California, harbinger of hard U.S. choices

May 27, 2009

James Saft Great Debate — James Saft is a Reuters columnist. The opinions expressed are his own —

California’s fiscal train wreck should be watched warily by investors in U.S. Treasuries; as the start of a trend among states seeking bailouts, as a source of pressure on Federal funds and as a harbinger of hard choices at national level.

California voters last week rejected a finance bolstering proposal, setting the stage for billions of dollars worth of  cuts in services, layoffs and a shortened school year.

It also leaves the state with a budget shortfall of more than $21 billion, an exacerbated seasonal revenue shortfall and a fragile reputation in the bond market.

These are just about the last things a state needs when unemployment is high and recession is deep, but California is trapped between its own high cost base, bond investors unwilling to give it the benefit of the doubt and a Federal government that is loath to play Santa Claus. Of the three, the last is most likely to give way, and if the U.S. does widen the bailout it is already giving to states it will have potentially profound consequences.

Treasury Secretary Tim Geithner knocked back, equivocally, a request from California Treasurer Bill Lockyer to use TARP funds to backstop the issuance of bonds by California. Lockyer fears that investors and banks will impose punitive costs on new borrowings, costs that will only worsen its overall position.

Though Geithner was right to say California wouldn’t fit under the TARP, saying in essence that this was not the purpose of the vehicle, he was far from final on the whole issue.

Asked to rule out categorically a California bailout, Geithner told Congress:

“We will have to do exceptional things, as we have done already, to fix this mess … That’s not putting on the table or taking off the table any specific thing like that. But I just want you to know that there are things that we’ve had to do I would never have contemplated doing.”

Christopher Thornberg, of Los Angeles-based Beacon Economics, thinks the stakes for California and the U.S. economy will prove too high.

“I don’t think the Feds can afford to say no to California just now.”


The economic and social impact of California’s spending cuts are unpleasant. Also of concern is the health of the municipal bond market itself, the continued smooth functioning of which is systemically important and could force the government’s hand. To be clear, Californian 10-year debt is still yielding a fairly reasonable 4.4 percent, a lot higher than equivalent Treasuries at about 3.3 percent but not ruinous. There are well founded fears about what the price will be going forward.

Treasury and Federal Reserve officials are understandably reluctant; after all, look at the mortgage market which continues to be hooked up to a government sponsored ventilator. Clearly too if Federal assistance were given to help California  sell bonds, other states and localities would quickly get in line for their share.

And while California makes the headlines, the finances of other states are also dire.

Forty-seven of the 50 states face budget deficits in fiscal years 2010 and 2011 totalling a hefty $350 billion, according to the Center on Budget and Policy Priorities.

Much of that will be resolved through higher taxes and spending cuts, but a chunky part could end up being bankrolled in one way or another by the Federal coffers, which should give pause to Treasury investors already absorbing massive issuance.

California is in some ways a special case: it requires two thirds majorities to pass tax increases. But its political inability to get to grips with a set of unpleasant choices is perhaps a warning for the U.S. as a whole.

There is precious little consensus in Congress for more bailout money and even if another tranche of support for states on top of the $140 billion already offered makes economic sense, it may not be forthcoming. It’s not hard to see political paralysis in Washington if more money is needed, for whatever reason.

Secretary Geithner has been lucky or smart to the extent that markets have decided that his tools and bankroll are equal to the task as far as banks go. That consensus may or may not hold and may or may not continue to matter.

If states or municipalities mean he must go back to a refractory Congress, confidence could ebb as rapidly and dramatically as we have seen it grow.

— At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —


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Don’t worry I hear california is going to sell bonds linked to future income from the lotteries. Failing this they can sell bonds from future income from school canteens. If all else fails they can start printing money. Opps sorry can’t do that the fed has all ready got that one covered.

Posted by gd | Report as abusive

Is it not remarkable that the thing that caused the problem is not talked about? Wild spending beyond the taxpayer means did in California. Yet they only talk about what they have to give up in cutbacks. As most of the things that municipal spending fuels are unnecessary, simply stopping the expenditures is called for immediately. Police may be somewhat necessary, but who can afford the present cost. Better to let all citizens be armed and reduce the police. Contracts for grand outlays simply must stop. Streets, and utilities need to be the main expenditures, not stadiums and grandiose city and county welfare programs, and out of control school districts. Everybody can NOT be coddled from cradle to grave…

Posted by Dusty | Report as abusive

I blame the anti-tax initiatives for a very large part of this. They systematically hollowed out state and local governments throughout the 80’s and 90’s, turning the schools on the west coast from national leaders underfunded garbage.

It’s time for rich people in this country to pay their fair share.

Posted by Josef Hoffman | Report as abusive

The continuous font of environmental initiatives from California is no accident. The state has historically suffered from high levels of pollution brought on in part by a willingness to accommodate urban sprawl. As a result there is widespread use of and dependency on automobiles. It takes a certain scale of economic activity to sustain this type of built-in inefficiency. California needs a perpetual amount of growth in terms of real income to ensure that roads and other infrastructure can be maintained. The state is not wired up to overcome challenging conditions.

Posted by Don | Report as abusive

I think that with all the millions made by the Hollywood stars, that they should put back into the economy of their state rather than around the world. If they love to live there and work there, they should support their state with their money and give back to the people. After all, how much money do they really need? Isn’t that the problem with Hollywood.

Posted by Barbara | Report as abusive


It seems the rich already pay much more than their fair share.

Top 1% of tax filers (AGI of $388,806+): 22.06% of total earnings by filers, but paid 39.89% of total taxes paid.

Top 5% of tax filers (AGI of $153,542+): 36.66% of total earnings by filers, but paid 60.14% of total taxes paid.

Top 25% of tax filers (AGI of $64,702+): 68.16% of total earnings by filers, but paid 86.27% of total taxes paid.

Bottom 50% of tax filers (AGI of less than $31,987): 12.51% of total earnings by filers, but paid only 2.99% of total taxes paid.

In other words, the “rich” already pay a much higher percentage of their earnings in the form of taxes than do the rest of us. I use the term “rich” because I know a lot of people that make $65,000 and they don’t seem rich to me. Middle class at best, but definitely not rich. Don’t fall for the “soak the rich” argument. It just doesn’t hold water. It sure sounds nice when ready from a teleprompter, though.

In case you think I contrived this data, it is taken from the Tax Foundation website if you’d like to read any further about the current progressive set-up of our tax structure.

How can you say its time for the rich to pay their fair share? 50.html

Posted by Jim | Report as abusive

The State of California should shrink government. The essentials remain the same, the non essentials all must go. No more pet projects for the political elite. All legislators must take a cross the board wage cut. They all must cut their staff in half, they all must give up their government cars. They must all turn down or turn off their air conditioning and or/heat in all government buildings. The state must end all taxes on businesses and reward companies that choose California as their state of residence so that people can be put back to work. Working people pay taxes, unemployed drain the coffers. Duh!!! When you drive out the employers you raise your costs. All illegals need to be sent hiking. Put low risk prisoners to work collecting and separating garbage. The government of the State of California must get real and quit growing itself. The people are sick and tired of working for them so that they can exert even more power over the people. Stop creating government jobs that do no more than restrict the rights of the people.

The United States government needs to do the same thing. Quit wasting our tax dollars and then saying you are out of money and we are broke because you wasted too much.-No pork barrel spending, no Acorn spending, no car bailouts, no bonuses for your lacky’s. Stop flying Air force one. Obama doesn’t need to be wasting our tax dollars flying around on his plane to do different press releases. He can just simply send his teleprompter via Fed-ex and have any moron read it for him. Quit printing monopoly money and making our currency worthless. Make all politicans give back any and all political contributions that they received from any company that received TARP money or a government bailout. Those monies are our tax dollars and these peole have no right to it. But most of all, vote every single politican that is currently in office out the next time they come up for reelection. I don’t care if they are a republican or a democrat. They all must go for this crap to end.

Posted by peanut | Report as abusive

There are ways to cut state spendings. Not only CA, other states would be benefited as well, but CA would get the most profound savings due to its size, geography, and demography.
Firstly, round up and send away all illegal aliens. This will lower the pressure on the state Medicaid, public schools, and roads. What? Nobody to pick the crop? Import the labor legally, with temporary work visas. Lots of folks in Mexico would accept the invitation, come in a comfort of air conditioned bus instead of wading across Rio Grande, pick the lettuce, and go back where the dollars go much longer way. Oh, and unlike the illegals these folks can be taxed by the state.
Secondly, kick out unions of state employees. Hire them individually at rates defined by the market, not dictated by union bosses. Or contract out the work to private companies.
Thirdly, cut the welfare rolls. Send the ones unable to work to SocSec programs. Maybe make exception for the ones who are receiving education or training that will assist in future employment. All others are free to go and actually earn their living.
But seems that even the Governator is not capable to do it. Too many special interests to overcome. While sounds simple, in fact it’s harder than firing Gatling gun off the hip.

Posted by Anonymous | Report as abusive

to Joseff Hoffman

“It’s time for rich people in this country to pay their fair share”

As I know, the more money individual makes, the bigger persentage of his income has to go to taxes. a person who do not make any money, does not pay taxes, but he uses more then rich people public services, all discounts, state scholarships, free lunches and etc. The question is: when poor people are going “to pay their faire share”? (I am not talking about disabled and old)

Posted by dina | Report as abusive

How much more debt can we continue to accumulate? In the 1930s the U.S. had a very low income to debt ratio when contemplating the New Deal programs. We are not in that position today. Moreover that spending did not lift the nation out of the Great Depression.

The IMF has quietly said to the U.S. it must break the hold and influence of the banking Oligarchy. If not the recovery will not be sustained. There will not be enough growth to pay back all this debt we are accumulating.

Who is it that will tell the U.S. government to take the bitter pill of default when the time comes?

Posted by Anubis | Report as abusive

California has created its own problem – Its problem is not that the legislature can’t raise taxes, but that it refuses to stop or reduce spending. Whatever special issue comes along gets approved instead of being scrutinized for fiscal impact and adjusted accordingly. If the fed steps in and gives California the money it wants then next year the same problem will recur except that the unions will want more. The voters need to send people to Sacremento who will vow to rein in the spending and bring the budget under control. Maybe then Californians will approve a tax increase.

Posted by Robert | Report as abusive

“I think that with all the millions made by the Hollywood stars, that they should put back into the economy of their state rather than around the world.”

The reason they make so much money is because they have demanding jobs (away from their homes months at a time, no private life, etc) and because their product earns that much money. You have no more right to tell them where to spend their money than they to tell you to spend your paycheck at a local grocer instead of walmart.

Posted by Drewbie | Report as abusive

San Francisco has brought Sacramento to it’s knees (and didn’t offer to pay the bill). What else is there to say?

Posted by Patrick | Report as abusive

Drewbie, money is by definition a social construct. It is also the property of the United States. It is not ours. As such, all U.S. dollars belong to the American people no matter whose hands they rest in. Only through law can the money be funneled and channeled. If we wish money to be privatized then we should all mint our own out of gold with our likeness on it as did Egyptian, Roman, and Persian emperors and pharohs.

Posted by Anubis | Report as abusive

Jim, there is no such thing as fair. That is a concept we teach children playing school sports and exercising privileges. The don’t seem to learn it either.

Some would say it is not fair that many families lose a parent to disease. violence or accident. Others would say it is not fair that some can afford to go to college while other just as capable people cannot. Is it fair that innocent women, children and elderly are killed by innocent bombing in war.

For society to work all must make sacrifices. Some far more than others. For the rich to give up much of the money they earn is small compared to the sacrifice a family endures when a loved one is lost in war serving his or her country. Surely there are more important things in life than money?

Posted by Anubis | Report as abusive

Money may be made by the government, but that does not mean that all US dollars belong to every US citizen. Steal some from a bank and try using that arguement in court.

Posted by Drewbie | Report as abusive


I think you are reading too much into the statement by either me or Josef, but I understand your point: Life is not fair. However, I was rebutting the inference by Josef that the “rich” do not currently pay their fair share. Josef was not bemoaning the unfair pain felt by families of innocents killed in war, or the inherent unfairness of losing a child or parent to cancer. Note the focus of Josef’s first sentence refers to anti-tax initiatives, not cancer and war. Josef seems to be saying that he believes that we (or rather, the government) should raise taxes on the rich to make them pay even more. A flat tax would be fair, but life is not fair so instead we have our current progressive taxation system where the “rich” are forced to pay far more than a pro-rata share. Hence, my comment to Josef.

I understand your point about the need for a willingness to sacrifice for the common good and agree with you to a point. I submit, however, that too many folks in this country do not pay any amount of taxes and yet somehow still get a “refund”. Where’s their sacrifice? How can they receive a tax refund if they pay no tax? Regarding sacrifice on a population-wide level, I feel our generation (I’m 42) and the younger generations are oten too short-sighted, too self-centered and not willing to make a sacrifice, unless they can sacrifice something of little value. Better yet, we are more likely to want to tell someone else to sacrifice. Josef’s comment sounded to me like a bit of jealousy or sour grapes concerning the rich.

While we’re talking about taxation and fairness, is it fair for so many of Obama’s appointees to have such an aversion to paying their taxes? These are our leaders, the people who make the rules for the rest of us to follow. Unfortunately, we do not get the pass, the mere slap on the wrist that so many of the current administration’s employee’s seemed to get in terms of avoiding meaningful legal consequences of ignoring the law. Again, I know, Life is Not Fair. Still, it smacks of hypocrisy or hubris, of an entitlement to somehow be above the law to see so many politicians so willing to try to boldly cheat the system.

Yes, Anubis, there are more things in life more important than money. Family, friends, fun and home come to mind. But since I must work to support my family, and I must pay my taxes, I expect others to do the same if they are able to do so. But, to choose not to work (as many do) and then to expect to be taken care of (as many do), that is not acceptable. One can choose not to work. That is their choice. But aren’t they then responsible for the outcome, for the consequences of that choice?



Posted by Jim | Report as abusive

Drewbie I stated that only through law can money be directed through society. This is why the government can seize money from an illegal enterprise should they find out about it. What does robbing a bank have to do with this discussion? As the American citizens are technically sovereign what there government chooses to do regarding taxation is done so by consent through the electoral process. If we are unhappy with government policy, one option is to replace representatives through the vote. John Locke spells out other measures to bring change that he claims are among the “Rights of Man”.

Posted by Anubis | Report as abusive

I agree Jim. Money is a tool that if used correctly can aid our survival and extend to us through hard work and discipline many comforts. It also if used wisely can enable a society to build that which it needs to prosper. Our political leaders unfortunately see money differently. It is used by politicians to coerce, bribe, extort and manipulate our society in there attempts to remain in power. Most politicians today care not who pays the bill for they defer that to future generations.

Thomas Jefferson stated that those who charge future generations to pay for what we would use today “commit a larceny against futurity”. He also stated “From time to time the tree of liberty must be replenished with the blood of patriots and tyrants”. Is debt assigned to many without their consent not enslavement?

Posted by Anubis | Report as abusive

RE: Rich Paying More Taxes,
website taxfoundation .org states the rich filers pay a large precentage of total tax collected. This is true. The big lie they leave out is what is the EFFECTIVE tax rate for these individuals. With an account of minor skills these folks pay a smaller percentage of their wealth to taxes than the working class who cannot afford tax free munis, booking losses on stocks, depreciation on business, etc. They pay a larger percentage of the total tax collected because they control a much larger percentage of the wealth. Much of that wealth is tax free or taxed at a lower rate. cannot dispute the concentration of wealth to the small top percentage of people. Another organization built on lies, damm lies and statistics. You see who’s bailing out the brightest financial minds in the world who didn’t know what they were doing?

Posted by Tim E | Report as abusive

I think California of all states needs to be careful about the financial decisions that are made there. The whole country has its eyes on California all the time, so they should be more careful about financial decisions. There really is no “right or wrong” answer when economic times are as tough as they are right now.

Posted by jjones444 | Report as abusive