Now California — which may have the biggest problem of all — is trying to work through the issues.  On Thursday Governor Jerry Brown declared California’s current system unsustainable and unveiled an approach that tries to deal with the inevitable effects of demographics.  Brown, a Democrat, proposes raising the retirement age for most government workers from 55 to 67, increasing employee contributions to 50 percent of pension costs, and moving the state’s system from a complete defined benefits program to one that includes a 401(k) component, where employee benefits depend on their contributions and the performance of investments they have selected.  He also proposes reforms to ensure that pensions are based on regular salaries, not on bonuses or overtime.  Public employee unions have been critical, arguing that they have recently given concessions and that any changes to benefits should be the product of collective bargaining.

From sea to shining sea, the handwriting is on the wall:  states and local governments eventually must grapple with meaningful reforms to budget-busting public employee pension and benefit costs.  The Ohio General Assembly attempted to do that with the legislation that is the subject of Issue 2.  If Ohio voters reject Issue 2 come Election Day, the issue is not going to go away.  Why not tackle it now?

The Golden State is facing a crushing, multi-billion-dollar budget shortfall — so much so that Governor Jerry Brown has ordered state departments to turn in their cell phones and BlackBerrys — and yet the state is getting ready to pass the California DREAM Act, one part of which makes public tuition assistance funds available to “undocumented immigrant students.”  The bill has passed the Assembly, seems certain to pass the Senate, and Governor Brown has said he will sign it.  The availability of tuition assistance comes on top of the fact that California allows the “undocumented immigrant students” to pay tuition at California state colleges at in-state levels, which are significantly lower that the tuition charged to out-of-state students.

I have nothing against immigrants — to borrow the linked editorial’s deft phrase, “illegal or otherwise” — but doesn’t it seem like fiscal nuttiness for a state that is billions of dollars in debt to be extending new benefits to anyone, much less to illegal immigrants?  With this kind of responsible management of the public purse, is it any wonder how California got into its current predicament?

States are taking different approaches to their predicament.  Illinois recently enacted huge increases to its individual and corporate income taxes.  California has declared a state of fiscal emergency.  Some states have focused exclusively on cutting spending.  And, it now appears, other states have quietly gone to Congress to explore the possibility of either a federal bailout or changes in the law to allow states to declare bankruptcy.  In these Tea Party days, there doesn’t seem to be much appetite for bailouts — especially for states that seem to have behaved irresponsibly with their budgeting decisions and can’t be trusted to behave responsibly in the future.  So, the “bankruptcy option” evidently is being seriously explored as a way to allow states to avoid their pension obligations.

I’m opposed to a federal bailout of the states.  I’m also opposed to any change in the law to facilitate states wiping out their debts through a bankruptcy-type process.  I think the bankruptcy option would be bad policy for two reasons.  First, I think such an approach is not fair to people who have agreements with the states that would be affected by a bankruptcy process.  State employees who have worked for years on the understanding that they will receive a pension should not be deprived of their pension payments.  For those workers, the pension was part of the deal, they have relied on the pension in their retirement planning, and it would be unfair for states to now renege on the deal.  Second, bankruptcy would affect not only state workers with pensions, but also all people who have contracts with the state, all people who purchases state bonds and debt instruments, and all others who do business with the states.  It would be a drastic step that would, I think, forever affect the state’s credit rating and investor confidence in government securities generally.  States that have been responsible in their budgeting and spending would be tarred, too, and would have to endure higher interest rates on their own borrowing as a result.  Obviously, neither of those results would be welcome.

The solution for states that are in a budget bind should lie in the state, itself, making the tough choices and difficult changes necessary to get their fiscal houses in order.  Cut spending.  Eliminate programs that aren’t essential.  Sell state property and assets.  Negotiate changes  to future pension obligations and eliminate pensions for newly hired employees.  Change laws that require automatic escalations in pension payments.  Explore users fees as additional revenue sources.  But don’t come to Uncle Sam for a bailout, and don’t take a bankruptcy option that could leave retirees high and dry and cripple state credit ratings for decades to come.

Interestingly, Schwarzenegger justified his signing of the bill solely on cost grounds.  He says California will save money on prosecutors, court personnel, police officers, and publicly provided defense attorneys who otherwise would be paid to prosecute marijuana possession misdemeanor offenses.  In 2008, for example, California had 61,000 arrests on misdemeanor possession charges.

California’s decision to decriminalize small quantities of marijuana is an interim step in the process that I think is probably inevitable.  Eventually cash-strapped states will find the lure of legalizing marijuana, and then taxing its sale, to be irresistible.  California faces a massive budget deficit.  By decriminalizing the possession of marijuana, California eliminates an expense item.  By legalizing marijuana and taxing its sale, California adds money to its revenue side.  With states having justified the legalization of casino gambling on job creation and revenue grounds, can legalized marijuana be far behind?

What is the meaning of this for the United States?  The fact that some other country’s debt is considered likely to default is not earth-shaking news; this article notes that bonds issued by Egypt and Azerbaijan have the same rating that has now been assigned to Greece.  No, the risk is that Greece’s unrelenting troubles — and the corresponding reduction in the credit rating of Portugal — will inflame general investor skittishness about the massive governmental debt among European countries and the U.S.A.  If investors perceive greater risk of non-payment, they are going to insist on higher interest payments to bear that risk, and higher interest rates mean more deficits and a spiraling debt problem that becomes increasingly difficult to solve.  The yield on Greece’s 2-year bonds is now trading at about 15%.  Imagine if the United States, or debt-ridden states like California, had to pay 15% interest on their borrowings, and an ever-growing portion of the federal budget therefore had to be devoted to debt payments to overseas investors.

The lesson to be drawn from Greece’s predicament is that deficits must be addressed, non-essential spending must be cut, and budgets must be balanced.  As Greece has now demonstrated, constant deficit spending and borrowing is the path to perdition.

The interesting point about this story is not that it has happened — with Greece’s borrowing-oriented, over-the-top welfare state mentality, a budget crisis was inevitable, and other debt-laden EU countries are not far behind — but the cultural and political fissures that have been exposed. In Germany, in particular, citizens and politicians are resisting bailing out the Greek government because they believe they are subsidizing sybaritic, free-spending ways of the Greeks.  In Greece, workers can retire at 63; in Germany, they must work until age 67.  Some Germans believe that the salaries paid to Greek civil servants are too large, that Greeks are too lazy, that the Greek culture is corrupt, and that Greek farmers are swindling the EU.

What the Greek debt crisis really demonstrates is that any political union must be based on trust and equity.  When times get tough, there must be a sense of shared sacrifice and shared values.  Eventually, if enough Germans believe they are being played for saps because they are working hard to support the unsustainable lifestyles of pleasure-loving Greeks (and others), they will refuse to continue to do so and the European Union will fracture and fail.

There is a lesson in all of this for California, which is facing its own version of a serious debt crisis.  Over the long term, California cannot expect the federal government to bail it out of its budget problems.  It won’t take long before hard-working Texans, or North Carolinians, or Ohioans, will object to subsidizing California’s absurdly generous public pension system, its unwillingness to cut programs, or its oppressive regulatory regime that has caused many companies to flee the Golden State for more business-friendly locations.

America is more politically and culturally cohesive than the European Union; Texans have much more in common with California than Germans have in common with Greece.  Still, the pressures that come from the ant subsidizing the grasshopper are the same, and would better be avoided by California getting its budgetary act together.

We’ve now seen how things will work.  The President will fly around the country, campaigning for Democratic Senators and Representatives and announcing new spending in their states and districts.  In the meantime, the “heavy lifting” of deficit reduction will be left for out-of-office political has-beens like former Senator Alan Simpson, who will be powerless to do anything other than recommend methods to reduce the deficit.  We all know how this will play out — the new spending will occur, while any proposed spending cuts won’t ever be enacted.

I sympathize with people who have lost their homes because they lost their jobs.  But how many of the people in California, Arizona, Nevada, and Florida who are experiencing foreclosure problems fall into that category?  How many of them stretched too far in buying their homes, or hoped to “flip” the houses when they bought in what used to be super-heated housing markets, or misrepresented their assets and income when they applied for their home loans?  How many of the banks involved just made bad loans?  Why should taxpayers in Ohio bail such people out, particularly when we have to borrow even more money to do it?

I think President Obama has shown his true stripes.  He doesn’t care about budget deficits or the federal debt, he cares about politics.  He doesn’t have the stomach to make the tough choices  because he cannot stand to suffer the political consequences that inevitably will result.  In that regard, note the sentence in the fourth paragraph of the linked article:  “He will be back in town-hall mode, a venue that aides say allows him to connect with people and distance himself from the messy process of Washington governing.” What could be a clearer indication that President Obama is taking the easy way out?

California has set up a bad pension system, has refused to fund it, and should not now be rescued from the consequences of its bad decisions by taxpayers in other states.  The federal government simply cannot and should not bankroll annual pension payments to state employees that are far larger than the annual retirement income to be received by the vast majority of Americans.

What’s interesting about the linked story is not that California has its hand out to the federal government — after all, with so many big banks and car companies and mortgage companies and other entities getting bailouts, why shouldn’t states join in the fun?  Instead, what is interesting is the rationalization of California politicians about why the federal government should bail out California, too.  California is the economic engine for the entire country, one of them says, and therefore it is in the national interest to help California get out of the ditch.  Another complains about federal regulations that impose costs without providing funding.

Has California looked in the mirror lately?  In reality, California’s penchant for extreme “environmental” regulations and ludicrous “consumer-friendly” laws have imposed enormous costs on doing business, which is one of the reasons so many companies have fled the state.  Those regulations are classic “unfunded mandates.”  And, those regulations have affected commerce in other states, because businesses that want to sell a widget to the California market don’t want to build one set of widgets to sell in California and another to sell in the other 49 states.  Rather, those businesses build one product that complies with California’s draconian regulatory regime and costs more for everyone else as a result.

I like California and have many friends there, but I think the state should be forced to deal with its crisis without getting federal bailout cash.  California’s current problems are entirely self-inflicted.  Any state that has 9,223 former state employees earning state pensions of more than $100,000 per year (to cite only one example) has been poorly governed and still has cutting to do.  If the fiscal crisis causes California legislators to finally realize that California residents who want to attend California’s colleges will have to pay a bit more, that state workers will have to take salary cuts and receive leaner benefits packages and be laid off, and that the state should take a hard look at some of its regulations and laws that have driven away employers, then the fiscal crisis will have served a salutary long-term purpose.  Americans in states like Ohio should not have to subsidize the bad management and profligate spending that has characterized California politics for decades.

The California Statehouse, where no man's property apparently is safe from confiscation

It is hard to imagine a more gutless gimmick to try to close a budget deficit while minimizing political risk. Rather than make the hard choices about cutting spending or raising taxes, California lawmakers have found a craven and weaselly solution that allows them to increase revenue while still being able to claim that they haven’t raised taxes. I certainly hope that California voters stand up for themselves at the next opportunity and throw out the legislators who concocted and supported such a duplicitous scheme. The lengths to which the California legislature will go to raid the pockets of taxpayers should cause any rational taxpayer to think of fleeing the state for a destination where the government has some modicum of respect for private property and the rule of law.

The single most amazing statistic in the article, to my mind, is that 9,223 former civil servants and educators are receiving pensions of more than $100,000 from California. Good lord! What did those individuals do to deserve such lucrative retirement packages, and how in the world is California ever going to right the budget ship if it has to bear those kinds of costs for pensions?

California’s medical marijuana business culture is interesting.  I was unaware that,as the article reports, there are “hundreds of medical marijuana dispensaries across the state” as a result of the 1996 ballot initiative that allows individuals to smoke marijuana for medical purposes.  How are those businesses regulated by the state, if at all?  And, given the fact that marijuana is illegal under federal law, how do those businesses operate?  Do they file tax returns that identify their business as “medical marijuana dispensary”?  How do they get the marijuana that they dispense, and how do they determine if individuals have a legitimate medical need for their product?

One wonders whether the enormous budget pressures that states are facing will cause them to make choices they really hadn’t considered palatable before.  In Ohio, for example, the Governor retreated from long-standing opposition to legalized gambling to allow video slot machines at seven Ohio racetracks.  The proposal is supposed to raise $1 billion in revenues and thereby help to close a multi-billion dollar budget deficit.  (I’ve never understood, incidentally, how it is really possible to estimate, with any degree of accuracy, the likely revenues from legalized gambling, and it would be interesting to see whether such estimates, in retrospect, have even come close to what is actually achieved.)

From a political standpoint, the great thing about sin taxes is that the people who don’t engage in the sin can decry the sin, raise the tax, and enjoy the revenue, all at the same time.  Such activities are easier than raising taxes on the general population or cutting existing programs or governmental employees.  It may well be that the poor economy and budget problems, coupled with those political considerations, make more progress toward legalizing marijuana than NORML ever has.