California, and its largest city, Los Angeles, continue to be embroiled in a political deadlock. Yesterday, Governor Arnold Schwarzenegger released a new executive order requiring state workers to take 3 unpaid days off per month starting in August. State workers were furloughed a total of 46 days when Schwarzenegger issued a similar order in February 2009, which translated to a pay cut of about 14%.
California faces a $19 billion deficit for the fiscal year that began July 1, and Schwarzenegger is demanding pension, tax and spending reforms in the new budget. He said that if the Legislature doesn't give him a budget that meets his expectations, he won't sign it.
It's unclear how long the latest round of furloughs could last, as Schwarzenegger and lawmakers enter the 5th week of the new fiscal year without a balanced budget. Earlier this week, the governor hinted that he might not sign a budget before he leaves office next January unless it includes pension, tax and spending reforms.
State Controller John Chiang has warned that he will start issuing IOUs in August or September if the budget stalemate drags on in the Legislature. Chiang said the cash-saving measure is necessary because the state is projected to run out of cash in October. While thus far IOUs have been honored at face value, it is increasingly likely that recipients may ultimately have to take a substantial discount, if the budget crisis isn't resolved. In the 19th century, when several states had to issues notes, holders lost about half face.
Los Angeles, like many other cities, is struggling with a budget crisis of its own. The situation is so grave that city officials have been involved in tense negotiations with the Department of Water and Power (DWP) over the transfer of funds into the city treasury.
On Tuesday, executives with the DWP issued a sharply worded defense of their decision to withhold $73.5 million from city coffers in the middle of a recent fight over electricity rates, saying they did so to protect the utility's credit rating and its customers.
After a lengthy standoff between the council and DWP over proposed rate increases, City Controller Wendy Greuel reviewed the utility's records and concluded that, contrary to its claim, the utility could have made the promised transfer to the cash-strapped city budget without first being granted the increase. Official with the DWP, in turn, accused Greuel of making misleading statements.
Unlike investor-owned power companies that pay regular dividends to stockholders, the DWP transfers more than $200 million each year to the city's general fund, which pays for police, fire and other basic services. This year, that transfer was broken into two installments — $147 million followed later by $73.5 million.
With so many states, cities and counties in financial trouble, it would seem inevitable that some will be forced to default. It's highly unlikely that California, which has the 8th largest economy in the world, on a stand-alone basis, would be allowed to go under. However, cities have fewer options to plug their budget gaps. If even one major city becomes unable to meet their debt obligations, the spillover into the investor community will be most severe.
And, if cities begin to default with police and fire support becoming extremely understaffed, can civil disobedience be far behind?
Marko's Take
Showing posts with label California. Show all posts
Showing posts with label California. Show all posts
Thursday, July 29, 2010
Thursday, February 25, 2010
California Crisis Deepens... Part 7
California's plan to raise $2 billion in General Obligation bonds has been temporarily shelved as a result of ongoing legislative hurdles.
The bond sale was scheduled to begin next week and price on March 4, but state Treasurer Bill Lockyer postponed the deal for a week. He said the delay was required because the state legislature hadn't voted on a cash-management bill that would make California debt more appealing to investors and ratings firms.
California has the lowest credit ratings of any state. Moody's Investors Service rates the state's general-obligation bonds Baa1, Standard & Poor's ranks them A-minus and Fitch Ratings rates them BBB.
But John Flahive, director of fixed income at BNY Mellon Wealth Management, said that because of the delay and the size of the deal, the bonds may come around 20 basis points over where existing debt trades, which means the yields would be in the range of 5.875% to 6%.
Meanwhile, Governor Schwarzenegger continues to search for ways to close the budget gap which is projected to be $20 billion.
In low-key votes, lawmakers slashed nearly $1 billion from the state’s prison system, chiefly from inmates’ medical care and approved a $540 million reduction in state workers’ paychecks. The state Senate had approved those measures last week and on Monday they passed the Assembly on party-line votes.
Any tax increases remain "off the table". A spokesperson for Schwarzenegger said the Governor “would veto any plan that includes suspending a tax break.”
Especially hard-hit thus far has been the California State educational system. The Cal State University system, that great bridge between working-class California and its middle class, is under threat. Tuition has been going up at a head-spinning rate -- 32% this year! Faculty is being cut, financial aid is disappearing and many key classes are impossible to get.
If that weren't enough, the 2008 collapse of Lehman Brothers has hit some communities especially hard.
San Mateo, a scenic swath of peninsula between the Pacific Ocean and San Francisco Bay, saw $155 million evaporate when Lehman Brothers went bankrupt in September. On top of deep budget cuts brought on by California's fiscal crisis, the loss on Lehman securities means San Mateo's 735,000 residents are taking a hit.
Public schools here have laid off dozens of teachers and delayed or canceled renovations. Local community colleges are slashing classes and scrapping new facilities, even as enrollment surges because of the bad economy. The county trimmed its commuter rail service and shelved plans to build a new women's jail to alleviate overcrowding.
The biggest factor behind San Mateo's trouble is California's spending cuts. But its Lehman losses have made a bad situation worse.
San Mateo County's loss was the biggest of any municipality. Under state rules, the county government, city governments and area school districts hold their operating funds, reserves and bond proceeds together in an investment pool that lost about 6% of its value when Lehman went under.
The investment pool owned highly rated Lehman bonds and notes, which currently trade around 20 cents on the dollar. Any recovery from the bankruptcy process will take at least another year. A recovery of 20 cents on the dollar would leave the pool with a loss of roughly $125 million.
By far the biggest hindrance toward a solution is the stalement between Governor Schwarzenegger, who adamantly opposes tax increases and the Democratic-controlled legislature, which is equally adamant in its opposition to further spending cuts. It appears that this stalement will keep California "on the brink" until the very critical 2010 election tips the scales either more toward Republicans or Democrats.
As the world's ninth largest economy, California's fortunes are critical to the United States and the entire world. Sadly, the crisis threatens to get worse unless unemployment should miraculously diminish or an economic recovery gains momentum. Readers of "Marko's Take" know that neither of these outcomes is likely in the near future. Thus, California's prospects are likely to reach a crisis level by the end of the year.
Think I'm off the mark? TAKE ME ON!
Marko's Take
Our second installment on YouTube, "What Exactly Is Peak Oil?.. Part 1" is now posted at http://www.youtube.com/markostaketv. Please stop in, feel free to leave comments and enjoy the excellent film-making care of Phoenix Film Group. (http://www.phoenixfilmgroup.com/)
Part 2 of the "Peak Oil" series will be posted in the next 48 hours!
The bond sale was scheduled to begin next week and price on March 4, but state Treasurer Bill Lockyer postponed the deal for a week. He said the delay was required because the state legislature hadn't voted on a cash-management bill that would make California debt more appealing to investors and ratings firms.
California has the lowest credit ratings of any state. Moody's Investors Service rates the state's general-obligation bonds Baa1, Standard & Poor's ranks them A-minus and Fitch Ratings rates them BBB.
But John Flahive, director of fixed income at BNY Mellon Wealth Management, said that because of the delay and the size of the deal, the bonds may come around 20 basis points over where existing debt trades, which means the yields would be in the range of 5.875% to 6%.
Meanwhile, Governor Schwarzenegger continues to search for ways to close the budget gap which is projected to be $20 billion.
In low-key votes, lawmakers slashed nearly $1 billion from the state’s prison system, chiefly from inmates’ medical care and approved a $540 million reduction in state workers’ paychecks. The state Senate had approved those measures last week and on Monday they passed the Assembly on party-line votes.
Any tax increases remain "off the table". A spokesperson for Schwarzenegger said the Governor “would veto any plan that includes suspending a tax break.”
Especially hard-hit thus far has been the California State educational system. The Cal State University system, that great bridge between working-class California and its middle class, is under threat. Tuition has been going up at a head-spinning rate -- 32% this year! Faculty is being cut, financial aid is disappearing and many key classes are impossible to get.
If that weren't enough, the 2008 collapse of Lehman Brothers has hit some communities especially hard.
San Mateo, a scenic swath of peninsula between the Pacific Ocean and San Francisco Bay, saw $155 million evaporate when Lehman Brothers went bankrupt in September. On top of deep budget cuts brought on by California's fiscal crisis, the loss on Lehman securities means San Mateo's 735,000 residents are taking a hit.
Public schools here have laid off dozens of teachers and delayed or canceled renovations. Local community colleges are slashing classes and scrapping new facilities, even as enrollment surges because of the bad economy. The county trimmed its commuter rail service and shelved plans to build a new women's jail to alleviate overcrowding.
The biggest factor behind San Mateo's trouble is California's spending cuts. But its Lehman losses have made a bad situation worse.
San Mateo County's loss was the biggest of any municipality. Under state rules, the county government, city governments and area school districts hold their operating funds, reserves and bond proceeds together in an investment pool that lost about 6% of its value when Lehman went under.
The investment pool owned highly rated Lehman bonds and notes, which currently trade around 20 cents on the dollar. Any recovery from the bankruptcy process will take at least another year. A recovery of 20 cents on the dollar would leave the pool with a loss of roughly $125 million.
By far the biggest hindrance toward a solution is the stalement between Governor Schwarzenegger, who adamantly opposes tax increases and the Democratic-controlled legislature, which is equally adamant in its opposition to further spending cuts. It appears that this stalement will keep California "on the brink" until the very critical 2010 election tips the scales either more toward Republicans or Democrats.
As the world's ninth largest economy, California's fortunes are critical to the United States and the entire world. Sadly, the crisis threatens to get worse unless unemployment should miraculously diminish or an economic recovery gains momentum. Readers of "Marko's Take" know that neither of these outcomes is likely in the near future. Thus, California's prospects are likely to reach a crisis level by the end of the year.
Think I'm off the mark? TAKE ME ON!
Marko's Take
Our second installment on YouTube, "What Exactly Is Peak Oil?.. Part 1" is now posted at http://www.youtube.com/markostaketv. Please stop in, feel free to leave comments and enjoy the excellent film-making care of Phoenix Film Group. (http://www.phoenixfilmgroup.com/)
Part 2 of the "Peak Oil" series will be posted in the next 48 hours!
Saturday, February 20, 2010
States In Big Trouble: Tax Refunds To Be Delayed!
Recently, the State of New York announced that it is considering delaying state tax refunds in order to help it cope with growing budget problems.
Governor David Patterson, facing dismal approval ratings, has warned that the $8.2 billion budget gap may force the state to postpone the tax refunds in order to avoid going bankrupt, unless it passes a budget by its April 1 deadline.
“We can only do this to stop the state from going bankrupt, but there are procedures we will have to take if the legislature doesn’t act, and close this deficit with real and recurring deficit reductions, not made-up, phony revenue enhancers that don’t really exist,” he said, according to local radio station WRVO’s Web site.
Patterson told another radio station, WOR, that taxpayers should blame the legislature for the budget woes. He claimed the legislature refused to cut spending and resolve the budget deficit.
New York is one of many states facing budget shortfalls this year due to the recession and plummeting tax revenues. Last year, California also announced it would be forced to delay income tax refunds, but the state eventually issued them.
New York is hardly alone. Hawaii's Department of Taxation recently said it will begin issuing the checks in July, but it could be that some refunds won't get sent out until late summer.
The delaying of refund checks is allowed by state law and is being used this year as Gov. Linda Lingle looks for ways to ease an expected $721 million revenue shortfall in the year that ends June 30.
Lingle is pushing some costs into the next fiscal period, which begins in July. Several states, including California, Missouri and Kansas, last year used the tactic of delaying refunds to help with their financial problems.
Also in trouble is North Carolina. Its Department of Revenue is now in its second year of delaying refunds and blames the delay on slow collection of income taxes.
The trend is disturbing enough. We ARE in a recovery after all, aren't we? What on earth will happen when the economic downturn asserts itself with a vengenace?
Comments? Disagree? Agree? TAKE ME ON!
Marko's Take
Our next episode on YouTube, "What Exactly Is Peak Oil... Part 1" will be added to the site shortly. To visit the site, click here: http://www.youtube.com/markostaketv
Governor David Patterson, facing dismal approval ratings, has warned that the $8.2 billion budget gap may force the state to postpone the tax refunds in order to avoid going bankrupt, unless it passes a budget by its April 1 deadline.
“We can only do this to stop the state from going bankrupt, but there are procedures we will have to take if the legislature doesn’t act, and close this deficit with real and recurring deficit reductions, not made-up, phony revenue enhancers that don’t really exist,” he said, according to local radio station WRVO’s Web site.
Patterson told another radio station, WOR, that taxpayers should blame the legislature for the budget woes. He claimed the legislature refused to cut spending and resolve the budget deficit.
New York is one of many states facing budget shortfalls this year due to the recession and plummeting tax revenues. Last year, California also announced it would be forced to delay income tax refunds, but the state eventually issued them.
New York is hardly alone. Hawaii's Department of Taxation recently said it will begin issuing the checks in July, but it could be that some refunds won't get sent out until late summer.
The delaying of refund checks is allowed by state law and is being used this year as Gov. Linda Lingle looks for ways to ease an expected $721 million revenue shortfall in the year that ends June 30.
Lingle is pushing some costs into the next fiscal period, which begins in July. Several states, including California, Missouri and Kansas, last year used the tactic of delaying refunds to help with their financial problems.
Also in trouble is North Carolina. Its Department of Revenue is now in its second year of delaying refunds and blames the delay on slow collection of income taxes.
The trend is disturbing enough. We ARE in a recovery after all, aren't we? What on earth will happen when the economic downturn asserts itself with a vengenace?
Comments? Disagree? Agree? TAKE ME ON!
Marko's Take
Our next episode on YouTube, "What Exactly Is Peak Oil... Part 1" will be added to the site shortly. To visit the site, click here: http://www.youtube.com/markostaketv
Monday, January 11, 2010
California's Crisis Deepens... Part 6
California's fiscal situation contiues to get more bleak. The budget is projected to have a deficit of $20 billion, despite a total of $60 billion in program cuts, tax hikes and Federal bailout funds enacted last year!
Lawmakers are stuck in a stalemate: Republicans, such as Governor Arnold Schwarzenegger read Bush 1's lips: NO NEW TAXES! Democrats are being equally obstinate by refusing to sign any spending cuts. This suggests that the budget will once again be forced to extend its legal due date and IOUs will need to be issued AGAIN!
Democrats control the Legislature and are dismissive of the proposed budget. In additon, they view the proposal as nothing more than a re-tread of last year's budget, which was rejected.
Democrats do applaud the $6.9 billion owed to the State as a result of various mandates.
The Governor has been particularly sharp in his criticism of Democrats, declaring in his usually upbeat State-of-the-State address, that the Federal Government is partly to blame. He also appeared on NBCs "Meet The Press" and said that the Democratic legislature was also at fault.
Schwarzenegger particularly irritated Democrats by taking umbrage with the possible Federal medical overhaul known as "Obamacare", which would pile billions in spending onto the state. Yet the Governor pushed his own version of healthcare reform only 3 years ago!
Schwarzenegger DOES have some valid points. The Federal Government has failed to protect the state's borders, which cost California nearly $1 billion.
If the $6.9 billion does not materialize, The Governor will aim to eliminate the State's welfare program called CalWorks. He will also terminate the healthy families healthcare program for poor kids. He'd also remove the program called In-House-Services, which provides care for the elderly and disabled. Furthermore, the plan would include an additional 5% reduction in wages on top of the 10% cut enacted already!
California's budget negotiations will prove quite messy. But the election of 2010 will undoubtedly shake things up and hopefully end the stalemate.
Thanks for reading! Tomorrow, we re-visit Gold.
Marko's Take
Lawmakers are stuck in a stalemate: Republicans, such as Governor Arnold Schwarzenegger read Bush 1's lips: NO NEW TAXES! Democrats are being equally obstinate by refusing to sign any spending cuts. This suggests that the budget will once again be forced to extend its legal due date and IOUs will need to be issued AGAIN!
Democrats control the Legislature and are dismissive of the proposed budget. In additon, they view the proposal as nothing more than a re-tread of last year's budget, which was rejected.
Democrats do applaud the $6.9 billion owed to the State as a result of various mandates.
The Governor has been particularly sharp in his criticism of Democrats, declaring in his usually upbeat State-of-the-State address, that the Federal Government is partly to blame. He also appeared on NBCs "Meet The Press" and said that the Democratic legislature was also at fault.
Schwarzenegger particularly irritated Democrats by taking umbrage with the possible Federal medical overhaul known as "Obamacare", which would pile billions in spending onto the state. Yet the Governor pushed his own version of healthcare reform only 3 years ago!
Schwarzenegger DOES have some valid points. The Federal Government has failed to protect the state's borders, which cost California nearly $1 billion.
If the $6.9 billion does not materialize, The Governor will aim to eliminate the State's welfare program called CalWorks. He will also terminate the healthy families healthcare program for poor kids. He'd also remove the program called In-House-Services, which provides care for the elderly and disabled. Furthermore, the plan would include an additional 5% reduction in wages on top of the 10% cut enacted already!
California's budget negotiations will prove quite messy. But the election of 2010 will undoubtedly shake things up and hopefully end the stalemate.
Thanks for reading! Tomorrow, we re-visit Gold.
Marko's Take
Thursday, December 31, 2009
"Califoria Crisis Deepens... Part 5"
Governor Schwarzenegger is begging the Obama Admistration for $21 billion dollars in relief to offset the state's looming budget shortfall. Nearly all of the solutions which the Governor could take have already been enacted.
The legislature and the Governor remain at odds. They are heavily weighted with Democrats who oppose further budget cuts. Governor Schwarzenneger is a Republican and is adamantly opposed to further tax hikes! YIKES!
But there are opportunites to preclude this mess. First off is the 2010 election, which is likely to change the political mix in its entirety. We must, as voters, facilitate a change in the form of governance through the ballot box. After all, it was the utter stupidity of voters in approving a variety of ridiculous measures in the first place!
Under current policies, even a relatively small cadre of the minority party can thwart any changes.
Preschool programs, after-school programs, a stem-cell program, new prisons, new bond issues and borrowing to balance the budget were ALL approved at the same time! Sure, they may be worthy causes, but come on! At the time, these very same voters gave the "thumbs up" to a special-interest tax break. HELLO???
One proposal that is "ready to go" institutes open primaries, allowing the top two candidates of either party to run in the general election. Hopefully, this will "put the brakes" on the current extremism existing today.
If you believe this to be confusing, join the club!
Tomorrow, I'll cover a lighter note, in honor of the upcoming Super Bowl. I'll "tackle" the worsening situation taking place in major league sports.
HAPPY NEW YEAR!
Marko's Take
The legislature and the Governor remain at odds. They are heavily weighted with Democrats who oppose further budget cuts. Governor Schwarzenneger is a Republican and is adamantly opposed to further tax hikes! YIKES!
But there are opportunites to preclude this mess. First off is the 2010 election, which is likely to change the political mix in its entirety. We must, as voters, facilitate a change in the form of governance through the ballot box. After all, it was the utter stupidity of voters in approving a variety of ridiculous measures in the first place!
Under current policies, even a relatively small cadre of the minority party can thwart any changes.
Preschool programs, after-school programs, a stem-cell program, new prisons, new bond issues and borrowing to balance the budget were ALL approved at the same time! Sure, they may be worthy causes, but come on! At the time, these very same voters gave the "thumbs up" to a special-interest tax break. HELLO???
One proposal that is "ready to go" institutes open primaries, allowing the top two candidates of either party to run in the general election. Hopefully, this will "put the brakes" on the current extremism existing today.
If you believe this to be confusing, join the club!
Tomorrow, I'll cover a lighter note, in honor of the upcoming Super Bowl. I'll "tackle" the worsening situation taking place in major league sports.
HAPPY NEW YEAR!
Marko's Take
Sunday, December 20, 2009
California Crisis Deepens... Part 4
OK! So I first thought there would only be 3 parts to this series. However, things keep getting worse on a daily basis. Who knows? There might even be a Part 5 and 6! Let's see how things develop.
In any case, California's deterioration continues. According to a very recent article in the L.A. Times, Bill Watkins, who heads the Center for Economic Research and Forecasting at Califonia Lutheran University, released a recent report. He urges that the State begin emergency discussions with both the Obama administration and the Federal Reserve in the increasingly likely event of a state default. Had he read "Marko's Take" he would have realized that these discussions are already taking place!
Watkins believes that the odds now FAVOR a default. California Treasurer Bill Lockyear sharply took exception with Mr. Watkins' assessment, accusing him of "irresponsible fear-mongering". It makes one wonder whether Mr. Lockyear has spoken to Governor Schwarzenegger who has been saying the same thing!
The crux of the problem is centered in the budget. Republicans are adamant in their refusal to increase taxes, while Democrats are equally determined in THEIR refusal of further budget cuts.
The only reason that California is NOT in default is that some banks still honor the IOUs already issued on 4 separate occasions. If they should refuse to honor those IOUs AND the Obama Administration refuses to provide emergency bailout funds, then the State will have no choice.
As I've mentioned previously in the "California Crisis Deepens" series, the State is SO important, not only to the United States, but the world. I believe the Obama admistration will have NO choice but to provide emergency bailout funds. Therefore, I disagree with Mr. Watkins' conclusions entirely.
California has come up with a rather interesting partial solution to the budget stalemate which will appear on the 2010 ballot: the legalization of growing marijuana! In so doing, the pot industry, the largest agricultural sector in the Golden State, will be subject to taxation at a variety of levels and should be able to raise revenues substantially. Recent polls show this initiative is very likely to pass.
I hope the new initiative has left this troubling piece on a "high" note!
So, why don't you give me your "Take" in the comments section below?
Marko's Take
In any case, California's deterioration continues. According to a very recent article in the L.A. Times, Bill Watkins, who heads the Center for Economic Research and Forecasting at Califonia Lutheran University, released a recent report. He urges that the State begin emergency discussions with both the Obama administration and the Federal Reserve in the increasingly likely event of a state default. Had he read "Marko's Take" he would have realized that these discussions are already taking place!
Watkins believes that the odds now FAVOR a default. California Treasurer Bill Lockyear sharply took exception with Mr. Watkins' assessment, accusing him of "irresponsible fear-mongering". It makes one wonder whether Mr. Lockyear has spoken to Governor Schwarzenegger who has been saying the same thing!
The crux of the problem is centered in the budget. Republicans are adamant in their refusal to increase taxes, while Democrats are equally determined in THEIR refusal of further budget cuts.
The only reason that California is NOT in default is that some banks still honor the IOUs already issued on 4 separate occasions. If they should refuse to honor those IOUs AND the Obama Administration refuses to provide emergency bailout funds, then the State will have no choice.
As I've mentioned previously in the "California Crisis Deepens" series, the State is SO important, not only to the United States, but the world. I believe the Obama admistration will have NO choice but to provide emergency bailout funds. Therefore, I disagree with Mr. Watkins' conclusions entirely.
California has come up with a rather interesting partial solution to the budget stalemate which will appear on the 2010 ballot: the legalization of growing marijuana! In so doing, the pot industry, the largest agricultural sector in the Golden State, will be subject to taxation at a variety of levels and should be able to raise revenues substantially. Recent polls show this initiative is very likely to pass.
I hope the new initiative has left this troubling piece on a "high" note!
So, why don't you give me your "Take" in the comments section below?
Marko's Take
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
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
Sunday, November 29, 2009
California's Crisis Deepens... Part 2
When the words bankruptcy and default come up in the context of California's financial crisis, they have the tendency to unnecessarily scare the heck out of many people. As we pointed out in Part 1 last Monday, the situation IS dire, in fact, VERY dire, but let's discuss what all this rhetoric really means.
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
Monday, November 23, 2009
California's Crisis Deepens... Part 1
California's financial situation is so complex it could fill up a book. So, I'll begin with the way things stand NOW and, in Parts 2 and 3, I'll tackle other aspects, such as the ramifications to the state.
There has been no shortage of talk regarding the worsening financial condition of the Golden State. Increasingly, people are speculating that California will default on its debts. Recently, Governor Arnold Schwarzenegger has stepped up the rhetoric by repeatedly warning of a default. He has even contacted former Treasury Secretary Hank Paulson to ask for assistance in arranging an emergency Federal loan of $7 billion. This was reported in the LA Times last week when a copy of the email correspondence was obtained.
John Chiang, the State Controller, publishes official records at his website (http://www.sco.ca.org/.). According to the most recent report, Chiang notes that the year-to-date deficit is already up to $794 million and he provides breakdowns of which sources of revenue are up and down. Since California's fiscal year starts July 1, a deficit that large so soon is quite troubling. He notes some positive items, though. For example, sales taxes were UP last month and even UP year-over-year. He also acknowledges the positive impact of "Cash For Clunkers", but that program was temporary. What Chiang does NOT acknowledge in the latest report, is that only one month earlier, he warned the Governor and other lawmakers quite starkly of the emergency conditions that were prevailing.
California recently enacted a significant increase in withholding taxes and, it is believed, that state finance officials intend to issue "IOUs" to anyone receiving a tax refund. This would be at least the fourth time "IOUs" have been used. The problem is that an "IOU" is a form of currency which, in California's case, carries a yield of 3.75%. Given the state's problems, they may ultimately prove to be worth FAR LESS than face value. At the moment, a small trading market has evolved, but apparently, a few banks are still honoring them. So for now, no sizable discounts that I know of exist. However, there are numerous reports of opportunistic buyers bidding as little as 85% of face value on places like Craigslist.
There is historical precedent to what the true market worth of "IOUs" might become, albeit from the 1840's. The states of Indiana and Michigan and the city of Chicago all issued some form of scrip, or "IOUs", only to have them ultimately drop to 40% of their original value.
If you listen to independent sources, the budget situation is far, far worse than Chiang implies. Very recently, The LA Times reported that a study by a man named Marc Taylor, who is described as a "non-partisan Legislative Analyst", estimated that over the next 18 months, ANOTHER $21 billion in budget deficits would be realized. The reality is that no one really knows how bad the deficit will actually become because of all of the constantly moving pieces. It is even conceivable that the deficit could go LOWER.
Finally, I want to re-iterate that Fitch, a respected rating agency, has given California a BBB rating, shared only with Louisiana. A rating of BBB is barely above junk bond status. Only one month ago, California tried to sell $4.5 billion worth of bonds to help finance its deficit. The issue size had to be scaled back by nearly 10% despite a hike in yields.
I hope this gives you a small glimpse into just how tragic the state's financial situation has become. Next Monday, in Part 2 of this series, I intend to cover the likelihood of California's potential descent into bankruptcy. As for tomorrow, my topic will be "Taxes On Taxes". Meanwhile, I hope you keep coming back and review some of the other topics we've covered. Your feedback, pro or con, is always welcome.
Marko's Take
There has been no shortage of talk regarding the worsening financial condition of the Golden State. Increasingly, people are speculating that California will default on its debts. Recently, Governor Arnold Schwarzenegger has stepped up the rhetoric by repeatedly warning of a default. He has even contacted former Treasury Secretary Hank Paulson to ask for assistance in arranging an emergency Federal loan of $7 billion. This was reported in the LA Times last week when a copy of the email correspondence was obtained.
John Chiang, the State Controller, publishes official records at his website (http://www.sco.ca.org/.). According to the most recent report, Chiang notes that the year-to-date deficit is already up to $794 million and he provides breakdowns of which sources of revenue are up and down. Since California's fiscal year starts July 1, a deficit that large so soon is quite troubling. He notes some positive items, though. For example, sales taxes were UP last month and even UP year-over-year. He also acknowledges the positive impact of "Cash For Clunkers", but that program was temporary. What Chiang does NOT acknowledge in the latest report, is that only one month earlier, he warned the Governor and other lawmakers quite starkly of the emergency conditions that were prevailing.
California recently enacted a significant increase in withholding taxes and, it is believed, that state finance officials intend to issue "IOUs" to anyone receiving a tax refund. This would be at least the fourth time "IOUs" have been used. The problem is that an "IOU" is a form of currency which, in California's case, carries a yield of 3.75%. Given the state's problems, they may ultimately prove to be worth FAR LESS than face value. At the moment, a small trading market has evolved, but apparently, a few banks are still honoring them. So for now, no sizable discounts that I know of exist. However, there are numerous reports of opportunistic buyers bidding as little as 85% of face value on places like Craigslist.
There is historical precedent to what the true market worth of "IOUs" might become, albeit from the 1840's. The states of Indiana and Michigan and the city of Chicago all issued some form of scrip, or "IOUs", only to have them ultimately drop to 40% of their original value.
If you listen to independent sources, the budget situation is far, far worse than Chiang implies. Very recently, The LA Times reported that a study by a man named Marc Taylor, who is described as a "non-partisan Legislative Analyst", estimated that over the next 18 months, ANOTHER $21 billion in budget deficits would be realized. The reality is that no one really knows how bad the deficit will actually become because of all of the constantly moving pieces. It is even conceivable that the deficit could go LOWER.
Finally, I want to re-iterate that Fitch, a respected rating agency, has given California a BBB rating, shared only with Louisiana. A rating of BBB is barely above junk bond status. Only one month ago, California tried to sell $4.5 billion worth of bonds to help finance its deficit. The issue size had to be scaled back by nearly 10% despite a hike in yields.
I hope this gives you a small glimpse into just how tragic the state's financial situation has become. Next Monday, in Part 2 of this series, I intend to cover the likelihood of California's potential descent into bankruptcy. As for tomorrow, my topic will be "Taxes On Taxes". Meanwhile, I hope you keep coming back and review some of the other topics we've covered. Your feedback, pro or con, is always welcome.
Marko's Take
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