California Budget Crisis Poised to Accelerate

Interested observers are wondering about California's looming deadline.

I've been harping on states like California for about 18 months now. Their finances have been terrible for that long (and much longer). But each time the issue appears to be coming to a head, the state congress seems to find a way to postpone the problems by issuing debt, making token service cuts or sneaking in new taxes.

But they've run out of options. Their credit rating is being cut, which eliminates the possibility of issuing debt, voters rejected tax increases on a recent ballot. So massive service cuts are the only option. But it appears that observers have become so tired of hearing the doom and gloom that they have grown complacent to the seriousness of it all.

Problems have been significantly compounded in the last few months due to the sharp drop-off in tax revenues. It seems that for every billion dollars the legislators figure out a way to save another two billion goes missing from budget projections. It's like trying to play table tennis in a hurricane.

Legislators are required to come to an agreement by midnight tonight on how to close the budget. If they don't, the state will suspend payment to "contractors, vendors, local governments and taxpayers expecting refunds" starting on Thursday. They will be replaced with government IOU's which will have an undetermined market value - if anything. This will, of course, start a chain reaction among contractors who will subsequently have to tell their employees there's no paycheck this month. Struggling municipalities will be required to do the same. Those on the dole have already seen their payouts slashed. Government workers will be furloughed another day in July - another 5% drop in monthly pay.

This all has the makings of something very ugly. People being thrown out of work in the middle of summer, while they're being told on TV that banks are set to rake in enormous profits after being bailed out by those on the streets. People keep asking me, "what's it going to take to get this comatose American population to come to their senses and start getting angry?" Maybe it will never happen, maybe this will be the catalyst. But eventually these imbalances that have been growing and growing without consequences will matter. Just because they haven't mattered until now doesn't mean they never will.

The same goes for pension shortfalls, CRE delinquencies, and the plethora of problems that were papered over or shuffled around in the last year. There are perhaps even more imbalances than there were building at around the same time last year, none of them have really gone away or been dealt with. Those that have been dealt with (automakers, residential RE - partly, various other corporate bankruptcies) have been replaced with other, just as large issues that will be met with less willingness from taxpayers to bail out.

But then again, you could just listen to this guy:



Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.