Wolf Richter: Next Shoe To Drop In Broke California’s Lopsided ‘Recovery’

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

If you come to San Francisco or Silicon Valley and look around, you’d arrive at the conclusion that California is booming, that companies jump through hoops to hire people, that they douse them with money, stock options, and free lunches. You’d see engineers spend lavishly and drive up rents and home prices to where landlords react with record evictions of the less-lucky. You’d see Google buses bring in people and trigger mini-demonstrations. You’d see entire layers of long-time residents getting pushed out because it has just gotten too expensive. In San Francisco, you’d see throngs of tourists from China and other places, spending money hand over fist. And there are a few other pockets in California where money is no objective.

But in the rest of the state, the picture isn’t that rosy. Total unemployment, officially, is still 8.5%, though that’s far better than the hellish 12.4% in February 2010. Of those unemployed, 28% have been jobless for over a year. Those receiving unemployment benefits – a fraction of the total unemployed – have dropped from 1.5 million to 712,000, whether they found jobs or just fell off the list. But, as the LA Times reported, there are still 400,000 fewer jobs in the state than there were before the crisis. So finding a job, if you aren’t into software, consumer tracking, or life sciences, is tough.   

The unemployment debacle has been expensive. Employers pay payroll-based unemployment insurance into a fund that then covers the 26 weeks of unemployment benefits that the state pays. But during the crisis, unemployment skyrocketed, and by January 2009, California’s unemployment system became one of the first in the nation to go broke.

California itself went broke; in July that year, it issued IOUs instead of checks to pay its bills. To keep state unemployment benefits flowing, the state had to beg the federal government for a bailout. By now, according to Loree Levy, a spokeswoman for the California Employment Development Department (EDD), the state owes the federal government $9.7 billion for state unemployment benefits.

How can California ever pay this back? Jacking up taxes on employers, raising eligibility requirements, and/or chopping benefits. None of them are palatable. None of them will help the economy. And the Legislature has not yet found, or even looked for, a solution.

Meanwhile, taxpayers – not employers – have paid $870 million in interest on this loan to the federal government. In its out-of-money desperation, the Legislature has been borrowing the interest from the State Disability Insurance (SDI) fund, which is funded by workers through payroll deductions. It’s up to taxpayers to put that money back in, explained to the National Employment Law Project. Shuffling money around like this is a common shell game in broke California.

In addition, unemployed Californians who couldn’t find a job within the 26 weeks of state unemployment insurance started receiving federally funded unemployment benefits under temporary programs Congress enshrined into law during the Great Recession, providing at their peak up to 73 weeks of extended benefits, for a total of 99 weeks, or just about two years. Some of those programs have since lapsed. Federal extended benefits in California are down to 37 weeks. Though average compensation is only $305 per week – “only” because California is expensive – it adds up: these programs have pumped another $45 billion in taxpayer money into the California economy.

Alas, Congress pointedly closed up shop for the holidays without extending these programs for the umpteenth time. And on Saturday, benefits for 222,000 long-term unemployed Californians – and about 1.3 million Americans overall – dissipate into the ether, leaving behind a $3.5 billion hole. Governor Jerry Brown warned two weeks ago that this would have “a ripple effect on the broader economy.”

So the state’s EDD sent out notices to the unlucky ones. It’s not like the EDD has its act together. Over Labor Day it was catapulted to national fame when it launched its super-duper software update, which promptly crashed and left claimants unpaid. Six weeks later, the backlog was still over 100,000 unpaid claimants, according to News10.

The cost of this wondrous project soared from $52 million in 2007 to at least $112 million, according to a legislative report last year. Deloitte Consulting was doing the work. It has already been paid at least $46 million. The IT industry has a stellar record at taking taxpayers to the cleaners with software that doesn’t work; see the fiasco of rolling out healthcare.gov.

The EDD is still processing many claims by hand. Claimants with problems – missing payments, for example – have a hard time getting anyone to help them. The Assembly Insurance Committee raked EDD officials over the coals last month. So just because you’re unemployed and eligible for benefits doesn’t mean you’re going to get paid, even if California has the money.

So on Saturday, an 222,000 people will be cut off. Many of them live inland, don’t write code, and don’t have PhDs in the life sciences. They’re living hand to mouth and have been plowing every dime of their benefits back into the economy. But no more. That $3.5 billion will no longer reach California. And then there are the $9.7 billion that California has to extract from taxpayers, employers, or workers to pay back Uncle Sam.

The newly benefit-less unemployed are going to join the other benefit-less unemployed in California, and they’re going to have to redouble their efforts to find a job. It will be tough, with 400,000 fewer jobs to go around.

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58 comments

  1. Phil

    The Bay Area is experiencing a boom only in regard to those who are making money hand-over-fist in the social networking tech sector, and a few other startup sectors. San Francisco housing – as in purchase of housing – is now officially out of reach of the middle class. Families are leaving this city in droves for the East Bay, or elsewhere.

    What we’re seeing in the Bay Area is a microcosm of what is happening in America – i.e. a relative few persons who are able enjoy the good life while everyone else has to adapt, or fall into the cracks.

    Overall, I’m optimistic, long-term, because Americans are eminently adaptable, but recovering any sense of true social mobility and economic mobility is going to take a long time. Too many structural constraints have been put into law by those in economic power. Law-by-law, the monied classes have over the last 20 years been able to put into law a series of barriers that will take years to unwind.

    We Americans have nobody but ourselves to blame for this, because we have not been paying attention. We’ve become like the helpless, immobile humans who have been spaceship-bound in the movie Wall-e (you should see this as one analogue to the present American condition).

    There is going to be a lot of pain, going forward. My primary concern is that this pain will make the populace more vulnerable to demagoguery, looking for easy answers. The latter is bound to happen and will probably delay substantial change. It’s going to be a long row to hoe, but we can pull out of it. Keep the faith and do what you can in your own sphere of influence to change the status quo, and don’t get sucked into any easy-answer scenarios.

    Last, a looming problem is automation – and the latter’s replacement of a lot of jobs. Rising population + increased replacement of jobs via automation = conflict. Be prepared; hold steady; and, do the hard work that change requires.

    1. Banger

      I think we have seen the flowering of Western Capitalism and now it has gone to seed. There is no chance that the old ways will continue–we are slowly entering the withering stage but have perhaps a decade or two before this is clearly understood.

      I see automation, robotics, technology in general as both a problem and an opportunity. Technology is now ripe enough to offer what many in the 1950’s believed was the dream of drastically shorter work-weeks and the spread of prosperity. With the proper social organization some of that was realizable by the 60s–part of the War on Poverty idea was to create that sort of society–where everyone could prosper. What happened? Why are we now so pessimistic about the future?

      I suggest to you that only a small percentage of people even want to look at that question. Here’s a hint: we had a couple of major political revolutions we don’t acknowledge because we are, in our culture, generally afraid to face reality, deal with evidence and connect the dots. We’d rather live in the mainstream media land of fantasy, propaganda and misdirection.

    2. P James

      “Law-by-law, the monied classes have over the last 20 years been able to put into law a series of barriers that will take years to unwind.”

      Could you give some examples of these legal barriers so I have a better idea of what you are referring to?

      Thanks.

      1. nevans

        To name just a few: Proposition 13 which froze property tax rates and requires a 2/3 vote to raise taxes in most instances (note only a majority vote is required to pass a tax cut, but a supermajority vote is required to raise or restore taxes); the constitutional provision requiring a 2/3 vote of the legislature to pass the budget, which was just recently changed by the voters, but for years allowed a small anti-tax minority to annually hold the budget hostage in exchange for tax cuts (even during deficit years such as 2009); term limits which reduces the power of the legislature and effectively increases the power of the executive; tax cuts and tax loopholes too numerous to list here, the most recent of which was overturned by the voters in 2012; and the initiative process which is far too easily manipulated by wealthy special interests. This is just off the top of my head–no doubt I will think of more later. Plus, California is still reeling from the effects of the tender ministrations of Enron following energy deregulation, the recall of Governor Davis, and the election of Arnold Schwarzenegger during a low-turn out special election. Ironically, there is currently an attempt to put an initiative on the ballot eliminating special elections to fill legislative vacancies and allow the governor to appoint them, thereby further increasing the power of the executive. If this law had been in place during the past 2 years, about 14% of the current legislature would have been appointed by the governor. As much as I like and support Governor Brown and his attempts to bring California back to health, I fear this proposal gives the executive branch too much power over the legislative.

      2. James Housel

        Well,

        Just for one…The Bush Tax Cuts that stood reason upside down by rewarding “unearned income” over labor. I pay a smaller percentage of my income than the worker at McDonalds.

        1. MyLessThanPrimeBeef

          In the Art of Wealth War, there are two strategies.

          One is offensive – how to get wealth.

          The other is defensive in nature – how to preserve wealth. That preferential tax treatment belongs to the latter, which also includes estate planning, non-profit charity foundations, property rights, etc.

          1. flora

            Preferential tax treatment includes corporate tax incentives for moving manufacturing off shore, eroding California’s jobs and tax base.

            http://www.exponentialimprovement.com/cms/offshoresubsidies.shtml
            “1. Current tax laws allow corporations to defer paying U.S. taxes on income earned by their foreign subsidiaries, providing a substantial tax break for companies that move investment and jobs overseas. Today, under U.S. tax law, a company that is trying to decide between locating production or services in the United States or in a foreign low tax haven is actually given a substantial tax incentive not only to move jobs overseas, but to reinvest profits permanently, as opposed to bring them back and re-invest in the United States.

            ” 3. The U.S. allows R&D investment tax credits to companies that do not retain their complementary assets (e.g., manufacturing) in the U.S. This is a problem because, when a nation that subsidizes an innovation does not retain the manufacturing, it does not fully profit from the innovation.”

      3. fresno dan

        http://deanbaker.net/images/stories/documents/End-of-Loser-Liberalism.pdf

        I can’t say I agree with everything Baker says, but I think he has many good points. I think the last “free trade” agreement is a very good example, where in theory, free trade (I have changed my mind on it, but I can see how a principled person could appreciate the theory) may be good, but the term “free trade” was a smokescreen to hide the true agenda of RESTRICKING trade. Some of the most egregious examples are patents and trademarks, defined in the constitution, but relentlessly expanded by big business. Dean Martin is dead, the guy who wrote “When the sky hits your eye like a big pizza pie that’s amore” is dead, but companies are still collecting royalties. The people involved with that song are dead – they no longer need incentives…
        Even worse are the drug patents and the prohibition of importing drugs, a very good example of those who scream free markets the most – doing their utmost to prevent free markets by rules and regulations. Its outrageous, but those with the biggest advertising budgets win.

    3. MyLessThanPrimeBeef

      That’s not social networking.

      That’s the NSA casting a big net.

      Maybe Berkeley will be the first city to ban it, if that people’s republic has not already succumbed to the money it has brought to the city.

      But I think a lot of parents are saying to themselves, I am glad my kid is in tech…in social networking tech.

    4. fajensen

      … because Americans are eminently adaptable, …
      “They” got that angle covered too: That is why “we” need so much legislation, To extend copyright into the next millennia, Big Brother NSA watching, Draconian law enforcement, Hardening of patent- and IPR- protections e.t.c..

      The great fear of the parasites is that society sometimes can evolve faster than they can adapt, “they” almost lost it with the youth movements in the 60-70’s, then again with the Internet – which is now being forged into “their” tool and this time, with TTIP, they want to nail that sucker down once and forever!

  2. middle seaman

    As a society, including California, we decided to treat the unfortunate badly. We hide the unfortunate, seldom mention them and, as a society, glorify the rich and shower them with extra benefits. The left has become an elitist movement interested in esoteric issues only such as foreign policy, the NSA (as if private companies haven’t been spying on us in daylight unobjectionably), inequality in the abstract only, etc.

      1. Yancey Ward

        There is just one problem with your argument- the state government is still controlled by Democrats despite how the Inland Empire votes. Or is your argument that the IE is being punished by the state government for voting Republican?

        1. Linden

          Who opposes the extension of unemployment benefits? Who made sure it never got to the floor of Congress for a vote?

        2. Linden

          Also, if you think the Democrats are bad, and they are, will putting the Republicans in power make things better, or worse? The Inland Empire doesn’t want to fix things — they just want to make sure nonwhites don’t get ahead, even if that means they don’t either.

          1. NotTimothyGeithner

            How do things get better? The Democratic Party is sick. More and better Democrats isn’t working because too many Democratic followers fall back into the blue/red team paradigm.

            The only question is why aren’t the Democratic pursuing popular policies? Why aren’t the Democrats going to the Lockheed Ceo and telling him this, get the UE extension votes or kiss your company good bye and say hello to the IRS? The answer is they don’t want to govern. They want the perks and the adulation from dimwits who just want to watch a sporting match.

            This has gone on for five years now. The sorry excuse about Republicans is done. The Democrats did nothing but shit all over the liberal activists for the first two years of the Obama administration, and then guess what happened, black people didn’t bother to vote for them. The Democrats have no one to blame but themselves.

            Guess what. Nader didn’t cost Gore the election. Gore’s crappy campaign did.

      2. cesqy

        California can increase the weeks of unemployment unilaterally, they just won’t get federal reimbursement. All they have to do is raise the unemployment insurance on companies to pay for the extended weeks. They won’t do it because its too much work and not free money!!!

    1. NotTimothyGeithner

      The NSA is another perfect example of U.S. government malfeasance and poor policy which leads to wealth inequality. The money spent on the NSA is not distributed to local economies but is instead either ripped off or directed to a few key locations. Public schools spend virtually every dime they receive in local economies that might come from the states with income taxes or federal appropriations. How much of the cost of a cruise missile reaches the local economy? We don’t know, its a secret.

      Foreign policy is an important issue because as long as the U.S. maintains empire there is the belief one can pillage other countries for wealth. France and the UK got rid of the old colonies and domestic living standards rose. Part of the reason is many of the hotheads wouldn’t leave the country which puts pressure on governments to do things.

      If the security state isn’t being paid, they aren’t a hammer against labor protests. Police and security spending are important issues.

      The Democratic Party is pro-NSA and pro-imperialism. The NSA is an obvious sham, and the best response is a proposal for minor reforms from the Democrats. The Democratic Party is not interested in these things except as much as their low information voters believe they are.

      1. Cassiodorus

        Back in the late years of the last century and the early years of this one, I taught in California public schools as a substitute teacher. I can only imagine what the schools look like now, with the state in serious financial trouble, the curriculum hamstrung by No Child Left Behind and Race to the Top, and the parents of the children in even worse financial shape. It’s not a pretty imagining.

  3. Clive

    You raise an interesting point there middle seaman, one which I’m tempted to agree with you on. While NC has covered in an exemplary way in the Links section (the splendidly titled “Big Brother is Watching You Watch :-) ) the various NSA wrongdoings which do represent a creeping, softly-softly, slide into totalitarianism and a definite over-reaching of the state into individual freedoms, I’m not entirely convinced it’s really “today’s problem”.

    Of course, if it isn’t resisted now, it’ll be all the harder to resist in future.

    But compared to the state of California which has seemingly read The Hunger Games and thought it was a policy document, I can’t help but think there are bigger fish to fry. Otherwise, like, err… Hitler, or Napoleon, we end up with wars on simply too many fronts. That’s not to say it isn’t a pretty crappy world right now and all these things aren’t legitimate targets ! For me, however, you can’t do everything at once and there has to be some prioritisation to capture what is a limited amount of public attention bandwidth.

    Am prepared to be wrong on this one though.

    1. Banger

      Basically you make a lot of sense. What seems to be lacking in discourse are central ideas and a broad perspective. Our central issues are political (not economic) and the central issue in politics is history. We don’t understand our history at all because we have not been able to grasp the full magnitude of misinformation, misdirection and Big Lies that have come out of the mainstream media including publishing, movies and video–so we end up arguing in their historical language rather than one based on an close analysis of power–particularly history after WWII.

  4. washunate

    “If you come to San Francisco or Silicon Valley and look around, you’d arrive at the conclusion that California is booming, that companies jump through hoops to hire people, that they douse them with money, stock options, and free lunches.”

    Even that sentiment of suggesting San Francisco is relatively better off than most of the state shows just how bad things are. It is actually extremely difficult to find a decent job in the Bay area.

    1. kareninca

      That is right!!!!! It IS very difficult to find a decent job in the Bay area.

      That is my one quibble with this otherwise truly excellent article, but it is a big quibble.

      “So finding a job, if you aren’t into software, consumer tracking, or life sciences, is tough” is misleading. I know many people who know how to write code very well, have PhDs in the life sciences, and are as techy-adept and credentialed as they come. Some of them have been unemployed, or grossly underemployed, for 3+ years. Why? Well, they are over 40, for one thing. For another, even when you have a lot of these jobs, there are still far more people looking for them, even in Silicon Valley, than there are jobs.

      When there is a tech bust, techy people tend to leave Silicon Valley and return to their home states (since it is so costly here that hanging on is very hard). That makes the unemployment figures look better than they are. But in addition, the area is full, full, full, of people over 40 hanging on, just surviving, who if they were ten years younger would be hired in a second by the glossy companies. It is very sad to see.

      To some extent it has been this way for decades. Some young person moves out here from Kansas because s/he has a good job offer. They settle in and earn well for a number of years. Then their company goes bust (very common) or just spits them out as too old. They cannot get another comparable here job because of age. Sometimes they leave the area; often they hang on, getting poorer and poorer and older and older and less and less employable.

      I do know a few people who have gotten those cool tech jobs in SF. They are all just out of college. Not one of them is any older than that.

      1. JTFaraday

        That’s exactly what I was thinking. Soon these companies, so dependent on marketing to shoppers, will figure out that they over hired and over paid and these people better save their money.

  5. Ché Pasa

    Stop with this “we” business.

    Richter is careful to point out who specifically is masterminding and ultimately responsible for this clusterfuck.

    Among them:

    * Unresponsive and unrepresentative legislative and executive bodies — which “we” may elect but have essentially no influence on or control over

    * Deloitte, which has long been in the lucrative business of fleecing the public for whatever it can get

    * Silicon Valley entrepreneurs whose money-making ventures never seem to have a public interest component

    * EDD, which has struggled for years with backlogs due to management incompetence and corruption

    * Congress, which abrogated its responsibilities to the People so many years ago, they have forgotten they ever had any, and over which “we” have less influence and control than “we” do over state legislatures.

    “We” have almost nothing to do with any of this. It is almost entirely a matter of what they are free to do to us.

    They believe they can behave this way because there is as yet too little resistance and there is barely an alternative in sight to their predation.

    But it isn’t because “we” agreed to it or are ignorant of our mutual plight.

  6. Dr. Dumbass

    “Many of them live inland, don’t write code, and don’t have PhDs in the life sciences.”

    I think you might want to read up on the job prospects for Life Science Ph.D.’s. As a CA resident, I can tell you first hand your impressions are wildly off base for the average life scientist. Even after excluding the far less employable Ecologists, plant physiologists, etc., who rely on careers in ill-funded University systems, the combination of training opportunity costs, industry/academia cost cutting, and immigration policies mean that the career path for U.S.-trained biomedical scientists is actually quite dark and scary.

    A Ph.D. in the Life Sciences requires a Bachelor’s degree (obviously), the more prestigious of which typically come with tremendous student loan burdens (mine did). Average training time: 5-7 years of grad school, 3-5 years of post-doctoral “training,” and huge competition from people with foreign “doctorates” (which are usually the equivalent of American/EU bachelors degrees).

    In CA and elsewhare, the H1b visa program is driving down salaries AND job opportunities.
    There were ~300,000 layoffs in Pharma between 2000 and 2011, and an additional ~20,000 between January and October of 2013 alone.

    http://www.forbes.com/sites/matthewherper/2011/04/13/a-decade-in-drug-industry-layoffs/
    http://www.dddmag.com/news/2013/12/infographic-pharma-layoffs-2013

    I’m in my late 40’s (very late), and have three Life Sciences degrees, the last was a doctorate from an Ivy League school. After several years of additional “required training” (i.e., exploitation in the Academic Diamond mines) I got my first paying job at age 36. I have been laid off three times since, each time taking a bath on a house and having to go on unemployment to pay for day care, mortgage/rent, etc. I had student loan debt until last year, and drive a 12 year old car. I do not own a home, nor do I currently qualify for a home loan at anything but usurous rates (layoffs will do that to a credit score). I have no pension, and my 401(k) savings started in my late 30’s (my after tax postdoc salary was less than my daycare expenses alone). My salary has been basically flat for a decade, during which time every month has brought with it a new level of layoff anxiety that keeps my family from taking any economic risks. Retirement is a pipe dream. I expect to die at work.

    Looking back at the personal pronoun count in this reply, I realize that I am probably coming off as a whiner. I should probably be happy for having a job at all. I do feel extremely lucky to have the opportunity to go into work and, to some extent, satisfy my curiosity. That is THE only benefit to having gone to grad school.

    Nevertheless, I think my story is reflective of the depth of the economic crisis facing the middle class.

    1. MyLessThanPrimeBeef

      It may be a pipedream, but with GDP sharing, everyone in the Nature-conquering army, including those in the marching band, in tech support or in reserve, is able to do what he/she truly cares about, what he/she is really passionate about, because it doesn’t matter what you do, you get an equal share.

      It’s through teamwork we conquer Nature, and therefore, reasonable that we share the spoils.

      1. Dirk77

        If he has friends on Wall St – and as a science phd he most surely has – he should be able to explore your suggestion without too much effort.

    2. kareninca

      Exactly right. Education, even in a “hot” field, means little as a means of obtaining job security or adequate wages, especially in California. Yes, the working poor who have low levels of education are suffering. But the middle (and even upper middle, if you call someone upper middle due to education) classes are being crushed, too, due to the lack of jobs. I wouldn’t be surprised if a lot of the people who lose long-term unemployment benefits in CA, are highly educated.

  7. Elizabeth Cook

    A world economy based on constant growth is destroying our planet. And this economy is not taking care of most folks anyway. It is a “privileged” economy. If you’re wealthy, you have access to resources, land and housing. If not, you might be lucky enough to find a job that may be contributing to the destruction of the world’s ecosystems, such as the fossil fuel industry. We can do better than this, but we have reigned in our imaginations to fit into the current acceptable contours of debate. We’re losing our planet in the process.

  8. diptherio

    The PTB are obviously too stupid to do anything about the problems that poor and unemployed people face. It is high time we stopped looking to them for solutions. Sure, harassing them for their callous and moronic behavior is fine, but we also need to be working on solutions ourselves. Waiting for these jack-asses to figure things out is surely a losing proposition.

    Here’s one idea that I like:
    Incubating Worker Cooperatives on a Shoestring with Time Banking

    I’d love to hear other ideas as well. How can we provide for ourselves in ways that don’t require the PTB to get their act together?

    Unemployment, imo, is a symptom of a broken system, not the fundamental problem. The fundamental problem is that large numbers of people are unable to provide for themselves. This, in turn, is due to a lack of adequate quantities of green slips of paper which our system requires to procure sustenance. Unemployment is only seen as a problem because in our current system employment is the major way people obtain the green slips of paper–otherwise we would welcome the increased amount of leisure time.

    ISTM that what we really need to do is to figure out ways to provide for ourselves that do not rely on the presence of little green slips of paper.

    1. Cassiodorus

      Well, the powers that be may be too stupid to deal with us, but that doesn’t mean that we can’t demand that they do something real about our plight. And, if they don’t, then we continue to organize for ourselves, in the mode and manner in which the Zapatistas did.

    2. JTFaraday

      I love how you know about all this stuff.

      Have you ever thought about writing about this stuff “for real” and pitching articles around town? I’m certain other people would find it interesting but this doesn’t seem to be anyone’s journalistic beat, (to our greater collective ignorance).

      That just means you can get in on the ground floor. :p

  9. bob smith

    While there is some good info in this entry- it ignores the positive side.
    California is projecting 10 billion dollar surpluses (annually) in the very near future.
    With that level of sun-power surplus, debt will melt away.

      1. bob smith

        Is California in surplus- or isn’t it?
        Just wait till they legalize pot, tax revenue from that could exceed one billion per year…

        1. FederalismForever

          California has achieved a “surplus” only by completely ignoring its numerous unfunded and growing pension and health costs – at the state, university and local level. California, like many other government entities, does not follow corporate accounting rules that require corporations to currently recognize some amount for future pension and health costs. In other words, you only get a “surplus” for California by committing accounting fraud (using the rules that apply to corporations). New accounting rules that will take effect in 2014-2015 will require government entities to more accurately reflect these future liabilities.

          California’s current fiscal profile is also getting a somewhat artificial boost from the record stock market highs. California’s income tax regime is extremely reliant on taxes on capital gains, which works great when the stock market is booming, but bodes ill if and when the stock market crashes.

          To his credit, Governor Brown realizes this, and often talks about the need to set the “surplus” into a “rainy-day fund” to try and pay down these unfunded pension and health liabilities, and to prepare for lower tax receipts from stock sales.

  10. Ishmael

    This story also fails to mention how California shoots itself in the head.

    First you have a struggling state and what does it do. It encourages people with no skill and no education to illegally pour over the border and suck what little money there is out of the system. Several million illegals in the California and they get more rights than citizens. In addition one-quarter of California’s prison population is illegal which requires more prisons and more highly paid union employees. The illegal population also increases crime dramatically. The majority of the people arrested during the Rodney King riots were not African Americans they were illegals. I live in a neighborhood which the Chief of Police calls the safest in LA but we still had a triple homicide gang-hit with-in 300 feet of our house.

    Second, under Grey Davis, pension benefits were expanded from 2/3 of income after 30 years to 100%. Now in fact due to various ways used to game the system most people get far more than 100% of their salary when the retire. The unfunded prior service cost of that increase is what basically bankrupted the state.

    Thirdly, the benefits of city and state employees is killing the state. Now I live in Santa Monica and a report was just issued that 28 city police officers are paid over $200,000 a year. First you need to know you never see a police officer on the streets in Santa Monica. It has become a very unpleasant place to live. In fact this problem ripples through all the cities with the number of city employees in the state making over $200,000 reaching several thousand. Guess what almost all of these cities are bankrupt due to the combination of these out sized pay packages and retirement benefits. Now I know many of the people on NC will start yelling that all these people deserve their pay etc. This is a matter of mathematics and it basically is unpayable. You can not have the average state employee being paid double what the average state worker makes. It does not work. In addition as they tax more they just drive business out of the state.

    Being involved in Argentina in the 70’s all I can say for California is “Don’t cry for me California!” I have already relocated my business to the Texas area and will soon be relocated myself. A time bomb waiting to explode.

    1. Cal Lee Fournier

      Wow. Enjoy Texas. Don’t expect many visitors.

      As for mathematics, take a look at the oil severance tax rates in the two states. The fraction of income CA simply doesn’t collect from Big Oil would more than pay for the supposedly extravagant pensions we promised to those evil kindergarten teachers, cops, and fire fighters. But we understand. Taxes Bad. Freedom Good.

      1. FederalismForever

        @Cal Lee Fournier. You are correct that California is unusual in that it has no specific tax on extraction. But even if it did, at a rate comparable to the one levied in Texas, it would not generate anywhere near enough in taxes to adequately pay for all of the unfunded pension and health benefits owed to state, university and local employees.

        1. Cal Lee Fournier

          I disagree. It’s well documented that at least 16 oil companies and a cabal of revolving door aspirants in the Minerals Management Service and Interior Departments vastly under-reported their royalty requirements, and unabashedly defrauded the taxpayers from about 1960 to at least the late ’90’s.

          http://www.sourcewatch.org/index.php?title=U.S._federal_oil_and_gas_royalties

          Unfortunately for CA, the denouement of these revelations and the resulting whistleblower lawsuits occurred during the height of the Republican-led Crony Capitalism Energy Orgy and Governator Installation. Being unethical but not stupid, “free marketers” cemented these profits through sweetheart out of court settlements, and CA never really recouped decades of unpaid taxes.

          So, while you may be correct that potential revenues from newly increased extraction taxes might not keep up with the growth in pension and health care costs, it is disingenuous and hypocritical to claim that this oily kid glove treatment isn’t part of the problem. It’s especially hypocritical that the right wing profit fetishists haven’t played by the rules, have no plans to enforce the rules, and are now crying about a crooked table. It would be funny were it not so tragically familiar.

          As to the solution, every penny helps, and every compounded penny helps just that much more. Ironically, if the right wing obsession with killing pensions (which we all know is really about further privatizing and limiting government services in general) does lead to cuts in pension plans, simple demographics suggests that the “problem” will fix itself in about 20 years.

    2. FederalismForever

      Great comment. I am second-generation Californian and watching this once-great state slowly decline is very hard to bear. All the points you mention about the problems from having so many illegals/undocumented are very true. In addition, having so many poorly educated non-English speakers come into the state over a relatively short time has put great pressure on student/teacher ratios and doctor/patient ratios – expect to hear more about this, as California simply does not have enough quality doctors to satisfy the growing demand for medical services given its ongoing Medicaid expansion under ObamaCare. Moreover, having so many non-English speakers wreaks havoc with our criminal justice system, since it takes so many out of the potential jury pool. Very very few trials take place today that conform to Fifth and Sixth Amendment standards. Rather, something like 95% (!) are resolved via plea bargaining – a much inferior method of criminal “justice” and something that would shock James Madison, were he alive today.

      1. participant-observer-observed

        Wow it is shocking to see the vitriol toward the “immigrants” on NC (and in Huffpo comments in CA issue articles).

        It sounds like pure euro/anglo imperialist angst.

        The fact of the matter is, not so very long ago, California belonged to Mexico; the “illegals” and “Spanish-speaking” have been living in SoCal for hundreds of years and are not coming and going anywhere new they have not been going for centuries! However many walls you want to build, they are going to be in what they consider to be their home, whether it is called Mexico or USA or whatever.

        What’s more, like most marks of the indigenous inhabitants of a place, they are the only people who appear to know how to grow food in this desert land.

        1. Ishmael

          Well in fact your discussion of this being part of Mexico is only half correct. It was part of Mexico only due to the Spanish conquest. The people that lived in California pre-European are just about as related to the Europeans as they are the people now coming back across the border.

          Believe what you will, I do not think this trend will continue. There always comes a breaking point where the willingness to turn a blind eye to such invasions end and it will not be pretty.

          Really, if it was not due to European style construction there would hardly be anyone living in So Cal. because there was no freaking water. Do you think a bunch of uneducated illegals can keep this infrastructure going? The other thing that gets me is all the illegals want to become a part of Mexico which is a place they fleed! Stupid!

          1. Lambert Strether

            “Fled,” right? Speaking of uneducated. And still speaking of uneducated, when did the adjective, illegal, become a noun?

            * * *

            For my money, what there is of it, ire would be far more appropriately directed toward the undeserving rich, whose criminality is both open and a huge net loss to the United States. Just saying.

        2. FederalismForever

          @participant-observer-observed. It is, frankly, laughable to conclude that the problems I mentioned regarding student/teacher and doctor/patient ratios are, in fact, entirely reducible to “pure” euro/anglo imperialist angst. These problems are very real, and Californians cannot simply dismiss them by playing the racist/imperialist card. The sad fact is that the many millions of undocumented immigrants who have poured into California in recent decades have included very few qualified teachers or doctors, and this really is creating problems for the California education and healthcare systems. Moreover, maintaining a criminal justice system that complies with the Fifth and Sixth Amendments really is quite difficult when so many potential jurors and accused do not speak a common language. All of this is leading to a de facto segregated system in which disputes involving immigrants are usually resolved via plea bargaining, rather than through the trial system. Without going into all the details, I think pretty much anyone involved in the criminal justice system, no matter their political party or beliefs, agrees that plea bargaining is an inferior system, and it saddens me that this inferior system is the one that so many recent immigrants have to experience.

          I am in no way arguing that any border fence be installed, and I quite agree that the history of that border is questionable. I am only saying that California needs to manage its immigration better. Too much has been done too thoughtlessly and without really thinking things through.

  11. J Stella

    With all that said, unfortunately California isn’t the only place the economy is in dire straits. Only time will tell how this will play out….if we have enough of it.

  12. Ep3

    Yves, another great but depressing post. I have a couple points to make.

    First, in regards to the unemployment shortage, several states have been dealing with this as far as I know. It was being called the FUTA credit. Maybe I am misunderstanding the loans you refer to above. To explain, the FUTA tax is really 6.2%. But states that have enough unemployment reserves to cover their claims, get a credit of 5.5% (my numbers are off, but the principle is there) so that their federal unemployment tax is much lower. Due to the confidence recession (that’s my nickname for it), several states needed extra funds to cover these lazy union deadbeats. And coincidently, the states needing loans were mostly blue states. So once is recession hit, states that were already hurting, employers were “punished”, or squeezed even more to cover these loans. And usually the additional was paid at year end, in January. Slowly states have paid back what they owe thru a combination of reducing unemployment leeches.
    Second, related to unemployment, the state of Michigan had traditionally had two forms for employers to report quarterly wages. One listed each employee & earnings while the other form summarized wages & calculated the tax due that quarter. So finally last year it was decided to combine the forms into one. And what a disaster. Most employers submit on time yet get letters stating no reporting or paying. Then when you call the unemployment office (which for some reason changed when the form changed) you never reach knowledgable employees, most have quit shortly after starting, all claim they are months behind and short of making life easier on preparers while preparing the form, more time is spent responding to useless notices.
    I think sometimes govt does this just to make itself look incompetent thus destroying any shred of faith from its constituents. I will note Michigan has a republican governor after taking over for an Obama suck up democrat. But my company just went thru a major accounting software change & there were massive hiccups & issues. since A) not everyone uses our business for something or reads about our daily goings on in the paper & B) since profit is the motivator, working thru the problems while still seeing that almighty metric rise blots out the implementation issues, only us employees complain about the heartache & get little sympathy beyond the familial strain.

  13. Carpenter

    Want to second what Ismael says. I am a carpenter and where once I could make a living wage working full time, most of my jobs are now cleaning up the messes left by “cheaper” Spanish speaking crews who work for $15 an hour or less and thus I am expected to work for the same.

    In addition, most of the money they make is in cash, so no taxes paid to make up for the public services they use and it is sent home to Central America and Mexico, thus removing it and the multiplier effect it could have from our local economy.

    You think age discrimination is bad? Just try applying for a job that demands “biligual Spanish English”.

    1. Ishmael

      Carpenter – save your breath. Being liberal means that you turn your brain off.

      Now the one liberal idea I do embrace is sustainability and a big problem with California is the current population is unsustainable. Water is becoming a major problem.

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