Budget crisis: Is California too big to fail?

Discussion in 'Wall St. News' started by S2007S, Jun 30, 2009.

  1. S2007S


    California on the brink

    1 hr 29 mins ago

    Armageddon. Apocalypse. Disaster: These are the words being used to describe California's staggering $24 billion budget deficit. With a midnight deadline to balance the budget, state lawmakers are facing a daunting task: Find a way to bridge the gap or start issuing $3 billion in IOUs this week to cover the bills.

    Almost every state is suffering from the effects of the recession, but not every state accounts for 12 percent of the national gross domestic product. According to AP, if California goes down, so goes the nation: California's annual $1.7 trillion economy is the world's eighth-largest economy and provides a significant chunk of tax revenue for the government; California alone funds many social programs for the entire nation.

    Like the Big Three automakers, California may be "too big to fail." If the state implodes, the ripple effect could slow the entire nation's recovery from the recession. Burt P. Flickinger, a retail consultant, tells AP:

    "California is the key catalyst for U.S. retail sales, and if California falls further you will see the U.S. economy suffer significantly."

    How did California dig itself such a huge hole? The recession certainly didn't help, but Time's Kevin O'Leary writes that California's financial troubles can be traced back to the passage of Proposition 13 in 1978. An antitax measure, Prop 13 makes it extremely difficult to raise taxes or pass a budget unless a 2/3 majority in both state houses agree — a virtually impossible task. California Rep. Zoe Lofgren tells Politico:

    "If we [in Congress] had to do what the California legislature does, we would never send a bill to the president of the United States,” she said.

    If the political wrangling over the budget isn't resolved by midnight tonight, Californians will be feeling the pain on every level, big and small. Just a few of the proposed spending cuts:

    — State employees will be forced to take another day of unpaid leave a month, in addition to the two days leave they were forced to take starting in December. (NYT)

    — Funding for the Bureau of Narcotics Enforcement will be slashed by $20 million. The "little-known unit" has played a key role in several of the state's high-profile cases: The bureau's agents helped arrest Scott Petersen for the murder of his wife and unborn child, and their investigation led to charges in Anna Nicole Smith's overdose death. (AP)

    — 80 percent of state parks would be closed, 25 in the Bay Area alone, including several beaches along the peninsula. Park visitors spend an estimated $2.6 billion a year in and near state parks, but closing the parks would save only .26 percent of the $24 billion deficit. (SF Chronicle)

    — Education funding would be reduced by $5.3 billion. School districts have already laid off 30,000 employees. Class sizes are expected to surge from 20 to 30 students and many after school programs, arts and music classes will be cut. A national education survey conducted this year ranked California 47th in per-student spending. (AP)

    — Gov. Schwarzenegger is proposing to eliminate the state's $1.3 billion welfare program. Frank Mecca, the head of the County Welfare Directors Association of California, tells Time, "California could become the only state in the First World without subsistence benefits for poor children."

    So far, the government is using a "wait and see" approach to California, or as a recent Politico headline stated more bluntly — "Washington to California: Drop dead." Earlier this month, White House spokesman Robert Gibbs said that the administration would "monitor" the situation, but that California's "budgetary problem unfortunately is one that they're going to have to solve."

    (Think you can do a better job at balancing the state budget than the governor or state lawmakers? The Los Angeles Times is letting the common folk try their hand with a "You balance the budget" interactive.)
  2. pspr


    Let em fail. The state government is NOT the California economy. Life will go on.
  3. Buyers of California Muni-Bonds are laughing at posts like this.
  4. California should nuke the San Andreas fault line, causing continental separation, and slip away all quiet like, into the night ocean, like deadbeat renters do at 2 in the morning.

    That's how they'll beat this 'debt crisis.'
  5. Says the guy who missed the last 42% move by looking for every negative article ever produced.


  6. S2007S


    I have a feeling someone is going to step in, how can the economy see anymore green shoots without the help from one of the biggest contributors to the GDP.

    12 percent of the national gross domestic product.
  7. You can see where that will lead. Without trimming CA's government expenses dramatically and the the Feds lending/giving CA money to meet it's bloated obligations... this drain can become perpetual.

    And after California, how can the Feds deny any other state? Amerika will be like Ouroboros.
  8. Missed? Do you mean I would have gotten back maybe 20% net of my losses had I been invested before the meltdown and crash?

    We'll see what I'VE MISSED at the end of the day, sparky.

    Oh, that's right - you're going to time everything perfectly and be up 10,000%, capturing each down and up move perfectly, over the next 3 years.

    Face it - you're a big, fat blah-blah.

    Blotter or bust, Zhifaga.

    stcok_trd3r is still awaiting your hand in his basement paper trading scheme.

    I predict you'll be lucky if you less than 75% of your starting capital by the time all is said and done, if you're fortunate and you really trade.

  9. As several have noted, the article quoted in the OP seems to assume that a government shutdown in California is equivalent to the state's entire economy simply ceasing to function. I suspect their economy might function better if several layers of state and local government were peeled back. Predictably, the government proposed the most high profile spending cuts, eg closing state parks. That'll teach those damn voters. Everyone knows they could shut entire departments with no noticeable effect, except on democrat campaign contributions. Instead, they blame a common sense Proposition that was enacted in response to an earlier generation's disgust at wild-spending politicians.

    I suspect most voters will hardly notice the so-called draconian cutbacks. A redundant state drug task force is shut? Probably a good idea. Education spending is cut? Since no one is learning anything anyway, why not? California's school system used to be topnotch, but a combination of crazed liberal control and a tsunami of illegals ruined it. State employees are furloughed one day a month? Oh, the horror.

    I don't really care how California deals with this problem, and that's the point. It's their problem, not ours. They have a valid point that the federal govenrment's failure to enforce immigration laws contributed to their woes, but then all the leading pols in California are all for open borders and amnesty, so start eating your own cooking. To ask citizens in responsible states to pay for this is outrageous, yet we all know that is what Obama will end up doing. Once he began to support the UAW with taxpayer dollars, how can he refuse anyone else? Or at least, any other important democrat constituencies?
  10. Illum


    "How did California dig itself such a huge hole? The recession certainly didn't help, but Time's Kevin O'Leary writes that California's financial troubles can be traced back to the passage of Proposition 13 in 1978. An antitax measure, Prop 13 makes it extremely difficult to raise taxes or pass a budget unless a 2/3 majority in both state houses agree — a virtually impossible task."

    This is annoying. They blame lack of taxes, and not the huge amount of spending. Whatever with these big gov babies. This time they have spent way too much and have to suck it up. They have no choice but to cut spending.
    #10     Jun 30, 2009