Posted on 13-5-2002

California Dreamin
by Alan Marston

Last year's dot-com bust may be fading from memory, but its flow-on effects
are far from simply historical interest. Local government is often
forgotten in the business pages and even the other pages of the media
opinion setters, affecting social consciousness, including politicians.
Sooner or later reality issues a wakeup call. Such is the case in the state
of California. But only a fool would think the problems stop there.

California Gov. Gray Davis and state finance officials are to release
updated figures for the state budget on Tuesday, and economists are
predicting that they will show a potentially catastrophic deficit of $20
billion to $25 billion for the current fiscal year, which ends June 30, and
the next. The shortfall could well force the state and local governments to
slash an array of services, including police protection and mental health,
state and local officials say. The California Legislature is expected to
spend most of the summer in a brutal political battle over who will have to
sacrifice the most.

State finance officials began expecting a problem months ago, given the
downturns in the technology industry and the stock market. In January they
predicted a shortfall of $12.5 billion. Now, with most tax returns tallied,
the figures have mushroomed. The principal cause, the officials say, is not
the overall economic malaise, or even the terrorist attacks, but plunging
tax revenues from stock options and other capital gains, which evaporated
when the dot-com bubble burst last year. "Everyone was taken by surprise,"
said Kathleen Connell, the state controller, who has been forced to prepare
an extraordinary $7.5 billion short-term bond offering next month to close
the state's financial gap. "The diminished revenue was startling. And we
don't see this as a single-year problem."

The problems are a reminder of just how unusual the 1990's were in
California. While poor and working class immigrants flooded into the state,
the wealthiest residents simply grew wealthier, laying the groundwork for
the current problem. The top 5 percent of taxpayers accounted for 22
percent of total personal income in California in 1980. By 2000, the top 5
percent of taxpayers — with gross incomes of $150,000 or more — accounted
for 42 percent of total personal income. When the stock options and
portfolios of that tiny slice of the population collapsed, so did the state
budget.

People don't live in `economies' they live in towns and cities and rural
districts, all dependent on local politics and local politics depends on
local incomes.