California isn’t broken
In the last month or so, an echo chamber of insults has engulfed California. An online opinion editor for the Wall Street Journal even called California “the Lindsay Lohan of states,” describing our state as having squandered its promise.
Critics have suggested the state will default on its debt payments, that it is addicted to spending and that it has a hostile business climate. The criticism is long on inflammatory rhetoric, but it lacks any evidentiary foundation.
First, let’s look at the default threat. California has never failed to make its bond payments on time and in full, not even during the Depression. And there is no chance we will smudge that pristine record.
Payment of debt service is constitutionally protected, with bond payments required even when the state is operating without a budget. Debt service has second call on general fund dollars, right behind education. Under the California Constitution, making sure bond investors get their money is a higher priority than providing healthcare to kids, protecting the environment and keeping our communities safe.
During the current fiscal year, general fund revenues are expected to total $89.4 billion. Education spending under Proposition 98 will total $36 billion. That leaves $53.4 billion available to pay debt service on bonds — more than eight times the $6.6 billion the state will need.
Our critics say we are addicted to spending. But the numbers show that isn’t true. Thirty years ago, general fund expenditures totaled about $7.43 for every $100 of personal income. In the 2009-10 fiscal year, that ratio was almost $2 less, at $5.52 for every $100 of personal income. In the current fiscal year, per capita general fund expenditures will total $2,246, less than the $2,289 spent 10 years ago and roughly equal to the inflation-adjusted level of 15 years ago.
Moreover, state and local government has grown slimmer relative to California’s population. In 2009, the state had 107 state employees per 10,000 residents, the fourth-lowest proportion in the nation and 25% below the national average. California also has the sixth-lowest combined number of state and local government employees relative to population, 12% below the national average and 16% below Texas.
California’s current budget woes have been caused by the devastation visited on our revenue base by the recession, not a failure to curb spending. In the three fiscal years preceding this one, general fund expenditures fell by $16 billion.
And what about the claim that we have a hostile business climate? Companies build new facilities, and move or close other facilities, all the time. If you compile anecdotes and look only at the folks who leave, it is easy to buy the “business is fleeing” mantra. But the Public Policy Institute of California reports that from 1992 to 2006, business relocations to other states accounted for just 1.7% of California’s job losses. Nationally, an average of about 2% of job loss in states was due to businesses moving out.
From 2000 to 2009, the number of businesses per capita in California held steady, while the number dropped slightly in Texas, Arizona and Nevada.
California’s manufacturing and film sectors supposedly are suffering a job exodus. And it’s true that California has seen huge manufacturing job losses — 600,000 jobs, or nearly 33% of the total since 2000, were lost. But the nation overall has not fared any better. And in some traditional manufacturing powerhouses, the job disappearance has been worse. Massachusetts lost 37% of its manufacturing jobs; North Carolina lost 44% and New York 39%. Meanwhile, California’s share of the nation’s film industry jobs grew slightly from 2000 to 2010, from 44% to 45%.
Certainly, the state’s unemployment rate is above the national average, but that is largely due to a bleak time for the construction industry. Construction spending in California declined from $100 billion in 2005 to $40 billion last year, as we went from building 200,000 new homes a year to fewer than 40,000 and the state lost more than 600,000 construction-related jobs.
Still, over the last decade, California has seen strong growth. From 1999 to 2009, the state’s GDP rose by 27.2%. That’s better growth than in the U.S. as a whole, which saw GDP growth of 20.2%, or in Texas, where GDP grew by 25.9%.
By another important measure of a state’s competitiveness and economic future — venture capital investment — California continues to tower above all other states.
In 2000, California firms captured 42% of the nation’s venture capital funding. In the second quarter of this year, California’s share rose to more than 50% — $3.06 billion of $5.9 billion was invested here. Massachusetts ranked a distant second behind California with $698 million. Texas attracted just $212 million. These numbers show that venture capitalists believe California is still the best place in the nation to find innovative entrepreneurs and productive workers.
California no doubt faces serious challenges. But our obstacles are not insurmountable.
Fiscally, we have to get smarter, think longer and stop hoping for a miracle. Californians have to assume more responsibility for deciding what they want government to do and how much they’re willing to pay for public services. We have to design a saner system for financing public schools.
We will meet these challenges. California has the most diversified economy in the country. It has the most diverse population, and the youngest. These are huge advantages. But we also possess the unmatched imagination and entrepreneurship of our people and their abiding frontier spirit. A few insults aren’t going to get us down.
Bill Lockyer is the state treasurer of California. Stephen Levy is director of the Center for Continuing Study of the California Economy.