Why California Will Get Even Sicker


Is there any hope for the Golden State? Like many U.S. states, California is bankrupt in fact but unable to do anything about it in law. The state's vast number of taxes and fees are driving away both people (as seen in this Pew study on interstate migration) and businesses (as seen in this list of departing companies from Joseph Vranich). And the state's massive commitments to public sector pensions and contracts make it impossible to work out the problem.

At City Journal, Steven Malanga details how the triumph of private and public sector unions created an unsustainable budget situation:

The unions' political triumphs have molded a California in which government workers thrive at the expense of a struggling private sector. The state's public school teachers are the highest-paid in the nation. Its prison guards can easily earn six-figure salaries. State workers routinely retire at 55 with pensions higher than their base pay for most of their working life. Meanwhile, what was once the most prosperous state now suffers from an unemployment rate far steeper than the nation's and a flood of firms and jobs escaping high taxes and stifling regulations. This toxic combination—high public-sector employee costs and sagging economic fortunes—has produced recurring budget crises in Sacramento and in virtually every municipality in the state…

This cartoon needs more callouts.

The SEIU's rise in California illustrates again how modern labor's biggest victories take place in back rooms, not on picket lines. In the late 1980s, the SEIU began eyeing a big jackpot: tens of thousands of home health-care workers being paid by California's county-run Medicaid programs. The SEIU initiated a long legal effort to have those workers, who were independent contractors, declared government employees. …

Municipalities around the state are also buckling under massive labor costs. One city, Vallejo, has already filed for bankruptcy to get out from under onerous employee salaries and pension obligations. (To stop other cities from going this route, unions are promoting a new law to make it harder for municipalities to declare bankruptcy.) Other local California governments, big and small, are nearing disaster. The city of Orange, with a budget of just $88 million in 2009, spent $13 million of it on pensions and expects that figure to rise to $23 million in just three years. Contra Costa's pension costs rose from $70 million in 2000 to $200 million by the end of the decade, producing a budget crisis. Los Angeles, where payroll constitutes nearly half the city's $7 billion budget, faces budget shortfalls of hundreds of millions of dollars next year, projected to grow to $1 billion annually in several years. In October 2007, even as it was clear that the area's housing economy was crashing, city officials had handed out 23 percent raises over a five-year period to workers. …

It will take an enormous effort to roll back decades of political and economic gains by government unions. But the status quo is unsustainable. And at long last, Californians are beginning to understand the connection between that status quo and the corruption at the heart of their politics.

Courtesy of Mish Shedlock. If you have not read Steven Greenhut's analysis of the dominance of public sector employees in California from the February issue of Reason, you should forthwith repair thitherward posthaste.

I am on record as believing that bankruptcy is the only way the Golden State can escape its obligations, but this can not happen. Slate's Christopher Beam explains why states are not allowed to declare bankruptcy, and his explanation suggests that the remaining option—federal receivership—would be even worse, as it would not allow Washington, DC to make the budget cuts necessary to eliminate a large chunk of the state government. Even if bankruptcy were an option, as it has been for the City of Vallejo, the political will is not there to make pension costs disappear.

In fact, based on the one modern example of a state defaulting on its debts—Arkansas in 1933—a California default would probably worsen all the problems described above. When the Razorback state got into hopeless debt through a road-building project, the solution included a new statewide tax and a decades-long moratorium on road-building. Higher taxes and worse roads would be a combination guaranteed to accelerate the state's decline.

Worse still, there is a large political force in favor of a "constitutional convention" that would eliminate California's few remaining brakes on increased spending and taxation. Here, my erstwhile colleagues at the L.A. Times editorial board enthusiastically stand up for a rewrite of the constitution to meet with the state's new "needs" and "aspirations." California's problem is both structural and willful: The state has lung cancer and the doctors can only recommend a switch to filterless cigarettes.

Are there any other options? California does sit on a major earthquake faultline, so there's always the possibility that the state might just fall into the ocean. But as the late Warren Zevon knew, even this option wouldn't allow Californians to get out from under their crushing debt burden: