Ways to Grow California's Economy: A Checklist for Discussion

There is no substitute to growing California’s private sector economy. Growing the economy has substantial benefits:

• The private sector economy is the only source of jobs and tax revenues.
• It’s better for everyone to raise tax revenues by growing the economy rather than through tax rate increases and new taxes.
• A growing private sector economy also reduces unemployment and welfare expenses, as well as making these expenses more affordable.
• State government can’t create private sector jobs.  However, it does create a climate that encourages or discourages business formation and the investments needed to grow the economy.
• California is in competition with other states and other countries for businesses and jobs needed to grow the state’s economy.
• Is California becoming more like New York?  New York has a slow growing economy.  New York City is affluent due to the highly profitable financial services industry.  Smaller, upstate cities such as Buffalo, Syracuse, and Rochester are in decline.  Industry and agriculture are losing jobs.  Sound familiar?

NON-FARM EMPLOYMENT GROWTH, FOUR LARGEST STATES  (1990 = 100)

Source:  U.S. Bureau of Labor Statistics

CALIFORNIA NET BUSINESS FORMATIONS  (2001-2010)

Source:  EMSI

WAYS TO GROW CALIFORNIA’S ECONOMY:  A CHECKLIST FOR DISCUSSION

1. California needs to substantially reduce the cost and complexity of doing business in the state to compete with other states and other countries for businesses and jobs:

• The state is losing businesses and taxpayers to other states, out migration.
• California has the highest income tax, sales tax, and gasoline tax rates in the country.
• At 8.7% the state has the fifth highest unemployment rate in the country.
• It has the only state “cap and trade” tax in the country.
• The business tax climate is the third worst behind New Jersey and New York.
• The legal environment is anti-business.
• The state is ranked by CEOs as the worst state to do business in for the ninth year in a row.

2.  California needs to reform public employee pay and retirement benefits to control the cost of government:

• The growth of salaries and funded and unfunded pension and healthcare benefits for public employees is a growing burden on present and future taxpayers.
• Many cities, counties, and school districts are cutting back on essential services and employment to cover unaffordable pension and retiree healthcare costs.  Some cities and counties face bankruptcy because of these costs.
• Pay and benefits for public employees are too generous and should be based on the private sector (aka taxpayer) equivalents for similar positions.
• Unfunded pension and healthcare liabilities need to be eliminated.  These costs should not be passed on to future taxpayers, a form of inter-generational theft.  These benefits should be fully funded during employees’ years of employment.
• The pension system needs to be reformed to be less dependent upon defined benefit plans where the taxpayer is stuck with the bill for any underfunding due to poor investment performance or the use of overly optimistic investment assumptions.
• If it isn’t funded, is it real?  Will future taxpayers and politicians be willing to raise taxes and cut spending to pay for unfunded pensions and retiree healthcare?  Or, will they look for ways to renege on these obligations?  Would today’s generous benefits have been awarded in the first place if their true costs were disclosed when they were awarded?

3.   It should be obvious that the state has been underinvesting in its infrastructure:

• The state’s roads, airports and other infrastructure have been neglected and need to be upgraded and expanded to support a growing economy.
• We pay for our infrastructure either way.  We can pay explicitly to upgrade and maintain the state’s infrastructure, or we can pay the hidden costs associated with inadequate infrastructure such as through increased traffic congestion, higher transportation costs, and slower economic growth with the associated loss of personal income, tax revenue, and jobs.
• Spending on infrastructure is being crowded out by welfare spending and growing public employee pay and benefits.
• The state needs to strike a better balance between essential infrastructure investments and other expenses.

4.  Financial reporting for state and local governments needs to be improved:

• More meaningful reports for state and local finances are needed to include, for example, long-term trends and performance metrics.
• Statements of actual expenditures are needed along with other data at the close of each fiscal year, the equivalent of annual reports, not just budgets for the next fiscal year.
• Reporting of debts and unfunded liabilities should be improved along with forecasts of these expenses.
• The state needs to publish timely consolidated reports for local governments, school districts, and special districts with some measures of financial performance and solvency.
• Much better reporting of public employee pension and retiree healthcare costs is required including actual payouts, fund contributions, and unfunded liabilities using more realistic investment return assumptions.

5.  Education needs substantial improvements:

• We shouldn’t give our students low-tech educations in a high-tech, global economy.
• Our students have to compete with their peers around the globe, not just in California or the U.S.
• As such, school performance should be measured based on international, not just U.S., standards.
• The education system at all levels needs to be opened up to more innovation, to provide more choice to students and parents, and to allow more competition.
• More vocational training is needed to give workers the skills needed to qualify for better paying jobs and to help grow the state’s economy.
• California’s colleges and universities need to find ways to reduce (not freeze but reduce) the cost of a vocational training and a college education.  Make education more affordable for everyone.
• The state needs to spend more on education.  However, more funding without reforms will probably not improve much.  How does California with the highest state tax rates in the U.S. also have below average per pupil spending for K-12 education?

6.  Welfare needs to be reformed to reduce costs and promote self-sufficiency:

• We shouldn’t promise more than we can afford.
• We need more job growth and better education to reduce welfare spending.  If there aren’t enough jobs or well-educated workers, we’ll get more unemployment and welfare spending.
• California can’t afford to be more generous than other states with similar per capita incomes, or compared to national averages.
• There is no substitute to helping everyone be self-supporting with incentives to get a job, improve skills and education, and save for the future.

7.  Healthcare is too expensive and bureaucratic and needs a big overhaul:

• We should be in favor of good, basic healthcare for everyone even if they can’t pay.
• Don’t confuse health insurance with healthcare.  They are not the same.
• The present system is unaffordable, and may not be sustainable.  More government bureaucracy, mandates, rules, and cost reduction programs won’t make it work.
• Pharmaceuticals, medical devices, and diagnostics are using the latest technology.  However, the rest of healthcare is way behind leading customer-oriented businesses such as Walmart or Amazon in using information systems and technology to be more efficient, more productive, more customer-friendly, and to lower costs.
• A better system would use insurance to manage risk and protect people who need expensive procedures or require expensive, long-term care.  Routine medical expenses should be covered by health savings accounts, supplemented by vouchers or tax credits for those who have low incomes.  Tax deductions aren’t equitable.  They are most valuable to those who have above average taxable incomes.
• A better system would include more innovation, more choice, and more competition across state lines.
• To lower costs, we need to get most people to make healthier lifestyle choices.

About the Author:  William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.