Is California Going Bankrupt?

Is California Going Bankrupt?

California is a unique state in the USA and the heart of it. It has the biggest population, and it is one of the largest, 3rh place if we are more specific. It is unique transportation and technological hub.

If we can choose which US state is suitable for the cultural capital of the country, California will be one of the leading pretenders.

Because of its unique position, the state hosts many businesses and its economy is quite diversified. California is famous for hosting one of the largest technology companies like Intel, AMD, NVIDIA, Apple… due to this fact, the state has the largest economy in the USA and one of the highest GDP per capita in the USA. The economy is so large, that if it declares independence from the USA, it will be the 5th large economy in the world (It will overtake the economies of France, UK, Span…) With its hot weather and glorious beaches, it is a desired place for many people all around the world.

But how are the finances of California-due to its infrastructure programs, social programs, the state is often criticized that with its level of spending and high taxes (which drives people to the other states) is on the verge of bankruptcy? Does California is a well-managed state or the rumors for bankruptcy are true?

Technically speaking, it doesn’t matter how bad is the fiscal situation with one State, it can’t legally declare bankruptcy, but this is not true for cities, towns or municipalities. If we see the history in the last 20 years, we have over 30 cities and towns that had filed for bankruptcy. One of the most notorious cases was Detroit in 2013… but this doesn’t apply to States. The law forbids them to declare bankruptcy. Under the current laws, if they have fiscal problems, they need simply to cut spending. But the situation is more complicated because some states forbid cutting spending on certain areas like pensions, healthcare, government services…

But how is the situation with California?

Let’s examine what is the size of its assets and compare it with its liabilities.

The state has combined assets of $362 billion, but not all of them are accessible for selling if it is required-some of them are capital and restricted assets (they can’t be sold). The available assets are almost $114 billion or 1/3 of the total assets. The assets are not enough to cover liabilities, which are total $388 billion[1]. They include state bonds, unfunded pension benefits, and unfunded health care benefits for the retired. The difference between assets and liabilities is $275 billion shortfalls. If we divide this sum to every taxpayer in California, the amount is a debt burden of $21 800 per taxpayer.

Among all US States, California is ranked on a 43rd place for its fiscal health[2] and received an F for its financial results from Truth in Accounting. 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.

The debt increased- the last year the total shortfall was $269.9 billion[3].

If we use other sources[4], they also rank California low for their fiscal health-42th position (combination between short-term and long-term). The state has between 0.82 and 1.62 times the cash needs to cover short-term obligations, which if we compare to other US states is below average[5].

Expanses are exceeding by revenue with 4%, the negative net asset ratio is 0.57 points. Long-term liabilities are 92% of total assets but without including unfunded pensions and medical liabilities which can exceed $1 296 billion (including Other post-employment benefits) which represents 59% of state personal income.

Unfortunately, in the last ten years, the results for the state worsen. The most obvious are long-term liabilities to total assets and pensions to income[6].

Debt to GDP is one of the best indicators that shows how much in debt is one country. The debt itself is not dangerous, but the ratio to GDP can make it risky to the economy for the country/state. The general rule is one debt must reach no more than 60% of the GDP. Debt that is exceeding 100% GDP is considered dangerous which can lead the country to default.

According to Forbes[7], the state of California has a debt-to-GDP ratio of 125% (or 153% using the broader definition of federal debt). The state has the same ratio as Portugal, Italy, and Greece.

From where does this enormous debt come?

-Pension gap

The State has over 1 trillion dollars in unfunded pension liabilities. If we include non-pensions benefits and health care benefits for retired state employees, the debt increases further. But how was this debt created? The standard practice is that an employee earns his retirement benefits during the years when he works and he puts money in his pension fund. If his present pension fund is not equal to future retirement benefits, a debt is created. But how is that possible? When you have politicians on top, they can promise retirement benefits that don’t match the present value of the state worker and offer much higher retirement benefits. In the end, this is not their money, but the money of the taxpayers. If the state has no money at the present, they will take a debt (issue a bond that promises future payment). Some of the politicians realize that they can’t pay so big retirement benefits, but if they acknowledged this, they will lose voters and unions will fight hard against them. Therefore, they continue to do the best what they can-to promise.

-High-cost social programs

For a surprise for many, California has domestic out-migration. The locals are leaving with their incomes too, which means less income for the state. The new immigrants that are coming (mainly new immigrants outside of the USA) are using high-cost social programs of the state. The cost for the taxpayers is so massive, that because of the deficit, the local government thinks about rising the current taxes or implementing a new one. To use the social benefits if you are not legalized is illegal in most states, but in California is legal.

Even if you are an undocumented immigrant, you will receive assistance and benefits from the local government[8]. The estimation costs are over $23 billion every year.[9]

No wondering why the debt is so high. The state is responsible for 21% of the U.S. illegal immigrant population and 26% of the overall national cost to state taxpayers. But this doesn’t warn local politicians and local activists-vice versa-they are happy to accept as many as possible…putting the finances of California at risk. The local laws had been changed, to stimulate immigration and stopping the federal government to expel them like:

-Prohibit California officials from retaining a jailed immigration violator for transfer to U.S. Immigration and Customs Enforcement (ICE) except serious felony[10]

-Forbid correction officers and police to transfer illegal immigrants to ICE unless significant crime or sex offenders.

-Forbid sharing any information with the federal government for an alien who is not available to the general public.

-State agencies are forbidden to require private employers to use E-Verify for their employees

-Wealthy people are leaving California

Democrats are notorious to consider high taxes and set them on almost everything. The results are that California has one of the highest taxes in the USA. If we add the fact that there is a sale tax too, we can easily understand that if you make a good income here, you will be taxed heavily. The rich and successful don’t like high taxes when they have an easy alternative-they can move to the nearby states and make the same income but reducing their taxes. Even some states have a zero tax on your income.

The results of high taxes are that everything in California is very expensive, and the cost of living is very high (this is the main reason why California has so many homeless people). Pressed too hard, the wealthy people will simply flee to other states. The results are that the local government continues to spend at the maximum and it is not sure that in the future the revenue will increase permanently, but many of the wealthy people simply run away from the high taxes.

-Overpaid Government workers?

We understood about pension gap (higher retirement that the employee had earned). But how much are their salaries? Are they equal to the private-sector workers…or higher?

If we compare the data, we can see that government-workers are paid almost twice than private-sector workers[11]. The examination of pay records of more than two million local and state-workers was examined by the California Policy Center (not including those in K–12 or college education). 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.

Conclusion

Despite being the richest state in the USA, hosting so many companies from Fortune 500 and the desired place for many people around the world, if the state doesn’t have a fiscal discipline (spend as much as they earn), the state can run into trouble. California is not an exception to this rule. With so enormous debt of $388 billion and not enough assets to cover it, bankruptcy is quite possible. The things that are good for California are that the future financial obligations are not so visible now, and they can be fixed if there is enough political will and it is not legally possible, a state to declare bankruptcy (this may change).

If the state manages their finances well, puts an end to the discrimination in payments between government-workers and private-sector workers, decreases the enormous amount of retirement benefits for retired government-workers and cuts taxes(companies&rich people will stop leaving and the domestic out-migration will stop), there is a chance to put the finances in order before it is too late. For the present, California is receiving an F for its Fiscal Health and governance.

Source:

[1]https://www.data-z.org/state_data_and_comparisons/detail/california available 01/2020

[2]Ibid, available 01/2020

[3]https://www.truthinaccounting.org/library/doclib/CA-2017-2pager.pdf available 01/2020

[4]https://www.usnews.com/news/best-states/rankings/fiscal-stability available 01/2020

[5]https://www.mercatus.org/publications/42-ranking-states-fiscal-condition-california available 01/2020

[6]Ibid, available 01/2020

[7]https://www.forbes.com/sites/patrickgleason/2019/04/16/no-californias-finances-are-not-back-in-black/#66db6b7537b5 available 01/2020

[8]https://www.npr.org/2019/07/10/740147546/california-first-state-to-offer-health-benefits-to-adult-undocumented-immigrants available 01/2020

[9]https://www.fairus.org/issue/publications-resources/fiscal-burden-illegal-immigration-ca-taxpayers available 01/2020

[10]Ibid, available 01/2020

[11]https://www.hoover.org/research/140000-year-why-are-government-workers-california-paid-twice-much-private-sector-workers available 01/2020