Governor Jerry Brown and the Legislature eliminated California’s approximately 400 redevelopment agencies. For more than 40 years, these agencies had diverted local property tax revenue from local governments to finance development projects that fell under the loose definition of “blight.” As part of the governor’s effort to realign government services from the state to the local level, these agencies were eliminated.
Mayor Pulido says he has hired a political consulting firm to draft an initiative for the 2014 ballot to revive the agencies. He said he is forming a nonprofit organization to back the
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measure – which he calls the Jobs & Economic Development Initiative (JEDI) – with funding from cities. In addition to bringing back redevelopment agencies, the initiative would expand the definition of “blight” to include areas of California with high unemployment rates.
The Voice of Orange County reported: “Yet Pulido’s JEDI seems to have received a cold reception, if not outright suspicion, from officials in some cities. Westminster Councilwoman Diana Carey said Pulido was pitching a ‘hard sell’ on the initiative, which made her uncomfortable. She also didn't like the idea of contributing to a nonprofit that would use the money to draft the initiative.” (Source: Voice of Orange County, September 27.)
ASSESSORS: Bob Musil Appointed Mono County Assessor, Dave Cogdill Leaving Stanislaus County Post
Bob Musil, Mono County’s former assistant assessor, has been appointed assessor by the Mono County Board of Supervisors, effective September 13, while Dave Cogdill is resigning as Stanislaus County’s assessor to take a position in the private sector.
Mr. Musil, who holds a bachelor’s degree in political science from San Jose State University, began his appraisal career in 1989 with the Los Angeles County Assessor's Office, and was assistant assessor in Mono County from 2006 to 2009.
Mr. Musil ran for assessor in 2008, but lost to Jody Henning in an election in which then-Assessor Jim Lovett was recalled. Mr. Musil got 28 percent of the vote. Ms. Henning resigned from the position in 2012, and Assistant Assessor Aimee Brewster has been in charge since then.
During his time away from Mono County, Mr. Musil was a mining appraiser for the Nevada Department of Taxation.
“I can’t wait to get started, and look forward to being a part of the Mono County Assessor team once again, reconnecting with staff and serving the people of Mono County once again,” Mr. Musil said.
In Stanislaus County, Assessor Cogdill will leave a vacancy when he takes over as president and chief executive officer of the California Building Industry Association on October 21 – a move that was announced September 27. Mr. Cogdill served in the Legislature from 2000 to 2010, and served as Senate Republican leader. (Sources: The Sheet, September 8; The Sacramento Bee Capitol Alert, September 27.)
UNEMPLOYMENT INSURANCE: Brown Administration Orders Payment of Claims Without Checking Eligibility
Marty Morgenstern, head of the Brown administration’s Labor and Workforce Development Agency, has ordered the Employment Development Department to immediately begin the
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process of paying backlogged claims for continued unemployment benefits, without first making a final determination of eligibility.
Critics said the September 25 order will lead to payments to ineligible applicants, and will add more unfunded costs to the bankrupt program.
The action stems from a computer snafu that has caused delayed payments of claims for nearly 800,000 people. Governor Jerry Brown said, “We all know about computers, they do break down.”
One EDD employee wrote The Sacramento Bee to say that the problem is not about checking eligibility, it is about the computer not allowing a payment to be made.
In an ironic twist, the U.S. Department of Labor announced September 26 that awards totaling approximately $176.4 million will be given to 40 state workforce agencies, including California’s, for unemployment insurance program integrity, performance and system improvement projects. The grants are intended to support the prevention and detection of improper benefit payments, and to improve state performance and address outdated information technology system infrastructures necessary to improve UI program integrity.
To qualify for program integrity funding, states must have implemented or committed to implement a set of core integrity activities. California’s award of $3.5 million was the largest award received of the 40 states. State-by-state data on improper payments can be viewed at www.dol.gov/dol/maps/.” (Sources: The Sacramento Bee, September 26; U.S. Department of Labor news release, September 26.)
WASTE, FRAUD & MISMANAGEMENT: Your Tax Dollars at Work
Los Angeles City Officials Investigating Whereabouts of $41.1 Million in Public Funds. The Los Angeles Times reports: “Los Angeles elected officials ramped up pressure Tuesday (September 24) on the city-owned Department of Water and Power to account for more than $40 million in ratepayer money paid to two nonprofits created to improve relations between agency managers and the largest employees’ union. City Controller Ron Galperin offered new details on the audit he’s launching, saying it will examine the nonprofits’ travel expenditures, salaries and the ‘rather significant and un-detailed outlays’ listed on the groups’ federal tax forms.”
The department has been hesitant to discuss how the two groups spend as much as $4 million in public funds that they receive each year, and the Times reported that the agency “would offer no specific examples of what either organization has accomplished in more than a decade.”
The two entities – the Joint Training Institute and the Joint Safety Institute – were formed in 2000 and 2002, with the listed purposes of identifying safety and training as core values at the Department of Water and Power, and promoting “communication, mutual trust and respect” between the department’s managers and union leaders. The managers
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and union leaders jointly control the organizations’ accounts. (Source: Los Angeles Times, September 24.)
Deal to Save BART $140 Million Morphs Into Plan That Will Cost $33.8 Million. San Francisco Chronicle columnists Phillip Matier and Andrew Ross report that in the negotiations between Bay Area Rapid Transit (BART) management and unions, “One look at what is on the table in the new round of BART negotiations … shows pretty clearly that the unions are winning.”
The columnists note that management originally proposed a deal that would save BART $140 million over the next four years, but the latest plan on the bargaining table goes the other direction, and would cost an additional $33.8 million over the same period of time.
Management has caved on its “no raises” position, and has softened dramatically on proposals to require BART workers to pay more into their pensions and medical insurance program.
“Meanwhile, the unions – who started with a call for 21 percent in raises over four years – have pretty much held firm, while decrying BART’s supposed unwillingness to negotiate,” the columnists write. (Source: San Francisco Chronicle, September 23.)
Modesto School District Pays Million to Absent Teachers. Modesto City Schools has paid at least $5 million over the last three school years to teachers who stay home, and The Modesto Bee reports that the K-12 school district “won’t say why.”
The newspaper found that the school board approved 283 paid leaves, averaging nearly 12 weeks each, for teachers and administrators during the past three school years. “The practice involved 233 individuals, or roughly 15 percent of its employees with teaching certificates,” the Bee noted.
The newspaper obtained the information through a Public Records Act request. Neither the district nor the teachers’ union would comment on the paid leaves.
The newspaper’s investigation did not include unpaid or partial-pay leaves that may have involved reduced hours, sabbaticals or extended sick leave. (Source: The Modesto Bee, September 21.)
Disgraced San Diego Mayor Gave Raises on Way Out the Door. Bob Filner, who served less than a year as San Diego’s mayor before resigning in the face of sexual harassment charges, gave raises to seven of his staff members just before stepping down.
The raises added $86,000 in annual costs for taxpayers, but some of the raises were reduced by the interim mayor after Mr. Filner left, and one of the six-figure recipients of Mr. Filner’s generosity was fired.
The biggest raise was given to Mr. Filner’s spokeswoman, Lena’ Lewis, whose annual salary went from $82,500 to $115,000 in August. Interim Mayor Todd Gloria subsequently reduced the amount to $95,000, and Ms. Lewis now serves as a “City Council liaison.” (Source: San Diego Union-Tribune, September 17.)
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TAX TRIVIA:
What is the tax significance of the photo below? (Answer below.)
BLAST FROM THE PAST:
“(Governor James) Rolph decided to attempt a political balancing act. He went ahead and signed the sales tax bill … but at the same time he disassociated himself from it. Publicly, he blamed the ‘wholly unnecessary Riley tax plan’ for forcing the state to take extreme measures. ‘I had nothing to do with the sales tax, except that I signed the bill because the legislature refused to accept my program.’ Afterward, during a speech at the opening of the 1933 state fair, he called for its repeal or, at a minimum, its modification to exclude food items. But people blamed him for the sales tax anyway. A week after it went into effect, waitresses were heard telling their customers: ‘That’ll be seventy-five cents for lunch and two cents for Governor Rolph.’ By August, the saying ‘a penny for Jimmy’ had become the best political joke of the year … .”
− From “Governor James Rolph and the Great Depression in California,” by James Worthen, 2006. (CalTax: Governor Rolph, a Republican, was known as “Sunny Jim.”)
Tax Trivia Answer: Mole-Richardson, which operated a ranch in Colorado and a film-lighting business in Hollywood, was the plaintiff in Mole-Richardson Co. v. Franchise Tax Board, 269 Cal. Rptr. 662 (2d Dist. 1990), a major California tax case won by the taxpayer. The Second District Court of Appeal rejected the FTB staff’s position on diverse businesses, and found that the lighting business was unitary with the ranch because of the strong centralized management presumption. Rejecting FTB arguments that distinct business activities may be combined “only if they form an inseparable unitary business,” the court said the FTB had cited no authority for equating unitary and inseparable, and the court found no such authority.