Wednesday, May 20, 2009

California: Terminal or Just Normal?

Check out today's Timothy Egan column in the NYT:
Not that it will make Bellingham, Whatcom County or the State of Washington feel any better, but the State of California is in worse shape.

More alarming is the fact that California voters, when given the chance to help the situation, have decided to whimp on every proposed measure, except limiting pay raises for State elected officials during deficit years.

Now, that ought to go a long way toward balancing their funny money budget!
Besides, it should discourage a few more people from even seeking public office; why would anyone want to serve in such a contentious and perpetually deficit-ridden State?
Doesn't sound like much fun to me.

Bad economy or not, the real problem has been expectations that are consistently way out of line with reality.
That inherently unsustainable pattern is guaranteed to produce deficits over time, whether its California, Washington DC or Bellingham.

What the 'Golden State' is experiencing now ought to provide a valuable lesson for every government entity.
But, will 'they' learn? And, who are 'they'?
And will the voters consistently help or hinder prudent budgetary practices, including raising additional taxes when necessary to pay for services?
What might be an upper limit on taxes before real TEA parties become rampant?

Just a few thoughts to brighten everyone's day....
Reprinted from the Internet:
California Rejects Schwarzenegger’s Budget Measures

The May 20 Bloomberg News reports that California's 'Governator' was dealt a crushing defeat as voters rejected a series of six budget-balancing measures that Governor Arnold Schwarzenegger said were needed to keep a $15 billion deficit from widening to $21 billion. A proposal to limit lawmaker pay passed.

“I respect the will of the people who are frustrated with the dysfunction in our budget system,” Schwarzenegger said in a statement from Washington conceding defeat. “In order to prevent a fiscal disaster, Democrats and Republicans must collaborate and work together to address this shortfall.”

Five of the propositions were failing with 64 percent of the votes counted, according to California’s elections office. The losing proposals would have capped spending and extended temporary tax increases, directed future surplus money to schools, authorized bonds backed by lottery profits and diverted already dedicated revenue to the budget.

Lawmakers put the measures on the ballot in February as part of a compromise to close what was then a record $42 billion budget gap. Since then, the deficit re-emerged as California’s economy, which on its own would be the world’s eighth-largest, worsened amid the national recession.
"The longer we wait, the worse the problem becomes and the more limited our choices will be," Schwarzenegger said.

Rainy Day Fund [Also, a favorite of some local electeds]
• Proposition 1A, which was failing 36 percent to 64 percent, would have limited state spending to inflation plus 3 percent above a 10-year average. Revenue exceeding that cap would have been deposited in a rainy day fund that could only be spent during deficit years. Any surplus amounting to more than 12.5 percent of the general fund would have been available for one- time needs or to pay down debt. The measure also would have extended three temporary tax raises approved in February.

• Proposition 1B would have required the state to pay $1.5 billion from the rainy day fund to schools for six years starting in 2011. It was failing 39 percent to 61 percent.
• Proposition 1C, which would have allowed the state to sell $5 billion of bonds backed by future lottery proceeds and use the money for the budget, was losing 37 percent to 63 percent.

• Proposition 1D would have allowed the state to strip $600 million over five years from a program that spends tobacco tax revenue on children’s health. It was failing by a 36 percent to 64 percent margin.

• Proposition 1E would have allowed lawmakers to siphon $250 million a year from a mental health services program financed by an income-tax increase approved by voters in 2004. It was losing 35 percent to 65 percent.

• Proposition 1F, which prohibits state lawmakers and elected officers from salary raises in years when the state is running a deficit, was winning 75 percent to 25 percent.

“The fact is, right now, Californians do not trust Sacramento or the political process by which the budget is crafted, and they cannot afford higher taxes,” Meg Whitman, the former EBay Inc. chief executive officer who plans to run for California governor, said in a statement.
[Why does Meg want the job? Will she use e-Bay to auction off State assets?]

The budget approved in February raised $12 billion in taxes, cut $16 billion in spending and spent $8 billion of federal stimulus money. It also relied on $6 billion that would have been raised had the ballot measures won.

Credit Ratings
The three major credit rating companies, citing the magnitude of California’s deficits, reduced the grades on more than $46 billion of bonds in February and March. Now, California’s full faith and credit pledge is rated A by Standard & Poor’s and an equivalent A2 by Moody’s Investors Service, five grades below the top investment ranking. California is the lowest-rated U.S. state.

A California general obligation bond maturing in 2038, which traded for as little as 81.5 cents on the dollar on Dec. 4, went for 96.4 cents to yield 5.5 percent on May 19, according to Municipal Securities Rulemaking Board data. That compares with 5 percent for top-rated municipal general obligation bonds, as measured by a Municipal Market Advisors index.

Schwarzenegger proposed on May 14 cutting another $6 billion in spending, half from schools and colleges, to close the new gap. He said more cuts, such as releasing 19,000 illegal immigrants now held in state prisons, would be necessary with voter rejection of the ballots measures.

Schwarzenegger has also proposed that the state borrow $6 billion of two-year cash flow warrants. He said more short-term borrowing would be needed later in the year, especially if the measures were rejected.

California Treasurer Bill Lockyer petitioned U.S. Treasury Secretary Timothy Geithner to arrange for the federal government to become a standby purchaser of the short-term loans in the event of default.
[Hey, we bailed out Wall Street, GM, etc., so why not California?]
Easy to see how economics got to be called the 'dismal science'.

And, how democracies may have a few inherent problems that only become visible or tangible over time.