Thursday, July 31, 2008

Schwarzenegger Orders Cuts Amid Fiscal Crisis - Workers to Minimum Wage

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We'll see how much of this is theater versus reality but some interesting developments happening across the United States of Subprime. This is one of our big calls not as much for THIS budget year (summer 2008 to summer 2009) but NEXT budget year (summer 2009 to summer 2010). Remember, California if it was a free standing country would be the 7th biggest economy in the world.

[Jul 25: States Slammed by Budget Shortfalls]
[Apr 25: Shoes Beginning to Fall in the States]
[Dec 16: California in a State of Emergency - Coming to a Theater Near You]

Normally I'd worry when I read a story like this but since Jim Cramer has called the bottom in the stock market, we have nothing to fear but reality itself...
  • With California's cash dwindling and legislators still debating a new budget, Gov. Arnold Schwarzenegger eliminated 22,000 part-time and temporary state positions Thursday and ordered that 200,000 state workers receive the federal minimum wage.
  • His signing of the executive order had been expected since last week but stood as a stark illustration of the cash problem facing the nation's most populous state. Schwarzenegger apologized to state workers but said he had no choice.
  • Lawmakers have yet to agree on a spending plan a month after the state's fiscal year began, leaving California without the ability to pay for contractors, the higher education system and legislative employees.
  • As of June, more than 30 states faced deficits totaling a projected $40 billion, or more than triple the gap of the previous year, according to the National Conference of State Legislatures. ($40 billion? Can't you just write it off?? - works for our banking system - that's not even 1 good earnings season for our banks. That's peanuts! Uncle Ben - to the presses! Pronto!! Oh wait, you only do that to bail out the executives at our banks - never mind then - let the states and their people suffer. Suckers.)
  • Schwarzenegger also cited a 2003 California Supreme Court ruling allowing him to slash the pay of regular full-time employees when the state lacks a budget. By law, those workers must be paid at least the federal minimum wage of $6.55 an hour and will be reimbursed once a budget is approved.
  • The administration estimates that immediately terminating the contracts and suspending overtime would save the state about $80 million a month. The deferred wages would take several weeks to implement, saving the state $300 million to $400 million a month starting in late August.
  • The governor's order is certain to be challenged. The state controller has said he will not comply, in part because he said the move is likely to invite lawsuits from employee unions. Controller John Chiang, a Democrat, has said will issue employees their regular paychecks, setting up a potential legal skirmish between his office and Schwarzenegger's.
Just a canary in the coal mine. Give it 15-20 years at the federal level and even with the ability to continuously print new money to devalue the paper in our pocket, at some point the bleep hits the wall. Such as when $1 of every $4 of GDP in this country goes to pay for health care. [May 23: David Walker on CNCB this Morning] We're just doing the previews of the real national emergencies here in the next year or two at the state level. [Mar 26: Annual Spring Entitlement Warning Falls on Deaf Ears] States are limited by the fact they cannot print money out of thin air. Federal government can still get by for another decade or perhaps two on this "printing" option... until the rest of the world balks on subsidizing us since we've become a high risk i.e. subprime customer. [Apr 15: Could the US Lost its AAA Rating?] I wonder what our FICO score would be? 400? 450?

Now about that next stimulus plan to spend money we don't have....


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