

Will California become America's first failed state? - sdave
http://www.guardian.co.uk/world/2009/oct/04/california-failing-state-debt
http://www.guardian.co.uk/world/2009/oct/04/california-failing-state-debt<p>i dont live in US, i wonder how a place like california got into such mess.
======
patio11
_i wonder how a place like california got into such mess._

They were ground zero for a pair of US bubbles. This caused the state's
revenues to skyrocket. Believing revenues would always skyrocket, groups which
have essentially captured the state and municipality budgeting processes voted
themselves large increases in benefits. It is politically impossible to reduce
those benefits once enacted, yet they automatically snowball in costs every
year. Its like the miracle of compound interest, except in reverse, and with
the full principal being due every year.

The bubbles have burst and California no longer sees the potential for
staggering revenue growth every year, but will see double-digit increases in
benefits outlays for the politically powerful groups.

Bonus points: every time California has a short-term lack of funds they
negotiate with their beneficiary groups to trade a lack of increase this year
(note: not a cut, just less increase than they would have otherwise gotten) in
favor of a new entitlement due in N years, whose NPV is astoundingly higher
than the savings due to the lack-of-increase.

~~~
callmeed
_"groups which have essentially captured the state and municipality budgeting
processes voted themselves large increases in benefits ..."_

By "groups", you mean "politicians, government employees, and unions" right?

\- California teachers and school employees are the highest paid in the
nation. 35% above the national average.

\- State employees make about 35% more than private-sector employees

\- An enormous pension problem for government employees. A public-safety
worker can retire at age 55 with 90% of his/her salary. The result: $65B in
upcoming, unfunded pension liability. My father-in-law is a retired probation
officer. He does consulting for his county and pulls a pension check–basically
working part-time and pulling 1.5 salaries.

\- The state spends 70% more (per capita) than the national average on social
services, primarily because of it's welfare programs.

Funny story: I worked at a CA community college for a few years while still in
college. Just special programming projects and IT stuff. When I quit to pursue
my first startup, I got a letter letting me know I had $2,000 in a PERS
retirement account. As much as I enjoyed cashing it out for our startup, it
just shows how reckless CA is with spending and obligations to these groups.

Don't think all this is because of a lack of income either. State personal
income tax is really high. Part of the reason we left 2 years ago.

~~~
thirdusername
_\- State employees make about 35% more than private-sector employees_

I'd like to know how they came up with those numbers, care to reference?

~~~
callmeed
"But the latest U.S. Census survey, from 2007, shows the average annual salary
of California state government employees was $53,958, compared with $40,991
for the average private-sector worker."

source: [http://seekingalpha.com/article/153159-california-s-
pension-...](http://seekingalpha.com/article/153159-california-s-pension-
problem-shockingly-irresponsible)

which is actually more like 31.6% higher ... sorry, bad head-math

~~~
jhancock
Private sector jobs include all the minimum wage stuff which have no benefits.
Even Steve Jobs only makes $1 a year, those types of pay packages skew the
results as well. It would be more interesting to see averages segmented by job
categories.

~~~
yummyfajitas
Many public sector jobs have a market rate barely above minimum wage [1], but
actually cost far more thanks to public sector unions.

I don't know about California, but I know that NYC MTA garbage collectors
(job: taking garbage out of the subway) make about $50-60k and gets to retire
after 20 years of work.

[1] Very few people, even highly unskilled workers, earn minimum wage. Market
rate tends to be higher.

[edit: to clarify, by "taking garbage out of the subway", I mean taking the
trash bags out of the garbage cans and bringing them to the dumpster,
sweeping, picking up refuse, etc. In the private sector, this does not cost
$50-60k. I'm not talking about track work.]

~~~
ct4ul4u
One point, garbage collection is a risky job and there is a substantial risk
premium built into the salary.

~~~
patio11
Given the observed difference between the salary of a (unionized) school
janitor and a (non-unionized) cleaning crew worker for a hotel, whose job
duties are essentially identical, I can only assume that either a) unions kill
more people than cancer or b) that there is another factor at play besides
risk premiums.

------
xcombinator
I live in Spain, like California:

1) We are frontier with way less developed countries. Africa-Europe frontier.

2)We have good climate all over the year.

3)We got in debt for buying houses. Tens of years of loan debt were given to
the government in the form of taxes. E.g, you got 35 year loan and paid right
now 16% taxes.

4) The government got used to spending the money, thinking ill will last
forever.

5) People stopped paying loans. They had the same money that before, taxes
grew because debt grew. Today we have millions of unsold houses.

6) Government spends way more that come in. They don't want to stop spending
so they, as an state, go in debt too.

7) Government is in trouble. We are near 20% unemployment rate, gov is
constantly trying to lower the official rate making statistical tricks, like
not considering unemployed those that don't work but go to a employment class.

8)To be continued...

~~~
yxhuvud
Given that Spain don't really have the ability to print money any more due to
being a member of the Euro, what do you think will happen?

~~~
borism
Spain's public debt is not so bad compared to it's other neighbors - France,
Portugal and Morocco all have almost twice as much. Spain's problem is mainly
with the private debt...

Anyway, as you mentioned Eurozone, PIGS countries (Portugal-Ireland-Greece-
Spain) are obviously a major burden with their problems.

But what will happen will depend on what actions will be taken. Personally I'm
quite pessimistic about Europe.

Here's a detailed analysis of the situation from Roubini Global Economics
Monitor [http://www.rgemonitor.com/euro-
monitor/255424/do_brics_and_g...](http://www.rgemonitor.com/euro-
monitor/255424/do_brics_and_germans_eat_pigs)

~~~
leonroy
Thanks, that was a great article, well worth a read (especially for those
inside Europe).

------
ricaurte
If California wasn't subsidizing the South, then they wouldn't have the fiscal
problems they currently have. In 2005 alone, Californians paid $47 billion
more to the Federal Government than they received in spending.

Considering California's annual budget is $100 billion, Californians could
lower their taxes by almost [Edit] 40% and avoid their budget problems if they
stopped subsidizing the red states.

\- <http://www.taxfoundation.org/research/show/22685.html> \-
[http://www.bloomberg.com/apps/news?pid=20601087&sid=a5_S...](http://www.bloomberg.com/apps/news?pid=20601087&sid=a5_Sl24RQ01U)

[Edit] A link to CA's budget:
[http://www.ebudget.ca.gov/pdf/Enacted/BudgetSummary/SummaryC...](http://www.ebudget.ca.gov/pdf/Enacted/BudgetSummary/SummaryCharts.pdf)

~~~
yummyfajitas
Those numbers would only be a fair comparison if they exclude military
spending and entitlements. A air force base in Kansas or a submarine purchased
from Misisippi is (in principle) defending the entire US.

Also, federal entitlements follow the person, not the state, and can't be
counted against states. Simple example: a person works in CA (paying taxes)
and then retires someplace cheaper like AZ (receiving taxes).

Maybe CA does subsidize the south. But the tax foundation numbers don't prove
much, one way or the other.

~~~
billswift
I don't have statistics, but in "Cities and the Wealth of Nations" Jane Jacobs
argued that what really happens in modern times is that cities end up
subsidizing rural areas. So more urbanized areas would "subsidize" those less
so.

------
ryanwaggoner
Is there some particular reason you didn't put the URL in the URL field?

For anyone else annoyed:

[http://www.guardian.co.uk/world/2009/oct/04/california-
faili...](http://www.guardian.co.uk/world/2009/oct/04/california-failing-
state-debt)

~~~
dkokelley
I resubmitted in the correct format:
<http://news.ycombinator.com/item?id=859776>

Should anybody prefer to use it.

~~~
cpach
It's better to let the HN admins take care of such matters. They have fixed
the original submission now.

------
bbg
The Economist in July of this year made an interesting contrast between the
fiscal policies of California and Texas.

<http://www.economist.com/displayStory.cfm?story_id=13990207>

~~~
ahlatimer
I think one of the biggest strengths for fiscal security the Texas government
has to offer is our inability to take on debt. By decree of the Texas state
constitution, the budget _must_ be balanced each and every year. That's
something that article misses out on.

Of course, there are some really stupid things that Texas does in relation to
its spending. Namely, budgets are set two years in advance. It might have made
sense when Texas was first formed, but it hardly makes sense now.

------
kevbin
The article overstates CA's response to its problems. The slashing and "vast
numbers" aren't enough to right the ship and are pretty minimal compared to
private industry, or even other state governments. The response of state
employees and their unions to furloughs (walkouts, infighting, demands for
still higher taxes) demonstrate seriousness hasn't set in.

Booms and busts define the state, long before the housing or internet bubbles,
there was the gold rush, the oil boom, the space race, the PC revolution, you
name it. There's always another boom to cover the last bust—this time, too.
That boom and bust mentality extends to radical political solutions that
become problematic in themselves, like the initiative process, super-majority
rules, and prop. 13. The state pretty much _is_ the guy described in the Lisp
thread: <http://news.ycombinator.com/item?id=859669>

Maybe it's in our interest to be the world's hypomanic dreamscape? If so, the
feds and everyone else can bail us out, like they do the rest of the nation's
problem children (banks, farmers, automakers, savings and loans, tire makers,
steel producers, railroads…), leave us to our booms and busts, enjoy the gravy
when times are good and let us live in their basement strumming our guitar
when we screw the pooch.

But, Uncle Sam's not much better off. He's just running on a slower pace. Long
enough in his basement and he'll start to see how alike we really are—right
around the time he gets foreclosed on. Our federal system has a seriously
great architectural basis, but it's an 18th and 19th century design burdened
with two centuries of gnarly patches and tweaks hacked together in two-year
bursts by groups of 535 glad-handers and administered by a nameless, faceless,
unrepresentative bureaucracy. As the nation scaled-up, the exquisite balance
of republic and democracy struck by the founders turned into an opaque,
incomprehensible, unfair, inefficient, ineffective cancer. Some major
refactoring needs to be done. CA, having the same issues, will serve as a
proving-ground for reforming the whole country. If it doesn't work out, well
there's always another boom after the bust.

------
cunninglinguist
The problem that this article doesn't point out and nobody wants to talk
about: California is burdened with the largest reservoir of
undocumented/illegal workers in the country. Until these people are brought
into the system, until we see some true immigration reform (either by
naturalizing every worker or, conversely, by getting serious about border
policy) the state is in an untenable position. Things will get worse before
they get better.

California and US immigration policy are a mammoth case of "walk on left side,
okay; walk on right side, okay; walk in middle - squish! just like grape"
which you Karate Kid fans might remember...

~~~
kingkongrevenge
What about deporting all the illegals? That would be far the most fiscally
effective solution.

~~~
KirinDave
Yeah, I'm sure that's an action that would basically pay for itself.</sarcasm>

I can think of no greater economic nightmare than a nice racially motivated
witch-hunt against the states most-exploited worker class.

~~~
yummyfajitas
How is enforcing existing laws against a group which is predominantly white a
"racially motivated witch-hunt"?

You are also horribly misusing the term "witch hunt". The problem with a
witch-hunt is that _witches don't exist_. Anyone you catch in a witch-hunt is
innocent. By contrast, rounding up illegals is highly likely to catch a bunch
of existing criminals and will probably have a low false positive rate.

------
joe_the_user
Hmm,

Remember, California has the size and diversity of many medium-sized
nations... so generalizations often don't work.

The scene at the forum wasn't really connected to the recession or California
but US health care and US urban poor in general.

I'm surprised how little I notice the recession, much less the "collapse" of
California. Of course, I'm in the Bay Area and I think that LA and especially
the central valley were harder hit. But that is how the US generally has been
economically - strong urban area but with hinter-lands that are poorer than
one would imagine.

~~~
TomOfTTB
Actually Los Angeles County's unemployment rate was only .6 percent higher
than Santa Clara County (12.6% vs 12%). San Francisco does a little better at
10.1% but it's still above the national average (see here:
[http://www.google.com/publicdata?ds=usunemployment&met=u...](http://www.google.com/publicdata?ds=usunemployment&met=unemployment_rate&idim=county:CN060370&q=Los+Angeles+County+Unemployment+Rate#met=unemployment_rate&idim=county:CN060370:PS060900:CN060850))

In reality California's unemployment rate gets dragged up by the smaller
counties in the extreme north and south. For example, Imperial County (which
borders Mexico) has a 28.7% unemployment rate while Shasta County (about 40
miles or so south of Oregon) has a 15.2%

------
zoba
Do the British use the word "hiring" instead of renting?

"The people are poor, many of them out of work, often hiring a bunch of DVDs
as a cheap way of passing the time."

~~~
dgbeale
Yes

------
Scott_MacGregor
California will ultimately pull out of this situation. The question is how
long will it take, and how much pain will people have to endure before things
get better.

As Entrepreneurs we hold part of the key to better times through the
development of our businesses. The other side of the equation is for the most
part out of our hands. Things such as the state passing a worldwide gross
receipts tax and other similar actions that in the past have served to cool
businesses interest in the state must bear some of the blame for this current
problem.

I sincerely hope that this problem is short lived, and that Governor
Schwarzenegger and the California legislature solve this problem ASAP for the
benefit of all of us.

------
korch
As a transplant to California for 2 years now, grimly apocalyptic articles
like this make me question staying. Thanks kevbin for framing California's
Boom & Bust problem as actually defining the state through history. Perhaps
being able to structurally and culturally handle endless Boom & Bust cycles
make California a stronger state! You've got to love counter-intuition...

------
chris123
It's not just California, it's the whole country that's in a mess. How did it
get there? In a word, greed. In a few more words, people failing to
understand, tolerate, care for, and stand up for each other, especially people
different from them. "Me, me, me" does not work. "We" works.

~~~
chrischen
Well America is a very individualistic society. Unless we have a massive
cultural overhaul, most people will keep thinking in terms of "me."

~~~
chrischen
The very concept of the "American Dream" is individualistic. Individualism is
ingrained in our culture. We are all taught to think for ourselves, and
thinking for ourselves usually winds up being thinking about ourselves for
most people.

------
jacquesm
A couple of days ago there was a statement here by someone claiming that
California got 1/3 of the worlds venture capital, it looks like that could be
spent better than on the 'next hot thing' on the web. Unbelievable, what a
scene.

~~~
ryanwaggoner
1\. VC do invest in a lot of things beyond "the next hot thing on the web",
including hardware, cleantech, enterprise software, etc.

2\. VCs have a responsibility to get returns for their investors, not fix the
government's fiscal problems.

3\. Those "next hot things" have at one time or another included companies
like Google, Yahoo, Facebook, and others, which have together contributed
billions of dollars and tens of thousands of jobs to the state of CA. Not bad
for some stupid web 2.0 fad, huh?

~~~
jacquesm
As evidenced by the state described in the article...

No, it's not bad, but apparently the wealth is not spread in a way that
precludes conditions the likes of which should not be seen in third world
countries, let alone the first.

Of course these problems are not there for the VCs to fix, it's just that
California was mentioned rather loudly as 'the place to be'.

For start-ups maybe.

~~~
ryanwaggoner
You've clearly never been to a third-world country or California if you think
that our problems are anywhere close to third-world status.

~~~
jacquesm
Wrong on both counts, so now what ?

A nice example from California, a little bit north of LA (where I've lived for
three months at the expense of one of my customers) there is an area with lots
of really really fancy houses. They must be worth upwards of several million $
a piece.

The driveways are absolutely immaculate, the road they empty out on is worse
than some of the roads in Northern Canada. I've seen the exact same thing in
countries that literally qualify as third world.

I refer you to this map:

<http://en.wikipedia.org/wiki/Third_world_country>

In case you don't know what is meant by the term, but Colombia and Panama
definitely qualify. By 'modern' standards some parts of Romania and eastern
Poland do too, but I've been to plenty of other places that would count,
either by that map or because of the local conditions. And I'm not talking
package holidays here but stays of at least several months.

I'm using these roads as an example because at the time it struck me as
indicative of what might be wrong there.

If your country is 'the richest in the world' by some measurements then that
wealth should be translated to an increased higher standard of living for the
poorest, and an increase in infrastructural spending that will benefit
everyone, not just the rich.

If you can't manage that, in other words if your poor are still not provided
health care, proper housing and education and if you have an underclass that
basically has very few choices of making parity with those born into richer
families (and hey, isn't that what that famous American dream is all about) as
well as an enormous criminal problem then maybe we should propose redrawing
that wikipedia map along more objective criteria.

And quite possibly, we'll find that California has much more in common with
third world countries than with the first, no matter how rich the rich, and no
matter how much the GDP.

Northern Canada is a good comparison because it probably has the lowest GDP
per surface unit of any country in the world, but they also have one of the
best health care systems, and their work on roads is nothing short of amazing,
especially if you take in to account the effect of the climate on the roads
there.

If everybody in California (including corporations) would be paying taxes
relative compared to other 'first world' countries then such things would be
taken for granted.

Until it is solved through taxation everybody, VCs included (who really are
only in the game to turn a ton of money in to even more money) has a
responsibility to look after their neighbours.

