S&P Downgrades California To A-, Outlook Negative

The following is a press release from Standard & Poor's:
 
SAN FRANCISCO (Standard & Poor's) Jan. 13, 2010--Standard & Poor's Ratings Services lowered to 'A-' from 'A' its ratings and underlying ratings (SPURs) on California's $63.9 billion of general obligation (GO) debt, and to 'BBB+' from 'A-' its ratings and SPURs on the state's $9.4 billion of
appropriation-backed lease revenue bonds. We also lowered to 'A-' from 'A' our rating on the state's $1.9 billion proposition 1A receivables program bonds, and to 'A-2' from 'A-1'our rating on the state's $2 billion commercial paper (CP) program. At the same time, we affirmed our 'SP-1' short-term rating on the state's $8.8 billion in revenue anticipation notes (RANs). The outlook is
negative.
 
Our 'A+' ratings and SPURs on the state's roughly $8.06 billion of sales tax-supported GO economic recovery bonds are not affected. These ratings have a stable outlook.
 
The rating actions reflect our view of the state's credit quality in light of its severe fiscal imbalance and the impending recurrence of a cash deficiency if the state's revenue and spending trajectories continue. With the recent release of his fiscal 2010-2011 budget proposal, Gov. Arnold Schwarzenegger declared a fiscal emergency. We understand that the governor seeks swift

adoption of $8.9 billion of the $19.9 billion of budget solutions in his proposal because if the legislature does not approve them by March 1, the full amount of estimated savings may not be attainable. The fiscal emergency declaration also reflects that forecasts of cash flows indicate the general fund will experience insufficient cash positions in March and July. According to the Department of Finance (DOF), adoption of the governor's proposal, including a plan to supplement financial liquidity with an external borrowing, should improve the state's cash position in July, although the DOF still expects a dearth of cash in March. To cover the low cash period in March, the governor's budget includes $1 billion in as-yet-undetermined cash solutions. However, the projected cash position improves toward the end of fiscal 2010 even without approval of a budget revision, providing 3.2x coverage of the $2.83 billion in RANs that mature in May and 2.02x the $5.98 billion of RANs maturing in June.
 
We believe that, relative to the past fiscal year, uncertain assumptions for major portions of the budget balancing proposal make the state's credit more susceptible to adverse economic or other developments.
 
Although the governor's budget proposal seeks structural improvement to the state's projected fiscal imbalance, it does so by assuming what we consider to be significant increases in federal reimbursements and funding ($6.9 billion) and reduced federal spending mandates -- provisions over which the state lacks singular or direct authority. It also requires voter approval of two ballot
measures to allow the redirection of $1 billion in funds presently earmarked pursuant to two prior election results. The budget proposal concurrently depends on a supermajority of state legislators agreeing to make vast cuts totaling $8.5 billion across a wide range of programs and agencies in addition to significant alternative funding ($3.9 billion). A trigger for even deeper cuts, including the outright elimination of CalWorks (the state's version of the federal temporary aid for needy families program) and numerous other social service programs, is in the budget proposal in case the new federal funding is not forthcoming before July 15, 2010. The trigger proposal also extends several previously adopted temporary tax increases that will phase out under existing law. We believe these assumptions and the scope of the proposed solutions increase the state's credit risk, particularly as it confronts redressing -- at least somewhat -- the existing budget for fiscal 2010, which is significantly out of balance in our view.
 
From the middle of fiscal 2009 and into early fiscal 2010, lawmakers addressed a cumulative budget gap of over $60 billion spanning the 18 months through June 2010, relying extensively on nonrecurring solutions. At its adoption, the amended fiscal 2010 budget assumed a balanced position for the year and, incorporating the expiration of the nonrecurring measures, projected a $7.4 billion shortfall in fiscal 2011. A number of the budget measures are not functioning as planned, contributing to a shortfall of $6.6 billion for the remainder of fiscal 2010 and building to a $12.3 billion projected deficit for fiscal 2011. These deficits represent 7.6% and 12% of total estimated budget expenses for fiscals 2010 and 2011, respectively (when measured as a portion
of the baseline workload budgets for each year as of July 2009, when the fiscal 2010 budget amendment was adopted). We believe the state's options have narrowed considerably as the one-time measures and funding have lapsed.
 
In our view, the combination of fewer unconventional nonrecurring potential budget solutions, reliance on what we consider to be extraordinary federal cooperation, voter approval, and difficulty in achieving the legislative agreement to make deep cuts as proposed could impede meaningful and timely progress on a budget agreement. The speed at which a budget stalemate among lawmakers could translate to a cash crisis depends to a large extent on the state's economic and revenue performance, adding urgency to the state's overall financial situation.
 
In our view, the following factors constrain the state's credit quality, including:
 
     -- Constitutional requirements for a two-thirds majority vote of the legislature for both budget approval and to increase taxes, which we believe complicates the former and effectively precludes the latter, given the legislature's political composition;
     -- General fund revenue composition, which in our view is highly sensitive to economic and equity market performance;

     -- Existing and proposed constitutional amendments that limit discretion over major portions of general fund spending, especially when combined with federal maintenance of effort requirements; and

     -- Our Financial Management Assessment (FMA), which at "standard" is the lowest of our state FMA scores.
 
We also believe the following factors underpin the current budget deficit while contributing to the difficulty of restoring balance in fiscal 2011:
 
     -- A reliance in the Amended 2009 Budget Act (for fiscal 2010) on approximately $20 billion (according to the state Legislative Analyst's Office) in nonrecurring or expiring budget solutions that are not available for the remainder of fiscal 2010 or 2011;

     -- Numerous fiscal 2010 budget solutions representing $7.2 billion of revenue or savings that either failed to materialize, eroded, or succumbed to legal challenges (many of which remain ongoing); and

     -- Upward pressure on spending due to current and projected population and caseload growth combined with a lowered revenue forecast, adding $4.8 billion to the projected deficit.
 
Despite its problematic areas, we believe the state's budget and finances benefit from a number of attributes, including:
 
     -- Indications of economic stabilization and revenue performance that have held up reasonably well compared with the state's budget assumptions, with general fund cash collections just 0.9% below budget assumptions for the fiscal year as of December 2009, according to the state controller;

     -- The state controller's demonstrated willingness and authority to exercise what we consider to be extraordinary cash management maneuvers that protect the state's priority payments, including those for debt service;

     -- Modest structural reform adopted in the Amended 2009 Budget Act (for fiscal 2010) that eliminated statutes providing for automatic inflationary cost-of-living adjustments in the annual budget process for some social services and state employee salaries (with an estimated value of $590 million in fiscal 2011); and

     -- A budget structure that assumes that the less-certain revenues and budget savings will occur late in fiscal 2010, coinciding with the stronger phase of the state's annual cash flow cycle, thereby mitigating and delaying the impact of their not materializing.
 
Longer-term credit attributes of the state include our view of:
 
     -- The magnitude and diversity of its economy, which accounts for nearly 13% of U.S. GDP and covers a broad array of industries;

     -- An educated workforce that, if sustained, can attract firms in progressive sectors and make California a leading venture capital recipient state; and

     -- A conservatively structured, albeit growing, debt burden. 

Serving as the source of repayment for all of the GO bonds and CP is the state's general fund, which the state has pledged under its full faith and credit. The public school system and public institutions of higher education are the state's only obligations that have a higher priority than debt service payments. The state's lease and appropriation-backed debt are among its other
priority payments that fall behind payments for education and GO bonds.
 
As noted, the CP is a general obligation of the state's credit and the state is authorized to issue CP notes on an interim basis in lieu of approved but unissued GO bonds. The CP also has security from a letter of credit (LOC) agreement, which includes provisions limiting the state to $2 billion in notes outstanding at any given time, provided severally from a consortium of banks. However, because the lowest-rated bank is Bayerische Landesbank (NR), Standard & Poor's does not incorporate the LOC into the rating at this time. The CP rating (A-2) is therefore based solely on the higher-rated support, that of the State of California (A-/Negative).
 
Debt service on the proposition 1A bonds takes priority over other obligations of the state, subject only to prior and constitutionally required payments for

---

 
S&P Lowers Various California Debt schools and debt service on the state's GO bonds. Authorization of legislation for the bonds also provides for a continuing resolution so that late budget adoption by the state will not impair semiannual interest payments, which are due on June 15 and Dec. 15 each year, or the principal payment, due on June 15, 2013.
 
The state's RANs are unsecured obligations of the general fund, subject to prior claims for schools, GO debt service, repayment of internal loans, wages and benefits payments, and lease payments supporting the state's lease revenue bonds.
 
Although the proposed state budget projects, assuming its adoption, that revenue in fiscals 2010 and 2011 will exceed expenses, the state's finances must also absorb the prior-year deficit of almost $6 billion carried into fiscal 2010. Prior- and current-year deficits, according to existing budget law, underlie the general fund's cumulative cash deficit, which is currently $24.8 billion, according to the state controller. A combination of internal ($16 billion) and external ($8.8 billion) borrowing provide interim financial liquidity to the state's general fund, according to the controller. As during the prior fiscal year, we believe the state's constitutionally based and,
relative to most other states, high requisite consensus among lawmakers to adopt a budget could put the state on course for another budget negotiation stalemate. Until legislators and the governor reach agreement on a budget revision, cash outflow will continue in accordance with existing law, unless the controller utilizes his extraordinary discretion to adjust the timing of the cash disbursements. Absent a change to the current budget, we expect that disbursements relative to cash receipts would very nearly deplete the state's general fund and borrowable cash resources in March, with the potential for an even weaker cash position in July.
 
We believe that these challenges, when combined with a reliance on federal funding and consent for relief from certain spending requirements, separate California's credit quality today from that of the prior fiscal year and of other states, all of which have higher GO or issuer credit ratings as a result.
 
We nonetheless believe the state controller's demonstrated capacity (in fiscals 2009 and 2010) to exert control over the timing of certain cash outflows helps protect the state's ability to meet its priority obligations, including its debt service. This quality of the state as a sovereign entity partially underscores our view of the state's fundamental credit quality, which we generally view as strong even if strained.
 
At its core, and absent the infusion of new federal funding sought by the state, adopting a balanced budget as mandated by the state constitution requires that lawmakers consider a mix of spending cuts or revenue increases. In our view, either cutting spending or increasing taxes could potentially subdue the incipient economic recovery underway in the state. We recognize that portions of recent budget solutions for fiscal 2010 included deferrals, furloughs, and revenue shifting from local governments. However, these often have a similar economic effect as outright spending reductions. Providing some offset to this are the governor's proposals for $700 million of job training funding and first-time homebuyer tax credits. If the $500 million job training program works as envisioned by the DOF, it will increase employment, particularly among those unemployed for nine months or more, by 100,000 throughout the state, which has lost approximately 1 million jobs since the recession began. According to the state's Employment Development Department, the unemployment rate was 12.3% as of December 2009, well above the national rate of 10% as of January 2010.
 
Two constitutional provisions outline California's ability to service its debt from a budget and cash flow perspective. Proposition 98, passed by voters in 1988, establishes the required minimum funding level for K-14 institutions (kindergarten through community college), with an estimated cost to the general fund of $36.09 billion in fiscal 2011. Meeting this requirement would leave $49.2 billion to fund an estimated $6.15 billion in GO and appropriation-backed debt service. Debt service represents what we consider a low 7.4% of total budgeted expenses but a more moderate 13% after adjusting for the proposition 98 funding requirement. The constitution separately establishes the state's required priority payments for education, which includes public higher education institutions (the California State University and University of California systems) as well as K-14 education. For 2011, the required education payments that enjoy a priority status, according to the proposed budget, total approximately $40.5 billion, and debt service therefore
represents 14.5% of the remaining $45 billion budget.
 
OUTLOOK

The negative outlook reflects our concerns about the large structural projected budget deficits facing the state and their implications for the state's cash position. Following a year in which the state grappled with a more than $60 billion deficit, we think the current deficit of approximately $19 billion could be more difficult to resolve given the state's extensive reliance on nonrecurring measures in the prior budget cycle. We believe indications of economic stabilization suggest that a recovery, if underway, remains precarious. Furthermore, if economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months. 

In this environment, the state's ability and willingness to raise revenues or reduce expenditures through tax increases or program reductions could become integral to maintaining credit quality because a significant delay could result in another episode of cash deficiency for the general fund. We remain concerned that the political process could impede timely solutions. The absence of timely action could result in our lowering the GO rating. On the other hand, if revenue performance is in our view adequate relative to budget assumptions and if lawmakers reach agreement on a reliable set of solutions in a timely manner, we could revise the outlook to stable.
 
GOVERNMENT REFORM AND VOTER INITIATIVES

We recognize that numerous government and budget reform initiatives are underway and in the public discourse. Although we incorporate the implications of each when assessing whether they have a material impact on credit, we observe that their cumulative effect has complicated and reduced discretion over the state's fiscal management. We estimate that because of a combination of constitutional amendments, provisions, or federal maintenance of effort
requirements, there is limited discretion for approximately 65% of general fund expenditures, absent what we consider to be extraordinary action in the course of budget adoption.

Comments

[George the baby...]

A-, how fair would that rating be in the real world?

[faustian bargain]

Dude if they gave A-'s in school for performing like CA, I would've graduated Magna Cum Laude.

[deadhead]

That's a golf clap!  Very funny shit there!

[faustian bargain]

thank you, thank you, I'm here until they unplug my comcast.

[VegasBD]

Im here until I get the balls to move back to Vegas. Pretty attractive rental rates right now. 1k/mo for 2500sq ft 4bd house in Green Valley. Half what it was when I sold my place a few years ago. Which, I could go back and buy now for less than I bought it for in '99. NEW.  =)

[thegreatsatan]

About as accurate as Obama giving himself a B+ for his first year in office.

[Anonymous]

And as comical as the Dems naming their healthcare iniative after an obese drunk.

[MarketTruth]

A- is not fair at all... and remember CA is now stealing 10% more from working citizens via enhanced taxation and still they get a downward rating. Umm, do you really think CA residents will see any of that back in non-IOU form come April 15, 2010?

[VegasBD]

Im hoping I get laid off. Then I can get my money back via unemployment for two years while I build my non income (yet) producing olive tree farm in wine country. =)

[faustian bargain]

sweet! sounds like fun. well, hard work too.

[dark pools of soros]

Is that because everyone else is already cornering the weed market??

[ghostfaceinvestah]

Imagine if their debt ratings were based on real returns of capital, not nominal.  What would the rating be on USTs?

[economessed]

Suddenly, the slope has become a little slipperier....

[Edna R. Rider]

I'm guessing this means move my money into the stock market where it's "safe"?

[Shameful]

Arnie should really call Uncle Ben.  His mistake was asking Obama and the congress, he should have been asking the Fed Reserve.  Hell maybe he can run a Fed approved private dealer bank out of Sacramento to buy his paper.  After all those banks specialize in buying worthless paper so it's a core competency, and really what's a 30+ billion dollar deficit?  I'm sure more money was spent on hookers and blow last year in Mordor...errr D.C.

[SilverIsKing]

Arnie should first don his Terminator outfit and then approach Ben.  I think he'd have a better chance of getting some loose change.

[Handle with care]

They're bankrupt and insolvent, have had to issue IOUs as they had literally no cash, have no conceivable route to ever getting back to a balanced budget in the forseeable future and NOW they finally get downgraded to an A-

What will it take for them to get downgraded to a B-, an earthquake that sinks the whole state?

"Moody's confirmed its rating on California state bonds today but issued a negative outlook stating that the state having sunk beneath the Pacific Ocean may affect its ability to gather sufficient revenue in the future."

[Gilgamesh]

In positive news for CA credit, the state looks poised to collect record inheritance taxes while payments to individuals have dropped to near zero.

[faustian bargain]

In other news, Nevada and Arizona have moved up on the 'watch' list.

[Rainman]

....both potential Silver and Bronze winners. In competition with NY, NJ, MI and IL .

[Mad Max]

Given that their state constitution gives a priority to debt payments, this doesn't seem so crazy.  It does, however, suggest the end of the line for much of the other government spending in that state.

[Stoploss]

Sell California to China, while everyone thinks it's still a great place.

[bugs_]

I just need enough to pay the interest until I can

GET TO THE CHOPPER!!!

[Steak]

Just wait till they fully legalize weed, then Cali bonds will be AAA

[Countrygenius]

S&P was on 'the pipe' when they gave them an 'A'.....

Colliefornia is bankrupt by all means and saying they aren't just doesn't make it so.

[chumbawamba]

NO!

You cannot legislate biology.  If something wants to grow, it will, Assembly Bills be damned.

"Legalization" will be the biggest mistake ever.  Anyone wishing for it is a myopic fool.

I am Chumbawamba.

[JackTheOffer]

You cannot legislate biology.

If you say so, but you sure can file a lawsuit over biology, at least in Cali.

Miss California breast enhancement lawsuit:

http://abovethelaw.com/2009/10/lawsuit_of_the_day_miss_califo.php

[Rainman]

Reefer will come in pill form. All other forms outlawed.

Gubmint is not opposed to drug use......as long as it's THEIR drugs.

[dark pools of soros]

you sir have not been spending any recent time in cali - the only reason weed can't be a great cash crop when fully legal is that it is too easy for everyone to grow

currently with it only legal for patients 'wink wink' but everyone basically able to buy it, that is the best way Cali can gain taxes off of it.

pill form is a joke

[Anonymous]

Buy doritos, fudge, and weight watchers stock. Munchies.

Of course, everyone will oversleep and miss work. But really, who works anymore? Just trade paper, collect gov't chits and buy agri-business garbage food.

Cradle to grave? Dope, welfare, sweet waves for everyone.

[xamax]

...but US Treasuries rating is still at AAA and they are even more bankrupt than CA, as areliable source calculated yesterday on ZH a debt to GDP of 350% (probably still conservative).

At least TBT had a nice rally on the news....

[cougar_w]

The states cannot print money, and cannot monetize their debt. The rumor is Cali is going to go to the Fed government asking for money back they own us, but our own Senators are saying that isn't going to fly; Cali is gonna get the bone.

State is in a very serious trap. Massive outlays for critical services meets massive collapse in global economy. There is no way out except via economic improvement. If things in the global economy do not turn around by the end of 2010 then Cali is going to roll over and probably take the rest of you suckers down with us.

cougar

[mikla]

If things in the global economy do not turn around by the end of 2010... <snip>,

HAHAHAHAHAHAHAAAA!

[cougar_w]

Well ... yeah.

But one hangs all hang. As they say.

[mikla]

;-))

Also, you do raise a good point with the second half of that sentence:

If things in the global economy do not turn around by the end of 2010 then Cali is going to roll over and probably take the rest of you suckers down with us.

I think there's a fairly decent chance that happens:  Whatever they do with California, so they do with New York (and maybe a couple other hangers-on), and that mass alone takes out the USA.

Of course, even if the Feds don't help the states at all, the US takes out the US just with Federal leveraging (although the loss of taxes from the failed states won't help).

[faustian bargain]

I think I heard a report that Arnie is asking for $6.9b, while it's estimated they might give $3b.

It's going to hurt...

[dark pools of soros]

let it go BK and give it back to the hippies...  have it all homegrown and homeschooled

[john_connor]

I think equities are asking for a 1987 type event, rather than a slow grinding sell off.  America wouldn't have it any other way.

[deadhead]

yep.

i would have disagreed a couple of months ago but the fed has just pushed, and pushed, and pushed.  History is very clear about these things.

it will likely happen with amazing speed.

Once again, there will be a convenient scapegoat and I can already hear Obama, Geithner (or his replacement) saying "the economy was going great, on the road to recovery and all was looking superfantastic until ___________________ happened."

fill in the blank with one of several hundred convenient scapegoats ranging from bombs over Iran to America's disappointment with Michele Obama's spring wardrobe.

What a pile of shit the USA is turning into

[chumbawamba]

I think we turned the corner into the pile of shit long ago.  We've just gotten used to the stench.

I am Chumbawamba.

[deadhead]

I believe you are correct Chumbawamba.

[Anonymous]

God bless America - an '87 style plunge will probably have a more healthy effect on politics than a Japanese grind down. Of course it should be perfectly possible to have one, followed by the other...

[cougar_w]

This move is probably in response to the governator's just-released budget. Turns out to be mostly a fantasy by anyone's measure. The game is on; the Legislators will have to hash it out, should take a solid year, and they still won't "fix" the fundamentals behind the shortfalls. Kick the can another block, issue IOUs again. But unless revenues pick up this is going to blow up in our faces. The real concern around here is cuts to critical services. If they decimate the social services (as they must) and empty prisons and mental health facilities then the level of dissatisfaction on the streets is going to go ballistic.

cougar in Cali

[Rainman]

Just do it, Arnie . DEFAULT !! Just do it dammit !!

rainman in Cali

[deadhead]

glad i didn't take a bet with you rainman.

cali beats new york, hands down.

if obama so much as gives cali a nickel, he will need extra secret service agents to protect him as chuck schumer will dive into the oval office demanding 5x as much for new york.

minsky moments shall be upon us

[Rainman]

I would have been ashamed to take your virtual dollar, DH.

I could see the card before it was flipped ( best pal on inside of pension mess ).

[Anonymous]

john - I'd prefer a slow grinding sell off versus a 1987 event - would do good to my short ETFs..

[SteveNYC]

Really, ratings don't matter to Uncle Ben. He can float California for the next 250yrs via QE version 1,167

[Anonymous]

California shows what happens when you are one of the only states with no balanced budget amendment like most have but unlike the feds they cant print money and are in real trouble even sooner.

[jmc8888]

Not entirely true anon, but I'm sure it feels good to think that.

Balanced budget amendments cause essential services to be cut, to save money, under the auspice that it cannot afford it. This is bull, but only because the federal gov't and the states aren't working in tandem.  It is the federal gov't's right and duty to provide the credit needed if the private sector won't.  The market has spoken, it won't.  The system is broken.  Otherwise they would.  But since they feel they can't, they won't. 

So if the market won't provide it, who will? Under this system, no one, thus contributing to the collapse, and further breaking the system.  California won't pull the rest under, that is already a given.  California won't be the straw the broke the camel's back.  The back is already broken, and California simply has a bit of straw on top of the camel with a broken back, along with every other state.

Balance budgets also force austerity amongst it's population which is unnecessary.  When states cut, business revenues are cut, neccesitating the need for further budget cuts from smaller tax receipts. When every state cuts, the states that provide the technology, machinery, or the service other states use, the providing states suffers.  California is one of those states, just like Michigan. 

The industrial sector was going to lose the most.  Since we aren't as a percentage nearly as industrialized as we were 20 years ago, let alone 60, this was not felt nearly as hard by many states.  But the states which relied on tax revenues from the industrial sector were hit harder, and their problems appear more exacerbated.  It wasn't because some people had a balanced budget provision they did better.  It's because their state didn't become dependant on the bubble nearly as much.  But as California is pushed down by the SYSTEM, the U.S. will be as well.  It won't be the fault of California, it'll be a further breaking of the SYSTEM, that causes further and further states, now appearing to have functional budgets, will be in the same spot as California is today. 

The cause wasn't subprime.  Subprime was just THE FIRST CRACK TO SHOW IN THE SYSTEM.  The effects of the subprime hit the derivatives, which was what really caused the downturn.  The system is broken, as everything is so interrelated, so leveraged, that any crack in the system can repeat the entire process, probably to a far greater degree of destruction than last time. 

Now as we're 2+ years since the crisis started, 1+ since it became apparent, the cracks have spread that far more things can bring us to the edge.

Basically when people are saying the California and Michigan budgets are at odds because of their own problems, they forget these problems were directly caused by specific events triggered by the cracking of the system (recently. you could go on about 40 years of outsourcing).  States like these were most vulnerable to the cracks, and thus would be the first to be insolvent. You could blame them for being more vulnerable, but as you'll soon find out, there was no way NOT to be vulnerable under our current system, thus it wasn't the policy differences between the states had no bearing on the outcome of each state.  As even your state, whatever one it is, will continue to crack until it's as bad as California and probably much worse.  No amount of austerity will fix this system.  Why force austerity at all, let alone when it won't change anything.

Even if the federal gov't backstopped Cali to the hilt, every state will still end up like Cali.  Because it's a problem of the system.

Look at how much Arnie has cut.  He's said 2-3 times that  roughly, 'these cuts have put our state onto a path of fiscal prosperity the like of which it has never seen'....until a couple months later when he needs to cut again.  This has been the game for years now, and it wasn't because California has more liberal laws and policies than most other places.

It wasn't not having a balanced budget, that produced the spiral, it was California and most of the U.S. that has been living increasingly off, and dependant upon, wall street's bubbles.

Look at my home state of Arizona.  Republican ideals, republican low tax laws, republican just about everything.  Why is it in such a bind? Because 30 percent of it's revenues came from the home construction and growth industry.   30 percent.  With the bubble bursting, that revenue is gone, let alone the losses from not having 100k-200k people moving here every year.   While growth was going to come here, losing 30 percent of your income, and all the ancilliary benefits has but Arizona, a near republican stronghold in both theory and practice, is having the same level of fiscal problems as demcorat stronghold in both theory and practice are having. 

Budget deficits for needed things, rarely causes harm.  Budget deficits for unneeded things, tax cuts, wars, and bailouts...certainly do. 

Indeed our entire country is in this problem as well.

When a significant portion of your budgets come from taxes collected on the profit of bubbles, when it bursts, so does your budget.  There is no sane, nor justified financial system that can build in successfully 70 percent cuts in state spending, and assume things will be fine after that. 

It was never about a higher minimum wage, or regulation, or unions.  It was the systematic deconstruction of California's economy over 40 years.  The embracing of the bubble revenues (real estate) and to focus the state's energies (like the other 49) into increasing revenues from bubble entities rather than real long term tangible cyclical revenues.

Everyone wanted to participate in the crusades, that no one stayed behind to plant the crops, or invent anything new.  Well now we as a society are what is left behind when everyone went off and chased fortunes, and no one bothered to put much time, attention, money, or resources to the areas that create real wealth.

When times were good it hid the real problems, now with them bad, it exacerbates them.

The real problem is the OVERALL STRUCTURE, the OVERALL SYSTEM. 

People smiling at California's problems and thinking it's because of democrats, will be rudely awakened to the truth soon enough. 

It's the system.  It's the system.  It's the SYSTEM. 

You won't find a sane budget, nor a balanced budget for any state going forward (if it's balanced, then that's because the pain was just increased).  We're still in the 1st inning and we could go extra.   Doesn't matter where you put cuts, nor what philosophy you believe.  No matter the cuts, no matter who they affect, they won't be enough.  What's putting California and every state in this position regardless of how liberal or conservative you state's policies? Simple, it's the SYSTEM.  The only difference between the states is time.

But it's too much to expect everyone to understand that, but put it in your mind and watch it unfold.  This isn't about providing for our needs and going overboards, this is about the system cracking to the point that the needs cannot be met with the revenues it is provided.  With the system still being very much broken, no state is safe.  That said, no country is safe.  When this thing crashes, AUS/CAN will still feel 90 percent or more that Americans feel.

So we can all play the game that we should all just accept no services, and I'll say we can do that, and the system still goes down.  The time for fiscal responsiblity has passed.  There's no way out now.  Forcing austerity in the hopes of closing a gap that cannot ever be closed is just forcing austerity needlessly and quickening the pace of the collapse.  But by taking money away from the investments that are needed and placing that time, effort, and resources instead into the bubble economy for 40 years, achieves exactly what we have.  We were never going to go bankrupt over paying for a child's education, or providing a safer road or bridge, or providing food assistance to the poor.  If anything, those staples help form a strong foundation for our economy to work.  Not providing them is as irresponsible as deficit spending for needless things. 

The federal gov't, mostly under Bush, but continuing on with Obama have been doing the old shell game state/fed gov't this whole past decade.  Bush would stop funding something on the federal level and force the states to pay. Otherwise W's budget deficits would have been much worse, and state's budgets would have been much better.  (not to mention this means the states would be further away from fiscal crisis than they currently are)

Well guess what happens to state budgets? Well you got a 300 dollar tax cut, but it'll cost your kid (and probably thus YOU who received a 300 dollar tax rebate check) two to three thousand extra per year to send your child to college. 

This was done on so many levels the past decade.  What once the federal gov't provided, now is an increase to the state budgets.  I don't think the balanced budget ammendment people had this in mind, but now that they are in place, they can be gamed like this - which is all it is. 

What happens if your state budget needs to double because the federal gov't cuts funding by that amount?  This is why balanced budget ammendments don't work well...because they are generic in a specific world.  They take the happenings of life, which is a case by case basis, and put everything under one generic rule assuming every dollar spent is equal.

  This when state budgets are a lagging indicator, displaying the results of the problems we face through budget deficits as a symptom of the problem.  It's not the fact there IS a deficit.  It's what are the real factors CAUSING it.  What changed to allow what we used to provide easily, to now taking up our entire budget, and hearing the calls to cut spending?  Gov't didn't just start providing 30 percent more services, if anything services are already down greatly over the past 20 years, and it still isn't enough to stop the bleeding?  It's the SYSTEM.

Also remember, we borrowed money for tax cuts.  So money that has already been given out, in majority to people who didn't need them, is now being paid back with interest by everyone now and in the future and will reach a point where it is priced in to any additional loan.  So your state budget got screwed, you pay thousands more for various services (in addition to reduction in services), the amount the nation borrowed went up and thus our interest payment went up, and all you got out of this was a lousy T-shirt...err....250 bucks.

But it's your money, and gov't is spending it ALL on wasteful things, you're sure of it.  Except if you think like that, you're wrong.  You got the money, other's suffered, the states budgets started going ape-crap, and when the downturn came, it made it worse.  Well it was spending it on wasteful things, it was spending it on tax cuts and wars.  The things everyone didn't mind spending it on.  Meanwhile it wasn't spending on the most important things like infrastructure, edcuation, r&d, etc. 

Again, what is our 12 trillion dollar deficit FROM? 

1. Wars

2. Tax Cuts

3. Bailouts

It wasn't welfare.  It was low taxes during a bubble economy (see self-fulfilling prophecy and need for higher taxes on the bubble levers...or we can keep having bubbles...if lucky), needless wars, and bailouts all occurring since reagan took office, oh sorry all but about 2 trillion since Reagan took office. 

The old saying went, Ronald Reagan borrowed more money than all the previous presidents combined.  That in 8 years he took all the national debt that took 200+ years to accrue, and doubled it.  W did the same.  We also had big tax cuts, multiple tax cuts during both of those presidents, and collectively those two presidents accrued most of our national debt.  Last I checked, Reagan and W were not deficit spending on liberal ideas.  It was tax cuts, bailouts, and wars.  So what are we really paying off?  Why are we approaching the minsky moment?  All these things were supposed to bring prosperity.  Tax cuts were supposed to.  Bailouts were supposed to save things.  Wars are great for our military industrial complex.  These things were supposed to help our economy (THE philosophy taught to us, or presented on tv for the past 40 years), instead they drowned it. 

So are we going to cut services so that we can do more bailouts, more tax cuts, and more wars that are supposed to bring a functional economy? Or will they again just be the problem again going forward?  I don't know when people will wake up, but the longer they wait, the further they're screwed.

Glass/Stegall

HBPA of 2007

Audit the fed

Cancel the bailouts

New bretton woods FIXED exchange rates

Hamiltonian American Credit system

(so it would be a CREDIT system version of Bretton Woods, not a monetary one)

LaRouche 4 Powers Plan

......or we can continue skewering each other over which state had it right or wrong, or is at fault over that state as things get worse and worse by the day/week/month/quarter/year.  Don't play that game.  The states weren't at fault. The system was.  The system let down every state.  The system let down EVERYONE.  If you want to blame someone for California's problems, look no further than the financial services sector, like our favorite whipping boy the squid. 

This game just started

[mikla]

This is a long missive, but I can't get past your point that the cost of wars (maybe $1T in the last ten years) is a greater concern than the cost of unfunded liabilities for social programs (currently around $100T for Social Security and Medicare alone).

Really?

[faustian bargain]

Government profligacy with little connection between revenue and spending, enabled by free money from the Fed's control of money supply, is what created our deficit. I believe huge financial interests are behind this.

But as nearly everyone here knows (to borrow a line from blarney-tongued O'Bama), this is not a Republican or Democrat thing. It may be a Republican AND Democrat thing. But thinking either of the members of the political duopoly has a workable solution, is naive and incorrect.

[WaterWings]

Gold-backed currency, or it's just the same merry-go-round.

[Frumundacheeze]

I' m curious what people here would say to thed idea

that California follow North Dakotas lead, and

simply walk away from the debt and form its own

fractional banking system. State-run, with all the revenue

being used locally. ND is currently the only state with

no deficit, and in fact are enoying a surplus this year.

[Anonymous]

as a californian i'm all for the north dakota route, i have checked it out....looks promising. calif. need not walk away from their debts...simply refinance the state debt after creating their own state bank that allows deposits from all state, county and local enities to deposit their funds in the state run bank. the savings on interest alone would be staggering....

[Anonymous]

Here in North Dakota our state budget is in the black for only one reason: OIL REVENUE. Since 2005 our state has been flooded with billions of dollars in oil revenues, tax receipts have skyrocketed, and complimenting that with our fairly conservative state budgets and small population and we are sitting pretty well.

The 'socialist' Bank of ND which the old pioneers started has really nothing to do with our state budget surplus. The bank is sound because of sound investments in loans in this portion of the country, (no risky affirmative action loans---The indians (native americans) in ND get their handouts from the feds) and the BND did NOT gamble on derivatives and wild speculation.

I had student loans with the BND and currently my mortgage is as well. It is a good conservative banking model, but I have doubts how it would work in an entitlement/nanny state such as California with large 'diverse' populations. Just my 2cents.

[OrganicGeorge]

I bailed on Cali a year ago when it became clear that nobody in government, state or local was serious about the financial collapse in 08.  Even my little town of Ojai was still spending money on development studies instead of holding the line on spending.

Arnie stole from the cities, he was going to pay it back but that was then and now he's holding services to the poor hostage to make up for his incompetent leadership. 

[JR]

As Bloomberg, reported today,  “California’s hopes are fading for federal help in closing a projected $19.9 billion deficit that has caused the lowest-rated state’s borrowing costs to rise 26 percent in three months.

“'We recognize they have enormous problems,' David Axelrod, senior advisor to President Barack Obama said in an interview.  'But we can’t solve all of those problems from Washington.'”

California politics is a network of mistakes, special interests and graft.  But no entity is more responsible for its core problems than the federal government.

It’s the feds who protect the rights of public employees to take and hold the lion’s share of state revenue.  It’s the feds who dictate housing and welfare rules of all kinds that affect state budgets.  It’s the feds that keep the borders open through ineffectual immigration enforcement…a policy that greatly accelerates local government costs for schools, health care, housing, police, roads and infrastructure of all kinds.

So now we have Axelrod’s indelicate quip…from the highest spending, most socialized government in U.S. history.  And it brings to mind the federal court’s answer to Californians trying to get some redress from U.S. excess in 1994 for the state's heavy expenses incurred from illegal immigration.

“California Proposition 187 (also known as the Save Our State initiative) was a 1994 ballot initiative designed to prohibit illegal immigrants from using social services, health care, and public education in the U.S. State of California. It was initially passed by the voters but later found unconstitutional by a federal court, with appeals against the judgment being halted by (later-elected Democrat) Governor Gray Davis.

“Proposition 187 was introduced by Republican assemblyman Dick Mountjoyof Monrovia as the "Save Our State" initiative. In the general election of November 8, 1994, California voters approved the proposition by a 58.93% margin. It was signed into law by (Republican) Governor Pete Wilson, a prominent supporter of the proposition, the following day. A number of legal challenges led to the law being eventually overturned in federal court.”

 http://en.wikipedia.org/wiki/California_Proposition_187_(1994)

[jmc8888]

It’s the feds who dictate housing and welfare rules of all kinds that affect state budgets.  It’s the feds that keep the borders open through ineffectual immigration enforcement…a policy that greatly accelerates local government costs for schools, health care, housing, police, roads and infrastructure of all kinds."

No the budget problems have been from a cracking system.  The welfare rules aren't LAX enough.  Our national and state deficits were not caused by illegal immigration, nor welfare.  But I'm sure THEY want you to believe that.

The federal gov't is in fiscal trouble because.....it has to borrow money from the fed

To pay for...

1. Tax Cuts

2. Bailouts

3. Wars

The states are in trouble.....

1.  Getting addicted to the easy revenue caused by the bubble (housing/finance/outsourcing)

2.  The shifting of federal spending programs (mostly by Bush) from federal gov't to state gov't. 

It wasn't illegal immigration, and certainly not welfare.  Of course there's more factors like what all these bubble's have done to our currency.  It pushed the prices up, so all money from the debt held by the person competing with you to buy the same goods caused higher inflation.  No market clearing was allowed as every time we needed it taxes were lowered, leverage was allowed higher, interest rates lowered. 

So most of the inflation we've seen (and been hidden) has been the effect of the increased debt load.  Thus even if you weren't involved, you were still paying for it because the person you were buying from is setting his prices to pay back the debt.  This didn't help budgets as well as the cost for maintaining services and infrastructure raised along with it.  With all the increases in toxic debt adding to this burden and putting a venerable floor on things during the next round of QE we never knew of...called tax cuts, interest rate cuts, to prevent recessions. 

As a percent how much of what we spend goes to service debt from legacy obligations? What is its effects upon a market in terms of staving off recessions, time after time?  What are the effects year after year of such policies?

Again, the most socialized? Personally I think Reagan doubling the national debt without a crisis more socialistic.  Especially when he spread the wealth to the richest few people in his tax cuts?

It's not about socialism.  It's about cronyism.  It's rampant through both parties, however I still feel it's 70-30 repub-dem, but hey Obama is on his way to evening that out.  Plus he is bailing out Reaganomics, which is what finally crashed.  You can blame Obama, I sure do.  But I blame the originators, far, far more, and that wasn't the left, but the right, with the Wall Street crowd playing both sides for their own purposes.

[faustian bargain]

Who was 'left' and 'right' back in 1913? The Fed is a fascist instrument. I guess some people would call that 'extreme right', but I don't think there are many on either side of the aisle, over the past 97 years, who were opposed enough to the existence of the Fed to indicate that it's a partisan issue.

Both party's platforms depend heavily on the existence of easy money from the Fed. That's why the thing was created - so that policy could be funded and influenced above and beyond the limited scope allowed by simple direct taxation.

[SimpleSimon]

And the people bowed and they prayed

To the government gods they had made

And S&P flashed out its warning

In the letters that it was forming

[chumbawamba]

I guess once The Big One hits and California is devestated then they'll finally lower us to B+.

I am Chumbawamba.

[cougar_w]

No no. You have it backwards. A major natural disaster would be a huge economic boon to the state. FEMA money, economic help to affected areas, huge pulse in construction related jobs and materials sales. Big pick up in sales taxes as everyone replaces their broken TV and shattered windows.

Big win.

cougar

[faustian bargain]

indeed. also it would contribute to the GDP.

[ghostfaceinvestah]

The Governator is a disgrace.  Cut spending, you idiot.

[faustian bargain]

I think his wife might have one of those remote control shocker things clamped around his genitals.

[Burnbright]

Yeah things are not going well here. My wife works at HSU and you would not believe the level of incompetence and mismanagement going on there. It seems that not only does the government create negative cash flow, but also everything the government subsidizes as well. HSU is so top heavy with management it is insane. Not to mention all the directed spending funds that are only used to build new buildings... when the school is laying off teachers and staff. Or spending 15 million dollars to implement people soft (from Oracle). The school also found out that it was losing money per student and this is while the school is mandating increasing enrollment, so what do they do, the school decides to increase tuition fees AFTER enrollment (which the school is now caught in a legal battle over). Its like "hey i know you just bought the car for 15K but you still owe me 2K more because other wise I would suffer a loss.

Personally I am surprised HSU and most of the CSU system isnt shut down. Over 60% of the students at HSU alone require either federal or state aid to attend.

[JR]

Exactly.

The essence is that government was created to protect property and private citizens and the rights of private citizens.  It was not created to go off on its own and build its own empire where it decides how much money it needs, which programs are important and which direction the state will go.  The intended use of government was to satisfy the intentions of the citizens. 

The citizens clearly have told California that they want a government run with the money they've given it.  And that means they will accept severe cuts in personnel and services.  The people are willing to do this, as evidenced by their latest referendum vote; it’s the government leaders pretending to be masters who are not willing to give up their ideas.

It reminds one of the U.S. Senate that initially set a rule of cutting off debate with a filibuster at two-thirds vote that proved to be too limiting to current big-government senators, so the rule has been altered to only 60 senators out of a 100.  The two-thirds theme also has been used to limit budget approvals by legislatures such as in California, and voter approval of tax increases, but the big-government Californians aren’t getting the taxes they think they deserve so their new theme is we need to reduce voter approval of tax increases to 50 percent and legislature approval of budgets to 50 percent.

In other words, fewer and fewer people are paying the bills... and they need to just shut up and pay.

[Anonymous]

Arnold and his man made global warming fantasy will save California with green jobs that cost the taxpayer 100 grand a piece. Isnt California pushing green jobs the most while taxing the heck out of business and citizens to help pay for the jobs that make no economic sense at this time ? Look where that has helped get them besides all their other socialist policies.

[carbonmutant]

A few questions here:

Isn't this one of the agencies that rated subprime MBSs as AAA?

If Pelosi can't get a bailout for the state, why re -elect her?

Aren't states "too big to fail"?

[deadhead]

if the Cali Governor was a Dem, there would have already been more money.

[carbonmutant]

If Superfly doesn't bailout California a lot of people are gonna switch parties.

Lets see how that works out in Nov.

[Anonymous]

The biggest boondoggle at CA is Pension benefits and Govt pay. Even in this environment govt pay raise has not been revoked. CA state employees and govt services is a money pit. Fill the pit. The solution will automatically show up.

[Burnbright]

Seriously, my wife showed me a chart of the pension plan for state workers sense she works at a CSU and it was something like after 5 years you are guarenteed 20% of your pay when you retire and 75% of your pay after 20 years. I could not believe it, a lot of management make 6 figure salaries and must CSU systems are over crowded with VPs.

[Anonymous]

F%^%$ CA. They elect a bunch of derelicts to the congress and senate everytime.

[jmc8888]

Like every other state and philosophy.  So why focus it on them.  You could focus on your own state just as successfully. 

[Anonymous]

Fresh fruit for rotting vegetables

http://www.youtube.com/watch?v=UW8UlY8eXCk

[glenlloyd]

For some reason I already thought they had been downgraded to junk...hmmm.

[ghostfaceinvestah]

Wasn't this idiot Governator proposing to re-implement a home buyer tax credit?  What is wrong with that guy?  Give away more wasteful tax breaks, while increasing personal income taxes?  What a moron.

[Anonymous]

Man, how long can this sick charade go on?

[ghostfaceinvestah]

This is what that idiot does while facing a massive deficit, and a downgrade, what a fucking moron.  Never mind that just about every economist alive agrees that these tax credits are horribly inefficient.

http://www.cbs47.tv/news/local/story/Governor-Visits-Fresno-to-Push-Tax-...

"Governor Schwarzenegger stopped in Fresno Wednesday morning to push a $10,000 homebuyer tax credit program."

[JR]

Two recent posts concerning California’s problem and solutions draw interesting implications.  First, jmc8888 suggests that immigration has not added to California’s budget problems.  And ghostfaceinvestah posts that “Governor Schwarzenegger stopped in Fresno Wednesday morning to push a $10,000 homebuyer tax credit program."   Anyone who knows Schwarzenegger by now knows that he operates for political expediency.  And the politics of this announcement has everything to do with immigration.

[Anonymous]

Here in North Dakota our state budget is in the black for only one reason: OIL REVENUE. Since 2005 our state has been flooded with billions of dollars in oil revenues, tax receipts have skyrocketed, and complimenting that with our fairly conservative state budgets and small population and we are sitting pretty well.

The 'socialist' Bank of ND which the old pioneers started has really nothing to do with our state budget surplus. The bank is sound because of sound conservative investment decisions by the executives in loans in this portion of the country, (no risky affirmative action loans---The indians (native americans) in ND get their handouts from the feds) and the BND did NOT gamble on derivatives and wild speculation. The truth is the old German and Scandinavian immigrant hard work ethic and honesty is alive and well up here... much different than the rest of the country.

I had student loans with the BND and currently my mortgage is as well. It is a good conservative banking model, but I have doubts how it would work in an entitlement/nanny state such as California with large 'diverse' populations... Just my 2cents.

[Anonymous]

Germans and scandinavians as hard workers. Whatta lie. You can't rely on stereotypes.

We all know they're lie-abouts, drinkers, and gamblers.

Luxury, booze, and gaming--that's the future.

[Anonymous]

I live in Copenhagen,..that would make me Scandinavian,..YOU, clueless!

[Anonymous]

however poor california claims to be - and they haven't even begun to tax hollywood enough - it still had enough money to pay off the ratings agency...that debt is solid bbb....a- is a farce...

[blueskyscottsdale]

California shot itself in the foot with the 2/3 majority rule required to pass budget amendments instead of the simple majority rule. So California has self inflicted gridlock. However the public sector abuse of state finances is systemic:

1. The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

2.When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

3.The growth in six-figure salaries has pushed the average federal worker's pay to $71,206, compared with $40,331 in the private sector.

4. Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months — and that's before overtime pay and bonuses are counted.

It doesn't matter if it is the northern California fire chief retiring with a $240,000 per year pension or if it is Washington D.C. salaries gone haywire, the public sector everywhere is bloated whilst people in the private sector have seen their wages, insurance, over time and hours cut. Arizona has 6 million people, a $4.7billion deficit and the governor has not cut any state employee salaries. Arnold can't cut California state employee salaries because when he tries, the 2/3 rule folks go wild and the ACLU sues him.

America is in denial and has no clue how to spend less. Truly, Suze Orman should run America's finances because nobody on Capitol Hill or in the state capitals know diddly about money. Money is about some basic concepts that people should have learned in their family. There are a startling number of people I have met who have been foreclosed upon and who think they did nothing wrong whatsoever. Zero personal responsibility. This is the scary bit - how many people seem to have learned nothing at all. Case in point is the US federal government. The highly respected Committee on the Fiscal Future of the United States called for 20% federal spending cuts. That's really what needs to happen yet all of Capitol Hill is in denial. So tell me, what exactly has been learned in America?

http://www.reuters.com/article/idUSN1311550220100113