Michael Lewis on California’s Fiscal Disaster

October 1, 2011

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Municipal bonds have not fallen apart as Meredith Whitney and many others (such as myself) had forecasted.   The state shares many similarities with Greece, not only in attitude and culture, but they share massively over compensated public sectors. Michael Lewis “California and Bust” only briefly touched on the disastrous state of the pension system, made worse by Mr. Bernanke’s operation twist.  A fiscal disaster is not a foregone conclusion since the solutions to a fiscal crises, reducing payrolls and transfer benefits appear to be on the docket, as opposed to tax highs, which history suggests would not work. After reading Michael Lewis’ piece, one is left wondering if those forecasting trouble were not wrong, just early.

Arnold

  • He came to power accidentally, but not without ideas about what he wanted to do. At his core he thought government had become more problem than solution
  • Two years into his tenure, in mid-2005, he’d tried everything he could think of to persuade individual California state legislators to vote against the short-term desires of their constituents for the greater long-term good of all.

In November 2005 he called a special election that sought votes on four reforms: limiting state spending, putting an end to the gerrymandering of legislative districts, limiting public-employee-union spending on elections, and lengthening the time it took for public-school teachers to get tenure. All four propositions addressed, directly or indirectly, the state’s large and growing financial mess. All four were defeated; the votes weren’t even close. From then until the end of his time in office he was effectively gelded: the legislators now knew that the people who had elected them to behave exactly the way they were already behaving were not going to undermine them when appealed to directly. The people of California might be irresponsible, but at least they were consistent.

Government Salaries and Pensions :

  • “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.”
  • The same fiscal year that the state spent $6 billion on prisons, it had invested just $4.7 billion in its higher education—that is, 33 campuses with 670,000 students. A prison guard who started his career at the age of 45 could retire after five years with a pension that very nearly equaled his former salary.

The pensions of state employees ate up twice as much of the budget when Schwarzenegger left office as they had when he arrived, for instance. The officially recognized gap between what the state would owe its workers and what it had on hand to pay them was roughly $105 billion, but that, thanks to accounting gimmicks, was probably only about half the real number. “This year the state will directly spend $32 billion on employee pay and benefits, up 65 percent over the past 10 years,” says Crane later. “Compare that to state spending on higher education [down 5 percent], health and human services [up just 5 percent], and parks and recreation [flat], all crowded out in large part by fast-rising employment costs.”

  • “I did a calculation of cost per public employee,” he says as we settle in. “We’re not as bad as Greece, I don’t think.”
  • “Our police and firefighters will earn more in retirement than they did when they were working
  • When did we go from giving people sick leave to letting them accumulate it and cash it in for hundreds of thousands of dollars when they are done working? There’s a corruption here. It’s not just a financial corruption. It’s a corruption of the attitude of public service.”
  • 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.
  • Back in 2008, unable to come to terms with its many creditors, Vallejo declared bankruptcy. Eighty percent of the city’s budget—and the lion’s share of the claims that had thrown it into bankruptcy—were wrapped up in the pay and benefits of public-safety workers. Relations between the police and the firefighters, on the one hand, and the citizens, on the other, were at historic lows.
  • The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death

“[The Mayor doesn't] view the city’s main problem as financial: the financial problems were the symptom. The disease was the culture.”

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