Thread: In California's meltdown, misery has long reach

In California's meltdown, misery has long reach


By William M. Welch, USA TODAY


VALLEJO, Calif. — California may still seem to be the dreamy land of movie stars and swimming pools, beautiful beaches and endless summer.
But the reality — and perhaps the future — of the nation's largest state looks more like this gritty city on San Pablo Bay north of San Francisco, where past extravagance has collided with economic recession and the collapse of home values to push it into bankruptcy.

"We were first to the bankruptcy door, but there are numerous cities right behind us and watching," says Osby Davis, Vallejo's mayor. "I think it's just a matter of time before many (California) municipalities go to the bankruptcy court."

The troubles in Vallejo reflect what's happening up and down California, tarnishing the Golden State's image as a land of opportunity, innovation and good living. California often set standards for economic activity in good times; now it is setting them in bad times.

The state itself stepped away from the brink of financial ruin early Thursday when the state Legislature ended months of deadlock and paralysis — which had shut down road projects and held up tax refund checks — by agreeing to a budget plan that increases taxes, cuts spending and borrows money to plug a $42 billion deficit by mid-2010.

In Vallejo, a city of 115,000 people, 1,700 homes are in foreclosure or owned by banks. The highest foreclosure rate in the USA — 9.5% last year — was in the California city of Stockton, which Forbes magazine declared as America's "most miserable city."

Signs of decline abound, from potholed streets to public school classrooms that are among the nation's most crowded, to neighborhoods emptied of residents by the mortgage foreclosure crisis. Median home values in Southern California dropped 35% in the past year, and California has the lowest S&P bond rating of all 50 states.

Gov. Arnold Schwarzenegger has proposed chopping the school year by five days, to give California one of the shortest school years in the nation.

California's troubles have been fueled by an influx of illegal immigrants who place increasing demands on social services. They have helped to boost the state's overall population even as it loses thousands of residents who are leaving for other states.

In each of four years prior to June 2008, more people left California than moved in from other states, a reversal of a decades-long trend in which the state took in more than it lost.

The U.S. Census reports that California's population rose despite the population outflow, from 34 million in 2000 to 37 million in 2008, because of an increase in births and foreign immigration, legal and illegal.

Those leaving point to an unemployment rate that hit 9.3% in December, up from 5.9% a year earlier and fourth-highest in the nation, and taxes on income, sales and gas that are among the highest in the nation.

The exodus is enough that California could lose one of its 53 seats in the U.S. House of Representatives in the redistricting that will be based on the 2010 Census.

"The main thing for me is the cost of living," says Carly Meyer, 25, who is weighing a move from Lompoc, a town of walnut farms and vineyards near the Pacific Coast, to Utah. "I've been thinking of buying a home, putting some money down, and it's just about impossible in California."

Still attractive to many

California has all the problems associated with the credit crisis and recession — budget deficits, home foreclosures, layoffs, cutbacks — only bigger. It's not just because the state is the most populous, observers say.

Joel Kotkin, a Los Angeles author and fellow in urban futures at Chapman University in Orange, Calif., said Texas is also a large state with a significant population of illegal immigrants yet it has avoided the severe fiscal distress California is seeing.

"Fundamentally, California is still the most attractive part of the United States by far in my mind: the weather, the topography, the concentration of diverse people and interesting things are still here," Kotkin says.

But the recession exposed an ugly version of California Dreamin'. Politicians spent the money that flooded in during the real estate boom and thought little of what would happen when the property taxes and income taxes that fueled the spending during the boom vanished in the bust.

"There's no real reason for California to have the kind of decline it is having now," Kotkin laments. "It's more and more clear that it's the failure of the political system more than anything else."

In Sacramento, the budget deal worked out early Thursday relies on $7.8 billion in aid from the federal stimulus package to help stop a fiscal meltdown in which state government was running out of cash to pay bills.

It raises individual income and sales taxes by $12.5 billion while cutting almost $15 billion in state spending and relying on $5.4 billion in borrowing to see the state through the next budget year.

The deal ends the immediate threat of state layoffs and allows billions of dollars of construction projects, idled by the impasse, to resume. GOP lawmakers had balked at the tax increases proposed by the Republican governor and backed by majority Democrats in the Legislature. California's requirement that a two-thirds supermajority approve the budget — it is one of only three states that do so — gave veto power to the Republican minority.

The logjam broke when Schwarzenegger won the vote of one GOP holdout in return for dropping a proposed 12-cents-a-gallon gas tax increase and other concessions. That Republican was one of three who voted for the budget.

A 'volatile' tax situation

California has long beenknown for being at the vanguardof American trends. The state's wide and vast freeways were amodel for the nation. Its public university systems were envied for their affordability and quality.

The nationwide environmental movement was born here with the Sierra Club. California's luring of lucrative aerospace and hightech industries had other statescoming up with tax-incentive programs to spawn their own SiliconValleys. Its entertainment industry, perfect weather and surfing culture drew millions.

"Up through the mid-1960s, California was an expanding economy. We were building freeways, building new campuses for the university and state colleges, we were building new water projects," says Daniel J.B. Mitchell, professor-emeritus at UCLA's Anderson Graduate School of Management.

California started other trends, too. Its 1978 ballot initiative that capped property tax increases, or Proposition 13, sparked a nationwide revolt that forced similar restrictions on many states.

California's response to the tax cap is why California finds itself in a deeper hole than other states, some say.

For one thing, California makes it easy for interest groups to bypass elected representatives. City employees and advocates for spending in schools and other pet projects passed many propositions of their own over the years at the ballot box. Some, such as a 1988 proposition for minimum spending on education from kindergarten through two years of college, locked in spending levels in the state constitution.

Also, the raising of income taxes to make up for the limit on property taxes created a "volatile" situation, Mitchell says. The state soaked the rich with taxes on income and capital gains — a strategy that showered the state with money in good times but dried up when the stock market and real estate markets tanked, he says.

Then there is the strain of illegal immigration. The Federation for American Immigration Reform estimates there are 3.2 million illegal immigrants in California. The cost of education, health care and other services for this population is $13 billion annually, and growing.

For all the spending, Californians don't have a sense that things are improving. The public schools are "lousy," Mitchell says.

"If your school district has to educate children in 70 or 80 languages, that gets expensive," says Dan Schnur, a Republican strategist and director of the Jesse Unruh Institute of Politics at the University of Southern California.

California's pupil-teacher ratio, 20.9-to-1, is far above the 15.5 U.S. average, third-worst in the nation behind Utah and Arizona, according to the National Center for Education Statistics. In achievement, California's student test scores rank below the nation's average in reading and math at fourth- and eighth-grade levels. Its teacher salaries rank highest in the nation, $64,424 this school year, according to the National Education Association.

Even as voters fret about taxes and services, California seems determined to dig the deficit hole deeper. Last fall, voters approved a ballot initiative to spend $10 billion on a new high-speed rail system. Some wonder whether the state — the seventh largest economy in the world —has become ungovernable.

"We don't solve problems in California anymore, we pay off interest groups," Kotkin says. "I am so disgusted." He and others say the tax and regulatory climate encourages businesses to flee.

In Oregon, one of several Western states that woo California businesses, economic and community development director Tim McCabe says his state can offer cheaper land and electricity, labor costs lower than in California's big cities, lower taxes and significantly cheaper workers' compensation rates.

California's 7.25% sales tax is the highest in the USA, as is its income tax rate of 10.3% for the top bracket. It led the nation in another innovation: the subprime mortgages at the heart of the housing crisis.

California was home to some of the biggest players in the industry, among them Irvine-based New Century Financial. Once the nation's biggest lender of subprime loans — those given to borrowers with less-than-stellar credit — New Century collapsed in 2007. That eliminated more than 20,000 jobs in Orange County, renowned for Newport Beach and wealthy residents.

The vision of the quintessential California neighborhood, homes of white stucco graced with palm trees and Spanish tile, is giving way to a grimmer spectacle.

Foreclosures have left neighborhoods filled with empty homes and abandoned swimming pools that are fetid breeding grounds for disease-carrying mosquitoes.

Some municipalities use helicoptersto search for abandoned pools in need of chlorine treatment to prevent a public health danger, says George Huang, economist for San Bernardino County's economic development agency.

"I found one cul-de-sac in Victorville where every house was foreclosed," Huang says. "You had gangs go in there, and there's nobody to call the police. There are some communities we look at and say this is not going to recover in two years. Nobody in their sane mind wants to be in that neighborhood."

More than half the home sales in Southern California in December were foreclosures. More than 43,000 homes in San Bernardino County are in default, foreclosed or bank-owned.

Debbie Wise-Farwell blames the housing situation for sending her Orange County RV business into bankruptcy. Customers for big-ticket campers often tapped home equity to finance the purchases. "It wasn't (rising) gas prices that killed us," she says. "It was (falling) home prices."

The drop in home prices, and thus property tax revenue, hit California harder, some say, because the state showed no restraint when times were better.

In Vallejo, as in other cities in California, unions representing police, fire and other municipal workers won generous pay and benefit deals. A rookie Vallejo cop earns a base salary of $79,000 but in five years is earning $96,000, all before overtime, which Davis says totals $100,000 or more for some officers.

With bumps for longevity and additional training, a cop can earn $112,000 or more in base pay without being promoted to corporal, according to documents prepared for the City Council by its staff this month. Officers can make $160,000 or more.

Mat Mustard, a detective and vice president of the local police union, says officers make 13% less than their original contracts called for, the city has lost one third of its cops to other cities that pay as well or better, and crime is going up.

Mark Baldassare, president and CEO of Public Policy Institute of California, says the problem in the state. .. is the state itself.

"While the nation is in a lot of difficulty in these areas, California has among the most difficult economic circumstances," he said."It's hard to have a high quality of life when you're under a lot of stress, and that's what people are feeling today. ...Government is not responding."

http://www.usatoday.com/news/nation/200 ... ting_N.htm

Gov. Arnold Schwarzenegger has proposed chopping the school year by five days, to give California one of the shortest school years in the nation.

At one time our schools were top notch....and now this. There is so much else I could comment on but it would take too long. After reading this article, it's no wonder the rest of the nation hates us.

I'm surprised (in a good way) that most of the comments at the link are so anti illegals. I think more and more people are starting to wake up to this as being a major issue. Furthermore, it is surprising that a major newspaper even mentioned how much of a burden they are to this state.