We fell short of our Fall Fundraiser goal of 2,500 donations. Help us catch up ⏩ Give Now
Marketplace Scratch Pad

California’s dreamin’

Scott Jagow Jan 14, 2010

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.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.