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Posted at 3:45 PM ET, 12/21/2010

California not so bad?!

By Jennifer Rubin

A reader calls my attention to an op-ed in the Los Angeles Times by Bill Lockyer, the state's Democratic treasurer, and Stephen Levy, the director of the Center for Continuing Study of the California Economy. The two argue that California's not all that bad.

After all, "California has never failed to make its bond payments on time and in full." No, it just has hundreds of billions in unfunded liabilities. The argument that debt payment "is constitutionally protected" is of no solace to residents whose taxes are skyrocketing and who are suffering cuts in basic services so that the state can maintain its bond obligations.

Lockyer and Levy argue that California doesn't have a spending problem: Rather, the state needs more revenue. This is nonsense. As I have written:

Between 1990 and 2009, according to a 2009 Reason Foundation report, "state spending--including the General Fund, special funds, and bond funds--has increased 180.9 percent, or an average of 5.91 percent a year. . . . Since FY 1990-91, General Fund spending alone has increased 156.8 percent, or 5.37 percent a year." The number of state employees soared by almost 40 percent. Per capita spending increased 95.9 percent in the same time period.

Despite the common argument that Proposition 13 had starved the state of revenue, cash flowed steadily into Sacramento's coffers. "Since FY 1990-91," the Reason Foundation report revealed, "revenues have increased 166.9 percent, or 5.61 percent a year. . . . Based on these revenues, if California had simply limited its spending increases to the 4.38 percent average increase in the state's consumer price index and population growth each year since FY 1990-91, instead of a $42 billion deficit, the state would be sitting on a $15 billion surplus this year."

And finally, Lockyer and Levy argue that the business climate isn't so bad. Really, not all that many jobs have been lost due to business relocation. The mind reels. (What about Northrop Grumman, Fluor, Hilton Hotels, Computer Sciences Corporation, and on and on?) Arizona, Texas and many other states have been the beneficiaries of not only a business exodus but a population exodus. (For a more reasoned argument, I would recommend Michael Barone's comparison of Texas and California.)

It is distressing to see that two supposedly influential Californians are as utterly out to lunch as Lockyer and Levy. But I will ask my California readers: Do you think the rest of the country, both political parties, the Californians who have left the state, the bond rating companies and a broad spectrum of economists and business executives have been exaggerating the extent of California's woes? Let me know in the comments section how bad you think the Golden State really is these days.

By Jennifer Rubin  | December 21, 2010; 3:45 PM ET
Categories:  economy  
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The rumor is that the Fed is currently buying state and muni bonds to stave off some defaults. Bernanke has hinted at the possibility, but has never actually come out and said this is ongoing.

The Build America Bonds program, a highly succesful part of the stimulus package, ends this year also. This had the Federal Government paying 36 percent of the interest due to bond holders, and contributed substantially to "normalizing" credit markets for the state and local governments.

The REAL ticking bomb in all of this is private equity. In the years leading up to the economic crisis, state and local pension funds invested between 5-10% of their assets in speculative private equity loans. PE has many of these loans coming due beginning in late 2011-2014. Without a drastic change in market conditions, many of these loans will either cause big layoffs/bankruptcies at the firms that took them out (an estimated 2 million jobs could be involved), or some combination of default/refinancing that will hurt the holders of these loans, the funds.

5-10% of assets may not seems too risky, but for many of these state and local funds it will be the proverbial straw!

Posted by: 54465446 | December 21, 2010 4:05 PM | Report abuse

To paraphrase Groucho Marx, who are you going to believe - Lockyer and Levy or your own eyes? Their article reads like any addict in denial. They are probably hiding their fix of new tax proposals in a shoebox under their bed.

Posted by: Larry3435 | December 21, 2010 4:26 PM | Report abuse

For many many years now the California’s population as a whole has been voting for unbalanced budgets leading to its present bankruptcy by voting against tax increases at the same time it has voted for a [Democratic] legislature that everybody understands will always spend without restraint.

You don’t have to be Einstein to see that California is insane.

Posted by: nvjma | December 21, 2010 4:39 PM | Report abuse

I am a professor at UC Berkeley in the engineering field. I can attest to the spurious and expensive state initiatives ongoing at Berkeley - How about a Vice Chancellor of Diversity who makes $400k while racial diversity, ethnic diversity and political diversity had dropped substantially? Not that there's been any political diversity for 20+ years.

Moreover, not only have taxes increased, but so have other fees such as bridge tolls - the Bay Bridge is now $5 and the Golden Gate $6. Also, local property taxes have increased through "special riders" that circumvent Prop 13.

The State is definitely off the tracks. It will be interesting to see if Jerry Brown can reverse the trend.

Posted by: DrBerkeley | December 21, 2010 4:47 PM | Report abuse

One more point. Mr. Lockyer's wife was just elected to the Alamedia County (Oakland) Board of Supervisors. She spent $1.6 million in her campaign, $1.0 million of which came from her husband's own campaign treasury.

Posted by: DrBerkeley | December 21, 2010 4:49 PM | Report abuse

One more point. Mr. Lockyer's wife was just elected to the Alamedia County (Oakland) Board of Supervisors. She spent $1.6 million in her campaign, $1.0 million of which came from her husband's own campaign treasury.

Posted by: DrBerkeley | December 21, 2010 4:50 PM | Report abuse

The writers seem to be as misguided and ignornant of the real problems as the majority that elected Jerry Brown again as Governor and did not slow down our version of cap and trade. California is headed for breakdown. Brown will likely offer draconian budget cuts soon that will scare people with the only relief to be promised by huge tax increases subject to a June vote by the people.I doubt he will offer fundamental solutions that would offend his union, public employee and green backers.

Posted by: drewa50 | December 21, 2010 5:00 PM | Report abuse

California CDSs are pushing 300bps. The market thinks there's a problem...

Posted by: sold2u | December 21, 2010 5:14 PM | Report abuse

Wonderful, informed comments! Thanks much. And do you sense things have hit rock bottom yet?

Posted by: Jennifer Rubin | December 21, 2010 5:34 PM | Report abuse

"And do you sense things have hit rock bottom yet?"

California's problems will substantially worsen within the next few years. Highly prized tax payers will leave in droves. The crazies are in control. Most Californian voters are unwilling to straighten out the mess. The elections of 2010 were probably their last chance---and these people blew it big time. Those living outside of California must make sure it does not mooch off the rest of us. One should not feel sorry for the Californians. Their grief is largely self inflicted.

Posted by: DavidThomson | December 21, 2010 5:48 PM | Report abuse

And do you sense things have hit rock bottom yet?

If you mean the crisis in munis and their effects on the market, we haven't even really started yet.

We are still in the denial phase. The hedge funds are looking at distressed munis as conceivably THE trade of 2011. People are still just getting up the curve.

Posted by: sold2u | December 21, 2010 5:53 PM | Report abuse

I continue to watch my great and golden state of California suffer denial. I think Mr. Lockyer is a big part of the problem. He is the former Senate Majority Leader, former two term Attorney General and now in his second term as Treasurer. A consequence of democracy is that we get what we vote for. The next four years should be interesting. Democrats control every statewide elected office, a huge majority in both the Assembly and Senate and the 2/3rds budget vote was repealed in November. They either get all the credit or all the blame. Be grateful you left.

Posted by: ndoom | December 21, 2010 6:04 PM | Report abuse

California will hit rock bottom, if the voters reject all or most of the Governor's and legislators' tax increases on the ballot in mid 2011. Rating agencies aren't giving our debt junk status yet so we can still borrow. At some point we may have to declare bankrupcty. No one should count on Federal help. The House will rightly not aid any attempt by Obama to bail out the state ( and union employees) without real reform. Other states are in trouble , too( IL, NY, NJ) so a combination of state financial emergencies might force real change or paralyze our government officials and slow down needed reforms. I don't know, if California will be the first to go under.

Posted by: drewa50 | December 21, 2010 7:37 PM | Report abuse

I was reading that California would be in drought conditions as far in the future as they could see. Now it is flooded.

Predictions are difficult. But the economy can come back, tax revenues go up and the budget fixed.

Thas should do.

Posted by: GaryEMasters | December 21, 2010 7:51 PM | Report abuse

Jennifer, the widely published estimates of unfunded pension and healthcare liabilities substantially understate California's obligations to state employees and retirees. First, the asset values used in computing liabilities include estimates of highly illiquid investments in private equity funds. The state must rely on the subjective valuations placed on these assets by the managers of these funds. It is anybody's guess whether these values can ultimately be realized. Second, the state employs government pension fund accounting principles in estimating liabilities, rather than the more conservative principles that must be used by public companies when reporting to their stockholders.

Posted by: ajbarton | December 21, 2010 8:32 PM | Report abuse

When you see PE firms like Blackstone playing hot potato with other PE firms, selling the same companies to each other in shorter durations, OR, pushing only moderately successful or largely unsucessful IPO's, then you know the wheels are coming off the bus and rock bottom is approaching

Posted by: 54465446 | December 21, 2010 8:32 PM | Report abuse


The benign explanation for that (which I pretty much buy into) is that the deals the PE firms have on the balance sheet are circa 2006 - 2008 deals - the peak of the PE bubble. Which pretty much means by definition, the most marginal deals. I still shake my head wondering why Blackstone chose to buy a semiconductor company (Freescale) - probably the worst LBO candidate out there. There are plenty of others.

The PE firms are looking at companies trading at 4x FCF and want to buy them, but first they have to get these turkeys from 2007 off their books. If they have to IPO them at a loss to do it, so what, its a sunk cost. If the opportunity is better in a 4x FCF cash generator than in Burlington Coat Factory they are going to go for the better opportunities.

Posted by: sold2u | December 21, 2010 8:42 PM | Report abuse

"Have things hit rock bottom yet?"

No, rock bottom will be hit when my fellow Californians realize that Jerry Brown and a Democratic controlled legislature cannot solve our state's many fiscal problems.

We have many problems here, but not all of them are of our own making. We are grossly under-represented in Washington (Vermont, with a population less than 1/5 the size of just San Diego county has the same two senators that our state of 38 million souls has). We are also 43rd in the union for return on our federal tax dollars ($0.78 return per tax dollar vs $0.94 for Texas (2005)), so please don't accuse Californians of "..mooch(ing) off the rest of us".

Our state is unique and has shown a surprising resiliency in the past. It's still a big draw for bright folks from around the world, and as China's star rises, California will be a key player in East-West trade and innovation.

Posted by: Beagle1 | December 21, 2010 9:13 PM | Report abuse


Agreed that we are not talking about problems with the PE firms themselves, but with those who hold the CLO's from the deals, and the companies themselves that have been taken private.

As I don't have to tell you, in most cases the PE firms make back their profit by their second or third year at the latest, so those deals have already closed well, probably even Freescale.

The other parties who could face problems are those institutions/investors who have continuing committments for cash to the PE firms that have not been exercised yet.

This is like talking about CDO's and derivatives in 2006. Few people have any idea what we're talking about.

Posted by: 54465446 | December 21, 2010 9:14 PM | Report abuse


Did you see Meredith Whitney's prediction about muni defaults? She oversold of course, because that's what grabs the headlines for her, and she failed to distinguish between rated and unrated.

However if yelling fire wakes a few people up, then maybe she did some good anyhow.

Posted by: 54465446 | December 21, 2010 9:25 PM | Report abuse

I don't believe one California Dem lost his seat in the recent election. The state deserves what the electorate voted for including Jerry Brown unless he has an immaculate conversion. Even then, what can he do? It is going to take the Fed (Bernake) with a bail-out to get California back on the straight and narrow. Or, and this may be best, bankruptcy. There have been good articles about California's financial problems: read Barone and Rubin for starters.

Posted by: rgenetaylor | December 21, 2010 10:16 PM | Report abuse

I don't believe one California Dem lost his seat in the recent election. The state deserves what the electorate voted for including Jerry Brown unless he has an immaculate conversion. Even then, what can he do? It is going to take the Fed (Bernake) with a bail-out to get California back on the straight and narrow. Or, and this may be best, bankruptcy. There have been good articles about California's financial problems: read Barone and Rubin for starters.

Posted by: rgenetaylor | December 21, 2010 10:18 PM | Report abuse

I am amazed that other Californians have been deceived by tax-and-spend liberal politicians for decades. The 2010 election was actually my first time voting (since I wasn't of age back in the election of 2008). I am probably one of the few here in the extremely liberal Bay Area who diddn't vote for any of the politicans who have created the serious budget crisis here.

It is quite rediculous that this state has become even more liberal by voting for Democrats in each state-wide position.

Unfortunately, this state's budget will probably remain in a tight situation. Lockyer's and Levy's phony claim that "California doesn't have a spending problem" will almost inevitably mean extremely high tax increases.

I don't have much hope either that Brown will actually stand up to unions which have supported him throughout his political career. During his first term as governor, a bill was passed which allowed for collective bargaining among public employees unions for the first time in California. This, along with a bill which former Governor Gray Davis signed in the late 1990s, has led to the absurdly generous pension plans and salaries for public employees. It may be a long time before the budget does get balanced, or at least stabilized.

I can only hope that my fellow Californians will 'wake up' and boot out all of the incumbents who have been ruining this once "Golden State."

Posted by: Kevin1884 | December 22, 2010 4:03 AM | Report abuse

Before you refinance, check your credit report for anything that could foul up a refinance. You don't want to lay out the money if a credit problem is going to keep you from refinancing, search online for "123 Mortgage Refinance" I just used them and they are the best, they got me 3.113% rate

Posted by: tanyacole | December 22, 2010 6:02 AM | Report abuse

I believe 144,000 (0.5%) people in my once great state now account for 50% of the income tax revenues. You tell me if that is sustainable and the way to build a long lasting economic tax base?

Posted by: belmontbob | December 22, 2010 12:07 PM | Report abuse


I would not disagree that the tax base is unsustainable. In fact, according to the Tax Foundation, California's individual income tax is "one of the most highly progressive structures in the nation."

Therefore, I would agree that the income tax rates should be become more regressive, i.e., more equal tax rates on all income tax brackets.

However,these income tax increases, along with any additional tax increases, should be coupled with considerable cutbacks in public employee pensions and social welfare programs such as MediCal. Additionally, they should end the "train to nowhere" program in which California Senators and representatives have foolishly advocated.

Posted by: Kevin1884 | December 22, 2010 4:58 PM | Report abuse

I don't want the government to bail out California in anyway. It will not help change the cause of the problems, only continue them. One of the many problems we face is the unions. Paying for the salaries and health care of retired union members is breaking the backs of tax payers. It is unjust when you compare the retirement of a union member to one who has paid into social security all of their lives and receive little compensation. California needs to address their problems. Next to this, immigration, welfare, healthcare all contribute to our problems. And politicians don't help. They have roads they are building (fast track)in the middle of nowhere because they can't completely fund them. The money they are using would better be spent on our water pipes as our water is being contaminated. And they are shutting down many farmlands that produce food in favor of a fish. When a company files bankruptcy, they require new management. California needs new management, not another bail out.

Posted by: willowthewisp | December 23, 2010 10:19 AM | Report abuse

California has NOT hit bottom yet. The state budget is $28 billion in the red. There is $500 billion in unfunded state employee pension liability. There is a projected $200 billion in city and county employee pension liability. The California State University school system cries that their funding has been cut so they've increased tuition by 74% since 2007. However, 33% of that increase is used to give 50% of the student body (180,000 students) a tuition free education. "Free" education is expensive. Lavish retirement benefits are expensive. But, California politicians' #1 concern is getting re-elected. So, they appease govt. employee unions rather than fix the problem. California voters keep electing these politicians. This is not a formula for change.

Posted by: DLinCA | December 27, 2010 8:29 PM | Report abuse

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