

California’s finances

Back to black

The laughing-stock of America gets serious about its budget

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Readers' comments


Black Lion

California is only called a laughing stock if (a) you're trolling or (b)you're the Wall Street Journal (or a WSJ wannabe). Or, I suppose, Fox News. If it were an independent country, it would have the fourth largest economy in the world, placing it comfortably ahead of... well... Britain for example. Be more professional; this is tone-deaf at best.

Robulous in reply to Black Lion

Agreed. The Economist needs to change its tone when reporting on California. The Economist is consistently mocking and denigrating to the state, its government, and its people in its reporting. It's makes the Economist seem downright provincial and ignorant - we know there is a stereotype in England of the air-headed, oddball Californian (this stereotype personified wonderfully, if ridiculously, as Bo on "Absolutely Fabulous"). The Economist is not an over-the-top slapstick comedy series.... right? They need to put on their big boy pants and resist the view of California that the untraveled and uneducated in England like to believe.


Back to Black - because of stimulus spending that's not a plan that's a hand out from the rest of the country. Let's see how this is sustainable with a declining population, the state with the greatest exodus, and who's taxes are the highest in the country.. Yup this state is certainly on the path the sustained prosperity for years to come, not!!


"Roughly in balance" says it all. fake number crunching to sugar coat the truth for their purpose. We'll see, cheers


When did "The Economist" become a mouthpiece for the Democrat party?
You completely ignore the fact that, rather than doing what the tax hike was sold to do by "improving education" it simply has mostly been used to spend more on the salaries and benefits of the current "educators", with no improvement in pupil:teacher ratios or any other reform.
CA has doubled down on the same thing that put it in the red in the first place: bloated public sector salaries and benefits while increasing the burden on the private sector.
Argentina here we come, California rest in peace.

Phillips J in reply to ZaphodB

You are suggesting a European "center-right" publication is supporting the American "Left" party? Hm.... Maybe that is because America has no "Left" party. Instead, America has a "center-right" party and an "extreme-right" party. Makes sense why TE supports the Democrats.

AccursedWolf in reply to Phillips J

Obama is not center-right - the democrats are centre-left broadly speaking and in favour of redistribution; but they certainly do not amount to the social democracy of the European flavour.

By your point is well made - America's choice is between centre-left and far right.

Makes you wonder if the GOP actually wish to ever occupy the white house again. Texas is going to turn purple soon and when that happens, the current neo-fascist incarnation of the GOP is finished.

hohan in reply to Phillips J

Honestly - the Economist maybe a center-right on economic issues but it's all "left" on social issues. It amazes me that when the Republicans at least appear to have a backbone and dig in on a fiscal solution they are called far-right, why?

Do you disagree with the following:
1. we have a debt problem
2. we have a spending problem
3. we have entitlement problems

This isn't really a republican notion but it's one we need to address as well.
4. we have a revenue (aka tax) problem

If you said yes to any or all of these then you're in line with the evil far-right republicans.

Jack Maynard in reply to ZaphodB

I fail to see how the tax hike has been used to "spend more on the salaries of the current 'educuators', with no improvement in pupil:teacher ratios" when the taxes have not even been collected yet.


It seems more accurate to say that California has now done something constructive with its budget, but dear lord that was alot of caveats at the end. I'd wager money that there will still be a deficit in 2013-2014


The surplus is (unfortunately) smoke and mirrors... windfall taxes & fudged liabilities.

Government spending has *not* declined and the next couple of years will show an 'unexpected' recurrence of the deficit

Connect The Dots

The Monterey Shale Formation in the central coast of California is rumored to have as much natural gas and oil as Mexico.
This may be the new California Gold Rush.
This would put the state back in the black(gold).
And potentially solve all their fiscal problems.


Some people seem to take pleasure, if not outright pride that their state (and this can apply to a city or country as well) funds most of its expenses by disproportionately taxing a few people.

This isn't something to be secure about, let alone proud. Its like putting all your money in a few stocks which is a VERY risky strategy. And one on which only a very brave (and very foolish) man would make such bold predictions and forecasts. Rich people have the highest mobility, whether that be personal, professional or income related. They're also unsurprisingly the most money-savvy (which is one of the important factors that got them rich in the first place).

And if California is relying on a 7.5% Year on Year return, then maybe their financial officers would be better off trying to get a job at a hedge fund.... or a casino.


"Now that the rich have been duly soaked, only the fiscal hawk remains."

Crawl out. The rich are doing just fine, thank you very much, in Santa Barbara, La Jolla, Coronado, Palo Alto, Torrey Pines, Venice Beach, Irvine, Beverly Hills, Santa Clara, Pebble Beach, Carlsbad...

ZaphodB in reply to Dialectic18

The Rich also know how to avoid taxes, and don't send their kids to the dismal public schools (where, instead of improving pupil teacher ratios, the 5% increase went to the CURRENT teachers, payback to their union).
The middle class, however, are screwed with higher taxes for the same crappy state services.

Dialectic18 in reply to ZaphodB

If you don't give the rich tax loopholes, they can't avoid paying taxes.
Anyway, where I live, the rich send their kids to public schools.
And, if California's rich don't want to live there, they can move. However, most choose to stay. If Houston really was so much better, they'd move there.
However, Rancho Santa Fe is much more pleasant, and even with the higher taxes.

YankeeLiberty in reply to Dialectic18

They ARE moving. The tax revenue decline is indeed about the 2-3 million rich and merely well-off who moved to Seattle, Portland, Boise, Denver, Colorado Springs, Dallas, Houston, Santa Fe, Phoenix; this will now accelerate. And they take their businesses with them. And the burden increases on those who stay for now. The main thing saving California revenues this year is that so many are stuck in their houses.

Dialectic18 in reply to YankeeLiberty

My point is that many types of business aren't easily transferable.

For example, if you own a restaurant, car painting business, auto parts store, etc., your business is dependent upon the disposable income of the surrounding community.

So, if you have a tax preparation business in Monterrey and move to Bend, Oregon, for example, it's not that easy to take all the clientele with you. Some, maybe, but not all, which may lead to a net decrease in your personal income.

Given the lower cost of living in Bend, it might net out okay. Or, it might not. Moving a business looks a lot easier on paper than in real life.


I would bet my paycheck that California's additional revenue from recent tax increases will fall short of projections. That being said, I congratulate the governor on his achievement.


Disappointed that The Economist didn't poke at this budget a bit more; it's a house of cards. As others have pointed out, there was a one-time boost from the Facebook IPO, and the retroactive nature of Prop 30 meant that people could not avoid it in 2012. Finally, many people pulled income forward into 2012 to avoid the huge increase in federal taxes in 2013, which likely inflated year-end revenue numbers. To top it all off, the $181 billion figure for unfunded pension liabilities is laughable since it assumes a long-term 7.5% rate of return. This might be reasonable for a super-aggressive portfolio, but they need cash for current retirees, and we have a demographic bulge already underway as baby boomers retire. The real figure is probably closer to $500B. If/when California is in the red again mid-2013, can you please shed light on these rosy assumptions. I have a feeling this is Jerry Brown's "Mission Accomplished" moment.

Nate1 in reply to Medicine4theDead

Obviously I can't predict the feature, so yes, a "feeling". Why are you so angry? Look, I'm not some Teabagger. I was born and raised in California and love this state, and I'm very much invested here. Nothing would make me happier than to have our budget woes suddenly disappear, but for the reasons I mentioned earlier I don't think (or feel) that our problems have disappeared, and overly optimistic assumptions actually make the problem worse. Only time will tell who is right.

Medicine4theDead in reply to Nate1

Because you want to base policy on a "feeling" much like George Bush. Your problem is that you are seeing budget issues from just this recession and like many reactionaries have extrapolated that out to want appears to be forever.

Nate1 in reply to Medicine4theDead

So you agree then that we still have budget issues. That's good to know, because you didn't address any of the points I raised previously and you continue to make ad hominem attacks. Bush made many policy mistakes, but that doesn't excuse California. Our budget problems go back to well before the Bush/Obama recession. If you can't see this then you're being blinded by your ideology.

Hitchslap in reply to Nate1

Excellent and rather disheartening analysis. Unfunded public sector pension liabilities together with future later life healthcare provision are promises made by politicians that will eventually crush every economy that operates a pay as you go system. Without wrenching and immediate reform the only industry that will remain will be the production of Soylent Green.

ShrNfr in reply to Nate1

Ya know, if I kept books the way California does and I did it for a publicly listed company, the SEC would be dragging me in for a "little talk" before I served some time next to Bernie Madoff. If government was forced to use GAAP, a lot of people would lose their lunch in a hurry. The Panglossian shock troops of the sorts that have commented that everything is just the good ship Hunky Dory would probably continue to have their heads in the sand however.

Sadly, California is not alone in its "accounting practices".

Nate1 in reply to Rob Roberts

Prop 13 is not ideal -- it causes distortions in the market because the annual rate increase is capped at 1.2%, much lower than long-term annual inflation. A better approach would be to index rate increases to the CPI to ensure that property taxes keep pace with inflation.

However, I disagree with the premise that Prop 13 causes feast and famine cycles in revenue. California does have lower average property tax rates, but not the lowest (http://images.trulia.com/blogimg/5/d/1/b/135498_1269054183089_o.jpg).
We also have very high income and sales tax revenue. Our income tax is very progressive, which is the primary cause of the dramatic ups and downs in tax revenue. The politicians know this, yet they continue to spend every last cent (and more) during the good times.

This problem will not be solved until the tax base is broadened and taxes increase for everyone. Changing Prop 13 could be part of the solution, but we should be clear that this will increase everyone's taxes, which could also be accomplished by "flattening" income taxes by increasing rates on the middle class.

If changes are made to Prop 13, I hope a predictable and fair cap is put in place. With big bills such as property taxes, people need long-term predictability and certainty. It would by very unfair to punish people for investing and putting down roots in a community that subsequently experienced a real estate boom.


Once again the Chicken Littlers are proven wrong. Not that long ago the Economist had the whole state in bankruptcy - WRONG!!! If the rich don't like the taxes they pay in California, they can always leave the state that soaks them in sun and beautiful weather and head for dreary England. I guess talented people like the sun and ocean and are willing to pay for it; you get what you pay for and all.

I didn't realize the state government of California is now taxing use of the sun and ocean there, though it's not surprising.

Thank you yoda <(~..~)> for bringing this to my attention. I'd expect nothing less from your thoughtful and insightful comments.

What I learned: 1) people who don't agree with you are "Chicken Littlers", 2) only talented people live in California, 3) the rich can leave California if they don't like it and the budget will balance itself despite 2/3rds revenue on income vanishing, 4) England is the only option for these people, 5) they are taxed for use of sun and ocean by the government that provides those services (not reflected in property prices or adjusted for earthquake risk I presume), and 6) one-off events to balance a budget are just as important as sustainable budgets.


So just to be perfectly clear about the situation, as a California resident not employed by a State agency, I will most probably have to work until I'm about 76 years of age in order to meet my obligations and finance my existence. Meanwhile State agency employees (DMV, teachers, prison guards, police, etc.) can retire at 55 or younger and enjoy a gold-plated pension and health care benefits. Anyone care to play "spot what's wrong with this picture?"

grnftr in reply to Medicine4theDead

You are wrong, google it, the so called public safety heros live longer than the average person, I'm sick and tired of the lies and distortions of public safety people. On top of their over the top pensnions they game disability, spike and distort the system to the max. Check the link below Also they require a degree for low end jobs and then use that to justify jacking the pay rate beyond any sense of reality.

grnftr in reply to Medicine4theDead

Medicine, I do very well, I just hate the fraud, deceit and lies. I also hate the scams they pull, like when the Alameda police and fire let a man drown because they were incompetent cowards. Law enforcement was to stupid to learn from the alcohol prohibition and gave us the total failure drug war that has given us the worlds largest, most expensive prison/police/court system in the world with vastly increased violence and mayhem. For total failure look at the Oakland hills fire. More recently I dealt with the local FD and they were totally substandard and willing to lie about it. The net has made information on proper fire fighting techniques available for all. I have several licenses I don't use and am self employed. I am considering forming an offshore corp like google, apple and cisco did to avoid business destroying taxes that are largely wasted. The problem isn't taxes, but the total lack of value delivered, especially in California.

grnftr in reply to Medicine4theDead


grnftr in reply to Medicine4theDead

Google it, you don't want to see the facts. I gave you the link on life span of public safety people out of Calpers, the fire report is available online and about a hundred plus pages and the US prison population and crime levels are well known as the total failure of prohibition. Please pull you head out of the ground.

Medicine4theDead in reply to grnftr

That which can be asserted without evidence can be dismissed without evidence and some guys blog doesn't prove anything. And then you attached to California's incarceration problem. Neither of which are connected. Please, you are all over the place like a manic person.

Anakha82 in reply to Medicine4theDead

Perhaps you'd care to enlighten us as to how working at the DMV, as a teacher, or as a social worker is "dangerous work". Perhaps you'd care to defend the inclusion of overtime pay when calculating the final salary on which California public employees' defined-benefit pensions are based. Or why it would be wrong to move public employees to defined-contribution pensions in order to reduce the risk to taxpayers.

kenroberts83 in reply to Medicine4theDead


Let me get this straight. You think that employing fewer government workers, or paying them on a scale equivalent to the private sector, is communist? I don't know if I have ever heard a more outrageous thing. If anything, it is the exact opposite.

Pablo Arias-Benavides

As a Californian it is a little sad to see our state referred to as 'the laughing stock of America.' Our state, at least in the south where I live, was largely built on agriculture - especially citrus orchards. We have been betrayed in large part by developers who have taken large portions of arable land out of use to satisfy the desires of the super-wealthy (many of whom are not Californians or even US-based) for real estate in one of the most famous climates of the world.

I agree that we cannot solve our problems by relying on taxing innovators or the very wealthy. Instead, California should re-focus on agricultural initiatives (we have been on the forefront of agronomy and sustainability research since the early 20th century, especially after Earth Day was founded in Santa Barbara, my home-town, in the 60s) and education. The entertainment and service / pleasure industries have taken their tolls on California and have not produced benefits for the state at large, so it is clearly time for a rethinking of our state's identity.


If California can sustain this surplus, it will only take 126 more years to pay off its debts!

Nate1 in reply to Medicine4theDead

Do you disagree with his calculation. Please enlighten us with your own insights into when the debts will be paid off (as Jerry calls it "the wall of debt"). Or are you just going to call people names?

grnftr in reply to Medicine4theDead

Medicine, the problem is the state delivers maybe 25 cents on the dollar in value. I have worked on many state projects and this is actually considered on the high side by many. People don't mind high taxes if they get high value. They aren't, they are getting royally screwed at all levels of government in the state. The have been transferring assets and wealth to the least efficient part of the economy and building a financial bomb that will blow up. The states books are a combination of Bernie Madoff and Enron accounting, Calpers only delivered 1% last year further setting the stage for a total meltdown. Do you think the people will allow a massive tax increase for the people that did the least effective, productive work?

Anakha82 in reply to Medicine4theDead

What in California's history makes you think that, if in the future it generates surpluses equal to its recent deficits, that it will have the fiscal discipline to use that money to either pay down its debt or, better yet, to save it in a rainy-day fund?


They are uncorking the champagne in Sacramento far too soon... California will stay solvent for another 12 months only because of the increase in taxes for high earners which, among other things applies to every freshly minted Facebook millionaire (of whom they are thousands in the Golden State). Unfortunately for the bean counters in the state treasurers office, there are no more big IPOs on the horizon and wealthy individuals have already started to leave California for greener pastures - Texas, Washington, Nevada, Colorado, Utah, etc. We will see what position the state is in this time next year but chances are it will not be pretty...

The article said it the best - California relies disproportionately on income taxes, specifically income taxes on the wealthy (including capital gains) which is highly volatile to say the least. California had a good year last year, but at some point the other shoe will drop and when it does rest assured they are going to be bleeding red ink again.


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