Sunday, December 13, 2009

California Crisis Deepens.... Part 3

The situation in California continues to deteriorate despite all the preventitive measures employed.  John Chiang, State Controller, just came out with his most recent report.  In that report, he went into detail as to the current status of the emergency IOUs issued.

Chiang notes that the IOUs issued between July 2 and September 4, 2009, totalled 450,000 - worth $2.6 billion.  He further reports that they have STOPPED accruing interest as of September 4th, the maturity date.  The interest had been a rather paltry 3.75% to begin with!  

Hurt by heavy investment losses over their last fiscal years, giants CalPers (California Public Employment Retirement System) and CalSTRs (California State Teachers Retirement Systems) were affected by downgrades from Moody's, a highly recognized credit rating agency.  Moody's specifically noted the lowered possibility of these funds to meet future obligations to pensioners.

The two funds together STILL hold a staggering $338 billion in assets despite losses of more than 25% in their last fiscal years.  CalPers remains the single largest pension fund.

According to the LA Times, the California State University System which incorporates 23 campuses and 450,000 students, has been subject to budget cuts of more than $500 million.  As a result, "Cal State" has been unable to avoid staff and faculty furloughs, steep student fee hikes and severe reduction in enrollment.
Currently, according to a variety of analysts, California faces a $21 billion deficit for the current fiscal year, ending June, 30th.  Futhermore, the deficit for the subsequent two fiscal years is projected to rise to ANOTHER $44 billion!

On the plus side, the news is rather scant.  In October, for example, prices of homes actually up-ticked, although being driven by the Federal tax credit for first-time buyers.  In addition, the state ADDED 26,000 new jobs.  So, if these sources are correct, California is firing teachers and hiring more adminstrators.  Talk about the left hand not knowing what the right hand is doing!  Whodda thunk it?

Meanwhile, leading Republican candidates to replace the current governor, former Ebay head Meg Whitman and Steve Poizner, have offered no solutions to the fiscal gap on their own.  What's a mother to do?

As you can clearly infer, California appears to be entering some sort of "death spiral".  But, fortunately this only represents 1/10th of the population of the United States!

I hope you find this essay useful and informative.  I welcome comments, both pro and con. I will continue to cover California over the ensuing weeks and months as new issues surface.

Marko's Take

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