Low-Hanging Fruit

California faces the possibility of highest budget deficit of any state, north of $19 billion. Its cities and towns are running out of cash at a parallel rate. It has massive under-funded pension obligations (I blogged about this issue vis-à-vis Los Angeles, but the same issues apply statewide as well), as a border state disproportionately bears the brunt of the social cost of undocumented aliens, faces wildfires and earthquakes that mimic the devastation of weapons of mass destruction, has one of fastest deteriorating local primary and secondary school systems in the entire country, has failed and failing basic infrastructure, has one of the highest unemployment rates and greatest falls in home values in the nation and still sports some of the highest income and sales tax rates in the U.S. It also has a voting mechanism where emotional issues can circumvent the legislative process through its ballot initiative process, with one such initiative force a nigh-impossible 2/3 majority to pass a state budget. Oh, but it does have amazing ocean views (for part of the state) and terrific weather.

How does the state plan to deal with this morass? Here’s what the Governator is proposing, although it unlikely he will generate the bi-partisan support necessary to ram this through a highly polarized legislature: “Proposing a budget that would eliminate the state’s welfare-to-work program and most child care for the poor, Gov. Arnold Schwarzenegger on [May 14^th] outlined a stark vision of a California that would sharply limit aid to some of its poorest and neediest citizens…. His $83.4-billion plan would also freeze funding for local schools, further cut state workers' pay and take away 60% of state money for local mental health programs. State parks and higher education are among the few areas the governor's proposal would spare… The proposal, which would not raise taxes, also relies on $3.4 billion in help from Washington — roughly half of what the governor sought earlier this year — to help close a budget gap now estimated at $19.1 billion. Billions more would be saved through accounting moves and fund shifts.”

“‘California no longer has low-hanging fruits,’ said Schwarzenegger at an afternoon news conference in Sacramento. ‘I now have no choice but to … call for elimination of some very important programs.’… Elimination of CalWorks, the state's main welfare program, would affect 1.3 million people, including about 1 million children. The program, which requires recipients to eventually have jobs, gives families an average $500 a month. Ending those payments would save the state $1.6 billion, the administration said. It would also make California the only state not to offer a welfare-to-work program for low-income families with children.” Los Angeles Times (May 14^th).

The problems of many states – those with high unemployment, under-performing consumer sales and falling housing prices – is obvious: there’s no tax base to support programs that were created in vastly better times. It is particularly hard to cut back on programs where the right to payment has vested – bond issues, loan repayments, pension requirements, union benefits – or where the federal government (either through matching fund incentives or simple statutory requirements) effectively has taken state discretion away. California and several cities within the state have taken to selling off real estate assets during the period of the lowest real estate values in years. With no clear mechanism to bankrupt at the state level (federal bankruptcy – Chapter 9 – only recognizes “municipal” bankruptcies), the solution to long-term commitments that such state may never again have the ability to pay is elusive. States can’t print money, and their ability to borrow depends heavily on the ratings that credit rating agencies apply to them. Borrowing also doesn’t fix the problem; it merely delays the inevitable, and “waiting out the economic downturn” – now couched as a number of years – isn’t a realistic option for states that are sliding into oblivion now.

As we watch Europe’s PIIGS nations deteriorate and the Euro falling in value, as we watch commercial real estate failures multiply and take down local banks and as credit seems to be drying up like a desert after a very short rainfall… the question is which shoe will drop next and exactly when. We need new industry, innovation and better education to lead us out of this dark and unexplored cave.

I’m Peter Dekom, and I have a whole lot more faith in the younger generation than I do in my own.