Friday, January 28, 2005
If they gave prizes for the government agency with the most unusual name, the short list would certainly include “The Milton Marks ‘Little Hoover’ Commission on California State Government Organization and Economy”. The name inspires visions. First, imagine a swarm of tiny vacuum cleaners scouring the halls of the state Capitol for bits of bureaucratic debris. Then close your eyes and look to the left, and you might see midget FBI agents dusting thru the paperwork in search of fingerprints or loose bits of organizational turf. Try once more, looking to the right, and Californians attuned to the hydraulic humming of a smoothly functioning administrative machine may visualize a retro-1930’s style Modern Engineering Wonder of the World.
History generates the fourth image. Back in 1947 one of our Presidents took pity on a predecessor, a talented engineer and administrator whose well-meaning and diligent efforts had so worsened a bad situation that his name had become a popular synonym for economic disaster. President Truman’s rehabilitation of Herbert Hoover was thru an appointment to a newly created commission on Federal government reorganization – and ‘Hoover Commission’ fit the headlines. States emulate Federal examples, and as language expands thru analogy, those particular state government agencies that are set up to assess the workings of state government itself are now generally called the “Little Hoovers”.
The California Performance Review -- Governor Schwarzenegger’s project to ‘blow up the boxes’ by inflating the bureaucracy — recommended that hundreds of official Boards and Commissions be eliminated, with their duties and powers transferred to state agency executives. Subsequent lobbying spared some agencies, such as the Horse Racing Board, from the chop list, but 88 boards and commissions were still on the block last January 7th, when the Governor transmitted his Reorganization Plan #1 to our state’s Little Hoover for review. Professor Tax submitted the following comments to the 'Hooves, and judging by press reports of the January 26th public hearing:
such comments only add more notes to a symphony of objections.
So where’s the vacuum? What’s being investigated? Who gives a dam? Read on.
To: The "Little Hoover" Commission on California State Government
Re: Comments on Reorganization Plan #1 - Boards and Commissions
Date: January 25, 2005
Summary: The Governor’s pending Plan to reorganize State Boards and Commissions is based on a false idea of what “accountability” means. Reorganization Plan #1 would diminish public participation in government while claiming to enhance it. The Plan is an outgrowth of the California Performance Review, and suffers from similar flaws: sloppy research, inflated claims of savings, and a crude command-and-control view of public administration. I hope that this Commission will give a favorable recommendation only to terminating inactive, “deadwood” commissions, and that the Commission’s report will urge reconsideration of the rest of the plan – in particular, the proposed elimination of the 30 bodies that now regulate the state-licensed professions.
1) False Accountability. At the core of the problem is the definition of “accountability”. The Reorganization Plan claims:
“A common misconception is that the requirement for a board to conduct its business in public results in accountability. Regardless of such a public forum, any board empowered to do what it wants without consequence is not accountable. If power and responsibility for making policy lies with an unelected, term-appointed board or commission, then no individual, group, or state agency is held responsible. Accountability for the failures and the successes of the executive branch must rest with the elected leader. The recommendations contained within this reorganization proposal advance both public accessibility and accountability.” Reorg. Plan #1, p. 8 (emph. added); online at: http://www.lhc.ca.gov/lhcdir/reorg/GRP1.pdf p. 10 of 57
This is a remarkable statement. There’s no mention of “checks and balances”, “separation of powers”, “audits and reports”, professional responsibility, or grass-roots participation. “Accountability” is equated with top-down rule by an ambitious, charismatic elected executive. In such a system, every worker, manager and state agency is responsible only to The Leader, and The Leader is personally responsible to the voters for everything that the State does or fails to do. This sort of government characterized late Republican Rome under Sulla and Caesar, as well as Central Europe in the 1930’s. It wasn’t a good idea then, and it isn’t one now.
The public members of this Commission can decide for themselves whether the premises of Reorganization Plan #1 are correct. They need only answer three questions:
· “Do I act irresponsibly because I was appointed to this Commission for a set term?”
· “Does this Commission itself act arbitrarily because there are no immediate negative consequences?”
· “Does anything make me, as a member of this Commission, accountable to the People of California?”
Such soul-searching by the Commission members should reveal that true “accountability” is much too important to vest in any one particular elected official, no matter how charming or how vain.
Then, too, what in the Reorganization Plan makes The Leader “accountable”? The fact of electoral victory? That’s in the past, and disappointed supporters cannot revoke their votes. The need to woo support for re-election or a bid for higher office? Perhaps, but that implies that the entire executive branch will cease to be accountable whenever an incumbent governor decides against another bid for office. Such a narrow notion of accountability can’t be right. Californians have a more balanced sense of the way government should work. The statute that created this Commission says: “The Legislature finds that our system of government is a complex structure of interlocking relationships among all levels of government for managing public funds and programs.” (Gov’t. Code §8521.5)
2) Diminished Public Participation. If the Reorganization Plan fails to promote real accountability, there is no other reason to adopt it. There’s no showing that California’s system of public representation on Boards and Commissions has caused real problems in practice. Consider professional licensing. Plan #1 offers only vapid generalizations, such as:
“Separation of the regulatory and licensing functions of state government into so many different entities limits access to information and services. Furthermore, the constituent is not protected as effectively because there is no single agency monitoring enforcement or setting policy and standards. Indeed, the constituent finds the range of entities confusing and not user-friendly.” (p. 6)
Is this really the case? How on earth does joining together the functions of the Acupuncture Board and the Structural Pest Control Board under the common aegis of the Department of Consumer Affairs help a “constituent” get more information and services? Will the agents who monitor auto repair shops also review accountants’ work papers to test compliance with technical standards after the Department absorbs the Accountancy Board? Are folks who want to know about architect’s licenses at present really so confused that they look for information under ‘Cosmetology’?
The Reorganization Plan assumes that individual administrators make better decisions than committee-like Boards and Commissions with several members. This assumption needs to be tested. There is no reason to think that professional bureaucrats are innately superior in perspective and experience to the professionals and public members who serve on regulatory Boards. Even those who joke about committees designing camel-like horses should acknowledge that plans are often improved and win acceptance more readily when they incorporate several individual points of view.
The proposal to abolish professional regulatory boards also ignores the reasons such entities exist. Historically, three characteristics distinguished professions from other trades and businesses: special study and knowledge, independent employment by and for clients, and an element of public interest. A Certified Public Accountant, for example, must maintain independence from a client, because:
“The accounting profession's public consists of clients, credit grantors, governments, employers, investors, the business and financial community, and others who rely on the objectivity and integrity of certified public accountants to maintain the orderly functioning of commerce.” (AICPA Principles of Professional Conduct, Article II)
Professionals are represented on the bodies that regulate them precisely because the practice of a profession is infused with a public interest. The danger that self-regulation will lead to cartels and excessive entry barriers is mitigated by the presence of “public” nonprofessionals on such boards. The Reorganization Plan would end the tradition of professional self-regulation in the public interest and replace it with bureaucratic rule by state administrators. The public and the professionals may continue to participate as supplicants, but they will be excluded from the circle of those who decide. The claim that this will “maximize the accessibility and accountability of state government” (Plan #1, p. 6) is an abuse of language.
Conclusion: Reorganization Plan #1 would significantly reduce citizen participation in government in furtherance of a false vision of public “accountability”. Rationalizing state boards and commissions is a worthwhile goal, but this plan needs to be redone from start to finish.
Wednesday, January 19, 2005
It’s an imaginary device that the national security eggheads dreamed up back in the 1950’s. They were trying to apply game theory to real world problems, like thermonuclear war, and looking at the bright side, they realized that no one in their right mind would ever start a war if it were certain to kill everyone on earth.
In its pure game theoretic form the question is: how do I convince other players they must avoid certain moves? How do I compel an opponent to behave reasonably? The Doomsday solution is to announce that "bad” moves will blow up the game -- that you are committed to annihilating any opponent who acts "unreasonably”, even if the price of doing so is your own destruction. The mechanical element makes the threat convincing. By automating the process of destruction, so that neither you nor anyone else can stop it once it has begun, you ensure that no opponent will risk the forbidden moves in hope that you will flinch or falter at the showdown.
Given a choice between (a) acting reasonably and (b) mutual assured destruction, other players should *always* choose (a). The game continues because the players are forced to act reasonably, just as the world can carry on, protected by the possibility of its own destruction.
“Sounds great, Professor.”
Unless something goes wrong.
“What can go wrong?”
Doctor Strangelove explains: “Deterrence is the art of producing in the mind of the enemy... the fear to attack. And so, because of the automated and irrevocable decision making process which rules out human meddling, the doomsday machine is terrifying. It's simple to understand. And completely credible, and convincing…. Yes, but the whole point of the doomsday machine is lost if you keep it a secret! Why didn't you tell the world?”
Soviet Ambassador: “It was to be announced at the Party Congress on Monday. As you know, the Premier loves surprises.”
“But that’s only a goofy 1960’s movie. And it’s dull and boring, made with cheap black & white film. People aren’t really that stupid, are they?”
Professor Tax recently finished reading John Keegan's The First World War. A most depressing story of the way the military mobilization plans of the great nations of Europe, with elaborate timetables synchronized to the efficient transport of armies by railroad, pulled unstoppably towards war. Each nation sought its own maximum advantage through precise, inflexible planning, but the plans interlinked in ways no one had foreseen. The statesmen and diplomats of the age appear to have been helpless, caught in the revolving gears of some giant mechanism they had created but could not control. Four years later a “tragic and unnecessary” conflict had left 20 million dead.
“Gosh. But what does all this snarky history have to do with ‘taxes, higher education, business frauds and California politics’? Is Professor Tax going freelance and abandoning his franchise? What’s the *local* angle?”
The new California state budget that premiered last week has a secret ingredient. The budget plan for '05-'06 is being pitched as an ugly but temporary stopgap measure. The real budget message is that the state’s prudent and parsimonious Director of Finance, Tom Campbell, thinks he has found the ultimate solution to California’s budget problems. Like any good scriptwriter (or Business School Dean), Campbell has distilled it down to a sound micro-bite: “across-the-board”. It’s not quite as good as “I’ll be back” or “Hasta la vista, Baby,” but Governor Narcissus can remember it, can make it sound almost meaningful, and can use it to dodge difficult questions about substantive policies.
So what is this “across-the-board” stuff, really? The specifics aren’t public yet (assuming they exist), but here’s the rough outline: In the last 25 years or so the state’s voters have passed ballot initiatives containing various formulas, autopilots, earmarks and set-asides, and it’s generally believed that their cumulative effect has mangled the budget process. Now the voters will be asked to change the State constitution (an act that's very hard to alter or rescind) to add a formula to end all formulas, a super-autopilot. In essence: (a) it would place the formulas for applying state revenues to schools and highways beyond legislative control (b) it would schedule a 15 year payback for the billions the State's "general fund" has borrowed from the schools, highways and other special funds, and prohibit interfund borrowing in the future and (c) funds would automatically be appropriated at the prior year level (with adjustments) if the legislature fails to pass a budget. [Note: this is the 'power of the purse'. Without the power to control how the Peoples' money gets spent, a Legislature is only a big room filled with comfortable chairs and lots of warm air. Tax history tells us how Prussian Chancellor Otto von Bismarck proved this back in 1862: when the legislature refused to approve the budget, the autocratic von Bismarck collected the taxes and spent the money regardless. "The great questions of the day are not decided by fine speeches or majority votes, but by blood and iron."]
Finally, (d) here's the McGuffin. Whenever the Director of Finance feels a deficit impending, the Governor and the legislature have 45 days (30 in some cases) to agree on a plan to keep the budget in balance, or:
"the State Controller will implement an across-the-board reduction in all State payments (except for debt service and other instances where doing so would violate the federal constitution)."
OK, counsel. Better dust off that "no state shall Impair the Obligation of Contracts" jurisprudence (US Constitution, Article I Sec. 10.) (fn. 1) Unless you're one of the people being stiffed by the State, you can have fun watching the Courts as they try to figure out what the hell this means. Suppose there's a 3% shortfall. Hmmm -- "reduction in *all* state payments"? So if I sell a computer to the state for $1,000, the state might only pay me $970. Looks like vendors will have to raise all their prices to compensate for the added risk. Construction contracts, too. What about leases -- are they 'debt service'? Are tax refunds 'state payments'? Are the school fund and highway fund moneys on-the-board or off-the-board? How do you feed 1,000 hungry jail inmates if you can only buy food for 970? What if there's a fire or a flood, or an epidemic?
"Wow. So that's what a budget doomsday machine looks like. The Governor, the Legislature, the Democrats, the Republicans will all *have* to behave reasonably. Lock the Statehouse doors, and don't let anyone out until they agree on a plan, because the alternative is an unbelieveable mess that will permanently soil the state's credit. What a clever idea!"
Too clever, perhaps. Professor Tax will leave the "what can go wrong" scenarios to others. Instead, a future post will try back-casting, to see what would have happened if the Campbell Doomsday Machine were in already in operation a few years ago, when the current budget turmoil started. The answer may surprise you. Until we meet again!
P.S. Please give credit to Professor Steve Sheffrin of UC Davis, who was first to publish the finding that the proposed Budget Control Plan is a Doomsday Machine, in his Jan 16th column in the Sacramento Bee.
fn. 1 See, e.g., State of Mississippi ex rel. Robinson v. Miller, 276 U.S. 174 (1928) at 179: "After services have been rendered by a public officer under a law specifying his compensation, there arises an implied contract under which he is entitled to have the amount so fixed. And the constitutional protection extends to such contracts just as it does to those specifically expressed. "
Thursday, January 13, 2005
There are two kinds of bad movies. Some, like Battlefield Earth or Plan 9 from Outer Space, are so exuberantly bad that it's almost worth suffering through them. Others are bad in a dull, miserable way, relieved only by the ease with which they are forgotten. Professor Tax had hoped that Governor Schwarzenegger’s new budget would be exuberantly bad, but those hopes have been disappointed. When the opening credits begin with the star/director/producer apologizing for the performance we’re about to watch, it doesn't take a Siskel & Ebert to know that what we’re about to endure should never have made it onto the screen. There are some punishments that not even a masochist could love.
The January 10th budget presentation (RealAudioMedia format)
The Department of Finance anti-ergonomic budget index
Those who are tempted to go further and read the book will find that the '05-'06 state budget is a sad, sad piece of work. It has no self-respect. Last year Finance Director Donna Arduin took aggressive pride in slashing spending, but that has now given way to an apologetic whine -- "we're very sorry, but unfortunately we decided that we need to screw over the poor, the teachers and the civil servants". Instead of the imaginative fiscal tricks of the past, such as long-term bonds collateralized by hypothetical future savings, all we have today is: "Sneaking billions of dollars out of the school fund and the highway fund is very, very bad, so we're only going to do it for two more years, and to show we’re sorry here’s a new law to cut off the fingers of anyone who ever tries this again." It's the Governor Gollum approach to public finance: "We hateses nasssty unionsss, yesss, Preciousss."
The only interesting aspect of the budget show was the new-found feistiness of the Sacramento press corps. Some of the news hacks seem to have shed their respectful awe of Arnold’s celebrity and are starting to ask intelligent questions. The reporters did not seem impressed by der Governor’s responses, which either repeated the clichés in his presentation script (“we have to live within our means… it’s not a tax problem, it’s a spending problem...”) or invoked his tough guy cinema persona to avoid substantive answers. Perhaps the charm is wearing thin, and someday the reporters will challenge ignorant falsehoods from Gov. Narcissinator just as they confront the lies other politicians tell.
Nor were the media particularly respectful when new budgetmeister Tom (“Uncle Scrooge”) Campbell came onstage in a supporting role as the prudent and parsimonious Angus McFrugal -- the sort of fellow who makes the eagle sing every time he spends a quarter. The reporters came close to trapping the canny Highlander into contradicting der Governor's ridiculous assertion that current formulas push spending up by $1.10 for every $1 of tax revenue. The questioners also were skeptical of the Thrifty Scot's unconvincing argument that the fix for all the bad voter initiative formulas and autopilots that snarl up rational state finance is to have the voters amend the constitution to add yet another autopilot formula. Indeed, one could almost hear the snickers when the press learned that the effective date of this measure would coincidently be delayed, so it would not start to operate 'til after the next gubernatorial election. In fact, Professor Tax suspects that the assembled news hacks saw right away that the Tartaned Tightwad's "reform" plan would completely paralyze the budget process, cut the purse-strings of legislative control, freeze California’s current tax structure for all time, and gradually devour the state's social fabric, from parks to universities, to fund the inexorable growth of the Medi-Cal monster.
It’s hard to find any amusement in this budget. There's only dour sermonizing on the Virtues of Wealth and Business, the Slippery Slope of Tax Increases, the Obligation to Provide for Oneself in Retirement and the Vices of Poverty and of the Poor. True, some may find unconscious irony in der Governor’s plan to spend $6 million to combat obesity, while saving @ $140 million by slicing away at property tax relief for the low income elderly. One way or the other, this budget should slim the old folks down. Connoisseurs of Schadenfreude may also appreciate how Narcissus "loves and protects kids” by combining cuts (not just “failure to increase”, but real cuts) in Calworks payments to families in poverty with increased spending on medical care for poor kids. Such charity! “I love kids so much that I’ll take the money I save by starving them and spend it on doctors when they get sick.”
Monday, January 10, 2005
And you realize that this is the Big Day, the Day when, as Governor, you will present your new budget to the adoring voters of California.
Saturday, January 08, 2005
What is the thread that connects these six proposals?
1) An amendment (no text available yet ) to further tangle up state budgeting.
2) An amendment that outlaws pension plans for new state employees, forcing them to bear their own investment risk in 401(k)-type "defined contribution" plans. The text of ACA 1_1 is now online, and it's worse than was imagined. "State", it seems, also means cities, counties, school districts, public universities and every other public entity or agency, right down to the Antelope Valley Mosquito Control District. So, by definition, "new state employee" includes all city police, local firefighters and schoolteachers who start work after June 30, 2007. How long until we see the headline: "Arnold Screws the Cops", or the TV ad showing the disabled retired firefighter begging on the sidewalk?
And why should Arnold do this? Barring new hires from joining a *city* pension plan, like San Francisco's, isn't a state budget issue at all. And why prompt a run on the Cal-PERS pension bank with Sec. 8(c), which allows the active members of existing public pension plans to cash out in full by rollovers to new defined contribution plans -- but only during the last six months of 2007?
Professor Tax has hinted that Arnold is being manipulated in private by the special interest devils he condems in public. Lo! We read in section 8(d)(2) that:
"a public agency may use one or more private-sector third-party administrators to manage a defined contribution plan provide investment vehicles and educate members and retirees on the appropriate investment strategies".This confirms the hunch. Der Governor's plan isn't about efficient government, but rather is a scheme to enrich brokers and investment managers by @$1.6 billion/year in fees and profits from privatizing the pool of public pension assets now held by Cal-PERS. Who is telling Arnold to do this? Which adviser to der Gov was corrupt enough to push this crude pension grab? Did somebody bribe a palace guard, or was this the work of those ideological fools "who sell their souls and votes for naught"?
There is one good thing about ACA 1-1 -- as submitted, it is so poorly drafted (e.g. it's unclear if a state worker who changes agencies is a 'new employee', e.g. one can't compute 'net present value' with no stated interest rate; eg. no co-ordination with the Federal tax rules for retirement plans) that it can't be intended as serious legislation. At least, let's hope not.
3) An amendment to base employment status and pay for teachers and school administrators on "performance." It's not called "merit pay" any more, because there's too much research showing that:
"Teachers have viewed merit pay plans as unfair and divisive, promoting competition that is counterproductive to a collaborative atmosphere and having a demoralizing effect on non-receipts. Likewise, from an administrative perspective individuals responsible for implementation and oversight of merit pay plans have found the plans to be unduly burdensome and time-consuming." When first introduced, in Massachusetts in 1908, "its reign was short- lived because of charges of ambiguity, favoritism and inequity" and in every subsequent generation, "merit pay plans have been tested, tried, and usually trashed within six years of implementation" (Desander, "Teacher Evaluation and Merit Pay" 14:4 Journal of Personnel Evaluation in Education 307-308 (2000) )
Professors Wilms and Chapleau trace pay linked to student performance test scores back to Victorian England, where it was finally dropped after 30 years because it distorted incentives, turned teaching into rote mechanical exercises, and encouraged manipulation and falsification of data. Some things never change. In NBER Working Paper #9414, Professors Jacob (Harvard) and Levitt (Chicago) report work on developing an algorithm to detect cheating by teachers and administrators (like "correcting" answer sheets after-the-fact or directly telling the students how to answer) when students take standardized tests. They estimate that the pressure from "high-stakes testing" that links incentives to test results leads to such cheating in 3% to 5% of Chicago's public elementary school classrooms every year.
The text of SCA 1X is not available yet. There's only a promotional fact sheet posted on the website of State Senator George Runner (R- Antelope Valley) telling us that local school boards will decide how to combine annual performance evaluations (by whom, on what basis, is not stated) with measures of student improvement on state standardized tests in order to assess teachers and administrators -- and adjust their pay in some unspecified way. We also learn that teachers now receive job tenure rights after a two-year probationary period, but this Constitutional amendment will require all new school employees to have 10 straight years of satisfactory performance evaluations before they get any such rights.
Poor Senator Runner! Arnold has given him the odious task of sponsoring legislation that repeats 140 years worth of mistakes in teacher performance evaluations. Or perhaps the Senator thinks that public school teaching in California is an attractive and lucrative occupation, with qualified potential teachers in such surplus that they will gladly work an additional eight years with no job security. Apparently some of der Governor's political advisers confuse "reforms" with "re-enacted failures", like the Englishman who replied, when asked if he had learned anything from his mistakes, "Certainly. I'm sure I could repeat them exactly."
4) Redistricting is der Governor's trump card. It really is outrageous, the way the Democratic legislature has gerrymandered legislative and congressional districts into fractal shapes resembling sea monsters and other nightmare creatures, so as to preserve their majority while protecting the incumbents of both parties. The progressive spirit of good government tells us to take the job of drawing district maps away from hands tainted by partisan self-interest. However, that progressive spirit also calls for many other reforms -- campaign finance, access to the media, artificial term limits, Republican congressional gerrymandering in Texas by Tom "The Enforcer" Delay, etc. The painful conclusion is that redistricting on der Governor's terms, without other political reforms or nationwide change in how districts are drawn, would amount to unilateral disarmament by California's Democratic party. A leader like Mahatma Gandhi or Martin Luther King might carry it off, but failing such leadership, redistricting in the name of good government would just deliver control into the hands of those who have no interest in better government.
5) Der Governor's first reorganization plan proposes to fix a broken and costly prison system. Professor Tax has no experience or expertise with regard to the criminal justice system, and can only hope that the plan will be a successful improvement.
6) The second reorganization proposal would increase government accountability to the public by abolishing 88 specialized boards and commissions on which members of the public now sit. The plan would replace public participation in government thru boards and commissions with bureaucratic authority exercised by directors and department managers.
"But, Professor Tax", you say. "That makes no sense. How does reducing public participation in government increase accountability to the public? Surely that page of der Governor's briefing book must have been turned upside down."
Actually, the page is in the right position -- it's the idea that's upside down. Der Governor's California Performance Report team (remember? those folks who fed the media dishonest numbers based on fraudulent research) -- have their own twisted definition of "accountability." The reorganization plan they scripted for der Governor (.pdf p. 10 of 57) comes right out and says it:
"Regardless of such a public forum, any board empowered to do what it wants without consequence is not accountable. If power and responsibility for making policy lies with an unelected, term-appointed board or commission, then no individual, group, or state agency is held responsible. Accountability for the failures and the successes of the executive branch must rest with the elected leader."
This is a familiar theme, but not an American one. More like central Europe @ 1938. No checks and balances, no professional responsibility, no participation with neighbors and colleagues, no separation of powers, just top-down rule by an ambitious, charismatic elected dictator. Wasn't a particularly good idea, either, as California kids learn in 10th grade. Accountability for failure in particular can lead to a rather unpleasant end.
Professor Tax will return to the details of Arnold's new agenda in the next post. What's important now is understanding that the core premise of this reorganization plan is completely false. Accountability is much too important to rest with any one man, no matter how charming or how vain.
Thursday, January 06, 2005
Arnold's second proposal is a state constitutional amendment aimed at wrecking California's public employees retirement system. Technically, it would change the retirement plan offered new state employees from a "defined benefit" system to a "defined contribution" arrangement. "Defined benefit" is a synonym for "pension plan", under which retiring workers receive annuities (a lifelong series of payments) based on their age at retirement, the number of years they worked, and their pay before retirement. [Full disclosure note: one could argue that California's current formula, which provides annual pensions of 2% times final compensation times years of service for those retiring at 55 is overly generous, but as a recent retiree from State University teaching and consequently a recipient of such payments, Professor Tax will leave that task to others.] In a defined contribution plan, on the other hand, some percentage of each employee's pay is set aside each year in an individual account for that employee, whose retirement income will depend on the investment results for that account. These plans are named after tax code sections or have weird acronyms, like "401K" , "403(b)", "SEP-IRAs", and "SIMPLEs" (which they aren't.)
The basic difference between defined benefit and defined contribution plans is in who bears the risk. In a defined benefit plan the employer must make up any shortfall if the plan investments don't produce enough to cover the projected benefits. On the bright side, employer payments into the plan can decrease if the investments do especially well. However, with a defined contribution plan each employee bears the risk. A participant who trustingly puts all their money into the stock of WorldCom -- or whatever enterprise turns out to be the next Worldcom -- will retire in penury. Someone who embraces the safety of a guaranteed but fixed return may well find that inflation turns their working dollars into retirement pennies. Tough luck, buddy -- with a defined contribution plan, you're on your own.
So why does Arnold want the State of California to join the many corporate employers who have been replacing defined benefits with defined contributions in order to shift investment risk onto their employees? Why replace the predictable uniformity of civil service pensions with the wild variability of individual accounts? Surely, Arnold is not worried about his own retirement finances as a rich and successful former movie actor. And the statistics the Governor invoked in the State of the State address don't make any sense:
"California's pension obligations have risen from $160 million in 2000 to $2.6 billion this year. Another government program out of control, threatening our state."
Fifteen basis points. That's pretty efficient. Compare that to the fees and transaction costs that individual employees are likely to encounter in trying to manage their own defined contribution plan investments. A December 2004 study by the Investment Company Institute found the total shareholder cost of equity funds (defined as the sum of fund expenses and annualized loads incurred by buyers) was 125 basis points or 1.25% of the amount invested during the year. Bond funds, with generally lower operating expenses, had a total shareholder cost of only 88 basis points.
"Wait a minute, Professor Tax. I don't get it. If Cal PERS's defined benefit plan is less risky for participants and is more efficient at investing, then why does der Governor want to amend the state Constitution to deny these benefits for all new state employees, requiring them to use risky and inefficient defined contribution plans instead? In the long run, won't this mean that Cal PERS will just waste away, because no new members can join and existing members will die, leave or drop out? And it's such a gradual change, as the state employee workforce turns over, that it won't be much help for the state budget in the near future. What's going on here?"
Excellent questions. Professor Tax suspects that two "special interests" -- two of the Governor's own pet devils -- are behind this proposal. It must be very frustrating for investment managers on Wall Street, Montgomery Street or Bunker Hill when they see this enormous pool of assets being managed so cheaply. If the CalPERS asset base were privatized and operated like a typical
mutual fund, there would be an additional 110 basis points = 1.1% = $1.6 billion available for fees and profits for fund management companies. You can practically hear them salivating at the prospect. It is also the case that CalPERS has been a leader in pressing for improved corporate governance in American boardrooms. What a nuisance it is for corporate America to have a large activist shareholder like CalPERS. How nice if CalPERS could be punished for activism by a "reform" that cuts off its funding base.
Wednesday, January 05, 2005
It’s all so predictable. The relentless dumbing down of public issues, the limited vocabulary carefully castrated of all words longer then two syllables, the macho posturing, like a capon on steroids. The meaningless rhetoric, the stereotyped thinking, the guttural Austrian accent, all appealing to the lowest common denominator among the voting audience. The overwhelming display of personal vanity. And it's that vanity that compels a continuing refusal to accept responsibility for the State deficit – even tho this year’s $8.1 billion dollar hole is roughly equal to the cumulative revenue that Arnold gave away by not letting the vehicle license tax revert to its normal historical level. Note, incidently, that the loss of car tax revenue is scored as state spending, since California is obliged to reimburse local governments for the forgone revenue from a property tax on autos. How amusing that Governor Humvee attacks state spending, when his first act in office was to increase it by $4 billion per year.
Enough prologue. Now let’s go watch the speech.
Well! The People of California certainly enjoy being told how honest, wise and wonderful they are. They also seem to enjoy the opportunity to legislate by popular vote on matters of which they know very little. California's initiative process has become a form of plebiscitory democracy, where voters are manipulated into favoring or oppose interest group legislation through expensive television advertising based on anecdotes and sentimental stereotypes. The process is tailormade for charismatic leaders like Governor Narcissus. By defining the issues on the ballot he can advance the agenda of the corporate Republican business interests for whom he fronts while at the same time promoting his personal ambition for re-election. The four constitutional amendments he proposes to place before the voters are the result. (The proposals will first be offered to a special session of the legislature in an obvious attempt to make the majority Democrats embarrass themselves by appearing to oppose "reforms".)
First, the budget amendment. Rather than deal honestly with the state budget, der Governor will "reform the process." There's no mention of his spending $4 billion a year on car tax relief. No, the problem is caused by mysterious "budget formulas":
"Last year, we had $78 billion in revenues coming in. The great news is that this year, we have $83 billion coming in, over $5 billion more than last year. Now that is terrific. However, various budget formulas require us to spend over $10 billion more. Do the math. Our revenue increases by more than 5 billion but our spending increases by over 10 billion. We don't have a revenue problem. We have a spending problem. In fact, the way the formulas now work, we will never catch up. No matter how well we do, the current system is programmed to spend even more."
Arnold's ignorance of how budget formulas actually work led him to assert that raising taxes would only widen the gap:
"We could raise taxes by billions but that would only further drive up spending by billions of dollars. California would never come out ahead."
Ignorance, it must be ignorance, frightening though that is in a head of state government, for a knowing lie that large would qualify him for the lead in the next remake of Pinocchio.
But where did these mysterious formulas come from? Why is California hamstrung by arbitrary spending formulas? Was this the work of corrupt legislators dancing to the tunes played by those shadowy special interests, who der Governor blames for all ills that plague the public? Er -- no. Actually, Proposition 98, which accounts for almost half the budget and for 3/4ths of all state public education funding, was passed by voter initiative in 1988. And surely Arnold has not forgotten proposition 49, the mandatory afterschool program spending initiative in 2002 that he used to translate his movie charisma into political fame. Indeed, proposition 98 itself was a delayed reaction to the primal manifestation of plebiscatory politics back in 1978 when state voters enacted proposition 13, freezing property taxes and gutting the school system which those taxes had financed.
There seems to be a pattern here. The initiative process is probably the worst possible way to arrive at a government budget. The voters have no say in defining the issues -- their only role is to mark the big circle "Ja" (or risk a "nein" in the little circle). The process favors those who can afford the massive amount of sophisticated advertising needed to manufacture public sentiment. There is no place in the process for evaluating specific programs or for making the concessions and political trade-offs that are essential in legislative budgeting. (Naturally, there is "waste" in government. A program cost that is a vital interest of one constituency may be useless in the eyes of a second constituency, which has its own preferred funding priorities. The legislative compromise that builds a majority including representatives from each constituency will be a budget that each will view as somewhat wasteful. They disagree, of course, as to which portion of the compromise is the useless part, and typically fail to recognize that what they call "waste" is a politically necessary component of the spending they regard as vital.)
Der Governor's proposal #1 reflects exquisite political calculation, but it is logically absurd. If the state budget system has been broken as a result of trying to allocate resources and legislate tax reductions by popular vote, then one more plebiscite is hardly a solution. "Mandatory spending cuts across the board" sounds macho on TV or in a ballot book ad -- but which bondholders will the state Treasurer stiff, and which prisoners will be sprung free when the state can't pay the jailers?
There's a better way. Any budget can be balanced. Just have the voters decree that 2+2 = 3 or 5 or whatever. And how about an initiative to make math easier for kids in school by setting pi equal to 3?
Coming next: a look at proposed Constitutional Amendments 2, 3 and 4.