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California’s Road to Fiscal Collapse: One Narrative

3 min readBy: Joseph Bishop-Henchman

California’s woes are often blamed on the state’s requirement that two-thirds of the legislature approve the budget (other states have that requirement as well, however, and aren’t in as bad shape), or Proposition 13 (although California still has the sixth highest state local taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burden in the country even with Proposition 13). The Flopping Aces blog has a write-up of another narrative:

A few decades ago, California […] was growing like crazy, had great roads, top public schools, top universities, and a vibrant growing economy. Drawn by the nice weather, a business friendly environment and all sorts of creative capital formation, entrepreneurs in technology, biology, engineering, health, and you name it flocked to the state. The universities turned out well educated graduates that stayed in the state and fed the almost insatiable hunger of the business community for intelligent, trainable employees. People young and old flocked to California which they rightfully perceived as a land of opportunity.

Things started to change in the seventies. Opposition to the Vietnam war had been strong in California and as the war wound down, that opposition, already organized around radical principles, began to assert itself as voters, electing ever more liberal local and statewide politicians.[…]

The peculiar way in which the legislature organizes itself gave the Speaker of the Assembly almost dictatorial power and hidden away in Sacramento, there is essentially no fourth estate scrutiny over legislative activities. A succession of Speakers starting with Phillip Burton, then Willie Brown etc. came from San Francisco and the Bay Area, long a liberal bastion, and they were able to control the ebb and flow of legislation such that left wing constituencies were rewarded, municipal unions were strengthened and the teachers’ unions gained complete control over public education. Regulation after regulation was imposed on business and a vast array of social welfare and related programs were enacted. It is estimated that regulations in the state currently cost nearly $500 billion per year. As long as the revenue was there, the legislature could find ways to spend it. Gradually, funding was shifting away from infrastructure maintenance and away from education and toward a miasma of social programs. Deferred infrastructure maintenance grew and grew. State government insinuated itself into nearly all aspects of life. Businesses large and small began to move from the state to escape these burdens.[…]

As a group, state employees and municipal employees are compensated at levels that far exceed those in the private sector. The state has literally thousands of employees whose salaries are in six figures and that does not include a benefit load that exceeds fifty percent. It has been estimated that the state’s unfunded benefit burden is north of $62 billion.

Finally, the state has financed much of its operations by incurring bonded indebtedness.[…]

In all of this, the state has acquired structural deficit that simply cannot be reduced. The legislature lacks the political will to honestly tackle this problem and the governor has no power to do so without legislative support. Last fiscal year, the deficit was about $25 billion and that gap was “filled” by accounting legerdemain, payment timing tricks, and other wishful thinking. Taxation was increased by $12.5 billion, $6 billion was borrowed, and the books were cooked in various ways to cover that deficit. This fiscal year the deficit is projected at another $21 billion and there are few if any more games available to play.[…] Every tentative effort to reduce expenditures precipitates howls of protest from the affected Democratic constituencies and the legislature backs down. The only response of the legislature has been to raise taxes.

Food for thought. The whole piece is here.

More on California here.