The Fiscal Collapse and Political Farce That Is California

May 19, 2009 may go down in California history as the date the most populous state in the Union became "obviously ungovernable." For on that date, the voters of California told their legislative representatives they had just elected to office that they - the voters - really did not want those representatives to attempt to operate and maintain government within the state.

And they repudiated the political compromise worked out by Governor Arnold Schwarzenegger who they elected when they recalled Governor Gray Davis, the second governor to be recalled in American history.

There aren't many Americans old enough to remember when during the depression, along with banks going under, state and local governments including schools started paying vendors and employees with "warrants" which were IOU's based on the hope that someday enough cash would come into the treasuries to cover them. Californians will get there.

The State of California is about to start massive layoffs beginning with about 6,000 employees in the next month with the initial largest layoffs in the Department of Corrections (yes, prison guards).

While most Californian's don't see the magnitude of the problem, the State and local governments of the world's 8th largest economy will suffer a financial shock over the next 6 months. I mention local governments, because the State is considering "borrowing" property tax revenues and will be unable to remit sales tax revenues to local governments because the State is again getting low on cash. The State's deficit is now 25% of the State General Fund and rising.

State spending on everything from cars and computers to food and toilet paper is going to have to be cut by a minimum of 15%. This is a surprisingly large amount of money that is going to cease to enter the private sector. The ripple effect in the national and world economy will be noticed by the economy's statistics keepers.

It's just the way it is unless Congress decides to intervene to bail out another poorly managed "too-large" economic entity within the American economy in order to reduce the impact on the world's economy. The Los Angeles Times, in discussing the likelihood that private investment in California's economy will dry up, noted today:

"We lose competitive advantage by being the state that can't solve its problems," economist Stephen Levy said. "Regardless of what we think the solution is, the fact is we can't find a solution."

The budget crisis threatens to further weaken the state's job market, which lost 63,700 more jobs last month, according to figures released Friday. The state's overall unemployment rate actually fell slightly, to 11% from 11.2%. But new job losses could prolong the vicious cycle in which the California economy is now trapped, with rising joblessness reducing consumer spending and delaying a housing rebound, thus leading to more layoffs.

Business Week yesterday called California a "basket case" in an article noting that 47 states face budget gaps explained:

The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you."

California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says.

Some see California's fiscal crisis as an opportunity to address structural problems with the state's government....

Indeed, some of us do see it that way. As we proposed in our Three Californias web site several years ago, California is too large to be effectively governed unless it becomes a separate country. Since that is unlikely, it is time to split the state into Northern California, Coastal California, and Southern California, as we have proposed.