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| Economy |
| Will the Feds take over California - force them to change their Constitution? |
| 2009-05-22 |
| IS California too big to fail? That’s the question President Obama and Congress will soon face. While many states have severe fiscal problems, the depth and unusual persistence of California’s budget problems — the state has run deficits for most of the decade — has emptied Sacramento’s till. On its current path, California will run short of the cash it needs to pay its bills in late July. It’s highly unlikely that the state’s political leaders will be able to fix the problem themselves. Typically, states build up a cushion of tax revenues in the spring to pay expenses through the fall, when little cash comes in. But enormous drops in tax revenue have left California without the savings to meet even one month’s worth of expenses. The other methods of cash management — transfers to the general budget from other state accounts and short-term borrowing in the credit markets — are no longer enough to address the problem. California’s leaders have drawn so deeply in recent years on the state’s hundreds of special funds that there is little cash left to repurpose. And selling short-term notes in the credit markets is difficult because of California’s credit rating, the lowest of any state. Even if the state could pay high interest costs, California may require more cash — more than $20 billion by some estimates — than it can plausibly acquire in the markets. It is true that California’s Legislature and governor, Arnold Schwarzenegger, could take bold action to conserve cash. But the size of the deficit and the state’s governing system make such action next to impossible. A two-thirds vote of the Legislature is required to pass any budget or raise any tax in the state, and compromise has become a dirty word. A legislative deal reached in February to address part of the budget problem came under such fierce attack from the left (for its spending cuts) and from the right (for its tax increases) that voters rejected five of its major components in a special election on Tuesday. The state Republicans, egged on by right-wing talk radio hosts, have started campaigns to recall two Republican lawmakers who voted for the compromise. California is not a patient that can heal itself. What to do? Bankruptcy would appear to be out. Federal law authorizes only local governments, not states, to seek bankruptcy protection. Yet in California, irresponsible voices on the right (and a few on the left) have suggested testing the limits of the law and forcing the state to begin to delay or default on its obligations. That would be a disaster, not only for California, but also for the country. Financial analysts fear that the failure of California’s government could further damage the state’s economy (and by extension, the nation’s) and shake confidence in the bond markets, making it difficult for cities and counties to borrow and perhaps sending some local governments into real bankruptcy. Others in Sacramento — including the Assembly speaker, Karen Bass, and the state treasurer, Bill Lockyer — are investigating the possibility of federal assistance. This could take several forms. The Treasury could offer guarantees on any short-term bonds that California sells to raise cash. Or money from the Troubled Asset Relief Program could be used to backstop such notes. Or Washington could speed up some of the stimulus money earmarked for the state. Each of those ideas, or a combination of the three, offers hope. However, as a condition of any assistance, the federal government should charge the state a fee that includes penalties if it fails to make major changes in its budgeting process. At a minimum, California should be required to submit for federal approval a multiyear plan to meet its obligations and to eliminate its structural deficit. Washington might also require the establishment of a board to oversee state finances. (Federal loan guarantees to New York City in the 1970s provide one model.) There would be fierce resistance to federal aid. Other states may wonder why California deserves special attention — it’s a fair point, and it might be wise for the government to offer similar guarantees to other states in distress. California officials might worry about the loss of sovereignty. And Democrats in the administration and Congress, many of them Californians, may be tempted to help a Democratic state without conditions. But they shouldn’t. By attaching strings to any aid, the federal government would give the state its best chance at saving itself. Most important, President Obama should press California’s elected officials and its voters — 61 percent of whom supported him last November — to make constitutional changes. Among these would be the elimination of the gridlock-creating two-thirds vote for budgets and tax increases, and new curbs on ballot initiatives that mandate spending for popular programs without identifying new tax dollars to pay for them. Federal officials may resist intervening at first, out of misplaced caution. But the combination of the state’s size and its dysfunction means that Washington will probably have to intervene sooner or later. There can be no American recovery if California collapses. |
| Posted by:GolfBravoUSMC |
| #11 Obama can't afford to have the CA electorate (at 12% of the nation) turn against the sitting government and Democratic Party the next election. He will do whatever required to placate them. If it requires he divert 0.5-1.0% of the Fed budget, then it's little effort for much political gain for him. |
| Posted by: ed 2009-05-22 23:02 |
| #10 Ed - I don't want a Fed bail out. I want this state to clean its' act up on its' own. It will be painful, and the squealing will be leftish and high-pitched. I'll have to pay more for my youngest to attend San Diego State. Oh well. |
| Posted by: Frank G 2009-05-22 19:44 |
| #9 I would start with a part-time legislature like Texas's, to limit their time for mischief, and cut legislature pay and office staff I'd dissolve the legislature but Frank's idea might be slightly more feasible. Seriously, the only good laws we get are ballot propositions that the people have to vote for anyway. All the bad laws, wasteful spending and gaming of the system come from the legislature. |
| Posted by: Ebbang Uluque6305 2009-05-22 19:23 |
| #8 With a Federal budget deficit nearing $2,000 billion, siphoning off another $20 or 30 billion to California won't even be noticed. |
| Posted by: ed 2009-05-22 19:18 |
| #7 cuts are due. IIRC the state budget has increased 20% over the last 5 years, while population has barely increased (many are bailing to cheaper climes). The typical teacher makes 35% (a number I saw quoted this week) more than the national average. Our prison system and guard pay is a disgrace financially. I read that there are 120 paid State boards and commissions. There's fat to be cut. Time they found it. I would start with a part-time legislature like Texas's, to limit their time for mischief, and cut legislature pay and office staff |
| Posted by: Frank G 2009-05-22 19:12 |
| #6 ...I still say that a Federal court will impose new taxes and tax hikes to save California. Mike |
| Posted by: Mike Kozlowski 2009-05-22 19:05 |
| #5 The issue is raising taxes (or borrowing money) vs cutting spending. The Democrats want to raise taxes, the people want to cut spending. Unlike California, the feds can print money and avoid the issue*. Obama's pollsters are trying to figure out a way to shovel cash to California (and New York and New Jersey and Michigan and etc.) without a) pissing off every other state in the union and (b) pissing off Californians who want to cut spending. TARP II for state and local governments would probably not pass. I suspect that there will be some additional "stimulus" bill passed to help all states maintain basic services (ie. keeping all SEIU members employed). * The administration is operating under the implicit assumption that it can print and spend, and then deftly avoid inflation with future, unspecified, policy changes. |
| Posted by: DoDo 2009-05-22 16:02 |
| #4 ...err..West Virginia.. |
| Posted by: Procopius2k 2009-05-22 14:24 |
| #3 I recall 11 southern states got some federal oversight and some constitutional changes. Others may also refer to that event as a 'hostile takeover' which seems to be the norm in Washington these days. However, iirc, the states didn't have votes in Congress till the process was completed. If you're looking for precedent. If they can skirt the Constitution creating West Virgina out of Virginia, then if California is too big to fail, then it's too big. |
| Posted by: Procopius2k 2009-05-22 14:22 |
| #2 Take away all our states' rights, let Bambi install his own obsequious little satraps all over the country to run the states instead of elected governors and legislators. Then stop calling it the United States of America and just call it the People's Republic of America. Hmmm. I think it's better to let Kaliphornia's governor and legislators simmer in their own witch's brew until they can somehow muster the guts they need to make some cuts. The pressure's on now and they have to do something. It's gonna hurt but it needs to be done. |
| Posted by: Ebbang Uluque6305 2009-05-22 13:43 |
| #1 "Most important, President Obama should press California’s elected officials and its voters — 61 percent of whom supported him last November" Karma. |
| Posted by: USMC6743 2009-05-22 13:39 |