State Has Yet To Hit Bottom

NOV. 28, 2010

Anyone who has dealt with a loved one deeply involved in some destructive behavior understands that there’s only so much you can do until the person hits whatever low point is necessary to spark a commitment to turn things around.

I think of my beloved California in the same light. What a great state, but it remains on a collision course with reality. We can’t keep spending money we don’t have, punishing those who pay the bills and ignoring the advice of truth tellers. Californians are known for crafting new realities, but the financial markets are immune to Disney-like fantasies. Eventually, the fiscal self-destruction has to stop – and adults have to step in with an intervention to divert our state from its dangerous path.

In the midterm elections, California bucked the nation’s “let’s get our house in order” trend. This is the latest evidence, according to futurist Joel Kotkin at Chapman University, that “California has drifted far away from the place that John Gunther described in 1946 as ‘the most spectacular and most diversified American state … so ripe, golden.’ Instead of a role model, California has become a cautionary tale of mismanagement of what by all rights should be the country’s most prosperous big state.” Kotkin points to California’s soaring poverty and unemployment rates, its declining economy and to the governor’s call for a special budget session of the Legislature to deal with a relentless structural deficit now estimated at about $25 billion over the next 18 months.

The website Tech Ticker reported recently that “[m]unicipal bonds have plummeted in recent days, as investors have suddenly focused on huge state and city budget deficits that there’s no easy way to fix. Nowhere has this collapse been more visible than California.”

A federal bailout, Tech Ticker reports, is unlikely with Republicans gaining control of the House, which is a good thing given that bailing out destructive behaviors, in individuals or governments, only prolongs the misery. The financial industry analyst quoted in the story predicts that the state will eventually default on its debt, yet another sobering thought in a state desperately in need of sobriety.

Meanwhile, California’s pension debt for government employees is estimated as high as a half-trillion dollars, the state’s unemployment fund has gone upside-down, and a new Stanford University report pins the overhang for local government pensions at $200 billion. Yet the state’s spending addicts still don’t recognize their problem and treat those who try to help them as troublemakers.

In San Francisco, for instance, the city’s political establishment and public employee unions spent millions of dollars smearing a modest proposal by Public Defender Jeff Adachi that would have required increased contributions by city workers to pay for their generous pension and health care plans. Had Proposition B passed Nov. 2, San Francisco would soon have an extra $120 million annually to use toward closing its nearly $500 million budget deficit, but voters there rejected it, 57 percent to 43 percent, even though the 94 percent of working people in the city who do not work for the government have to pay these bills and rarely receive benefits anywhere near what the government employees receive. Chalk it up the value of a well-funded and one-sided “no” campaign.

But after three weeks of gloating, San Francisco officials and union leaders have started to sing a bit of a different tune regarding reform, thanks to the imposition of harsh reality. On Nov. 17, Moody’s Investors Service downgraded to Aa2 from Aa1 the rating on San Francisco’s general obligation bonds, which will cost the city additional millions of dollars to borrow money. Moody’s pointed to the city’s lack of a sufficient reserve fund and its gaping budget hole, but also to the failure of Adachi’s initiative: “[T]here are no indications that there is the political will or practical ability to bridge this still very large [budget] gap in a structurally sound manner. In fact, in the recent election voters defeated Proposition B … . [I]t appears clear that there is no political pressure to cut programs and services in order to achieve structural balance.”

The line about “political will” should apply to the entire state. The fiscal mess is bad enough, but Californians lack the will to do much about it. The financial markets see a state that has yet to recognize that its long-standing behaviors are going to lead to ruin. They see a spending addict who has not yet hit bottom, who still believes that the state can grow its way out of the problem. Perhaps the financial markets will provide some adult supervision, which will be even more lacking in Sacramento after Democrats consolidated their power and voters approved new rules (Prop. 25) that allow Democrats to pass budgets without input from the Republican minority.

The good news is that, in San Francisco, even the unions are paying lip service to pension and health care reform following the Moody’s downgrade. “We took an issue that’s a complicated one and brought it into the public debate and dialogue,” Adachi told me. “110,000 people voted yes. They got it. We have to continue our work.” He is working on a new initiative and talking about a more aggressive campaign next time.

Adachi understands the dire financial consequences of ignoring this problem and wants to keep explaining it to San Franciscans in a way that fits with their progressive politics – namely, that refusing to fix the problem will result in massive layoffs and the depletion of the public services they value so highly. Anyone who travels to San Francisco regularly, as I do, recognizes that the public spaces and infrastructure already are becoming noticeably shoddy.

Adachi hasn’t gotten anything but guff for his efforts to tell the truth, but, then again, how appreciative is that loved one while he’s still on a bender?

–Steven Greenhut