California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."
While its fiscal crisis is severe, experts say the state is unlikely to default on what it owes, even if it runs out of cash. It can raise money through taxes and other means to assure repayment of its debt. Most likely are massive cuts in public services.
"After June 15th, every day of inaction jeopardizes our state's solvency and our ability to pay schools and teachers and to keep hospitals and ERs open," Gov. Arnold Schwarzenegger (R) said Friday.
Problems unique to California have made it hard for the state to find a way out of its crisis.
The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California. The signature example of "ballot box budgeting" left the Golden State inordinately reliant on the personal income tax, which accounts for half of revenue to Sacramento.
California's budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.
"Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets," said Michael Cohen, deputy analyst in the Legislative Analyst's Office.
Consider capital gains -- income from sales of stocks or other assets. In California, that income dropped to $52 billion in 2008 from $130 billion a year earlier. It is estimated to be $36 billion this year.
By February, the shortfall was projected at $42 billion over two years. Lawmakers stared at the figure for weeks, stymied by the state constitution's requirement that the budget pass with two-thirds of the legislative vote and their own profound partisanship. The deadlock broke when a moderate Republican defied his caucus's pledge against any tax hike, but it didn't end there.
In April, budget analysts revised revenue projections downward by another $12 billion. And in May, voters overwhelmingly rejected the portions of the February deal that legally had to be put before them, taking $6 billion off the table.
To close an annual gap now put at $24 billion, Schwarzenegger and leaders of the legislature's Democratic majority have put aside talk of tax increases to concentrate on cuts. Most dramatically, Schwarzenegger would eliminate the state's basic welfare program, which serves 1.3 million.
Facing gridlock and few options other than severe cuts, California began to look to Washington for help. State Treasurer Bill Lockyer sent a letter to Geithner in mid-May, urging him to consider helping cash-strapped municipalities.
"A fiscal meltdown by California or any other large state or municipality would surely destabilize the U.S., if not worldwide, financial markets," Lockyer wrote. If the state were to default, it could shake bond markets and undermine investor confidence in a still-fragile financial system.
Tom Dresslar, a spokesman for Lockyer, said California will not default on its general obligation debts. But by late July, the state conceivably could run out of money to operate, as revenue continues to deteriorate while costs keep mounting. "The problem is getting worse, certainly not getting better," he said.
In testimony before Congress, Geithner did not rule out aiding California. But he was far from enthusiastic about such a proposal, instead suggesting that Congress was better positioned to help the states -- and that states should balance their budgets.
"A lot of the burden," Geithner said, "is going to be on them to lay out a path that gets their deficits down to the point where they're going to be able to fund themselves comfortably."
Most members of California's congressional delegation have also been ambivalent about whether to press for federal help.
State officials are "not expecting any help from the federal government," Dresslar said. "At this point, we're on our own."
but....
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James P. Pinkerton
June 16th, 2009 9:38 AM Eastern
JAMES P. PINKERTON: The Washington Post Wants YOU to Bail Out California!
Should the federal government bail out the state of California? You know, the federal government that owes trillions–should it give borrowed money to a state that owes billions? The Washington Post sure seems to think so. Here’s the way its
front-page story this morning begins: “The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy — the state of California.” Wow. One’s first reaction is that if even the Obama administration opposes a bailout, then it must be a pretty bad bailout.
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Even the Obama administration recognizes that California doesn’t have a ‘budget crisis’ — it has a spending crisis.
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But the word-choices in The Post piece are instructive–instructive about the knee-jerk bailout mentality of the MSM: those meanies in the Obama White House have “turned back pleas” from the Golden State. And then this is rich: The Post describes California’s budget crisis as “one of the biggest remaining threats to the economy.”
Oh yes, the prospect that Sacramento might have to make deep cuts in state government spending is as big a threat to America as unemployment, inflation, de-industrialization–not to mention the ominous prospect of “cap and tax” legislation aimed at saving us from the dire threat of carbon dioxide (legislation championed, by the way, by House Energy and Commerce Committee chairman Henry Waxman, Democrat of… California). We are supposed to believe, according to The Post’s logic, that the “Termination” of Governor Arnold Schwarzenegger’s political stardom is a reason for the rest of us to pay out money we don’t have, so that California politicos can come to Washington and continue the work of shutting down American manufacturing.
And yet even The Post has to admit, buried down deep in the piece, that the source of the problem is the reluctance of California voters to pay for the government they are stuck with.
Of course, that’s not how The Post puts it. Instead, the paper writes, “The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California.” Again note the loaded word choices: “burdened” … “inflexible.” Facts of life that you like are “sturdy principles.” Facts of life that you don’t like are “inflexible burdens.” And so now we know what The Post thinks of tax-limitations–although, of course, we already knew that.
That California ballot initiative, Proposition 13, passed by a 2:1 margin 31 years ago–there’s been plenty of opportunity, since then, for the voters to repeal their own tax-limiting handiwork. And yet they have chosen not to do so. Now what does that tell you? But The Post derides that choice–affirmed and reaffirmed over three decades–as “ballot box budgeting,” and then glosses over the fact that this past May, the people of California voted down a huge tax increase, Proposition 1A, that was pushed by Governor Schwarzenegger and the state’s Democratic political establishment. And so what does that tell you?
It tells us that the voters are simply waiting for the politicians to get the message: cut spending.
California doesn’t have a budget crisis. California has an overspending crisis. But don’t take my word for it–take the word of the people of California, who keep voting “yea” on tax cuts, and “nay” on tax increases.
One of these days, the governor and the legislature will get that message. But don’t hold out much hope for The Post. In Washington, things are different–but you knew that.