California faces its moment of truth

June 29, 2009

agnes1The California budget impasse comes to a head one way or the other this week, with state lawmakers needing to make nice by June 30 to close a $24 billion budget gap. If they don’t, rating agencies have threatened to downgrade the state’s credit ratings.

California’s Comptroller said he would begin handing out IOUs on July 2 and the Treasurer said the state will draw on reserves to service the debt of all economic recovery bonds on July 1. (These bonds were created in 2004, when voters gave the state government the authority to raise $15 billion through bond issuance to plug another budget deficit.)

While a slump in real estate and tax revenue are very real factors behind California’s disastrous finances, the San Francisco Chronicle also bullet-points more entrenched problems that have made it difficult if not impossible for the state to surmount extreme dysfunction.

Partisanship: California’s gerrymandered legislative districts tend to protect incumbents and encourage more political extremes – Republicans on the right and Democrats on the left with less incentive to reach out to the political middle, much less compromise at the Capitol.

Term limits: Proposition 140, passed in 1990, limits legislators terms to six years in the Assembly and eight in the state Senate.

Ballot-box budgeting: Initiative-loving Californians mandated set-aside funding for all kinds of single-interest issues, from education to stem cell research.

Prop. 13: The 1978 landmark law slashed commercial and residential property tax rates, shifting state reliance to other more volatile sources.

The two-thirds majority rule: The Golden State is one of just three states that require a two-thirds majority vote from each legislative house to pass budgets.

Fitch Ratings cut California’s ratings to A-minus last week from A, and warned that further action could be forthcoming if there’s not a budget agreement beyond June 30.

California general obligation bonds have been getting hit as a result of all the uncertainty. In May, the bonds were trading roughly 37 basis points above AAA-rated munis, according to Municipal Market Advisors. Now they stand at 105 basis points. It’s also helping to drag down the overall market, though returns for the year are still in the black at 5.2%.

The big fear of course is default, but there are many gradations about what they could mean for bondholders.  The worst case scenario would be repudiation, or simply walking away from its debt obligations, though this seems extremely unlikely given the size of the California economy (eighth in the world if it stood alone) and its dependence on future credit market financing. Then there’s defaulting on the debt servicing or paying only part of it.

There’s still some hope that the federal government would step in if it came to default, but the Obama Administration has been reluctant to prop up state and local governments, especially when it has its hands full with the auto industry and the financial system. It also would open up the federal government to petitions from a long line of states and municipalities also getting squeezed.

12 comments

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Gerrymandering of districts and low income taxes at the Federal level pose similar problems. Having a filibuster proof Senate is is difficult to maintain let alone achieve. The Senate is good at blocking or watering down legislation.The federal government however has the FED who can run to the rescue and print more money.

The U.S. is still the largest economy in the world by GDP. California is not only the eighth largest in the world but the largest economy of all of the states. Perhaps democracy
doesn’t work so well for large populations with great material wealth. Further exacerbating the matter is a fixed number of representatives in governments that have been around for as much as two hundred years and have experienced tremendous population growth.

The U.S. has one Representative for every 300,000 of voting age citizens. The 1930s would have been one representative for every 140,000 citizens of voting age. By contrast European nations have one elected representative for every 40,000 to 60,000 people. As our population increases I believe representation will become even less effective.

Posted by Anubis | Report as abusive

You don’t mention the fact the unions hold the democrats in the palm of their hand and refuse to yield on demanding increases while state workers get unsustainable pensions and benefits, and are higher paid than the private sector. You also fail to mention in your reasons why California is in this mess is also partly to do with the mandatory spending increases (and note, giving schools a lower increase is NOT A CUT TO THEIR BUDGET!!!). You also don’t mention the Governor’s insistence that any and all monies funneled to illegal immigrants are irrelevant to the crisis even though it is taxpayer money they are Not Entitled To.

And the only reason the state hasn’t gone to hell in a handbasket so far is because the 2/3 majority mean they have to get huge support for budgets, and are forced to compromise. If they didn’t I can only imagine what the tax hike in February would have looked like… and it was the Highest in the history of the USA.

It seems the golden state is pretty gold plated, because what we think we are getting is not half as pretty and shiny as what we actually get.

Posted by Bluebell | Report as abusive

California has 12 percent of the nation’s general population, but 32 percent of the nation’s welfare population. Ten million foreign nationals who came here illegally plus a high percentage of welfare recipients plus 800,000 state workers (current and retired) are all living off a small and shrinking number of taxpayers. The state’s budget has doubled in the last 10 years, but the population hasn’t. At some point it’s a spending problem, not a revenue (tax) problem. We long ago reached that point.

Posted by Tammy | Report as abusive

More recycled leftist credo with a veiled agenda to convince the reader more taxes are in order. WRONG! As has been said before, California does not have a taxation problem. California HAS A SPENDING PROBLEM.

Decades of Democrat rule have promoted the welfare mentality and pushed small business out the door. The rewards are now being reaped. Enjoy!

Posted by E.F. Taylor | Report as abusive

California has the same problem as the auto industry…years of built up spending that has substantially outgrown revenues. Downsizing should have been occurring all along, and now trying to do it all in one year is impossible.

Add to that the fact that our legislators knowingly pass fraudulent…yes FRAUDULENT budgets based on tricky accounting maneuvers and over-projected revenues. These politicians own houses in Calif. also…they knew their own property taxes were going down due to decreased valuations, yet they proceeded to build into their BASE budget the over exaggerated property tax and business/income tax revenues.

Also, you cannot blame State employees for the entire problem and try to balance it on their backs. I guarantee each and every one of you that the MOMENT you need GOVERNMENT to HELP YOU OUT from a disaster, YOU WILL ASK! Most state workers do get good benefits and retirements, however their pays are well under private industry pay standards and potential, particularly for white-collar jobs. The few State workers/legislators who are high enough to be blamed do not make up billions of dollars worth of FRAUDULENT budgets! They should all be FIRED.

I don’t give a flying fig whether CA needs less spending OR more taxes. They can (eventually) figure that out themselves. I just don’t want them to get ANY federal bailout – and that includes guaranteeing their bonds. And don’t give me that cr@p about Californians paying more to the feds than they get back. There are plenty of “net donor” states – including mine And in every state there are “net donor” communities. What – are we supposed to let every rich suburb secede from its state – or the country, for that matter? CA needs to work this one out on their own. Period.

Posted by Olaf | Report as abusive

E.F.Taylor, years of spending at the Federal level without the means to pay for it has been foisted upon us by the Republicans. Welfare lines increased under Reagan with waivers after the government initially removed millions from the dole.

It would seem neither party has the ability to run government within it’s means.

Posted by Anubis | Report as abusive

Apparently the readers of this article have a far better understanding of the problems than the author. Ms. Crane is is only right on one of the bullet points, Partisanship, every other bullet point, as others have said, is leftist spin.

Here’s a nice article written by Chris Reed regarding Prop 13. http://weblog.signonsandiego.com/weblogs  /afb/archives/034048.html

Mr. Reed actually took the time to research if Prop 13 was indeed the culprit to California’s current financial problems.

Here is his findings:

Property tax revenue in 1980-1981: $6.36 billion
Property tax revenue in 2006-2007: $43.16 billion
That’s a 579% increase.

Population in 1980-1981: 24 million
Population in 2006-2007: 38 million
That’s an increase of 58%.

CPI (inflation) 1980-1981: 88
CPI (inflation) 2006-2007: 202.4
That’s a 133% increase.

Total general/special fund revenue for CA 1980-1981: $22.1 billion
Total general/special fund revenue for CA 2006-2007: $120.7 billion
That’s a 555% increase.

So lets see, property tax revenue has exceeded population and inflation combined. It’s also higher than all other sources of revenue collected by the state.

The facts are Ms. Crane, that California’s budget has almost doubled in just 10 years. Not due to inflation. Not due to population growth. Due only to bad decisions made by the legislature, in particular, decisions based around public employee unions.

In regard to your other bullet points:

Term limits: The legislature managed to bankrupt the 8th largest economy in the world in the just the last decade. How exactly would greater terms help?

Ballot-box budgeting: This one’s debatable.

The two-thirds majority rule: This came about with Prop 13. Fixed-income people were losing their homes (completely paid for BTW) due to property tax increases passed by the legislature to fund their “out-of-control” spending spree.

California is one the top five states in every tax category (I believe we are #1 in a couple of them) save property taxes. Tax revenue is not the problem. The problem is spending and the promises made to the large unions.

Posted by Daniel | Report as abusive

Tammy actually said it all. But a little to add. If we give the state even a penny more they will just raise their pay and benefits. Here is the whole story The gov is destroying our lives and futures in order to enrich the people who elected them ( Teachers, Welfare Recipents, Gov employees and others who get a check from the state. This is the end but the elected stooges are trying to drag us down with them.

Posted by What Happened | Report as abusive

I agree with Olaf’s comment about the “net donor” mantra being meaningless. When the Federal Government spends its money it wants the best deal too. California-based services and products tend to be more expensive, so it’s not surprising that more tax money gets spent in other states.

Posted by civilator | Report as abusive

Prop 13 is an incentive to stay in your home. It provides a medium of protection for those that have worked hard and now are trying to retire and KEEP their home without property taxes taking it out of reach. Before Prop 13, it was getting worse and worse as life long residents were being forced out of their homes and out of the state.

California’s legislature has been driven by cultural lunacy and greed. They want all the special projects with no care of funding. They want wonderful retirement benefits with no care of funding. Their spending has vastly outstripped the revenue and their response… more spending. As I said, it’s simple lunacy.

They got us to allow the state lottery under the guise that half would go to our school system and thus INCREASE the inadequate funding… then they REDUCED school funding by a dollar for every dollar earned from the lottery putting the schools right back… (putting that “new found” money into their pockets!) but then they said if the lottery money slows up, the schools would have to tighten their belts, “there’s no more funds available from Sacramento”…. They GAVE AWAY the funding responsibility of our state’s schools? They turned their back? What better reason to dismiss the lot of them?

Arnold got into office saying he would stop the run-away spending… and the Democratic legislature laughed and laughed and spent even more and more.

They increased costs for permits and licensing of business and forced workman comp rates to a point that businesses left the state. With reduced revenue, they did what any idiot would do, increased the rates charged, forcing more businesses to move out.

Many recent “tax initiatives” have been voted down in flames by us who are STILL saying “Stop the out of control spending” but the legislature doesn’t hear anything but their special interest groups lobbying for “free money” for the stupid San Francisco sand mouse or more “benefits” for illegals.

Good ole Arnold responding to my cry to remove benefits and sanctuary for illegals said that “he understands… BUT. we can’t deny them money and support… after all, HE is an immigrant too, and HE understands.” When I noted back that HE is a LEGAL immigrant, that HIS entry was with the knowledge and approval of our federal government, not some simple mass invasion of another nation, he took me off his “response list”. Yep, those special interests sure don’t want to hear about responsibility and moral fiber. When asked why Arnold wasn’t taking a firm hand on securing the border or enforcing immigration laws, he stated (you gotta love this…) “I believe the illegal immigration is the same as it’s been for years!” You just have to marvel at the depth of thought and reasoning.

But it is MY country and it is MY state and I will continue to push for fiscal responsibility of others as I maintain on myself. Grey Davis was kicked out for much of what Arnold is now trying to justify! Seems some folks just don’t understand the simple statement, “We are fed up with your irresponsibility!”

It’s reported that 1/4 of our budget goes to supporting illegals and the businesses that thrive on them. Now does anybody figure that 1/4 of our budget could be saved by becoming a responsible part of this sovereign nation? We have the highest LEGAL immigration policy of any and yet they allow AND ENCOURAGE this mass INVASION by others. But to a greedy politician, NOTHING looks better than another potential voter… NOTHING!

Posted by Mike B | Report as abusive

rather than requiring its elected legislators to prioritize spending and balance the budget, california undermines itself through the initiative process. in theory, its great that voters can decide by ballot where their money should go- housing, transportation, education or infrastructure. but in practice, all sense of scale and cumulative proportion is lost through this process. when an economic contraction happens, as is now the case, all this initiative-based spending is mandated by law, and lawmakers have no choice but to cut essential services in order to make ends meet. California’s budget process is too inflexible to work properly.