The obvious solution to California's budget deficit is to cut government down to a size that taxpayers can afford and to supply the public goods and services for which they are willing to pay.
News that Governor Arnold Schwarzenegger proposes to fund a portion of California's $21 billion budget deficit by exercising a little-known 2004 state law that allows Sacramento to demand loans of up to 8 percent of the property tax revenues collected by cities, counties and special taxing districts raises the specter that more local governments will go the way of Vallejo, the town just north of San Francisco that declared bankruptcy last year.
Having, like General Motors, locked themselves into labor contracts providing generous pension and healthcare benefits for municipal employees and seeing their tax revenues dry up as the recession presses on, mayors and other local officials are in the midst of their own budget crises, which only will worsen if they are forced to loan money to a profligate state government whose creditworthiness already is in jeopardy – and whose ability to repay those loans is open to serious question.
But wait! Foreseeing that the governor's plan is likely to push many local governments over the edge, a bill being considered by the state legislature would make it much more difficult for cities to follow Vallejo's lead. Supported by an organization known as California Professional Firefighters, the legislation requires cities considering filing for Chapter 9 protection to first obtain the blessing of a new four-person state bankruptcy commission, whose membership will be comprised entirely, as you might have guessed, not of experts in public finance but of state legislators.
Sacramento to Rio Vista: Don't dare try to avoid "loaning" us money by going belly up and breaking sacred union contracts!
Rio Vista has another card up its sleeve, however. It, as are bankrupt Vallejo and several other small towns around the nation, including Mountain View, Colorado, and Mesa, Washington, is thinking about "de-incorporating", that is, dissolving its municipal government altogether and throwing itself on the mercy of county taxpayers, who thereby would become responsible for sharing the cost of sewerage, police and fire protection and other public services formerly paid for by city residents.
De-incorporation, which would benefit Rio Vista but harm everyone paying county taxes, is equivalent to rearranging the chairs on the deck of the Titanic after it had struck the iceberg. Unlike a declaration of bankruptcy, de-incorporation would not permit Rio Vista or any other municipality to get out from under existing contractual obligations.
Except for scale, there is no essential difference between municipal de-incorporation and Governor Schwarzenegger's demand that California's sub-governments help pay Sacramento's bills. He can blame mayors for any tax increases required to pay the piper and the mayors of Rio Vista and Vallejo can blame their county officials.
The fundamental problem here is that governments at every level overspent when economic times were good. Now that the recession has brought the chickens home to roost, all are engaged in desperate attempts to shift the burden of paying for past extravagances onto others' shoulders. A more principled response – although not one which should be expected from self-serving politicians – would be to cut government down to a size that taxpayers can afford and to supply the public goods and services for which they are willing to pay.
Republished with permission from the Independent Institute.
I used to live in California. As I recall somewhere around 1985 the democrats won permanent majority in the Sacramento State House. They announced then that California would become ‘liberalism’s laboratory’. They declared; “We will show the country the capabilities of progressive government. As we lead in California, the balance of the nation will follow.”
The state is now running a $42 billion deficit. The governor has suspended welfare payments, as well as tax refunds, student grants, and most social welfare programs. The state has become a wonderful place to live if you are a union member or a layabout. In 2006, the top 1 percent of earners paid 48 percent of the income taxes. California’s income and sales taxes are among the nation’s highest, its business conditions among the worst, as measured by 16 variables directly influenced by the Legislature. Unemployment, the nation’s fourth highest, is 11.2 percent. Is it any wonder that, over the last decade, net out-migration of American citizens from California has topped 1.4 million?
There is a saying; “As goes California, so goes the nation.” Witnessing the enormous amount of spending in Washington as financial institutions, manufacturing concerns, and finally state governments plead for federal bailout money; can there be any doubt as to the accuracy of the above statement.
The majority of the American people seem to have developed a ‘whatever’ attitude. Those of us that are left who believe in hard work, saving, and delayed gratification are in a distinct minority. Washington progressives have found enough support through the expansion of entitlement programs to place the burden of financing the country on a ‘progressively’ smaller and smaller portion of American society.
Unlike the ‘Limousine Liberals’ of the Hollywood establishment that threatened to leave the country were George Bush to be elected: I wonder how many entrepreneurs are presently contemplating just such a move. Even as California taxes become higher, more and more business owners leave California; seeking a better climate in which to conduct their business.
The progressive experiment in California has collapsed. In California, rampant progressivism has been exposed fully as the fraud it is. However; as is usually the case, progressives have found a new host, the federal government. Why continue to suckle at the dried up teat of California government when we can enjoy the full flavor of fat rich milk that a government that prints its own money can provide?
As another ex-Californian, I’m aware through my business connections of various businesses who are either moving, or are creating new units elsewhere because they can’t take California’s taxation and regulatory climate. The population is now reversing the trend we saw during the Great Depression. People are leaving the state rather than moving there.
We may see this trend reflected in the rest of the nation shortly if national economic policies do not change. The only question is where would people go. I’d suggest one of the emerging Asian countries.