Tuesday, January 13, 2015 ~ Silicon Valley, CA

If you think California is a truly entrepreneurial state, come with me on this 14 minute read and let’s look a little closer. I think California has a problem. A debt problem.

Maybe you have heard the things that I am about to say, maybe you haven’t. If you want the 30 second version you can skip to the conclusion.

My inspiration in writing this comes from three things: (1) There is a fog that seems to surround us all in the onset of another new century, (2) There seems to be a general lack of clarity around jounalistic truth in mainstream media today, and (3) I feel I can no longer sleep through the current movie we are all living in.

“We are programmed to receive. You can check-out any time you like. But you can never leave.”

Maybe the shock put the song in my head and this familiar refrain from the song on the album of the same name — “Hotel California” seems appropriate. Quoted by Eagles’ band member, Don Henly, as “a song about the dark underbelly of the American dream and about excess in America…” the song’s backstory, while set in a different time and place, also seems quite prophetic. The lyrics have a dark undertone, but when mixed with the seductive rhythm it creates an intoxicating magic that people are drawn to. Much, apparently, like people seem drawn to the Golden State itself. But how many know the dark possibility that the State Of California may be in debt to the approximate tune of $1.1Trillion.

[ Click to tweet (can edit before sending): http://ctt.ec/aucw6 ]

News ?…

I had never heard that number before, certainly not related to California’s debt. Why hadn’t I heard or seen that big number stated before ? Had I missed it in my aversion to today’s circus of mainstream media ? Social media is the new TV, entertainer to many, why hadn’t I seen it referrenced there ? For real news I go to The Economist, which still practices journalistic ethics and standards in it’s worldview coverage of a very wide range of topics. I don’t recall reading about the debt issue there either. Had everybody missed the $1.1Trillon story ?

No. Perhaps it was a little too accurate to be sensationalist news.

My attention to the debt issue was drawn out by a claim that I had seen on TV ( Facebook to be exact ) that California’s economy was both thriving and robustly outperforming other states that had opted for polar opposite economic strategies in regard to taxation. I was in wonder. The opinion piece by Dante Atkins for Daily Kos offered that while California had raised taxes, other states had lowered taxes. But, contained in the original post was a rebuttal comment from a “Friend” featuring a link. By clicking the link to dig a little deeper what I found was quite surprising.

Digging deeper still I discovered that; last summer, California Governor, Jerry Brown, in his 2014/15 proposed budget, estimated the state’s debt at $26.2Billion; also last summer, Executive Director of California Common Sense, Autumn Carter, published a piece estimating the state’s debt at $443Billion; and what really got my attention was a report the previous fall by William Fletcher and Ed Ring, which was written for the California Policy Center ( CPC ), that estimated the state’s debt at $848.4Billion. *The trip North, according to the report, to $1.1Trillon is realized by adding the state’s unfunded pension liabilities.

While the range of these debt estimates alone should turn swagger to stagger — the real issue — as pointed out in the CPC report — is the lack of any single structure or entity within the Golden State that is accountable for a complete and accurate debt tally. This, to me, was beyond amazing.

Debt is Debt ~ Assets are Assets

Not Exactly.

Governments can not sell equity. So, in theory, debt is a common and acceptable instrument for government financing. The term debt, however always seems to be heard in a negative way. This is 100% accurate, especially when government debt is used to finance things other than valuable assets — think bankrupt —that will not repay the debt. From this perspective you can see that the issue is not so much about debt, but exactly what the debt is used for.

The CPC report wisely points out two distinctions to assess debt.

Good debt is used to create an asset — think investment — that would generate fees and taxes that are then used to cover interest and principle payments. Simple examples of these would be; toll roads, water treatment plants, highways or even buildings and parks. Obviously, maintenance and repair costs would also have to be offset and the object would be to completely retire the debt.

Bad debt is used to create more liabilities — think bankruptcy — because the money does not get used to create assets that will generate revenue. The money, for example, gets used to make current interest and principle payments on existing debt. This is like getting a new credit card to make payments on an old credit card — a game that can not last long — unless you actually create enough cash flow to eventually pay off both cards in full. That would take thinking and acting differently.

Which debt is California’s ? You would think assessing that would be somebody’s job. Maybe the State Treasurer ? But, to do that they would have to direct a team to go through the rigorous process of compiling a total and analyzing each puzzle piece to create an aggregated total.

The 1.1 Trillion Piece Puzzle

Q: When you don’t know the total amount of debt that you owe, how can you effectively manage the future ?

A: When you are “programmed to receive” you don’t have to. Turn up — tune out — and keep jamming ~ people will continue to pay because we are cool !

Sarcastic humor — break over — California’s infrastructure needs more than a facelift to support the the 60Million people estimated to inhabit the state in 2050. That estimate, established in 2007, occurred when the state’s population was ~36M people. Today the most recent census data pegs the state’s 2013 population at 38.33M people, which represents a 6.5% jump in six years. It has been difficult times. While we are currently trending under the estimated growth we need more data to actually see where we are now. It may also be worth noting that California’s population was a little more than 10% of the entire U.S. population in 2013.

Trying to put California’s economic viability puzzle together is no easy task indeed. The visibility problem persists. Stop by Fresno and you might find where the state just broke ground on the estimated $68Billion High-Speed Rail System, which will connect Los Angeles with San Francisco by 2029. And aside from the occasional highway sign we might see things going on around us, but I would offer that the big picture escapes us equally as well as it seems to be escaping our leaders from a total debt perspective.

If we set the state’s correctional facility, political gridlock, and tax fund distribution issues aside, and those are very big asides — there are still huge issues that surround climate change, water supply, sewage treatment, waste disposal, transportation, power grid, internet connectivity, and general urban planning for a short list — topped, of course, with generally rebooting employment and streamlining business formation, particularly for businesses that create jobs.

This makes another piece of the puzzle, the portion of the existing $1.1Trillion debt figure that directly addresses these issues a must. There needs to be some good debt in the total, right ?

Guess again — the CPC report, which is based “primarily on official reports prepared by the State Controller and State Treasurer” — very clearly outlines a different case. The lion’s share of tax revenue is destined to pay bad debt:

$465.4Billion of the $848.4Billion debt ( 54.8% ) relates to “Pension” and “Retiree Healthcare”.

$654.9Billion of the $1.1Trillion debt ( 59.5% ) relates to “Pension” and “Retiree Healthcare”.

Then when you add the $49.7Billion borrowed for education, which will likely not be paid back directly, it boosts the bad debt percentages to ( 60.7% ) and ( 64% ) respectively. Additional monies will also be due: $10.9Billion for “Unemployment Insurance”, another $73.1Billion for “General Obligation”, another $35.6Billion for “Lease Obligations” — and you can see where this is headed.

Against the good debt/bad debt criteria it turns out that very little of the $1.1Trillion relates to good debt that will provide for California’s future and a huge percentage is bad debt required to pay for the past and present. Sadly, the present will also soon be the past.

“Driving That Train…”

Another song, Casey Jones, by California icons, Grateful Dead, comes to mind. The lyrics seem equally prophetic — “Driving that train,“… high on cocaine, Casey Jones you better, watch your speed.” — and the call for a speed check points to an opportunity to put things in perspective. Here are my thoughts for a renewed and collective leadership, thoughts that I think are critical for EVERYONE invested in California:

We need to wake up. This is not a TV show, and there is no hero/heroine coming to save us. We all need to become heroes, action heroes in action.

I myself am guilty in thinking that; apathy is ok, whatever I do really doesn’t matter, nothing is within my control, the deck is stacked against me and there is nothing I can do. This is complete bullshit. Lincoln said it well in his Gettysburg Address, when he offered that this country is based on “government of the people, by the people and for the people”. We need to get that back. We need to wake up, get up, start thinking clearly and figure out where we CAN take effective action today and each and every day thereafter to turn things around. This article is one such step that I can take.

We need to get pragmatic. Pragmatism is “an approach that assesses the truth of meaning of theories or beliefs in terms of the success of their practical application.”

Being too lazy to dig a little bit for the facts on both sides of the debate and being narrow minded about; what people have to say, what people really care about and putting down possible solutions that you didn’t think of — these are practices of choice — not art forms to be perfected.

Political persuasion, which party you are registered with, seems to be an outdated idea. Personally, I grew up in a Republican household and have voted both Democratic and Independent. Libertarianism is a compelling argument. But, I think what really matters today is the nurturing and creation of legitimate jobs. Jobs that people can be engaged in. Jobs that enable living in good health and living with dignity. Politically oriented finger pointing about how we got here is an irrelevant waste of time.

We need to stop doing things just because that is the way we used to do them and begin doing things because they serve more than a personal purpose.

We can’t continue to be arrogant. California is great, but let’s be honest, people don’t have to spend their tourist dollars here, they don’t have to set up their businesses here, and they don’t have to continue to live here. 90% of the country does not live here. The state may be special geographically. But the people who live in California are just as human as everybody else, not special.

Will California continue to be a great place to visit ? Maybe. Among tangible assets such as weather, scenery and long list of quaint destinations you would think that California is on the list of tourists and would-be tourists the world over. That revenue has got to help, right ? Not really. According to Visit California — “accommodations, restaurants, retailers, attractions, transportation companies and travel service providers that have gross California receipts of $1 million or more is 0.065%, and is applied only to tourism‐related revenues.” — so, that really isn’t going to help, especially when 60%+ of every tax dollar that is used to pay down debt is required to pay people that don’t work here anymore. Such economics can do nothing, theoretically, short of forcing prices higher. It is time to be honest about long term viability as a destination and consider what will happen when California’s looks fade and she can’t afford makeup or critical surgeries.

And, while we are discussing looks, have you taken a close look at the freeway interchanges, on ramps and off ramps around our major cities — they are literally dump sites for a constant and growing amount of trash. Some might say these are pimples on the face of our beautiful state, but I say these are early signs of chicken pox, which can be very deadly when contracted as an adult.

Will California continue to be a great place to start a business ? Maybe. One data point is not a trend. We need more data over an extended period of time to really make an accurate assessment. To me, the Kos article was simply a regurgitation of short term information, published in the state capitol, for cheerleading purposes. Truthful ? Maybe. Narrow in perspective ? Absolutely.

Will California continue to be a great place to live ? Maybe. If you can afford it. Again, one data point is not a trend and we need more data. Being in a beautiful place isn’t beautiful if you can’t afford to buy a house, pay your rent, drive your car, or eat healthy food.

We can’t continue to be spendthrifts. A spendthrift is “a person who spends money in an extravagant, irresponsible way.” I would also like to offer that a spendthrift is a person, or a group of people that either wastes assets, or invests needlesly in redundant assets.

Do we really need a $68Billion high speed rail line to go from San Francisco to Los Angeles ? No. Not right now. We don’t need a competing asset. We have perfectly good airports, a number of which were just upgraded and expanded. According to a 2010 Airport Council International report, California’s 29 Airports generated ~$157.9Billion annually in what the report called output. Essentially gross revenue. Who owns the airports ? Two of the biggest; LAX, for example is “owned and operated by Los Angeles World Airports, an agency of the Los Angeles city government.” and SJC is a San Jose “city-owned public airport.

Did the City of San Jose need a new $342Million city hall ? Not really. Regardless of the fact that San Jose has tried to brand itself as “The Capitol of Silicon Valley” other high profile cities such as Seattle, WA and Austin, TX only spent $72M and $46.7M repspectively on their new city halls. Eight years after San Jose’s 550K sq. ft. architectural monument was completed in 2005 an outside tennant was acquired, through significant discounting, in the form of a satellite office of the U.S. Patent and Trademark Office.

Did the powers that be in our Golden State really need to send 70,000 acre feet of water from “Folsom and other reservoirs on the American and Stanislaus rivers” to the Pacific Ocean — “23 billion gallons to lower river water temperatures by a few degrees.” — in the middle of a historic draught to meet an environmental policy ? Doubtful. Did the farmers need the water ? Yes, absolutely. Did fish need the extra push and the minute and fleeting temperature dampening ? Debatable, but pragmatic ? No.

We can no longer tolerate entitlement. Entitlement is “the belief that one is inherently deserving of privileges or special treatment.” That is just bullshit.

We are each no better and no worse than what we deserve based on our actions in the moment. Who you were in the past is irrelevant and who you will be in the future is unknown.

Do we need to pay salaries in excess of $100k per year to some retired government workers ? No. CPC’s California Public Safety Pension Evaluation states that “public safety retirees comprise just 15% of the state and local government workforce, while accounting for 25% of total pension costs.”. Yes, there is an additional element of danger in their jobs, but it seems that just being a citizen is dangerous proposition these days. And what about teachers, are teacher’s jobs less dangerous and less valuable ? I don’t think so.

To further put this in perspective, in the entrepreneurial spirit that we frequently find ourselves in; if you started a company and you had a fairly compelling product, but had to set aside over 60% of each and every revenue dollar to pay the salary of somebody that didn’t work for your company anymore, how long do you think you would actually stay in business ?

Conclusion:

California is bankrupt. Bankruptcy “is a legal status of a person or other entity that cannot repay the debts it owes to creditors.”. Bankruptcy isn’t necessarily a bad thing and typically what happens is that the debt holders get somewhere between nothing and pennies on the dollar, which allows the debtor to restructure their previous debt obligations in a way that allows them to keep functioning. General Motors went bankrupt. So did Chrysler. Their new versions are still around today.

California is different in that it is not a publicly traded company and as such the state’s handlers are able to publicly ignore the state’s “off-balance-sheet” debt. This is the whole issue surrounding the difference between $26.2Billion and $1.1Trillion.

California is exemplar, but not unique. The U.S. Government has the same problem. We have a national debt that is the biggest in U.S. history and has been laid on the back of each and every American, while we, as a population seem deeper asleep than ever before. Each an every one of us, as Americans, might do more than just take what has been said here under consideration.

I appreciate your attention, thank you and while I look forward to your comments, I am more interested in what we all might do to begin to change the course we all seem to be on together !!!…

Notes and Acknowledgements:

I am neither a journalist, an English major or a punctuation expert. If you are any of these things, you already knew that.

My background is business. I didn’t graduate from colledge. Instead I have failed a lot. Along the way I co-founded a high tech manufacturing company. My partners and I grew that business from three people to six hundred people, generating a little over $100M in annual revenue from facilities in two states. We accomplished that in about six years and sold the business to a large conglomerate. In addition to growing that business, I have studied and applied the disciplines of biology, linguistics, human behavior and effective action in my work with other businesses for almost twenty years. I consult with business owners, executives and management teams on a variety of topics.

This piece took about 12 hours to write, which included research and refinement. It is not intended to be perfect, and I am no “expert” on any of the topics touched. I think being or calling yourself and expert these days is an opportunity for and label of narrowmindedness. The intention here is to offer the best data I could find, some critical thinking and some serious offers for action that we can all begin to take to effect change and return to real prosperity.

This past Sunday I read a piece by @Jason, which inspired me to refine this piece in two different ways. One to reflect more rigor in the data selections behind the links, being presented, the other to offer some actionable solutions. His piece, “Is there a place for the truth in journalism today?”, very clearly defines what I think is the root cause of some of things that have been bothering me about journalism for some time, but I couldn’t quite put a finger on. Well done. The piece also seemed to be a bit of a pitch for, @inside, one of his projects and something that I have also experimented with as a potential solution to the problems of journalism today. His “pitch” reminded me that there is nothing wrong with citing an issue and offering a solution to see if people can get behind what you are up to. This is, in fact, essential and something we need more of these days, regardless of the fact that it takes more work.

Header imagery here has been cropped from an online image of the original Hotel California album cover, which was comprised of a photograph of the Beverly Hills Hotel by David Alexander with further design and art direction by Kosh.

At this writing; I am not a politician, nor do I have the desire to be one; no one is paying me to write this piece; nor am I an investor in, or employee of any of the entities mentioned; any opinions offered here are solely my own; I am seriously interested in some positive change, not just here in California, but here in the Unites States and in what we all do here on the pale blue dot we call Earth.