I've heard the old saying "As goes California, so goes the nation" many times. I'm hoping and praying it's no longer true . . . because California's in a right old mess, and if the rest of the country is headed in the same direction, our future is bleak.
Joseph L. Shaefer made some interesting points about the state in a blog post earlier this year.
California is sliding down a slippery slope these days. And there are huge investment implications here, not just for California but for all investors. Because California’s undoing has been a very simple formula that is now being duplicated in many other states and, clearly, by the national government. I fear the results will be predictable unless we reverse the trend. That economy- and jobs-killing formula is: over-regulation, over-taxation, over-borrowing, minding other people’s business rather than your own, and under-investing in the people who create the most new jobs: entrepreneurs and small businesses. Is the national government headed the same direction? There are signs that it is. Let’s look at these California hallmarks, one by one.
* Over-regulation. ... The Small Business & Entrepreneurship Council publishes an annual ranking of the best and worst states in which to start and run a business. My state, Nevada, which has seen an influx of new residents fleeing California, is ranked #2. California is ranked #49.
New regulations to finance the social engineering initiatives of politicians are added daily. Businesses are being strangled by “hidden” taxes in the form of fees, licenses, and time away from productive work in order to gain permission and report progress to local commissars.
The burden of small business red tape in California is estimated to be something like a half-trillion dollars every year. For that kind of money, 4 million full-time California jobs could be created by private industry. (P.S. California’s unemployment rate is 12.4%, fifth highest in the nation.)
* Over-taxation. "Taxifornia’s" top tax rate for individuals is 10.3%, the highest in the nation -- higher than even DC, New York, New Jersey and other failed governments pursuing their social agenda at taxpayer expense. A businessman organized as a sole proprietorship could increase his profits by 10.3% simply by moving his business to Texas, Nevada or one of the other 5 states that charge no personal income tax on top of the federal income tax. At least California isn’t the very worst with its corporate income tax -- its 8.84% makes it only the 9th-worst behind bottom-of-the-barrel Pennsylvania, at 9.99%. None of this has stopped California from giving the 6th-most liberal worker’s’ comp benefits, however. After all, they can always soak the “rich” car wash owner, carpet-cleaner or landscapers who hires the workers.
Glad you don’t live in California? That’s not the purpose of this article. My purpose is to sound a clarion call to preserve the sanctity of a free economy where hard work is rewarded, not taxed to death.
* Over-borrowing. Bond buyers aren’t stupid. If they see an issuer over-extending themselves, they will insist upon a higher rate of interest to compensate for their increase in risk. California’s Single-A rating is now the lowest rating of any state. Yet it is the largest issuer of municipal bonds in the USA. California has gone back to the borrowing well so often that it has driven up the amount it pays above top-rated municipal debt 6 times since September 2008! California has more than $83 billion in bond debt outstanding -- and faces a $20 billion revenue shortfall in the coming 18 months. When asked how the state could keep its bonds from defaulting or the state from going bankrupt, Aaron McLear, spokesman for Governor Schwarzenegger, said, “We’re going to stay at it to make sure we get our fair share from the feds.” That’s their solution? Get it from residents of Iowa, Texas, Alabama and Nevada? Brilliant.
* Minding other people’s business rather than your own. The fact that they want us to bail them out doesn’t stop every state bureaucrat and elected official from pursuing their own social and environmental pet project they believe it is their God-given right to inflict on others. For instance, all electricity imported from other states must be from green sources. Californian authorities don’t know the added cost this adds to small businesses, nor do they care. As a result California, with abundant oil, gas and refineries, ranks 11th-worst in the nation in its cost of electricity. And it has the highest state gasoline taxes of any state.
* Under-investing in the people who create the most new jobs: entrepreneurs and small businesses. The sad truth is that Californians have thus far chosen to elect people who view job-creators as something evil -- exploiters of the masses and all that. If the voters don’t change this approach this election, they will doom California to becoming a second-rate state.
Your investments, whether in California or in the United States of America, will never succeed unless they are given a fair chance at success. If pursuing a personal social agenda becomes the primary role of elected leadership, all is lost. If over-regulation, over-taxation and over-borrowing become the order of the day, no business can succeed. California’s entitlements system and entitlements mentality are driving the state into bankruptcy.
How does California pay for its roads and highways, its courts, its mass transit, its water? It issues bonds. It borrows more money -- and spends more and more every year on interest for its ever-increasing debt. We can all learn from this example -- and hope California voters do, as well -- and resolve not to re-create it in our own lives, or in our nation.
There's more at the link.
Jennifer Rubin points out that California's problems have been developing for a long time.
The reform era that began after the turn of the last century, a reaction to the railroad-baron-dominated government of the 19th century, contributed a heavy dose of direct democracy—a system of referenda, initiatives, and recalls that allowed the public to bypass the state legislature but also to accelerate the influence of special-interest groups that learned to draft and promote measures ranging from budget protection for teachers’ unions to bans on horse meat. The result was an unworkable governmental maze in which lobbyists and public-employee unions came to wield huge power.
Liberals finger the tax revolt of the 1970s and the successful passage of the Proposition 13 referendum in 1978 as the culprits for the state’s fiscal woes. They are correct in part, but for reasons they would prefer to ignore and the reform’s authors never imagined would result from it. In the 1970s, the influx of new residents and the frenzy for home-buying coincided with a nasty bout of inflation. Real-estate prices rose to astronomical levels. Middle-class families and the elderly faced crushing property-tax bills and the potential loss of their homes. California’s boom was imperiled. When the legislature proved unresponsive, the citizenry organized and launched the anti-tax crusade that is a direct precursor to the Tea Party movement of today.
As promised, Prop 13 drastically reduced property taxes and permitted residential homes to be re-assessed only at the time of sale, fixes that relieved homeowners of the heavy tax burden that had fueled the revolt. But Prop 13 had other effects as well. Local governments lost nearly a quarter of their revenue, and the state, which was then flush with cash, stepped in to take over school and social-welfare funding. This centralized spending in Sacramento and made the state capital an unparalleled target of opportunity for special-interest groups, which became expert in navigating the unwieldy bureaucracy and convoluted budgeting apparatus.
Over time, even well-intentioned legislators found their hands tied by the exigencies of fiscal law and the legislature’s political dynamics. Since the 1930s, a two-thirds majority of both state houses has been required to pass spending and budget bills. Prop 13 added a two-thirds vote requirement to pass tax hikes. While this reform was intended to compel fiscal discipline, it actually empowered small numbers of legislators to hold out for pork-barrel spending in their districts—effectively blackmailing the governor and more-responsible leaders, who felt compelled to pass timely budgets. An annual face-off would occur as the state edged closer to the budget deadline. California took to issuing IOUs while awaiting the passage of budgets. Crafty maneuverers, as Matthews and Paul explain, learned to reach budget compromises “through questionable borrowing and accounting gimmicks.” Thus, “in many ways, Prop 13 represented a liberal dream come true.”
California went on an unprecedented spending spree. Between 1990 and 2009, according to a 2009 Reason Foundation report, “state spending—including the General Fund, special funds, and bond funds—has increased 180.9 percent, or an average of 5.91 percent a year. . . . Since FY 1990-91, General Fund spending alone has increased 156.8 percent, or 5.37 percent a year.” The number of state employees soared by almost 40 percent. Per capita spending increased 95.9 percent in the same time period.
Despite the common argument that Proposition 13 had starved the state of revenue, cash flowed steadily into Sacramento’s coffers. “Since FY 1990-91,” the Reason Foundation report revealed, “revenues have increased 166.9 percent, or 5.61 percent a year. . . . Based on these revenues, if California had simply limited its spending increases to the 4.38 percent average increase in the state’s consumer price index and population growth each year since FY 1990-91, instead of a $42 billion deficit, the state would be sitting on a $15 billion surplus this year.”
The Wall Street Journal editorial page explained that in 1999, then-Governor Gray Davis, in cahoots with the California State Employees Association, passed “the largest issuance of non-voter-approved debt in the state’s history. The bill...granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries.” The California Public Employees’ Retirement System (known as CalPERS) promised that no additional state contributions were needed and that the plans would be “fully funded.” It was the ultimate something-for-nothing scheme: “They also claimed that enhanced pensions would not cost taxpayers ‘a dime’ because investment bets would cover the expense.”
But CalPERS and Davis didn’t tell the voters that the state would have to pick up the tab if the ludicrous investment predictions (for example, that the Dow would hit 25,000 by 2009) failed to pan out. The shortfall turned out to be hundreds of billions of dollars. Nor did voters learn that “CalPERS’s own employees would benefit from the pension increases [or that]...members of CalPERs’s board had received contributions from the public employee unions who would benefit from the legislation.”
A sense of unreality still pervades. In August 2010, on the site of the Ambassador Hotel in Pasadena, a new high school named for Robert F. Kennedy (who was killed there on the night of the 1968 state primary) opened at a cost of $578 million, almost nine times that of an average new school in the state and the most ever spent on a high school. According to the Associated Press, it features “fine art murals and a marble memorial depicting the complex’s namesake, a manicured public park, a state-of-the-art swimming pool and preservation of pieces of the original hotel.” Meanwhile, “nearly 3,000 teachers have been laid off over the past two years [and] the academic year and programs have been slashed. The district also faces a $640 million shortfall and some schools persistently rank among the nation’s lowest performing.” A school-building advocate dryly observed, “Architects and builders love this stuff, but there’s a little bit of a lack of discipline here.”
That would aptly describe the state as a whole. This year, an official budget shortfall of $19 billion and record unemployment have Californians reeling. But even that understates the problem. The real extent of the state’s debt, including unfunded liabilities, now runs into the hundreds of billions. New scandals break daily—bloated pensions, lavish state salaries, and threatened draconian cuts in services. If you make more than $60,000 a year, a relatively modest wage considering the cost of living, your top marginal state income tax rate is now over 9 percent—and given the severity of the cuts in basic services, you have little to show for the money taken from you.
The notion that growth would be endless, that debt could be piled on future generations, and that government could provide an ever-growing array of services with no impact on the state’s ability to retain and attract wealth has reached its inevitable conclusion: full-fledged financial chaos. And while there are many responsible parties (Democratic-dominated legislatures, weak Republican governors, labor unions), at bottom Californians created their own morass. Much of the debt was piled on by popular referenda. Lawmakers were elected and re-elected. The people acted, and the people are now suffering the consequences.
Even so, some of those consequences were entirely unintended. Property-tax reform led to the centralization of power, which allowed interest groups to become politically pre-eminent. Term limits were supposed to end the reign of professional politicians, but the policy simply shuffled politicians from one post to another and strengthened the grip of outside interests and more-experienced bureaucrats.
Again, there's more at the link.
Unfortunately, many of the State's elected 'leaders' appear to be fiddling while Rome burns. The Wall Street Journal recently reported:
On the brink of insolvency, California may have to pay its bills with IOUs soon. A budget was due three months ago, and the legislature hasn't passed one.
The lawmakers can, however, point to a list of other achievements this year. Awaiting Gov. Arnold Schwarzenegger's signature, for example, is a bill that would bar the state from filming cows in New Zealand. It's the fruit of five committee votes and eight legislative analyses.
California lawmakers also voted to form a lobster commission. They created "Motorcycle Awareness Month," not to mention a "Cuss Free Week."
. . .
Failure to pass a budget has reinforced the most populous state's image as also the most ungovernable. Mr. Schwarzenegger proposed his budget in January. Legislators have had all year to revise it and pass one more to their liking. It's the only state with a fiscal year that began July 1 that hasn't passed a budget.
California paid bills with IOUs for two months last year, and the state controller says he may resort to them again in the next weeks if lawmakers tarry. Legislative leaders say they hope to have a preliminary budget this week to deal with a shortfall currently projected at $19 billion. It still may take weeks of wrangling to wrap up final details.
Lawmakers lined up votes more quickly to pass the "Happy Cows" bill, as Assembly Bill 1778 has been dubbed. The legislation would bar publicly funded commercials that promote California products from being filmed outside the state. The bill's author, Ted Lieu, a Democrat, says it would keep jobs in Hollywood.
The commercials feature "unhappy" foreign cows auditioning, American Idol-style, to come to the state and be "happy California cows." Mr. Lieu learned that the state-supervised California Milk Advisory Board, which makes the spots, had filmed some in New Zealand.
"You're promoting California dairy because we have happy cows, and you say, 'Well, let's go to New Zealand,'" he says indignantly. "It's a very misleading thing to be doing." His bill included a thorough analysis by the Assembly Committee on Arts, Entertainment, Sports, Tourism, and Internet Media.
The milk board says antipodean animals starred strictly as unhappy foreign cows, such as "Anna" from the Alps and "Soo" in Korea. "The only images of cows filmed in New Zealand are foreign cows, unhappy cows from all the world, auditioning to become a California cow," says Michael Freeman, the board's vice president of advertising. "We've never filmed California cows any place other than here in California."
The cow bill is on the governor's desk. His spokesman says the governor has no position on it and generally doesn't publicly comment on pending bills.
Others in the statehouse do. "The state's broke," says Assemblyman Chris Norby, a Republican. "Is this really what we should be spending our time on?"
. . .
Some legislators say it's unfair to criticize them for spending time on matters like this. Only a few in the leadership or budget committee are involved in developing a spending plan, they say, so others must go about the normal business of lawmaking.
"If we all focus on the budget, then we're going to crash," says Assemblywoman Lori Saldana, who persuaded colleagues to pass her plan to create the "Lobster Management Enhancement Advisory Committee." It is designed to help the state's estimated 200 lobstermen trap California spiny lobsters.
You can't make this stuff up, can you? *Sigh* Again, there's more at the link.
Sadly, these sorts of problems and attitudes are precisely what we've seen from Congress and the Senate during the past couple of years. We've had gridlock, deadlock and all other varieties of lock on most of the important issues, while irrelevant, minor matters receive solemn attention from lawmakers. We've seen refusal to compromise, bitter interpersonal and inter-party disputes, and an almost complete lack of willingness to put the needs of the country ahead of partisan political interests. Both sides have been equally to blame. This isn't a problem of only the Democratic or Republican parties - it's a problem shared by almost all our elected representatives.
If anyone's in any doubt about the need to get rid of incumbent politicians (from both parties) and get fresh blood into Congress and the Senate, just look at what's happened to California in its absence. If we want to prevent the same thing happening to the nation as a whole, we need to act this November to throw out the 'old guard' and put into office those who will listen to us, and fix the problems confronting us - not fall back on the same old pious political platitudes. Frankly, I don't care which party they're from . . . just as long as they'll listen, and represent our real needs rather than their party's special interest paymasters.