For a while it looked like the California dream had turned into a permanent nightmare. For months this past winter, legislators grappled with how to plug a massive US$42-billion hole in the state’s finances for the year. Some 20,000 public sector jobs were on the chopping block. Billions in personal income-tax refunds, welfare payments and student grants were put on hold. In short, California was going broke. Last December, Gov. Schwarzenegger did what he’s had to do a lot of lately. He declared a state of emergency, this one fiscal. In the end, the state passed a budget involving US$13 billion in new taxes and US$15 billion in spending cuts. Schwarzenegger, meanwhile, may be popular in the rest of the country, but in California his approval rating is in free fall.
But if the state managed to temporarily plug its fiscal hole, in Vallejo the dam has broken wide open. Last year, this scenic city 53 km north of San Francisco declared bankruptcy. “We’re out of money,” says Stephanie Gomes, a city council member.
Since the late 1970s, when anti-tax advocates introduced a state ballot measure called Proposition 13 that capped property taxes, cities in California have increasingly relied on new home construction and commercial development fees to feed their revenue needs. Now, with the foreclosure crisis and businesses closing, that money has dried up.
But even as cities like Vallejo are having a hard time finding new revenue, they are also suffering the after-effects of a massive spending spree. Spending on public sector salaries in particular has skyrocketed. According to Gomes, a leader in the fight to fix Vallejo’s financial mess, 26 employees each earned more than US$250,000 last year, most of them firefighters. The city’s unfunded liabilities, meaning the money it must eventually pay out to cover employees’ health and retirement benefits, total more than US$200 million. As a result, Vallejo has had to slash services. The number of police positions has been cut to 116 from 150, while two fire stations have been closed and another two are at risk. “People are hurting, they’re losing their jobs, losing their homes, yet we’re looking at a US$13-million shortfall,” says Gomes. “We can’t go and ask people for more money until we get our own house in order.”
Some fear other cities may tumble into the bankruptcy pit. Several small towns outside the Bay Area, such as Rio Vista and Isleton, are said to be at risk. “There’s not much else cities can do,” says Lynn LoPucki, a professor of bankruptcy law at UCLA School of Law, “other than sell off city hall to pay down their debts.”
If Vallejo represents the worst-case scenario for California, then Silicon Valley remains its greatest hope. If the state can regain its past glory, the bets are that the turnaround will start here.
No one’s saying the tech hub has escaped the recession unscathed. The foreclosure crisis has touched cities like San Jose and Palo Alto. Unemployment in the region has also hit 9.4 per cent. Giants like Hewlett-Packard, Microsoft and even Google have announced layoffs. At a Starbucks near the Google campus in Mountain View, several customers update their resumés on laptops. One of them, Michelle, moved to the area three years ago from back east and quickly landed a job as an office administrator at a small tech start-up. The company recently shut down. “Anyone who tells you Silicon Valley will avoid the recession doesn’t know what they’re talking about,” she says.
Still, the region is proving more resilient than other parts of the state. A big reason for that was the carnage of the dot-com crash in 2000, which left the tech sector much leaner. “There are microcosms of economic viability in California, and Silicon Valley is one of them, because we already had our crash and depression,” says Patti Wilson, a career adviser. While companies have been laying off workers, they’re still hiring new ones, replacing poor performers with better talent. And Silicon Valley continues to attract the lion’s share of the world’s venture capital.
Yet even Wilson is hedging her bets. She was born in Canada but has lived and worked in the Bay Area’s tech sector most of her life. Her plan is to move back to Canada part-time. She says that decision is driven partly by the economic crisis, but also her unhappiness with the state of politics in the U.S. “This is a very troubled time,” she says. “There’s no early remedy for the challenges facing the United States. This will be long-term, pervasive and debilitating.”
Back in Merced, there are signs of hope. Wal-Mart plans to open a distribution centre in the city, which would bring hundreds of jobs. The housing market, meanwhile, seems to be slowly regaining its footing.
It’s early evening and Roberta Flanagan, an 84-year-old real estate agent in the business since the 1960s, has thrown a party for her clients, complete with 100 lb. of corned beef. Standing in the crowded room, you wouldn’t know there’s a recession going on outside. A steady stream of people comes in through the door. Many have taken the opportunity of the housing crash to buy homes they couldn’t afford before. “A whole generation just got a hard lesson in life,” says Flanagan. “Good old common sense is going to come out of this. Is there a future? You bet.”
Such optimism in itself is not going to be enough to fuel a recovery, even if it were shared by the rest of state. But when the economy does turn around, California will likely be at the forefront of the rebound. It’s just that, with unemployment rising and damage from the foreclosure crisis still unfolding, it could be some time before that happens.
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