Death Spiral

Forbes Magazine identifies California as a “death spiral” state, with a “taker to maker” ration of 1.39.

A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A maker is someone gainfully employed in the private sector…

….The taker count is the number of state and local government workers plus the number of people on Medicaid plus 1 for each $100,000 of unfunded pension liabilities. Sources: the Bureau of Labor Statistics, the Kaiser Commission on Medicaid and a study of state worker pensions done in 2009 by two academics, Joshua Rauh and Rovert Novy-Marx. Professor Rauh estimates that the shortage in pension funding is on average a third higher today.

Actually the shortage in pension funding is much worse than even that (see “Why California Is Going Broke“), because the 8.5% return assumption used by Calpers is beyond unreasonable, given the Fed’s commitment to financial repression.

California’s profligacy has been brought into even sharper focus in recent days by a combination of factors. First of all, revelations of the ludicrous compensation paid to state employees as a result of incompetent and indolent management, legislative corruption and aggressive unions. Secondly, revenues are collapsing as the recently-passed tax increases drive away the high income individuals who provide most of California’s tax income.

California State Controller John Chiang just announced that total State revenue for the month of November 2012 fell $806.8 million, or 10.8%, below budget. Democrats thought they could hammer “the rich” by convincing voters to pass Proposition 30 to create the highest state income tax in the nation. But it now appears that high income earners have already “voted-with-their-feet” by moving themselves and their businesses out of state, resulting in over $1 billion shortfall in corporate and income taxes last month and the beginning of a new financial crisis.

It is amusing to note that France, which also decided to tax the rich, is finding the same thing – all of a sudden the “greedy rich” disappear. Jerry Brown should know better – he tried this before in his previous term as governor and it didn’t work then, either.

Municipal and county governments are under the same pressures and are going bankrupt in increasing numbers. Calpers is attempting to establish itself as a preferred creditor in these situations, which strategy will, if successful, effectively subordinate all municipal debt in California to employee pensions. No-one will lend money to municipalities under those circumstances, so Calpers looks to have a good shot at turning the death spiral into a plummet.

Florida is looking pretty good so far.

Post a comment or leave a trackback: Trackback URL.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: