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California on Forbes’ list of ‘Death Spiral States’

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Posted: Friday, March 1, 2013 12:19 pm

In December Forbes magazines, one of the nation’s leading business journals, published a list of what it called “Death Spiral States.” The story set off a furious round of Internet mass emails complete with color-coded maps that identified the collapsing states. But although the branded states are in poor fiscal condition — reporter William Baldwin called them “fiscal hellholes” — things might not be as grim as the emails indicated.

According to the widely circulated emails, a state is in a “death spiral” if its number of “takers” (those collecting welfare) exceeds its “makers” (wage earners who contribute to the tax base that supports “takers.”)

But Forbes included among “takers” those “dependent on government” such as state and local employees as well as former government employees currently collecting pensions and Medicaid benefits. The emails (which you may have received) omitted this vital information. Baldwin also noted that while there may be states with more residents who receive welfare than work, he pointed out that the determinant would be how welfare is defined. Does the definition include Temporary Assistance for Needy Families and Supplemental Nutrition Assistance, formerly known as food stamps?

Baldwin insists that he was comparing private sector employment to all government dependency. Using Baldwin’s definition of “welfare” — those enrolled only in Medicaid — none of the states he analyzed has more people on welfare than workers, whether in the private sector or overall.

In compiling its list, Forbes also considered a second factor: the state’s credit rating. Many variables go into determining creditworthiness. Most important are aggregate debt, depressed home prices, unfriendly business environment and high unemployment. After Forbes tallied all the factors, California with a 1.39 taker-maker ratio finished third behind number two Mississippi (1.49) and number one New Mexico (1.53). Other states with more than a 1.0 ratio included Maine, Kentucky, New York, South Carolina, Illinois, Hawaii and Ohio.

As a result of its findings, Forbes recommended that investors holding California municipal bonds should sell them. And, if sent to California as part of a corporate relocation assignment, don’t buy a house — rent. If you already live in California, leave.

While that may be too drastic a measure for some, a realistic look at California’s economic health is in order. Last week, Sacramento City Manager John Sherey told the City Council that the capital is $2 billion in debt and that managing it would be “challenging.”

The state's cumulative debt load is hundreds of billions of dollars, proportionately one of the nation’s largest. Sacramento Bee columnist Dan Walters estimates that California’s cities have about $30 billion in bonded debt and counties another $20 billion more in redevelopment debt.

In the midst of this waterfall of bad news, one attention-grabbing item came across my desk that offered an intriguing option. For the disenfranchised, the best place to move is Cuba.

During the two years that have passed since the first real estate transaction between private parties in decades, property values have increased by 20 percent. The weather’s great. Raul Castro announced that he’ll be resigning in five years. Unfortunately, the United States has an ongoing embargo against Cuba that makes money transfers to purchase property next to impossible.

Come to think of it, ending the Cuban embargo might prove easier than California working out from under its multiple debt layers.

Joe Guzzardi retired from the Lodi Unified School District in 2008. Contact him at guzzjoe@yahoo.com

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