As an alumnus of the great
baby boomer migration from the East Coast to the West Coast in the 1970â€™s (Long
Island to Berkeley) on the belief that weather, D, S and RnR would be a far
better experience in the Bay Area than in the Great South Bay, 35 years on from
the onset of great migration the California Dream of the 60â€™s and 70â€™s is
looking more like the California Nightmare. BTW I made it out early â€“
The BLS today listed Californiaâ€™s unemployment rate in January at 12.5%, up from
12.3% in December and only just less than Rhode Island, South Carolina and Nevada rates (Puerto Rico, a
territory as opposed to a state, leads at over 15%).
Droughts are the norm
(population needs far outstrips the water supply, even in a rainy, snowy
winter). Farmers are facing serious water shortages and leaving fields
fallow. A drive through the Valley reveals all sorts of signs posting â€śNew
Dust Bowl from US Congressâ€ť which farmers claim is more interested in
preserving some species of fish the size of oneâ€™s finger than the stateâ€™s
agricultural interests. While the Valley is not home to a huge population,
it has been home to its share of the boom in population and housing booms.
Apart from the tech
sector, the engine of growth in the state is the prison systemâ€¦the new
factories in the fields (of SacramentoValley), 33 in all.
The budget deficit in the
state is forecast at $20bln for 2010 (though government is forecasting $14bln),
about what it was in 2009. And this despite massive cuts in state
programs including Medical, education and infrastructure.
The state legislature is
more dysfunctional than the US Senate, requiring super majorities to raise
taxes and assuring permanent gridlock on most budget issues. Governor
Schwarzeneggerâ€™s approach to the budget gap funding problem when he was first
elected to office was borrow long to pay for short-term debt expirations and
currency expenditures. This was unsustainable short of an elevated growth
rate in the state and the Great Recession has been no greater than in California.
So I read with special
interest todayâ€™s WSJ article on the stateâ€™s budget crisis and in particular the
tuition increases at the University of California system â€“ 32% tuition increase
has prompted a state-wide rash of student protests reminiscent of government
workers lashing out against austerity measures in Athens. Sather Gate on
UC Berkeley campus, which I walked under daily as a student there, is the photo
journalistâ€™s preferred shot of student protesters. And tuition and fees
are now $10,300 a year up three fold from 1999 and up from $636 a year when I
was enrolled. The students are complaining that the cost of state public
education is now on par with private post-secondary education. In other
words the social subsidy, aimed at allowing less advantaged students to afford
a quality university education, is largely gone. The reality is quite
different than the claim to social equalizer for UC systemâ€¦enrollment in the
best universities in the UC system has always been largely dominated by
students who could afford to pay private level tuition and fees paid for the
average tax payer who could not afford and mostly canâ€™t qualify to get into the
most competitive campuses in the system. What has gone away for the UC
system (clearly there is a real need for a number of educationally gifted and
income constrained students), is a subsidy for higher income families paid for
by those who mostly never consume directly the benefits (sending their kids
there) of the UC system.
the higher education subsidy story is not enough to cause the hair on your neck
to stand up, then look at what the great state of California is doing for its stateâ€™s first responders retirement
benefits according to the WSJ today.
Good luck with that. In 1999, the Democratic legislature ran a reckless gamble
that makes Wall Street's bankers look cautious. At the top of a bull market,
they assumed their investment returns would grow at a 8.25% rate in perpetuityâ€”equivalent
to assuming that the Dow would reach 25,000 by 2009â€”and enacted a huge pension
boon for public-safety and industrial unions.
bill refigured the compensation formula for pension benefits of all
public-safety employees who retired on or after January 1, 2000. It let firefighters retire at age 50 and receive 3%
of their final year's compensation times the number of years they worked. If a
firefighter started working at the age of 20, he could retire at 50 and earn
90% of his final salary, in perpetuity. One SanRamonValley fire chief's yearly pension amounted to $284,000â€”more
than his $221,000 annual salary.
2002, the state legislature further extended benefits to many non-safety
classifications, such as milk and billboard inspectors. More than 15,000 public
employees have retired with annual pensions greater than $100,000. Who needs
college when you can get a state job and make out like that?
In the last decade, government worker pension costs
(not including health care) have risen to $3 billion from $150 million, a
2,000% jump, while state revenues have increased by 24%. Because the stock
market didn't grow the way the legislature predicted in 1999, the only way to
cover the skyrocketing costs of these defined-benefit pension plans has been to
cut other programs (and increase taxes).
_This year alone $3 billion was diverted from other
programs to fund pensions, including more than $800 million from the UC system.
It is becoming clear that in the most strapped liberal states there's a pecking
order: Unions get the lifeboats, and everyone else gets thrown over the side.
Sorry, kids. â€ś
state also has a very active proposition legislative channel that more often
than not allows special interest groups to amass enough signatures and run ad
campaigns to get fiscally imprudent laws passedâ€¦recall Proposition 13 of the
late 1970â€™s that stripped government of raising real estate taxes unless a
property is sold (property tax rate adjusts to the new owner and home price)â€¦this
one crippled the educational system at the time until the government responded
with borrowing more in the debt market to fund itself.
there CDS market for California state bonds and muniâ€™s? If there is a CDS on state paper I would
be a buyer. Californiaâ€™s fiscal position is every bit as bad as Greeceâ€™s
and increasingly facing a similar set of choices and constraints â€¦massive
spending cuts and tax hikes (assuming they can be passed), higher borrowing
costs and sub-par growth. The crisis is here. I just wonder when
markets and US government debt will reflect this implicit guarantee.
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