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Monday, October 15, 2012

Ending Union Dominance In The Golden State

"When plunder becomes a way of life for a group of men living together in society, they create for themselves, in the course of time, a legal system that authorizes it and a moral code that glorifies it." — Frederic Bastiat, The Law, 1849.

There is no doubt that California is broke. California’s GDP once ranked 5th in world ranking has now slipped to 9th behind Brazil. Once ranking first in average income California has fallen to 17th ($43,647 per year) behind North Dakota, ranked at 7th.with $47,236 per year and Wyoming at 6th with $46, 898 per year. (Connecticut ranks 1st with $57,902 per year.) But, California has the largest budget deficit in the nation at $10 billion and this does not include the unfunded liabilities for government worker’s pensions and life-time healthcare.

Keep in mind that these numbers are for the state at large and do not include counties, cities, and school districts — and in California that number is astronomical. In fact is so bad that three major cities; San Diego; and San Jose have passed ballot measures reducing the impact of civil service workers on their budget and Stockton has declared bankruptcy.

One of the reasons California is in the mess that is in today is the tremendous amount on influence the unions have on Sacramento. The unions with the most influence are the public sector unions, teachers unions, and SEIU. Without the money and voting numbers these unions are able to bring to the polls each election California would be a red state and Jerry (“Moonbeam”) Brown would not be governor. In 2010 Brown won by more than 1.3 million votes (53.8%) and there are an estimated 900,000 SEIU members in the state, including nurses and hotel workers.

From the outside looking in, you have to admit that something is a little "off"Jerry Brown in California politics. In the year 2010, while voters nationwide swept Republicans into office high and low, voters in California kept Democrats in office, with the numbers in the California House delegation remaining exactly the same. Not only did Californians re-elect far-left U.S. Senator Barbara Boxer, but California voters also dusted off and voted back in as governor a relic from the 1970's, Jerry "Moonbeam" Brown. Californians preserved a Democrat majority in the California Senate and even added to a Democratic majority in the Assembly. And I am sure Obama will carry the golden state by the same margin.

When my wife and I arrived in California in 1962 the political climate was much different. California was a “fair and balanced” state. Pat Brown, a Democrat, was governor and the state was moving forward with water and transportation projects. People, by the thousands, were migrating to California to find opportunities for a better life and to enjoy the favorable climate.

When my wife and I arrived in California I took a job with the California Division of Highways (now Caltrans) as a surveyor and highway engineer. During my 10 year tenure with Caltrans I served under Pat Brown and Ronald Reagan and I did well, advancing in my profession and providing for my expanding family.

After 10-years I had had enough of civil service as I became disenchanted with the culture and the desire to begin my own consulting civil engineering and surveying business, which I did along with two partners. Things went well for my partners and me as we grew the business to 100 employees by 1980. Then with the election of Jimmy Carter and his disastrous economic policies and mortgage interest rising to 22% our business began a rapid decline as most of our clients were land developers and home builders. By 1982 we had declined to ten employees and one of my partners had decided to look for other opportunities. I had to look for another form to merge with.

In 1982 I was able to strike a deal with another firm suffering from the same effects of the Carter economy and for the next 22 years I served as a principal and director of our combined forms and by the time I retired we had grown to over 800 employees with offices throughout California and in Arizona, Nevada, and Colorado. I was responsible for developing business in the public and corporate sector due to my experience and knowledge in the transportation sector and my disdain for working in the land development sector of the business. My clients were now federal agencies, state and local governments, utility companies, and large A&E firms such as Bechtel and Parsons Brinkerhoff.

Jerry (Moon-Beam) Brown, Pat Brown’s son was inaugurated as the 34th governor of the State of California on January 6, 1975 and things in California began to go downhill. There is a saying, when talking about the similarities between a father and a son that states “the apple does not fall far from the tree.” In Jerry Brown’s case the apple fell or rolled miles away. Jerry Brown was anti-transportation and pro-government. He cancelled many of the proposed freeway projects and supported something called the Dill’s Act. In 1978, he signed the "Dill’s Act," which gave California public employees the right to collective bargaining. Not only did the Dill’s act allow public employee collective bargaining it laid the foundation for an economic disaster in California, defined public employee pension programs. It also insured the dominance of the Power of the Democrat Party in California.

In normal collective bargaining, say between a private sector union and a group of employers, the union negotiates with the employer on the basis of what will be financially beneficial for both parties. This means that the union knows it cannot ask for more than the employer can afford without going out of business and ending the jobs for the union employees. This was the case in the 70’s when the auto workers kept pushing the American auto makers and the auto makers kept giving into the unions and increasing the prices of their cars. As the prices rose the door opened for foreign auto makers to move in with less expensive and more reliable cars. As the Japanese auto makers began to erode the market for the American car makers they began opening plants in the United States, and these plants were non-union shops. To this day these Japanese (now Korean and German) auto plants remain non-union and their employees have resisted all attempts by the UAW to organize them into the union.

This is not the case with public sector unions. Here the union representative negotiates with the employer in the same manner as the private sector. The one big difference is the employers are the politicians who are supported with union money, money that is coerced from the employees whether they like it or not and then donated to the same politicians that will determine their wages and benefits. It’s a closed loop.

The public service and teachers unions also pose a monopoly on the work they perform. As two examples are the teachers unions and in A&E services. The teachers unions, through their massive political donations to the Democrat Party have been able to stifle school vouchers and the establishment of charter schools where non-union teachers are hired. This has been done to the detriment of our K-12 education system.

Architect and Engineering services are a more egregious abuse of the public service unions. Federal, state, and local governments need A&E services to design and construct buildings, highways, dams, subways and other civil works. As these projects vary in intensity and number it makes no sense to for government to maintain high level of workforce. This is why these agencies will outsource his work to the private sector where they can obtain qualified professionals. State highway departments outsource and average of 50% of these services to the private sector to avoid staffing for peak levels and then maintain these civil servants for twenty-five to thirty years and paying them for doing nothing. This also greatly adds to the liabilities for defined pension programs that are breaking the budgets of state and local governments. (See the Tale of Two Cities)

California's 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."

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.

In the State of California less than 10% of these A&E services are outsourced to the private sector. This is due to the power of the PECG (Professional Engineers in California Government), the public service union representing architects, engineers, surveyors, and mappers. Due to PECG’s money and power Caltrans is over-staffed by at least 30%-40%. The currently have a workforce of about 22,000, a workforce that should be somewhere around 14,000 or less. While this does not sound like a big deal you should consider that these 8,000 employees with be there for 25 to 30 years and then draw a defined pension and health care benefits for the remainder of their lives. Currently one-third of the Caltrans $11 billion dollar budget is devoted to salaries of civil service employees. As for the monies owed for pensions and health care you need to look at CalPERS, California’s combined pension program.

I had a very personal experience with the power of PECG in 1997 when the California Supreme Court upheld a 1990 decision by a Sacramento Superior Court, Eugene T. Gualco. The court found that since the 1986-1987 fiscal year, Caltrans has unlawfully contracted privately for engineering projects that the civil service has traditionally done;  that by hiring more civil service employees, Caltrans could have the work at issue performed in a timely manner, and that Caltrans failed to justify private contracting on a cost-effectiveness or other valid basis.

The trial court also found that Caltrans undertook private contracting as a direct result of “gubernatorial/executive branch policy against the expansion of state government,” which required Caltrans to “balance and temper” its requests for funding for additional staff by contracting with private entities, without regard to whether qualified persons were actually available for civil service employment or whether Caltrans could assimilate and train them in a timely manner. The court found insufficient evidence to support Caltrans's contentions that (1) its increased project workload involved short-term or temporary work that private contractors could perform most economically and efficiently, or (2) private contracting would allow Caltrans to perform its work in a more timely and effective manner than hiring new civil service staff.

Thus, on April 17, 1990, the court issued a permanent injunction prohibiting Caltrans from (1) contracting privately for engineering and inspection services for highway projects unless the work was to be performed in compliance with the then existing criteria set forth in section 14101 and former section 14130 et seq.;  (2) entering into cooperative agreements with local entities when private entities were to perform part or all of the work;  and (3) awarding contracts to private entities for construction survey staking.

As I mentioned above I was developing a book of business with public agencies and in one court decision I had $7 million dollars in contract value wiped off my desk — work I and my firm were well qualified to perform and a lesser cost than the public sector.

This did not sit well with the California voters and in 2000 they approved Proposition 35 by 55.2% to 44.8). Prop 35 amended the California Constitution by eliminating several restrictions that had previously prevented the state government and local governments throughout the state from contracting with private entities for engineering and architectural services. Under the terms of Proposition 35, at any time that a California government agency awards a contract to a private entity, the government agency first has to go through a competitive selection process.

Still, to this day PECG fights any efforts of Caltrans to outsource more than 10% of its work. According to the American Council of Engineering Companies of California, both the bipartisan Legislative Analyst’s Office (LAO) and the State Auditor have previously recommended that the state can make meaningful savings at Caltrans — money that the state could put to better use in actually rebuilding its crumbling infrastructure. The LAO, for example, has concluded that Caltrans is way overstaffed and recommended cutting Caltrans staff by 1,500 positions for a savings of approximately $200 million per year. That proposed reduction would be more than 4.5 times the size of the governor’s proposal.

The ACEC says that Caltrans management itself has also recognized that the department needs to shift more of its engineering work to the private sector in order to better manage project and personnel workload. Management last year asked to be able to contract up to 20% of its workload to the private sector instead of the 10% historically contracted out. Gov. Brown’s proposal will result in Caltrans being able to contract out just 11% of its work, according to the ACEC.

Caltrans today is actually an anomaly, says Paul Meyer, executive director at ACECC. “Nationwide, state departments of transportation use private engineering firms on average for more than 50% of their workload,” he says. DOTs realize, he adds, that with a private firm after a project is satisfactorily finished, the state has no further financial obligations, such as public employee pensions and lifetime health care.

In addition, the LAO and State Auditor have also pointed to systemic inefficiencies in Caltrans’ operations. Until addressed with meaningful reforms, these will continue to hamper the department’s ability to accurately account for project costs and limit its efficient operation, the ACECC says.

Meanwhile, the California Transportation Commission is taking up the challenge of raising public awareness with its first “Needs Report” since 1999. The 191-page report covers roads, highways, bridges, airports, seaports, railways, border crossings, and public transit infrastructure, warning that further decay and a deterioration of these transportation systems “may take many years to recover.” The reality is that, in the aftermath of the “Great Recession,” the public has lost its focus on big picture issues like the transportation system, says the CTC.

“California’s transportation system is the largest and most complex in the nation. Historical investments in freeways, roads, bridges, rail systems, airports, public transit, and other transportation infrastructure have fueled the state’s phenomenal economic growth in recent decades. But times have changed,” the CTC notes.

“Today, California’s transportation system is in jeopardy,” the report continues. “Investments to preserve transportation systems simply have not kept pace with the demands on them, and this underfunding — decade after decade – has led to the decay of one of the state’s greatest assets.”

The State Auditor recently released a lengthy, highly critical report on Caltrans’ spending on project “support” costs, which is primarily spending on Caltrans’ own employees. This spending is important. When “support” spending is too high, that takes money away from actually constructing new projects and creating new jobs.

Here are some findings along with comments:

“Caltrans exceeded their own budgets for project support on 62 percent of their projects. [Editor’s note: This is your gasoline tax money they are wasting]

The legislature's annual arbitrary imposition of a 10% cap on the use of outside consultants actually ends up reducing Caltrans' flexibility. [Note: That may be why Caltrans has hired an excessive number of full-time, long-term employees — and thereby taken on the huge liability of their long-term pension costs. The 49 other state departments of transportation know well how inflexible and expensive the Caltrans model is, and so they regularly use consultants for 50 to 60 per cent of their workload.]

Caltrans' time-reporting system lacks strong internal controls — and consequently no one really knows to what extent Caltrans’ employees are correctly charging their time to projects.

Caltrans also failed — in each of the last three fiscal years — to meet its own goal: a maximum of 32 per cent in the ratio of support costs to total project costs. That is a strong sign that Caltrans is overstaffed. [Note: Last year the Legislative Analyst’s Office (LAO) found that Caltrans was overstaffed by at least 1,500 personnel years (PYs), the equivalent of approximately $300 million/year.]

Another problem with support costs is that Caltrans may be comparing apples to oranges. The State Auditor found that from year-to-year Caltrans fails to use a consistent method to calculate the ratio of support to total costs.

The State Auditor made a series of recommendations to address these findings, including that Caltrans should not hire permanent staff beyond its long-term need for such staff.

The report further states that the Legislature should give Caltrans the leeway to hire consultants to meet its temporary workload increases — a recommendation with which Caltrans to its credit agrees. Now it is up to the California Legislature to act on it.

The report also recommends that the state commission an independent study of the costs and benefits of using consultants. Although Caltrans was not thrilled with that idea, Caltrans does note that “consultants pay for and bring their own tools, equipment and office space to the job — all of which are cost items for the taxpayer to support staff positions. Outside consultants also take care of their own healthcare costs and pension obligations; both “big ticket” items and something the report reminds us are also not included in Caltrans’ staff cost estimates.”

To download a copy of the State Auditor's report, which was released on April 28, click here.

As Joel Kotkin writes in his excellent article in the City Journal:

“California has long been a destination for those seeking a better place to live. For most of its history, the state enacted sensible policies that created one of the wealthiest and most innovative economies in human history. California realized the American dream but better, fostering a huge middle class that, for the most part, owned their homes, sent their kids to public schools, and found meaningful work connected to the state’s amazingly diverse, innovative economy.

Recently, though, the dream has been evaporating. Between 2003 and 2007, California state and local government spending grew 31 percent, even as the state’s population grew just 5 percent. The overall tax burden as a percentage of state income, once middling among the states, has risen to the sixth-highest in the nation, says the Tax Foundation. Since 1990, according to an analysis by California Lutheran University, the state’s share of overall U.S. employment has dropped a remarkable 10 percent. When the state economy has done well, it has usually been the result of asset inflation—first during the dot-com bubble of the late 1990s, and then during the housing boom, which was responsible for nearly half of all jobs created earlier in this decade.


What went so wrong? The answer lies in a change in the nature of progressive politics in California. During the second half of the twentieth century, the state shifted from an older progressivism, which emphasized infrastructure investment and business growth, to a newer version, which views the private sector much the way the Huns viewed a city—as something to be sacked and plundered. The result is two separate California realities: a lucrative one for the wealthy and for government workers, who are largely insulated from economic decline; and a grim one for the private-sector middle and working classes, who are fleeing the state.”

Much of this malaise in California is due to the passage of the Dill’s act and the power of the public service unions.

There are 13 initiatives on the California ballot this year. I do not usually note for these ballot measures as they end up being “not as advertised” and have numerous unintended consequences. However, there is one ballot measure I will surely vote for —Proposition 32. Prop 32 goes as far as the Constitution allows by severing the money tie between special interests and career politicians by:

  • Prohibiting unions and corporations from giving to candidates
  • Prohibiting unions and corporations from deducting money from employee paychecks for political purposes without permission, making all political contributions truly voluntary
  • Prohibiting contractors from contributing to politicians who approve their contracts

The disconnect between the demands of the unions and those of California voters is what backers of Proposition 32 hope to remedy with their proposal to end all union and corporate donations to candidates, and to end automatic union and corporate deductions in paychecks for political contributions.

If this all sounds familiar, it should. Similar California ballot measures have been proposed and have lost in the past. Both Proposition 226 in 1998 and Proposition 75 in 2005 went down to defeat, thanks to unions outspending the proponents 4 to 1 in the case of Proposition 226 and 10 to 1 in the case of Proposition 75.

So what is different this time? For one is the momentum gained from Wisconsin's battle with unions. A similar measure passed in Wisconsin under Gov. Scott Walker, and Wisconsin Republicans who favored the measure survived a recall. The knowledge that this measure may actually pass may inspire supporters to actually cast their votes for Proposition 32.

Also, unlike with prior measures, in addition to paycheck protection, Proposition 32 also prohibits corporations and unions from contributing to candidate campaigns, so this measure is more even-handed. Proposition 32 also prohibits contractors from contributing money to the politicians who will award contracts.

Another difference this time is Gloria Romero, former Democrat state senator and major supporter of Prop. 32. As California's Senate Democratic majority leader from 2001-2009, she saw first-hand the public-sector union corruption in Sacramento. "There is no other way to say it politely," she recently told the Wall Street Journal. "It's owned." Both in office and later as head of the California chapter of Democrats for Education Reform, Romero has fought for education reform in California, including the ability of parents to take their kids out of failing schools, but has butted heads with the CTA (California Teachers Association) and other public-sector unions many times. The CTA "has killed or hijacked nearly every reform bill that has popped up in the legislature," she told the Journal. CTA officials "walk around the capitol "like they're God."

Romero has been featured in a very effective ad supporting Prop. 32, in which she challenges the voter: "if you want to take back California from the special interests, if you want to get big money out of California politics, if you want elected officials to answer to the people again join me in voting yes on Proposition 32." It is almost enough to make non-Californians move to California so they can vote for Prop. 32.

Romero's ad is the only Prop. 32 ad that directly takes on the teachers' unions. Other Prop. 32 ads target the prison guards union and the large corporate campaign donors, and they are all very effective.

This time around, California also has some home-grown momentum. Earlier this summer San Diego and deep-blue San Jose, California passed ballot measures that kept union pensions from swallowing up their city budgets. In the case of San Jose, the results were not even close: 70% voted in favor of limiting union pensions. Suddenly the old union demagoguery didn't work in cities that wanted to keep their same city services along with manageable union pensions, and not raise taxes to pay for it all.

So far, Prop. 32 is still polling even with Californians. But the unions are putting up a fight. While Proposition 32 proponents have raised a meager $5 million, opponents to Prop. 32 have amassed $36 million to use in campaigning the issue, with millions more in union dues to come. That is a lot of money to pay for TV commercials with worried-looking teachers and nurses groveling before Californians, begging the citizenry not to cut their pay.

There is a saying in California: "as California goes, so goes the country." Well, admittedly, that phrase may have itself spread across the country more than actual California policies. But you have to admit that California's 1978 victory with Proposition 13 in 1978 spread some tax-cutting frenzy, culminating in tax cuts that were passed under President Reagan in 1981. It could be that passing Proposition 32 in California could be the next step in regaining control of America's states from out-of-control unions.

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