California DREAMing

You have to give the California state government some serious credit for apparently being completely divorced from fiscal realities.

The Golden State is facing a crushing, multi-billion-dollar budget shortfall — so much so that Governor Jerry Brown has ordered state departments to turn in their cell phones and BlackBerrys — and yet the state is getting ready to pass the California DREAM Act, one part of which makes public tuition assistance funds available to “undocumented immigrant students.”  The bill has passed the Assembly, seems certain to pass the Senate, and Governor Brown has said he will sign it.  The availability of tuition assistance comes on top of the fact that California allows the “undocumented immigrant students” to pay tuition at California state colleges at in-state levels, which are significantly lower that the tuition charged to out-of-state students.

I have nothing against immigrants — to borrow the linked editorial’s deft phrase, “illegal or otherwise” — but doesn’t it seem like fiscal nuttiness for a state that is billions of dollars in debt to be extending new benefits to anyone, much less to illegal immigrants?  With this kind of responsible management of the public purse, is it any wonder how California got into its current predicament?

 

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States In The Red, Looking For A Way Out

As even a casual follower of the news knows, many states are struggling with huge budget problems.  Ohio is one of them.  Usually the problems are the result of declining tax revenues, increased government spending and support obligations, and the fact that bills are starting to come due on grossly underfunded state employee pension and retirement plans.

States are taking different approaches to their predicament.  Illinois recently enacted huge increases to its individual and corporate income taxesCalifornia has declared a state of fiscal emergency.  Some states have focused exclusively on cutting spending.  And, it now appears, other states have quietly gone to Congress to explore the possibility of either a federal bailout or changes in the law to allow states to declare bankruptcy.  In these Tea Party days, there doesn’t seem to be much appetite for bailouts — especially for states that seem to have behaved irresponsibly with their budgeting decisions and can’t be trusted to behave responsibly in the future.  So, the “bankruptcy option” evidently is being seriously explored as a way to allow states to avoid their pension obligations.

I’m opposed to a federal bailout of the states.  I’m also opposed to any change in the law to facilitate states wiping out their debts through a bankruptcy-type process.  I think the bankruptcy option would be bad policy for two reasons.  First, I think such an approach is not fair to people who have agreements with the states that would be affected by a bankruptcy process.  State employees who have worked for years on the understanding that they will receive a pension should not be deprived of their pension payments.  For those workers, the pension was part of the deal, they have relied on the pension in their retirement planning, and it would be unfair for states to now renege on the deal.  Second, bankruptcy would affect not only state workers with pensions, but also all people who have contracts with the state, all people who purchases state bonds and debt instruments, and all others who do business with the states.  It would be a drastic step that would, I think, forever affect the state’s credit rating and investor confidence in government securities generally.  States that have been responsible in their budgeting and spending would be tarred, too, and would have to endure higher interest rates on their own borrowing as a result.  Obviously, neither of those results would be welcome.

The solution for states that are in a budget bind should lie in the state, itself, making the tough choices and difficult changes necessary to get their fiscal houses in order.  Cut spending.  Eliminate programs that aren’t essential.  Sell state property and assets.  Negotiate changes  to future pension obligations and eliminate pensions for newly hired employees.  Change laws that require automatic escalations in pension payments.  Explore users fees as additional revenue sources.  But don’t come to Uncle Sam for a bailout, and don’t take a bankruptcy option that could leave retirees high and dry and cripple state credit ratings for decades to come.

First Decriminalization, Then Legalization, Then Taxation?

Yesterday California Governor Arnold Schwarzenegger signed a bill decriminalizing the possession of less than an ounce of marijuana in California.  The new law takes effect in January.  Thereafter, possession of an ounce or less will be a simple infraction punishable by a maximum $100 fine.

Interestingly, Schwarzenegger justified his signing of the bill solely on cost grounds.  He says California will save money on prosecutors, court personnel, police officers, and publicly provided defense attorneys who otherwise would be paid to prosecute marijuana possession misdemeanor offenses.  In 2008, for example, California had 61,000 arrests on misdemeanor possession charges.

California’s decision to decriminalize small quantities of marijuana is an interim step in the process that I think is probably inevitable.  Eventually cash-strapped states will find the lure of legalizing marijuana, and then taxing its sale, to be irresistible.  California faces a massive budget deficit.  By decriminalizing the possession of marijuana, California eliminates an expense item.  By legalizing marijuana and taxing its sale, California adds money to its revenue side.  With states having justified the legalization of casino gambling on job creation and revenue grounds, can legalized marijuana be far behind?

Greece Fire

Standard & Poor’s has cut Greece’s credit rating to “junk” status.  In so doing, the ratings agency indicates that it considers it unlikely that investors who purchase the bonds will ultimately be paid the principal amount of the bonds and all required interest payments.

What is the meaning of this for the United States?  The fact that some other country’s debt is considered likely to default is not earth-shaking news; this article notes that bonds issued by Egypt and Azerbaijan have the same rating that has now been assigned to Greece.  No, the risk is that Greece’s unrelenting troubles — and the corresponding reduction in the credit rating of Portugal — will inflame general investor skittishness about the massive governmental debt among European countries and the U.S.A.  If investors perceive greater risk of non-payment, they are going to insist on higher interest payments to bear that risk, and higher interest rates mean more deficits and a spiraling debt problem that becomes increasingly difficult to solve.  The yield on Greece’s 2-year bonds is now trading at about 15%.  Imagine if the United States, or debt-ridden states like California, had to pay 15% interest on their borrowings, and an ever-growing portion of the federal budget therefore had to be devoted to debt payments to overseas investors.

The lesson to be drawn from Greece’s predicament is that deficits must be addressed, non-essential spending must be cut, and budgets must be balanced.  As Greece has now demonstrated, constant deficit spending and borrowing is the path to perdition.

Greece And California

The Greek debt crisis is putting enormous strains on the European Union.  Greece is heavily in debt.  Its 2009 budget deficit was projected to reach 13 percent of its Gross Domestic Product.  Greek’s mounting debt problems prompted fears that Greece would default, causing investors to sell Greek debt instruments, which in turn put pressure on the European Union’s common currency, the Euro.  As a result, European financial and political leaders are pressuring the Greek government to impose unpopular austerity measures, and some members of the Greek community have been protesting those cuts.  In the meantime, Greece is appealing to Germany and France, as the financially stronger members of the EU, for support.  The French President, Nicolas Sarkozy, says the EU has to support Greece or give up on the idea of a common currency and common political future.  The German government seems to be more on the fence.

The interesting point about this story is not that it has happened — with Greece’s borrowing-oriented, over-the-top welfare state mentality, a budget crisis was inevitable, and other debt-laden EU countries are not far behind — but the cultural and political fissures that have been exposed. In Germany, in particular, citizens and politicians are resisting bailing out the Greek government because they believe they are subsidizing sybaritic, free-spending ways of the Greeks.  In Greece, workers can retire at 63; in Germany, they must work until age 67Some Germans believe that the salaries paid to Greek civil servants are too large, that Greeks are too lazy, that the Greek culture is corrupt, and that Greek farmers are swindling the EU.

What the Greek debt crisis really demonstrates is that any political union must be based on trust and equity.  When times get tough, there must be a sense of shared sacrifice and shared values.  Eventually, if enough Germans believe they are being played for saps because they are working hard to support the unsustainable lifestyles of pleasure-loving Greeks (and others), they will refuse to continue to do so and the European Union will fracture and fail.

There is a lesson in all of this for California, which is facing its own version of a serious debt crisis.  Over the long term, California cannot expect the federal government to bail it out of its budget problems.  It won’t take long before hard-working Texans, or North Carolinians, or Ohioans, will object to subsidizing California’s absurdly generous public pension system, its unwillingness to cut programs, or its oppressive regulatory regime that has caused many companies to flee the Golden State for more business-friendly locations.

America is more politically and culturally cohesive than the European Union; Texans have much more in common with California than Germans have in common with Greece.  Still, the pressures that come from the ant subsidizing the grasshopper are the same, and would better be avoided by California getting its budgetary act together.

Pension Princes

Here’s an article that provides a bit more detail on California’s budget woes and the extraordinarily generous pensions that State has provided to many public employees.  This kind of article demonstrates why the federal government should not bail out California or, for that matter, any other state.  There is no reason why taxpayers in Ohio, or New Jersey, or North Dakota should be footing the bill for an insane public employee pension system that has produced 15,000 retirees who receive pension payments of more than $100,000 a year, who are permitted to retire at age 50 and receive pension payments at 90 percent of their last year’s salary, and who receive automatic cost of living adjustments.  Given the absurd richness of the benefits, it is not surprising that California’s public employee pension system is underfunded in the amount of a stunning $63 billion.

California has set up a bad pension system, has refused to fund it, and should not now be rescued from the consequences of its bad decisions by taxpayers in other states.  The federal government simply cannot and should not bankroll annual pension payments to state employees that are far larger than the annual retirement income to be received by the vast majority of Americans.

Higher Revenue (Cont.)

I’ve written before on California’s budget problems and the lure of revenue from legalizing, and then taxing, the sale of marijuana.  That posting has turned out to be a bit prescient, because a committee of the California General Assembly has now approved a bill to legalize and tax the sale of marijuana.  Interestingly, the proposal is that the revenue from the “fee” of $50 per ounce would be used, in part, to fund drug eradication and drug awareness efforts.