California’s Fiscal Emergency a Microcosm of Americans’ Debt Concerns

When it comes to the economy, what happens in California doesn’t always stay in California.

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“It used to be that people had vague concerns about the deficit. They knew there was one, but it didn’t seem to really matter,” Republican Minnesota Gov. Tim Pawlenty told the Hill. “Now average people outside of politics are zoomed in on it. You go to the grocery store or the dry cleaners or some place and average people, they make comments about the debt, the deficit, and spending.”

Maybe they’re reacting to stories like this one, out this morning on the Reuters wire: “Schwarzenegger Declares California Fiscal Emergency.” Here’s why the governor had to declare an emergency:

1. California has been operating for more than a month without a budget (their fiscal year ended in June and lawmakers are still fighting);

2. The budget must close a $19 billion “shortfall” (I’d say when you’re into the double-digits of billions of dollars, that’s more than a shortfall--can we call it a longfall?);

3. The budget gap is a result of very low personal income tax collections, due to the recession, reduced housing prices, turmoil in the financial markets, and high unemployment. Even though California is the eighth largest economy in the world, it’s clear people there aren’t making enough money to pay much in taxes. Schwarzenegger has proposed slashing spending, which Democratic lawmakers oppose (they prefer tax increases). 

4. As a result, Schwarzenegger announced monthly three-day furloughs for tens of thousands of state employees starting in August, so they can save the cash to pay first for interest on its debt and then essential state services;

5. If that doesn’t work, he may have to issue paper IOU notes, as he did last year, for interest payments for investors holding state bonds. I am not making this up. This would threaten the state’s already weak credit rating, which is only a few notches above “junk” status, according to Reuters. 

[See which members of Congress get the most in campaign contributions from the finance and credit industry.]

6. Finally, the governor said he’d only sign a budget agreement that includes an overhaul of CALPERS (the California Public Employee Retirement System), the biggest public pension fund in the United States, because he says that poses the biggest financial threat to the state of all. Looming costs of public pension funds are threatening the governments of Ireland and Britain as well; CALPERS not only pays the pensions of many retirees, it currently holds over $200 billion in investment funds in large and small businesses. I suspect CALPERS, in one way or another, affects the finances of every family in California.

"Without a budget in place that addresses our $19 billion budget deficit, every day of delay brings California closer to a fiscal meltdown," Schwarzenegger said in a statement.

[Check out a roundup of editorial cartoons on the economy.]

(No wonder the Los Angeles Times reported yesterday that one in five adults in California said they need mental healthcare, and about a million of them meet the criteria for “serious psychological distress,” according to a UCLA survey released this week. I’m stressed out just reading about it.) 

Governor Pawlenty is right--and polls reflect it--that Americans are “zoomed in” on this. Across the country, voters have valid concerns about state and federal spending and the increasing size and scope of government. They realize that when it comes to the economy, what happens in California doesn’t always stay in California.

  • Check out a roundup of editorial cartoons on the economy.
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  • Read more coverage of the political stories of the year.