May 24, 2024

California Ignores Growing Fiscal Crisis

California’s budget crisis is growing worse as its shortfall for its current fiscal year has increased to an estimated $14.8 billion from a previously estimated $11.2 billion, Gov. Arnold Schwarzenegger said on Wednesday.

During a press conference broadcast on his office’s website, the Republican governor said he would call top lawmakers into a meeting to stress the need for fast action by the Democrat-led legislature on balancing the budget of the government of the most populous U.S. state because it may be out of cash by the end of February.

General fund revenues for November were down a staggering 18% from already reduced expectations.  The Governor had previously demanded action from the legislature to address the fiscal situation but was stymied by competing political agendas.  The Republicans don’t want to raise taxes and the Democrats don’t want to cut spending.   As California’s debt ratings continue to sink and investors boycott their debt offerings, it has become obvious that the previous solution of borrowing to cover out of control spending will not work this time.

California’s budget has increased by an astonishing 40% over the past four years.  Gov. Arnold Schwarzenegger was voted into office on a promise to cut spending and establish some semblance of fiscal sanity.  He soon gave this effort up when his popularity ratings plummeted as he attempted to rein in out of control spending. Every spending cut is essentially a reduction of benefits or cash payments to various voters.   The voters are apparently accustomed to ever increasing benefits and payments, without the nuisance of having to pay for them.  Pandering politicians have attempted to give everything to everyone at no cost and accordingly created a sense of entitlement by the voters.   Demands for new benefits will only grow larger with unemployment at almost 10% and surging higher by the day.

We are now seeing the end result of fiscal insanity – an over leveraged state that has reached the limits of borrowing, politicians who will not confront reality, voters who will not tolerate tax increases or spending cuts and the largest State economy on the verge of fiscal collapse.   This has been discussed as a national issue previously –   IOU’S Pile Up – Taxpayers Refuse to Pay.

The only action California has taken to date, which does not address the reality of their situation has been to offer IOU’s to the State’s vendors and suppliers.  Those who chose to accept these IOU’s will soon find themselves as bankrupt as the issuer.

This fiscal lunacy will continue until California has borrowed and spent its last dollar.  When this point is reached the next phase of Federal bailouts will commence with 49 other states lined up behind California.

Ultimately, serious minds will begin to question the financial integrity of the United States.

The line at the Treasury grows longer

It is no secret that the budget deficits of state and local governments have been growing this year and are likely to accelerate sharply as this recession deepens.  Tax revenues for most states in the previous two months have shown no growth and this situation will only darken with each passing month as job losses accelerate.  Alaska, the only state with a healthy surplus due to higher oil prices is also likely to see their fiscal fortunes darken as the price of oil collapses due to a weak global economy.

Question: given the seeming inability at any level of government to cut spending or increase taxes (see IOU’s Pile Up – Taxpayers Refuse to Pay), what outcome can we expect?

Answer:  based on the numerous recent bailout precedents by the US Government,  the state governments, one after another will line up outside the Treasury for bailouts or government guarantees of their debt issues.  Result:more bailouts until we reach the point where serious minds will have to ask “who is going to bailout the US Treasury?

This week California was the latest supplicant to the US Treasury, asking for $7 billion to tide them over until tax receipts come in.   State officials also blamed the frozen credit markets for preventing them from tapping the credit markets.   I have news for the State of California -you can’t run up never ending debts without limit; it is not “frozen credit” markets causing the problem – it is the fact that poor credit quality borrowers cannot now expect to borrow unlimited sums at low rates.  After his election, Governor Schwarzenegger attempted to cut the State’s budget by reducing the bloated state bureaucracy; after massive political protests he gave up and here we are.

If the Treasury bails out California, there will be 49 states in line right behind them also asking for loans and guarantees.  After spending  $800 billion bailing out Wall Street and providing tax breaks to special interests, it will be politically impossible for Washington to say no to California.   Is Washington going to do what President Gerald Ford did in 1975  when New York City was on the verge of bankruptcy -“Ford to New York City – Drop Dead”?   Different time and different place -California will get their loans and guarantees and continue to spend until there is no one left  foolish enough to lend them money.

Here’s a solution for Governor Schwarzenegger – fight against the financial insanity of open ended deficits; lose  the next election if necessary for the greater good of the State.  Insist on budget cuts – increasing taxes will only make things worse; take on the unions that are bankrupting the future of unborn; get your financial house in order by reducing debt, sell State assets – there is an ocean of cash waiting for the right time and price point to invest; be candid with your citizens and tell them that we cannot borrow our way to “prosperity” anymore, there will be pain but you we will be building a future based on economic growth and real prosperity instead of the false prosperity built upon leverage and debt; tell your citizens that times have changed  and we all need to spend less, expect less and save more until we can correct the insane excesses of the past; if necessary go the route of The City of Vallejo, California which filed for Chapter 9 in order to break the fiscal stranglehold of sky high municipal salaries and benefits.

Sarah Palin touched on the need to save and only buy what we can afford to during her last debate but I am convinced that there are few politicians out there who have the courage or verbal skills to give the voters this type of message.

Unfortunately, the local, state and federal governments face tough choices on the road to financial health since they will need to reduce the multi trillion dollar benefits promised but now impossible to pay.   An age of hard times is upon us and those who chose to believe that their “entitlements” are due no matter what are in for a rude awakening since the future has already been spent.

Say no to California for  a bailout – they need to figure things out for themselves.