Is the State of California Broke?

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 same 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…

Comments

[1 of 4:]

Yes it's true and the voters are pushing back because they resent the fact that Sacramento continues to punt on making the hard decisions. Private sector people are tired of paying ever increasing taxes for the inflated salaries and generous retirement plans of police and firefighters. On the other hand, when the issues are parsed and presented to the voters directly, few turn (vote) down benefits for the firefighters, police or teachers. Those factions all have strong unions that spend millions each election to sway voters. They're spending like crazy on the current initiatives, but this time it looks like they're going down. The last initiative, 1F, is nothing more than an uptick rule. So they can't increase pay in an economic downturn, but they'll catch it up when things turn around.

May 12 09:58 AM

[margel:]

This election is not about the failure of the legislature to do its duty, but the failure of California to give the legislature the discretion to make budgets. The reason we are having a special election in California to approve a crisis budget is that over the past 30 years California voters have approved state ballot initiatives that wrote into the state constitution provisions both (a) severely limiting the discretion of the legislators to increase taxes and (b) creating permanent earmarks which mandate levels of state spending for education, mental health and other area. These initiatives have in effect put the California legislature into a fiscal strait jacket. It cannot make major changes to the budget with respect to spending or taxes unless it goes back to the voters and ask them to temporarily or permanently change the constitution itself. Most of the changes proposed are temporary, except for the expansion of the rainy day fund, which involves a very complicated formula which nobody understands. It is another lock which will only make the strait jacket tighter and exacerbate the current crisis. I think it is time for major constitutional change which gives back to the legislature discretionary power to tax and spend.

May 12 01:56 PM

[dybydx:]

if defaulting on muni's allow debtor to take possession of assets, i'd love to buy more cali bonds.

May 12 07:46 PM

[bogoMIPs:]

I get a perverse laugh everytime I see Mexifornia's problems just get worse and worse.

1. Too many people drawing from government payrolls.

2. Too many illegal aliens, sucking off of the assistance programs and paying nothing.

3. Too may illegal aliens commiting crimes, being arrested, and clogging their judiciary and prisons.

4. Too many softie liberal voters trying to craft the "visualize whirled peas" agenda thru the ballot box.

X. Too many other touchie-feelie things to ever cover adequately here.

May 12 07:55 PM

[MusicLover1:]

FYI bogoMIPs

Get your perverse laughs if you like.

But 48-50 other USA States are in the same
leaky rowboat and the last years of
conservative government and wildly unreastic
spending and "budgets" put them all there.

Reaganomics has come home to roost.

Cut everyone's taxes to zero
and then expect Lexua style government services.

The bills are now coming due.
The Credit Card orgy of credit is all coming
a crashing down.

May 12 08:21 PM

[Moon Kil Woong:]

bogoMIPs, I find your comment galling. One can not blame the economic problems solely on Hispanic labor. Furthermore, Arnold is not a liberal nor even a Democrat. Your comments belittle the complexity of California and it's much too complicated "change the constitution by proposition system".

Rather than give people power over the budgeting process, the Proposition system has opened up the way for a raft of special interest groups to hijack any sensible fiscal budget. Both from the bond issuance and extra taxes for necessary projects to the spending allocations, the Proposition system has ruined the State budget and the citizens.

Propositions to increase public spending and schools has only been a cloak to raise taxes to pay for existing public school and necessary services so that existing money can go to clandestine and largely useless other special lobbyist pet projects.

Hopefully, with 9.25% sales tax and ranking close to the lowest spending on education per student in the nation Californians will wake up and see what's happening. California is broke. Billions of dollars are being siphoned off, not for education, fire departments, or other neccesary services, but for pork. The bureaucracy is enormous. The processes for doing anything is ridiculous. Administrative costs are unweildy. Regulation is off the charts. The tax loopholes are astounding.

The answer is not to say yes, but to say no. Only then can we stop and ask how do we create a system that delivers what you pay for and what is reasonable to pay for it. For the last 15 years the State has survived off of stealing tax dollars from municipalities property tax revenue that would otherwise go to fixing potholes, running parks, and other beneficial real services. There is no one left for California to steal from.

These are the real problems California faces, not some foreign agent. The agent of fiscal chaos is so very very domestic. Lobbying, unfortunately, is straight from the good ol USA.

May 12 10:03 PM

[Dean M:]

Solar panels and stem cell research will save the day

May 12 10:06 PM

[doubleguns:]

Possibly the only way that California can cure its problems will be to crash and burn. Then a new constitution, minus the proposition nightmare, can be rebuilt from the ashes.

Horrible solution but not entirely out of the question. Problem is another 49 states are sitting on the launch pad waiting.

And finally there is the federal government.

May 12 11:17 PM

[john s. gordon:]

musiclover -

reaganomics -

during the 1980 nomination process george bush senior called it voodoo economics.
> jack

May 13 08:29 AM

[Gregman2:]

The built-in legacy costs from past initiatives lock in expenditures,
regardless of revenues collected by the state, which have dropped seriously since 2006. With so many foreclosures property tax receipts are way down, and income taxes are down due to high unemployment. Yes, basically, the state is broke, and Props. 1A/1B are emergency attempts to shift the deck chairs on the Titanic.

May 13 12:16 PM

[EX-republican:]

Great comments. Living in Illinois or Cali light we have same problems. Our new governor is going to double our state taxes unless we can send him to prison first. Going to use the stimulus money to try and extend the status quo (ponzi game) a little longer. I actually thought Cali had something right with the propositions at first being able to rein in taxes, but now its all about unfunded mandates. I'm 50, worked all my life in manufacturing supv. and expect to work at least a dozen more years. While my cop and teacher friends are already retired, I hope for the stock market to inflate my 401k. My hometown (barely 5k people) fire dept just bought a million $ ladder truck and we dont have a building over 20' tall in this town. What force can stop overspending? I've only seen it once when REAL Republicans held Bill Clintons feet to the fire in the 90's. Sadly they dont exist anymore.

May 13 02:00 PM

[devassocx:]

Embrace the coming financial crisis...a cleansing of state gov't is
sorely needed.

Even though revenues are down, this is not a revenue problem; It's
a spending problem and a monster state government that will fight
to the death to continue growing on the backs of the taxpayer. This
is nothing new and has been going on for many years.

Reality is a bitch and it will soon be here.

Finally, it's laughable that all the threats about losing fireman, cops and
releasing all the prisoners on the state's populace is going to happen.
Those are the last things that will happen.

There is so much fat in the bloated state unions, waste in government operations, etc that are long overdue for major adjustments.

California is one of the highest taxed states in the country...that is
the problem that must be solved.

May 13 02:23 PM