Aloha To California

The State of California, home to perpetual government turmoil, has warned the world again that it will self-destruct leaving its citizens without a single government service. Both taxpayers and the unemployed no longer believe the chatter. It comes from Sacramento too often.

The state’s controller has just announced that California will run out of money in fifty days. May revenue was down almost 18% from a year ago, dropping to $1.14 billion. Unemployment in California is high and real estate values have dropped more than 50% in some areas. Controller John Chiang was quoted by Reuters as saying, “A truly balanced budget is the only responsible way out of the worst cash crisis since the Great Depression.”

California’s government will collapse and it will either have to be saved by the US Congress and Administration or be forced into a form of receivership under which budget cuts will be mandated by accountants.  The only ways that this might be avoided is if the politicians in the state agree to make deep cuts to state programs, which will force thousands of workers onto unemployment lines and diminish essential state services. The other alternative is to factor California’s receivables, essentially allowing vultures to take income from the state treasury just as it comes though the door. The problem with this solution is that it would mitigate the problem for a few months, at most. Revenue won’t pick up enough for the state to wean itself from a factoring program.

America has never seen the total financial collapse of a major state or municipality. It nearly happened in New York in 1975 when the city ran low on money and approached the federal government. Gerald Ford told New York that it could “drop dead.”

President Obama may love California and may want to do what he can to save the state. He is up against the fact that the most recent update of the federal budget shows that income is running well below the Administration’s plan and the Treasury’s need to raise money is beginning to put unanticipated, at least by the Treasury, pressure on interest rates.

No one is able to describe what will happen in California in August when the state does not have the money to pay its employees, its suppliers, and the expenses that are required to keep critical public services working. The mess will then be shoveled in the direction of Washington.  The taxpayers will be asked to pay even more over the next decade.  The only wild card is what the Chinese are willing to take on faith.

Douglas A. McIntyre