Kersten Communications

Published on California Progress Report (http://www.californiaprogressreport.com/site)

Created 08/18/2010 – 12:42pm

By David Kersten

California’s 32-year failed experiment with minority rule has proven the principal of majority rule is essential to the efficient and effective functioning of the California State Legislature.  

Majority rule is a fundamental principal embodied by the United States Constitution, but something that has been hijacked by the initiative process in California to provide for the tyranny by 1/3 of the population to the detriment of a majority of Californians.

Research undertaken by Kersten Communications has found that in left-leaning academic circles, there is a consensus that Prop. 13’s 2/3 vote requirement needs to be replaced with a majority vote or 55% vote.   Political scientists on the right, on the other hand, support the 2/3 vote requirement because it restrains the size of government.  (Note: right-leaning academics were contacted for this analysis but chose not to comment).   

In California, we allow representatives for 1/3 of the population to thwart the will of the remaining 2/3 of the population on two essential government functions—the passage of a state budget and any tax measure which increases taxes on a single taxpayer.  This principal of minority rule was enshrined in the California Constitution when a majority of voters passed Proposition 13 in 1978.       

Majority rule was utilized by the framers of the United State Consitution to ensure that the wants of the median voter are represented in government, but the reverse is true in California where 1/3 of the population controls the wishes of the other 2/3 of the population on the two most important government functions—the budget and taxes. 

“Right now you can change the rules of the game as Proposition 13 did, with only 50% plus one person.  Most political scientist say if you are going to change the rules of the game that should be hard, you should not make that too easy because that is going to mess things up often,” said Henry E. Brady, professor of public policy and Dean of the Goldman School of Public Policy at the University of California at Berkeley a budget forum hosted by the university last year.

“Most political scientists, including all that I know, say this is just backwards.  We got it backwards,” Brady said.

“The right 45% loves the 2/3 vote requirement because, they believe, it reduces the size of government,” said Roger Noll, professor of economics emeritus at Stanford University.

“You are correct to note that there is a consensus among academics that the 2/3 rule is “backwards,” while conservatives (including conservative academics) oppose this change because it might lead to bigger government,” said Thad Kousser, an associate professor of political science who is spending the 2009-10 year at Stanford University working on California constitutional reform. 

“But I think it is important to note that us lefties don’t support shifting to a majority rule on the budget because it will lead to bigger government—in fact, most of us doubt that it will lead to much higher spending.  I think the major justification is that it allows budget deals to happen more quickly, and for the final deal to represent what the median voter wants.  It’s about representation and the lack of gridlock, rather than a preference for larger government,” Kousser said. 

Bruce Cain, Heller Professor of Political Science at the University of California Berkeley, said a consensus of conservative political scientists would likely “agree in principle that a majority vote is best but do not trust the legislature, and so are reluctant in this instance to favor the majority vote.”

“If we went to a simple majority to raise taxes in all likelihood the Democrats would raise taxes to solve California’s budget problems.  They would over reach.  They would get thrown out of office and the Republicans would have their best chance of gaining a majority in the Legislature,” said University of California Berkeley professor of public policy John Ellwood.  

“Now the Democrats can propose anything because they know that with the Republican veto nothing will pass.  And the Republicans know that they can get away with simply saying no,” Ellwood said, adding that “nothing gets done either way” and we are just stuck with gridlock. 

“The problem is, I’m not sure the voters want it,” Ellwood said, noting that Proposition 56, which proposed a 55% vote for a budget and taxes was handily defeated in the early 2000s. 

Given that the state is in the midst of yet another prolonged budget stalemate, the debate about the 2/3 vote requirement has flared up again as a way to reduce future budget gridlock.  The existence of Proposition 25 on the November ballot, which would lower the legislative vote requirement to pass a state budget from 2/3 to a simple majority, but retain the state’s 2/3 vote requirement for increase taxes, has thrown additional fuel on the fire. 

A minority of Californians will always support the 2/3 vote requirement because it provides them with overrepresentation of their desires when it comes to state spending and taxes.  This does not mean that they are justified in their beliefs–they have simply been spoiled over the last 32 years by being overrepresented by Prop. 13’s 2/3 legislative vote requirement. 

The time has come for the majority of Californians to reassert their desire for adequate political representation, uphold valid principals of majority rule, and pass Prop. 25 on the November ballot.

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This article was written by David Kersten, president of Kersten Communications—a Sacramento-based public policy research firm.  Kersten is an expert in tax, budget, and fiscal issues. 

Kersten Communications (KC) has completed a brief report, titled “Two Schools of Academic Thought Emerge on How to Break Budget Gridlock in Sacramento,” which examines the opinions of experts at the state’s premier universities on how to break out of the budget gridlock in Sacramento.  To view the report click here.   

Another KC report, titled “Statewide Protests Target Chase Bank and Wall Street Firms, Summary Report Released with Research Support from Kersten Communications,” which summarizes why a group of community activists and labor and education leaders staged a series of protests on August 10 to call attention to a $17 billion bill itemizing the ways Wall Street banks are shortchanging California residents and state and local governments.  To view the report click here.  

A third report, titled “State General Fund Spending Has Dropped by $20 Billion Since 2006-07, Major Decreases for Every Major Program Area,” provides new KC analysis of Department of Finance data which illustrates how the three state budgets passed since 2007-08 have significantly ratcheted down state spending on major state programs such as education, higher education, and health and human services, despite the increasing needs of a growing state population.  To view the report click here.     

KC Fiscal Focus is periodic electronic newsletter that focuses on California State public policy issues from a fiscal perspective.  KC is a Sacramento-based consulting firm which specializes in public policy research and analysis.  To sign-up for KC Fiscal Focus click here.

Finally, we welcome your feedback on this newsletter and our other publications.  To submit your comments click here.

With the state and local governments facing large budget deficits, a group of community activists and labor and education leaders staged a series of protests on August 10 to deliver a giant $17 billion bill itemizing the ways Wall Street banks are shortchanging California residents and state and local governments. 

The organizers released a report titled, “Wake Up Wall Street: While Californians Must Choose Between Education and Public Services…Wall Street Banks Owe California Billions,” which itemizes the $17 billion owed to California.  The protests, which occurred in Sacramento, Alameda, San Francisco, Santa Clara, Los Angeles, and Fresno counties, were organized by the Service Employees International Union (SEIU) and the Alliance of Californians for Community Empowerment (ACCE).  SEIU and ACCE also authored the report referenced above. 

Kersten Communications provided research support for the report which details how banks and other Wall Street private equity firms have bought major properties in California in recent years, but are not paying the correct amount of property taxes. 

According to a San Francisco Chronicle report, during an August 10 protest at JP Morgan Chase’s offices at 560 Mission Street in San Francisco, protestors demanded to speak with a Chase representative but Chase declined to send a representative to meet with the crowd of approximately 35, whose grievances included unpaid property taxes, the costs to counties associated with blighted residential foreclosures, a decline in small business loans, and lost retirement savings due to reckless investments by financial institutions. 

 “We came here today to get Chase to pay their fair share in taxes…They foreclosed our homes and got government money and put it in their own pockets,” said Dorothy Hicks, a retired nurse from Oakland and member of ACCE, who spoke through a bullhorn outside the downtown San Francisco high-rise, according to the San Francisco Chronicle report. 

“We have all played by the rules…It’s time for banks to do the same,” said demonstrator Veronica Rodriguez out of a bullhorn at an August 10 demonstration in front of a Watsonville Chase bank, according to a report by the Santa Cruz Sentinel.  

Specifically, “under Proposition 13, properties in California should be reassessed at fair market value upon a change in ownership, but loopholes has led to banks skipping out on an estimated hundreds of millions of dollars in property tax revenues,” according to research by Kersten Communications. 

JP Morgan Chase merged with Washington Mutual Bank (WaMu) in 2008 in a deal reportedly worth $1.9 billion, but two years later many WaMu banks and other WaMu assets have still not been reassessed at current property values.  Wells Fargo and Company purchased Wachovia Corp. in 2008 for a reported $15.1 billion in an all stock deal, but many of Wachovia’s California assets have not been reassessed to date.

In a small sampling of properties in just 11 of California’s 58 counties, research provided by Kersten Communications shows that Chase owes an estimated $15.3 million in back taxes to state and local governments.  Statewide, Chase is estimated to owe tens of millions of dollars in back taxes, according to estimates prepared by Kersten Communications. 

A sampling of specific properties owned by Wall Street private equity firms and other corporations are estimated to owe $34.8 million in back taxes.  “These numbers represent just the tip of the iceberg.”  Estimates provided by Kersten Communications show that banks, Wall Street firms and other corporations are conservatively estimated to owe California $51.6 million in just 11 counties for a small sampling of properties.  Statewide, Kersten Communications estimates that banks and corporations currently owe hundreds of millions of dollars in additional property taxes. 

The report also urges banks to “step up to fix the foreclosure crisis” and estimates that the foreclosure crisis has cost California state and local governments $13.9 billion.  “Banks must agree to real and effective loan modification that includes reducing principal; and pay for blight and safety hazards that foreclosures unleash on our neighborhoods.”     

“Big banks like Goldman Sachs, JP Morgan Chase and Bank of America continue to bill taxpayers for millions a year on risky derivatives called “interest rate swap deals,” according to the report.  Since September 2008 banks have profited $1 billion through these deals that have locked local governments in at high interest rates. 

“Before the crisis hit, big banks peddled toxic swap deals to states and cities on the promise that they would be protected against interest rate spikes.  But now that interest rates are near zero, banks are refusing to renegotiate or cancel these deals,” the report states.    The U.S. Department of Justice and Attorney General in California, Florida, and Connecticut are all investigating potentially illegal behavior by the banks in connection with these deals. 

Cities such as Los Angeles, Oakland, and Frenso have filed lawsuits against the banks over interest rate swaps and other municipal derivatives and bank of America has admitted to a criminal violation of antitrust laws.

The report also blames Wall Street’s reckless behavior for devastating Californian’s retirement security.  “Big banks gambled with and lost the retirement savings of hard-working Californians like nurses, college professors, firefighters, and child protection workers.”  Between October 2007 and December 2008, the top 1,000 U.S. pension funds lost $1.75 trillion, nearly are quarter of their value. 

“The losses were no accident,  In several cases, pension funds like the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) have uncovered deceptive and dishonest practices on the part of banks.  CalPERS and CalSTRS have filed class action lawsuits against banks like Bank of America and State Street Corp. to protect retirement security for more than two million Californians,” states the report. 

The report also urges banks to restore small business loans which have been significantly cut back since the financial crisis began in 2008. 

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Protesters gather outside Chase bank in Watsonville in an SEIU-sponsored demonstration against the bank’s loan policies Tuesday. (Dan Coyro/Sentinel)

WATSONVILLE – Frustration with the banking industry became so great for a group of Central Coast residents Tuesday they paraded into a Chase bank and demanded payback for the financial havoc wreaked by the nation’s foreclosure crisis.

“We had a conversation with the branch manager, and he decided he didn’t want to talk to us. And he threw us out,” reported activist Erik Larsen. “(But) we’ll be back.”

Larsen was met outside by some 50 cheering people, part of an event staged in several California cities this week to highlight the alleged indiscretions of banks. Though it’s been two years since a taxpayer bailout helped rescue the industry from overly risky behavior, organizers of Tuesday’s event sought to show that bank actions are continuing to burden average American households.

A report by the Alliance of Californians for Community Empowerment, released in tandem with this week’s rallies, suggests that the financial industry is shorting taxpayers billions of dollars.

Among the group’s claims is that banks that changed hands during the bailout have not paid their updated property tax bill. No bank, according to the group, has settled up for the foreclosure toll they put on local governments for such expenses as additional neighborhood maintenance and public safety.

“We have all played by the rules,” said demonstrator Veronica Rodriquez out of a bullhorn at Tuesday’s demonstration. “It’s time for banks to do the same.”

Statewide, the cost of foreclosures on local government is $13.9 billion, according to the new report. In Santa Cruz County, banks and equity firms, including Watsonville’s Chase Bank, should have paid $734,943 more in property taxes, had their recently acquired properties been reassessed and their tax bills updated.

The Main Street Chase Bank branch manager declined an interview Tuesday, and officials at the company’s corporate office did not return phone calls.

Chase has acquired several properties owned by Washington Mutual Bank. The properties may not have been reassessed since the purchase, according to the Santa Cruz County Assessor’s Office, but county officials say reassessments of corporate property can take years and are done only with the consent of the state Board of Equalization. The companies, however, will have to pay any back taxes they owe once new property is reassessed, according to the Assessor’s Office.

Teresa Garbini was among Tuesday’s demonstrators. The Aptos resident recently had her hours cut at work and has been unable to make her home mortgage payments. The bank is scheduled to foreclose on her property at the end of the month, she says.

“I’ve been trying to get a loan modification with Wells Fargo Bank… but I’ve been denied,” she said. “How can a bank that was saved from bankruptcy by us, the taxpayers, be so insensitive to people’s needs?”

Police monitored Tuesday’s demonstration, which kicked off around noon, but the event remained peaceful.

Robert Selna, Chronicle Staff Writer

Wednesday, August 11, 2010

Community and labor organizations demanded Tuesday that banks and private equity firms pay California counties millions in overdue real estate taxes related to corporate acquisitions stemming from the economic crisis.

During a protest Tuesday afternoon at JPMorgan Chase’s offices at 560 Mission St. in San Francisco, members of the Alliance of Californians for Community Empowerment, the Service Employees International Union, and other groups demanded to speak with a Chase representative.

Chase declined to send a representative to meet with the crowd of approximately 35, whose grievances included the unpaid taxes and other issues, including the costs to counties associated with blighted residential foreclosures, a decline in small business loans, and lost retirement savings due to reckless investments by financial institutions.

“We came here today to get Chase to pay their fair share in taxes,” said Dorothy Hicks, an Oakland resident and member of the Alliance of Californians for Community Empowerment. “They foreclosed our homes and got government money and put it in their own pockets.”

Hicks, a retired nurse from Oakland, spoke through a bullhorn outside the downtown high-rise. Earlier, the building’s management called the San Francisco police to ask the protesters to vacate the building’s elevator bank area. The group reluctantly complied after police officers explained that they might be cited for trespassing.

Allegations that banks have failed to pay real estate taxes while simultaneously receiving government bailouts are not isolated. In April, San Francisco Assessor-Recorder Phil Ting announced that his office would open an investigation with the goal of forcing banks to pay taxes from multibillion-dollar mergers. At the time, Ting estimated that the city was owed $1 million in real estate taxes.

Financial crisis

The backdrop for the claims is the financial crisis, which hit a tipping point in autumn 2008.

In late 2008 and early 2009, some of the nation’s largest banks acquired failing institutions. Under state law, real estate owned by a company that is acquired is subject to transfer tax and property reassessment because the property is considered to have undergone an ownership change.

Transactions cited by Ting were JP Morgan Chase’s acquisition of Washington Mutual, Bank of America’s appropriation of Merrill Lynch, and Wells Fargo & Co.’s acquisition of Wachovia.

In response to Ting’s announcement in April, JPMorgan Chase spokesman Gary Kishner said the bank had submitted the proper paperwork to the state of California documenting ownership changes and would be filing the changes with counties and paying transfer taxes.

On Tuesday, Ting said that his office’s inquiry remained active and that he might announce results in the coming weeks. Ting noted that notifying the state of ownership changes is not sufficient and that each county must be alerted. He said his office has been working with the banks in question for the past several months to straighten out discrepancies.

County assessments

Also on Tuesday, Kishner maintained that Chase pays its county assessments. He did not have an immediate answer about whether Chase was current on its payments in San Francisco.

The California Tax Reform Association recently compiled property assessment data from 11 of California’s 58 counties and estimated that private equity firms and banks owe approximately $50 million in back taxes. That figure does not include transfer taxes.

The tab owed San Francisco, according to the association, is about $11.8 million. Ting said he planned to contact the association about the disparity between that figure and the city’s research. He said that some tax payments may not have been captured by the association because they were still moving through the administrative process.

Any underpayment should be accounted for, according to Paul McIntosh, executive director of the California State Association of Counties.

“Every dollar that is owed in taxes to California counties is important right now, so delinquency by these financial institutions is a significant issue,” McIntosh said.

E-mail Robert Selna at rselna@sfchronicle.com.

http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/08/11/BUN71ES0A8.DTL

This article appeared on page D – 1 of the San Francisco Chronicle

DEMONSTRATION: State is owed $19 billion for their actions, officials say.

With the state facing a $19 billion budget shortfall, community activists and labor and education leaders will gather today outside a major bank in downtown Los Angeles to deliver a giant $17 billion bill itemizing the ways Wall Street banks are allegedly “cheating California residents.”

California homeowners are paying a growing share of state’s property taxes, while corporations’ property tax bills have shrunk, according to a report issued Thursday by advocates of raising commercial property taxes.

In 1978, voters approved the landmark Proposition 13, which capped property taxes, for businesses and residents alike, and said land values would only be reassessed when property changed hands.

Assemblyman Tom Ammiano, a San Francisco Democrat who is carrying legislation to beef up property tax collections on businesses, said California companies today engage in a game of “three-card Monte” to skirt reassessment.

“The big boys and girls are laughing at us,” Ammiano said.

In Los Angeles, residential property accounted for 53% of the property taxes paid in 1975. In 2009, that figure had mushroomed to 69%, according to the report.

Lenny Goldberg, executive director of the California Tax Reform Assn., which wrote the study, said a broken property tax system has allowed companies like Chase, which purchased Washington Mutual in 2008, to avoid paying higher property taxes on all the bank branches’ land.

“We’re leaving tens of millions, if not hundreds of millions, on the table,” Goldberg said, as the state faces an estimated $18.6-billion budget deficit.

Ammiano’s AB 2492 will be heard in committee next week. Read the hefty 124-page report here.

– Shane Goldmacher in Sacramento

By Phil Marshall, Published May 10, 2010

Democratic Assemblyman Tom Ammiano of San Francisco will introduce a bill into the California Legislature today that could close tax loopholes in Proposition 13. Some believe industrial and commercial property owners are using the loopholes to avoid paying their fair share of taxes. Others, however, believe the problem is overstated and that the bill will only hurt the state’s economy.

AB 2492 seeks to redefine the codes that determine how property is assessed and taxed. Currently, under California tax codes property value is reassessed every time there is a change in ownership. When a home or business changes ownership a new tax rate is established based on what the existing market value is. However, a report released last week by the California Tax Reform Association found instances, statewide, of companies that are paying the rates of the former property owner.

The report stated, “We have found major changes of ownership in major properties which have gone without reassessment. The ones we examined are predominantly those of private equity buyouts, corporate purchases of companies and bank mergers which have avoided reassessment.”

According to the report, at least five Long’s Drug properties have not been reassessed since the 2008 buyout by CVS. One store in Oakland is paying a property tax rate based on its 1975 assessment.

There are other examples. When Shell Oil merged with Pennzoil in 2002 it acquired daughter company Jiffy Lube, but the report found that many Jiffy Lube properties have not been reassessed since the 1980s. One Contra Costa County station is still listed as last changing hands in 1995.

According to California Tax Reform Association, the tax codes have contributed to the larger effects of Proposition 13 and moved the bulk of taxes away from commercial and industrial property owners onto residential property owners. The 1978 proposition set a baseline amount on property, and restricted taxes to an increase of no more than 2 percent annually regardless of what the surrounding real estate value was. Originally the idea was born out of a desire to keep long-term home owners from getting priced out of their homes. But many believe the lasting effect was that large firms benefited because they had a slower turnover rate than homeowners.

To that, the California Tax Reform Association report found that Alameda County’s residential taxes increased from 55 percent in 1973 to 74 percent in 2009. Likewise, Contra Costa County’s residential tax burden has increased from 48 percent in 1970 to 74 percent in 2009.

The new bill aims to reform the current codes so that there are better definitions of ownership. For instance, when a corporation, partnership, or other legal entity obtains control of more than 50 percent of the voting stock, the purchase or transfer of that stock would constitute a change of ownership. In addition, the bill would require the State Board of Equalization to notify assessors of when a change in ownership has occurred.

Lenny Goldberg of the California Tax Reform Association said that reformers are only going after the most egregious cases. He said Ammiano was forced to amend his bill to make it more palatable to legislators. “This is going to be part of an organizing effort that will take place over the next two years,” said Goldberg. It’s his association’s hope that the report will attract more people who are interested in researching these issues and will join the cause.

However, opponents argue that the bill would merely increase the cost of doing business in California. “If you’re increasing the tax on employers, it will do the opposite of what the desired effect is,” said Kyla Christoffersen, policy analyst with the California Chamber of Commerce. “A robust economy is the answer.” In addition, she believes the tax burden on residential property is overblown, and says about two-thirds of the taxes in California come from the non-residential sector.

Indeed, more taxes during a recession can be a dodgy proposition. Increased property taxes would raise the overhead for a company, which would ultimately be covered by higher prices on the shelves. The higher prices could drive down consumption and raise unemployment.

A 2008 Field Poll found that a split-roll property tax gets mixed reactions based on how the question is posed. “Voters are divided if this means increasing the property taxes of business and commercial property (47 percent approve and 44 percent disapprove).” The poll also found “voters approve 61 percent to 28 percent if this means lowering the property tax rates of residential property owners.”