Fundmastery Blog

Kurt Brouwer May 11th, 2009

When my younger son Luke was almost two years old, he watched a Thomas the Tank Engine video over and over. In that episode, a train went across a ravine on a rickety trestle bridge and then it crashed to the bottom of the ravine. He watched that video over and over and it always ended the same way. When the crash happened, Luke would intone, “Into the bine [ravine] below.”

When I see the news on fiscal and budgetary policy in California, I get the feeling I had when I watched the Thomas the Tank Engine video — the crash is coming and there is nothing we can do to stop it. We are all going into the ravine below:

California could be broke by July, state official warns (Los Angeles Times, May 7, 2009, Evan Halper and Eric Bailey)

…If the propositions do not pass, the state could find itself as much as $23 billion short of the money it needs to pay its bills over the next year, according to a new forecast by Legislative Analyst Mac Taylor. The poll, from the Public Policy Institute of California, found that even as voter interest in the ballot measures rises, all are trailing except the sixth one — Proposition 1F, which would bar pay hikes for lawmakers in deficit years…. As the ballot measures lag in the polls, the administration of Gov. Arnold Schwarzenegger has begun revealing the cuts it is weighing as an alternative.

On Thursday, the administration advised law enforcement officials that it was preparing plans to commute the sentences of 38,000 state prison inmates, including all illegal immigrants. It also is considering closing some prisons and sending inmates to county jails, according to a copy of the proposal obtained by The Times.

Under the plan, 19,000 illegal immigrants — 11% of state prisoners — would be turned over to the U.S. Immigration and Customs Enforcement Agency after having their sentences commuted. An additional 19,000 “relatively low-risk offenders” would have their sentences commuted as well.

Earlier in the week, the administration warned local officials that it may raid their budgets for $2 billion and close firehouses.

Opponents of the ballot measures call such proposals scare tactics.

“It’s all about fear,” said Jon Coupal, president of the Howard Jarvis Taxpayers Assn. “This week it’s firefighters; next week they’ll threaten school closures.”

… The unpopularity of the ballot measures appears to reflect intense voter distrust of Sacramento. Just 16% of likely voters say they trust the state government to do the right thing. Schwarzenegger’s approval rating remains at a near-historic low, 34%. The state Legislature’s, meanwhile, stands at an anemic 12%.

“The voters seem interested in delivering a message,” said Mark Baldassare, Public Policy Institute of California president and survey director. “The measures are very complex and confusing to voters — and they don’t seem to have trust in what the governor and Legislature have put before them.”

…The only measure that voters back widely would do little to help the state budget — but it would send a clear message to Sacramento. The poll found that 73% plan to vote for Proposition 1F, which would freeze the salaries of lawmakers in deficit years.

Just to make one point, the state of California is already broke and it has been for years. Like a family with too much debt and too little income, the state has been raiding the kids’ piggy banks and borrowing money until it has finally run out of resources to tap.

The powers that be may have one more trick up their sleeve such as getting some bailout billions from the Feds, but the outcome is pretty much fixed. If you spend more than you bring in, eventually you go broke.

Update: This piece from The Bond Buyer is interesting. The Bond Buyer is a publication for municipal bond professionals [emphasis added]:

…California’s short-term borrowing requirements this summer will be billions of dollars larger than the mammoth numbers officials were already projecting, according to a report last week from the state Legislative Analyst’s Office.

State finance officials have been talking about a cash-flow borrowing of up to $13 billion this summer.

But absent any changes to state revenue and spending plans, California’s government will need at least $17 billion, and up to $23 billion if public opinion polls are correct and voters next week reject a series of budget-related ballot measures in a May 19 special election, the LAO report said.

“Given the current state of the credit markets and the state of California’s own credit standing, the state of California will have difficulty borrowing that amount,” said Jason Dickerson, fiscal and policy analyst for the office and author of the report.

Without the massive borrowing or a major legislative budget correction, “the state will not be able to pay many of its bills on time for much of its 2009‑10 fiscal year,” his report said.

State Controller John Chiang made a similar point Friday in releasing his cash balance report for April. Through the first 10 months of the fiscal year, revenue is $2.1 billion below budget estimates.

“Beginning this summer, we face a cash problem unseen in nearly eight decades, and the magnitude of that problem grows with every projected revenue dollar that fails to appear,” Chiang said in a statement…

• Economy , Geopolitics , debt , income taxes
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