SF Chronicle: California's Fiscal Crisis is of "Staggering" Proportions

[marmar]

New state budget plan may carry hard choices
Matthew Yi, Chronicle Sacramento Bureau

Monday, May 12, 2008



Sacramento -- With the state's fiscal crisis worsening, there will likely be no good news when Gov. Arnold Schwarzenegger unveils a revised version of his budget proposal on Wednesday.

Schwarzenegger warned last month that California's looming budget deficit could be as high as $20 billion, a staggering figure that represents about one-fifth of the state's annual general-fund spending.

Efforts to close the gap are expected to result in cutting popular programs as well as generating more revenues by increasing taxes or fees. And with budget negotiations likely to drag on through the summer, this story probably won't have a happy ending for the actor-turned-governor or the 38 million Californians, experts say.

"If this was a Schwarzenegger movie, there would be some secret weapon or escape hatch, but unfortunately this is Schwarzenegger reality, not a movie," said John Pitney Jr., a political science professor at Claremont McKenna College. "He's going to lose political capital no matter what he does."

The governor already has been on a losing streak. He trumpeted 2007 as the year of health care reform, but a plan that he brokered with Assembly Speaker Fabian Núñez, D-Los Angeles, failed to gain approval by a Senate committee.

Schwarzenegger declared 2008 would be the year of education, but with state's revenues tanking, the governor has proposed cutting nearly $5 billion in K-12 and higher education for the new fiscal year that begins July 1.

More recently, the governor has been criticized on many fronts after his budget proposal in January included across-the-board cuts that would result in suspending the state's education funding obligations, closing state parks and releasing early tens of thousands prisoners.

Drastic measures

Schwarzenegger, who says he doesn't want to raise taxes, said such drastic measures would be necessary to close what he estimated in January would be a $14.5 billion budget deficit by July 1. By February, nonpartisan Legislative Analyst Elizabeth Hill said the gap would grow to $16 billion, blaming the continuing fallout from the housing market meltdown. ......(more)

The complete piece is at: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/11/MNSM10J97G.DTL&feed=rss.bayarea

[dubeskin]

1. It truly is a crisis waiting to happen

Not that it already hasn't, but just in general we're starting to see a fairly moderate governator look towards the Republican route. Personally I think there are better routes to go down rather than cutting programs that so many in our state need. Perhaps look to higher class tax increases and cut funding from programs where money is just sort of sitting. We could also always try to bolster our agriculture industry. In a time when crops are looked towards for fuel, maybe we could promote that ideology and sell our agriculture. One would think from the large immigrant population our agriculture industry would be thriving.

[mac2]

2. Ashcroft bankrupted them from his false terrorist alerts.

Illgals and huge immigration has brought cheap labor but the tax payers pay for their health, education, and law enforcement needs.

Arson fires have been costly. For jobs? For lumber removal,etc.?

If you out source all the good jobs (farming,movies,technology ones) who will pay the taxes? The unemployed or cheaply paid can't.

Housing melt down is the fault of state regulators who refused to monitor banks.

The old banking regulation forbade excessive investments, etc. There was a certain amount they had to keep as cash, etc. Bring them back Arnold if you have to guts to do it. Where is that "wonder man" movie star image now?

[rpannier]

4. This train wreck came back with Prop 13

The state has been shaky many times since.

It's been on that slow collision course since 1978

[lonestarnot]

5. What was prop 13?

[PSPS]

7. It limits property tax

Read about it here:
http://en.wikipedia.org/wiki/California_Proposition_13_%281978%29

(I don't usually issue Wikipedia references because of its unreliability, but it will give you an overview.)

It's spokesman, Howard Jarvis, became so well known that it got him a cameo role in the 1980 movie "Airplane!"

[lonestarnot]

9. Thanks PSPS.

[NashVegas]

11. I Think There's a Whole Lot of Myth Making There

By people who want the housing market to return to the investment opportunities that were had in the first half of this decade.

[DadOf2LittleAngels]

12. It does not limit property tax

It limits the percent of a home owners value that you can be taxed...

--

"A large contributor to Proposition 13 was the sentiment that older Californians should not be priced out of their homes through high taxes. The proposition has been called the "third rail" (untouchable subject) of California politics and it is not politically popular for Sacramento lawmakers to attempt to change it."

"In addition, contrary to predictions by opponents, the restriction of tax increases for previously owned property has decreased volatility of funding for municipalities. Property tax revenue has continued to increase the inflation rate as a result of property changing hands. David Doerr argues that the "acquisition value system" acts as a control to overspending due to high real estate values, while permitting a source of revenue growth in times of recession. Local governments would then have to have cut spending more severely when the housing market came down."

The U.S. Supreme Court declared in Nordlinger v. Hahn that Proposition 13 was constitutional. Justice Harry Blackmun, writing the majority opinion, noted that the state had a "legitimate interest in local neighborhood preservation, continuity, and stability", and that it was acceptable to treat owners who have invested for some time in property differently than new owners. If one objected to the rules, they could choose not to buy.

[Retrograde]

14. Not quite

it limits the amount the taxable valuation can go up each year. Baseline is 1% of the purchase price, then yearly increases are limited to 1-2% of the previous value.

BTW, additional taxes can be imposed if they're approved by 2/3 of the voters. My town got a parcel tax passed that way.

The big problem with Prop 13 is that it doesn't just apply to residential properties: it's a great loophole for corporations.

[Retrograde]

15. our beloved state legislature helped

by returning the surplus we had a few years ago rather than saving it for an emergency.

[rpannier]

3. They've been propping up the state since Prop 13 passed

and now it's finally come down to the crush.

The state could not ever achieve fiscal sanity because it had limited ways to get money.

The people who voted yes on 13 back in 78 and those who kept buying into the meme "Don't raise my taxes on anything" have themselves to blame for this.

[kestrel91316]

6. People in CA think you can run this state on air. They simply DON'T get

how vital services require REAL DOLLARS for salaries and just keeping the damned place up and running. If you have no state income to fund state government, the only political system you can f---ing afford is ANARCHY.

The City of LA is also in deep trouble. They get lots of their money from city business licenses, the fees for which are based on your business's gross income. Mine is down AT LEAST 30% and probably 40% from last year. I assume other businesses are doing as badly. The streets are empty some mornings, people losing jobs right and left, people getting evicted and moving away........things are completely in the toilet. Our streets are completely falling apart and nearly undriveable in places.

But everything is peachy. At least they haven't raised taxes.........

:sarcasm:

[mac2]

8. A large state like CA can't be run on air.

The Republicans can't run government. They destroy it since they don't believe in it.

[kestrel91316]

10. Pretty much sums up the 7 years of sabotage........

[Radio_Lady]

19. Holy mackerel, Kestrel. I had no idea things have gotten so bad.

What a mess!

[DadOf2LittleAngels]

13. Hose crap..

Prop 13 means that if you lose your job and your house has went up 200% in value but not been assessed you wont have a huge burden for property taxes. It helps seniors and people on fixed incomes keep their homes in a rising housing market!

You need more money go after corporations, sales taxes, and income taxes.. Raise the fees for registering new cars, ...

[twiceshy]

17. Nobody has said it -- the public unions are out of control.

I saw an article listing Fire Fighter salaries from Oakland and there were literally dozens of folks making over $200,000 a year. I have a Masters in Computer Systems and 20 years experience and make about half of that. Fold in the pensions (also absurdly high) and you have an unsolvable problem.

[DadOf2LittleAngels]

18. Well people are afraid to say it here...

But you're right the public roles are all screwy... Two things have to happen they have to fix th pension system to a sustainable one goring forward and they have to weather the next several decades of ballooning pension cost..

[Xithras]

20. How much of that was overtime?

It's a common problem here in California. A public job like police or firefigher, and in some cities even more common positions like park maintenance or sewer repair, will have a fairly "normal" base pay rate of $60,000 to $80,000 per year. The cities don't have the money to hire full crews, so instead implement mandatory overtime measures. The police officer with the $75,000 yearly position may end up bringing home twice that once the overtime from his 70 hour workweeks and mandatory holiday call-in's are factored. The cities don't have to deal with things like workers comp or insurance for extra employees, so they still come out ahead financially in the deal when compared to what they'd be spending if they actually hired more staff.

The downside comes at retirement time, since PERS retirements are calculated based on your previous wages. Those previous wages include overtime.

[Xithras]

16. California is facing a "damned if you do, damned if you don't" moment.

The problem does boil down to Prop 13, but the solution, at this point, isn't to repeal it.

Proposition 13 froze state spending from property taxes, forcing the legislature to depend more heavily on sales and income taxes to fund program growth. As income taxes climbed through the 80's, residents (both liberal and conservative) began complaining loudly about our state income tax levels shooting up (California has the second highest income tax rate in the nation). Realizing that income can only be taxed so much, they turned their attention on corporate earning and "the rich". So, we jacked up our corporate tax rates to among the highest in the nation too (I think we're 3rd or 4th overall).

What was the result? The big companies fled California. Virtually all of the manufacturing and technology jobs that once drive the California economy have either relocated overseas or moved to Nevada. The companies that remain only do so because moving is more expensive than taxes, and they compensate by cutting workers wages. Pick a California industry from 25 years ago, and compare it to todays economy. Aerospace? Virtually all of the aerospace companies have moved primary R&D and production out of California. The NASA centers are largely shuttered. Movies? Few movies are filmed in California anymore. Movie companies still have studios in California, but most on-site filming happens in other states. The income for those companies is largely held by corporations based in other states. Lumber? Dead for environmental reasons. Fishing? Ditto. Farming? Outside of the Central Valley, it's been subsumed by sprawl. We here in the Central Valley are working hard to catch up. Technology? Between Bangalore and Beijing, actual technology work here is increasingly limited to the boardroom level.

California, as a result of the high income and corporate tax rates created by Prop 13, has become a model service economy. Service jobs pay less than manufacturing or industrial jobs, and this eats into the state tax base too. As the middle class shrinks under service wages, the state compensates by raising corporate taxes even higher, driving more of the remaining jobs away. It's a nasty spiral.

Over the past decade, California has been facing another major problem caused largely by these first few...economically driven white flight. Longtime California residents have been waking up to the fact that our state has become an outrageously expensive place to live, and that many middle class people CAN afford to pack up, move east, and either live better on the same money, or live the same at a much lower cost. I own a couple of riverside acres that are worth about $600k here. That's $600,000 for 3 acres of land with a 30 year old 1500 square foot single story ranch style home suffering from dryrot issues. During the boom, its value briefly flirted with the million dollar mark. Do you know what kind of home a person can buy in the rest of the country for $600 grand? Bigger, nicer, more room. My sister lived in Missouri for a decade, and she mentioned once that my home wouldn't go for more than $75,000 there. It makes one think, and increasingly, it's making many leave. Why spend a half million bucks on a stucco walled suburban tract-home with a 2 hour commute, when you can get a nicer stucco walled tract-home with a 1 hour commute for $200,000 less in Nevada or Idaho? Middle class families are fleeing this state at a rate of over 100,000 per year. Those middle class white and blue collar workers are the traditional taxpaying backbone of the state economy and tax system. And who is replacing them? Migrants, a substantial portion of whom are illegal, who pay little or no taxes because their incomes are massively lower than those of the fleeing residents they are replacing. Where those middle class workers largely paid taxes in, most new immigrant families are "break even" at best when it comes to their tax impact. Again, this equates to a net loss of state revenue.

So what's the solution? Some people unthinkingly parrot the "repeal prop 13" line, but that ignores the real damage that a repeal would have on our economy. Depending on where you live in California, between 2% and 10% of the homes are in some stage of foreclosure, and the impact of those foreclosures is HUGE. This would be dwarfed by a prop 13 repeal, however, which some have estimated will result in up to 20% of Californians losing their homes. In other states, people buy with the understanding that they'll need to leave room in their budgets for property taxes. Californian's don't do that, and our housing prices have adjusted to consume the income that might have otherwise gone into those taxes. If we slap those taxes on top of housing prices now, a huge percentage of the population wouldn't be able to afford them. I'm actually in that group myself. A 20% increase in my property taxes would push my home beyond the point where I could afford it. The result? I'd have to sell, and would probably end up moving up to Oregon to join the rest of my family.

Personally, I don't think there IS a solution. We're circling the drain, and there's no way out. The only solution will be to rebuild our economic base, but nobody is willing to enact the measures needed to accomplish that. How do you attract companies back once they've left your state? How do you convince people that it's BETTER to pay twice as much for half the house? How do you bring jobs back from overseas, and convince employers that they're better off paying Californian's $30 an hour than they are paying Chinese $3 a day? I don't think you can. I think the golden age is over for the golden state.