Cities Like Davis, California Get Screwed Over By High Taxes And Pension Bailouts

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A report from a visit to Davis, California…The university seems to be in good shape despite all of the talk of dire budget problems. The lawns are trimmed and the students seem happy and purposeful. Due to the tuition of $13,000 per year (source; compare to $35,000 at Harvard), the school is a place where a lot of kids from poorer families are able to start working their way up the economic ladder (California has a falling white population, so necessarily the UC system will be serving a lot of immigrants and children of recent immigrants). Professors seemed to take undergraduate education seriously.

The town has done a lot of sensible things with local tax dollars, e.g., run a decent school system and maintain a lot of pleasant “greenways”. Unfortunately, however fiscally responsible the town might be, the residents will end up paying the pension costs of fiscally irresponsible cities such as Vallejo, California. Vallejo may be bankrupt and reneging on its promises to bondholders, but the pension promises that their politicians handed out are now obligations of the state, as far as I know (see this article, which contains some numbers on average compensation, this more detailed study from Cato Institute, this detailed table of Vallejo firefighter compensation, this list of some particular individuals earning up to $300,000 per year in simple wages). In theory, I think the California towns and cities that handed out all of the $200,000-500,000/year pensions will have to pay the costs. In practice, if they can’t pay, I would think that the burden will fall on Californians in other parts of the state (though I guess you could argue that the federal government will step in and bail out California with tax dollars raised from citizens of other states).

People who live in the town seem to love it. All of their friends are easily accessible by bicycle and a lot of recreational activities are available within a 1- to 2.5-hour drive (there will soon be fewer opportunities for recreation, since California is closing roughly one quarter of its state parks (story)). Unlike a New England or Old England town, the immediate surroundings of Davis are not attractive. One goes straight from subdivision to agribusiness. So the opportunities for a pleasant walk are better if one is willing to drive two hours round-trip to the trailhead. They aren’t as good as in a lot of smaller New England towns if one wants to walk out one’s backyard.

Houses close to the town centre and university tend to be from the 1960s and on small lots. Despite the high costs of these houses, ranging from $400,000 to $800,000, they are poorly maintained and hardly anyone has invested in new construction or extensive renovations. People who want to live in newer nicer houses drive or bike an extra couple of miles into subdivisions that are on the outskirts of town. Curiously these are on lots ranging in size from 0.15-0.2 acres. Given the footprints of the houses, which tend to sprawl a bit, the result is a house that might cost as much as $2 million and that has essentially no yard. The space between houses is best described as an “air shaft” rather than a side yard. Hardly anyone has enough of a backyard that a couple of 8-year-olds could throw a ball around. Consequently, kids are dumped into the street and public areas, which isn’t so bad since most of the streets are cul-de-sacs and playgrounds dot the landscape every few hundred feet.

It seems odd that the newer bigger houses would be built on such small lots. There does not seem to be any shortage of land near Davis. realtor.com shows that nearby farmland sells for between $6,000 and $25,000 per acre.

California has a lot of great natural resources, e.g., the perfect climate of La Jolla or the scenic beauty of San Francisco Bay. California has a lot of concentrations of interesting industries, e.g., entertainment in Los Angeles or technology in Silicon Valley. If you live in a place with natural beauty or fantastic job opportunities, it might not be too painful to pay the nation’s third highest income tax rate, the nation’s highest sales tax rate, or endure the 2nd worst business tax climate in the U.S. (source for all three). But a person in a town such as Davis does not benefit, on a daily basis, from any of the things that draw people to San Diego, Los Angeles, or the Bay Area. So how is it fair for the Davis resident to pay the same 9% sales tax and 10% income tax as the Google or Disney employee?

[Why are the pensions so expensive? In California they are based on the total cash received from the state in the last year of work. If the employee has saved up months of vacation days from previous years and gets paid for them on the day of retirement, e.g., on his 50th birthday, up to 90 per cent of that one-time payment, plus an inflation adjustment, will be added every year to his or her pension. I.e., if the employee lives to be 100 and we assume a discount rate after inflation of 1 per cent, the employee will be paid, in net present value terms, 35.4X  whatever his or her ordinary salary was for those vacation days (45X without discounting). An employee whose base salary was $200,000 per year, for example, and who’d saved three months of vacation would get paid approximately $2.255 million for those vacation days, in today’s dollars. Discounting at a 1 per cent rate (similar to the yield on TIPS bonds), the value of those vacation payments would be $1.769 million. Any payments for overtime worked would be similarly multiplied.]

This post was published at the author’s blog >

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