California

The Rich Will Always Be with Us

Mark Paul — Mon, 12 May 2008 22:26:00 -0400

Like generals who are always fighting the last war, California's pundits are still fighting their way out of the last budget crisis. Latest case in point: George Skelton of the Los Angeles Times, who recently complained again that California's income tax "depends too heavily on the wealthy." In Skelton's world, the wealthy are just like those men mothers always warn their daughters about: they'll show you a good time, and then disappear, leaving you heartbroken. "Their incomes rise and fall steeply with the economy," he writes, "and therefore so do state budget deficits."

Except that's not why California has a budget crisis. As the state controller reported on May 9, personal income tax collections for the first nine months of the current budget year are $1.4 billion over the estimate in Gov. Schwarzenegger's January budget and within a whisker of the amount budgeted last summer. Through the first nine months California revenues are up 1.2 percent over a year ago, thanks entirely to the income tax, which has more than made up for the decline in sales tax revenues caused by the housing crash.

The pundits' obsession with the volatility of income tax revenues is a holdover from the past. In 1999 and 2000 the incomes--and income tax payments--of the wealthy, powered by huge capital gains and stock option grants during the Internet stock market bubble, soared. Then they fell back to earth in 2001 and 2002, dragging California into a budget crisis. But as I've explained in more detail elsewhere, the bubble and its subsequent popping were an unprecedented event. Just look at the chart below, showing California's four largest sources of general fund tax revenue over the last three decades.

Uploaded with plasq's Skitch!

Take out the bubble years, and revenues don't resemble a "roller coaster," as Skelton puts it. They rise when the economy grows and flatten out when it shrinks, as it did in the sharp recession and restructuring that hit California in the early 1990s. Charts of federal revenue, also dependent on income taxes, show the same pattern. The Internet boom was an anomaly.

But let's suppose for a moment that it wasn't. What would the pundits do so that California no longer "depends too heavily on the wealthy"?

Raise taxes on the poor and middle class? According to an analysis done for the California Budget Project by the Institute on Taxation and Economic Policy, low- and middle-income households already pay a higher percentage of their incomes in state and local taxes than do those in the top 1 percent.

Cut income tax rates on the wealthy? California has already done that. The state had top marginal rates of 10 percent and 11 percent on the wealthy through the 1970s, most of the 1980s, and some of the 1990s, but lowered them to 9.3 percent (in 2004 voters added, by initiative, an extra 0.7 percentage points on incomes over $1 million, with the funds earmarked for expanded mental health care.) Yet the amounts collected by the income tax continue to grow.

Why? Because of an underlying economic shift the pundits rarely mention: California gets an increasing share of its budget from income taxes on the wealthy because that's where all the money is. According to California Franchise Tax Board data, in 1979 the top 10 percent of taxpayers had about one-third of the state's total adjusted gross income. In 2005, their share had grown to roughly half.

If the pundits know a way to balance the budget, reduce the share of taxes paid by the wealthy, and not widen this growing income gap between the wealthy and everybody else, they should let us in on the secret.

More Republican Proposals in California

Joe Mathews — Sun, 11 May 2008 13:06:00 -0400

This blog took a shot last week at senate Republican leader Dave Cogdill yesterday for the hypocrisy of going after ballot initiatives as part of reform proposals. But Cogdill and his Assembly counterpart Mike Villines at least are offering a number of reform ideas. It's a long, piecemeal rollout, as they tackle contracting, education, and budget reform. Given the power of labor and the fact they're the minority party, few of these ideas have much chance of passing. But it's good that they're raising issues--California desperately needs a serious, wide-ranging debate about the structure of its government, its budget system, and its tax system. Here's the latest set of proposals. Of these ideas, the ones that have the best chance of making it are the ones calling for more government transparency (requiring public agencies to publish their expenditures on the Internet in a searchable form), the elimination of some state mandates to local school districts in bad budget times, and the speeding up of voter-approved infrastructure projects.

Budget Confusion in California

Mark Paul — Wed, 07 May 2008 20:25:00 -0400

As usual, California faces a budget crisis. And just as predictably, Californians are mired in budget confusion.

How big is the crisis? a conscientious citizen might ask. The answer is: As big as you want it to be. Just take your pick. An "$8 billion budget shortfall," reports the San Jose Mercury News. "A $10 billion gap," says the Sacramento Bee. Gov. Arnold Schwarzenegger uses a more technical description: "$20 billion out of whack," he recently said.

This cacophony of numbers and nouns is a big piece of California's budget problem. Not only does California routinely fail to balance its budget, it can't even talk straight about its finances.

In normal accounting and common understanding, a budget is balanced when spending doesn't exceed revenues in a budget year. If revenues are greater than spending, the difference is a surplus; if spending exceeds revenues, the difference is a deficit. Revenues are the proceeds of taxes, fees, and interest on investments.

But not in California. Here, state leaders (and the press) variously and promiscuously refer to the state's budget problems as a "shortfall," a "hole," a "gap," and a "deficit." Sometimes they actually mean to talk about the annual deficit. More often than not, though, they are referring to an amalgam of the state's cash reserve at the beginning of the current year, a current year deficit, a projected budget year deficit, and the desired reserve for the budget year. As UCLA Prof. Daniel Mitchell, who's campaigned tirelessly (and, alas, so far unsuccessfully) for budget transparency, points out, California's bad habit of talking about this "shortfall" confuses a stock (your savings account) and a flow (your paycheck), obscuring the true size and nature of the state's deficit. Most households understand that if they earn $50,000 a year and spend $100,000, making up the difference from their savings, they don't have a balanced budget. California doesn't. Even if it spends more than it collects in taxes, California counts the budget as balanced if has sufficient cash reserves to make up the difference.

To understand how badly confused California is, just imagine what national budget discussions would be like if the same loose terminology were used in Washington. News reports would be talking about Washington's "$5.5 trillion budget shortfall": the $350 billion deficit for the current year and the projected $200 billion deficit for the 2009 budget year, all topped off by the $5 trillion of outstanding public debt rung up by Congresses and presidents since they powdered their wigs and buckled their knee britches.

California is also confused about the meaning of "revenues." For example, at a recent budget conference, Thomas Sheehy, a deputy director of California's Department of Finance, was asked whether Schwarzenegger would consider raising revenues to balance the budget. Sheehy replied that the governor's budget, in fact, already included new revenues: $3.3 billion from the sale of deficit bonds!

Don't try this at home. The cash advance you take out on your credit card isn't revenue. It's debt. And so, of course, is California's borrowing to cover up deficits. When the top people in the state's finance department think debt is revenue, you know California's fiscal problems go all the way to the bone.

Getting the accounting right isn't just a cosmetic nicety. It's essential to making good decisions. In 2003, former Gov. Gray Davis hyped the size of the state's budget problem, talking about a $38 billion "shortfall." He apparently believed the bigger the stated challenge, the more likely California would be to tackle it. He was half right. Californians were indeed appalled by the size of the "shortfall." But they responded not by supporting Davis' proposed solutions, but by recalling the feckless leader who'd let the problem grow so big.

Now Schwarzenegger seems to be taking the same path, talking about a budget that's "$20 billion out of whack," the equivalent of one dollars out of every five in the general fund budget. He apparently hopes to bludgeon lawmakers into budget action. It's more likely, though, that exaggerated figures will only make Californians throw up their hands in hopelessness.

In fact, California's real problem is more manageable: an annual deficit of about $5 billion to $8 billion a year. That amounts to about a half penny on a dollar of state output and is about the same magnitude as the state's annual cost ($6.1 billion) for Schwarzenegger's car tax reduction in 2003. Schwarzenegger has spent much of the year trying to sell Californians on various kinds of budget reform, most of them with little relevance to the crisis at hand. But he doesn't need anyone's consent to insist on budget transparency and clarity. Budget reform could start right at his own desk.

Great Resource on Ballot Measure Money in California

Joe Mathews — Fri, 02 May 2008 15:42:00 -0400

Take a look at ElectionTrack, which provides daily updates on donations to major California campaigns, including ballot measure ones. For example, here are reports on the two competing eminent domain initiative campaigns for the June ballot: No on 98/Yes on 99 and Yes on 98

IN THE STATES: Californians are Still Dreaming

Joanne Kenen — Mon, 28 Apr 2008 19:26:00 -0400

Apparently, a lot of Californians shared our disappointment when the state's health reform efforts fell apart earlier this year. A new Field Health Policy Survey shows that Californians are none too confident about the future of health care in their state after lawmakers killed Gov. Arnold Schwarzenegger's plan to cover all Californians in January.

The survey, commissioned by the California Wellness Foundation, found that voters are even more worried now (quite possibly because as the economy worsens, people get more nervous about health costs and job-related insurance). For instance, 59 percent are "very concerned" about not being able to pay all of the costs for a major illness or surgery, up from 48 percent in late 2006. Other findings:

58 percent report being very concerned about having to pay more out of pocket for their health insurance coverage (up from 40 percent).
57 percent are very concerned about either not having or potentially losing their health care coverage (up from 48 percent).
59 percent are very concerned about the possibility of their insurance provider canceling or severely limiting their coverage due to a health condition.
51 percent are very concerned about not having access to quality doctors and health care services (up from 40 percent).

Field reported that three times as many Californians expect the health care system to be worse in five years as think it will be better. The poll found no consensus, however, on whether the solution lies in Sacramento or Washington. The poll of 1,202 registered voters was conducted March 12-30.

The voters were asked specifically about the state's health reform package—including how to pay for it. After hearing a description of the main provisions of the plan Schwarzenegger negotiated with state legislative leaders, more than seven out of ten (72 percent) approved overall. In addition, large majorities backed these specific components:

84 percent favored requiring health insurance companies to offer coverage to anyone without regard to their health condition.
78 percent supported providing state tax credits to moderate-income people if they need to buy health insurance in the open market.
77 percent endorsed the idea of providing state-subsidized health insurance coverage to low-income adults.
73 percent favored an "employer mandate," which would require all employers to help pay for their employees' health coverage on a sliding scale, with larger companies paying more and smaller companies paying less.
68 percent supported the idea of an "individual mandate," that would require all Californians to have a minimum level of health coverage either by purchasing it themselves or by obtaining it through an employer or government agency.

The toughest part of expanding coverage is often how to pay for it, but by large margins (70 percent or more) the California voters surveyed approved of all these funding mechanisms: getting the uninsured to pay more themselves (depending on family income); requiring employers to provide a minimum contribution toward their workers' health coverage, and increasing cigarette taxes by $1.75 per pack. The only unpopular item on the fiscal menu: increasing hospital fees by 4 percent. More than three in four voters opposed that.

We can't predict when health reform will return to policymakers' agenda in California; obviously we don't expect the governor to try again tomorrow. But as the voters made clear, the problem isn't going away. But as voters' concerns about the future intensify, it may be easier next time around to reach consensus on solutions—whether in Sacramento or Washington.

Saving Across America

Ellen Seidman — Thu, 24 Apr 2008 14:44:00 -0400

Last week I had the privilege of discussing asset building for lower income Americans in three very different settings: the annual Opportunity Economics Colloquium of the Hope Street Group, held at the Lansdowne Resort outside of Washington; an Assets Forum sponsored by the New America Foundation in the State Capitol in Sacramento, California; and with a group of financial services, social service and foundation representatives brought together by the City of Seattle. While the settings and audiences varied, the theme was the same: how to empower and encourage all Americans, particularly those who do not have funds either to cushion an economic setback or to invest to achieve economic security, to take sustainable first steps toward saving. Given the current financial crisis, one wishes these discussions had started ten years ago, but that same crisis makes it all the more important that they're happening now.

Our group at Hope Street, which included policy types and investment bankers and other private sector players, young and less young, from both coasts, was assigned the task of recommending policies that would be effective to increase to 50% the percentage of Americans who had savings to cover six months of operating expenses. In other words, unlike the usual Washington policy debate, this was not about pension and retirement savings, important as those are. We settled on a goal of about $10,000-recognizing that it was low, but to give us a target to shoot for-and focused on liquid assets, while recognizing that bankable non-liquid assets, such as a home, can sometimes serve the same purposes. While we didn't stick entirely to the task, in that at least one of our policy recommendations is a bet on the longer term, the policies we chose would all constitute effective steps toward the goal.

After four hours of robust discussion and debate, we settled on five top policy recommendations. These are: build a new generation of savers by seeding a savings account for every child-to become available at age 18-with $500 and, as in the United Kingdom, use the new account to enhance the financial literacy of the entire family; encourage greater competition in the consumer financial services sector-while recognizing the need for effective consumer protection-to increase innovation in products and services that serve the bottom half of the wealth distribution; encourage greater efforts in the workplace to provide easy, automatic paths to saving beyond retirement saving, and financial education about how to manage and grow those savings; revitalize the US Savings Bond program, which provides a totally safe, small denomination, non-account-based, modestly liquid vehicle for saving in small amounts; and stop punishing savings by substantially modifying the asset limits that discourage everyone from TANF recipients to applicants for Pell grants for higher education from saving. The Hope Street colloquium ended with presentation of these ideas to representatives of the three Presidential candidates.

In Sacramento, the focus was on financial literacy, both to build on and to build up momentum for the California Financial Literacy Initiative (AB 2123), introduced by Rules Committee Chair Ted Lieu and sponsored by California Controller John Chiang. We discussed the increased need for financial literacy in a world of enhanced individual responsibility for financial health, a younger and older population, and ever more complex financial products from a widening array of providers. The Financial Literacy Initiative is a platform on which the state and its partners can build both financial literacy resources and outreach. Already the California Library Literacy Services has indicated interest in adding financial literacy to its broader literacy initiative, potentially bringing this type of education into a trusted resource for adults in over 600 communities. A particularly innovative element of AB 2123 would start the process of establishing a Financial Literacy Corps to mobilize financial professionals and others to provide unbiased financial advice to low- and middle-income families who are now without this resource. New America Foundation is working on this concept on a national scale and it is exciting to see it begin to take shape in California.

Seattle and King County have been working on a series of asset-building initiatives, including a Bank on Seattle program. The participants in the asset-building coalition-city and county officials; social service agencies; banks, thrifts and credit unions; and the philanthropic sector-are focused on building pathways to enable people to better meet their financial needs. We spent our time discussing what was needed, the roles of all parties, examples of success and best practices, and what the literature tells us. Specific areas of concern were bringing people into bank accounts and linking those accounts to saving; effectively coordinating financial education with the opportunity to use what was being taught; small dollar loans; and the challenges of banking immigrants in both urban and rural settings. Participants were very interested in the Federal Deposit Insurance Corporation's small dollar loan pilot program, both for what the 30 bank participants in that program (none of them, unfortunately, in Washington State) will be trying and demonstrating and because the FDIC will be disseminating the learnings widely.

It is enormously exciting that the importance of building savings and assets-of establishing the underpinnings of financial stability-has gained such interest in such a variety of venues. It is even more exciting that people across the country, from all sectors, are working together to develop and implement long-term, sustainable strategies to make financial stability attainable for everyone.

Wednesday Round Up: $10 Minimum in Eureka?

Joe Mathews — Wed, 23 Apr 2008 13:43:00 -0400

ANTI-GAY MARRIAGE MEASURE HEADED FOR CALIFORNIA BALLOT: Or so its supporters say. This tracks though with information first reported here over the weekend that the initiative, at $2 per signature, had made the ballot. This is in spite of a well-organized blocking campaign by opponents. One wonders, however, why backers are spending their money. Some polls suggest that Californian is close to having a majority of citizens who support same-sex marriage, and the Republican governor has vowed to fight this.

$10 PER HOUR IN EUREKA: Signature gathering is about to begin on a new minimum wage ballot initiative that would guarantee $10 per hour to anyone working in the city of Eureka on California's northern coast.

MOMENTUM FOR COLORADO RIGHT TO WORK: That's according to its supporters, who are lining up endorsements. Business groups are backing it, but they should be wary. A frontal attack on labor is likely to unite the state's unions and turn out to be a setback for business interests. Exhibit A: California, the year 2005.

MICHIGAN HEALTH: Health care groups are getting behind a Michigan ballot initiative that would enshrine health insurance as a right in the state constitution.

BUT IN ARIZONA. Supporters of a similar health care ballot initiative are giving up. The sponsors blame John McCain for supposely suppressing fundraising for progressive causes in Arizona. Or something. It might be more accurate to blame Barack Obama; progressive donors may be thinking that a Democratic president would tackle health care nationally, and thus are saving their bucks for that fight.

ANTI ABORTION MEASURES:: The Wall Street Journal has a summary of anti-abortion ballot initiatives, focusing on the difference in approach between pro-life advocates who seek to put restrictions on abortion and others who prefer "personhood" initiatives that grant embryos the rights of human beings in an effort to ban abortion all together.

WORKING THE REFEREES: Sponsors of anti-illegal immigration initiative in Arkansas are accusing the attorney general of not playing fair. The a.g. blocked their first attempt at an initiative.

A WATER WAR IN UTAH: Residents of a Utah county want a referendum as a way to stop a state water pipeline. The pipeline would divert Colorado River water to support development in several counties. Look for more of these kinds of measures as the Western drought deepens.

Coverage: Reassessing Rescissions in California

Health Policy — Tue, 22 Apr 2008 23:50:00 -0400

New Health Dialogue is pleased to welcome, Leif Wellington Haase, the Director of New America’s California Program, to share his insights on the recent debate on insurance rescissions in California.

Few things have given California insurers a blacker eye than the practice of rescission, the retroactive cancellation of individual health insurance policies. Critics charge that insurers find supposed errors and discrepancies in customers' original applications and disenroll them after they have racked up large medical bills, leaving them unexpectedly with tens or hundreds of thousands of dollars in unpaid claims. (Rescissions are a standard part of the insurance business; plans have a right to protect themselves if someone commits fraud or omits essential relevant health information. The controversy that has been grabbing headlines in California involves insurers allegedly cutting off coverage for minor mistakes on insurance applications only after the applicants incur expensive medical services).

Last Friday, in a remarkable press conference in Sacramento, Cindy Ehnes, director of California's Department of Managed Care, found that twenty-six patients had been wrongfully dropped from insurance coverage. She ordered them immediately reinstated and their past claims paid. Ehnes also announced a review of several thousand other rescissions made by the state's five largest health plans.

This decision gave a boost to a bill, currently making its way through committees in California's Assembly and Senate, which would establish an independent panel to review rescinded policies and move toward standardizing the application process for individual coverage.

It prods insurers to clean up their act on their own, which they have pledged to do. They are getting considerable heat over rescissions. For instance, Rocky Delgadillo, the ambitious City Attorney of Los Angeles, has sued Anthem Blue Cross, the state's largest insurer, for what he contends is a deliberate pattern of false advertising and intent to disenroll patients who incur high medical costs. Anthem (which recently changed its name from Blue Cross of California) disputes the charges and has mounted an effort to repair its public image through a massive print, radio, and television campaign.

The dust-up over rescissions demonstrates the almost intractable problems with individual health insurance markets (which cover only about 2.8 million of around 28 million insured Californians) and the need to expand group coverage and to broaden risk pools through large-scale reform. It shows, in strong relief, the need for guaranteed issue (selling insurance to all comers regardless of prior health conditions) and a requirement to purchase insurance (so not just the sick seek to enroll) as part of comprehensive health reform. That gives everybody insurance that will still be there when they need it.

Big Daddy and Dual Measures

Joe Mathews — Sun, 20 Apr 2008 16:09:00 -0400

For the weekend, here's a little bit of blockbuster democracy history, and a lesson about dual measures.

What do I mean by dual measures? It's a proven tactic in the ballot initiative game. If you oppose an initiative that's headed for the ballot, it may not be enough simply to fight the initiative directly. You may want to qualify your own initiative -- ideally, something that sounds similar and covers the same topic, but does something different than the initiative you oppose. Why bother with a counter initiative? Voters, faced with two like-sounding measures -- usually vote "no" on both. And so the initiative you opposed is defeated. The drug industry did this expertly in 2005 in California by qualifying its own, faux-drug discount measure to defeat a drug discount measure. For this June's ballot, cities and counties qualified a counter measure on eminent domain to counter a more aggressive initiative, qualified by property owners, that would restrict the ability of governments to take property for any sort of private use. (The LA Times sorts this out today).

But in his fascinating new biography of Jesse Unruh (the legenday California Assembly speaker known as Big Daddy), Bill Boyarsky tells a crucial and forgotten story of how this strategy backfired. Before 1952, California candidates for state office had been able to cross-file--that is, to run in both the Democratic and Republican primaries. This created a political culture of bipartisanship, but the minority Democrats didn't like it. So in 1952, they qualified an initiative, with financing from a Democratic oil magnate, to eliminate cross-filing. The Republicans in the legislature responded with their own measure to counter it, retaining cross-filing but forcing candidates to list their own party affiliation on the ballot. Boyarsky calls this a "strategic error" because instead of both measures going down to defeat, the Republican counter-measure won. The measure heightened partisan identification and helped Democrats, who had the lead in voter registrations. Within a decade, the Democrats had won back the governorship and broken the Republican grip on the legislature.

Voter Registration Up in California

Joe Mathews — Sat, 19 Apr 2008 22:08:00 -0400

At least that's the raw numbers from the Secretary of State's office show. The state's population of adults eligible to votes is also growing, so it's hard to know if there's a percentage gain. But Democratic numbers are up -- though their percentage of total voters is even. Republicans continue to lose voters -- in both absolute and percentage terms. The party has done this to itself--by preventing decline to state voters from taking Republican ballots, the GOP is pushing people to the Democrats. And "decline to states" -- that's California for independent -- continue to grow. They're now nearly 20 percent of all voters.