California’s Economic Crisis: Part 2 – The Nitty Gritty and the Path to Poorness
Submitted by J Boogie [TLL] on Saturday, 21 February 2009Comments
California’s budget has just been signed by Governor Arnold, at just before 2 pm on Friday. Now that the budget is in fact effective, what does it really mean for Californians? And how did California actually end up being so broke? First, let’s recap what we know so far:
- $12.5 billion in tax increases, including a 1% sales tax increase, an increase in vehicle licensing fees, and an increase on state taxable income in the amount of 0.25%. Depending on which tax bracket you fall into, this amounts to anywhere from $125 more on the low end, up to about $1,250 for those in a higher tax bracket. However, depending on the total amount of Obama stimulus money the state receives, this could drop to 0.125%, i.e. if California gets $10 billion, we get the reduced state income tax rate.
- $14.8 billion in spending cuts, the majority of which ($8.6 billion) comes from public education funding.
- Proposed $5.4 billion in borrowing, to be backed by the California State Lottery. This would need to be approved by voters in March.
- $7.8 billion in federal stimulus funds (so far).
- $1.7 billion in savings from government payrolls, including eliminations of two state holidays, changes in overtime rules, and workers will be furloughed at least one day a month.
- All in all, this works out to $42.2 billion, just enough to cover California’s record deficit.
- In May (which is right around the corner, Californians, hint hint), Voters will be asked whether they want to approve restraints on government expansion and growth, borrowing against future state lottery revenues, and cuts in mental health and early childhood educational programs. My take on this is that government expansion is absolutely ridiculous. It must be stopped. We pay legislators to make laws and handle the governing so we don’t have to. They fail in this respect. Epic fail.
- Standard & Poor’s has cut the rating on $46 billion of California’s bonds from A+ to A. This gives California the worst credit grade of any state in the union.
The budget has become a hugely divisive issue for California politicians. Fundamental ideological differences exist that prevent the two sides from working together. This is true for politicians all across the board. As a result of these differences, California went without a budget for several months. Now, it has thrown together hail mary of a budget in a last ditch effort to save the state from a complete disaster, and preventing the loss of 20,000 jobs. Just how did the nation’s largest state get itself into such a shitty situation? TLL analyzes California’s road to the poorhouse.
- Massive Borrowing and Spending- California is a huge state, and a huge economic force. However, as rich and vibrant as its economy is, the state borrows a ton of money! It also spends a boat load of cash. Some of the money is spent well. A lot of the money however, faces a less fortunate fate. Voter initiatives put a huge drain on state resources. Propositions should be eliminated, because that is what lawmakers are for. With a drop in California’s bond credit rating, the barometer indicates that California will have a difficult time to borrow such huge amounts in the future. Where does California borrow from? Well, just about everywhere. It borrows from local government and cities. It also borrows from other agencies and funds allocated for other uses, the Fish and Game Preservation Fund for example. During the past 17 or so months that California has had no money in its general funds account, the state has borrowed from Wall Street and special internal funds. California is essentially living on borrowed time. It isn’t the smartest way to run the big show, now is it? Yet the state continues to pour money into different programs, and as a result, California is simply overextended.
- California Mortgage Industry – As many people in the loop have been aware, the housing industry and more specifically, the mortgage industry have played a large role in the current economic crisis in both California and the entire country as well. Essentially, the story plays out as follows. In the economic heydey that was 2007, the housing market was a booming industry in California. So many people were eager to purchase homes, yet many of those people were unqualified credit-wise. In an effort to offer these people the chance to live the American dream, mortgage companies began offering sub-prime loans with variable interest rates. The result was that any would-be-home owner was able to be approved for a loan, even if they had bad credit, no credit, were an extra-terrestrial. The problem was that many of these individuals would face the inability to pay their mortgages, and in an overly-simplified way, the housing crisis began. As things stand now, homes are grossly over-valued, and it has once again become a buyers wet dream. But a great many more people are still unable to afford to pay for their homes, and have been forced to foreclose as a result. Often, as we at TLL have learned first-hand from those in the home loan industry, lenders knew that their customers would not be able to consistently afford their payments. Yet they offered the loans anyway. Little wonder that if someone were to attempt to place a starting point of the current economic disaster, it would likely be placed here.
- Politics As Usual- Republicans, Democrats. Democrats, Republicans. Republicrats, Democlicans. Annoying, right? The two sides sit pretty far apart ideologically. However, the idea (as is always the case) is for a bi-partisan approach to government to take place. This, in reality, rarely happens. Though California consists of many more moderates on both sides than it does extreme leftists or rightists, it is difficult for these sides to work together. This is another reason that California has been unable to pass any budget. Bi-partisanship can be especially difficult considering how polarizing the past Presidential administration has been. Yet with a new President, not much has changed. Clearly, California runs a wide spectrum of political ideologies, so why has it been so difficult this time around to get a budget passed? Keep reading.
- 2/3 State Senate Requirement – California’s current government requires a super-majority 2/3 of legislators to pass a budget. This frustrating requirement has led to years of linebacking against tax increases. However, this requirement is also single handedly responsible for the 5 day budget deadlock, as well as the months of California being budget-less. Getting a 2/3 majority is nearly impossible in a state such as California. Despite its liberal, left-leaning appearance, the state is a mixed bag. If you take a look at political maps of the state, it makes for a nice shade of purple. Northern California is decidedly more liberal than the richer, Hollywood Southern California. Thus, legislators work for dramatically difference populaces. Achieving a 2/3 vote in such a dynamically different state has been a huge problem in getting reforms passed. And you must remember, reform to our budget system is exactly what we are trying to accomplish here. Things haven’t worked out, and it is time to change the status quo. Thus, the 2/3 requirement for budget issues must be abolished. The proposed 55% system would be much welcomed. It gives enough latitude to overcome the flaws of a +1 system, while not being nearly as rigid as the super-majority system we currently have in place.
- Contested budget provisions – Some of the most highly contested provisions of the budget that resulted in such a long stalemate include: the 1% sales tax increase, increased gas tax (did not make the cut), increased alcohol tax (did not make the cut), $700 million in tax breaks for some large corporations, no reduction in budgeting for the state prison system, among plenty of others that simply didn’t make the cut. To be fair, it does take time to make an honest effort to get through so many proposals, and the legislature did work into the early hours to get this thing done. Might not be so bad except for the fact that this budget should have been taken care of a long time ago.
California has been on the decline for some time now. It has spent staggering sums of money, mostly on a borrowed dime. This budget has mistreated education to the point that it must make other states think California doesn’t mind the fact that its education system ranks 47th in the nation. Look, as bad as it is, we need to pay higher taxes. It is just the economic reality. But we could be saving money in key areas, such as the Prison system, which is grossly over-crowded and over-funded. In 1985, California’s correctional facilities budget was $923 million. In 2004, that budget had increased to a jaw-dropping $5.7 BILLION. Yet in the economic budget that was just passed, no changes to the correctional facility budget were made.
Now the argument on the other side will probably go something like this: “The budget increase just means that there were more criminals that needed a place to be locked up.” The retort is, well, yes. But then you must ask what exactly has been deemed criminal? Here are some numbers for you to chew. We hold, in our nations state and federal prison systems, around 45,000 prisoners for Marijuana related offenses. This does not include local (e.g. Jail) data. There were 786,546 marijuana arrests in 2005 alone! We do not need to be spending huge sums of taxpayer money to keep pot-smokers incarcerated. It is an absolute waste of money. And if you disagree, you have been bamboozled into thinking otherwise my friend. (I apolgize for the unusual ending this post is taking, however the story is so large that there is no real way to end it, other than to transition into the next piece ;)
The final chapter of TLL’s California series will look to explore ways we could have avoided the poorhouse, and what can be done in the future to ensure that money is never taken away from our children’s education again. Until then, respect.
-TLL
