California's Wall of Debt: A Growing $443 Billion Crisis - Research Paper

Introduction

For the last decade, California amassed extensive debts that they have incurred over the years and have to pay over the coming decades. Due to the high build-up of these debts, the state government together with the media began referring to it as "wall of debt." This debt has been generally summed up to around $443 billion walls of debt. This debt has been incurred due to several reasons commencing with unsustainable budgeting practices. The repayment of this debt rises, and it is estimated to be paid by incoming generations. This has greatly affected the funds spent by the public in this state inclusive of health care services, education, settlement, etc. This paper seeks to depict the historical context and circumstances of the incurred debts in California, the manifestation of these debts to the citizens of the state and how it is significant in the current state as well as in the future (Friedman, 2018). The issue in the discussion is treated as recent because the debt still exists and has sparked recent discussions.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Order now

Historical Context of Debt in California

Since the 1960s California had reported with the largest population of people summing up to around 20 million people, the economic strength then enabled this state to afford the erection of a very great State Water Project together with higher education systems which became highly envied by the rest of the continent. California's future was promising as it also had a grandeur and trade friendly coastline as well as leaders who had a vision and mission for the state.

Since 2003, the state had a large shortfall that worsened in the year 2008 when the governor Arnold Schwarzenegger signed a budget of 2008-2009. The Democrats fought to lower the cuts to this budget while the Republicans who were the minority did not accept any increment on the tax. Therefore, both the Democrats and Republicans compiled the spending cuts, internal borrowing together with accounting maneuvers. This budget included one leave of absence day per month for the employee with a 5% reduction in pay, the employees were subjected to work in holidays with the exclusion of Columbus Day and Lincolns Birthday, and they would receive a holiday credit as opposed to time and half payment (Friedman, 2018). The budget also had changes in overtime payments so that considerations of leave time would no longer apply.

In 2009, state sales and use taxes increased temporarily as the state was selling bank guaranteed short term notes to get money, but in June the credit ratings decreased. The administration of Obama asked the state to solve its issues since it had no authority legally to back the state notes. The state began experiencing a budget deficit due to its high public spending. With a three-month delay passage of the budget, the bodies of the legislature thought that they had solved this deficit. On the contrary, they were delaying it, and the decline in the economy together with the crisis of credits worsened, and they became urgent at the end of the year.

In 2011 when Jerry Brown took office, he faced the financial issues of the state as he pushed a budget that was to fix the tax included extensions and reduce the spending on higher education and social programs. However, even after seven years the state still faces risks including a potential trade war between China and the US that jeopardizes the jobs of thousands in the state. The economy is at risk as it becomes vulnerable when it's on its lower side especially in the stock market. However, over the years, all this has put this state at risk due to the following reasons;

California Infrastructure Deficit

The State Water Project was designed for a population that ranged to about 25 million people. The current population in California is about 40 million, and it is estimated to continue to increase up to 50 million in the coming years. However, for the past 50 years, the infrastructure of this state has been ignored since the State Water Project remains the same as it was in the 1960s. The roads have been declared to be of the lowest quality when compared to the other states in the nation, and it is deemed to get even worse since they need to be repaired with immediate effect. The roads need repairing and bridges to be structurally stable, water catchment areas like dams should be constructed to have drinking water, irrigation water, and wastewater needs to be dealt with as well. The schools of the state need to be looked at also.

Government Debt

Disclosures of the debts to the government with regards to California have been hard to know since the accurate number is not well known. Despite having the largest surplus in the past decade, the debts incurred to the government are making the state to face a real financial mess. This government debt is caused by the small debts incurred in; retirement benefit debt, deferred infrastructure maintenance payments, bond debts such as lease revenue bonds, inter-fund borrowing, and federal unemployment fund.

California Taxes and Regulations

California is said to be the most regulated state in the United States of America due to its legal and regulatory systems. These systems include the global warming law. It is approximated to be among the most highly taxed states as well in the nation; the income tax rates are high together with the sale taxes which is ranked the 10th highest. California is based on high living cost, and it takes a small amount in the incomes of its residents which sums up to be a high rate that is subjected to many Californians. Over 35 million people pay off the income tax which does not strike an equilibrium with the system the future of the economy of California is limited due to the high taxes, the debts incurred together with the many regulations in the state. The middle class has been affected, and many are fleeing from the state due to high housing costs and taxes.

California's Government

Due to the poor financial state of the nation, the leaders should be worried and cut down on the costs spent to reduce the debts. However, they are always moving to the opposite side of the road, and they want the nation to pay for these debts. About $200 billion is spent on the budget in a year (Penny, 2018). Railway projects, debt financing like paying off pension debts, etc. the old and conservative leaders like Jerry Brown and Diane Feinstein fought for the concerns of the future debts and tried to look for ways that would reduce them. On the other hand, the new generation leaders are not interested in future debts as they are in support of the high taxations on the members of the state.

Impact of the Wall of Debt in California

Increased Delayed Debt Repayment

The debt continues to grow since the costs of maintaining it keep increasing as it remains unpaid. Transportation, social services and higher education institutions such as University of California portions of the budget o the state have been cut down. This will lead to the crowd out effect on the major services in the state. The fiscal sustainability will be harmed due to creditworthiness, and the ability to borrow is limited. This delayed debt payment weakens the long term financial sustainability of California as there is a risk posed to future generations as the debt will become more expensive for them to repay. Thus the citizens will continue to finance the increasing debt interests, increased retiree health cost payments as well as the annual retirement benefit if significant reforms will not be invented.

Increased Taxation

Their citizens are highly taxed by the state government so that they can find ways of repaying the debts. This high taxation is affecting the economy. There are many service cuts as well as those of holidays and overtime for working employees. This increased taxation is also due to the strict regulations adopted in the state.

Unemployment and Foreclosure

Due to the large debts that were incurred, the rate of foreclosure in many defaulters in mortgage payments was high. This led to the rise in unemployment at a speedy rate. Since the great recession, California has come a long way as it was declared among the highest rates of unemployment in the nation. Numerous foreclosed homes affected the housing market of the state (Penny, 2018). In 2010, the rate of joblessness hit 12.2 percent, and many empty houses increased as people moved to get better housing rates in other states. In 2016, the largest number of foreclosures in the nation was scored by California, but it marks the country's largest population state. This rendered many people homeless, and they sort help from the street.

Credit Card Debit Increments

Californians heavily rely on credit cards together with rack up a debt of substantial amounts. According to the Transunion credit rating agency, California borrows up to $5196 on average for credit card debt.

Consumer Debt in California

In addition to the credit card debts, the people of California carry significant amounts of mortgage, auto loan debt, and student loans.

Mortgage Debt

In 2016 many Californians owed large sums of money for the ownership of their homes. It had the highest state average in the United States. Since there was a lot in the foreclosure agencies due to the debt incurred in mortgages payments.

Students Loan debt

Students require loans so that they can be able to pay for their higher education costs. The number of students entering colleges in California is double due to its large population, and many students require loans due to a variety of reasons. Some the reason include their family being incapable of paying all of the cost required for learning, inability to get scholarships, unemployed parents, etc. (Tran et al. 2018). However, many class graduates and the increased college costs lead to increments in the debts. These students after graduation, they work to pay off these loans, but due to the high rate of unemployment, these loans stay unpaid thus increasing the debts.

Bankruptcy

Bankruptcy filing goes hand in hand with the rate of unemployment. If people lose their jobs at a high rate like in the state of California, the rate of bankruptcy is high. Before the recession in 2007, people took advantage of the prior downturn credit. In turn after the recession, people lost their sources of income, mortgage interest rates increased rapidly, and their housing markets degenerated. This caused many state members to develop problems in their debt repayment that proved to be impossible without declaring bankruptcy in the court. Bankruptcy broke out in 2005, and this foreshadowed financial crisis that was looming in the state which meant that the following

Increased Delinquency

With the high rate of unemployment and homelessness, there was an increased rate of crime being committed. Many of these class graduates sought to crime to put food on the table. Many also joined in gangs that were not good. Such gangs dealt in the selling of drugs, murder sprees, and robbery, etc. the number of drug users increased and this disrupted the peace and harmony of the members of the state (Penny, 2018). This brought hatred in the streets as people lacked respect for one another even through the use of social media.

Poor Infrastructure

Due to the high ballooned wall of debt in California, it has impacted on the infrastructure. The roads are poor due to lack of funds to repair and maintain them. These roads have been declared to be of the lowest quality in the nation compared to roads of other states. Moreover, water conservation due to the ignorance of modernizing the State Water Project that has been ignored since the 1960s (Penny, 2018). This has affected the transportation industry, and it will continue affecting it if no action is taken to repair the roads.

Disease Outbreaks

Due to the state of being homele...