Penniless in Paradise
The decline and fall of California


John Magness, the biggest real-estate developer in San Bernardino, is bearish on the city’s near-term prospects. “No respectable developer would risk its relationships by getting its clients to locate in a city with this risk,” he says. He estimates that his company’s projects have added $1 billion to the city’s tax base and about 5,000 jobs over the past decade, but finds himself “reluctant to encourage customers to come here in this uncertain environment.” He spoke in favor of the bankruptcy filing and fiscal emergency, arguing that it would give the city an opportunity to run a river of reform through the Augean stables of its finances, renegotiating contracts and rewriting the city charter. The local business leaders were nearly unanimous in endorsing the measures.

The citizens, as usual, were a mixed bag: One argued that the city’s economic prospects could be turned around by recruiting a Trader Joe’s to open, while another argued that the city’s most pressing problem was the official harassment of “legitimate cannabis-based businesses.” While a bottle of Trader Joe’s Three-Buck Chuck and a few bong hits might take some of the sting out of the city’s straits, its problems go much deeper. San Bernardino, like many California cities, like the state of California, and like the United States at large, is finding out the hard way that it is not as rich as it thought it was ten years ago. It’s rich, of course — and California is fabulously rich — but it’s like the rich guy who has taken out a $10 million mortgage on a house that turns out to be worth only $1 million: A million-dollar house is still a lot of house, but you have to make some adjustments. In 1999, at the peak of the dot-com stock-market bubble, California reformulated its pensions and other public-employee-compensation practices, making them much, much more liberal than they had been. The state’s Democrat-run legislature did this on the theory that pension investments would keep offering double-digit returns more or less forever, which led elected officials to make big promises and set aside approximately zilch to make good on them. If borrowing money to acquire an asset based on the theory that the appreciation of that asset will more than offset the cost of financing the borrowing sounds to you like the woeful tale of a million subprime mortgages, then they really could have used you in the California legislature a decade or so ago, or at Fannie Mae. In bubble after bubble after bubble, the country keeps repeating the practice that everybody swore off after the great market crash of 1929 and the Great Depression: investing on margin. California took out something very much like an adjustable-rate mortgage, financing present political consumption by in effect borrowing against future returns on the assets in its pension system — but the returns didn’t materialize. CalPERS, the gigantic statewide pension system, was until a few weeks ago projecting 7.5 percent returns on its investments. Real returns: just over 1 percent. The entirety of the state’s finances are from top to bottom exactly what one San Bernardino resident called his city’s fiscal charade: a shell game.

August 13, 2012    |     Volume LXIV, NO. 15

Books, Arts & Manners
  • Steven Hayward reviews How to Think Seriously about the Planet: The Case for an Environmental Conservatism, by Roger Scruton.
  • Samuel R. Staley reviews Debacle: Obama’s War on Jobs and Growth and What We Can Do Now to Regain Our Future, by Grover G. Norquist and John R. Lott Jr.
  • Scott Winship reviews The Great Divergence: America’s Growing Inequality Crisis and What We Can Do About It, by Timothy Noah.
  • Florence King reviews Winter King: Henry VII and the Dawn of Tudor England, by Thomas Penn.
  • Ross Douthat reviews The Dark Knight Rises.
  • Richard Brookhiser offers Kerouacian haikus.
The Long View  .  .  .  .  .  .  .  .  
Athwart  .  .  .  .  .  .  .  .  
Poetry  .  .  .  .  .  .  .  .  
Happy Warrior  .  .  .  .  .  .  .  .