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Mamradpivo's avatar

Why is California in such dire financial straits?

Asked by Mamradpivo (9625 points ) February 17th, 2009 from iPhone

I’m not interested in the various political explanations: “it’s Schwarzenager’s fault, it’s the Democrats’ fault.”
California has one of the largest economies in the world. They’re a top agricultural producer, produce almost everything. And yet they’ve been in financial trouble for the last generation or so. In all seriousness: what gives?

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23 Answers

Allie's avatar

The housing crisis and home-loan defaults hit California hard, I think. In most places in the state real estate prices plummeted. A $1.2 million dollar house was sold for $600,699 here. On top of that, Cali has been in debt for a while. We spend a lot of money we don’t have and just get into more debt. Ag counts for about 2% of the states gross. According to the Cal Department of Food and Ag, the state brings in about $30 billion through agriculture. That’s not a lot considering how in debt we are and how much we still need. Also, 10,000 workers are about to be laid off and our unemployment rate (9.3%) is already well above the rest of the nation (7.6%). It’s harder to get anything done here, too. In order to pass a tax or spending plan, it must first be approved by 2/3rds of the legislature.

Mamradpivo's avatar

How did you end up in such debt though? You recalled your last governor for all the economic mess, but nothing has gotten any better..

Allie's avatar

From 1975–90 California was above the states average in both personal income and wage and salary employment. The strong economy was partially due to financial growth and a strong housing market. In 1990, the recession hit us harder and it took us longer to recover – and our recovery wasn’t as strong. Our income growth was about half the average of the rest of the nation.
I think recessions/depressions hit us harder and we get into a bigger mess. This part is just my opinion, but it seems like a bad domino effect. From listening to the news after the housing crisis hit, everything else just went down the chute as well, and quick. I don’t know.. and I’m starting to confuse myself quite honestly.

Mamradpivo's avatar

Thank you Allie for the background. I really appreciate it, i’ve been having trouble understanding what’s going on down there.

Allie's avatar

I did the best I could. I hope another jelly can come along and give you more (meaning better) information. Glad I could help a little, though.

basp's avatar

All of the states are facing financial problems or are on the brink of it.
A big part of the reason is because of the way government funding works.
Money comes from the Feds and goes to the states, then gets distributed at the local county level. At each level there is a required ‘match’ that must be met to receive that money. In the past eight years, the match at the federal level has, increasingly, been unpaid at the federal level and passed onto the state. So, inborder to receive the funding, thecstate has to make their match and the federal match. In addition, most federal funding has been stagnant or reduced in the past eight years.
Now, couple this with the fact that while funding has been, essentially, decreasing, the federal mandates have been increasing. NCLB is a prime example…an under funded mandated program. There are many mandates by the Feds that are e pected with no money to carry them out.
Now trow in the greed that fueled the housing market collapse and the funding for cities generated by property taxes has taken a hit and you can easily see how all the factors are woven together and impact in one area causes a dominino effect where everything needs to be carefully balanced.

TaoSan's avatar

It’s a good question. I remember rolling blackouts in the Bay Area when it got hot. This all goes way back to Gray Davis.

I think one of the reasons (I believe to have read somewhere back in the day), is that California was pretty lax in enforcing their tax collections or something.

I moved to Cali 1998, and even back then it was budget deficit this, budget deficit that.

There’s also been a steady exodus of large businesses because of the high taxes and utility prices.

cheebdragon's avatar

This might help you understand

I found it on the California Department of Finance website (www,dof.ca,gov)

TaoSan's avatar

@cheebdragon

Cheesh, the Government using the term “disaster” for something else than force majeure.

That’s quite something….

Meathooks24's avatar

In my opinion is California is one of the States with such a growing economy of its own and its population is growing fast… way too fast. Schools, Welfare, Jobs and of course the U.S. economy is what is slowly decreasing California’s money. @Mamradpivo You asked it from a view without political insights. Being from California I know because I have dealt with it my whole life. Not that I am against illegal immigration, but when everybody sneaks into the U.S. to get the freedom they deserve the tax payers have to suffer. But I know everyone including the ones sneaking in deserve the freedom our great country offers.

SuperMouse's avatar

Two words, Proposition 13. I paid less in property taxes on my $450,000 dollar house in Southern California than I do on my $200,000 house here in The Cornfield – a lot less. The bottom line is that California needs more property tax revenue.

Michael's avatar

SuperMouse hits one major factor on the head. Prop 13 drastically reduced CA’s income from property taxes. Second, in CA it requires a two-thirds majority of the legislature to pass tax increases, making it nearly impossible to rectify the situation or pass other taxes to make up for the loss. This has led to a third problem: namely, CA has, for at least the past two decades, relied much too heavily on bond issues. This is essentially borrowed money and the interest payments on these loans have become burdensome. Finally, there is the problem of the initiative system in CA. It is relatively easy and cheap to put an initiative before the CA voting public. These propositions have had, on balance, a deleterious effect on CA’s long-term budget, and not just from Prop 13 (there is a longer explanation for why this is).

These structural factors have combined to make it nearly impossible for CA lawmakers to rationally approach their state budget. I firmly believe that CA needs to undertake thorough review of their legislative processes (with an eye toward major reform of the initiative system, annual budget procedures, and even a repeal of prop 13), or else the state will find itself in a perpetual state of insolvency.

Mamradpivo's avatar

So, it seems as though Californian citizens and legislators have spent the last few decades being extremely short-sighted and ignoring long-term systemic problems.

cheebdragon's avatar

If low property tax is the problem, why aren’t the states with lower property taxes than California, also going broke?

mij's avatar

Her in Western Australia all I know is that Arnie is in charge, and like me he talks funny.
And of course Beach Boys. California Dreaming… C’mon California snap out of it, are you in a time warp…
Let’s do the Time Warp again…

basp's avatar

cheebdragon
all states are facing financial difficulties. Some are just ahead of others on this path.

lataylor's avatar

The problem is complex. It is not simply due to Prop 13. The legislature has expanded the government greatly and the result is a tripling of the state budget 15 years. It is difficult to imagine how you could triple the tax revenue to pay for all that spending (salaries don’t rise that fast). The deficit this year is nearly as large as the entire state budget 15 years ago. On top of that, the regulations have made it more difficult to court industry so revenue is even harder to generate. So now CA has the highest income tax (over 10%) and highest sales tax in the country. And the legislature still increased spending last year, even with rising unemployment and a receding economy. Already the next years’ budget is expected to have a $8 billion shortfall. That will widen, as unemployment is still rising (10.5%). This is twice the unemployemnt in New Mexico, a state that has a balanced budget and takes far less federal dollars, an dhas a lower tax rate.

SeventhSense's avatar

More than anywhere else, Californians live beyond their means. The income to credit ratio is out of control and people feel that it’s almost their God given right to have a particular lifestyle, especially in Southern CA.

Tomfafa's avatar

Just look at the city of bell… any place run by liberals turns to shit!

ItsAHabit's avatar

The problem is spending too much money and driving the state into massive debt.

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