Thursday, February 20, 2020

California: A Model for the Rest of the Country, Part 1

Downtown San Francisco: Taken over by the homeless.

California's path is unsustainable

The Democratic presidential candidate and former New York City mayor likes a lot of what he sees in the Golden State and thinks its efforts on climate change, gun control and criminal justice reform sets a benchmark for other states to emulate.

“I think that California can serve as a great example for the rest of this country,” Bloomberg told supporters at the opening of his Angeles headquarters in January 2020.

California is a place unlike any other. It boasts perhaps the greatest natural resources of any state along with shining high-tech industries. However, like many good economic stories, government policies threaten its future.

Indeed, its government has made California unsustainable.

Of course, it wasn’t always this way. 

As the 1960s came to a close in California, it had a population of nearly twenty million. In the decade before, its economic strength afforded the construction of a vast State Water Project and higher education system that was the envy of the world. Matched with a majestic and trade friendly coastline, along with visionary business leaders, California’s future seemed secured. 

Statistic: 83.8% of Californian adults have a high school diploma. The share of adults in California with a high school diploma is the lowest of any state in the country and well below the 88.3% national high school attainment rate.

And San Francisco. A sad story. Hostage to the Homeless.

But I digress.

By Thomas Del Beccaro, Forbes are the four major reasons California is at such great risk.

4. California’s Infrastructure Deficit.

That vast State Water Project was designed for a population not much greater than 25
million. Today, on any one day, California verges on nearly 40 million people within its
borders and is projected to reach 50 million if not higher.

In the last 50 years, however, California’s infrastructure needs have been ignored.

The state’s water system remains essentially is as it was in the 1960s. As for its roads, a
recent headline declared that “California’s roads are some of the poorest in the
nation and rapidly getting worse.”

According to a 2017 infrastructure report card:

“Driving on roads in need of repair in California costs each driver $844 per year, and 5.5%
of bridges are rated structurally deficient. Drinking water needs in California are an
estimated $44.5 billion, and wastewater needs total $26.2 billion. 678 dams are considered to be high-hazard potential. The state’s schools have an estimated capital
expenditure gap of $3.2 billion.”

In 2017, California’s Governor Jerry Brown estimated California was “facing $187
billion in unmet infrastructure needs.” However, the Bay Area Council Economic
Institute “pegs the cost of California’s unfunded infrastructure needs at up to
$737 billion and possibly as much as $765 billion.” Who is right? It’s hard to
know but all of those figures are more than daunting.

3. Government Debt.

How much in debt are the California governments? That’s hard to know too. According to
a January 2017 study, “California state and local governments owe $1.3 trillion
as of June 30, 2015.” The study was based on “a review of federal, state and local
financial disclosures.”

In other words, that $1.3 trillion in debt is the amount to which California governments
admit. Other studies believe it to be more. Indeed, one study says it is actually $2.3
trillion and a recent Hoover Institute stated that there is over $1 trillion in pension
liability alone, or $76,884 per household. Incredibly, there are 4 million current
pension beneficiaries, a number that continues to grow and which exceeds the total
population of 22 states.

What’s the right number? Apparently, it is so large it is hard to accurately estimate. In
every case, the number is staggering.

2. California’s Taxes and Regulations.

When you consider the California legal system and its regulatory system, inclusive of the
world’s most comprehensive global warming law, California is likely the most regulated
state in the Country, if not the World.

California also is among the highest taxed states in the nation. California has the highest
income tax rates. The top rate is 13.3%. The next closest top tax rate is in Oregon at 9.9%.
However, Oregon does not have a sales tax. California has the 10 highest sales tax.
What is remarkable about the California income tax isn’t just that it has the highest rate, it
is how little income it takes, just above $52,000, to qualify for California rate of 9.3%.

Given the high cost of living in California, that means many Californians are subject to
that rate.

On the other hand, for more than a decade, less than 150,000 of California’s 35+ million
people pay half of all of its income tax – a highly imbalanced system.

Now, many might think California needs all of those taxes given its infrastructure deficit
and debt. The problem with that notion is that those prolonged high taxes, debt burden
and regulations limit California’s economic future. After all, why would businesses locate
in California in the future with the impending tax-aggeddon that must be in the offing?

Also, California’s middle class has been hollowed. A recent CNBC headline read:
"Californians fed up with housing costs and taxes are fleeing state in big
numbers." Where are they going? Many have left for low tax states offering
more jobs than California.

They have been replaced by those taking advantage of California’s magnet government
policies, which increase California’s long-term spending needs. For those that remain,
according to "California has the highest debt-to-income ratio
in the country.”

Little wonder, the demographer Joel Kotkin concluded that “the state is run for the very
rich, the very poor, and the public employees.” It is also how California found itself with
the worst poverty problem and why “California ranks dead last among U.S. states
in quality of life, according to a study by U.S. News.”

All of which brings us to the number one reason California is not sustainable.

1. The California Governments.

You would think all of the above would have government officials deeply worried. So much
so that they would cut back everywhere they could. If you thought that, you would be
wrong – very wrong.

California spends nearly $200 billion a year on budget and even more off-budget in the
form of programs paid with bonds, i.e. debt financing. As for the pension debt, of that
nearly $200 billion, in the most recent budget less than $2 billion was allocated to paying
down that pension debt. More than that was spent this year on a high-speed rail project
currently estimated to cost $70 billion and which no one seems to want.

Beyond that, as I wrote earlier, California is moving ever farther left and wants
the nation to pay for it. The next generation of leaders, Gavin Newsom, Kevin de Leon,
Xavier Becerra and Kamala Harris are significantly to the Left of the old (and
“conservative” by comparison) Jerry Brown and Diane Feinstein. That new generation of
leaders are supported by an influx of friendly voters who are replacing those that are

All of those leaders support the dozens of lawsuits brought by the Democrat Attorney
General Xavier Becerra against the Trump Administration. Many describe those lawsuits
as part of California Democrats resistance movement – a resistance designed to result in
political gains more than policy benefits.

Gavin Newsom, Kevin de Leon, Xavier Becerra and Kamala Harris also support some form
of significantly expanded healthcare benefits if not universal healthcare – which is
estimated to cost as much as $400 billion a year (that is not a typo). All of them support
the California magnet policies that attracted so many of those in California illegally. In
fact, there is no indication that the next generation has any concern for the future debt.
Instead, they support higher taxes.

What taxes will those be? Within a decade you can expect higher income taxes and sales
taxes. There is always a movement afoot to do away with California’s landmark property
tax protection known as Prop 13. You also can expect a service tax – a tax on lawyers and
accountants as well as hairdressers and gardeners. That service tax would be on top of the
existing income tax. Beyond all of that, sooner or later an asset tax will be proposed.
California counties already collect an asset tax on businesses. Look for that to be proposed
statewide as California lurches ever farther to the Left and if forced to confront future

Is there a silver lining in this story?

If you are living in one of the 49 other states, you should learn from the lesson that is
California. If you are living in California, there is always the lesson of how Michigan came
to be governed by a more centrist government. Of course, that came after the failure of the
prior government. For now, however, for all its concern for sustainable foods and
products, California is on a high-speed rail to unsustainability.

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