California worlds 8th largeest econ. deep trouble

[bumper]

California's cash crunch: IOUs coming
Golden State won't be able to meet payments until new budget accord reached.

Last Updated: January 31, 2009: 2:17 PM ET

AMERICA'S MONEY CRISIS
California's cash crunch: IOUs coming

I remember California Highway Patrolman wotking on IOU's before as I recall the late 70's. The states governement, governopr Wilson then siezed money from the PEERS state retirment fund. Whics was overruled in court later and the money paid back. I don't think that is an option this time at least I hope not. PEERS works on a ten year plan so the retirement system can ride this out I hope [-o<

I do know when you go to the PEERS web site you see a general notice saying don't worry we are OK.

I am very grateful to be riding this out here. It takes a lot less money to make it here then it does in California.

NEW YORK (CNNMoney.com) -- The world's eighth largest economy is on the verge of issuing IOUs.

Suffering from both a $15 billion budget deficit and a multi-million dollar cash shortfall, California is days away from not having enough money to cover all of its bills.

Starting on Sunday, state controller John Chiang plans to delay sending state tax refund checks, payments to contractors and disbursements to counties and agencies that provide social services. He estimates that the state will be at least $346 million short in February.

"Rather than helping stimulate the economy, withholding money from Californians will prolong our pain and delay our economic recovery," he said. "Individuals who already are vulnerable will be hit hard."

Gov. Arnold Schwarzenegger and legislative leaders are behind closed doors trying to hammer out a solution to the state's mid-year budget crisis and a projected $25 billion gap for 2009-2010. The governor has proposed draconian spending cuts in virtually every department, as well as hefty tax increases, to close the widest deficit in its history.

California is not alone in its budget troubles. Some 46 states face budget shortfalls, forcing them to slash funding for many services. But California is the largest state in the union, and its problems are particularly severe. Its deficit totals more than 35% of its general fund.

Some 257,400 jobs in the Golden State evaporated in 2008, pushing the unemployment rate up to 9.3% in December, the fourth highest nationwide. Its median home price plunged nearly 50% since the spring of 2007.

Meanwhile, the demand for assistance has risen. The number of Californians receiving food stamp benefits increased by 13.8% for the year ending September 2008, while the number of families receiving cash assistance from the CalWORKs welfare program rose by 5.9%, according to the California Budget Project.

The state's fiscal troubles largely stem from its heavy reliance on personal income taxes. This revenue stream dries up when recessions hit and unemployment soars. California also never fully recovered from the dot-com bust earlier this decade, which led to big budget problems at the time. So the state didn't have large reserves to fall back on when the bottom fell out of the economy.

"We went into this downturn in a very weak position," said Jean Ross, the California Budget Project's executive director.

On top of its economic troubles, the state is also coping with a near shutdown of the nation's government bond markets, which had allowed it to borrow to cover its short-term debts. This fall, the state was only able to borrow half of what it needed to see it through the fiscal year.

The lack of access to the bond markets prompted the state in December to suspend funding for more than 2,000 infrastructure projects, leaving many people and businesses without much-needed work.

And because of California's financial woes, credit rating agencies are taking a dim view of the state. Moody's warned in mid-January it might downgrade California's general obligation bond rating because of its budget and liquidity problems. If this happens, it will become even costlier for California to borrow.

Deep cuts and steep tax increases
To shore up California's budget, the governor wants to slash spending by $17.4 billion, according to the California Budget Project.

The cuts include:

$7.7 billion from public education
$322.9 million from the community college system
Eliminate dental and other benefits for adults on Medicaid
Cut monthly grants to low-income families by 10% and restrict eligibility for cash assistance
Cap payments to attendants working for the In-Home Supportive Services program
Require state workers to take two unpaid days off per month.
"It will involve pain for Californians," said Jerry Nickelsburg, senior economist at UCLA Anderson Forecast. The state "just doesn't have the money to cover all the spending that's been approved."

Schwarzenegger is also looking to boost revenue by $14.3 billion and borrow $10 billion more.

His fundraising measures include:

Raising state sales tax by 1.5 points - to 8.75% - through the end of 2011.
Broaden the tax base by levying state sales taxes on appliance and car repairs, vet services, sporting events and golf
Raise alcoholic beverage taxes by a nickel a drink
Increase vehicle registration fees by $12 per car and driver's license fees by $3.
"The truth is that California is in a state of emergency," Schwarzenegger said in his State of the State address on Jan. 15. "The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off."

To conserve whatever cash remains to fund education and meet debt obligations, the state's controller plans to delay other payments or issue IOUs, which the state hasn't done since officials failed to pass a budget in 1992. This could mean thousands of businesses and millions of people will be left hanging until a budget plan is hammered out.

The controller was also going to delay payments to more than a million elderly, blind and disabled residents who receive the state's supplement to Social Security benefits, but the federal government said it would cover the difference. Likewise, colleges said they would make up for delayed student aid grants that would also be affected.

Funds from Washington D.C.
Some relief may be coming California's way. The state stands to receive billions from the $819 billion stimulus package that just passed the U.S. House of Representatives.

The state could get as much as $63.4 billion, some 12.3% of which could be used to balance the budget, according to the Center for American Progress. Some $3.6 billion could go for highway construction and transit improvements, restarting some of the projects currently idling. California will also receive billions to pay for education, Medicaid and other benefits.

Schwarzenegger, however, says the state must still work out its own budget problems.

"I always make it clear that we will not use that money to bail us out, because we have to bail ourselves out," he said in a speech this week. "I think we have to be careful not to look at them [the federal government] as the savior, but to just look at them as the icing on the cake."

First Published: January 30, 2009: 6:29 PM ET

[aznyron]

I don't know how a State like CA could get it self in to deep sh/it unless they are supporting illegals that flood that state the sad part is the only people who benefit from them are the small business who hire them for sub standard wages and then dump them on the tax payers payroll I think it time they go after these business who hire them when they no longer hire illegals they go home and of course cut the welfare payments & medical care for them just deport them when they show up for these perks you can not condemn people for trying to make a better life for them selfs we are doing the exact same thing
when we came to Thailand except we came through the front door not the back door and we came with money and are self supporting

[WBU ALUM]

Arnold was elected governor after a recall of Gov. Gray Davis (D).

Of course, the people of California don't understand that their state legislature is the one spending the money that they don't have (much of it on all of the illegals flooding the state). Not to mention all of the "sanctuary" cities (like San Francisco) who have a policy not to report illegals.

The voters blamed the financial woes on Gov. Davis. They'll blame Arnold this time, too.

A simple civics lesson for most Americans would clear everything up, but they prefer to make it up as they go or let the media educate them.

[Pakawala]

Education by the media... now that's a very scary thought.

[bumper]

Really not much of surprise in it. Everywhere there is problems they will get through it.

[JimboPSM]

The big increases in property foreclosures along with personal and business bankruptcies will mean that the burden will probably have to be carried by fewer and fewer people and businesses who may well have reduced levels of incomes and profits from which to pay them.

This could become a really vicious circle with individuals and businesses tempted to seek bankruptcy protection - only adding to the burden of those who do continue to pay

[WBU ALUM]

This could become a really vicious circle with individuals and businesses tempted to seek bankruptcy protection - only adding to the burden of those who do continue to pay

Excellent concise analysis, Jimbo.

The group "paying" into the system gets smaller and smaller.

[tigerryan]

It's not just business seeking bank protection that will reduce tax collection many business owners like myself are looking at moving money around to defer this years tax liability through actions that are not well reasoned or explained in a normal economic environment. Life and captive insurance policies, foreign business losses, selling property to your foreign holdings at a loss are just examples of the shenanagians that will going on in massive amounts this tax season.

I am finding it very difficult to compel myself to send 40+% of my earning into this financial abyss. I am really feeling depressed about the situation as a whole. I have done OK for myself, I am simply sad for my country's prospects.

I have always held most of my elders in high esteem but many are unlike the one I have grown up with. There are so many old folks that have allowed these solcialist policies to grab hold then benefited from then egregiously only helping propel our economy into the dark ages .

I find my sympathy for the financial condition of some pensioners I meet living off of money that was in many cases never actually paid into the system to be to less then heartfelt as this economic crisis develops. Whatever promise that was made during the creation of the "great society "perceived or in writing should now be broken.

I would support a program to simply eliminate all forms of welfare including social security benefits for those that are now "net" recipients of these programs. Its time to get people back to work. Hey Gramps wanna buy me a beer?

[WBU ALUM]

I would support a program to simply eliminate all forms of welfare including social security benefits for those that are now "net" recipients of these programs. Its time to get people back to work.

We agree, but it ain't gonna happen.

Any politician who tells people that they must determine their own way in life will be branded as racist, evil and heartless. Welfare is here to stay until the number who pay for it get smaller and smaller and the tax base shrinks.

[bumper]

Well Arnie called it in a speech, we got spoiled living like there was no tomorow. Spending money we didn't have and he wasn't excluding the government. The biggest problem bond rating is way down, so the chances of borrowing money right now is smaller and more expensive.

They are in line for good chunk of Fed money, but I don't think that alone will do it. Cost of housing has alway been redicules there, even more so in the last decade.

Yes there are a lot illegals in California, but the fact is people give them work or they wouldn't come in the first place. How they qaulify for assistance I have no idea but they do.

[WBU ALUM]

California's 'Green Jobs' Experiment Isn't Going Well
Wall Street Journal
By STEPHEN MOORE

Los Angeles

Gov. Arnold Schwarzenegger was all smiles in 2006 when he signed into law the toughest anti-global-warming regulations of any state. Mr. Schwarzenegger and his green supporters boasted that the regulations would steer California into a prosperous era of green jobs, renewable energy, and technological leadership. Instead, since 2007 -- in anticipation of the new mandates -- California has led the nation in job losses.

The regulations created a cap-and-trade system, similar to proposed federal global-warming measures, by limiting the CO2 that utilities, trucking companies and other businesses can emit, and imposed steep new taxes on companies that exceed the caps. Since energy is an input in everything that's produced, this will raise the cost of production inside California's borders.

Now, as the Golden State prepares to implement this regulatory scheme, employers are howling. It's become clear to nearly everyone that the plan's backers have underestimated its negative impact and exaggerated the benefits. "We've been sold a false bill of goods," is how Republican Assemblyman Roger Niello, who has been the GOP's point man on environmental issues in the legislature, put it to me.

The environmental plan was built on the notion that imposing some $23 billion of new taxes and fees on households (through higher electricity bills) and employers will cost the economy nothing, while also reducing greenhouse gases. Almost no one believes that anymore except for the five members of the California Air Resources Board (CARB). This is the state's air-quality regulator, which voted unanimously in December to stick with the cap-and-trade system despite the recession. CARB justified its go-ahead by issuing what almost all experts agree is a rigged study on the economic impact of the cap-and-trade system. The study concludes that the plan "will not only significantly reduce California's greenhouse gas emissions, but will also have a net positive effect on California's economic growth through 2020."

This finding elicited a chorus of hallelujahs from environmental groups. The state finally discovered a do-good policy that pays for itself. Californians can still scurry around in their cars, heat up their Jacuzzis, and help save the planet. But there was a problem. The CARB had commissioned five economists from around the country to critique this study. They panned it.

Harvard's Robert Stavins, chairman of the federal Environmental Protection Agency's economic advisory committee under Bill Clinton, told me that "None of us knew who the other reviewers were, but we all came up with almost the same conclusion. The report was severely flawed and systematically underestimated costs." Another reviewer, UCLA Prof. Matthew E. Kahn, a supporter of the new regulations, criticized the "free lunch" aspect of the report. "The net dollar costs of each of these regulations is likely to be much larger than is reported," he concluded. Mr. Stavins points out that if these regulations are a net boon for businesses and the economy, "why would you need to impose regulations like cap and trade?"

WSJ Article

[aznyron]

It's not just business seeking bank protection that will reduce tax collection many business owners like myself are looking at moving money around to defer this years tax liability through actions that are not well reasoned or explained in a normal economic environment. Life and captive insurance policies, foreign business losses, selling property to your foreign holdings at a loss are just examples of the shenanagians that will going on in massive amounts this tax season.

I am finding it very difficult to compel myself to send 40+% of my earning into this financial abyss. I am really feeling depressed about the situation as a whole. I have done OK for myself, I am simply sad for my country's prospects.

I have always held most of my elders in high esteem but many are unlike the one I have grown up with. There are so many old folks that have allowed these solcialist policies to grab hold then benefited from then egregiously only helping propel our economy into the dark ages .

I find my sympathy for the financial condition of some pensioners I meet living off of money that was in many cases never actually paid into the system to be to less then heartfelt as this economic crisis develops. Whatever promise that was made during the creation of the "great society "perceived or in writing should now be broken.

I would support a program to simply eliminate all forms of welfare including social security benefits for those that are now "net" recipients of these programs. Its time to get people back to work. Hey Gramps wanna buy me a beer?

Tiger I just want to say many years a go when I was in my early thirties we had a discussion about social security
now people much smarter than I said I quote them that if you put in to private retirement fund such as insurance fund you would get a much higher return for your money then what the Government is giving you also you would get a life insurance policy along with it so I say to all you who think we seniors are getting more for our buck then we deserve you are sadly mistaken and to be honest I am tired of reading about it what you all are saying is we are robbing you well when your day comes you will look at it much different

[tigerryan]

Ron, I could go dig up the data on how much more the average social security recipient has received from the social security program compared to what they have paid into the program on average, but I prefer to just spout my own mental diarhia based own my own angry biased filled conclusions of how the seniors in our society are currently screwing the current taxpayers and shoving our economy into the depths of Zimbabawian inflationary poverty ( I am not a real cut and past news source "proof" kind of guy, but more of a throw some stuff at the wall and see what sticks and hopefully dose not bounce type:) long sentences sorry.

I like old guys but get real all of these crazy seniors socialist programs probably have a greater drag on the US economy then some twenty year old illegal guy from Mexico that want to landscape your yard for five bucks.

The US needs to make some hard choices soon or we are going to be painfully lapped again and again by the young economies of Asia.

[moderator*]

This is about California's cash crisis, isn't it?

[tigerryan]

Lots of old folks in Cali I guess