How Can California Get By?

The financial and real estate crisis has hit right in the middle the entire Golden state. The voters just made the decision to refuse the tax increases that were advocated by Governor Arnold Schwarzenegger. California now has an imperative need for help from Washington. Here are some explanations”

“Your success will depend upon two factors: the rain in the Northern part of the country and a strong economy. There’s nothing you can do about them.” Gray Davis, the former Democratic governor had warned the Republican leader Arnold Schwarzenegger. Tough luck for the former bodybuilding champion who became a star in Hollywood: he too has to deal with a crisis. California’s actually suffering much more than the other states. Its unemployment rate reached 11.02% in March, three points higher than the national average. Nevertheless, this big-sized state of 37 million inhabitants, with a powerful and diverse economy, indeed has disastrous public finances. The California budget deficit is increasing by 500 dollars every second. According to the most recent estimations, this deficit should reach between 15 and 21 billion dollars by July 2009. And for the first time since 1938, budget incomes are even going to decrease in May.

The tax income fall is actually the reason of all these changes. As a pioneer in the development of sub primes, California now has to pay for its excesses: in this state, 13 towns out of 25 have the highest numbers of housing seizures. In April 2009, around 100,000 procedures were issued solely on California territory, that is to say almost a quarter of the national seizures. As a reaction to the increase of the outstanding loans and bankruptcies, mortgage loans have become rare and expensive. The fall of housing prices and of transactions had strong repercussions on the rights of property transfers. Some losses that directly put a severe strain on some already very sick public finances.

California isn’t the only state that suffers from budget matters. Kansas, for instance, regularly delays income tax refunds. Washington state also had to reduce its budget. However, California has a big political specificity that makes the crisis worse.

The Political Failure

It was one of the only states requesting a majority of two-thirds of the Congress to get the budget approved. However, the state is going through a “cohabitation” – the Congress is Democratic and the governor is a Republican: every time the budget has to be approved, it’s the old same quarrel. The first ones are in favor of a tax increase, the other ones aren’t. A mechanism that leads to a kind of paralysis.

Just to make things worse, direct democracy is about to supplant the representative democracy. Election after election, more and more questions are directly asked to the public. Californians are demanding, though. They are used to live beyond their means and refuse to restrict their expenses and are reluctant to tax increases. It is therefore almost impossible to reinforce the tax incomes. At a rate of about 70%, Californians rejected the consumption, incomes and vehicle related taxes this Tuesday, some measures that were supposed to make the public finances healthier.

Arnold Schwarzenegger had warned about this: in case the referendum would be rejected, a hypothesis that puts the deficit level up to 21 billions of dollars by the end of 2009, the state will have to take action. Drastically. The governor’s plan is to lay off 5,000 teachers, to release 19,000 prisoners, to reduce the budget that is allocated to schools and universities, to shorten the school year and to drastically cut social expenses. Not sure that the Californians will win in the bargain, even though some other solutions are still under consideration such as taxing marijuana sales, which would mean legalizing it – the state estimates 1.3 billion in fiscal revenues that cannabis cultivation would create. Another solution would be to sell prisons and stadiums.

However, this won’t be enough to get the state out of the assets crisis that it will soon have to face according to the governor.

So, does this mean that California is going bankrupt? The federal government shouldn’t abandon this part of the U.S., which includes 37 millions inhabitants, that is to say one American out of 8. The “Golden State” will receive a large share of the stimulus plan established by Barack Obama. According to experts, California can expect between 10 to 14 billions of dollars. Nevertheless, Washington will demand compensation, even though it’s too early to know what these latter will be.