The Governator on 60 Minutes; More California Towns Potentially Going Bust

What can we say, we've been warning about California (and many many more states following suit) for a long while - over a year now. [Dec 16 2007: California in a State of Emergency - Coming to a Theater Near You]

Here it begins folks.... as I stated in this week's piece [The Web of Credit Snares Another: Cleveland] One point I forgot to mention in the 2008 1st half predictions piece is the role of ever decreasing housing values on state (and city) revenue. A large part of revenue inflows is based on an asset (real estate) that is decreasing throughout the country. Budgets (and benefits) are set to recent 'good times'. Like most enterprises very few government institutions will save for coming rainy day times - they just assume the good times will continue to roll. But when they don't, they are in trouble. Especially if a very large revenue source starts to shrink (property taxes). And this should be happening over the next few years throughout the country.

Why do you care if you don't live in California? Well it will be hitting a lot of other states for one, and secondly eventually the "real economy" affects the market ... eventually...

Ah December 2007 - the good ole days; 401ks used to be 401ks, and not 201ks, the Federal Reserve was going to save us (some things never change), Hank Paulson was on his first plan to save his buddies on Wall Street (the SUPER SIV plan!) Bear Stearns was still an apple of all our eyes, Fannie and Freddie were still the biggest lobbyists on Capital Hill. We're usually early and just enjoy sitting here aghast watching the market completely miss things until that are in plain sight. By "enjoy" I mean, sit in raw horror that so many miss so much that someone with a thinking cap could ferret out. Even in those fanciful days when I did not have to walk uphill, both ways, barefoot, avoiding hedge fund carnage to trade stock - we targeted this coming budget year (summer 2009-summer 2010) as when the proverbial bleep hits the bleep. (watch for teacher strikes and major fights over school funding coming this fall)

Back in May 2008 we talked about the first California town to go under [May 7: Vallejo California Votes for Bankruptcy] There seems to be a bit of a disconnect in our public employee system; while the private sector has seen wages stagnate and benefits cut - more and more has been promised to those in the public sector. And why not? Most of these deals are done at town meetings that only show on local public cable (who pays attention to those?) and the "costs" of which are only borne years later - you know - things like when 56 employees of Vallejo make over $180,000-$300,000 a year. Now sift around your medium sized non government workplace (not for you investment bank types) and try to think how many make $180-$300K. [May 8: It Pays to be a Firefighter in Vallejo]

Below are charts of the $200-$299K and $180-$199K ranges. Dominated by firefighters (and some policemen). Again, I have no bones with these people being compensated for tough work but when private industry is being battered by falling wages, and low(er) paying jobs - how can our tax dollars continue to pay such wages? As I wrote in my earlier piece

What I've been amazed to watch locally is how local governments (in a 1 state recession we've had for about 4 years now) won't cut jobs or benefits (for themselves) while private enterprise is cutting jobs, benefits, wages left and right. I guess they will hold on - until they go BK. But we need to either see very sizeable tax increases and/or job cuts/services lost to pay for our excesses of the housing bubble.

Well the bill for these disconnects is coming due. It looks like a few more California towns are on their way to joining Vallejo ....

• California may soon have more bankrupt towns on its hands. The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.
• Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.
• "We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.
• "California's fiscal house is burning down," State Treasurer Bill Lockyer said in a statement.
• Rio Vista began to see the trouble last year, when property-tax revenue began to falter. The city lacks revenue sources such as big-box retailers and depends heavily on two auto dealerships for sales-tax revenue, Mr. De La Rosa says. But the dealerships have hit hard times. (remember one of my 13 2009 Outlier Predictions is a large wave of auto dealerships closing, breaking the backs of many smaller towns)
• Rio Vista has cut a third of its city workers (I'm curious how many of these people will be joining Mr Cramer in the "I'm ready to buy a house now that it's 4.5% interest rate!) and slashed its recreation budget to $29,000 from about $250,000. The city is looking into selling more than 100 acres of its land for revenue. Since July 2007, Rio Vista has cut $1 million from its $7 million budget but still faces an $800,000 shortfall. "The fact we are a small town makes it more difficult to handle this slide we are on," says Rio Vista Mayor Jan Vick. "We don't have that much to cut."

Now these are small towns but I'd still love to see the salaries and benefits of the higher ups. Our canaries in the state coal mine are beginning to grasp for oxygen. Another of my 2009 Outliers is the eventual backstopping (we will backstop everything) of municipal debt by the Federal Reserve....

In the bigger picture of California (let me remind you as a stand alone country it would be the 8th largest economy in the world - hence very important) is beginning to "attempt" to take some of the serious steps which are unfortunately, necessary. These steps hurt the current hedge fund thesis that 4.5% mortgage rates for all will "have us back on track for 2nd half 2009!"

• Gov. Arnold Schwarzenegger on Friday ordered a state hiring freeze and payroll cuts to conserve cash as California struggles to deal with a $42 billion budget deficit. The governor issued an executive order that requires state agencies to reduce payroll by 10 percent, which could lead to massive layoffs. He also ordered the state's 235,000 employees to take two days off a month without pay, starting Feb. 1.
• Union officials said they were considering filing a lawsuit to prevent job losses. "Our contract doesn't allow him to do this."

Now let me tell you, I think much like Obama, Schwarzenegger is in a very bad situation and much like Schwarzenegger came in with 60%+ approval ratings and hope, Obama will be faced with the same road. Hope will fade to reality soon enough. The problems are larger than the man. In a non political vein I actually like Schwarzenegger - every time I see him on a Sunday morning political show or in a news magazine he seems pragmatic, centrist and not beholden to the GOP. He says he is a public servant not a GOP servant. I like centrists who actually attempt to serve the people who employ them (as opposed to themself) even if not all the ideas are perfect. All I know is apparently he is pissing off both the GOP and Dems ... which in my book says he is doing something right. Anything that gets both sides upset must actually be doing something constructive. Unfortunately, there are no good choices - one day Americans need to be told that instead of bending to their near term whims with more debt (yes you can have anything!! tax cuts along with giving you anything to boot! just vote for me! I'll give you anything!) and more obligations on our children and grandchildren. It appears very few politicians are actually adult enough to try to tell the citizenry the truth - Ahhhhhnold appears to be one.

Here is a piece from last Sunday's 60 Minutes. (12 minute video)


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