1 Gone
Jul 6, 2018

No More Money $


Retirements and Pensions can't be paid.....Have a plan B ?


California Spending May Doom The Boom



California has had its share of calamities in recent years: Drought, followed by massively heavy rains. Multiple secession movements. A sharp demographic and economic split between the wealthy coastal elites and rural inland dwellers. Soaring pension liabilities. The departure of thousands of the state's businesses.

But none of these have been as disastrous as California's self-inflicted fiscal wounds, which have made the state's finances not only highly volatile but threaten the state's very future as a center of innovation and technology.

That might seem surprising, given that California is in the midst of an epic tech and real estate boom, with both Silicon Valley and Southern California's Silicon Beach flourishing in tandem.

High-end jobs are growing, more billionaires are being made, real estate values have again reached stratospheric levels, and China is buying and building commercial skyscrapers in downtown Los Angeles like there's no tomorrow. If it were a sovereign nation, California's $2.5 trillion economy would make it the sixth-largest economy in the world.

Yet California's top marginal income tax rate of 13.3% remains the highest in the nation. Last year, it ranked dead last in Chief Executive magazine's "Best and Worst States for Business" survey for the 12th year in a row. And the state got an "F" in Thumbtack.com's "2016 Small Business Friendliness Survey."

Middle-income workers have left in droves, seeking lower living costs, more-affordable housing and job opportunities in nearby states. From 2004 to 2013, 5 million Californians departed, while just 3.9 million people moved in from other states, a net loss of more than 1 million in population. California's population still grew overall, due to immigration and in-state births. But those who left took a net $26 billion in annual income with them.

Businesses are also skedaddling. Last year, business relocation firm Spectrum Location Solutions said that since 2008 nearly 10,000 companies either had left the state or cut back on investments, due largely to its tax and regulatory policies. And a planned hike in the state minimum wage to $15 an hour, which could destroy 600,000 jobs, will only make the business exodus grow.

Worst-case scenario: The technology and tech-driven entertainment media companies now carrying the state also pack up for less-costly locales, leaving a mostly low-wage, low productivity business landscape incapable of sustaining what's left of California's once-thriving middle-class dream.

Soaring Spending

The reason for all this, economists largely agree, is the state's fast-growing budget and the tax and regulatory policies that feed it.

This year, Democratic Gov. Jerry Brown, who has led the state for 16 of the last 43 years, unveiled a 2018 budget calling for $179.5 billion in spending, a 53% increase since just 2010. And, in a surprise, Brown said he expects a $1.6 billion deficit, in large part because tax revenues are lower than expected.

"The trajectory of revenue growth is declining," Brown said, adding: "To manage unreliability requires prudence."

How can that be? As Brown suggests, the state's budget has become nearly unpredictable because it relies heavily on personal income taxes of wealthy Californians, much of it capital gains and other one-time income boosts.

In 2014, just 144,000 wealthy individuals out of nearly 40 million Californians paid half of all the taxes.

That may sound like a progressive paradise, but one bad year in the stock market — capital gains are a critical part of the state's revenue base — can wipe out a planned budget surplus. As the chart shows, capital gains revenues are highly volatile and unpredictable.

The problem is so bad that debt-rating agencies have warned the state about its overdependence on its wealthiest citizens, in particular the volatile tech industry, for its tax base. Because of this, Moody's Investors Service last year rated California as one of two states "least prepared" to weather a recession. (The other was fiscal basket-case Illinois.)

Worse, actual spending in California next year is expected to be closer to $284.5 billion, thanks mostly to $105 billion in federal spending in the state. Now home to one-third of all U.S. welfare recipients, millions of illegal immigrants, and a fast-growing Medicaid population, California depends on federal money for 37% of all its spending.

Ignoring Infrastructure

Long-term costs — some of avoidable, some not — just keep piling up. Just maintaining the state's most basic physical and social infrastructure will be enormously expensive. But there's a major conflict: This year, California will spend more than 80% of its budget on welfare, education, health care, pensions and interest.

Some Californians want to add even more government, pushing for a single-payer health care plan for the state — even though the state's budget analyst eight years ago estimated the cost would be an added $40 billion a year, even after imposing a steep health care tax on Californians and pooling what the state now spends on health care.

As the debate over increased social spending goes on, recent heavy rains that flooded much of the state demonstrated that California has put off dealing with a massive amount of basic maintenance and infrastructure repair. And those costs are mounting.

After California's huge Oroville Dam, the tallest in the nation, developed cracks and holes in its spillway, Brown admitted that the state has close to $187 billion in unmet infrastructure needs. He's hoping to get the federal government to fund at least $100 billion of that.

But this is an old story. For years, the state has spent massively on social programs, education and health care, while critical infrastructure spending has often been deferred into the future. Oroville's dam scare is a case in point. Warnings were made 12 years ago that the giant reservoir needed repairs. They went unheeded, leading to near-disaster this winter.

Gov. Brown seems to have taken the scare to heart. If the state fails to rebuild its creaking infrastructure, he warned in late February, an "apocalypse and absolute disaster ... is a real possibility."

What Brown didn't say is that California's infrastructure deficit will get worse, in part due to lavish planned spending on Gov. Brown's pet project, a "high-speed" train that is now expected to cost $68.4 billion, more than twice the $32.8 billion originally estimated. Other infrastructure, like water storage, bridges and roads, get short shrift.

The Other Gov. Brown

There's an irony in this. Under Jerry Brown's father, the late California Gov. Edmund G. "Pat" Brown, about 20% of California's budget went to infrastructure spending. This is why the 1950s and 1960s are often remembered as the state's golden age.

Today, under the younger Brown, infrastructure spending makes up less than 3% of the total, not enough to sustain California's huge economy, say economists.

"California ... made remarkable transportation and water infrastructure investments in the 1960s, but those investments are not being adequately maintained nor expanded," wrote Nobel Prize-winning economist Edward Prescott and UCLA economics professor Lee Ohanian in a scathing article last July.

The economists noted that not only was California's road network ranked second worst in the country by the Reason Foundation, but the bad condition of the state's roads now cost drivers $44 billion a year in unnecessary costs — a kind of deferred maintenance tax that everyone pays.

Worse, despite prolonged periods of drought, the last major water project completed was the California Water Project in 1960.

Since 1970, some 15 water-related bonds have been passed, but nothing has been added to the parched state's water storage. With the population having doubled since then, water infrastructure — both flood control and storage — is severely out of date.

Another big problem is the state's questionable estimates for what it owes long term, which rarely gets aired in the public debate.

Officially, the state estimates its long-term indebtedness at about $26 billion, a manageable amount for a state of 40 million people.

But some budget and watchdog groups question that number, saying that when you count up all the liabilities likely to be incurred from current budget promises, the indebtedness soars to over $400 billion.

Pension Debt Bomb

Then there's California's public employee retirement system, known as CalPERS, the largest public investment fund in the country, and its smaller twin, CalSTRS, the teachers' pension fund. CalPERS and CalSTRS are now $1 trillion underfunded, based on market value, according to a study by Stanford University's Kersten Institute for Governance and Economic Policy Research. That's $93,000 per household.

The amount of underfunding has soared 157% since 2008. Californians don't seem to realize it yet, but they will be hit with huge tax hikes in coming years to pay for this — either through actual increases in taxes paid, or by squeezing other spending to fill in the budget's widening pension hole.

Due to poor returns on pension investments, Brown has asked for $5.6 billion in next year's budget for pension underfunding. That amount will only grow in coming years, and at a rate much faster than the rest of the budget.

In a state dominated by politicians funded by public employee unions, the pressure will grow on the Democratic legislature to "do something" about the public pension funds' mismanagement, poor performance and exploding future liabilities. Benefit tweaks have not come close to solving the problem. That likely means higher taxes on all Californians.

And yet paying for all the added spending that the state wants now, to a shocking degree, depends on the highly erratic flow of capital gains revenues into the state's coffers.

The next downturn will leave the state's budget exposed. Far from California having solved its chronic issues with red ink, the recent surge in tech activity and a capital gains boom has merely covered it up. California's tax code, on which almost all outside experts, budget analysts and economists agree, is outdated, ineffective and a recipe for fiscal disaster.

Is Tax Reform Possible?

Eventually, just like the federal government, California will have to reform its tax code to be less reliant on a few wealthy people, and instead boost the number of taxpayers who have "skin in the game." That means flatter, lower taxes, but probably new taxes on things that now aren't fully taxed — including services.

"The progressivity of the California tax code is what causes volatility," said James Hamilton, an economist at the University of California, San Diego. "There's a trade-off between saying we want to get revenue from capital gains and saying we want steady, predictable revenues."

Hamilton notes that many proposed fixes, such as an increase in the sales tax, or gasoline tax, or a new tax on services, would "be more regressive, hitting lower income people hardest."

Given the California budget's ravenous appetite for revenues, some kind of tax reform to broaden the tax base will be the only workable solution, say analysts. In the meantime, Brown, to his credit, has begun setting aside money for a "rainy day" fund for budget emergencies.

This year, the fund is forecast to be about $8 billion in size. But just eight years ago, California faced a single-year deficit of $21.5 billion. Is $8 billion enough?

And a bigger question looms: Will it be politically possible to reform taxes? In California's notoriously liberal political environment, it may be tough. But given the harsh reality of the Golden State's structurally imbalanced budget and its threat to the state's economic health — including its vaunted tech and biotech sectors — the dream of a rational tax code may yet become a reality. After all, it's California.

New Posts
  • 1 Gone
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    Top reasons people are fleeing the state..... More Californians are considering fleeing the state as they blame sky-high costs, survey finds A growing number of Californians are contemplating moving from the state due to the sky-high cost of living, with sentiment highest among millennials, according to a new study.Fifty-three percent say they are considering fleeing, representing a jump over the 49 percent a year ago.The poll conducted by Edelman Intelligence found the chief reason for dissatisfaction isn't wildfires or earthquakes but housing cost and availability. LOS ANGELES — A growing number of Californians are contemplating moving from the state — and not due to wildfires or earthquakes but the sky-high cost of living, according to a survey released Wednesday. The online survey, conducted last month by Edelman Intelligence , found that 53 percent of Californians surveyed are considering fleeing, representing a jump over the 49 percent polled a year ago. The desire to exit the nation's most populous state was highest among millennials, the survey noted. "California is a great, great place if you're young and ambitious and daddy's paying the rent," said Joel Kotkin, a presidential fellow in Urban Futures at Chapman University in Orange, California. "It's similar to New York with the same dynamic, and maybe more of it." Kotkin, who has researched California demographic and economic trends for decades, said he's astounded when he asks his Chapman students whether they think they'll be in the state in 10 years. "I would say the majority would say 'no,' — and many grew up in California," he said. "There's no doubt that California's economy, for all of its strengths when it comes to innovation and creating these industries that people want to be part of, is struggling with high costs," said Aaron Terrazas, a senior economist with online real estate site Zillow. "Costs have gotten way ahead of incomes in California, and that's making a lot of people think about whether it's worth the hurdles." According to Edelman, 63 percent of millennials in the 2019 survey indicated they were considering a move from sunny California. The chief reason for dissatisfaction: housing. When asked in general about what would make them leave California, 60 percent of millennials in the survey gave housing cost and availability as the reason. That was slightly higher than the general population (55 percent), although 65 percent of renters cited housing factors as a reason to leave. Californians believe housing costs are four times more threatening to the state's economy than high health costs. Residents also consider crime and security as a top-three concern. Terrazas said millennials in California who are "tired of renting and looking to settle down and buy a home are finding it's often out of reach for them." He said this is especially the case in coastal job centers of the state, whether Los Angeles County or the San Francisco Bay Area. "California just doesn't strike them as reasonable," the economist said. "The state has consistently seen much faster home value appreciation than most of the country, and the same goes for rent until about two years ago. Rents have begun to slow down, ... although they remain at high levels." Terrazas said Southern California has high housing costs and on average lower incomes than Northern California. "In some ways, Southern California is in much more dire straits," he said. Even with higher average incomes in Silicon Valley, though, he said homebuyers now must spend about half of their pretax incomes on a monthly mortgage for a median home. The median home in the Silicon Valley market topped $1.2 million at the end of 2018, according to Zillow data. Statewide, the median home value in California was $547,400 at the end of 2018, while the U.S. median home value was $223,900 . By comparison, the median home value in New York state stood at $289,000 and $681,500 in New York City; New Jersey was $324,700. The Edelman survey found 47 percent of Californians are considering moving out of the state in the next five years. Again, it found the rates among millennials were higher with 55 percent of them contemplating the move. And 57 percent of Californians with kids under 18 also were considering packing up and leaving in the next five years. Chapman's Kotkin believes the next wave of discontent in California won't necessarily be focused on housing costs but taxes. "Taxes are a real killer if you're upper middle class and whether you're a younger person trying to buy a house or you just want to be able to spend what you make," said Kotkin. "There's also concern among people looking to retire and having their income taxed into oblivion." At 12.3 percent, California led the 50 states in 2018 with the highest top marginal tax rate, according to the Federation of Tax Administrators . And that doesn't include an additional 1-percent surcharge for those Californians with incomes of $1 million or more. "The tax bill made it worse," Kotkin said, pointing out that the federal tax changes mean deductions for state, local and property taxes now get capped at $10,000. "State taxes have become a significant factor now. We're getting into a situation where the middle class in California really can't hack it." Overall, the Edelman survey involved a total of 1,900 California residents and was conducted Jan. 4 to Jan. 20. It said results were weighted to the Census to be representative of the state's adult population. A report from California's Legislative Analyst's Office last year indicated Texas, Arizona, Oregon and Nevada are popular destinations for relocating Californians. It also found families with kids and those Californians with only a high school education were most likely to flee to lower cost states than college-educated residents. Finally, the survey found more than 60 percent of residents feel that the best days of living in California are behind instead of ahead. And a large number of residents are "ambivalent" toward tech as an engine of prosperity, the survey said. Jeff Daniels Reporter
  • 1 Gone
    Feb 1

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  • 1 Gone
    Jan 24

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