The state of California

[Levett]

Some recent info on CA bonds. http://www.bloomberg.com/apps/news?pid= ... r=home[url]

Bob U.[/url]

[chaz]

I've sold my CA Muni bond funds (at a loss) and now only hold CA money market funds.

I wouldn't even hold those.

A lot of people have even been moving themselves out of Calif.

[epilnk]

Our system of governance- spending huge amounts of money we don't have, and increasing that spending year after year- is literally bankrupt.

Giving the government less to spend is the only way to stop the hemorrhaging. Then choices must be made how to spend the money government does receive.

This doesn't work at the federal level - see the Bush tax cuts, for example. At the state level where balanced budgets are mandated there is more potential. But we're seeing quite a bit of revenue decline here in CA and they're having a lot of trouble adjusting to it.

[Met Income]

Our system of governance- spending huge amounts of money we don't have, and increasing that spending year after year- is literally bankrupt.

Giving the government less to spend is the only way to stop the hemorrhaging. Then choices must be made how to spend the money government does receive.

This doesn't work at the federal level - see the Bush tax cuts, for example. At the state level where balanced budgets are mandated there is more potential. But we're seeing quite a bit of revenue decline here in CA and they're having a lot of trouble adjusting to it.

It only doesn't work because we allow our governments to still find other ways to spend - by issuing debt when we're already in a deficit. Congress just raises the debt limit when it "has" to. Can't cut spending - never!

[dmcmahon]

Some recent info on CA bonds. http://www.bloomberg.com/apps/news?pid= ... r=home[url]

Bob U.[/url]

With 12% of my portfolio in "high quality" cal munis, all I can say is - ugh!

[White Coat Investor]

This doesn't work at the federal level - see the Bush tax cuts, for example. At the state level where balanced budgets are mandated there is more potential. But we're seeing quite a bit of revenue decline here in CA and they're having a lot of trouble adjusting to it.

It works at the federal level because the federal government can print more money (a hidden tax). It does not work at the state level because they cannot do that. Thus the importance of balanced budget amendments.

What I'm not sure of is whether it would be wise to balance the federal budget. Clearly our deficit/debt is getting out of control, but as I understand it, a little deficit/debt is probably a good thing.

[Eureka]

California is the canary in the coal mine. Most other states have huge budget problems, too. It will be interesting to see what happens.

Illinois has a big deficit. Despite being completely under Democratic Party control for almost six years, no statewide tax increases have been passed. Ironically, our recently arrested governor is probably the main reason the income tax (now a flat 3 percent) hasn't been raised; he has opposed an increase at every turn.

Our property tax is already too high (much higher than California's) and too inequitable for anyone to propose raising it. Ditto on the sales tax, as local sales tax levies have driven the total to more than 7 percent pretty much everywhere. Cook County has the highest sales tax in the country at 10 percent, thanks to the free-spending Cook County Board chairman, whose main qualification for office is that he's the son of the previous chairman.

A lot of Illinois' problems stem from the endemic corruption of "pay to play" politics and the stranglehold public employee unions have here. Public employee pension and retirement benefit obligations have risen to ridiculous levels, and no one will do anything about it.

[celia]

I have read that a lot of California's budget is devoted to things we voted on and are required to be paid (eg, 40% ? of the state budget is to be spent on education), leaving very little discretionary money in the budget for the legislature to earmark/compromise with/cut.

[MossySF]

I have read that a lot of California's budget is devoted to things we voted on and are required to be paid (eg, 40% ? of the state budget is to be spent on education), leaving very little discretionary money in the budget for the legislature to earmark/compromise with/cut.

Shrug... everybody wants the benefits but don't want to pay for it. People rail left and right about spending but forget that they send their representatives to bring home the pork for themselves.

[dmcmahon]

Here in California, our sales tax is 7.25% and the income tax rate is 9.3% for most people (it's the top rate, except for a 1% surtax that kicks in at $1 million, and the 9.3% bracket kicks in at a fairly middling income level). Cities and counties often levy an additional sales tax of 1% or so. Property taxes are around 1.25%, which aren't low, especially considering the inflated property values here. Even pre-bubble real estate enjoying the prop 13 protection was pricey and should be bringing in decent amounts of tax, especially compared to most other states with lower property values. In short, it's hard to see how the state can't make ends meet. I can't help comparing California to Virginia, where I'm originally from. Something's wrong here - why can't anyone drill into the details and figure out what?

[Paladin]

Here in California, our sales tax is 7.25% and the income tax rate is 9.3% for most people (it's the top rate, except for a 1% surtax that kicks in at $1 million, and the 9.3% bracket kicks in at a fairly middling income level). Cities and counties often levy an additional sales tax of 1% or so. Property taxes are around 1.25%, which aren't low, especially considering the inflated property values here. Even pre-bubble real estate enjoying the prop 13 protection was pricey and should be bringing in decent amounts of tax, especially compared to most other states with lower property values. In short, it's hard to see how the state can't make ends meet. I can't help comparing California to Virginia, where I'm originally from. Something's wrong here - why can't anyone drill into the details and figure out what?

Could not agree more. I don't get how the state can't make ends meet. It can't do it in relatively good times either.

[bengt]

I think everybody knows what are the problems in CA. Arnold, to his credit, tried to at least partially solve these, but in the end, unions and the other party defeated him in the referendum so people of California fully deserve the financial mess. People in CA can't blame anybody (not even politicians) but themselves. They had the opportunity in referendum to stop the bleeding.

Federal Govt should certainly not bail out CA. There are still states that are governed responsible (at least compared to CA).

One issue (already mentioned here) is education. I came from a country that is constantly ranked number 1 (or 2) in this area globally. We have 1 teacher per class (25-30 kids, in elementary school) and the school has typically 1 admin assistant, 1 auxiliary teacher and 1 headmaster. This is enough for world class results. What I have understood in CA, is that there are - in addition to actual teachers and assistant teachers in a small class- massive amount of taxpayer funded parasites in various administrative positions adding no value whatsoever and the result is comparable to a 3rd world country where kids can barely read or write English. Despite what Teacher Union says, class size has no effect to actual education results: it is just a way to bloat the system with extra teachers.

In CA, bi-lingual education and illegal immigrants are massive drain in the system, but apparently people are fine with it. So be it.

So, I would get rid of the CA muni funds, although deep down, I know that Uncle Sam will bail out CA when the time comes.

[dmcmahon]

Could not agree more. I don't get how the state can't make ends meet. It can't do it in relatively good times either.

My theory is that during the good times, they start projecting the revenues into infinity and sign up for spending that is then hard to "cut" later when the inevitable declines arise.

Tax rates are already very high here. They can try raising them some more, but I expect it will just drive more people and businesses out of the state. High real estate prices have been driving people out anyway. You can't get blood out of a stone.

I suppose they could try defaulting on their bonds and starting over. But that won't really make the overspending problem go away, and since the budget's out of balance on an annual basis, one would think that the inability to borrow any more money would have immediate consequences.

[Paladin]

Could not agree more. I don't get how the state can't make ends meet. It can't do it in relatively good times either.

My theory is that during the good times, they start projecting the revenues into infinity and sign up for spending that is then hard to "cut" later when the inevitable declines arise.

Tax rates are already very high here. They can try raising them some more, but I expect it will just drive more people and businesses out of the state. High real estate prices have been driving people out anyway. You can't get blood out of a stone.

I suppose they could try defaulting on their bonds and starting over. But that won't really make the overspending problem go away, and since the budget's out of balance on an annual basis, one would think that the inability to borrow any more money would have immediate consequences.

Yes we have seen revenue projection several times the past decade. Happens irrespective who is in Sacramento.

[Ricola]

Something's wrong here - why can't anyone drill into the details and figure out what?

You can't drill down to the details because govt financial details are kept hidden and not made transparent. Just trying going to a public school and see if you can see their detailed financial's. California will never get better because as they say, a pig won't butcher itself. Our public servants are the new Bourgeoisie class and will maintain the status quo as long as possible.

[Beagler]

One issue (already mentioned here) is education. I came from a country that is constantly ranked number 1 (or 2) in this area globally. We have 1 teacher per class (25-30 kids, in elementary school) and the school has typically 1 admin assistant, 1 auxiliary teacher and 1 headmaster. This is enough for world class results. What I have understood in CA, is that there are - in addition to actual teachers and assistant teachers in a small class- massive amount of taxpayer funded parasites in various administrative positions adding no value whatsoever and the result is comparable to a 3rd world country where kids can barely read or write English. Despite what Teacher Union says, class size has no effect to actual education results: it is just a way to bloat the system with extra teachers.

Calif (if not most school districts in the country) could learn a lot from the model under which you studied. Is the difference student motivation?

[Beagler]

Tax rates are already very high here. They can try raising them some more, but I expect it will just drive more people and businesses out of the state. High real estate prices have been driving people out anyway. You can't get blood out of a stone.

Plenty of people are leaving California for lower tax states. Didn't DFA relocate a lot of its people from Calif to Austin a couple of years ago?

Lot of us known people who've left Calif for lower tax states -- esp. relatively successful people. Those left behind will be paying higher and higher taxes. Pity Calif can't restrain its spending like any responsible household. As they say, nice place to visit, but....

[Beagler]

Just for fun here's a sampling of what a Calif biz deals with:

http://tinyurl.com/9r9793
http://tinyurl.com/86m9mt
http://tinyurl.com/8xukw6

[stan1]

A lot of the bureaucracy in education has been imposed by testing standards, which were intended to improve performance but actually mean that teachers teach to the test, and other well intentioned but bureaucratic ideas from above like "No Child Left Behind."

There are about 1000 school districts in California. People want local control of schools, so we pay for it.

In some ways education is like the auto industry: built for a different era with a lot of structural barriers to change no matter how visionary the leadership is.

[johnjtaylorus]

Perhaps California should appeal to Mexico for financial help?

[Ricola]

A lot of the bureaucracy in education has been imposed by testing standards, which were intended to improve performance but actually mean that teachers teach to the test, and other well intentioned but bureaucratic ideas from above like "No Child Left Behind."

I never understood why people don't like the idea of teaching to the test. If you want students to understand Algebra, you put Algebra on the test. Guess what, they have to learn Algebra to the pass the test. Every other field of endeavor has to teach to the test; driver license, military training, pilots, doctors, are all taught knowing there are tests or hurdles that must be passed. From experience I also know there are a lot of teachers that prefer to do there own thing and not be forced to teach to any standards, curriculum, or outcome.

[cato]

Could not agree more. I don't get how the state can't make ends meet. It can't do it in relatively good times either.

Really? Did you know California is opening a brand new law school at UC Irvine? The school's expectation is that none of the students will pay any tuition at all:

http://www.law.uci.edu/paying_for_uci_law.html

Obviously, CA desparately needs more lawyers. Subsidizing them will make the state much more competitive. We need to put fire protection, primary education, and the prison system on hold, so we can create more lawyers......

[sopogah]

California has more lawyes than Japan has engineers :lol:

[AnotherCFP]

This doesn't work at the federal level - see the Bush tax cuts, for example. At the state level where balanced budgets are mandated there is more potential. But we're seeing quite a bit of revenue decline here in CA and they're having a lot of trouble adjusting to it.

It works at the federal level because the federal government can print more money (a hidden tax). It does not work at the state level because they cannot do that. Thus the importance of balanced budget amendments.

What I'm not sure of is whether it would be wise to balance the federal budget. Clearly our deficit/debt is getting out of control, but as I understand it, a little deficit/debt is probably a good thing.

First of all Why can't California issue bonds just like the Feds can?
What if that happened to the U.S. Gov't?
There is one VERY scary issue that this should bring to light and it is this:

How much longer before the US Gov'ts fiscal situation starts to look like California? At what point do our liabilities become payable and the inflation spiral begins to haunt future growths ability to pay down out massive deficit.

on a side note:
Per Wiki: So if Interest on our debt is currently 9% of the total US budget. What if our interest costs doubled from 2007 levels? By my back of envelope calculation That would amount to a 1/3 cut in all spending sans defense, entitlements and mandatory spending.

Its hard to scare me more than by looking at links like this.

http://en.wikipedia.org/wiki/Us_budget

sorry about the thread jacking.

[cmarino]

Many Alaskans are still trying to figure out what gives the federal government the right to 72% of the land.

Well I am still trying to figure out what gives anyone the right to any land, but here's just one minor possibility

[White Coat Investor]

Awesome! Where did you find that image?

I wish they'd sell some of it to me at that price. What a steal, even if you adjusted it for inflation.

Even so, a nation is simply the representative of its people. A state is also the representative of its people. How do you decide what parts of your land you want in the state bucket and what parts in the federal bucket?

[chaz]

California has more lawyes than Japan has engineers :lol:

Lawyers congregate where they are needed.

[chaz]

Perhaps California should appeal to Mexico for financial help?

It gets help from Mexico in the form of very cheap labor.

[cato]

California has more lawyes than Japan has engineers :lol:

Lawyers congregate where they are needed.

Or where a tort system of "jackpot justice" prevails -- a system devised by.... lawyers.

Here's what happens when you increase most professions:

More bakers => more bread => everybody's better off, because they can eat better and cheaper

More engineers => better designed products and infrastructure => everybody's better off

More doctors => less time in the waiting room and better healthcare => everybody's better off

etc.....

Now increase the number of lawyers and what do you get? More litigation. No wealth or value is created. Everybody's worse off.

[Gregory]

There's an old Yiddish proverb that is summarized 'once there was a small town with one lawyer, and he did OK. Then, another lawyer moved to town, and they both became wealthy.' (It's all about litigation and billable hours.) I've never forgotten that proverb.

[dmcmahon]

First of all Why can't California issue bonds just like the Feds can?
What if that happened to the U.S. Gov't?

California would have to find real buyers for any new debt, whereas the federal government can just print money and buy its own debt if there aren't enough buyers. Similarly, foreign governments whose foreign debt is denominated in dollars must actually earn dollars to pay off those bonds, whereas the US government's foreign debt, being already denominated in dollars, can be paid back by printing them up.

[chaz]

California has more lawyes than Japan has engineers :lol:

Lawyers congregate where they are needed.

Or where a tort system of "jackpot justice" prevails -- a system devised by.... lawyers.

Here's what happens when you increase most professions:

More bakers => more bread => everybody's better off, because they can eat better and cheaper

More engineers => better designed products and infrastructure => everybody's better off

More doctors => less time in the waiting room and better healthcare => everybody's better off

etc.....

Now increase the number of lawyers and what do you get? More litigation. No wealth or value is created. Everybody's worse off.

It's the law of supply and demand. The lawyers would vanish if the public didn't give them enough fees.

[stan1]

Could not agree more. I don't get how the state can't make ends meet. It can't do it in relatively good times either.

Really? Did you know California is opening a brand new law school at UC Irvine? The school's expectation is that none of the students will pay any tuition at all:

http://www.law.uci.edu/paying_for_uci_law.html

Obviously, CA desparately needs more lawyers. Subsidizing them will make the state much more competitive. We need to put fire protection, primary education, and the prison system on hold, so we can create more lawyers......

Let's look at this from another perspective. This offer is for the first class through a new law school with no reputation and possibly still working on obtaining required accreditation. The only way any sane student would go there under those circumstances is on full scholarship (or a deep discount).

[jcharles]

http://www.bloomberg.com/apps/news?pid= ... refer=home

Might this have anything to do with living beyond one's means? Bob U.

The requirement of 2/3rds majority to pass any funding bill has interesting consequences--- it's a game theory classic.

The threat to a member of the legislative is that they will be defeated in the primary, usually by a candidate further to the left (or right) in the direction of the party.

There are actually very few competitive seats in the general election.

So the minority party in California has every incentive to refuse to cooperate, in the hopes of landing the majority party in the soup. Hence, no cooperation on funding bills.

Couple that with fiscal straightjackets enforced by popular referendum: from 3 Strikes through to Proposition 13. Which cripple the state's spending and tax raising powers.

The governor is elected by a recall vote on the previous occupant, and blows a huge hole in the budget by cancelling motor vehicle license fees-- hence a big part of the current imbroglio.

The latest version of this is that the legislature will abolish a bunch of user fees, pass a 'tax neutral' budget, and then reinstate the user fees to balance the budget. This makes a nonsense of any rational democratic procedure, but it's how things are done in CA.

Value Thinker:

Implicit in your post is the real cause of the budget problems in California, i.e., gerrymandering the voting districts, See:

http://articles.latimes.com/2008/aug/28/local/me-cap28

However, looking at the list of people and groups in the following url who oppose proposition 11 will likely lead you to the conclusion that the current districts were basically drawn up to protect the majority party in power and the special interests who influence that party.

http://ballotpedia.org/wiki/index.php/C ... _11_(2008)

Hopefully the passage of prop 11 will stick so that we can get out of the legislative quagmire we are in. Additionally, I am not be so quick to discount earlier populist measures such as prop 13 given the political party power grabs and special interest budget demands this state has been subjected to for decades. The super majority sledgehammers have been the only source of control we Californians have been able to maintain over our personal wallets.

[cato]

It's the law of supply and demand. The lawyers would vanish if the public didn't give them enough fees.

Unfortunately that's not the case. Lawyers, like govt. occupations, are not subject to supply and demand. Law firms operate more like mafia protection-money rackets.

I've been represented in countless class-actions where I had no say in the fees. Typical example: law firm sues airline "on my behalf" for price-fixing. The settlement is the law firm gets $20 Million for a few dozen hours of work and all the wronged customers get a #%^#^@#^%!! useless coupon that can only be used on off-peak week days.

[Met Income]

It's the law of supply and demand. The lawyers would vanish if the public didn't give them enough fees.

Unfortunately that's not the case. Lawyers, like govt. occupations, are not subject to supply and demand. Law firms operate more like mafia protection-money rackets.

I've been represented in countless class-actions where I had no say in the fees. Typical example: law firm sues airline "on my behalf" for price-fixing. The settlement is the law firm gets $20 Million for a few dozen hours of work and all the wronged customers get a #%^#^@#^%!! useless coupon that can only be used on off-peak week days.

I'm surprised someone with the name of cato believes there are exceptions to supply and demand.

[jcharles]

http://www.bloomberg.com/apps/news?pid= ... refer=home

Might this have anything to do with living beyond one's means? Bob U.

The requirement of 2/3rds majority to pass any funding bill has interesting consequences--- it's a game theory classic.

The threat to a member of the legislative is that they will be defeated in the primary, usually by a candidate further to the left (or right) in the direction of the party.

There are actually very few competitive seats in the general election.

So the minority party in California has every incentive to refuse to cooperate, in the hopes of landing the majority party in the soup. Hence, no cooperation on funding bills.

Couple that with fiscal straightjackets enforced by popular referendum: from 3 Strikes through to Proposition 13. Which cripple the state's spending and tax raising powers.

The governor is elected by a recall vote on the previous occupant, and blows a huge hole in the budget by cancelling motor vehicle license fees-- hence a big part of the current imbroglio.

The latest version of this is that the legislature will abolish a bunch of user fees, pass a 'tax neutral' budget, and then reinstate the user fees to balance the budget. This makes a nonsense of any rational democratic procedure, but it's how things are done in CA.

Value Thinker:

Implicit in your post is the real cause of the budget problems in California, i.e., gerrymandering the voting districts, See:

http://articles.latimes.com/2008/aug/28/local/me-cap28

However, looking at the list of people and groups in the following url who oppose proposition 11 will likely lead you to the conclusion that the current districts were basically drawn up to protect the majority party in power and the special interests who influence that party.

http://ballotpedia.org/wiki/index.php/C ... _11_(2008)

Hopefully the passage of prop 11 will stick so that we can get out of the legislative quagmire we are in. Additionally, I am not be so quick to discount earlier populist measures such as prop 13 given the political party power grabs and special interest budget demands this state has been subjected to for decades. The super majority sledgehammers have been the only source of control we Californians have been able to maintain over our personal wallets.

[cato]

I'm surprised someone with the name of cato believes there are exceptions to supply and demand.

Huh? Supply and demand don't ever apply when the coercive force of govt. is involved, as it is in lawsuits. That's why someone named Cato is apprehensive about expansive govt.

[superlight]

Maybe I'm wrong (obviously) but I've got about 5% of my net worth in Vanguard's California Intermediate bond fund. I feel more tempted to double that than to dump it.

Two factors: First, I think that no matter the brinkmanship, the legislature gets as real as they have to be (barely). Second, [in the event of real catastrophe] given the wide-open federal checkbook, I can't see the auto companies (say) funded in preference to the states.

Admittedly the legislature has institutionalized their dysfunction longer than I thought they could.