Aaron Klein's Corner

One Trillion Dollars

I had to blog this quickly.

Ever wondered what $1 trillion dollars looks like?

Wonder no more.

A Note to Clients (The Ones with a Sense of Humor)

A local investment advisor penned the following "note to clients", and I have to assume he limited the distribution list to the ones with a sense of humor.

As the invisible hand of our free market is replaced by the strong and inflexible arm of government, investment strategies must be reevaluated.

I have to apologize to my clients.  Though I have been vigilant in teaching sound principles of asset allocation and the importance of a well diversified portfolio, I completely failed to include in my portfolios the element of irresponsibility.  By not instructing you to buy a house you could not possibly afford I caused you to miss out on perhaps the most profitable investment of the last 6 years, a government bailout.  My sincerest apologies, I hope this oversight is not sufficient to lose your trust as I watch over your investments.  Please know that for the future I have adopted a policy of having at least a small portion of every portfolio I manage in the most irresponsible investment available; this hedge will ensure your position to take advantage of future government handouts and bailouts.

Steve Poizner Rocks the House in Sacramento

I wasn't there, but I'm told by numerous friends that California Insurance Commissioner and 2010 Gubernatorial Candidate Steve Poizner gave a rollicking speech tonight in Sacramento.

"The state budget today is more than 40 percent higher than it was just five years ago.  Over these same five years, the state has added more than 56,000 employees to the government payroll.  Yet even with the economy in trouble, some politicians seem more intent on protecting those government jobs rather than saving the private-sector jobs that just keep vanishing."

» Read the Entire Speech

Priceless

For any of you who are as thrilled as I am with spending $2 trillion dollars of our kids' money to try and buy our way to prosperity...

White House Press Secretary Robert Gibbs this morning offered to buy him a cup of coffee and try to explain the President's plan...but he said he'd only buy decaf. :)

California Legislature Punts Again

Well, the Republicans and Democrats in the California State Legislature have punted again. The day of reckoning for California's unending hunger for more spending is pushed off to the future — which means, when it comes, it will be all the more painful when it arrives.

Let's review...

• We passed $14 billion in new taxes that won't actually generate $14 billion in revenue. Why? Just look back to the 1990s when this happened under Governor Wilson. They raised income taxes by $5 billion, and the amount of revenue that actually came in went down by $1 billion. A $6 billion hole!
  
  So I predict right now: we will be right back in this situation in 6 to 9 months, dealing with the possibility of huge spending cuts, or even more job-killing tax increases.
  
  
• Spending has grown by 40%+ in the last four years. Sit back for a second and think about that. Is that a sustainable practice?
  
  
• For all of the pain of these tax increases, which will hurt California families and drive jobs and growth out of our state, we still didn't close the structural deficit. We borrow $11.4 billion dollars to fund overspending for the next 18 months.
  
  
• And the most ridiculous thing of all is that these tax increases will hurt the most vulnerable and needy in our state. This may be the most regressive tax increase in the history of California...one family I know calculates $3,000 in new taxes. My numbers show that I'll pay $985 more, and $1,200 more once my daughter arrives. (That's right -- your federal taxes DROP when you have a kid, but this new tax increase HIKES your taxes the more kids you have.)

Now, I'll try and put my optimistic hat on. If there are a few bright rays of sunshine in this budget deal, here they are:

• I applaud the Governor and legislative leaders for understanding that community colleges are one of the few areas of government spending that can actually have a positive impact on economic growth, by equipping people to create and fill new jobs, start businesses, and fuel an economic recovery. Other than the long-term effects of delaying the day of reckoning, this budget made community college education a priority.

• We may get a real spending cap that stops the out-of-control politicians from spending like drunken sailors in the good times, and raising our taxes and depressing economic growth in the bad times. If that actually passes (hard to say, and perhaps even a long shot), it may actually put California's budget on a sustainable track for the first time in a very long time.

How specifically will this budget affect Sierra College, and what is our outlook for the next fiscal year? I'll tackle that in another post in the next few days.

Continued absurdities from the Sacramento Bee

The Sacramento Bee has refused to endorse me in both of my races. I've won both times. In this last election, they used the editorial page to pointedly attack me and call for my ouster. Instead, I won by seven points district-wide, and in one of their highest readership areas (Sun City Roseville), I won by a whopping twenty points.

Let's hope the same thing happens with this latest barrage from the Bee. Have you ever heard of a newspaper sending an "action alert" asking citizens to call a legislator and demand that he vote for higher taxes and a budget deficit? And only in the SacBee's world can they justify this deficit-ridden deal as "heroic"!

Frankly, I'm thankful that my senator has the good sense to hold out for a better deal that can make California competitive again. Dave has always been a strong supporter of community colleges, and I trust him to do the right thing. The Sacramento Bee should go back to reporting the news.

The State Budget Deal and Community Colleges

Our state budget saga continues this morning, with legislators locked into the Assembly and Senate chambers for votes. While this budget deal may still pass, it doesn't seem like we're actually going to achieve the fundamental reforms that California needs to be competitive, to create jobs, and to build an economic recovery.

I don't care whether you're a conservative or liberal, but most people believe that government has to live within its means. Years of double-digit spending increases that weren't backed up by corresponding increases in revenue have come home to roost. Deficits are not a sustainable practice. (This is one of the truths we decided to make as policy at Sierra College, and four years later, the results are clear: we have a structurally balanced budget, and 10.5% reserves as a "lifeboat" to protect the stability of our institution.)

Now, some of my more liberal friends think the solution is simple: just raise taxes so we have enough revenue to keep the spending going. The problem, of course, is that we already have the highest tax burden of any state in the union (highest income taxes, highest sales taxes, and average property taxes), and more importantly, especially in this economy, raising tax rates can actually reduce revenue, rather than raise it.

On the other hand, if our state government was to live within its means, and target its spending to making California competitive, equipping people to create and fill jobs, and driving the generation of sustainable and long-term economic growth, this would actually increase revenue to state government, without an increase in tax rates.

The budget deal on the table is $14 billion in new taxes, $15 billion in spending cuts and $10 billion $11.4 billion in borrowing. Will this deal accomplish those goals and get California growing again?

Here are three questions to ask:

1. Do you honestly believe that raising taxes by $14 billion will bring in $14 billion in new revenue? If so, why is this tax increase any different from all the other tax increases passed in this state in the past, which failed to generate more than a fraction of the revenues they promised? Do you just not believe the economic law that taxes provide a disincentive to economic activity? And how do you justify massive tax increases that will throw people out of work and further depress the economy when we're getting close to 10% unemployment?

2. Do you honestly believe that a "state spending cap" ballot initiative as proposed will actually pass, given that voters would be voting to extend these tax increases for an additional three years by saying yes? Has there ever been a time when people voted for $42 billion in additional taxes in the past? And given that every interest group on the right and left will be opposed for their own reasons, why do you think this will work?

3. $10 billion $11.4 billion of this year's budget deficit will be paid for by borrowing. In the next budget cycle, you therefore start with a $10 billion $11.4 billion structural deficit, which will be compounded by #1 and likely be $15 to $18 billion $16 to $19 billion. What is your plan then, and how can you call this a balanced budget, since it doesn't close the structural deficit?

Bottom line: if this deal won't actually bring in the revenues it promises, borrows money to balance the budget, and does nothing to right-size our spending to get it in line with our revenues, why is this a good budget deal? How will this make California competitive again?

Part of me is conflicted because this is a relatively "good" budget deal when it comes to funding for community colleges. The CCLC, our statewide advocacy organization, is actively pushing this deal. And I firmly believe that community college education is going to be one of the key drivers of the economic recovery by equipping people to start new businesses, create new jobs, and fill those jobs with a qualified workforce.

But I have to say: any budget deal that fails to fundamentally reform California government, right-size spending in line with revenues, and give us a stable environment for creating jobs and opportunity in our state, is a budget that ultimately will do great damage to the incredible value that community college education delivers in driving economic recovery.

The state is going to have to do fewer things, and learn to live within its means. That's going to be painful. At the community college level, one example might be losing state funding for things like non-credit and life enrichment courses, and instead, charging those students self-supporting fees for those kinds of classes.

Above all else, I'm convinced that community colleges will have to shrink our mission to the core aspects of preparing students to thrive in any four-year university in the world, and equipping people with the skills they need to create and fill jobs. These are the parts of our mission that give people the skills and ability to create economic growth -- and these are the parts of community colleges that are critical to our state's competitiveness in the future.

I can't really predict whether or not this budget deal will pass. But I can say this: either way, the underlying crisis is far from over. The Governor and legislative leaders need to sit down and negotiate true reforms so that government starts living within its means, and invests in making California competitive, creating jobs and building a golden state yet again.

Correction 11:18PM: The borrowing is $11.4 billion, not $10 billion. "A billion here, a billion there, pretty soon you're talking real money."  -Senator Everett Dirksen

Weintraub on the State Budget Crisis

A remarkably good article about the state budget crisis from Daniel Weintraub at the Bee. If this doesn't convince you that raising taxes won't solve anything in Sacramento...

California Budget 101: What went wrong, when

By Daniel Weintraub

When Gov. Arnold Schwarzenegger signed the state budget last summer, he all but declared "mission accomplished" in his administration's biggest battle. The spending plan not only eliminated the state's perpetual deficit, he said, it also boasted a record $4 billion reserve. The state was fully funding education and public safety and repaying debt earlier than required, all without raising taxes.

"I applaud the Republicans for pushing us to take the operating deficit down to zero this year," Schwarzenegger said as he signed the document after a seven-week stalemate. "And I applaud the Democrats for being willing to compromise while sticking to their principles to get the budget done. It was a difficult process, but in the end, this is a good budget for California."

Even as Schwarzenegger spoke, however, trouble was looming. The tax projections on which the spending plan was based already were proving to be overly optimistic. And spending, especially in the state prison system, was heading higher than expected, thanks mainly to court-ordered payments for inmate medical care.

Now, nine months later, the governor is back in the fiscal swamp. His reserve has been wiped out, and projections for the end of the current year and the next fiscal year combined showed a potential shortfall of $17 billion if Schwarzenegger and the Legislature were to do nothing more to avert it.

This month, as the governor released a revised spending proposal, readers reported to me that they did not understand how the state got itself into this predicament. As citizens, they said, they can't be expected to assess the relative wisdom of budget cuts, tax hikes, gimmicks or borrowing without a fuller explanation of the dimensions of the problem those remedies are meant to solve. This column begins to answer that question in a very abbreviated and simplified form.

So, what went wrong?

The latest trouble is partly the result of the sluggish economy. Employment growth flattened. Corporate profits sagged. The crash in the housing market slowed consumer spending. Tax revenues that last summer had been expected to total more than $102 billion now figure to come in under $98 billion for the year.

Spending is up, too, though. The forecast for the current year was about $102 billion. The latest figures now put the cost of the state's commitments at more than $104 billion.

But the economic issues only worsened a basic, structural problem in the state budget: Spending is programmed by law to grow each year at a rate that is generally faster than tax revenues can match. Current state law would push general fund spending to $113 billion next year if nothing is done to slow it, according to the Schwarzenegger administration. Revenues, meanwhile, are projected to decline further, to about $95 billion. The budget Schwarzenegger celebrated last summer would have bridged the gap for one year at best.

Since Schwarzenegger has been governor, the state's revenues have grown by 25 percent. But spending has grown even faster – far faster than population growth and inflation combined. The spending increase totals about $26 billion, starting from a base of $77 billion.

Where did all that money go? Most of it went to education, health and welfare programs, and prisons, with a good-sized chunk for transportation.

The state today reports spending $13 billion more on kindergarten through 12th grade education than it did the year before Schwarzenegger took office, an increase of nearly 50 percent. That number overstates the growth in education spending because of accounting changes and the changing relationship between state and local finances. A better way to measure it is to look at state and local tax dollars combined for schools. But even by that yardstick, spending per pupil has still increased by 29 percent, from $6,624 per student to $8,564.

Health and welfare programs have grown at the same rate, 29 percent, or $6.6 billion since 2002-03. The biggest cost driver there has been health care for the poor, which took about half the gain. The other half of the growth was split mainly among services for people with mental illness, help for the developmentally disabled and assistance to the elderly and the disabled in their homes.

Prison costs also have escalated rapidly, gobbling up about $4 billion of the overall increase. Their rate of growth – 74 percent – has been by far the fastest among the state's major programs. Thanks to tough sentencing measures and a parole system that sees 70 percent of ex-cons going back to prison within three years of their release, the number of inmates behind bars has grown from about 160,000 to 169,000 on Schwarzenegger's watch. Correctional officers also got a 37 percent pay raise spread over five years that began just before Schwarzenegger took office. And the courts have ordered hundreds of millions of dollars in new costs for inmate health care.

The state is also spending a lot more on transportation, mainly building roads, bridges and public transit systems. Most of that increase – about $1.3 billion – is money from sales tax collections that the voters redirected to transportation programs when they passed Proposition 42 in 2002. Spending on higher education has grown in step with population and inflation, about 25 percent, or $2.3 billion.

So if you want to roll back spending, those are the places that have to be cut. If you want to slow the growth in government, then education, health and welfare, and prisons are the places to look for the big bucks. And if you are asked to consider raising taxes, those are the programs that are going to benefit most from the increased revenues.

That's a bare-bones explanation. But I hope it helps.

» Read the Article on SacBee.com

2 out of 3 voters will vote absentee

One of my favorite election traditions is to go to the polls with my wife on election morning. We always go to Starbucks for a coffee, then head down to Colfax City Hall, greet the friendly volunteers, and walk out with our "I Voted" stickers.

Somebody just shared with me the projection that 67% of Placer County voters will cast absentee ballots in the election on June 3. Wow! I'm hoping that my preferred method of voting is not going the way of the dinosaur. Frankly, I like that it takes some effort to vote -- it makes for better citizenship.

But in any case, I'm actually at a conference in San Jose that week, so I officially contributed to that statistic by dropping off my ballot at the Elections Department today. Oh, well. :)

Don't forget to vote!

Changing our thinking about taxes

In the debate over taxes (and you can put me firmly in the "lower is better" category), we sometimes get so caught up with the question of "yes or no" on a potential tax increase that we ignore the bigger picture of the incredible amount of taxes that we already pay.

Think about the ways we "ignore" that:

• We have debates over passing a tax increase that "will only cost the equivalent of a cup of coffee every day" without remembering that many of us already pay enough taxes every year to buy a small coffee shop.



• When we get to April 15, and we get a refund back from the IRS, we literally say to ourselves, "hooray! I didn't have to pay taxes this year!" Yeah, right.



• Conversely, we get upset when April 15 comes and we owe more in taxes. In all actuality, we should be happy about one thing — we didn't give the government a 15 month interest free loan!

We all know that $1 in the hands of government will always produce less benefit to our economy than that same $1 left in the hands of its original owner — the taxpayer. But we also know that we need a government to protect our rights to life, liberty and the pursuit of happiness, and that means paying taxes!

So really, the most important thing that every taxpayer can do is get a stronger understanding of HOW our government spends money. Start at the local level — dig out your property tax statement, and look at the special assessments. Find that last "report to the taxpayers" from your county government, and look at the breakdown in spending.

And then, use that knowledge to shape which taxes and spending you support, and which taxes and spending you oppose, to keep up the pressure on our local governments to spend your money in the ways that protect our life, liberty and the pursuit of happiness.

As a Sierra College Trustee, one of my most important jobs is to make sure that the budgets we pass and the policies we set deliver the highest possible quality education, to the greatest number of students, at the lowest possible cost.

I think education is a critical part of protecting our freedoms in this country — it takes an educated populace to make the right decisions about our future. A friend of mine recently sent me this quote from Thomas Jefferson, in a letter he wrote in 1786.

"I think by far the most important bill in our whole code, is that for the diffusion of knowledge among the people. No other sure foundation can be devised for the preservation of freedom and happiness... The tax which will be paid for this purpose is not more than the thousandth part of what will be paid to kings, priests and nobles who will rise up among us if we leave the people in ignorance." (Thomas Jefferson to George Wythe, 1786. ME 5:396)

Well said.

UPDATE 4/21 5:00PM: This post was linked to by Red County Placer, and a commenter was a bit confused by a paragraph of this post. I thought I'd post my response here as well.

Perhaps I can make my point in another way that makes it more clear. An hour of my time spent taking my car in for an oil change produces much less benefit to me than spending that hour in productive work. It also does zero to increase the value of my car. Yet I do it anyway, because otherwise, I will quickly lose the ability to drive my car!

In the same way, $1 in the hands of government will always produce less benefit to our economy than that same $1 in the hands of the original owner -- the taxpayer. Yet that doesn't mean that we don't need government -- and the quote from Thomas Jefferson in my complete post illustrates how I feel about education being a critical part of our local government.

The overarching point of my post is that we all need to be thoughtful when considering taxes and spending by our government. We need to look at how each of our local governments, and our state and federal governments, spend the money we've already entrusted to them, and weigh that against their requests for more.

If we look at that through the lens of the Declaration of Independence -- which I think we can all agree is incredibly valuable as the intellectual basis on which the American experiment was founded -- I think we can make wiser decisions about which taxes and spending we're willing to support, and which ones deserve our opposition.

And that's the kind of educated populace that Thomas Jefferson envisioned would hold back the "kings, priests and nobles".