05/21/2012 05:59 pm ET Updated Jul 21, 2012

Hopeless in California

Governor Jerry Brown has proposed a "temporary" (seven year) 30% increase in the tax rate on California incomes over $250,000 to close about half of what has become an annual event - a $15-20 billion budget deficit. If approved, ritual smoke and mirror accounting tricks, he says, will close the lion's share of the balance of this year's deficit, although the Governor points out that such fixes will not be available in the future. Brown argues that Californians should approve the tax increases because they will serve as a "bridge" to the day when presumably California's ship will come in. Apparently hope is alive and well in Sacramento.

The view from the rest of the state is less rosy. California state and local government pension obligations are underfunded by approximately one half trillion dollars. Additional annual infrastructure spending of $10-15 billion is required to arrest the continued deterioration of California's transportation, water, sewer, and power systems. There is a steady out migration of high tax-paying citizens and continuing in migration of folks requiring government assistance. There is little prospect for a surge in business investment since despite its beauty, climate, and natural resources, California has polled for eight straight years as the worst of fifty states to do business. And policy makers are adamant against tapping the state's abundant fossil fuel energy resources.

Since migrations patterns are increasing the percentage of the population that requires assistance, job and wealth creating industry is red-lining the state, and potential windfall energy resources are shut-in, how exactly is California expected to close its structural budget deficits, make vital infrastructure investments, and honor its colossal pension obligations?

There is a world of difference between optimism and self delusion. There appears no plausible future economic scenario by which California government can continue on its present course and meet all these obligations. Neither can Washington be expected to ride to the rescue. The federal government is running trillion dollar annual deficits and has massive unfunded obligations of its own while accumulating the highest debt levels since World War II. It has neither the resources nor the political will to bail out states like California that have mismanaged their finances.

Californians will soon vote and make their own decision about raising the taxes requested by the Governor. Presumably the higher rates will yield some increase in net revenues albeit certainly at the cost of further out migration by high income earners and added damage to the state's ability to attract business. In the end however, the increased revenue would be a drop in the bucket and despite the Governor's wishes, a bridge to nowhere.

California government is arguably insolvent. It has dissipated the natural advantages of the most geographically favored place in America if not the world. Californians have come to the end of the road. There is no place left to "kick the can." The sustainable scope of government must be redefined; the cumulative detritus of interest group sponsored legislation and publicly passed initiatives set aside; and the "unfundable" pension obligations judicially restructured.

If Governor Brown envisions a realistic alternative for carrying the state forward, he should spell it out. The status quo is unsustainable and no amount of hope can change it.