A little gold dust may be returning to the Golden State. California Governor Jerry Brown gave a State of the State speech on Wednesday and declared, "California is on the mend."
Gov. Brown says the state has managed to reduce its eye-popping deficit by 75 percent, achieving that through cuts and shifting costs to local municipalities. Also, revenues are rising, though perhaps not as much as predicted.
The projected deficit through the next 17 months is pegged at $9.2 billion, and Brown plans to close this with even more cuts and tax hikes.
The tax increases — a temporary sales tax hike and a hike in income taxes for those making more than $250,000 — need voter approval, and Gov. Brown hopes to get that approval in November. "Neither is popular but both must be done," he told legislators.
Still, the Governor continues to support a high-speed rail plan, which analysts say could cost $98 billion to complete, one on which voters have turned sour. "If you believe that California will continue to grow, as I do, and that millions more people will be living in our state, this is a wise investment," he said.
He also proposes support for a massive water project, clean air laws, and ramping up the state's renewable energy. All of this will have a financial impact. However, as often happens in California, if the stock market does well, some of this may appear more achievable.
For example, the Governor is not specifically counting on a Facebook IPO, but a public offering by the social networking site— based in California —could mean a huge windfall for the state. If Facebook goes public, once shares are unlocked, employees may start to sell. Capital gains in California are taxes as regular income, from 9.3 percent to 10.3 percent.
The state is already starting to benefit from LinkedIn employees liquidating some shares, and USA Today reports that in 2006, after Google went public, "16 Google insiders owed the state as much as $380 million in taxes...enough to cover the salaries of more than 3,000 state workers."
Beyond technology and the state’s dependence on capital gains, there are other hopeful economic signs. The Port of Los Angeles reports it shipped out a record 2.1 million containers in 2011. Those are American goods going overseas.
RBC Capital Markets says that while California's economy is "still weak," it is "increasingly showing signs of stabilization.” The report points to the more than 200,000 jobs added to payrolls in the first 11 months of 2011, an unemployment rate that's fallen from 12.5 percent to 11.3 percent, stabilizing home sales volumes (though prices remain depressed), and even progress in commercial real estate. "Economists are generally more optimistic about the outlook particularly as the year progresses," according to RBC.
At the same time, this being California, some of its most lucrative industries are facing new hurdles. The adult film business in Los Angeles reportedly accounts for 90 percent of the porn industry. Some producers are now threatening to leave LA as the City Council has passed a law forcing performers to wear condoms.
Then there's medical marijuana, legal in California for 16 years, but still illegal in the eyes of the federal government. On Wednesday, the Justice Department announced a second wave of crackdowns on medical pot storefronts, filing asset forfeiture lawsuits against four in Orange and LA Counties and sending threatening letters to dozens more.
One of the stores being sued is Otherwise Farms in Costa Mesa. The feds claim the operator told officials he "intended 'to make so much money' at the location that he was going to give the city of Costa Mesa a 'donation' of up to $500,000 every year that would help the city stave off layoffs." Guess that won't happen now.