Monday, July 23, 2012

Why California Is Failing While Wisconsin Is Succeeding

Last week we compared the relative economic situations of three states: Florida, New Jersey, and California (http://www.loathemygovernment.blogspot.com/2012/07/state-level-economic-musings-california.html). Florida fared the best in our analysis, with unnecessary government costs being cut, funding for education being increased, no taxes being raised, but essential government functions still operating. This has resulted in Florida making some of the best improvements in its economy and unemployment rate in the country.

We concluded that New jersey Governor Chris Christie was making all of the right moves to get that state economy moving again but was facing a long tradition of the state overspending its tax stream and raising taxes to cover the shortfall. Its economy has been slow to recover but at least the governor is doing the right things.

The basket case of the three was California. Tax shortfalls, underperfoming schools, budget overruns, good sized cities declaring bankruptcy (San Bernadino and Stockton), an out migration of better off citizens and business, a general malaise throughout the state and its population. However, we did present a rather radical plan from famed economist Arthur Laffer to help pull the state's economy and state government out of the ditch. However, it is doubtful the state's political class is willing or able to accomplish such a feat.

If we had waited a few days, we could have included some other worthwhile advice on how to fix this broken state, courtesy of an article and analysis in the L.A. Times:

 (http://www.latimes.com/news/opinion/commentary/la-oe-malanga-wisconsin-california-bankruptcies-20120717,0,5879241.story).

It has been my experience that the L.A. Times is a left leaning, Democratic Party preferring publication. So when it sings high praise for the economic progress and approach of a REPUBLICAN governor from another state, I sit up and take notice since complimenting a Republican anything is rather rare in a main stream media publication like the Times.

The Republican being complimented is Governor Scott Walker of Wisconsin. As you may know, Walker just prevailed in a bitter recall election that was headed by state government unions in the state. The unions were against many of the changes that Walker had pushed through the state legislature that would have reduced the power of state government workers in the state.

The Times article, "California, Look To Wisconsin," made the following points:

  • Walker argued that the biggest beneficiaries of his budget reform plans would be cities, towns and school districts, which would gain the ability to cut costs without having to negotiate every change in compensation or work rules with local unions.
  • This legislation specifically eliminated collective bargaining by government workers for benefits and required greater contributions from them towards their pensions.
  • Once his plan was enacted into law, Wisconsin citizens quickly found out that state employee unions had used its power to force local school districts to provide health care insurance coverage only through a nonprofit insurer affiliated with the union.
  • Once the state allowed bargaining on health care contracts, school boards began competitively bidding out their health insurance, which hopefully would reduce costs.
  • According to the Times' article, just two months after Walker's reforms took effect, 23 Wisconsin school districts had redone their insurance contracts, saving $16 million, or an average of $211 per student.
  • The MacIver Institute in Wisconsin estimated that if all the state's districts were able to negotiate similar deals once their contracts with the union-affiliated insurer expired, schools, and Wisconsin taxpayers, could save $186 million.
  • The Milwaukee Journal Sentinel reported that the city of Milwaukee would save as much as $36 million in its next budget by using the new bargaining leverage the Walker reforms provided.
  • This flexibility allowed the city to avoid having to implement layoffs of city workers.
  • However, the Milwaukee school system was not so lucky since it had agreed to a contract with its teachers' union just before the reforms took effect and thus, were locked into an existing contract. The school board asked for concessions from the union, the union refused, and the school board was forced to layoff 519 people which included 334 teachers. The Times article estimates that if the union had made the concessions, 200 teacher jobs could have been saved.
Great success story. Government employees still get a robust set of benefits, state and local governments and school districts get financial relief, teachers stay on the job, and the strain of ever increasing taxes on residents is eased. Walker has successfully bent the so-called "cost curve" downward with minimal pain and maximum benefits to a wide range of constituencies.

California, not so much. According to the Times' article:
  • Average annual pay for a California local government employee rose 60% between 1999 and 2008, far higher than the inflation rate over that time.
  • For a perspective, that rise is about 70% more than the increase in private sector pay levels in California over the same frame.
  • The annual cost of funding pensions in California's 20 largest cities has gone from $1.3 billion in 1999 to $5.1 billion 2011, according to a study by Stanford University professor Joe Nathan, an annual growth rate of more than 11%.
  • No city government's revenue stream is increasing anywhere near that much, meaning that at some point something in the current process has to snap.
  • The article points out that cities like San Jose, California do not have the flexibility that Wisconsin local governments have. In San Jose, the average annual cost of employing a city worker, including benefits, has risen to an unbelievable cost of $142,000, resulting in San Jose laying off 2,000 employees and cutting back on parks, libraries and other services over the past three years.
  • The city of Stockton, California has already declared bankruptcy, driven by the fact that for every wage dollar it spends, it now has to spend another dollar to cover city employee benefits. This has required the city to layoff 25% of its fire and police force over the past few years but even that was not enough to avoid going bankrupt.
The Times article concludes with this appraisal of California's budget problem: "Without pension reform in Sacramento, and with local contracts that make it impossible to cut costs without concessions from unions, cities and school districts in the Golden State are left with few good choices to balance their budgets." Not a good situation to be in because at some point, California local and city governments end up being little more than collection agencies for bad union contracts while schools, teachers, parks, and other important government functions get emasculated.


Florida figured it out, Wisconsin figured it out. Any human organization, whether it is a nonprofit, a small business, an international conglomerate, a family household, or a government entity, has to live within its budget and available resources. If it does not, the ever escalating cost curve and ever present economic reality and limits will eventually lead to the collapse of that human organization.


How soon will it take California, and more importantly Washington D.C., to understand that "economies cannot tax themselves to prosperity." At some point, and hopefully before it is too late, both California and Washington need to wake up to the fact that spending has to match up with revenue, that is simply a fact of life.




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