California Becomes Fiscal Basket Case

Tuesday, 06 Oct 2009 07:52 PM

By John Rossomando

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Although California once conjured up visions of a warm paradise with limitless possibilities, it now fosters images of widespread fiscal disaster and economic dead ends.

That tarnishing of the Golden State's image could have been avoided if officials had eschewed out-of-control spending and high taxation, observers say.

From its 12 percent unemployment rate — the highest in 70 years — and housing collapse to the terrible fiscal condition of its state government, the state stands as a symbol of what not to do, says Grover Norquist, president of Americans for Tax Reform.

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Decades of fiscal mismanagement are forcing the state to slash programs to balance its budget. Indeed, the government found itself so deeply in debt at the beginning of the summer that it began issuing IOU's to state workers instead of wages.

It had to cut its Healthy Families program, which provides healthcare to low-income children, despite increasing demands for services.

The state’s education system ranks 47th out of the 50 states, and its bonds are junk.

Under the budget deal Gov. Arnold Schwartzenegger and the Democratic-controlled Legislature cut this summer to close California’s $26.3 billion budget deficit, billions were slashed from the education budget, and 60,000 state employees were slated to be sacked.

Some teachers even resorted to a hunger strike in response.

All of this has dealt a huge blow to Schwartzenegger’s popularity.

Crisis Could Have Been Averted,

“Sadly, this story could have had a happy ending,” Norquist said.

Had California lived within the limitations imposed under the 1979 Gann Amendment, which limited the growth of spending to the rate of economic growth, some analysts say the state would be in a far better fiscal situation today.

But former Republican Gov. George Deukmejian allowed exemptions to budget items, such as education, before leaving office in 1991, which began the state’s current fiscal trend.

So, California’s spending increased 180.9 percent between 1991 and 2001, and the state budget ballooned from $51.4 billion in 1991 to $144.5 during the past fiscal year, according to the Reason Foundation.

Since 1991, California’s revenues have increased by 166.9 percent, or 5.61 percent annually. The state would have a $15 billion surplus today instead of expecting a $42 billion deficit in 2010 had it lived within the limits of the Gann Amendment and limited its spending increases to 4.38 percent annually, the Reason Foundation found.

During the past 10 years, the number of California state employees exploded from around 270,000 in 1997 to 356,000 today, which placed increasing pressure on the state budget, especially in the form of pension obligations.

California Economy Has Global Implications

California’s problems matter globally because, if it were an independent nation, it would have the world’s eighth-largest economy. It dwarfs those of Iceland and Ireland ? both of which have economies that have fallen into shambles.

The boom days of the 1950s and 1960s when jobs were plentiful and towns and cities sprang from the desert have faded into memories.

“The concept of the California dream was a certain quality of life,” Michael Levine, a Hollywood mover and shaker, told The Guardian. “It was experimentalism and creativity. California was a utopia.”

But that utopia is largely gone now. In Los Angeles alone, the poverty rate has hit 20 percent, and Fresno and Modesto have jobless rates rivaling Detroit.

The situation prompted University of Southern California professor Kevin Starr, who has written a series of books on California history, to say: “California is on the verge of becoming the first failed state in America,” according to The Guardian.

The bursting of the housing bubble and the resulting epidemic of unemployment and homelessness in parts of California symbolize the state’s economic downturn.

One in four mortgages in which homeowners owe more than their property is worth can be found in California.

The area surrounding Riverside, known as the Inland Empire, has become home to large numbers of boarded-up foreclosed houses and abandoned swimming pools that have devolved into breeding grounds for mosquitoes.

One city has seen the establishment of a squatters camp of newly homeless workers living in their cars in a supermarket parking lot, and the municipality has responded by setting up public toilets and a mobile shower.

In the town of Merced, in California’s Central Valley, home prices have plunged by 70 percent, spurring two local Democrats to call for their districts to be declared disaster zones.

The city of Mendota, near Fresno, which calls itself the “Cantaloupe Center of the World,” has seen its unemployment rate skyrocket to 38 percent. The rate is expected to hit 50 percent once the harvest ends and laborers are let go.

More than 40 percent of the town’s population lives below the poverty level, and many shops and restaurants stand shuttered. The city of just under 10,000 people also suffers from a serious drug and alcohol problem the downturn has aggravated.

Taxation Hinders California’s Economic Growth

Contributing heavily to California’s economic nightmare has been the state’s high level of taxation, which has chased many high-income earners out of the state and hindered economic growth, Americans for Tax Reform's Norquist said.

“Several things have happened,” Norquist said. “Because they’ve shifted the tax burden to high-income earners, high-income earners have been leaving the state. . . These new people coming into the state tend to be low-income and not paying a lot of tax increases.”

As a result, a very small number of people in California pays half of the state’s income tax.

“Right now taxes on businesses and top income earners are so onerous that many businesses leave the state and few come in,” he said.

California can reverse its situation if it reduces taxes on those who create jobs and reins in the spending that has escalated the state’s fiscal crisis, Norquist said.

“The one thing that comes out of this is that California can be an example of what not to do for the rest of the country,” he said.

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