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California's dreamin'
S & P has lowered its rating on California bonds, essentially saying the state's plan for erasing its budget deficit is pure nonsense. The debt rating is now A-. A minus? For an entity that's been called a "failed state?"
A- is still four notches above speculative grade or "junk status." But consider this
from Reuters:
The cost to insure California's debt with credit default swaps is now higher than debt of developing countries, such as Kazakhstan, Lebanon and Uruguay. It costs $277,000 per year for five years to insure $10 million in California debt, compared with $172,000 for Kazakh debt.
Yes, Kazakhstan, host country of the movie "Borat."
S & P's slight downgrade seems to be focused on a seemingly delusional quality in Governor Arnold Schwarzenegger's budget plan. He's asking the federal government to hand over about $7 billion. Here's what he told his state's congressional delegation:
"There is no rational way to absolve Washington of any responsibility for state budget deficits until Congress acts to remove the barriers that prevent states from reducing spending as needed to live within our means."
Schwarzenegger says the state is owed for federal health-care mandates, forced education standards and putting illegal immigrants in its jails. But many say Schwarzenegger is California dreamin' if he thinks the federal government is coming to the rescue. From the Bakersfield Californian:
This is the same federal government that's wallowing in debt and clearly dubious about writing checks to a state that seems incapable of correcting its own missteps with the necessary hard decisions...
As in more spending cuts and/or tax increases.
But others argue California's budget situation is being overblown, that S & P has it about right by grading the state's bonds an A minus. From the Wall Street Journal:
Municipal bond coupons enjoy substantial constitutional protection in California: Only K-12 education spending ranks higher in priorities. "Going back as far as the Great Depression," says H.D. Palmer, spokesman for the Department of Finance, "California has never, ever missed a scheduled payment to bondholders or noteholders, and we will move heaven and earth to make sure that streak is never broken."
State Treasurer Bill Lockyer has said in this space that California will pay its bondholders short of anything except a nuclear war.
Why doesn't California seem to have the same resolve in fixing its budget deficit? The Journal editorial shares Schwarzenegger's view that Washington is partly to blame:
...California taxpayers have been subsidizing the rest of America for decades. The federal tax code is progressive, taxing highest earners most. And those are more likely to be found in Silicon Valley than in, say, the Tennessee Valley. The highest-earning states, like California, New Jersey and New York, only get back in federal spending a fraction of what their taxpayers are paying in. The difference goes to pay for schools and highways and even, sometimes, pork projects in lower-earning states.
Governor Arnold Schwarzenegger mentioned this when asking for more federal money this month, but he probably didn't go far enough. The Tax Foundation suggests the cumulative subsidies paid by Californians, during the quarter century through 2005, ran to hundreds of billions of dollars.
That would be enough to pay the entire Sacramento state budget for years. Failed state? They should declare independence.
Oh boy. Those sound like fightin' words. Do you think California (and other states) have a legitimate beef with the federal government?
Tonight on Marketplace, we'll look at the rating agency side of this.
I am a CA resident and what's happening in state legislature is very disturbing. Personally, I can't understand why the politicians can't put some of their personal pet projects and viewpoints aside and work together to create a realistic and honest budget. Part of the problem is the 2/3 majority required to make anything happen. The other part of the problem, is that the politicans along with the state employees union have acted in an extremely irresponsible fashion in regards to pensions for state workers. The pensions are the most generous in the nation. On top of all that, I can't understand why it's so hard for the guvenator to start a jobs creation program and get people back to work. You would also think that CA would have the best public schools in the nation based on their costs, but honestly they are a shame. I think the legislature needs to do something different to examine the good ideas of its CA residents to save money on some of these state run programs.
The Bond Market carried the State through its cash crisis in summer 2009 despite the mixed budget bag of dubious assumptions, accounting tricks, and cash flow games.
Summer 2010 is fraught with even more perils unless the Legislature can pass a responsible budget for the first time in years. Small wonder that the November 2010 ballot will be full of new remedies fueled by frustration and anger.
Well California has averaged $48,376,361.91 per day in unemployment borrowing since January 4th (Total so far in January $534,000,000)....if the numbers keep up the current trend January should be another sizable increase over December.
To put that in perspective here is the average daily revenue collection (TOTAL - Corporate, Personal, Sales, Other, & Non-Revenue) from July 1st through December 31st - $211,289,617.49
...which puts current daily unemployment borrowing at 23% of the prior 6 months average daily revenue collection.
I'm a Californian, and I love my state. We're plagued by a hyper-inefficient government structure that's become so dysfunctional that it seems only a matter of time before we either implode or convene a constitutional convention (the ballot initiative process to call such a convention is already under way).
If we're going to go to the trouble of redesigning our government for the 21st century, how can Californians not consider the option of secession?
Even if we redesign our government to work more efficiently, we will see little return on all that work if we're still subject to the onerous and largely unfunded mandates, leveraged incentives, and general poor leadership of the federal government?
As it is, Californians don't get a fair return on the tax dollars they send to Washington: we are overtaxed and underrepresented. 40 million Californians are represented by the same number of US Senators as the roughly half-a-million residents of Wyoming. That means Wyoming residents get nearly 80x the representation a Californian does! We can no longer afford such unequitable underrepresentation; the status quo is hostile to the state.
BTW, this is what allows senators from small states, like Max Baucus of Montana, and the industry interests behind them to control "the peoples' branch."
Californians: wouldn't it be nice if our tax dollars were being spent in our communities instead of on the wars in Afghanistan and Iraq, the bailout of TBTF banks, or subsidizing bad loans?
We're begging for our fair share, but we're unlikely to be heard (it's funny that the TBTF banks didn't even have to ask).
Given our circumstances, how can Californians not consider secession?
You should check the mathematics in the link you posted. The formulas of "The Method of Equal Proportions" are posted which means that states gain or lose seats based on population. Yes, every state is guaranteed a seat in the house, but the population differences on the states guarantees more influence to the higher populated states.
Matt, I think you need to take a civics refresher and/or a history refresher. Let me help you out: Our country has a Legislative branch made up of two houses, the Senate and the House of Representatives. The House of Representatives members are divided up by population so states like California have many more delegates than, say, Montana. But see our founding fathers were smart guys because they realized that majority rule is not always best. They needed to make a provision for small states so they had some clout in the Legislative branch as well. So the Senate has two representatives from each state giving them all an equal voice to help moderate the power of the large states over the small states. So you see, Matt, in the House of Representatives we do have a bigger say than Montana but in the Senate we are equal...by design.
Thank you for the civics lesson, David.
I'm sure when the founding fathers designed our bicameral system in 1787, back when we had 13 colonies, they were envisioning our current situation, with California having roughly 12%, and Wyoming having less than .2%, of the country's population of roughly 310 million, but both having equal representation in the Senate.
And even if this is exactly what they intended, taxation without representation was not.
Until 1873, the total membership of the US House of Representatives never exceeded 250 members. Since 1963, its been capped at 435. <a href="http://en.wikipedia.org/wiki/United_States_congressional_apportionment#P....
"During the period that the current U.S. Constitution has been in effect, the number of citizens per congressional district has risen from an average of 33,000 in 1790 to almost 700,000 as of 2008." <a href="http://en.wikipedia.org/wiki/United_States_congressional_apportionment#C....
If we adopted the <a href="http://en.wikipedia.org/wiki/Wyoming_Rule">Wyoming Rule</a>, it would be more fair, and California would be much better represented.
