Michael Lewis, author of "Moneyball" and "Liar's Poker," has a big article in the November Vanity Fair about how dire California's public finances are. His thesis is blunt: escalating pension costs are pushing California cities into bankruptcy — if they aren't already there.
It's a lengthy article, running many thousands of words. It covers a lot of territory. In it, we meet municipal-bond naysayer Meredith Whitney, bicycle hellion and former California governor Arnold Schwarzenegger, and a beleaguered local California government official from the ruined town of Vallejo who's trying to invent a whole new way to fight fires. Boilerplate Michael Lewis, right?
It's a good read, but if you want just the summary — the extremely worrisome summary about where California's cities could be headed — then here you go:
- In 2011, the "average Californian" made $48,000 a year, but is carrying $78,000 in debt. Lewis trots this figure out as an example of hedonistic excess and to begin laying a case that Californians are a spoiled people who want everything but don't want to tax themselves to pay for it. Borrowing is so much easier than raising revenue! His data comes from the Federal Reserve, but Lewis fails to mention that much of the debt is mortgage debt — debt that until the financial crisis was considered "good debt," or debt assumed to purchase an appreciating asset that could become a storehouse of wealth and a bulwark against crisis.
- In 2011, California will spend $32 billion on employee pay and benefits. 2010 spending in prisons was $6 billion, while spending on higher education was $4.7 billion. Tuition at the University of California has increased from $776 per year in 1980 to — Gulp! — $13,218 in 2010. And that's before the beer. "Everywhere you turn, the long-term future of the state is being sacrificed," Lewis writes.
- San Jose has a AAA bond rating from Moody's, but that's a sham. The city is nearly bankrupt. And at $245 million, pensions and health-care for retired city workers "are more than half" the yearly budget. Eventually, they will consume the entire budget. There will be one city worker, whose job consists of paying out pensions since there are no other city services.
- Vallejo saw its real-estate values fall 66 percent from 2006-2010. Bankruptcy was declared in 2008.
- Vallejo has a population of 112,000, and 13,000 fire calls per year. That's 8.7 calls per person. Or 37 calls each day. There are 67 firefighters in the department. So that 194 calls per firefighter. Luckily, they aren't all fires.
Lewis ends up sounding a cautiously optimsitic note, after his tour of California public-finance Hell. The challenge is huge. But California may rise to it:
When people pile up debts they will find difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying, less obviously, that their present wants are so important that, to satisfy them, it is worth some future difficulty. But in making that bargain they are implying that, when the future difficulty arrives, they’ll figure it out. They don’t always do that. But you can never rule out the possibility that they will.