California Nightmare

If you want to get a birds-eye view of what has gone terribly wrong financially in America, a feature entitled California And Bust in the current issue of Vanity Fair is a good place to start. The piece was written by Michael Lewis, who introduced many of us to the creeping insanity engulfing Wall Street in the ’80s in his bestseller, Liar’s Poker.

Lewis begins with a high-altitude look at the fiscal calamity now threatening to dismantle California, which once proudly boasted that it possessed the 10th-largest economy on the planet. Here are a couple of related samplings from the Golden State’s surreal balance sheet:

— In 2010, California spent $6 billion on fewer than 30,000 guards and other prison-system employees. A prison guard who started his career at the age of 45 could retire after five years with a pension that nearly equaled his former salary. The head parole psychiatrist for the California prison system was the state’s highest-paid public employee — in 2010, he pocketed $838,706.

— The same fiscal year that the state spent $6 billion on prisons, it invested $4.7 billion in its 33 university campuses, populated with 670,000 students. Since 1980, the state’s share of the budget for the University of California has fallen from 30 percent to 11 percent, an amount that soon may be cut in half. In 1980, a Cal student paid $776 a year in tuition; in 2011, the amount is $13,218.

In other words, California today is cannibalizing its crown jewels just to keep pace with lavish pensions that were promised to state and municipal workers decades ago, when governments headed by politicians from both major parties assumed the sun would never set on the Golden State’s expansive economy and the bill for luxury-level benefits would never fully come due. Savage budget-cutting appears to be the only viable option available to a state that years ago passed a sweeping referendum essentially outlawing tax increases and which constitutionally gives its residents the right to override the Legislature with instant ballot initiatives.

After a riveting introduction, which includes an interview conducted during a harrowing morning bicycle ride with former Gov. Schwarzenegger  (Arnold basically says “I tried to fix it, but the people wouldn’t let me” while careening through red lights), Lewis swoops down to the grim reality confronting California’s cities and towns. These are the places where the bar tabs for the drunken sailors in Washington and Sacramento must now be paid, and it isn’t a pretty picture.

First stop on Lewis’ tour is San Jose. The pension and health-care costs of retired workers in this city of one million, currently surging at $245 million annually, now consume more than half of the municipal budget. This has forced San Jose to cut its workforce from 7,450 to 5,400, the level that existed in 1988 when it had a quarter of a million fewer residents. The remaining workers recently swallowed a 10-percent pay cut. Libraries are closed three days a week; a newly completed multi-million-dollar community center cannot be opened because there is no money to pay the staff. The city is laying off dozens of police officers and firefighters.

San Jose is projecting its pension costs will top $400 million in less than three years ($650 million when adjusted for “real life expectancy”). The mayor estimates that by 2014 the nation’s 10th-largest city will be serviced by no more than 1,600 public workers just to keep pace with its staggering obligations. If you want to get a sense of the scale of this debacle, consider that the average police precinct in New York City is home to more than 1,600 cops.

Lewis’ trip into California’s apocalyptic fiscal landscape really gets scary when he arrives in Vallejo, which greets visitors with a sign declaring it the “City of Opportunity.”

Here is an excerpt:

“The shops that remain open display signs that say: we accept food stamps. Weeds surround abandoned businesses, and all traffic lights are set to permanently blink, which is a formality, as there are no longer any cops to police the streets. Vallejo is the one city in the Bay Area where you can park anywhere and not worry about getting a ticket, because there are no meter maids either. The windows of city hall are dark, but its front porch is a hive of activity. A young man in a backward baseball cap, sunglasses, and a new pair of Nike sneakers stands on a low wall and calls out an address…the people in the crowd below instantly begin bidding.”

From 2006 to 2010 the value of Vallejo real estate fell 66 percent. One in 16 homes in the city is in foreclosure. The lobby of city hall is completely empty. There’s a receptionist’s desk but no receptionist. Instead, there’s a sign: “To foreclosure auctioneers and foreclosure bidders — please do not conduct business in the city hall lobby.”

Lewis introduces us to the new city manager, Phil Batchelor, who is running the city with a staff of one — his administrative assistant.  “When she goes out to the bathroom, she has to lock the [office] door,” he says, “because I’m in meetings, and we have no one else.”

Vallejo was an early casualty of the collapse of the housing bubble; the city declared bankruptcy in 2008. At that time, 80 percent of the city’s budget—and the lion’s share of the claims that had thrown it into bankruptcy—were associated with the pay and benefits of public-safety workers.

Three years later, much of Batchelor’s time is consumed negotiating with 1,013 claimants who have filed a half-billion dollars in claims against the paltry $6 million that remains in the city’s piggy bank. The city manager is kept busy trying to convince them to take the crumbs and settle.

When Vallejo entered bankruptcy, the fire department was cut from 121 to 67 firefighters, even though the department was handling approximately 13,000 calls per year for a city of 112,000 people. To deal with the huge numbers of calls, Vallejo once had eight stations, eight three-person engine companies, a four-man truck company, one fireboat, one confined-space rescue team and a team to deal with hazardous materials.

The Vallejo Fire Department now consists of four stations, four engines and a truck.

Welcome to the Hotel California, where America’s fiscal nightmare has checked in and doesn’t appear to be leaving anytime soon.