Saturday, October 22, 2016

What California's Direct Democracy is up to This November

Here in California, the seventh largest economy in the world ($2.4 trillion/2014) we take our direct democracy seriously. In the upcoming election on November 8, we will vote on 17 state propositions. This year we get to vote on weighty matters (abolishing the death penalty (Yes!), legalizing marijuana, gun control), on fiscal matters (approving school bonds, hospital fees, and taxes on high income earners), on school policy (bilingual education) and on the more prosaic (approving a ban on single use plastic bags, non-binding constitutional advice on Citizen's United, and whether actors in the adult film industry should wear condoms). 

For anyone interested, here's what we're concerned about this November in California now that Hillary is safely heading for the White House. 

Prop 51.  Yes on School Bonds. This is an initiative statute that authorizes $9 billion in general obligation bonds for new construction and modernization of K-12 public schools, vocational schools, and community colleges. With interest this amounts to $17.6 billion over 35 years, if interest is 5%. With interest at 5% payments from general fund would be $500 million/year for 35 years. At the present time, interest payments may be significantly less than 5%. This infrastructure spending will create jobs, the money is cheap, it’s a good time to build. I’m voting “Yes.”

Some interesting facts: There are 6.2 million students in California (k-12), attending 10,000 schools.  There are 950 School Districts.  In addition, there are 2.1 million students who attend community colleges in 113 campuses. The state is currently paying $2.4 billion annually on accumulated bonds, plus $300 million for CC debt. This is roughly 2% of the state budget of $109 billion (2015).

Prop 52.  Yes on Hospital Fees. This would make permanent fees imposed on hospitals required to obtain matching federal funds. The fees fund Medi-Cal  and health services for the uninsured and children. The fees are being collected currently, but Prop 52 would make the fees permanent. The federal government will have to approve these fees as well.  I’m voting “Yes.”

Interesting facts: 2015-16 spending on Medi-Cal was $95 billion; $23 billion coming from the general fund. There are 450 general acute care hospitals with 20% being public hospitals.

Prop 53. No on Voter Approval of Large Revenue Bonds. Requires voter approval of all statewide revenue bonds in excess of $2 billion.  Current projects affected would be the CA water fix (2 tunnels through Sacramento San Joaquin River Delta) and High Speed rail.  The term “project” is not well defined.  Large infrastructure projects are always very difficult to get approved politically. This would throw another road-block to future development. I’m voting “No.”

Prop 54. No on Freezing Legislation Before Vote. This would require all proposed statutes to be published, and left unmodified, for 72 hours before a final vote.  Opponents argue that this would give special interests an extra opportunity to attack legislation, and it would prevent last minute compromises which is often the only way to get legislation done. Supporters argue that it would provide more transparency and give the public a chance to weigh in. The measure is bankrolled by Charles Munger, a Republican billionaire who was also active with California redistricting.

One of my peeves about the way we get new legislation is that the people voting on legislation don’t understand what’s in it.  Legislators have a keen sense of what will buy them support (money or votes) or opposition, but that is very different from having a keen understanding and independent judgment on legislation.  Prop 54 won’t address that problem. It is also unclear to me that providing three days with no amendments to legislation before every vote will reduce the power of special interests (monied interests) over the general good. The argument against prop 54, that it will increase the power of special interests seems plausible to me. Recording and having video’s available within 24 hours seems like a good idea, but it is mostly being done now, and it’s not like any meaningful segment of the population looks at these recordings.  It seems plausible to me that there is some benefit to make last minute compromises and adjustments to legislation in order to get things passed.  I have too many unanswered questions on this and am giving the benefit of the doubt to the “No” argument.

Prop 55. Yes on Extending Tax on High Earners. More than half of state revenues go to education. Prop 55 extends through 2030 the increases in state income tax on high earners that was passed in 2012 in order to help pay for education. Prop 55 also adjusts the formula for funding Medi-Cal, the state health care program that serves 13 million of California’s poorest people (~1/3 of population).  Money raised by this tax can vary from $4 billion to $9 billion depending on the economy and the stock market—i.e. depending on how much high earners earn.

The predicted fluctuation in revenue illustrates a problem with the California tax base. We have a problem in that our tax base is heavily dependent on high earner income taxes.  This results in a highly variable income stream for the state and makes planning difficult.  For joint filers the 2012 increase which is proposed to be extended here is 1.0% for income of $526,000 to $632,000; 2.0% for income between $632,000 and $1,053,000; and 3.0% in income in excess of $1,053,000.

I’m voting in favor because a) schools need the money; b) where else are we going to get it; c) it mitigates income inequality; and d) state needs to learn how to handle the fluctuations, and I’m willing to see how they do.

Prop 56. No on Cigarette Tax. Increases cigarette tax by $2.00/pack, and equivalent increases in the sale of other tobacco products and e-cigarettes.  This would raise revenue of $1 billion +.  But it is a regressive tax. About 11% of adults and teens in California smoke. This is about 3.4 million smokers. They tend to be less affluent, less educated than non-smokers. This tax would raise the cost of pack of cigarettes from approximately $6/pack to $8/pack. The rationale for the tax is to make it prohibitively expensive for kids to start smoking. It’s also being justified as a user tax to offset the increased medical costs for treating patients who get cancer from smoking. The proposition is long and convoluted and not very transparent for voter approval. This is a tax the legislature could enact if they chose to, and they have the job and resources to hold hearings, and consider all the fine print.  Although I’m sympathetic to using tax policy to reduce smoking, the regressive nature of the tax, the size of the increase, and the unclear text of this proposition for the average voter lead me to say “No.”

Prop 57. Yes on Reducing Prison Population. In California we have 128,000 individuals in state prisons.  That is 328 per 100,000.  That is ten times higher than the rate of gun deaths, or fatal car injuries. It’s a bit less than new cancer cases each year (454/100k).  Notably it is significantly less than the national average of 456/100k.  But it is three times higher than the rate of incarceration across Europe (133/100K) and nearly twice the rate in Canada (188/100k). Our rate of incarceration is too high. Prop 57 will help reduce the rate of incarceration.

Prop 57 would make more prisoners eligible for parole and would authorize the CDCR to award sentencing credits to inmates.  It would also end making the transfer of some juvenile offenders automatic, depending on the seriousness of the crime.  Transfer would always be subject to review by a juvenile court judge.  Governor Brown and the state’s chief probation officer support Prop 57. We are still recovering from the reactionary hard on crime policies of the 1980's and 1990's, e.g. three strikes legislation (1994). I'm voting "Yes" on Prop 57.

Prop 58. Yes on Flexibility for Bilingual Instruction. This allows school districts more flexibility regarding instruction of the 20 percent of California students who are English learners. It permits flexibility on bilingual education that was taken away by Prop 227 passed in 1998. It would permit English speakers to take advanatage of Spanish (and other languages) immersion programs. Credible parties are lining up on both sides of this issue.  The revision had more than 2/1 support in both the Senate and Assembly in Sacramento. This looks like local educators and parents vs. ideologues.  I’m giving the benefit of the doubt to local control.  I’m voting “yes.”

Prop 59. No on Meaningless Advice. This is an advisory question, whether the California legislature should do what it can to amend to U.S. constitution to permit the full regulation or limitation of campaign contributions and spending…, and to make clear corporations don’t have the same rights as human beings.”  I think this compound question is less than clear, and I think an advisory opinion is not useful. I’m voting “No.”

Prop 60. No on Adult Film Regulations. This seeks to enact regulations governing the adult film industry. I don’t think this an appropriate thing to do through initiative with six pages of fine print in our voter pamphlet. I’m voting “No.”

Prop 61. No on Half-Backed Drug Pricing Edict. Lower drug prices are good. This would require the State agencies to not pay more for drugs than the VA manages to negotiate.  This seems not well thought through. California is a large customer of drug purchasers. They should be able to obtain favorable pricing on their own. VA pricing is not always available (may be subject to confidentiality agreements).  If the state wants to enter a common market with the VA, it should take steps to achieve national legislation making this possible, or to enter into a compact with the VA to make this possible. This legislation does not sound like a solution: legislating what a third party (drug companies) will agree to seems like wishful thinking. I’m voting “No.” 

Prop 62. Yes on Abolishing the Death Penalty. Since 1978 California has sentenced 930 criminal defendants to death.  Of these, 15 have been executed, 103 have died prior to execution, and 64 had their sentences reduced by the courts.  748 remain on death row.  No executions have taken place since 2006 because of legal issues surrounding the state’s lethal injection procedures.

This measure abolishes the death penalty in California. The 748 inmates on death row would be resentenced to life in prison without possibility of parole. Inmates would be required to work, and 60% of their wages can be deducted for any payments owed to victims. Abolishing the death penalty will save the state approximately $150,000,000 annually in legal and other costs.

This is a moral imperative. The death penalty has been unevenly and discriminatorily applied.  A number of those convicted of murder have subsequently been cleared.  When it applies this ultimate sanction, the state, like anyone else makes mistakes. When it comes to putting people to death such mistakes are intolerable. The death penalty has been shown not to have a deterrent effect. As to retribution, when we put people to death in middle or old age for a crime committed in youth, there is no meaningful connection to retribution. At the end of the day it’s just another killing. It does not make up for the initial crime, it does not achieve justice, it does not deter others….and it costs a fortune.

Doing away with the death penalty is long overdue. I’m glad we get to do it in this election. 

Prop 63. Yes on Regulating Firearms and Ammunition. In the United States we have approximately 33,000 gun deaths annually.  One third of these are homicides and two thirds are suicides.  And there are more than 300 gun injuries each day, or ~130,000 annually. Mass shootings continue to jar us on a regular basis.  Gun deaths in the United States are far higher than they are in other wealthy countries.

After every mass shooting there has been an outcry for action in Congress, but each time the gun lobby has beaten back attempts to tighten regulation. For twenty years, Congress has not managed to pass meaningful gun regulation, and they even blocked funds for the study of gun violence.

California has been on the forefront of gun regulation in the U.S. Under federal and state laws some individuals are currently prohibited from owning firearms, e.g. 1) individuals convicted of felonies and some misdemeanors (assault and battery); 2) individuals found by a court to be a danger to themselves or others; and 3) persons with a restraining order against them.  In California, people not allowed to have firearms are also not allowed to have ammunition.

Under federal law gun dealers must complete a background check of gun-purchasers. There exist a National Instant Criminal Background database for this purpose. The California Department of Justice also maintains a data base of legal gun owners in the state and uses this database to remove guns from individuals who are no longer allowed to own guns. Other existing state regulations include limits on the type of firearms that can be bought, a ten day waiting period before a dealer may give a firearm to a buyer, and requirements for recording and reporting firearm sales.

In 2016 the state also passed legislation to regulate ammunition in a similar way as gun purchases. Starting in 2018, individuals and businesses selling ammunition will require a licensee from the DOJ. Beginning in July 2019, ammunition dealers will be required to complete a background check of purchasers (using the official databases). The state also recently enacted limits on ownership of large-scale magazines (more than 10 rounds).

Proposition 63 would add additional regulations and create an enforcement agency. Here is what it would do:
  • Requires all purchasers of ammunition to obtain a license from the DOJ, to be renewed every four years. The DOJ must verify that purchasers of ammunition have the required permit. There will be a $50 fee.
  • Requires the DOJ to revoke licenses from people who become ineligible (e.g. because they are convicted of a crime, there is a restraining order, or they are found to be a threat to themselves or others)
  • Creates new court process for removing firearms from persons who become ineligible to have firearms (e.g. because they are convicted of a crime, there is a restraining order, or they are found to be a threat to themselves or others)
  • Implements reporting requirements (e.g. dealers must report ammunition thefts; requires individuals to report stolen firearms)
  • Eliminates previous grandfather clause on possession of large-capacity magazines. Anyone in possession of magazines with capacity of more than 10 rounds must return them. 
  • Penalties for theft of firearms are increased.
This proposition is a big deal. The legislative analyst estimates that cost of the new enforcement courts could be in the $10’s of millions annually. 

Guns are not toys. They kill thousands every year. It’s time to start treating them seriously. I’m voting “Yes” on proposition 63.

Prop 64 Yes on Regulating Our Biggest Cash Crop….it’s Overdue. Marijuana is California’s biggest cash crop, but it remains almost completely unregulated. Growers don’t pay their way with taxes, they degrade the environment, they don’t provide solid and dependable jobs. All this must change and proposition 64 is a start. This is a much better proposal than last time this was on the ballot.  Lt. Governor Gavin Newsom convened a blue ribbon panel of marijuana experts that crafted the ballot measure, and it shows.

It’s a conservative measure. It cleans up the criminal aspects in a productive way. It imposes an age limit of 21 and limits legal possession to one ounce. It also contemplates that marijuana consumption will stay on the margins, hidden away in smoke-easies and in private homes.  Smoking will not be allowed while driving.

It’s time to make our biggest cash crop part of the regular economy. I’m voting “Yes.”

Prop 65 No on the Plastic Bag Ban Poison Pill. This proposition is sponsored by the plastic bag industry and they are playing games. Each year, about 15 billion single use plastic carry bags are provided to shoppers (400 bags per Californian). In the past few years about 150 local jurisdictions have adopted bans of single use plastic bans.  These local ordinances cover about 40% of the California population. In 2014 the California legislature followed suit and passed a state wide plastic bag ban (SB270). SB270 also required stores to charge at least 10 cents for paper bags or other reusable bags. Under SB270 stores can keep this money.

Prop 65 would require stores collecting their 10 cents per bag mandated by SB270n to pay this money into an environmental fund. That all sounds good.  However, Prop 65 was put on the ballot by the plastic bag industry and their cynical hope is that the SB270 single use plastic bag ban will be overturned.  The companion Prop 67—see below—is on the ballot as a referendum on SB270.  If it does not pass, the statewide ban on single use plastic bags will be gone.

This proposition is dressed up in attractive language directing fees collected on reusable bag fees.  It is dressed up as vote bait. However, Section 6 of this proposition 65 says if it receives more votes than Prop 67 (except they misleadingly don’t identify it) then Prop 65 will go into effect and the referendum on SB270 (Prop 67 and its statewide single use plastic bag ban) will fail, and the plastic bag industry will get to sell single use plastic bags again! 

I’m voting “No” on this devious and deceptive Proposition.

Prop 66 No on This Alternative to Abolishing the Death Penalty. We need to abolish the death penalty, see Prop 62 above.  I’m voting “No” on this alternative that would tweak death penalty procedures.

Prop 67 Yes to Approve the Statewide Ban on Single Use Plastic Bags. As noted above under the discussion of Prop 65, this is a referendum on the SB270, a statute passed in 2014 that banned single use plastic bags. 

The evidence on the environmental benefits of banning single use plastic bags is not slam-dunk.  See, for example, this Bloomberg article on the mixed results found by Austin Texas. See this Pacific Research Institute report. Here is a Media Matters report that finds bans effective.The San Diego Union Tribune recently wrote “In 2012 after San Jose adopted its ban, surveys found an 89 percent reduction in bag litter in its storm drain system and about a 60 percent reduction in city creeks, rivers, streets and neighborhoods.” After long opposing bans on singly use plastic bans, they are now on board.

San Francisco was the first city in California to adopt the ban in 2007, soon after we moved here. It seems to have worked well. We bring our cloth Public Radio bags to walk to the grocery store. There’s something aesthetically pleasing about it. The deceptive campaign of the plastic bag industry is resolving any remaining doubts for me.  I’m voting “Yes” on Prop 67 to uphold the statewide single use plastic bag ban.

You can follow me on Twitter @RolandNikles

Sunday, October 16, 2016

Litigation is Like Throwing a Rock, and Waiting Five Years for it to Sail Through the Window…, all the while burning a comet's tail of money.

Comet and Oort Cloud,
"I haven't seen a dime. These things go on forever and forever. Never get involved in litigation. Your hair will fall out, your bones will turn to sand. And it will still be going on. … It was like throwing a rock through a window-but you wait for five years to hear the sound. Litigation is like picking up a glass of water with a prosthetic hand. It's very frustrating, and you'll never get it to your lips. But when you have to, you have to. If somebody burned your house down, you'd have to do something about it."
                            – Tom Waits, The Observer November 23, 1992

I recently almost finished a trial; a bittersweet experience and confirmation yet again that Tom Waits had it right in 1992.

In 1983, the year I graduated from law school, a group of professors published a study attempting to evaluate the costs and benefits of litigation. They evaluated what they called an “investment model” of litigation: do parties get more out of it than they put in? Does litigation make economic sense? See The Costs of Ordinary Litigation, 31 UCLA Law Review 72 (1983). The professors were optimistic about the process and concluded, “yes,” for plaintiffs and defendants alike, litigation was often a good investment.  But the costs of litigation they reported were quaint by today’s standards. After 33 years of legal practice I can report that parties often get more than they bargained for when they throw that rock of litigation and wait five years for it to sail through the window. The rock burns money like a comet’s tail as it flies, and the window sometimes shatters in unexpected ways. A failure to properly evaluate and resolve a case early can be painful.

Case in Point 1. For a while one of my clients had the dubious distinction of having the longest running civil case in the Alameda County, California court system. It was an ordinary fee dispute between an architect and his mechanical, electrical, plumbing engineering consultant for the construction of a new public hospital. When the engineering client came to me in 1996 they were owed about $800,000 in fees: not an inconsequential amount. The problem was, for various good reasons, the architect had convinced the county board of supervisors to reconfigure the new hospital and substantially increase its size. A selling point for the new plan was that the construction cost would remain unchanged—but this was a misrepresentation to the board.  The architect also neglected to say that the new project would entail significantly more architectural and engineering services (and fees). That request would come later, after the project was approved.

There are studies which claim that for public infrastructure projects, like hospitals, roads, bridges, political decision-makers get lied to about the costs at the point of decision making 90% of the time. This hospital project was an example. The decision to build the new hospital was made in the early 90’s. The county was obligated to provide county health care services—but they were not required to build a new hospital. Privatizing was in vogue politically at the time and some board members advocated that the county should outsource medical services rather than build a new county hospital.  An extra $10 million of construction costs for the new hospital might have tilted the balance of arguments against building a new hospital. So hospital administrators and their service provider, the architect, (all of whom badly desired approval of the new hospital project) represented the revised project plan as “on time and on budget, but better” when compared to the original plan. In order to make this claim they made a number of dubious assumptions about costs. In short the board was being lied to about the true costs in order to get the project approved politically.

Once the expanded project was approved, the county’s project administrators had to find inventive ways to justify the increased costs that would invariably be needed—like the extra architectural costs and the extra engineering costs. They couldn’t very well go to the board and say “Ahem, we need more fees for the architect and its consultants because we misrepresented the true costs to you a couple of years back.” So as committed fees ran out, and as the architect and consultant kept working on the project, pressure mounted.  Finally, the county administrator and the architect found a way to make an added fee request in conjunction with a further addition to the project.  But … in the process… my client’s $800,000 fee request was not addressed.  The architect made a final deal with the county and agreed he would ask for no further fees for its consultant, now. Perhaps later…. 

On construction projects the expectation is that owners will pay for the architectural and engineering fees, and the architect will not pay consultants until fees are squared away with the owner first. That’s how it should work if everyone does his or her job. In this longest running case, however, the architect failed to properly manage the process. In order to get the project approved initially, and in order to secure its own fee increase later, the architect neglected to secure fees it would need to pay its consultant. Having represented the project as “on time and on budget” in order to help sell it to a resistant board, and later failing to include my client’s additional fees in the change order with the county, the architect was hemmed in. The architect found he was unable to obtain approval of a further fee request for my client after the fact.

When my client, the engineering consultant, threw the rock and articulated its claim in a lawsuit, the architect should have recognized that it was in a vulnerable position. It should have found a way to settle with the consultant.  Indeed, at the outset of the case the architect would have resolved the issue for approximately $380,000.  That was the range of settlement demand by my client at the outset. Correct evaluation at the outset of the case was critical.

But the architect and its attorneys failed to properly evaluate the case. They considered the normal process—money must come from the owner—and they refused to acknowledge the unusual circumstances, or any separate responsibility for the architect.  So that rock of a lawsuit sailed through the court system for 14 years burning money like a comet. There were two court trials and two appeals, and at the end a judgment for my client in the amount of $4.7 million. In addition to paying this judgment, the architect had to pay its own attorneys an undisclosed amount.  If you are curious the 2nd Appeal can be found here: Ted Jacob Engineering Group, Inc. v. The Ratcliff Architects, et al. Failing to properly evaluate a case early can be very expensive.

Case in Point 2. The arbitration I just concluded involved payment due to my client, a subcontractor on a $72 million high school construction project. For reasons unrelated to my client, the school district elected to terminate its relationship with the general contractor five years ago, shortly prior to completion of all the work. The usual factors were at play: bad architectural plans, construction defects, and mismatched, or overmatched, personalities.

My client was responsible for earthwork, such as grading under building pads, installation of site utilities (potable water, fire water, storm drains, sanitary sewers, and gas) and preparing the ground for laying a synthetic baseball field.  At the time the owner and general contractor parted ways, my client was owed about $900,000, less a credit for some deleted work under the ball field.

In the heat of battle, when the school district terminated the general contractor, the school district grossly overvalued the credit for my client’s deducted work.  The value of the deducted work was somewhere between $350,000 and $526,000. [There were some other issues, very interesting to construction lawyers but not relevant to our point here]

There was good reason, therefore, to resolve my client’s final contract amount early at somewhere between $374,000 and $500,000.  In fact, my client offered to settle for $300,000 with the general contractor five years ago in 2011. This offer was rejected.

The general contractor’s rejection of my client’s $300,000 offer in 2011 was understandable because my client’s claim was a pimple on a much larger dispute between the general contractor and the school district. The problem is that by September 2015, when the school district and the general contractor settled their issues, my client’s rock of litigation had been sailing through space burning money like a comet for four years. It was known to everyone at the outset that if my client recovered anything, he would also recover attorney’s fees; in other words, the defendants would be responsible for that comet’s tail of money trailing the rock of litigation.

Since there was no question that my client would be the prevailing party in the lawsuit, it was just a question of how much, not whether my client would recover, the rational thing to do was to settle early.  The defendants, however, elected to wait until two days into arbitration before making a reasonable offer of settlement. The case, which could have settled for less than $500,000 in 2011, settled for $1 million two days into arbitration, five years later.

Like any settlement, the result was a mixed bag. Deducting litigation costs, my client achieved approximately the result he would have had his offer been accepted five years ago. Collectively, the defendants paid a lot more than if they had settled earlier.  In addition to the $1 million dollars the defendants paid to my client in settlement, they also incurred their own attorneys fees, the last 12 months exclusively on this matter. The total costs to the defendants of deferring settlement is bound to be in excess of $1.3 million. And it could have been worse. If the case had proceeded to judgment, depending on the amount of interest and attorneys fees the arbitrator might have awarded. At the point of settlement in mid trial, the flight of the rock was beyond the defendant’s control.

Tom Waits had it right: litigation is like throwing a rock and waiting five years for it to fly through the window. Settle in mid-flight and the comet tail of money trailing this rock vanishes into thin air as sunk costs. If the matter proceeds to judgment, the rock and the accumulated weight of its comet tail come crashing through the window. It can burn your house down. If possible, it’s better never to throw rocks. But, as Waits said: “when you have to, you have to.”

Note: If you've not run into Tom Waits, he's worth paying attention to. You can also watch him in Jim Jarmusch films. Check out "Down by Law" for example.  Here is Waits singing his iconic "Heart Attack & Vine."

Tom Waits: "Heart Attack & Vine"