Business

California debt: What options are available?

Vallejo police offier
Image caption Vallejo is in the process of negotiating wages with its police and fire fighters

In May 2008, too much borrowing and too much spending tipped Vallejo over the edge and it became the largest California city ever to file for bankruptcy.

However, the budget problems of Vallejo are dwarfed by those of California as a whole.

It is a giant economy - if it stood alone, it would be the eighth-biggest economy in the world.

In Vallejo, the situation was blamed on exorbitant salaries and benefits for fire fighters and police officers, which accounted for 80% of the city's budget.

A police lieutenant earns about $200,000 (£130,000) a year before benefits, whereas the average wage for an FBI agent, who typically has to have a law degree, is about 30% less.

At the time, Mayor Osby Davis told Business Daily: "When somebody has their foot on your neck, you don't ask, 'Will I get up.' You get up and do what you can to keep it from happening again. And our city is going to get up and it is going to thrive."

The city emerged from bankruptcy in November 2011 after restructuring its debts. City councillor Marti Brown explains how the authorities have tackled some of the problems they had.

"We have cut our staffing levels and some of the services we provide," she says. "And we also introduced a 1% sales tax after it was passed in a referendum."

Balancing act

California's governor Jerry Brown recently revealed that the state deficit is almost twice as big as first thought and is currently standing at $16bn (£10.3bn).

States do not have the option to file for bankruptcy as Vallejo did, so he says he is going to cut the budget and hopefully raise taxes.

"The tax, and some pretty drastic cuts, will be subject to voter approval in November," he says.

He proposes $8.3bn of cuts in public services in California to help close the deficit.

"The public sector needs more than it is currently getting. You can't squeeze blood out of a turnip and I am going to make this budget balance," he asserts.

His plan is to put the measures to a referendum in order to bypass the assembly, where he has met stiff opposition and has been unable to get them through.

The governor says the new proposal for the coming fiscal year, which begins on 1 July, seeks to end the state's deficit and balance the state's budget for the next few years without borrowing money.

"It's better to take our medicine now and get the state on a balanced footing," he says.

Voters to decide

Professor John Ellwood at the University of California, Berkeley says California's main problem is that people do not want to pay higher taxes.

"The reason California taxes are so low is mostly because to raise them through the legislative process requires a two-thirds vote in both houses of the legislature and then the governor signing it," he says.

The Republican members of the legislature refuse to vote for higher taxes, while Democrats account for 60% of the members, well short of the necessary two-thirds majority.

But California has what is called the direct initiative, where citizens can create constitutional amendments and pass laws.

"On the November ballot, there will be two measures to raise taxes," Dr Ellwood explains, "and it only takes a simple majority for them to be accepted."

The motions will be for a higher personal tax and a temporary rise in the sales tax.

"If those pass, California will begin to raise its fiscal base," he says.

"If they don't pass, then we will have continued cuts," he adds.

However, he thinks that many Americans believe there is so much waste, fraud and abuse in the public sector that there is no need to raise taxes, so it will be interesting to see how the citizens of California respond.

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