Tuesday, June 30, 2009

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:

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mike.montchalin said...

I get the feeling California legislators are completely incapable of becoming debt averse. That means, 1) Matt Stiles' readers need another social mood piece; 2) Californians need to replace their legislators.

Occdude said...

There are definitely storm clouds on the horizon that are fast approaching. As far as the Cali crisis goes, the federal government WILL step in, you have no idea how bad things will get in this state (my state) if they don't, not to mention the whole muni market. What will be interesting, is the reaction of the bond market when they do step in.

They're running out of gimmicks, its the federal govenment or bust.

Anonymous said...

I think CA bond holders are relying on being 2nd in line (after education) -- but when the Fed. gov't takes over, anything goes. Look what happened to GM bondholders.

mannfm11 said...

Dennis Kneale is such an idiot, I find the credibility of CNBC even more greatly reduced that he is on the shows they do. Everything he mentioned was in better shape was revealed to be down this week. The stock market story is one of the biggest crap stories I have ever followed. I am still baffled how they could say this is the best quarter in the last million years? I recall the entire LTCM bust in 1998 was wiped out between 10/8 and the end of 1998. My recall was that was a 266 point loss. Being the first 130 points of the rise off the bottom happened by the end of March, I find that hard to believe. In fact the move was from 790 to 919, a little over 15%. The close on 12/30/98 was 1229. The open 10/1/98 was 1017. I believe that is 20% and it didn't follow a constant 60% decline. The SPX opened 1/2/09 at 903 and closed at 934, meaning the SPX is now below where it closed the first day of the year. The almost 4 month rally hasn't wiped out the 2 month decline.

I just finished reading Michael Pettis' blog from China. It is clear if there is a such thing as accounting in China that a bank crisis there is right around the corner. Speculators in China have run a corner on many commodities in a speculative move. Wait when you see this mess break. I suspect some of the US firms are playing right along with them and it would cheer my spirits to see Goldman take a bath. There shouldn't be a place too hot in hell for these guys.

As far as California goes? The Fed can't take over. The states run the Fed,not the other way around.

mannfm11 said...

One more thing. I went to the Texas Rangers/California Angels game Tuesday night. This is a battle for first place and suddenly the attendance has broken down again. There were only a little over 20,000 at the game. The Rangers have draw over 2 million with some horrible teams. This crowd would project out to a total draw of about 1.6 million and should draw around 40,000 or about twice what it did draw. The DFW area is supposed to be one of the better economies in the US, but the ballgame makes it clear that the economy isn't getting better. A month ago the draws were much better. The consumer confidence figures were down in the latest poll. This ballgame is a reflection of that. I believe the public was trying to buy the green shoots nonsense, but their financial positions won't let them.

Matt Stiles said...

Well, it wasn't just California that missed the deadline. A number of other states did also. The only place I could find any coverage of this was in a small online ohio newspaper. I guess they didn't get the message.


ADP employment was also down 100k more than expected, ISM number worse than expected, construction spending worse than expected.

But the market is rallying, so I'm sure none of this matters. Anyone still think news drives the market?

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