Funding California

My prediction that at least one of the states would suffer a financial crisis looms nearer every day:

SACRAMENTO, Calif. (AP) – California’s controller says he will begin a 30-day delay on tax refunds and other payments starting Feb. 1 because the state is running out of money.

Controller John Chiang said Friday he must delay $3.7 billion in payments next month because lawmakers have failed to address California’s growing deficit.

With a $41.6 billion shortfall over the next year-and-a-half, the state is on the brink of issuing IOUs.

Chiang says his office must continue education and debt payments but will defer money for tax refunds, student aid, social services and mental health programs.

A severe drop in revenue has left the state’s main bank account depleted. The state had been relying on borrowing from special funds and Wall Street investors; those options are no longer available.

California has run into the perfect storm. Prop. 13 ensures that the state’s real estate tax revenues don’t increase unless new houses are built or old ones are sold and the rate at which houses are being built or sold has fallen precipitously. California’s state sales tax is already high enough to discourage retail sales. The state’s income tax is one of the highest in the country—high enough to motivate wealthy Californians to jump ship. The revenue stream is tapped out.

California’s credit rating is one of the nation’s worst: only Louisiana can match its A+. That means that borrowing is relatively expensive for the state and likely to get worse in a climate in which lenders are reluctant to lend.

Most of California’s expenses aren’t welfare checks—they aren’t transfer payments. I’ve read California’s budget. Most of the expenses are payrolls. California needs to reduce the compensation paid to state employees.

Short of cutting payrolls, likely impossible considering how beholden the state legislature is to the government employees’ workers unions, the state’s only hope is if it can find somebody dumb generous enough to give the profligate state a hand. Now who might that be?

6 comments… add one
  • PD Shaw Link

    As the saying goes, one deals with the government at one’s own peril. Government contractors beware! Hospitals, doctors, colleges beware! People who withold taxes from their paycheck, beware!

  • PD:
    Yes, so much better to deal with businesses like Lehman, Bear, Circuit City, Wachovia, Chrysler . . .

    So far it’s government rescuing business and business greedily snapping up the money.

    A federal bailout of California is still theoretical. California is profligate and rather stupid, but they weren’t quite as dumb as the free market geniuses who decided that bad loans would become safe investments so long as you had a lot of them in one big bundle. And California’s shortfall is still smaller than the amount Bernie Madoff stole from a long list of clever businessmen.

    At the moment it seems more of our problems were caused by suits paying themselves 30 million a year than by civil servants making 30k. I think the days of facile ridicule of all things government and praise of all things market is over.

  • Drew Link

    Mr Reynolds –

    I believe you will find upon deeper investigation that it was the government, specifically HUD (Housing and Urban Development) who decided that offering credit to uncreditworthy borrowers was good social policy, ignoring the inevitable, and predictable, results. “Affordable housing” you know.

    All that ensued could be described as Pandora’s effluent……

    I can think of worse descriptions, but “effluent” seems the most gentile.

  • Drew:

    And did the government then force the bundling of said loans and their overvaluing and the hundreds of billions invested therein? Did the government hold a gun to investors heads?


    And the problems are not limited to sub-prime loans. Sorry, the government shares blame but you cannot pretend that this isn’t bankers and investors behaving badly.

  • Drew Link

    Michael –

    I did not say others are not to blame or are involved as well. But let me ask you. You are the Chief Credit Officer of the bank. You know darn good and well these are bad loans. The Feds are hammering you to make them. You have fiduciary responsibilities. What do you do? You get them off your books. Thats where Freddie comes in. And lobbying Freddie to buy these loans was an absolutely predictable result of what was set in motion.

    The best quip I have seen, and I wish I thought of it, was: Blaming this mess on (Wall Street) greed is like blaming plane crashes on gravity. It has a seductive element of truth. But it gives absolutely no insight as to what really happened. None. Zip. Zero.

    Gravity is everywhere, as is greed, and always has been – banks, entertainment stars and their agents, unions, government officials, everyday people, mortgage brokers, home speculators……..So what. You have to have something actionable for greed to be plied. And so it was: bad credit in the name of social policy. And just as putting two 20 year olds with raging hormones in a dark room…nature took its course.

    Some like to argue that regulation is the answer. I invite you to review the tapes of the Congressional hearings on Freddie and Fannie. They are on CSPAN. You won’t have much faith in regulation, or Barney Frank, after that.

    As for my own quip….I find the blame being passed around to everything but the root cause to be like the 20 year smoker who suddenly shows up with lung cancer. They want to blame the doctor who didn’t ask the right question, the surgeon who didn’t get the tumor all out, the radiologist who missed that vague shadow, the medical system etc etc. Everything but the root cause: smoking.

    The 1977 CRA managed to make it for almost 20 years without totally corrupting the credit system. And there was greed in 1977, too. But then Andrew Cuomo’s HUD, and his policy bedfellows, decided that they were going to have “affordable housing” by God. Read: growing and pervasive bad credit. Everything else followed.

    Be careful what you wish for.

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