Understanding the California Budget Crisis
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Living beyond your means is a sure way to guarantee financial ruin. Today, millions are dealing with the fallout from artificially-inflated real estate values and accessible, unsecured credit. For those recently (or still) in this situation, a number of temporary solutions were once readily available – refinancing, taking out home equity lines, taking on additional credit cards – but, these quick fixes all had one thing in common: they only delayed the inevitable. But it’s one thing for an individual to act irresponsibly, and quite another for an entire state.
The State of California resembles a classic spendthrift; the world’s 8th largest economy, was long characterized by its numerous economic opportunities, inviting business climate, and bustling real estate industries. But, the state was also regularly in deficit for the last several decades. This did not seem to matter. The state continued to borrow against future revenue, in order to finance its budget requirements – much like an individual would borrow against the speculative increase in their home’s value to pay for existing bills. The way they were able to do this, was by the sale of short-term notes for cash (similar to bonds).
The logic behind these actions was that growth was always expected: businesses were going to continue to grow, unemployment would be always be low, and income tax revenues were going to continue to increase. Most importantly, existing and new debt would always be recouped by future profits. If this sounds familiar, it probably is. For Californians that witnessed their home values skyrocketing between 2002-2006, taking out new loans for motorcycles and boats, or for kitchen remodels or expensive vacations almost made since, even if what you earned did not justify these costs. Your house was a passive (almost magical) source of money from which everything would one day be paid off, and everything would once again be right with the universe
What Happened?
Starting with the real estate market slumping in 2007, the situation quickly become grim for the state with the credit and financial markets meltdown in 2008. Shortly thereafter, the State’s credit rating was reduced. Due to a lack of confidence in the short-term notes, their sales have slowed down considerably. And, in the face of a devaluing dollar and massive trade deficits, the Obama administration denied the state’s request to federally-back the state notes, citing that states are responsible for solving their own budgetary problems.
California’s general fund has also experienced sharp declines in tax revenue. Income tax revenues have dropped considerably since 2007; 2009 receipts alone, are expected to be over $1B less than the pre-year prediction – which was already lower than normal. The state is also experiencing (on average) $200 Million less per month from Sales and Use Tax revenues from pre-year forecasts. Also, the State has the nation’s highest level of unemployment at 11.5% (68,900 jobs were lost in May 2009 alone) – which is also a 30-yr high for CA. This has exacerbated existing budget issues, with a higher-than-normal amount of unemployment payments being dispersed to a larger non-working population.
The condition of the state is analogous to an individual simultaneously experiencing a reduced income, either because of mandatory vacations, or hour cuts (or even becoming occasionally-employed), and an increase in their expenses (an adjustable rate mortgage, increased credit card APRs, etc). Not surprisingly, this has increasingly become the norm for many California citizens. The situation is at the intersection of circumstance and lackluster planning. Looking back at the last decade of California’s dynamic economy, we can now all see that things really seemed too good to be true, because, in fact, they were.
What This Means
Currently the state is facing a shortfall of over $27 billion, and this deficit is estimated to increase to $40 billion by the end of 2010.To put this in perspective, $27 billion is more than ¼ of the state’s general fund. Or rather, the state only has ¾ of the funds necessary to run at full capacity.
When the state legislature met in May to discuss wide-reaching budgetary cuts, it created a division among party lines: Republicans agreed to lower the income of state employees; Democrats strove to increase fees for select goods and services (cigarettes, oil wells). Governor Schwarzenegger, however, moved to generate revenue by borrowing from local governments. Because the parties involved at the state legislature were unable to come to a resolution, Governor Schwarzenegger has declared a Fiscal State of Emergency. What this means is that if a deficit is not solved within 45 days, the state legislature cannot act on other bills until this is resolved – in short, the state must figure out a way to substantially reduce this deficit, and/or find new money.
Unlike people, states can’t simply file for some type of bankruptcy protection. If the state were to default on its creditors, it will be in an exponentially worse situation. The state will lose a sizable source of regular revenue, in that investors would no longer want to invest here. Courting investors may not be the solution for the immediate crises, it will inevitably be required, should the state get back on track.
To make matters worse California’s labor market, does not show signs of having hit rock bottom. Forecasts by Beacon Economics, the UCLA Anderson School and Chapman University estimate that unemployment may near 13% by year’s end; and according to Esmael Adibi (Chapman), the recession, “…at the state level should end by mid-2010, when job creation will start.”
How the State is Coping:
Because of the grim diagnosis, the state will be forced to enact a number of the cuts in an effort to shrink the deficit. There will also be a number of new and increased taxes that will be levied on citizens, to help bare the cost. Some of the more noted cuts and taxes include:
- Mandatory furloughs for many state employees Feb 2009 – June 2010. This is estimated to save $1.3 Billion. (The partial government shutdown also will lead to a third furlough day for 235,000 state employees, bringing their total pay cut this year to about 14%).
- Additionally, layoffs, reductions and other efficiencies will be instituted in an effort to cut payroll by 10%. This is estimated to amount to as many as 60,000 state jobs.
- As of April 1, 2009 Sales tax was increased by 1%.
- As of July 2, 2009 the State began issuing IOUs for state tax refund payments.
- The Vehicle License Fee (VLF) rate increased from 0.65 percent to 1.15 percent from May 19, 2009, to June 30, 2011.
- More than $3 B in cuts to public education.
- Nearly $1 B in cuts to public health care.
Prospective Cuts:
- As many as 200 of California’s 279 State Parks may be closed.
- A suspension of Cal Grants and Cal Works – state programs that provide health and education services to low-income families.
The Takeaway:
The type of problems facing California lawmakers are reminiscent of those presently faced by millions of Americans and their households. Similarly, the state’s response is largely a reaction to market conditions; the same can be said about so many Americans, in that we only fix what is broken. Expense management is perhaps the most important lesson learned on one’s way to financial maturity, and unfortunately for so many it usually only comes from past failures. There are a number of lessons to be learned at the administrative level, and I think I speak for most Californians when I say that I hope our leaders are wise enough to find a solution that enables our getting out of this situation, but also makes it more difficult for the state to get in this type of a mess in the foreseeable future.
Here are Mint’s guides on budgeting, investing and managing credit to help you manage your finances.
Sources:
http://www.latimes.com/features/health/medicine/la-ed-budget8-2009jun08,0,7552895.story
http://www.huffingtonpost.com/2009/07/02/ca-assembly-speaker-schwa_n_224673.html
http://www.latimes.com/business/la-fi-california-jobless20-2009jun20,0,3863292.story
http://www.bizjournals.com/sacramento/stories/2009/06/29/daily29.html
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34 Comments so far
leave a commentNot one mention of the 2/3 majority rule to increase taxes, Proposition 13, or California’s stupid initiative and referendum system?
If we actually cut free medical care, free education, subsidized in-state tuition rates, free welfare, free food, free social services for illegal aliens, then maybe we’d save about an additional $10 billion, per various studies conducted on the net economic impact of illegal immigrants on the California economy.
But no one dares mention that it IS possible to be stricter in law enforcement – especially of immigration laws.
Fact Check – The title of highest unemployment currently belongs to MI with a respectable 14.1%! There are at least a couple of additional states that have unemployment rates higher than 11.5%, including Oregon.
All of this an no mention of Prop 13? You’ve missed one of the largest contributing factors to CA’s budget woes.
are Californians stupid? their government is cutting public funds and increasing taxes and they let them, WTF?
Are you stupid?… You must cut down on expenditures and increase revenue to just survive. You must be one of those people that lives on credit cards and does not want to work. Get a clue: LIVE WITHIN YOUR MEANS. This applies to you, your local,state and fed gov. Weather your like it or not.
As a californian I find it reprehensible that the legislature voted themselves a pay raise during this entire fiasco..on top of everything else.
If CA we to stop spending billions a year on Illegal Aliens, maybe they would have more money in their budget! GET RID OF ILLEGALS, STOP GIVING THEM FREE HEALTH CARE! ILLEGALS GO HOME!
Great article! Thanks!
While interesting, this article doesn’t address much budget history, or look at why we’ve been running in the red for so long.
One example:
The Vehicle License Fee was reduced from 2% in 1998 to 0.65% when Schwarzenegger came to office in 2003. This reduced state revenue by more then $4 billion per year, but there were no corresponding cuts in State services to offset this reduced budget revenues. You would think that the VLF would be directly tied to something like Vehicles, but it’s not. In fact, road and other vehicle costs continue to get more expensive.
This is only one example where politicians tried to cut funding sources, without providing a way to reduce costs. In effect, they passed on the responsibility, and now we need to deal with it.
While people mock Democrats for their “Tax and spend” policies, few people will consider the impact of the “Cut and spend” Republicans.
What about the millions and millions of dollars paid out resulting from lawsuits filed because of bad police behavior. Its the small things of the past that comes back to bit you when your in a financial crisis.
There are several major factors causing the CA economic disaster, none of them having to do with voter initiatives or prop 13. Calif was run very efficiently throughout the 1980s-90s under the restraint of Prop 13.
Calif now has 12% of the nations population and 32% of its welfare burden. This is due to the self-destructive policy of favoring illegal immigrants with programs designed for citizens. Compound this with a very lax fraud enforcement and low qualification standards. Those who are at first turned down for welfare programs automatically appeal. The system is widely known for its almost non-existent resistance to fraudulent appeals.
Calif has a huge fixed percentage of the budget allotted for public education which is actually shrinking. New schools are being built for non-existent students. The calif public school system is scholastically one of the worst and has a 40%-55% drop out rate in most urban areas. Due to lax discipline and lack of structured meaningful syllabus (with more administrators per pupil than any other school system) crime and gang infestation are pandemic. Constant disturbances and disruptions, threats of violence and abject disillusionment of teachers prevent a reasonably stable class environment for those who need it most. You can spend $10k-$15K per student by wasting it on profligate salaries and benefits for teachers and administrators who impart little or no useful class time and instruction to students.
The Calif state bureaucracy is under the control of the corrupt SEIU services employees international union. They push for legislation to expand gov’t programs for non-existent clients (like the fraudulent home services medical care program), and/or criminal opportunists.
The legislators and staff and civil service workers of Calif get huge salary, medical, and retirement benefits sometimes achieving more than one lifetime payment by double and triple dipping, with awards of up to 90% of original salary for each retirement account. Legislators and staff and chief administrators get perks such as salaries above $100-$200K per annum AND a Per Diem cash living and transportation allowance of from $20K to$35K (tax free) per year, as well as a taxpayer paid new car.
It is not difficult to ascertain how Califiornia is shot thorough with conflict of interest corruption for union expansion and the control of huge overstaffed departments which spend billions more than they did a decade ago with worse results. It is calculated that the cost of supporting illegal aliens in calif almost precisely accounts for the budget shortfalls, and a simple enforcement of the rules by which all decent people live in their own homes and communities would end most of their economic troubles. Charity is by definition VOLUNTARY not a mattter of forced taxatiopn at the point of a gun.
All the above is quite easily researched and discovered, not to mention that the elimination of illegals would reduce the related crime frequency, law enforcement costs and California municipal and state prison costs by about half.
There are movements afoot to recall several of the worst most corrupt legislators and roll back salaries and benefits to union parasites. There are also plans to make the Calif legislature part time and eliminate the need for constantly inflating expenses and unnecessary new legislation. We can send these people back to their home districts where then can earn an honest living.
Enron.
And read Thucididies if you are curious about the benefits of referendum government.
It’s Not The Fault of Proposition 13
by Richard Rider
Chair, San Diego Tax
For 25 years, one of the most enduring canards is that “Prop 13 gutted local California governments.” Every imaginable failing by local government has, at one point or another, been blamed on Prop. 13.
Indeed, it has always been my admittedly facetious contention that, if the voters hadn’t passed Prop 13, local politicians and bureaucrats WOULD have — because Prop 13 has been the widely-accepted alibi politicians trot out time and time again to explain their ongoing failure to manage their budgets and properly deliver the fundamental government services for which we pay.
Local politicians DO have one legitimate beef about property taxes — the state is confiscating a huge chunk of this revenue. But that is not the fault of Prop 13. Most of this revenue shift to the state occurred supposedly as a temporary measure in 1993 to shore up state funding during the recession. Of course, this “temporary” measure has become permanent, and THAT is what the local politicos SHOULD be screaming about.
The core contention by the big spenders is that we don’t pay enough property taxes — that Prop 13 destroyed the tax base for local government. These whiners cleverly omit the actual historical figures — the data destroys their argument. Consider San Diego County’s property tax history.
In the year prior to Prop 13 taking effect, San Diego city and county property owners paid $638.6 million in property tax. The next year, property tax revenues, which had soared 20% in just the last two years, dropped back dramatically to $353.4 million to meet Prop 13’s 1% of appraised value limitation. Since then, property tax revenues have climbed rapidly. Within six years, property tax revenues exceeded pre-Prop 13 levels.
This fiscal year (ending in June), total county property taxes are $2,834.6 million, over four times more than we paid the year PRIOR to Prop 13, and eight times more than the first year Prop 13 took effect.
However, to be accurate, we need to adjust this figure to reflect both population growth and inflation since the passage of Prop 13. Total San Diego County population has grown from 1,694,000 in 1978 to about 2,835,000 today, a population increase of 67.4%.
During this same time, the total inflation has been about 180%, according to the Bureau of Labor Statistics (there is an inflation calculator on its home page — http://www.bls.gov/ ). Thus, if the bloated PRE-Prop 13 property tax revenue had continued to grow by inflation plus population growth (totaling 274.4%), revenues would now total $2,218.5 million. But this amount is over $600 million less than is now being collected WITH Prop 13 in place!
Stated differently, we are now paying 27.8% more property taxes than the old bloated tax, even after adjusting for population and inflation increases. The mind boggles to think how much higher property tax payments would be if we had NOT passed Prop 13.
Sadly, one can be confident that, even if we HAD paid all that extra property tax, the spendthrift politicians would STILL be telling us that we need to pay even higher taxes. They spend all they can lay their hands on, and then plead government poverty.
Actually, total tax revenues from real estate are growing at an ever faster rate. In the last 5 years, San Diego County core property tax revenue has risen 56.5%, with no slowdown in sight. In addition, in the last decade, a host of property tax assessments for everything from school bonds to road median maintenance have been levied against property owners. And local building “fees” (in essence, extortion charges levied to get permission to build — fees ultimately paid by the property buyers) are now among the highest in the nation, particularly within the city of San Diego.
Add to that increase the rapid growth of other forms of local government revenue (especially sales tax rate increases and water/sewer charges), and it is apparent that San Diego politicians do not have a revenue problem — they have a SPENDING problem.
All you people who bash Prop 13 – that prop prevents people from being priced out of their own house. The neighbor across from me bought her house 40 years ago when it was nothing but orchards. Its now part of San Jose, and worth a lot of money. She’s going to be there till she dies. Should she have to pay taxes on a BS government appraisal of her property that she’ll never capitalize on, and probably not be able to pay? Sure, get rid of Prop 13, throw people out of their houses, and redistribute the land and real estate the the uber-wealthy. That’s the American way.
When she passes, and her relatives inherit the house and sell it, THEN the taxes will be reset and CA gets to make more on it.
Prop 13 isn’t the problem. Its California voters voting yes to everything that comes their way, without thought of how it will be paid. And once they have it, you can never take it away from them.
If a proposition cost money, I vote no. Guess what? Everything I ever voted no for passed.
California’s Fiscal Solutions
A plethora of possible financial solutions for California’s former fiscal irresponsibility….
California could confiscate on paper all private business as collateral and borrow 200 billion from Goldman Sachs at 12 percent interest for 30 years guaranteed by the Federal Reserve. (The high interest rate would be tied to possible litigation by the private firms.) That would give California three to four years before they defaulted on the loan and determined they actually didn’t have the right to confiscate the private property. The US treasury could then pay back Goldman the defaulted principle, and GS would would earn 12 percent for three – four years on 200 billion. 24 billion per year in interest plus the CDS’s and 10’s of trillions of dollars of other notional derivatives on the 200 billion principle – that might jump start the world economy (or not). The Federal Reserve could then put the Goldman Sachs bailout defaulted amount in an off-balance account joining the likes of social security funds earning 7 percent – or other larger bailout funds with the caveat that US taxpayers now owned some portion of the more scenic parts of Yosemite and Death Valley and/or could gain admission to those state parks at possibly a 25 percent discount. (Admission is currently free.) Every entity here does well on paper for short term and long term – no need for state furloughs or belt tightening…
Or the state could encourage the federal government to create a new federal banking system and a new currency with the Federal Reserve and its feeder banks on the hook for all former foreign, public, and private US debt obligations to be paid in the old currency. That would really be a popular citizen measure evaporating the paper wealth of the rich holding that bad paper. debt. The government would print enough old dollars for all citizens and states to pay off their former bank loans and public bonds. The whole US macroeconomy and debtor consumer class could take a Mulligan. The US’s hard assets would still be there and have new value unencumbered by debt. Citizens could take loans in the new currency on those unencumbered assets.
Or California could secede from the union, default to what ever degree they choose to on their former statehood and county pension plans and bonds obligations; charge the rest of the states large handling fees for Asian goods entering through their ports into North America market place, and of course create their own new California national currency and new California national bank with unlimited money creation powers.
If only California were more fiscally responsible …. like for instance the Federal System: the Federal Legislatures and Budgeters, the Central Bankers, the Federal Housing and student Loan Programmers- and, of course the System’s very good partners at AIG, Goldman Sachs, et. al. Wall Street Financial Interbred Conglomerates …. if only the state were as responsible ….. it wouldn’t be in such a dilemma of making the choice between so many possible solutions.
It’s simply staggering why our governments cannot get the formula right. If any one of us (using mint.com or not) ran our personal finances like CA or the Federal Gov we would have been bankrupt 100 times over. Why are these government entities getting away with it?
Why did the CA budget grow so high?
For the 2004-05 fiscal year, the first following Arnold’s election to
governorship, the state had 35.6M people, 313,700 “personnel years” and a
total budget of $157.7B including Federal funds.
For the 2008-2009 year, population was 36.8M (+2.9%), personnel years of
363,000 (+15.7%) and a budget of $202.7B (+28.5%).
Sadly, throughout this period K-12 went up only 3.6% in $$$ spent and 8.5%
in personnel years and now seems to be subject to more than its
proportionate share of cost cutting.
Any insight or sources that may have analyzed the increase would be greatly appreciated.
I still can not accept the California state,they spend too much.
We should send ALL ILLEGAL ALIENS to the white house – let Nobama take them in and see first hand how we cannot afford to let them stay in our country.
We need to cut Ca. loose
illegal immigrant is not the problem here. Its the lazy folk who dont do crap. the one who choose to live off the welfare system.
illegal immigrant come here to do farm labor with a few exceptions.
If we kick all illegal immigrant out of the state. Our economy would collapse even worse. Ask yourself, when was the last time you were out in the field 8-10 hours under the hot sun pick fruits. California is in the hole cause our government allow it to happen.
Almost a decade ago, Business Week noted that goverments at all levels had made personnel promises that could never be delivered on. The cover had a drawing of a city, with black clouds and lightening.
The real estate bubble hid that reality for a time, with temporarily imflated coffers. Now we are dealing with the reality. Don’t let the shell game being played by state and local politicians fool you. A period of serious cost cutting and layoffs is ahead. Hopefully, we can rid ourselves of some of these undeliverable promises.
Perhaps the thing that gets me is after paying 9% income tax, 9.25% sales tax, and a huge amount for property tax, California is still in major debt. Compare this to a state like Texas: no state / local income tax, and sales tax is around 6.25% or so.
It’s a constant shock to me when I hear about how we can potentially generate additional revenues when cutting government involvement in our lives (and therefore cost) is what the debate ought to be about. The government is *supposed* to have few responsibilities and should handle those well but it has forced itself into so many areas of our lives, quite likely because that can require additional money and additional money equals additional power. And let’s face it, many of those drawn to government positions have the tendency to seek power. So we need to realize that the government is made up of people who want to draw more power unto themselves so their sole purpose is to grow the government. It’s an abomination that our legislators describe their jobs as “public service”.
When budget cuts are made (and they’ll need to be made), they will consist of many of the most damaging areas they can think of… to teach us taxpayers a lesson. The lesson of course is, don’t resist taxation.
Rather than killing two birds with one stone by implementing a school voucher program, they’ll keep the same crappy system but increase class sizes. In D.C. there is a program where students can apply for a $7500/year voucher and choose a qualified private school. Since the regular school system spends $14,500 per year per student, this would be a huge savings. And guess what, the students participating are blowing the doors off the public system while attending the private schools, for less than half the cost. We’ll not see that here because of the teacher’s union but that’s the kind of thing we ought to be talking about.
We ought to be talking about cutting taxes and getting more for our dollar than we get today. Prop 13 didn’t go nearly far enough in my view.
Great article and I love the comments. It is very interesting to here all perspectives. I think it comes down to the same problem the entire country is facing. We continue to spend more than we make – we want to continue to have the best of everything but we don’t want to pay for it. We have an amazing amount of waste in our budgets – we have little compassion for others until we have a crisis in our own lives, and we have a political system built on confict vs resolution and compromise for the greater good.
I hope we don’t have to crash and burn like Rome to relearn lessons in history.
American families in need should get all the help their is that will get them on there feet, especially during hard times like these, there shouldn’t be any starving or homeless children in this country and people that need help to get good jobs to support there families should have to same opportunities to do so as people who have the money just from coming from a wealthy family. Why should we cut down on help for Americans who really need it and make sure the rich people continue to stay rich?
Because they are rich and its their money.
good article and yes there are serious consequences on on state bankruptcy:
http://www.wealthalchemist.com/Blog/2009/07/east-ease/
Prop 13 is NOT the cause of California’s budget problems. That would imply that there is a revenue problem, which is factually not the case. California legislators just passed the biggest tax increase in history bringing some of it’s taxes imposed on it’s residents to the highest in the country. Does that sound like the state is not taking enough of it’s residents hard earned money? They just imposed a $16 Billion tax increase and now it has the highest gas taxes, income taxes, and business taxes in the United States. Jobs and small businesses are already fleeing the state to move to neighboring states just to stay in business. They are taking the jobs with them and the middle class is moving out.
Taxes have and will be raised by politicians despite the 2/3 requirement. All it does it require the state legislators to work harder to find real solutions and not run to raising taxes every time they run out of money. They spend too much and that is a fact. Citizens tried to pass reforms requiring the state to live within its means, but they big unions spend billions to make sure they don’t pass. They own the state and every California voter knows it.
Who said anything was real in california, the land of dreamers and left wing fanatics. What goes around comes around. You vote for spenders and you got spenders. You voted against your future and now you have no near if ever future. So keep those idiots like pelosi coming and we will watch you sink deeper. In fact you will sink before the earthquakes hit to drop you off the face of the earth. In fact, that is your best alternative.
Tominator
All the people on here who talk about ‘living within our means’ never specify in what areas we are supposed to do that. Of course what it always comes down to is cutting the poor back to where they go into the streets and the grave, but sparing fat cat corporations, 9 of the biggest of which in CA pay severely reduced taxes which cuts state income from corporations by about 25 percent, while instead we balance the budget on the backs of those least able to pay. We love to scapegoat here in CA to cover our own selfishness. How many of those advocating ‘living within our means’ apply that to themselves? How about cutting THEIR benefits that THEY receive from the state (police, fire, city and county services, income tax deductions, lowered property taxes which have to be shifted onto someone else, etc)? I don’t think they would be such big fans of cuts and budget austerity were that austerity applied equally to them. It is always easier to cut someone else and blame someone else than admit we have a system that actually is skewed toward fat cats and is hard on every day people. It is easy to blame illegals, welfare people, etc…but where do they get their statistics that falsely blame poor people for all our state’s ills without mentioning that for instance CA’s oil companies pay NO severance tax and CA is the third largest oil producer in the nation? It is always ‘blame the poor and feed the rich’ that their arguments boil down to. Why else is the gap widening ever larger between ‘haves’ and ‘have nots’ in CA?
Cool site, love the info.