Are California’s chickens coming home to roost?
California has been blessed with the longest and best bull market in our history. This has allowed many fundamental flaws to be hidden or marginalized.
California politicians have been trying to conceal the fact that we have a ticking time bomb on our hands.
We have over a trillion dollars in unfunded pension and medical benefits and no way to pay them.
Politicians have tried to kick the can down the road in two ways.
The hope that the markets don’t crash on their watch. The other is advocating for tax increases.
Unfortunately, with the panic of the Coronavirus, we have seen a freefall of stocks that are reminiscent of the Great Recession.
With markets tumbling, the rate of return on our investments will most likely be at a loss; thus, negative returns.
Therefore, the government must still pay pensioners even will less money coming in. Meaning more tax dollars by percentage will go to pay these liabilities and less for other services.
But the question is, is there enough money?
No, that is why politicians advocate for tax increases.
You see them all the time. Tax increases usually come in the form of a sales tax. They promise you public safety and the world for a marginal tax increase.
But these are bald-faced lies.
They are all pension bailout tax increases. Those tax increases will be diverted if they can. If not, they will take other tax dollars that were going to public safety and then redirect them to help fund these unfunded liabilities.
But these tax increases are not enough. So they must go big. That is why they are going after Prop. 13 property tax protection in November.
They must dramatically increase property tax in the hopes of kicking the can down the road even further. Make no mistake; this will not actually solve the problem, but politicians are always looking to put a bandaid on a bullet hole.
So, what can we expect will be the longterm effects of this economic turndown?
Since we have passed the buck for so long, and in many instances can’t anymore, we will see a desperate attempts to raise taxes, cut spending, and in some cases, selling off government-owned properties. Unfortunately, this will be futile, and you will begin to see a string of smaller municipalities declaring bankruptcy.
They just won’t be able to pay their unfunded liabilities.
In the short-term, larger school districts and municipalities will weather the storm, but without actual structural reforms, these institutions are on the same path. This downturn is merely accelerating them closer to their judgment day. I’m looking at you Los Angeles and LA Unified School District.
With tens of billions in unfunded liabilities and record deficit spending of hundreds of millions, it’s a matter of when not if for Los Angeles.
The State of California is not immune, either. California has been down this road for decades. Unfortunately, our Governor and state legislators are not interested in fixing these problems. They seem hellbent on doubling down on these flawed policies.
Unfortunately, for California, unlike municipalities or counties, a state cannot go bankrupt to renegotiate contracts or debts. A state is not the federal government, they don’t have the Federal Reserve to artificially create fiat currency and pump money into the economy.
Our problem is so deep that even though the federal government will help, it won’t be enough.
California’s only options are to either raise taxes or cut services or a combination of both. California will face difficulties in the years to come.
Some will want to blame the Coronavirus, and that will have a part to play, but the crisis was going to happen eventually because our elected officials have failed us.
We can no longer kick the can down the road, and our elected officials can’t hope the Coronavirus panic quickly fades away, and the markets rapidly rebound.
We need real solutions and significant reform. The question is, will we get them before it’s too late?
I hope we will, and I believe we can.
That is why I will continue to fight and advocate a government reform agenda. I hope, in the end, the Coronavirus panic was the catalyst we needed to turn the Great State of California around. Together we can come out of this stronger than ever before.