Thursday, December 24, 2009

California Asks Rest of Nation's Taxpayers to Help Pay for Its Unbalanced Budget

I have not had time to post some recent data on the growing chasm between public and private worker pay in the US, but I still plan to do it as this is a theme we've been pounding the table on since blog inception in 07... [Dec 16, 2007: California in a State of Fiscal Emergency - Coming to a Theater Near You]  Much like many of its people who have spent far more than they take in, the politicos at the state level act no different than the politicos at the federal level.  Spend what you have today, and never assume a rainy day in the future.  Since the state and city level budgets cannot be solved by more and more borrowing, there is only one ultimate solution.  Full subsidization by the federal government, who not only is running massive deficits of its own - but in the end game, will be the vessel for states to run deficits.  [May 5, 2009: Federal Aid Surpasses Sales Tax as Top Revenue Generator for States]  We are now officially at that point as some of the states have run out of accounting gimmicks to paper over deficits.

I tried to be generous in the title of this specific piece since it's the holiday season, but it really should be something akin to "private workers of country asked for bailout to subsidize early retirement and generous benefit packages for public workers of California."  Or "taxpayers in Idaho asked to pay for imbalances in California."  In LA alone, pension payment will be sucking up 1 in 3 (yes, you heard that right) of all revenues in half a decade.  Leaving the other 2/3rds for minor things like... running the 2nd largest city in the nation.  [Aug 11, 2009: LA Times - Amid Cost Cutting, Los Angeles City Pensions Continue to Soar]  These are the type of things the nation is being asked to subsidize via these "stimulus plans" and whatever the Governor is asking for now.

•"We should never, ever design a pension formula that provides more for a person when they retire than when they are working. It defies any common sense," said Marcia Fritz, vice president of the California Foundation for Fiscal Responsibility, a nonprofit pension reform group headed by former GOP Assemblyman Keith Richman.

•"But that's what we're finding" in some school systems and public safety agencies, Fritz said.

...that the share of the city general fund receipts required by two large pension funds would jump from 15% this year to 33% in 2013-14.

I am aghast when we hear comments such as "there is nothing left to cut" ... no there is; simply putting public workers pay and benefits at par with what the private worker now gets would immediately cause massive surpluses at the state and municipal level.  But this is now the third rail of politics so rather than make such harsh decisions, we now are at the next step of the move to Banana Republic.  We've now had 2 stimulus plans (the spring 2009 and the coming "jobs plan" in early 2010) that are blank check handouts to state workers ... and now California is asking for $8B more in direct aid (aka "adjustments") OVER AND ABOVE what has already been transferred to them via "stimulus"..  I am not sure when the private sector employees of the country finally say "enough" but let us be sure, until they do - we'll continue down this path. 

I write this with no offense to readers in the public sector - this is just an untenable situation.  It's a ponzi scheme, plain and simple - some form of reality check must happen at the public level; we cannot run 2 parallel America's; one open to global wage arbitrage, evaporated pensions, et al and another completely protected from such realities. 

[Dec 4, 2009: Public Workers Continue to Live the Good Life in New Jersey]
[May 8, 2008: It Pays to be a Firefighter in Vallejo]
[May 7, 2008: Vallejo, California Votes for Bankruptcy]


Bloomberg: Schwarzenegger Seeks Obama’s Help for Deficit Relief
  • California Governor Arnold Schwarzenegger, anticipating a $21 billion budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.
  • Instead of seeking one-time stimulus money or a bailout, (which the state has ALREADY received earlier in the year via the massive stimulus plan - and will receive AGAIN when the next 'jobs plan' hatches early next year) the most-populous state wants the U.S. to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.
  • The problem is that there are no easy solutions left,” (wrong - there are easy solutions - there are simply none that are popular; any solutions past the previous accounting gimmicks will require actual sacrifice) said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor.
  • Schwarzenegger and lawmakers worked to close a record $60 billion gap from February through July with $32 billion in spending cuts, $12.5 billion of temporary tax increases, $8 billion of federal stimulus money and more than $6 billion of other one-time fixes.  ("temporary", "one-time", "stimulus" - all these assuming a return to 'good ole times' - kick the can policies at their best ... what happens if the 'new normal' is nothing like the good ole times?)
  • Schwarzenegger’s arsenal of one-time accounting maneuvers he and lawmakers have previously used to temporarily paper over parts of the gap -- such as accelerating income-tax collections -- has been mostly depleted, making efforts to erase the latest $21 billion deficit more difficult.
  • An accounting error means the state has to spend almost $1 billion more on schools than budgeted. Officials also underestimated the cost of health care for the poor by $900 million, and lawmakers failed to pass legislation to realize $1 billion less in anticipated prison spending.
  • Combined, the state faces a $6.3 billion gap in the current year and another $14.4 billion in the next. (depending on the assumptions for revenue of course)
  • The state was the biggest bond issuer this year, selling $36 billion of debt.
California is the largest and most obvious black hole, but it's effectively a nationwide problem.  If you are in Arizona you might want to head over to Mish Shedlock's site for today's post: 'Arizona Governor Jan Brewer: "We face a state fiscal crisis of unparalleled dimension'.  Actually if you are a reader from ANY state you now need to care about Arizona... because you are going to help bail them out... err, provide "stimulus".
  • Nationally, 35 states and Puerto Rico expect to have $56 billion less next year than they will need to pay for all of their programs.  (we've become so immune to large numbers as "300 Billion bailouts" are now no skin off our noses, but there was a time... 3 years ago ... that $56 billion would have been a huge number. Now we've become numb - just go borrow some more, or print it)
  • In Nevada, Arizona and New Jersey, the difference amounts to more than one-quarter of their budgets, the conference said. Funds from the $787 billion federal economic stimulus bill enacted in February run out at the end of next year. (which is why we will have YET ANOTHER "stimulus" in early 2011, after the early 2010 "jobs plan"... we have no stomach to restructure the states budgets, so federal money will flow in each year under the guise of stimulus - these are yearly backdoor bailouts)
Circling back to California - we've talked about the issues in Greece quite often the past month; where 1 in 4 workers is now a public sector employee.  In America, if you include healthcare and education (what I call pseudo public as they are heavily reliant on public funds), we are now at 1 in 3 of all employees relying on fellow citizens tax dollars.  And the share is growing rapidly by the year...

How is this going to work in the long run?  It won't - ask Greece.  Eventually there will be no blood left to squeeze from fellow citizens.  Think of where the states would be without direct federal aid the past year.
  • California’s general-obligation debt rating from Moody’s Investors Service is Baa1, the company’s eighth-highest investment grade, and A from Standard & Poor’s, the sixth- highest. By comparison, Greece, the poorest member of the 16- nation euro region, is rated two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.
  • “California, which is more than three times bigger than Greece, is running out of money.”
So this simply continues the ongoing mosaic of America.  The federal government will continue to borrow to plug hole after hole.  At some point there will be more holes in the dam, then fingers.  Then we're going to see things that make the episode of 2007-2009 pale by comparison.  Until then, I expect everyone to fight for what is "rightfully theirs" since almost every decision in the country is made on a 2-4 year election cycle.  Prepare your wallets. [Dec 11, 2009: NYT - Many See the VAT Option as the Cure for DeficitsDon't forget - all the same accounting tricks working to "kick the can" are throughout the nation's public pension plans as well - that amount is still big enough to shock people who have become numb to large numbers. [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout]

[Apr 25, 2008: Shoes Beginning to Fall in the States]
[July 25, 2008: WSJ: States Slammed by Tax Shortfalls]

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