Does California become a failing state?
Does California become a failing state?
California always was a unique state because of its location, population, and culture. The state is blessed, it has the largest economy in the USA, most populated one with one of the highest incomes (GDP-per capita). It is famous for its free spirit and freedom. Because of this, the biggest changes and technological innovations happened there. When you have good conditions that many of the Fortune 500 companies are located there, it is quite normal to be the leading state in technological developments and innovations. But does everything is in order in the state, or there are internal problems too?
We received disturbing news about infrastructure problems, too many homeless people, high crime rate, lack of affordable houses, bad business ranking, too many regulations. Is this true or they are simply exaggerated? Does California is a prosperous and booming state, or it is a failing one?
-What is the condition of infrastructure?
The main infrastructure was built in the last century. Its purpose was to support the population between 20–25 million people. But the population increased dramatically. Now it’s almost 40 million people and by 2050 it is expected to reach 50 million people. How is supposed so many people to live comfortably, when the infrastructure is not enough and the main fault is on the local government?
We use different sources, and all of them put the infrastructure of California in poor shape.
As we can see, the state has one of the worst roads among all states and more than half of the major urban roads are in poor condition.[1] According to the same source, the lack of proper roads costs to the state around $61 billion annually because of increased vehicle operating costs, traffic collisions and congestion-related delays. The worst conditions combined with congested areas are making the state with one of the worst road networks.
The main reasons for these poor conditions are several:
-poor maintenance
-poor managing of the funds
-a larger population, which requires more roads and infrastructures to support them-If they are lacking, the current infrastructure deteriorates faster.
Other examples of the bad infrastructure are bridges. If we use the National Bridge Inventory database, there are 25 737 bridges in California[2]. Most of them are obsoleted-over 50% of them are 50+ years old.
Most of the bridges are designed for a 50-year lifespan. If we see the graph, 40% of bridges are 50+ years old[3], 19%, 40+ years old and 13%, 75+ years old or 53% of the bridges are obsolete and 19% are close to their maximum lifespan.
The bridges that are in a normal lifespan (up to 29 years of maximum 50 years) are only 20%. The state will need to make quick investments in new bridges and infrastructure before some catastrophic event happens.
-High debt
Despite the largest economy and one of the highest incomes in the USA, if one state is not managed well, it can be in trouble. One of the problems in California is its higher debt. The total debt is $388 billion[4] which includes bonds unfunded pension benefits and unfunded health care benefits for retirees.
Yes, the state has some assets, but are they enough to cover the bill? The total assets are $362 billion, but not all of them are eligible for selling if it is needed-the majority are capital and restricted assets.
The available assets are only 1/3 or around $114 billion. The difference between assets and liabilities is $275 billion shortfalls.
One of the reasons for this massive debt is the generous promises about future retirement of the state employees, which the state can’t fulfill. With such generous promises, the state acquires a new debt-the difference between earned retirement and future retirement. If there is any difference, the state issues a bond (debt) with an obligation to pay it in the future. Knowing that the state can’t declare bankruptcy (it is not legal, but it may change in the future), politicians give promises that they know the state will have difficulties to fulfill, like generous retirement and medical benefits.
Also, if you compare the salaries plus annual bonuses of state-workers to private-sector workers, you will see that the difference is almost double. The examination of California Policy Center[5](not including those in K–12 or college education), shows that in 2015, the average total compensation was $137,392, for a full-time worker, $117,425, for country workers and $116,887 for state workers. For comparison, a full-time private-sector worker received an average total compensation of $62,475.
With such results, we can understand why the debt of the state is so high.
- Homelessness hits a high record rate
Homelessness is a big problem for California. If there is a completion of which state is the best suitable candidate for the capital of homeless people, California will be defiantly the winner.
With a total of 129 927[6], California is the state with the most homeless people among all U.S. states.
From 10,000 people, 33 in California experienced homelessness -one of the highest ranks.
Unfortunately, the number is increasing, with 5.3% [7] in comparison with 2010.
The reasons are several-not adequate policies of the local government to deal with them. Not enough assistance for homeless people for proper shelters; the median house prices are the highest in the USA, making them quite unfordable; the local government failed to build affordable houses for the people in need…
More efforts from the local government need to end this shameful act. It is a pity, the state which is the richest one, to be the state with most homeless people and not to resolve the issue.
-High taxes
The high taxes can sound good, but in practice, they are not working-they make everything much more expansive and unaffordable. Every product and service are more unaffordable due to high taxes. In addition, we also have a high sales tax, which makes the goods and services more expansive.
How high are they?
California has a sales tax, which is 7.25%, which is one of the highest sales taxes in the USA. Additionally, there are local sales tax, which combined can reach 10% in some cities in California, although the average sales tax is 8.54 %.
Additionally, you have a state tax on your income. Some states don’t have tax on the income, but California is not one of them-the tax starts from 1% and reaches up to 13.3% (incomes over 1 million), which makes the state taxes one of the highest among all states.
The only exception is the property tax, which is only 0.76% and it is below the national average of 1.1%. The tax is assessed at fair market value, but can’t increase more than 2 percent over the previous year.
-Too many regulations
The local government definitely wants to make California the green capital of the USA. It puts too many restrictions and regulations to make almost everything green. But pushing too hard and too quickly can hurt the economy and can cost thousands of lost jobs. The new “green” jobs are responsible for less than 1% of the state’s working force. With so big regulations, the local government is killing the manufacturing industry. Creating thousands of green jobs while losing hundreds of thousands of manufacturing jobs is not a wise policy.
The manufacturing industry is providing a well-paid job for the middle-class family and generating billions of taxes for the state, which is in high debt. The manufactory companies are leaving California because of uncertainty (regulations which are changing constantly) and cost (it is quite expansive and becomes more expansive with all these new regulations). They must be predictable and efficient-too much regulation and they are driving the business out together with thousands of jobs and billions of dollars lost tax revenue. The local bureaucracy, which was not elected by anyone, must be put in order.
- Bad business climate
It will be a total surprise for many, but according to Chief Executive, the worst place for doing business among all states is in California[8]. It is extremely expensive, regulated and with too many taxes… and one of the local governments is taking care to change something.
“You can’t tax a society into prosperity”-unfortunately, the local government in California thinks otherwise.
-The middle class is dying
Because of the increased housing costs (the most expansive houses among all states), high cost of living and many companies are leaving due to high operational cost, high taxes and too many regulations…there are no new jobs to replace them.
The middle class is moving out of California. Between 2007 and 2016, six million people left California, but only 5 million moved to the state or loss of one million people due to domestic migration[9]
The majority moved to Texas, Arizona, Nevada, Oregon, and Washington. The other states offer lower taxes, lower cost of living and affordable houses…something that local government in California can’t provide to its citizens.
There is a quite paradox-in California are located tech industries in Silicon Valley which are highly skilled and high-paying jobs… but they have a demand for nannies, restaurant workers, and dry-cleaners or low-paying jobs… but they can’t survive in California due to the high cost of living and high cost of the houses.
Conclusion
California has every condition to be one of the most successful states and to provide an excellent environment for its residents-excellent climate, largest economy, one of the highest GDP per capita, hosting many companies from Fortune 500…but at the end, the local government is failing and pushing California to fail state. The main answer is inefficient governance.
Accumulating too much debt mainly to higher state worker salaries and retirement benefits is a heavy burden to the state when they lack actions and resources for much more important areas like building and maintaining a proper infrastructure like roads (which are in poor conditions), bridges(when more than 50% of them are obsoleted) or taking care of homeless people who are in the highest among all other U.S. states.
High taxes which make the life here very expansive in combination with high regulations, make the business climate bad, and many companies (especially manufacturing companies) are moving out and not enough new jobs to replace them. The existing companies are afraid to expand due to the high costs of everything and uncertainty about what would be the future regulations.
The middle-class struggles to pay bills and find houses that become more and more unaffordable. The population is increasing and by 2050 it is expected to be 50 million people. If the local government doesn’t make enough efforts to make houses affordable by different policies like less regulation, more building permits, rent controls… it will affect the economy, because even high paying industries and jobs need supports from the middle class and low class(cleaners, waiters, restaurant staff, shop assistants)… if they are struggling to survive, the situation can lead to social unrest.
Source:
[1]REPORT CARD FOR INFRASTRUCTURE CALIFORNIA’S 2019 p.92
[2]https://www.fhwa.dot.gov/bridge/nbi/ascii2018.cfm available 01/2020
[3]https://www.infrastructurereportcard.org/wp-content/uploads/2018/10/ASCEReport-CA.pdf p.9
[4]https://www.truthinaccounting.org/library/doclib/CA-2017-2pager.pdf available 01/2020
[5]https://www.hoover.org/research/140000-year-why-are-government-workers-california-paid-twice-much-private-sector-workers available 01/2020
[6]https://www.usich.gov/tools-for-action/map/#fn[]=1400&fn[]=2900&fn[]=6000&fn[]=9900&fn[]=13500&families=true&year=2018 available 01/2020
[7] The 2018 Annual HomelessAssessment Report (AHAR) to Congress, p 81
[8]https://chiefexecutive.net/2019-best-worst-for-states-business/ available 01/2020
[9]https://lao.ca.gov/LAOEconTax/Article/Detail/265
