Wolf Richter www.testosteronepit.com
California is broke again. The “balanced” budget of last summer turned out to be another pile of overoptimistic assumptions. This time, the out-of-money date is March 8, Controller John Chiang said yesterday. $3.3 billion must be dug up, and pronto. The problem: $2.6 billion in “anticipated” revenues didn’t materialize, but $2.6 billion in “unanticipated” expenditures did. Last fall, California had to borrow $5.4 billion from Wall Street and another $15.6 billion from special state accounts just to make it to the hoped-for flood of tax revenues in April. And despite the government’s inelegant gyrations about budget cuts, the state payroll rose 3% in 2011.
But now all eyes are on Facebook. Its IPO will singlehandedly solve all of California’s budget problems forever—just like Google’s IPO had done.
Everybody still remembers the Google manna that descended on California. Holders of Google shares were able to sell them starting in February 2005. At first, people spent. They bought big houses at the top of the housing bubble and fancy cars. They splurged on restaurants and clothes and maybe a few boats. Sales taxes jumped. Then in early 2006, they paid their capital gains taxes, which coincided with a run-up of the stock market to produce a breathtaking and now legendary $7 billion leap in state revenues.
And the state budget jumped by 9.5%. With a Republican governor, who loved it too. Everybody loves manna. And then came the crisis, and the manna was gone, and California had to pay contractors and others with IOUs instead of real money because it was bankrupt for the second time in its history.
Facebook’s IPO is going to be far larger than Google's. Already, many Facebook employees feel rich, knowing that their stock options can soon be turned into lots of cash, and their spending habits may have already adjusted to that in anticipation. But after the IPO, their wealth will become liquid, and spending will start in earnest, or at least, that’s what everyone around them is hoping for.
They will buy fancy houses, expensive cars, toys, and gadgets, and those that feel really smart because they're suddenly among the one-percenters will dabble in angel investing, and much of that money will evaporate from their accounts and dissipate into the local economy and into the accounts of those who’ve been waiting for years for just that moment. Each step along the way, the state of California and cities will extract their share through sales taxes (8.25% - 8.5% in much of the Bay Area), through vehicle registration fees (around 10% in many cities), and through other means. And then, in 2013 and 2014, there will be the real manna: capital gains taxes.
Already, interest groups and lobbyists are forming thick droves around state legislators, even when they go to the bathroom, to urge them to fund worthwhile programs and ridiculous boondoggles alike. After years of unpopular, nay detested budget cuts, pressures are immense from all sides to shovel money this way and that way before any of it has even arrived and plow it not only into one-time projects, but into ongoing programs that will then run out of money because manna is a one-time event.
There are still some voices of reason audible above the din. Governor Brown, for example, said that it should be used to reduce California's mountain of debt. But this being an election year, promises need to be made and votes need to be bought and elections need to be won. It’s breathing new life into a gigantic project that ran into a wall of resistance after its costs nearly tripled before construction even started. For this astounding debacle, read.... California’s High-Speed Rail To Nowhere.