Tuesday, February 17, 2009

Kansas Joins California in Budget Woes

Readers if you have any interesting budget shortfall stories in your local state please email me... I can't catch them all.


Can you imagine the state of our country at this moment if the federal government could not print or borrow money? Many of our states act as subprime borrowers - spend, spend, spend as if there is no rainy day coming in the future. I wish there was some instrument to short individual states budgets because we would of been rich since we've been on this story since 2007. Now it is bearing fruit, if you will, across the nation. Back "then" (see posts below) we were still in denial or ignorance on Wall Street.

[Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]

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.

What's the solution? Print more money. Wait. You can only do that at the federal government level. So I guess the solution is.... well, I don't know what the solution is.

Again, keep in mind how critical California is - its GDP if it stood as a stand alone country would place it around #7 in the world. So these 'messy subprime mess' that 'only affects' Ohio, Michigan, Florida, and California... (as the politicians put it), is so much bigger. Housing "only" affects 4.5% of GDP blah blah blah...

[Apr 25, 2008: Shoes Beginning to Fall in the States]

This is a theme I have been promoting for a while, and it's going to hit this year, next year, and 2010. Unlike the federal government who fixes all fiscal emergencies by simply printing money out of thin air or taking hat in hand to China, Middle East, or anyone who will buy our Treasuries, the states do not have that luxury.

All in good time folks... most of the economic issues of the real economy will take quarters to play out while Wall Street wants its solutions "now" and can't forecast out more than then their next paycheck cycle.... they continues to refuse to see the impact the real economy is happening on Main Street. Today, an AP article is stating these effects we predicted are now happening.

Again, I keep repeating this: The pundits who are telling you we either have shallow recession or are coming out of recession are the same fellas who denied recession was even possible 6 months ago. How the same people who denied a recession was even possible, now have the cajones to tell us don't worry, we are going to be out of it by end of summer, is beyond me.

[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]

So here we are - the new fiscal year begins in July 2008 and CNBC's long touted 2nd half 2008 recovery is upon us! Oops. Not so much. As tax revenue from both the home "fake boom" and consumer spending "fake boom" dwindle, state and local budgets are now becoming an issue. And we have not even faced the real "unemployment" depths that will be hitting within the next 12-18 months. Budget year summer 09 to summer 10 is going to make this year look like a picnic.

[Nov 14, 2008: November 2008 Thoughts/Roadmap]

#1 State Budgets - I cannot reinforce enough the point I have made many times for the past 15 months. State budgets in 2009 are going to be a complete disaster. I truly think this will be one of the biggest emergencies in the year ahead - in the next 2 years I could see 15 or so states potentially defaulting. Remember state budgets are from middle of 1 year to the next. The bleep hits the fan in summer 2009 to summer 2010 budget year. Revenue comes from (a) real estate values (b) spending and (c) corporations. Based on my vision above - all these go into the tank - in fact they already have but rainy day funds and other things have been used to stem the flow. Next year many states won't have that option. We will have a disaster on our hands and unlike the federal government there will be no printing of money out of thin air to make up deficits. So you know the solution here - the federal government will be bailing out individual states. If not, we lose many services, we lose many schools, we lose many things people take for granted as a society.

The ironic thing about the federal government "stimulus" is it is rewarding bad behavior - in an article I read yesterday the governor of North Carolina said "we do not want to be punished for not having a deficit" - meaning they wanted their fair share of the federal stimulus and did not want to get less than if they had been running their state government into the ground like some of our other states. Isn't that just a perfect summation of moral hazard and ill intended consequences?

Kansas is the next to join California in some unprecedented steps...
  • Kansas has suspended income tax refunds and may not pay its employees on time, state officials said Monday. The ruckus left lawmakers uncertain where to secure millions of dollars owed Medicaid providers serving the poor, K-12 public schools, community corrections programs and the state's bioscience authority.
  • The game of political chicken places state taxpayers, workers and schoolchildren squarely in the middle of a politically charged battle over massive budget cuts. Republicans, who hold majorities in both chambers of the Legislature, blocked Sebelius’ proposal to borrow $225 million from healthy state funds to cover shortages in accounts used to meet the state’s payroll and issue tax refunds.
  • Republican leaders said they had no choice, that by law the state couldn’t borrow any more money from itself. Sebelius and Democrats disagree, accusing the GOP of playing politics with people’s paychecks.
  • Kansas’ cash-flow problem stems from the worsening recession and lower-than-expected tax revenues. As a result, the state had only $10 million in its checking account Monday morning. To make up the shortfall, Sebelius proposed borrowing from other healthy state funds. Such loans — called certificates of indebtedness — are routinely used when the state runs short on cash. State leaders already had authorized $550 million in certificates this fiscal year.
Meanwhile back in Cali... it's Terminator Tuesday!
  • California lawmakers were told to bring their toothbrushes and prepare for a long day Tuesday, with the goal of passing a budget as the state faces a $42 billion deficit and 20,000 layoff notices were set to go out to state workers Tuesday.
  • Lawmakers had missed a Monday night deadline to reach a budget deal, prompting Gov. Arnold Schwarzenegger's move on the layoff notices
And you know how this all ends for you dear taxpayer.... [Jul 2: Cook County, Chicago ---> Highest Taxes in the Nation: 10.25%] [Dec 4: Bloomberg - Hoboken New Jersey Increases Taxes 47%] [Dec 19: New York Times - States' Funds for Jobless Dry Up]

Again, let's thank the Gods of Printing Press we can print money forever to make up for incompetent self serving politicians who cannot look out past 1 election cycle and promise everything to everyone so that they can get re-elected. Eventually the sheeple of America will have their version of the Boston Tea Party - but for now we just continue to beg, borrow, and print and promise we can do it without any consequences. I don't know when the Rage against the Machine begins - but at some point the sheeple has to understand where this is all going.

[May 7, 2008: Vallejo California Votes for Bankruptcy]
[May 8, 2008: It Pays to be a Firefighter in Vallejo]
[Jul 31, 2008: Schwarzenegger Orders Cuts Amid Financial Crisis]
[Nov 24, 2008: WSJ - States Cut Services for Elderly, Disabled]
[Dec 6, 2008: How Bad is Minnesota's Budget Deficit? Mega-Bad]
[Dec 12, 2008: California - Missed the Budget Shortfall by THAT Much]

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