With Greece in the news, some have compared their perilous situation to that of California. Let’s look at the facts and see how the comparison stacks up.
What they have in common:
- Both have experienced a severe recession in recent years.
- Both governments are battling historical budget deficits, increased usage of debt financing, and have unfunded pension issues.
- Both governments have had their access to capital markets constrained over the last year.
Conclusion: California is no Greece because….
- California has greater financial flexibility: Greece must implement larger policy changes than the state of California to get its fiscal operations in balance. In 2011, California had a $40 billion (2% of Gross State Product (GSP)) budget deficit to overcome. Greece has a $50 billion deficit to fix which represents 113% of its GDP. California pension issue is smaller and there are numerous reforms for California that are not available in Greece.
- California has greater financial resources: As the 13th largest economy in the world, and 13% of the USA GSP, California has considerably more wealth and economic activity to support its debt than does Greece. This allows for numerous options to increase state revenues and secure debt service payments.
- Environment for change is better in California: The political and social environment, although quirky at times, is favorable compared to Greece. And, unlike the state of California, Greece is not fully in control of their fiscal operations. They are working with EU policy makers and must get approval for any changes, unpopular amongst the Greeks. In California, policy makers can make concessions and changes that meet with voter approval.
- California’s economic outlook: There are positive developments in the California economy with good prospects going forward – the same cannot be said for Greece. California GDP growth was 1.8% in 2010.5 GDP growth in Greece was -4.5%.6
1Standard & Poor’s, May 3, 2011
2Estimated using a pay as you go system in Greece, future costs not included.
3Source: “Greece Proposed Reform of the Pension System” by Milton Netarios.
4California unfunded pension was at 80.7% at end of 2009. Source: S&P States Pension Funded Ratios, 3/31/2011
5Rockefeller Institute of Government, “Tax Revenues Finished 2010 Strong; Growth Continues in Early 2011”, April, 2011
6Global Finance Magazine, “Information on GDP and Economic Growth for Greece”, 2010