California dreaming (of solvency): Local Government Chronicle

Posted on July 7, 2009 · Posted in Local Government Chronicle

Local government in the United States is in a dire mess.  Nowhere is this more true than in the state of California, where counties, cities and the state itself are in absolute crisis.

 

If the ‘golden state’ were a nation its economy would be one of the ten largest in the world. Yet, today, it is trapped in a $24bn deficit.

 

Superstar governor Arnold Schwarzenegger – heading towards the end of his second and last term of office – has taken a scythe to state and municipal spending as he tries to meet the state’s legal obligation of balancing its budget. The main cause of the crisis, not surprisingly, is the collapse in income tax as a result of the economic meltdown.

 

Matters have been made much worse by legislation imposed on the governor by a state-wide citizens’ ballot from 1978, which limited rises in property taxes and leaves a requirement for a two-thirds majority in the state senate to raise any other taxes. The state is therefore over-dependent on income tax in a time of economic depression – and state revenues have fallen 27% in a year.

 

Meanwhile, of course, more citizens are unemployed, dependent on welfare and increasing the cost burden on the state, cities and counties. Yet a recent plebiscite on property tax reforms that would have helped the state out of its hole were rejected by a population that resists paying more in tax.

 

As a result, California’s Controller, John Chiang, warns that by July 29, the state will be unable to pay its bills – making it effectively insolvent. Nor can it raise sufficient loans in the markets to finance the deficit – a plight made worse by its credit rating having been downgraded.

 

In desperation, Schwarzenegger has launched a cost-cutting programme that has to be described as draconian. “Our wallet is empty, our bank is closed and our credit is dried-up,” Schwarzenegger told his state senate in proposing a range of cuts.

 

I have already used my executive authority to reduce the state’s payroll,” he explained. “And I have proposed the necessary cuts to the three largest areas of our budget: education, health care and prisons. I know the consequences of these cuts are not just dollars. I see the faces behind those dollars. I see the children whose teacher will be laid-off. I see the Alzheimer’s’ patients losing some of their in-home support services. I see the firefighters and police officers who will lose their jobs.”

 

State employees had already had their wages cut by 10% at the end of last year: now they are being reduced by a further 5%. Healthcare provision is being cut-back, including for children. College grants will reduce. Prisoner welfare and rehabilitation schemes are being slashed, with non-violent prisoners released a year early. Most state parks will close.

 

These are symptoms of despair and are probably self-defeating over the longer-term. With fewer reformed prisoners, but more released, crime will presumably increase. Managers of the state parks argue that the state support more than pays for itself in generating tourism income.

 

It is a prescription for disaster,” Paul Witt, a parks commissioner was quoted as saying in the Los Angeles Times. “We cannot make these cuts safely. We will spend more in litigating lawsuits against the state, even if we win them.”

 

Meanwhile, California has done what it can to make up for lost revenues – it has increased the rates of income and sales tax and doubled the vehicle license fee.

 

Nor are the cuts only felt at state level. California has withdrawn $2bn of funding to its municipalities: the cities and counties. But the governor described them in different terms: “We must also restructure the relationship between state and local government,” he said. But the impact is cuts in budgets that are being passed onto the services municipalities control.

 

This means that city libraries will close. They will also have to make big cuts to police services and fire protection. There will also be massive closures of community school schemes, with after school provision being abandoned across much of California. Nearly a quarter of a million students in Los Angeles city alone face the loss of summer courses.

 

And worse could follow. With the state saying it cannot afford to continue to pay healthcare at the level it has provided, it is considering passing some of the responsibility down to local government for it to decide what it can fund, what should be cut and what other services will have to go as a result.

 

California is now making severe cuts to its healthcare programme for the poor – just at the time that President Obama is trying to repair a system that lets down the underprivileged. As a result, the municipalities’ own medical centres are likely to face an upsurge in demand.

 

The municipalities are angry that the state of California is dumping its problems onto them. “The only thing that does to our county is to put us in a truly perfect fiscal storm,” Supervisor Kim Vann of Colusa County told the LA Times. “It will mean financial devastation.” Vann predicts redundancies and prison overcrowding.

 

Los Angeles County expects to lose about $300m of money it would have received from the state, in a period when its economy is in dire trouble. This will lead to cuts of about 20% in its discretionary funding.

 

It’s beyond my wildest imagination,” Supervisor Don Knabe of Los Angeles County said to the LA Times. “It’s like nothing I’ve ever seen before. Do I want a deputy sheriff pulled off the street? Do we close City Hall for a day? Do we close a library for a day?”

 

Undoubtedly, the financial crisis in California and its municipalities is the worst in the United States. But the same situation, to a lesser extent, is felt across the country. Washington state has lost $4.2bn in revenues since November, on a $32bn budget. In Pennsylvania, a deficit is projected of $2.3bn – and rising quickly.

 

In New York state, income has collapsed. Where, in April last year, the state collected €8.6bn in revenues, this year it slumped by 44% to just $4.8bn. On income tax, there was a 49% fall in taxes collected. In response, the state is increasing its tax rate on the highest earners.

 

New York State Comptroller Thomas P. DiNapoli explained: “This was a poor start to the fiscal year. It’s been less than a month since the state’s financial plan was released, and general fund revenues are already off nearly a quarter of a billion dollars. The economy continues to be shaky, which is significantly hurting state finances.

 

We’ve already tapped nearly all of our unreserved funds so there is very little cushion if revenues continue to fall. We need to watch revenues and spending very closely, because the state may be forced to readjust priorities.”

 

DiNapoli also announced that the state’s pension fund declined 26% in value in the last year, because of the state of the markets. But public sector employers have been given permission to reduce contributions, given the severe difficulties with their own budgets.

 

The financial crisis in US states and municipalities spreads across the country and affects more than revenue budgets and pension funds. A planned $2.5bn privatisation of Chicago’s airport has been abandoned. Other schemes intended to sell real estate and use the proceeds to build new roads, bridges and other infrastructure have also collapsed. Cities and counties are now concerned at the limited prospects for alternative methods of financing infrastructure improvement – seen as necessary not only because much of it needs replacing, but also to stimulate the economy.

 

Some desperate municipalities are looking to sale and leaseback of assets, but this will drive-up future revenue overheads. “It’s shortsighted,” Anders Lindall of the American Federation of State, County and Municipal Employees told the Washington Post. “It’s the equivalent of burning your furniture to heat your house. By the middle of winter, you’ll have no heat and nothing to sit on.”

 

But there is a reason for the desperation felt by municipalities and states – they see no acceptable way forward to balance their budgets when their costs are mostly fixed and their revenues are plummeting. Many now want Obama to bail them out in the same way he is trying to rescue the banks and car makers. This may, though, be one bail-out too many.