Monday, July 26, 2010

The Golden State- Part 1

There are many reasons to compare the State of California with the small European nation of Greece besides their warm Mediterranean climates. Like Greece, the Golden State has become a symbol of fiscal irresponsibility, in effect spending what it cannot pay for through taxes. And, although there is no serious need to worry about the state defaulting on its debt; rating agencies consider that risk in California to be greater than all the other 49 states.

Even after a decade of passing measures to cut spending, the state is once again considering a new budget, proportionally smaller to what is was a decade ago after taking into account population growth and inflation. And, even then the state still faces a $17.9 budget hole in the current and coming fiscal years. To produce more cash, without raising taxes, California will be forced to cut whole programs including welfare-to-work, subsidized child care, and the cash assistance to poor families with children. Reducing overgenerous state employee pensions costing the state over $6 billion a year remains a priority, as well as initiating an alternative budgetary system proposed by bi-partisan leadership last year that introduces a new value-added tax, simplifies income taxes, and scraps more from corporate and sales taxes. Part of the state’s problematic tax issues revolves around the ineffective proposition 13 of 1978 which fails to raise enough money from property taxes for local municipalities. On top of that, Proposition 98 of 1988 was meant to find new ways of generating funds, but it’s horrendously complex mathematical systems and funding formulas have never produced positive results.

California faces a more general problem as the political structure ensures spending will always outpace revenues. While simple majorities in Sacramento are required to lower taxes, super majorities must agree to increase them. The recent primary elections for the governor’s seat in California have highlighted new ideas on spending reductions in various sectors of the government, however statistics in 2008 indicated that California had 108 state employees for every 10,000 residents, a ratio which remains one of the lowest in the United States, only Florida and Illinois have fewer. Where the incumbent governor can realistically cut jobs remains unclear. Recently, Governor Schwarzenegger has initiated measures to cut the state’s employee pay to minimum wage. Although this may help ease the state’s economic problems it seems rather controversial that a few must suffer the irresponsibility’s of an entire society. There will come a time when the taxes will have to be increased, and presently it seems we are once again prolonging the inevitable for immediate political safety.

Tom Rodelli
Research Analyst
Analyze Capital LLC

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