What will become of California?

[Rich_by_the_Bay]

As I ponder the plight of California retirees or soon-to-be's (as well as my son who lives near SF) I wonder what ultimate damage will be from the state's bankruptcy-like status.

What do you see ahead, say 5 years? Higher income tax (already a flat 10% or so), pension take-backs? A state sales or VAT type tax? Muni defaults? Breakdown of core civil services?

Or do you feel it will work itself out relatively painlessly (except for those who loses their jobs, the big victims) as the economy ultimately recovers? I'm interested in the opinions of Ca residents as well as "outsiders."

 

[W2R]

I do not live in California presently, but have lived as an adult for 6 years in Northern California and 6 more years in Southern California. Although I know that many love that state dearly, I have had no desire to move back.

I suspect that California will work things out, perhaps with assistance from the federal government. Those who want to live there, love it so much that higher income taxes or sales taxes won't drive them away IMO. I think housing has begun to recover in some parts of California already.

 

[HatePayingTaxes]

California resident here. Gov Brown recently announced that he'll be closing the budget gap by cutting gov't spending and having special election in June to extend the increased sales, income, and vehicle license tax. I doubt this will pass in the special election. They'll have to reduce pension obligation but, under the current law, they can't retroactively change the pension promises.

Lets see... I'm just waiting to see what happens to CA this year and see if I should move out of this state.

 

[MasterBlaster]

I see the Greece-ification of California.

I have lived in SoCal for many years. The state government is dysfunctional and is run by and for the special interests. Oh sure, they talk a good game, but I don't see anything good happening to shore up the state finances. Jerry Brown's proposals for truly significant cuts have little chance of passing through the legislature. Already we hear the chorus from each affected group how catastrophic the proposed cuts will be.

Further, the business climate is stifling. Those in charge of our state, will continue to legislate mandates and regulations until every private business is either bankrupt or moves out of state.

I see higher taxes, continued high unemployment, and declining state services as inevitable. It just keeps getting worse.

Only some discipline from the bond markets will slow down the growth in state spending.

This train wreck will play out over a number of years.

 

[kumquat]

I thought the "Big One" will move the coast line inland a few hundred miles.

Oh, you guys are talking finances, sorry.

 

[Martha]

My sister works for a drug and mental health treatment program provider in Los Angeles. They have been on the edge for a while, living on federal stimulus money and late payments from LA county, and private donations. They have laid off a number of staff but service needs increase. I worry about her and the work she does.

 

[SunsetSail]

I've lived in So Cal in aggregate 35 years.

The combined sales tax rate for large population counties is bumping up against 10%(a portion of Brown's proposal depends on an extension of the tax increases that got the sales tax rate that high). Cities such as LA and San Francisco have gross receipt or similar taxes that pull in world wide receipts as the starting point of the tax calculation. There isn't much room to add more taxes. Few politicians will even bring up the third-rail of California tax - a repeal of prop 13 (several years ago when May Co was still around they filed suit against the State Board of Equalization claiming in part one small part of prop 13 for businesses was invalid. The public revolt against it was so strong that May Co stores were picketed and boycotted. They dropped the suit before it went anywhere.)

Most of the legislature was elected through the support of the public employee unions, so I think a reduction in vested pension benefits won't happen. Current employees have already seen cutbacks in future benefits.

There are some questions as to whether California can default on munis - that is, the state may be required to service the debt ahead of other obligations based on certain constitutional provisions. I dumped all my CA munis in 2008 so I haven't followed this closely.

I think the only possible way to fixed things in a combination of higher taxes and lower services. Jerry Brown's proposal is interesting to shift the responsibility of funding many programs to the county and city level. The political subdivisions of the state would have more power to raise revenue, but in theory could direct the spending better than the state.

Over the years I lost several large corporate clients each year due to moves out of state. The business and tax environment is only going to get worse which could likely reduce the tax base and increase the need for even higher tax rates.

There is a fundamental problem and constant conflict with direct democracy and the republic system. I don't think the spending problems can be ultimately fixed unless the direct democracy element is eliminated. The problem is the CA constitution would need to be scraped and re-written.

DW is 5th generation CA and I am 4th. We have a huge network of family and friends here, but we still talk about moving all the time. Austin always comes up in those conversations...I could probably cut my FIRE plan from 10 years to 5 years based on reduced housing costs. It almost seems stupid not to move.

 

[Nords]

As I ponder the plight of California retirees or soon-to-be's (as well as my son who lives near SF) I wonder what ultimate damage will be from the state's bankruptcy-like status.

I've never really studied the history of the 1990s Orange County bankruptcy, and I guess NYC's 1970s troubles are too far in the past to be relevant.

I know San Diego's been working through some problems-- would their experience be a template for the rest of the state?

So how much preferred stock would California have to offer to Berkshire Hathaway for a capital infusion? I hear Charlie Munger has a few ideas he'd like to try out...

 

[chinaco]

Higher taxes less govt handouts, less generous govt pensions, and less govt spending.

 

[JBmadera]

Lived here in CA most of my life and we will be moving out fairly soon (last daughter heads off to college this fall!!!), as other have stated solution will be a combo of higher taxes (several kinds) and lower level of services.

Watch the Vallejo bankruptcy closely for clues.

 

[Midpack]

Interesting post SunsetSail, thanks. I can't imagine how this will all play out for California, but it will be interesting to watch. It appears New Jersey has begun to grab the bull by the horns, might be instructive for California, but too soon to tell. And Illinois is another to watch, among others, IMO.

Glad I live in flyover country, not all bad...

Though I live in "Chicagoland" I am not in IL, but I get Chicago news so I hear all about IL issues.

 

[ERD50]

Another thing that amazes me is just how much money (that they don't have) the State of California gives away. A little googling didn't come up with a comprehensive list, but I seem to recall that whenever we talk about solar or personal windmills, electric cars, or just about anything you might be able to call 'green', California has a large subsidy for it, over and above any Federal subsidies.

Maybe in good times it could make some sense to promote things that you think might improve the quality of life in your state (and I think these are very questionable anyhow), but if you don't have the money, and the improvement is hard to quantify - drop it!

Maybe these states can act as a warning for the country. If some states keep spending, and try to fund it with a constant flow of increased taxes, we can all sit and watch them lose business, lose resident, and lose tax revenue. As that progresses, those states will need to raise taxes even more - rinse, repeat.

So it's one thing to lose businesses to another state (and some of those will be lost to other countries), but if the country continues on a tax & spend path, we will be going down the path of these states.

-ERD50

 

[ls99]

Another thing that amazes me is just how much money (that they don't have) the State of California gives away. A little googling didn't come up with a comprehensive list, but I seem to recall that whenever we talk about solar or personal windmills, electric cars, or just about anything you might be able to call 'green', California has a large subsidy for it, over and above any Federal subsidies.

Maybe in good times it could make some sense to promote things that you think might improve the quality of life in your state (and I think these are very questionable anyhow), but if you don't have the money, and the improvement is hard to quantify - drop it!

Maybe these states can act as a warning for the country. If some states keep spending, and try to fund it with a constant flow of increased taxes, we can all sit and watch them lose business, lose resident, and lose tax revenue. As that progresses, those states will need to raise taxes even more - rinse, repeat.

So it's one thing to lose businesses to another state (and some of those will be lost to other countries), but if the country continues on a tax & spend path, we will be going down the path of these states.

-ERD50

+1 !

A long time ago I lived and w*rked in CA, just south of San Clemente.

It was my impression then and still is that CA figured out a good line of BS to have the rest of the US, and debt of the state, pay for all of their progressive programs and ideas.

I found it totally unpalatable, putting it politely, and left.

California should come to grips with the idea and reality of paying for all their expenses with what they have, else go bankrupt. My guess is they will go bankrupt. Hopefully the feds will turn off the spigot of money. Somehow they will muddle trough, unless a 11.0 realigns the coastline for beachfront property in Nevada.

By the way I did spend some time in Bezerkley [-]Berkeley[/-]. A good showing in a microcosm of what was and is wrong with CA.

 

[SunsetSail]

I've never really studied the history of the 1990s Orange County bankruptcy, and I guess NYC's 1970s troubles are too far in the past to be relevant.

I know San Diego's been working through some problems-- would their experience be a template for the rest of the state?

So how much preferred stock would California have to offer to Berkshire Hathaway for a capital infusion? I hear Charlie Munger has a few ideas he'd like to try out...

States aren't permitted to declare bankruptcy because they are separate sovereigns. They can't be sued without their permission so why would they even need the automatic stay in bankruptcy. I think it would take more than an amendment to the bankruptcy code to change it because the distinction has a basis in the Constitution.

The OC bankruptcy might be a stretch for political subdivisions of the state because it was based on restoring solvency due to a failed leveraged bet. The problem now is simply spending is greater than revenues and I don't think a bankruptcy order breaking a few contracts is going to be enough to fix things. Maybe the cities need to be put under Federal receivership...

I think Charlie proposed a repeal of the frozen property tax base under prop 13. Or are you referring to something else? I'm always interested in hearing anything he has to say.

 

[harley]

I think they will legalize drugs, gambling, and prostitution, with appropriate taxes, of course. They will become even more of a tourist destination because what could be better than riding Magic Mountain with a hooker and a joint, or taking a few mikes and wandering through the redwood forests? The increased taxes and tourist dollars will enable them to maintain their foolish overspending until the big one hits and it all becomes moot. JMO.

 

[HFWR]

...taking a few mikes and wandering through the redwood forests...

I used to drop acid; now I drop antacid...

 

[Zero]

As I recall, Gov. Moonbeam was originally opposed to Prop 13, so maybe he will heed Munger's advice.

I sold my PV Estates home in October, and in 2009, the wife opted for a lump sum from her employer who we feared would suffer greatly due to state funding drying up, so I feel lucky to be totally free of this impending disaster.

Hard to imagine a good outcome here. We spend more time outside the state now than inside, so it's good to hear some current resident's take on the situation.

 

[kramer]

California's pain is entirely self-inflicted and it deserves what it gets. I would be willing to fly to Washington and protest in the cold to stop any bailout of that state with federal dollars.

Remember that at the core California has a spending problem, not a revenue problem. When Arnold was running for governor the first time, his main competitor, Tom McClintock, stated in a debate that California spent almost twice as much per capita in the preceding year as Arizona. I didn't believe it so I looked it up and it was true! And the last I checked, California was spending something like 1/3 to 40% more per capita than Texas was a couple of years ago. Texas is a state with similar demographics and a similar illegal immigration scenario.

When I was explaining this spending issue to a California voter about that time, her reply was "Well, things are more expensive here. I noticed that milk cost a lot more here that it was when I traveled to Colorado."

Arnold put some decent reforms on the ballot a couple of years after he was elected and they were ALL defeated by the voters.

Let's hope Jerry Brown can provide the "come to Jesus moment" and the leadership the state needs to start making rational choices for that one political party state.

And on Prop 13, you can forget that changing. People of all political stripes oppose any change. I am a political conservative and thought surely other conservatives would support me on this but no, I received untold opprobrium for even discussing the idea. It is like the mortgage interest deduction in the federal tax code (which never made any sense to me) which is strongly supported by most voters and politicians and probably will never change despite being bad policy.

By the way, some cities, like San Francisco, are in much worse shape than the state.

 

[Purron]

I feel lucky to be totally free of this impending disaster.

Are any of us really free from this? I live in Virginia and have no personal or business ties to California. Even so, I'm concerned about this since I believe the problems there have the potential to impact all of us.

The GDP of CA in 2009 was the largest of any single state and represented 13.4% of the total GDP of the US:

GDP by State

 

[califdreamer]

Try your hand at solving the CA budget crisis here:

Los Angeles Times: California budget balancer - latimes.com

 

[vicente solano]

Another thing that amazes me is just how much money (that they don't have) the State of California gives away. A little googling didn't come up with a comprehensive list, but I seem to recall that whenever we talk about solar or personal windmills, electric cars, or just about anything you might be able to call 'green', California has a large subsidy for it, over and above any Federal subsidies.

Maybe in good times it could make some sense to promote things that you think might improve the quality of life in your state (and I think these are very questionable anyhow), but if you don't have the money, and the improvement is hard to quantify - drop it!

Maybe these states can act as a warning for the country. If some states keep spending, and try to fund it with a constant flow of increased taxes, we can all sit and watch them lose business, lose resident, and lose tax revenue. As that progresses, those states will need to raise taxes even more - rinse, repeat.

So it's one thing to lose businesses to another state (and some of those will be lost to other countries), but if the country continues on a tax & spend path, we will be going down the path of these states.

-ERD50

I totally agree with you. Some of what you say is currently happening in Spain. With our 20.4% unemployment derived from the residential building, tourism and other services crises, and 44 % of youth unemployed, plus our public debt, plus a SS system in need of urgent reform if it wants to survive....these are no times for utopian and beatific measures that, aside from being uncertainly succesful, create a small number of very qualified jobs -unsuitable for most aforementioned unemployed- and may destroy others in a superior number.

Let´s all rant a bit!

 

[Zero]

Are any of us really free from this? I live in Virginia and have no personal or business ties to California. Even so, I'm concerned about this since I believe the problems there have the potential to impact all of us.

The GDP of CA in 2009 was the largest of any single state and represented 13.4% of the total GDP of the US:

GDP by State

Yeah, I guess I was thinking in terms of the pain Californians will suffer if the state takes the necessary steps to implement a solution to the problem rather than the possibility of a total failure which will impact us all as you point out.

 

[FIREd]

The GDP of CA in 2009 was the largest of any single state and represented 13.4% of the total GDP of the US:

GDP by State

Exactly. The words "too big to fail" come to mind. The feds rescued AIG and General Motors to save a few hundred thousand jobs, can they really walk away from the state with the largest economy in the country? I think not. California will be bailed out and I think the politicians there know that.

What I don't understand about California is how do they spend their tax revenues? They have some of the highest taxes in the country, yet I have never seen so many bad roads in a place with zero snow falls.

 

[MichaelB]

The actions needed in California are quite clear. The question is if they can be carried out. There is no indication the political leadership is (or ever has been) committed to serious financial reform. The few past and current efforts are still focused on austerity upon others, which will not work in California (and probably not elsewhere).

Employment by state and local gov't increased around 10% in the past decade, and at the same time public employers became more generous. Employment needs to be reduced to '00 levels and total cost of employment frozen. There is no other way.

Bailout is not likely, because the problem is not one-time but ongoing, and the remedy is not complex, just hard, so it is easier to say "no, fix it yourself" . There is a constituent that will step in sooner or later to force the issue - the bond market - without which no government can operate.

Delayed action means deeper cuts. Getting back to the original question, my guess is there will be 5-10% reduction in public sector employment combined with a slowing of compensation cost and an effort to freeze pensions and reduce health care costs by passing more to the employees. Education and social services will suffer the deepest cuts. Property taxes are likely to increase at a higher rate and may offset some of the education cuts. It will be a long, drawn out, noisy and painful process. Something similar will happen in at least half the states over the next decade.

 

[grasshopper]

I used to drop acid; now I drop antacid...

Once a Prankster, always a Prankster.