Michael Lewis, author of "Moneyball" and "Liar's Poker," has a lengthy article in the November issue of Vanity Fair magazine about how dire California's public finances are.
Lewis also talks about how the City of San Jose is on the verge of bankruptcy. He goes into detail about how San Jose mayor Chuck Reed and Vallejo Fire Chief, Paige Meyer, are trying to avert catastrophes in their respective cities.
One of the experts interviewed for the article says that people want more services, they just don't want to pay for them. Another perspective is that those providing such services (those working in the prison systems, police officers, fire fighter's, etc.) have been unrealistic in their demands for salary and benefits.
The article goes into great depth about what happened in California, but if you want just a summary, here it is:
• In 2011, California will spend $32 billion on employee pay and benefits. In 2010 California spent $6 billion on prisons and another $4.7 billion on higher education. Over the past 30 years the state's share of the budget for the University of California has fallen from 30% to 11%. In 1976 a Cal student paid $776 a year in tuition, and in 2011 now pays $13,218.
• The head parole psychiatrist for the California prison system was the state's highest paid public employee; being paid $838,706 in 2010.
• Lewis claims San Jose is nearly bankrupt, despite its AAA bond rating from Moody's. He fears the $245 million San Jose has to pay out in pensions and health-care for retired city workers "are more than half" the yearly budget and eventually, they consume the entire budget.
• San Jose's budget turns on the pay of its public-safety workers: the police and fire fighters now make up 75% of discretionary spending. Lewis writes that over the past decade the City of San Jose repeatedly caved to the demands of its public-safety unions. As result of higher pay and benefits, San Jose has now been forced to lay off thousands of city workers, closed libraries three days a week, and cancel plans to open a new community center.
• In Vallejo 80% of the city's budget was wrapped up in the pay and benefits of public-safety workers. Since Vallejo's bankruptcy the police and fire departments have been cut in half.
• From 2006-2010 Vallejo saw its real-estate values fall 66 percent. Vallejo then declared bankruptcy in 2008.
• Vallejo has a population of 112,000, and the Fire Department receive13,000 fire calls per year. That's 8.7 fire calls per person. Or 37 fire calls each day. There are 67 firefighters in Vallejo's fire department. So thats 194 calls per firefighter. Fortunately, they aren't all fires.
• In Vallejo all the traffic lights are set to blink; there are no more cops to police the streets.
The bottom line was a housing-price collapse in California lead to a decline in property tax revenues. Lewis offers an explanation of how this all snowballed:
"From 2002 to 2008, the states had piled up debts right alongside their citizens': their level of indebtedness, as a group, had almost doubled, and state spending had grown by two- thirds. In that time they had also systematically underfunded their pension plans and other future liabilities by a total of nearly $1.5 trillion. In response, perhaps, the pension money that they had set aside was invested in ever riskier assets. In 1980 only 23 percent of state pension money had been invested in the stock market; by 2008 the number had risen to 60 percent. To top it off, these pension funds were pretty much all assuming they could earn 8 percent on the money they had to invest, at a time when the Federal Reserve was promising to keep interest rates at zero. Toss in underfunded health-care plans, a reduction in federal dollars available to the states, and the depression in tax revenues caused by a soft economy, and you were looking at multi-trillion-dollar holes that could be dealt with in only one of two ways: massive cutbacks in public services or a default--or both."
The observations are interesting, but there are some oversights. In 2011, the "average Californian" made $48,000 a year, but is carrying $78,000 in debt; that's a negative of a whopping $30,000! Lewis attributes this to people living beyond their means. Lewis relied on data from the Federal Reserve, but he failed to mention that much of that debt is mortgage debt, which until the recent financial crisis was considered "good debt", since homes are considered an appreciating asset. Also, owning a home in California is a lot more expensive than in the rest of the U.S. Whether or not San Jose if forced to follow Vallejo into bankruptcy, there are a lot of lessons to be learned from the last boom and bust!
Ronald Wilcox, Attorney at Law, represents individuals in all aspects of financial reorganization and bankruptcy. For a Free consultation call 408-296-0400.
