California: In a State of Quiet Desperation

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California has quickly turned into a case study for the long-term effects of the housing market. The state, which ranks as the eighth largest economy in the world, found itself in a state of quiet desperation when the credit crunch took effect in October. California had already delayed its yearly budget over 80 days, finally settling on an agreement in September. In October, Arnold Schwarzenegger, the state?s governor (my state, I might add), announced he would be seeking billions of dollars from short-term loans and bond-sales to finance such basic costs as payroll expenditures.

Two months later, the state has announced that it is considering making payments to contractors, food-services companies and other state vendors in the form of warrants paying a 5% interest rate on the principal amount. That?s right. Whatever money that California has been able to raise over the past months has only been enough to pay its most immediate bills, forcing it to issue the equivalent of IOU?s to the state’s other service providers. The state has admitted that it may run out of necessary cash as early as March.

California is, of course, only 1 of 50 states in the United States. Yet it represents 13% of the housing market, and it is contributing 19% of foreclosures in the housing market to the United States economy. Couple that with a low property tax rate (among other things) that ranges between 3.6 and 6.5% and does not contribute any funding to the actual state budget (only local and county), and you are presented with a rather ugly picture. Schwarzenegger has made it clear that he would seek federal aid if the budget situation does not improve, painting a picture of a possible bailout for the state.

Adding to its woes, California also has the highest rate of unemployment of any state in the nation. That rate, at last count, is currently sitting at a 14-year high of 8.2%. The provides ample support for those calling for a further downturn in California?s economy, as disposable income for consumers rapidly evaporates, driving business activity downward, causing further reduced tax revenue for the state. It sounds ugly, and clearly it is.

I live in California, specifically in the inland area that has been hit hardest by the sub-prime crisis. California is chock-full of tremendously wealthy individuals and families, but the gap between income groups is growing more and more apparent as the financial crisis continues. Lower income families and individuals are driven to spend as though they earn as much as the wealthy, perhaps due to the ubiquitous presence of Hollywood. Even our governor, after all, is a movie star. Yet when your state finds itself bereft of funding, all the sheen and charisma in the world won?t help.

The trouble is, with the employment picture growing increasingly dire, it is entirely possible that California will not be the only state to find itself asking for handouts. Socialist programs may be extended beyond the corporate welfare policies our government has been experimenting with since the Bear Stearns bailout, and could finally include we-the-taxpayers. And yet it’s funny how that doesn’t exactly excite me.