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Saturday, August 21, 2010

California Dreaming – Not Anymore

In 1962 my wife and I left Cleveland, Ohio and headed to California to make a new life. Like so many other Easterner and Mid-westerners we saw California as the land of opportunity. A place where you could get a good education, a good job, purchase a nice home and enjoy the good life.

Under the leadership of governors Goodwin Knight (R), Edmund (Pat) Brown (D) and Ronald Reagan (R) the state had the best education system in the nation, especially the free community colleges, the best infrastructure and a great business and investor climate. These governors realized the importance of the private sector in building the state and creating a growing economy. People flocked to the Golden State and a rate of 1,000 per day. Property values were continually on the rise.

When I arrived in California I took a job with the California Division of Highways as a highway engineer and surveyor. We did not have public sector unions then and were told we made 80% of what our equivalent colleagues in the private sector made. The reason for this, as was told, is that we did not need to fear layoffs and our jobs were more secure. For a person with a growing family this was just fine. Oh Happy days.

This went on for the next ten years. My career with CDH was on a fast track and things were going great. We had a new house, car and three kids. My parents and my wife’s sisters had also moved to California. Everyone was happy and we were gloating at the rest of the country. By 1970 I was feeling restless and seeing things I did not like. The environmentalists were being to exert more influence on our transportation infrastructure. It took longer and longer for a project to get approved. Even a simple road widening would run into opposition from the tree huggers. Every time someone, even the State, wanted to do something there were lawsuits filed by the various environmental groups. California was becoming a very litigious state.

The last major project I worked on was the Century freeway (I-105). This was supposed to be a fast tracked project as it was to relieve the east-west traffic on the I-10. The project was stalled before the preliminary design was completed. The major problem was that the state did not file and proper Environmental Impact Report and a federal court issued an injunction against the project. The biggest issue was over the rights of eminent domain the state had. The route was to go through south central Los Angeles to the airport. Many houses would be condemned and the litigious environmentalists had found their big stick. Most of these houses were small two and three bedroom homes with six, seven, eight or even ten people living in them. The court ruled that the state would need to replace that house with a larger home providing a bedroom for no more than two people. Now the state had to replace a 1,000 square foot home with a 3,000 square foot home in the same area. An almost impossible task without developers building these homes, which they were loathe doing without state subsidies. It took twenty years to complete this freeway. This is when I decided to leave CDH and venture in my own business, which was a good decision.

In 1974 Ronald Reagan was term limited out of the Governor’s office and the people of the California elected, probably their worst governor in the history of the state, Jerry Brown or as we called him Governor “Moonbeam”. Edmund G. 'Jerry' Brown was the son of Pat Brown the governor in office when I moved to California. I think he was adopted as he shared none of his father’s DNA when it came to governance. He was the complete opposite. He hated freeways and wanted people to take the bus or walk in sandals like he did. He hated the private sector, probably because he could not get a good job there and he loved the welfare state and the government workers. He loved them so much that in 1977 he pushed through the infamous Dill Act, which he signed into law in 1978, that gave public employees the right to collective bargaining, a polite way of saying to unionize. Even social progressives such as Woodrow Wilson and Franklin Roosevelt opposed allowing public employees the right unionize and therefore strike. They believed this would allow the public employees and bureaucrats to hold the taxpayers hostage. I rarely, if ever, agree with a social progressive but on this issue I am with them 100%.

One other comment on Jerry Moonbeam before I move on to today’s problems in California. Brown appointed a 36 year old woman as the director of the California Department of Transportation (CALTRANS – the successor in name to the California Division of Highways), Adriana Gianturco, or as we called her Adriana Giant Turkey). She was educated at Smith College, UC Berkeley and Harvard graduate school, with jobs in urban planning and transportation under her belt and was best known for the Diamond Lane. Adriana was a real dyed in the wool liberal and social progressive that believed she knew what was best for everyone. She was as hated and vilified as much as her boss Jerry Moonbeam.

Several years ago while lecturing at a conference of transportation engineers I had the opportunity to sit with Adriana and my friend Carolyn Ewing at lunch. This was my big chance to fire back at her for all the dumb things she did and said. Much to my disappointment Adriana told me she was now a Libertarian and had no use to Jerry Brown. She went on to say that when she took the director’s job Brown told her he wanted her to rip CALTRANS apart and get rid of the good old boy engineers. You see, Jerry wanted everyone to ride the bus and walk to work in their sandals. Oh, I already said that, didn’t I? Suffice it to say I was more than a bit taken by her comments and I had a very nice lunch with her. To this day you cannot mention her name in the hallowed halls of the Department of Transportation building in Sacramento; you will be run out of the building.

Today there are 350,000 state employees working for the State of California. All of these employees are members of one of the numerous public employee unions in this state. With millions form dues in their coffers these unions now control Sacramento. We have a legislature in the pockets of these union leaders with the biggest paid for legislatures being the Speaker of the California House, John A. Pérez (D-Los Angeles), and Senate President pro Tem Darrell Steinberg (D-Sacramento). Both of these politicians are long time supporters of the public employee unions with Steinberg being the most vocal and egregious. It was Steinberg who led the fight against Proposition 35, a ballot initiative changing the State Constitution to allow outsourcing of State work to the private sector.

In 2000 the voters of California passed a ballot initiative (55%-45%) changing the State Constitution to specifically allow for the outsourcing of state services to the private sector, especially in the area of architectural and engineering services. I was deeply involved with this issue for ten years and an outspoken advocate of outsourcing as many state services as possible. I believed in three basic principles: (1) Competition was good for the taxpayer. The state has no right to a monopoly in anything, especially with taxpayer’s money. (2) There is plenty of capacity and talent in the private sector. State bureaucrats don’t hold a monopoly on brains, talent and creativity. I know, I used to work for the state. (3) With the increasing number of state employees the taxpayers of California would someday have to pay the piper in terms of pensions and benefits. It’s really tough to get rid of state, unionized employees, but you can get rid of a contractor in a day without severance of pension payments. You don’t hire a live in gardener when you want your lawn cut once a week.

At the time not too many people were paying attention to the pension and benefit issues. California had plenty of money or so we thought. Some forward looking politicians, namely Tom McClintock, were beginning to warn us about the unfunded liability looming on the horizon. Tom was a voice in the vast wilderness of Sacramento, somewhat akin to Churchill warning the British of the growing threat of Hitler. No one wanted to listen. They said it was just politics. Well now we are at that point McClintock warned us about.

California is the nation's shameful example of what happens when Democrats influenced by big-government labor rule the statehouse for forty years.

With 12.5% unemployment (up from 4.5% a mere three years ago) and a "recognized" budget deficit of $21 billion, California has just found that out it is in much, much more financial trouble than anyone, especially a Democrat, really wants to admit.

Governor Schwarzenegger commissioned a study by Stanford University, which has found that California's three public employee pension funds (The California Public Employees' Retirement System [CalPERS], California State Teachers' Retirement System [CalSTRS], and University of California Retirement System [UCRS]) lost $109.7 billion in portfolio value in one year (June '08 to June '09) and are currently in shortfall of "more than half a trillion dollars."

One of the problems with these pension programs is that they are managed by bureaucrats who have never worked on Wall Street. They are more political than financial experts. Who would expect to hire a good, competent financial manager for $250,000 per year?

By law, California taxpayers are required to pay the public employees' pensions shortfalls that may occur. Local governments cannot "print money" as the federal government does to cover budget deficits. This means that CalPERS will have to pay for those exorbitant pensions in cities like Bell and Vernon. Bell is liable for $47 million in pension to its city manager and police chief, a city of 37,000 where the median household income is $40,000 per year. Vernon is in worse shape. The retired city administrator, Bruce Malkenhorst, receives an annual pension of $449,675 from CalPERS. Vernon, a Los Angeles suburb and a neighbor to Bell, has 92 residents.

What should have been considered a huge scandal in the state pension fund system in the past year got little attention but is more pertinent now: The two largest plans, CalPERS and CalSTRS, were reportedly near bankruptcy in 2009 after it was learned the funds had lost from 25%-41% of their value due to risky investments in real estate and the stock market. Former employees of the state plans were accused in January of getting huge fees to direct pension investments to certain banks or ventures.

There are outrageous examples of abuse in the California public pension system., which has been tracking the pension fund liability issue for five years, has found that 9, 233 retired members of CalPERS or CalSTRS receive more than $100,000 per year in retirement benefits, amounting to more than a billion dollars a year.

California's state employee pension fund liabilities have ballooned for years with increased numbers of state employees, many of whom can retire at age 50, can "spike" their last years' income with overtime to increase their retirement, and can then move on to other government or private jobs without losing their pensions.

The state cannot declare bankruptcy and renegotiate the pensions and union contracts. Cities can declare Chapter 9, but the state cannot. The only way out of this mess is for the politicians to make some hard choices concerning their largest supporters, the public sector unions. If you want to see who sponsored the Democrat Party convention, this April, click on this link. You will be astonished. My fear and belief is that we are doomed unless we make a dramatic change of the political elite in this state. Politicians controlled by unions will not be hard on unions. They will continue to push the problem down the road until the road ends and the road is ending very, very soon, if it hasn’t already done so. Federal stimulus money will only exacerbate the problem as it will give the politicians an out to do nothing.

With the ever increasing number of public employees dependent on government there is little chance that this voting bloc will vote against their own self interest. Somehow the voters of this state must vote out the Democrat Party at every level.

I believe we need to do the following if we wish to survive as a financially sound state.
  1. Financial transparency – post all state employees and government official’s salaries and pensions online for the taxpayers to see where the money is going and to who it is going to.
  2. Dramatically cut state staff through attrition and layoffs. If the private sector can suffer state employees can share in it. How about a 20% across the board cut for starters beginning with employees with less than five years tenure. This includes the state university system and teachers.
  3. Outsource everything that is possible to the private sector. This will create jobs in the private sector and dramatically reduce future pension liabilities. This includes teachers, prison staff, architects, engineers, and all lower level administrative personnel, such as the DMV. If an engineer works for CALTRANS why can’t he or she work for a private firm when the work needs to be done?
  4. Cut the power of the unions by reducing the number of dues paying members and putting curbs on the amount money a public sector union can contribute to a political campaign.
  5. Stop financing the illegal immigrants in his state.
Can Meg Whitman do this with a Democrat controlled legislature? Without a sure mandate from the voters and her using her executive powers to take these steps I doubt we will be able to survive. We really don’t Meg Whitman, we need Margret Thatcher. The City of Los Angeles will be the next to fall. There only out is Chapter 9.

Update, August 29, 2010

I am adding to this post due to a recent report posted on, an online publication of the Reason Policy Institute.

Outgoing Gov. Schwarzenegger is using fiscal emergency as leverage toward a permanent solution to the public employee pension crisis that has gutted California’s budget and hamstrung other states. If he succeeds, the example could point to a solution for the many states that need to get a handle on their public employee commitments. To read the full report please click here.

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