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When I ran for California State Controller in 2018, I warned voters what was coming down the pipeline. I warned that even without a recession, many smaller and financially strapped municipalities would begin to go into default and go bankrupt, starting around 2021.
With many local governments having to nearly double their contributions due to losses from the Great Recession, and the lavish pensions they were handing out, the result would be financial ruin.
If you are paying more in pensions than your current salaries, you know you’re screwed. These municipalities will not have enough money to pay pensions, current employees, and provide essential, let alone non-essential services.
I warned not if, but when we have our next big recession, California will be in a severe financial crisis along with counties and cities. The only way to prevent this was by doing massive pension reform and stopping our spending addiction.
Don’t believe me. Here are my responses to questions asked by The San Diego Union-Tribune regarding our pension and the state’s spending problem.
Again, in a recent article on March 13, 2020, before Governor Newsom was the first governor to shut their state down (March 19th), I warned once again on what was going to transpire.
I stated, “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.”
Now, some people may think I’m crazy, but let me turn your attention to what Senate Majority Leader Mitch McConnell said today.
“I would certainly be in favor of allowing states to use the bankruptcy route,” he said Wednesday in a response to a question on the syndicated Hugh Hewitt radio show. “It’s saved some cities, and there’s no good reason for it not to be available.”
The host cited California, Illinois and Connecticut as states that had given too much to public employee unions, and McConnell said he was reluctant to take on more debt for any rescue.
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“You raised yourself the important issue of what states have done, many of them have done to themselves with their pension programs,” he said. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
So, can the federal government bailout the states, yes. Will they, I think they will, but it will not be enough money to fix the problem.
Can the federal government allow states to declare bankruptcy, that is unclear. My initial thought is without a constitutional amendment; this can’t happen. One thing I’m sure of is if they allow states to declare bankruptcy, there will be a myriad of lawsuits from bondholders and public sector unions.
The McConnell article also stated, “No state has defaulted on its debts since the Great Depression and even after the last recession only a handful of cities went bankrupt, since governments have broad ability to raise taxes.”
What does this mean? Exactly what I told you what was going to happen, massive tax increase and cuts in services because whatever bailout the states get, it will not be nearly enough.
First, I warned that they would be coming after Prop 13 property tax protection regardless of a pension crisis because they know they need more money, they are drunk on spending, and they refuse to fix the problem.
As you may know, there is a statewide ballot initiative in November to eliminate parts of Prop 13. This would allow the government to raise property taxes as fast and as high as they want.
My prediction is that the state legislature has a two-thirds majority and may act on this before November, or could ignore the voters as they did in 2018 with rent control and go against the wishes of the voters.
It wouldn’t surprise me if they tried to eliminate Prop 13 completely, but I suspect they will try to do it piecemeal like they currently are.
My other prediction is what I warned about during the 2018 campaign and how my opponent, California Controller Betty Yee, was advocating for a service tax, as well as other politicians.
If you’re not aware, the service tax is like a sales tax but on service. For instance, when you get your car fixed you don’t pay sales tax on the whole bill, just on the parts. The labor isn’t taxable. Under a service tax, labor would be taxes.
If labor was taxes at the same rate as sales tax in California it would generate $120 billion according to Betty Yee’s study.
What percentage a service tax will begin at is unknown at this point, but I’m fairly certain you will see a service tax coming in the near future.
I hate that I have to write this article and state the same things year after year. Hopefully, it will be the last time, but I suspect it won’t be.
Konstantinos Roditis is a government reform and taxpayer advocate and was a 2018 nominated candidate for California State Controller. You can follow him on Twitter & Facebook.
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