California AND Bust @ Vanity Fair

Interesting article at Vanity Fair by Michael Lewis* on California's financial woes. 7 rambling pages, but highly readable and totally worth the effort.

“How does the United States emerge from the credit crisis?” Whitney asked
herself. “I was convinced—because the credit crisis had been so different from
region to region—that it would emerge with new regional strengths and
weaknesses. Companies are more likely to flourish in the stronger states; the
individuals will go to where the jobs are. Ultimately, the people will follow
the companies.” The country, she thought, might organize itself increasingly
into zones of financial security and zones of financial crisis. And the more
clearly people understood which zones were which, the more friction there would
be between the two. (“Indiana is going to be like, ‘N.F.W. I’m bailing out New
Jersey.’ ”) As more and more people grasped which places had serious financial
problems and which did not, the problems would only increase. “Those who have
money and can move do so,” Whitney wrote in her report to her Wall Street
clients, “those without money and who cannot move do not, and ultimately rely
more on state and local assistance. It becomes effectively a ‘tragedy of the
commons.’ ”

I have left California. I do not want to say where I went, because I don't want Californians following me. They messed up California, I don't want them coming here and messing up a state that still paves its streets and polices its neighborhoods. For several years, I have been expecting the California exodus, like the Dust Bowl exodus of the Great Depression era, to result in tensions against the modern-day Okies. There came a point, living in California, when I realized that California voters will approve ANY gift from the taxpayers (as long as it's paid by somebody else) and ANY new tax increase, as long as it taxes somebody else.

Partisanship is killing this country. Psychologically, it is in-group/out-group behavior. Californians have enormously fractured social identities, with little observable loyalty to the greater good. You can't get Californians to forego a light rail project in the midst of economic catastrophe, because they don't recognize that the whole society will pay for it. Instead, the majority sees their own little group (democrat, progressive, social activist, whatever name they choose) as responsible for approving "progress" while the outgroup (the rich, corporations, or anyone else they can label as less deserving of having earned money) is responsible for paying.

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Below are several quotes from the VF article, but the whole 7-page enchilada is well worth a read.

California had organized itself, not accidentally, into highly partisan
legislative districts. It elected highly partisan people to office and then
required these people to reach a two-thirds majority to enact any new tax or
meddle with big spending decisions. On the off chance that they found some
common ground, it could be pulled out from under them by voters through the
initiative process. Throw in term limits—no elected official now serves in
California government long enough to fully understand it—and you have a recipe
for generating maximum contempt for elected officials.

But when you look below the surface, he adds, the system is actually very good at giving Californians what they want. “What all the polls show,” says Paul, “is that people want services and not to pay for them. And that’s exactly what they have now got.” ....
San Jose has the highest per capita income of any city in the United States, after New York. It has the highest credit rating of any city in California with a population over 250,000. It is one of the few cities in America with a triple-A rating from Moody’s and Standard & Poor’s, but only because its bondholders have the power to compel the city to levy a tax on property owners to pay off the bonds. The city itself is not all that far from being bankrupt.

The problem, he explains, pre-dates the most recent financial crisis. “Hell, I was here. I know how it started. It started in the 1990s with the Internet boom. We live near rich people, so we thought we were rich.” San Jose’s budget, like the budget of any city, turns on the pay of public-safety workers: the police and firefighters now eat 75 percent of all discretionary spending. The Internet boom created both great expectations for public employees and tax revenues to meet them. In its negotiations with unions the city was required to submit to binding arbitration, which works for police officers and firefighters just as it does for Major League Baseball players. Each side of any pay dispute makes its best offer, and a putatively neutral judge picks one of them. There is no meeting in the middle: the judge simply rules for one side or the other. Each side thus has an incentive to be reasonable, for the less reasonable they are, the less likely it is that the judge will favor their proposal. The problem with binding arbitration for police officers and firefighters, says Reed, is that the judges are not neutral. “They tend to be labor lawyers who favor the unions,” he says, “and so the city does anything it can to avoid the process.” And what politician wants to spat publicly with police officers and firefighters? ....

He hands me a chart. It shows that the city’s pension costs when he first became interested in the subject were projected to run $73 million a year. This year they would be $245 million: pension and health-care costs of retired workers now are more than half the budget. In three years’ time pension costs alone would come to $400 million, though “if you were to adjust for real life expectancy it is more like $650 million.” Legally obliged to meet these costs, the city can respond only by cutting elsewhere. As a result, San Jose, once run by 7,450 city workers, was now being run by 5,400 city workers. The city was back to staffing levels of 1988, when it had a quarter of a million fewer residents. The remaining workers had taken a 10 percent pay cut; yet even that was not enough to offset the increase in the city’s pension liability. The city had closed its libraries three days a week. It had cut back servicing its parks. It had refrained from opening a brand-new community center, built before the housing bust, because it couldn’t pay to staff the place. For the first time in history it had laid off police officers and firefighters.

B y 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.

This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.”

*Lewis was an accidental Wall Street trader before he became an author and columnist. He is a humanities guy who understands finance, and he lives in California.