California fiscal crisis

Californians are scratching their heads trying to figure out why their government has run out of cash. Some blame the constitution. Some blame the governor. Some blame the lobbyists. Let’s run a few numbers.

The median wage of a California state employee is $66,000 (source).  The median wage among all Californians (including those state workers) is just over $36,000.  The state employee can retire with a full pension in his or her late 40s or early 50s, which essentially means that the taxpayers have to pay for double the number of state workers that are required to provide current services.  In addition to salaries that are much higher than private sector equivalents, the state employee has health care and other benefits that by themselves may exceed the total compensation of a full-time private sector employee.  The reasonable question to ask is not “How did they run out of cash?” but “How was this ever supposed to work?”

The picture is worse than the numbers would suggest.  A lot of new Californians are working illegally.  Their wages, which may be paid in cash, are less than $36,000 per year, and are not reflected in official statistics.  Yet an immigrant who arrives to take a $10 per hour job still requires teachers for his children, policemen and firemen for his neighborhood, etc.

California has a tax burden of 10.5 percent of its citizens’ income, higher than the U.S. average of 9.7 percent (source).  Due to the fact that California government has grown so much in the past few decades, its pension and health care payment obligations for retired state workers are going to skyrocket in the next 20-30 years.  (The inefficient states of the Eastern U.S. were more or less equally inefficient in 1980 and had roughly the same population and size of government workforce.)

California could become solvent… if it can insure that everyone who moves to the state for the next 30 years is a medical doctor earning at least $150,000 per year from Medicare, Medicaid, and other out of state sources.

[Related:  This guy calculates that, adjusted for inflation, California government now spends 3.54X as much per citizen as it did in 1970.  It seems hard to believe, but I don’t have enough data to contradict it.

The federal government is not doing a whole lot better, according to this Congressional Budget Office posting. What keeps the Feds going is their ability to borrow and print money.]

22 thoughts on “California fiscal crisis

  1. California cannot become insolvent as it indirectly relies on the federal govt to print currency. The California law prevents the state from going bankrupt and so it falls on the federal government to finance it. In other words, California is dutifully doing its part to plunge the US further into debt.

  2. A friend of mine from California once said, “what happens in California is what is going to happen in the rest of America.” There are certainly lessons to be learned from this situation.


  3. I had heard government employees in California made more, but this bit
    ” The state employee can retire with a full pension in his or her late 40s or early 50s,” wow. I believe the first step every government and company will eventually have to make is move this age limit (before cutting the benefits all together), its just unsustainable to retire at that age. The whole process is backwards, people are living longer and they are shortening the time to retirement!

    This is a very interesting article on the topic ‘The end of retirement’
    The most interesting part:
    “WHEN Otto von Bismarck introduced the first pension for workers over 70 in 1889, the life expectancy of a Prussian was 45. In 1908, when Lloyd George bullied through a payment of five shillings a week for poor men who had reached 70, Britons, especially poor ones, were lucky to survive much past 50. By 1935, when America set up its Social Security system, the official pension age was 65—three years beyond the lifespan of the typical American. State-sponsored retirement was designed to be a brief sunset to life, for a few hardy souls.”

    Case in point, retirement was not an entitlement. Now its seen as one.

    If you think things can get pretty bad for California or the entire U.S following this route, you need to look no further than your southern neighbors in Mexico to look how zany things can get. State school teachers(syndicate) making more than people with masters degrees(from U.S or European schools), politicians making more than businessmen which hold the greater risks. Business and professionals outside the government operate under the radar.

    Its gotten to the point were if you make a cash deposit in a bank (of over $2,000 Dlls aprox), they deduct taxes automatically! You get a $1900 deposit receipt and a $100 receipt for a payment in taxes which you can use on your tax returns. People are fed up and the government is that desperate to collect. Needless to say take a look at were that money ends up (not in schools, roads or other infrastructure). And this is considering that about half the government’s income comes from the state oil run company
    (Here is a good source in English with all this stuff : )

    Its Ayn Rand in the living flesh for a few of us here. And it will surely be for many in California, I doubt medical doctors will be looking to move to California come the next imminent tax reform.

  4. None of the respondents, that I read, even mentioned the two basic problems affecting the state income:

    1. Proposition 13, from the 1970’s giving tax relief mainly to owners of real estate property ( now original owners of homes before the initiative passed.

    2.The initiative that required a 2/3 majority to pass any tax increases.

    No wonder that not only is the state suffering, many cities and towns are also handicapped by this arcane thinking and going bankrupt.

  5. California, or any state, cannot go bankrupt. But municipalities can… and will. When enough of them do, it will make the current budget situation look like the roaring 90s…

  6. Very well said, Phil.

    So much of the current financial crisis takes little more than a cocktail napkin and 4th grade math to understand. Usually it comes down to this: How could this possibly work?

    It’s infuriating listening to government employees complaining about potential cuts in salary and pension benefits when unemployment is north of 10%.

    I have to give some credit to Schwarzenegger a month or two back who basically said to the unions: “Whose side should we (Californians) be on? The people that provide services or those that receive services?” Duh.

    The power of denial and the sense of entitlement are our two biggest problems right now.

  7. I think popular revolts will be here soon.

    It’s one thing to put up with exorbitant executive pay by private companies, even those that landed on the government dole. The population of CXOs just isn’t large enough to be mathematically significant to our problems at large. Plus, rightly or wrongly, these people are perceived to have specialized skills that are scarce and thus valuable.

    But when focus starts falling on Dilbert and the average government office paper pusher–possibly the very people that are processing one’s unemployment claims–I don’t think patience is going to last very long.

  8. As to the illegal immigrants, the picture is slightly offset by the illegal immigrants that work, make significant salaries, pay taxes, and can only collect a partial benefit from those taxes. How large is this group? I have no idea. Based on the stories from my sons (about kids embarrassed that their families are here illegally, and somehow live in our slightly pricey area in suburbia), the group is much larger than I would have thought.

    (How that works, I do not know. How can illegal immigrants – apparently well-educated – find upper-middle class jobs and incomes? I did not think this would be possible.)

    On a different note, this talk about averages and retirement does not mean the same thing for everyone. From personal family history it looks as though I will be lucky to reach 65. If public policy is to aim for retirement age well past when I will likely be dead – hard for me to be enthusiastic.

  9. Two points:

    1) “Exodus of wealth”. In CA a relatively low percentage of pensioners remain in the state. “Take the money and run”. Rich-retirees god for any state.

    2) Inability of county gov’ts (CA county-gov’t salary/benefits/size rivals the state) to do anything other than “expand”. Case in point…

    I retired to Inyokern solely to write dirt-bike stories. I write more of them than anyone in the country and like Phil, I have a readership. Last week at a County Sheriff’s meeting (attended by dirt-bike groups) the (good guy) Sergeant tasked with “Enforcement of Trespass” violations (i.e. “writing tickets for riding your dirt-bike on private land”) told us how he had asked the County why “…40 more officers were being assigned to this trespass-detail when the total number of trespass-complaints filed with the (Kern) County Sheriff’s dept last year was ZERO.” Be advised that for 95% of the land in Kern County, there is no “city” i.e. it’s all “county” jurisdiction.

    For any dirt-bike Walter Mitty’s…

    …most are fun/informative but sometimes *very* serious…

    Team Red Line @ Sierra Safari 2008

    Editor: If posting my website “too much” please edit this section out. Honestly I think my “County Sheriff” blurb worthwhile…

  10. Comment to Hal on CA Prop-13…

    “…Proposition 13, from the 1970’s giving tax relief mainly to owners of real estate property…”.

    This is incorrect. Prop-13 does *not* give “tax relief”. What Prop-13 does is cap property taxes at 1% of the sale-price, per year. Add 1/4% for county/fees. Your tax bill is allowed to rise 3%/year (approx) i.e. if you paid $3,000 last year, your taxes can be $3,090 this year.

    Given CA real estate valuations (even today, high by any standard) taxes on a new-buy of 1.25% are steep ($400K home, bought today, would pay $5,000/yr). Yes I know some states are higher (most much lower).

    Prop-13, during the bubble, actually fueled the bureaucratic beast. Every home sold (new/used does not matter) re-set the taxes to a much higher amount. As far as CA/County/Local gov’t was concerned, from ’03 to Jan-’08 it was “raining money”.

  11. It is easy when things look good to spend and not account for it when things get bad. In business you go out of business wtih this philosphy, but governent unlike business dosen’t seem to understand or even think they to should go out of business.

    G.M is a great example of spending on employees and when things get bad, they crash and burn taking taxpayer money with them.

    I have worked for myself for years, have to earn and spend and if I blow it pay the consequencous. Its time for both the federal and state legislators to wake up and take a hard look at reality.

  12. I guess I am living in the wrong place since 1.25% property tax sounds like a really good deal. Mine is 2.5%. Half goes to the school district and the other for debt, police, taxes!, roads, parks, etc. in this order.

  13. tekumse… 2.5% is outrageous.

    tekumse… Question: 2.5% of *what*?

    To all: When computing “property tax” (on homes) be cognizant of “the usual method” which is an “assessment” (done usually by the municipality, and usually abnormally low) and to further confound the issue, this assessment sometimes multiplied by a “mill rate” (a percentage of “assessment”).

    In America, this is IMO the real-crime. 99% of “property valuation” wholly-arbitrary and perhaps CA’s Prop-13 (property tax 1.25% of selling-price, as upheld by the Supreme Court) the only “fairly computed” property tax in America (like it or not).

  14. What CA and the nation is running into is no difference than a spoiled child. We are depending more and more on government services then ever before. What’s worse, our elected officers are making more false promises to get our votes. Yes, living longer, careless spending (during good and bad times), ridicules policies, etc. etc. etc. are to be blamed but till when the voters wake up and vote with logic vs. on false promises and hopes, and stop over borrowing just to by that 3rd LCD TV, to keep up with the next door Jon’s, we will remain in this crises for a long time to come and eventually destroy the nation.

    We are becoming a nation of “wanters” and “selfishness” — we are demanding more then we are producing — this can’t be sustained.

    — George

  15. There was an editorial in my local paper recently, from a longer article written by a fellow who was in the California Assembly for 30-40 years. He took all relevant parties to account, showing how all of them had helped to make the situation worse, and concluded by writing, “It seems that taxpayers want more services and lower taxes. This is obviously unsustainable. All Californians need to have an honest dialogue with each other and their government over what kind of state they want in the future.” From term limits to prop 13 to the wacky initiative system, Californians have basically made good government against the law.

  16. I am in San Diego at the moment. We drive in from the west on the 8 about once a year. This time I had to contend with 1 photo enforced speed trap, multiple border checkpoints, an agricultural checkpoint and state hwy. police were in abundance (all appear to be driving new cars). Would like to see the amount of revenue the state takes in this year from fines compared to prior years by local.

  17. 2.5% of close to real market value. Similar houses sell for about 220K and my taxes are a little over $5K. I don’t want to give exact details so I keep my illusion of privacy.

  18. Christopher Caldwell, writing in the Financial Times:

    California’s problems are those of “direct democracy”. The state’s laws are shaped by plebiscites to a degree unmatched outside of Venezuela. In voting on “propositions”, which sometimes touch on detailed budgetary matters, citizens of the Golden State have stood up consistently for two principles: the state should provide vastly more services to its citizens, and citizens should pay vastly less to the state. In 1978, Proposition 13 halved government’s take from property taxes; a decade later, Proposition 98 required the state to spend 40 per cent of its “general fund” on schools. Adding to the problem is the requirement of supermajorities for raising taxes.

  19. Daniel

    “This is a very interesting article on the topic ‘The end of retirement’
    The most interesting part:
    “WHEN Otto von Bismarck introduced the first pension for workers over 70 in 1889, the life expectancy of a Prussian was 45. In 1908, when Lloyd George bullied through a payment of five shillings a week for poor men who had reached 70, Britons, especially poor ones, were lucky to survive much past 50. By 1935, when America set up its Social Security system, the official pension age was 65—three years beyond the lifespan of the typical American. State-sponsored retirement was designed to be a brief sunset to life, for a few hardy souls.”

    Case in point, retirement was not an entitlement. Now its seen as one.

    This a misleading argument, because mean life expectancy is useless for pension calculation, what you need is conditional expectancy at certain age. Digging up a common (Male) mortality table 1932-1934 for example shows that at Age 0 life expectancy was indeed 63.48. At Age 2 life expectancy (additional years) was 65, explained by the very high infant mortality rates. If a man lived to 45, then additional life expectancy was 26.87 years or total expected life (having lived to 45) was 73.55 years.

  20. Sorry accidentally hit the button early, the upshot – if a man lived to retirement age at 65 he was not on 3 years borrowed time, but had the life expectancy of 12.40 years to enjoy the retirement.

    BTW. There is often a similar argument for male African Americans’ life expectancy being much less than others in US and the fairness of Social security vis-a-vis different races. This possibly has to do with high infancy mortality and much higher teenage deaths due to violence. Once you look at people who survive to the age where they pay into the system (18 or so) the survivor mortality is comparable to whites, though slightly lower due to the often cited but not primary causes of lower mean life expectancy (higher incidence of heart disease and diabetes)

  21. Leo – thanks for raising the point about life expectancy for those who live beyond a certain age. I had never heard that point of view before but it makes perfect sense.

    I think, generally, most state (and definitely the federal) govt jobs have offered different levels of retirement once you had 20 years of service. I believe some states even credit you with time served for your federal service (military maybe) though I don’t have a link to prove that so I could be completely mistaken.

    My dad retired from the Air Force when he was 37 and has been collecting his pension ever since. I think it was a 50% deal but each year it has gone up thanks to cost-of-living allowance increases so I imagine he probably makes more now than he last received a full paycheck. I figure state pensions probably work in a similar fashion.

    I don’t imagine this is an expense that would be easy to curtail considering there are probably contractual obligations to provide the retirement $$ for all those who are already retired plus for all those who will retire under their current deals. But, for future hires what is the option? Extending the number of years you have to work before you can get a pension? Only offering a 401k? Or maybe not letting people claim their pension until they cross a certain age threshold regardless of how long they worked for the state?

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