Saturday, March 6, 2010

California - From Riches To Public Sector Unions To Ruin

I posted here that public sector unions are an economic cancer in our nation, in addition to being the single most fundamental roadblock to improving our nation's vastly underperforming school systems. Exhibit One to that argument is California, a state that continues to sink under the incredible weight of its left wing excesses. George Will recently described this people's paradise as a Unionocracy. How bad is it and how did California utterly squander its riches - this from Newgeography:

For decades following WWII, people flooded into the golden state in search of weather, opportunity and the good life. California delivered. Under Governor Pat Brown in the 1960s, California had wonderful weather, plentiful water, new highways, and the best public school systems in America. Every student had access to a strong community college system and top students were guaranteed admission to the University of California. Agriculture, Hollywood, aerospace and construction provided more jobs than workers.

The 1970s brought harbingers of California’s future. The environmental movement muzzled a robust real estate industry with alphabet agencies like AQMD, CEQA, EIR and CCC. Building moratoriums raised home prices along the coast. Aggressive land use controls pushed development inland creating urban sprawl and long commutes as residents sought affordable housing inland. Governor Jerry Brown quipped, “If we do not build it, they will not come” and shut down highway construction, public school construction and added layers of new regulations. The people came anyway. . . .

In 2001, the dot come bubble burst. The politicians in Sacramento, emboldened by an endless supply of money from the dotcommers to state coffers, spent over $100 billion while revenues fell to just $70 billion. They ran up a $38.2 billion deficit in 2002 under Governor Gray Davis – more than the other 49 states combined. The people recalled Davis in 2003 and replaced him with the Terminator, Arnold Schwarzenegger. . . .

California survived the bursting dot com bubble with yet another round of real estate escalation (the housing bubble) that lifted home prices by 20% per year. Spending escalated in line with home prices. More regulations were added to burden industry. Taxes were raised. Tuition increased. California added “The Global Warming Solutions Act of 2006” as if California alone could stem global warming. In response to 9-11, politicians passed SB 400, a feel good law that allowed cops and fireman to retire at 50. It was budgeted to cost “just $400 million” per year. Last year it cost $3 billion. Then, they passed SB183 the next year, applying the same benefits to non-safety state employees like billboard inspectors. When the housing bubble burst in 2007, California found itself with a $20 billion deficit – again.

This time, California will not climb out so easily. Federal regulators, implementing the Endangered Species Act that was invented in California, diverted water from the farms of the Imperial Valley to the ocean to protect the engendered Delta Smelt. This tiny fish, with no commercial value, threatens the well being of tens of thousands of agricultural workers and contributes to unemployment figures worse than the Great Depression. California’s schools now rank 49th in the nation. They no longer generate the brilliant minds that fueled past economies. California’s 11.6% income tax has forced many high income earners to no income tax states like Florida or Nevada. The housing industry that created 212,960 units in 2006 was only able to build 36,000 units in 2009.

Former state librarian and California historian Kevin Starr talks about the potential of California being the nation’s first failed state. John Moorlach, Orange County Supervisor says, “We better start talking about this. What are we going to do when the entity (state government) above us crumbles? I think we are already technically bankrupt.” He should know: Orange County went bankrupt in 1994. The City of Vallejo, population 120,000, was forced into bankruptcy in 2008 by commitments by its politicians to pay its City Manager $400,000 per year and its fireman an average of $175,000 annually.

The biggest obstacle facing California’s recovery is a dysfunctional pension system created by politicians indebted to the public employee unions. The pension obligation is now $17 billion per year. California has 260,000 state employees and 38,000 are paid more than $100,000 per year. The University of California employs another 250,000 and 19,000 are paid over 100,000 annually. These generous salaries have been converted into lifetime annuities. The Legislative Analyst’s Office estimates the unfunded pension obligations of California to total $237 billion. In an era of retiring baby-boomers, this trajectory is clearly unsustainable. With tax receipts down, huge pension obligations and a state budget deficit of $20 billion, the vast majority of municipalities in California are suffering deficits and facing the prospect of Chapter 9 municipal bankruptcy.

Schwarzenegger . . . told the Sacramento Press Club, “No single issue threatens the fiscal health of this state more than our exploding pension obligations. Over the last 10 years, our pension costs have gone up by 2,000 percent from $150 million per year to $3 billion a year (for state government workers). That means hundreds of billions in unfunded liabilities and it means the $3 billion we are spending now will go up to $10 or $12 billion.”

In October, state Treasurer Bill Locker told lawmakers they needed to reform the pension system or “it will bankrupt the state.” The California Public Employees’ Pension System chief actuary has described the current pension system as “unsustainable.” Adam B. Summers, a policy analyst at the Reason Foundation and author of “California Spending By The Numbers: A Historic Look At State Spending From Gov. Pete Wilson to Gov. Arnold Schwarzenegger” warns, “I think we are starting to approach a tipping point.”

Do the politicians in Sacramento want to do something about the train wreck that is coming? The answer as of now is clearly no. There is no evidence that they are willing to curtail spending and reform the pension laws that cover 500,000 state employees. They know the State of California cannot go bankrupt under existing laws. However, if they will not act, the people may act for them. Just as they did in 2003 with the recall of Gray Davis, the people are taking the initiative. They are sponsoring the Citizens Power Initiative to curtail the ability of unions to use payroll deductions for campaign purposes. Another initiative would make California’s full-time legislature part-time. In the meantime, the California economy continues to grind to a halt. Will the people of California shock the nation like the people of Massachusetts did with the election of Scott Brown? Or will the unions buy another election and drive the Golden State over the edge, making it the First Failed State?

The failure of California would seem to be inevitable. The only question is what will arise from the ashes.


cdor said...

I hate to sound like a broken record, but aren't their billions of dollars of oil awaiting extraction off the coast of California?

There are no painless solutions to any of our unfunded liabilities, state or federal, throughout this nation. Our gutless politicians whom we deserved because, as citizens, we elected them, have been kicking the can and increasing the magnitude of the problem by expanding and/or creating even more "programs" for years. What could have been solved 40 years ago with the equivalent of a pin prick (along with a moratorium on expansion), will now take an amputation.

Californians will most definitely demand with a high degree of petulance that the Federal government print another trillion dollars to get their bloated butts out of the fire. They will not feel the slightest need to make any sacrifice while the rest of us lose our hard earned savings through the inflating of our dollars. We must fight them with all the vigor of our fight against health care takeover and "immigration reform". Let them go bankrupt!

OBloodyHell said...

> They will not feel the slightest need to make any sacrifice while the rest of us lose our hard earned savings through the inflating of our dollars.

To be honest, the only way to actually get out of this overall economic situation looming over us involving all the unfunded pension mandates (esp. Social Security), not relating to Cali at all, without a full-scale economic collapse is going to be to inflate the currency, I think.

I can live with that, as long as we FIX the problems we've allowed to accumulate by preventing them from happening all over again.

1) No more "funny money" accounting practices -- The State, Local, and Fed MUST be forced to adhere to GAAP in their accounting. Why should the government be excluded from operating like any other business?

2) A strict ratio on debt-to-GNP at the appropriate levels (state, local, federal) with the mandate that, if you hit it (either directly, by budget, or indirectly, by shortfall), you have to pay it down to zero. And perhaps a mandate that all incumbents who are in power when this happens are subject to a "recall" style vote that makes this their last term eligible for ANY government political office (elected OR appointed) if they can't get a 66% supermajority approval vote.

3) All funding is prioritized into, oh, five classes. First funding cuts come from priority 5 (lowest) until those budgets have been cut to 75% level. Second round of cuts come from P4 (to 75%) and P5(to 50%). Third round from P3, P4, P5 (to 75/50/25%, respectively). So you don't cut P1 services (presumably fire, emergency, and police) until you've completely eliminated all funding from the P5 tier, and those agency/activities are virtually shut down, temporarily if not permanently. And priority assignments are identified by appropriate bureaucrats, BUT, subject to judicial challenge. If the challenge is upheld, then the appropriate bureaucrat is summarily fired without pension or benefit package (should keep anyone from creeping the priorities up until "sidewalk cleaning" and "summertime ice skating" are P1)

In general, make these idiots personally accountable for what they do financially, so they'll be necessarily cautious rather than taking the approach of "hey, it's not my money" which is so clearly prevalent in their thinking.