Officials announced that the city council in San Bernardino filed for bankruptcy so it could renegotiate its labor agreement. Currently, San Bernardino takes in $120 million in revenue and pays out $126 million to workers and retirees. You read that correctly- before any basic civil service is carried out, the city is 6m in the hole. The economic situation for the city looks even bleaker when you take into account the city's 16% unemployment rate and a foreclosure rate that is three times the national average.
Municipalities all over the state aren't doing much better than San Bernardino. They too are running out of money, mostly due to outrageous pension obligations and rising health care costs. And don't think Sacramento, where the state government resides, will be able to fix the debt crisis at the state and local level should more communities reach out for help. The recent bankruptcies of its communities are indicative of a larger structural problem throughout the state of California. If California does not lead the way towards making serious structural changes to their deficit, there will be many more cities declaring bankruptcy to escape the pressure of meeting their financial obligations.
California's state coffers are already overburdened. According to the Pew Research Center, California has a $1.38 trillion gap between the pension benefits they've promised to pay and the money they've set aside. Add the state's already overwhelming financial obligations to an unemployment rate of 10.8%, the largest in the nation after Nevada and Rhode Island, and the still felt impact of the financial meltdown, and you've got a serious financial problem.
The financial problem, unsurprisingly, has its roots in some mind-boggling political decisions. California is known to make irrational spending choices with little regard to the future costs, like the recent blessing Governor Brown and the legislature gave to a $68 billion high-speed rail boondoggle. While spending by the general fund is the lowest it has been since 1973 (as a share of the total economy), these white-elephant projects are still indefensible. There is an obvious and unsustainable pattern in California in which basic expenditures are growing at a higher rate than state and local revenues. Tax revenues, in particular, are taxing an ever-diminishing part of the economy. Susan from the Pew Research Center is spot on when she says "California is using a 20th century tax base for a 21st century world." In other words: sales taxes aren't growing because people are buying more online, Gas taxes aren't as effective because people are buying more fuel efficient cars. Furthermore, Governor Brown's ballot initiative to raise the top income tax rate to 13.3%, which is the highest in the U.S., will surely result in more people moving--the tax base of entrepreneurs and the middle class is already being replaced by lower income people who-surprise, surprise-generally utilize more social benefits and pay no taxes.
Municipalities all over the state aren't doing much better than San Bernardino. They too are running out of money, mostly due to outrageous pension obligations and rising health care costs. And don't think Sacramento, where the state government resides, will be able to fix the debt crisis at the state and local level should more communities reach out for help. The recent bankruptcies of its communities are indicative of a larger structural problem throughout the state of California. If California does not lead the way towards making serious structural changes to their deficit, there will be many more cities declaring bankruptcy to escape the pressure of meeting their financial obligations.
California's state coffers are already overburdened. According to the Pew Research Center, California has a $1.38 trillion gap between the pension benefits they've promised to pay and the money they've set aside. Add the state's already overwhelming financial obligations to an unemployment rate of 10.8%, the largest in the nation after Nevada and Rhode Island, and the still felt impact of the financial meltdown, and you've got a serious financial problem.
The financial problem, unsurprisingly, has its roots in some mind-boggling political decisions. California is known to make irrational spending choices with little regard to the future costs, like the recent blessing Governor Brown and the legislature gave to a $68 billion high-speed rail boondoggle. While spending by the general fund is the lowest it has been since 1973 (as a share of the total economy), these white-elephant projects are still indefensible. There is an obvious and unsustainable pattern in California in which basic expenditures are growing at a higher rate than state and local revenues. Tax revenues, in particular, are taxing an ever-diminishing part of the economy. Susan from the Pew Research Center is spot on when she says "California is using a 20th century tax base for a 21st century world." In other words: sales taxes aren't growing because people are buying more online, Gas taxes aren't as effective because people are buying more fuel efficient cars. Furthermore, Governor Brown's ballot initiative to raise the top income tax rate to 13.3%, which is the highest in the U.S., will surely result in more people moving--the tax base of entrepreneurs and the middle class is already being replaced by lower income people who-surprise, surprise-generally utilize more social benefits and pay no taxes.
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