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Posts Tagged ‘budget crisis’

Here’s Why California’s Budget Crisis Is Going To Be Much Worse Next Year

Here’s Why California’s Budget Crisis Is Going To Be Much Worse Next Year

california

Courtesy of Joe Weisenthal, Business Insider 

California recently closed its budget, but in January the state will need to begin working on its next one.

According to the LA Times, a $19 billion hole is already projected, and here’s the problem: The easy budget cuts and the easy tax hikes are already in the books.

The are other problems, too. The new governor, whoever that is, will be reluctant to waste political capital (Schwarzenegger had the benefit of being a lame duck) and fresh legislators will once again have to learn how the whole process works (California has term limits, meaning nobody ever sticks around long enough to know how it works).

Also, the public has unrealistic expectations:

In a survey of 1,000 Californians conducted in June by the Pew Center on the States and the Public Policy Institute of California, half of respondents believed state spending could be cut 20% or more with no impact on services. The report points out that the state would have to eliminate the equivalent of its entire prison system, all welfare programs and all transportation spending to save that much.

The authors went to Mike Genest, Schwarzenegger’s former budget director, for some perspective.

"Reality hasn’t caught up with the voting public," Genest told them. "Politicians have made it sound like there are other alternatives, like we can simply get rid of fraud, waste and abuse and [have] a spending freeze and … have the same kind of government we’ve always had. … That’s just not true."

Anyway, assuming a big GOP sweep in November in DC, there won’t be much help coming from the Feds. Barring another tax-revenue-creating bubble, this should be quite a horror show.

Now see the 11 states most likely to default >

Image: AP


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California’s $100 Billion Whooping

California’s $100 Billion Whooping

Courtesy of Leo Kolivakis at Pension Pulse

 
California's $100 Billion Whooping

As if California didn’t have enough to deal with its budget crisis, now the FT reports that the two largest pension funds in the US have recorded steep losses following the turmoil in stock markets, with the value of their combined portfolios shrinking by almost $100bn:

The California Public Employees’ Retirement System (Calpers) and the California State Teachers’ Retirement System (Calstrs) were hit by the real estate slowdown and the slump in global equities. Calpers said the fall in the value of its assets was the most severe in its history.

“This result is not a surprise; it is about what we expected, given the collapse of markets across the globe,” said Joe Dear, investment chief at Calpers.

The value of Calpers assets fell 23.4 per cent for the year to June 30, raising concerns that state employees and local governments might have to increase their ontributions to cover the shortfall.

But Calpers presented a bullish view. “The system has more than enough cash through contributions and income from investments to meet our present liabilities, so we are in a good position to ride out the current downturn and come out stronger,” said Mr Dear.

The market value of Calpers assets was $180.9bn (£110bn) on June 30, down from $237.1bn on the same date the previous year. The value of the portfolio had fallen to $160bn in March of this year but rebounded by $20bn by the end of June thanks to a partial recovery in equity markets.

Both organisations shifted a portion of their portfolios out of equities and into fixed income and real estate during the year to take advantage of lower prices.

Calpers also said it was “realigning relationships with hedge funds and private equity partners”. This would lead to “reduced fees, better alignment of interests, and more mutually beneficial long-term relationships”.

The value of Calpers real estate and private equity investments fell by 35.8 per cent and 31.4 per cent respectively in the year to June 30.

Calstrs was hit by the same macro-economic factors, with the value of its assets falling from $162.2bn to $118.8bn in the 12 months to June 30.

The organisation wrote down the value of its property holdings rather than spread the


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IOU and State of Emergency

Joe Weisenthal at ClusterStock updating on California’s budget crisis drama.

IOU

schwarzenegger tbiYou know, all this time we’ve been saying that the difference between California and the Federal Government was that California couldn’t print currency to get out of a pinch.

But really, isn’t printing currency exactly what issuing IOUs is? Granted, it’s not the most solid currency given with the state you’re dealing with, but it’s something.

Anyway, we’ll get to find out, because California has missed (surprise!) its deadline for closing its budget gap and is now set to hand out IOUs instead of actual money.

Reuters: The notes will mark the first time in 17 years the most populous U.S. state’s government will have to resort to the unusual and dramatic measure.

Democrats who control the legislature could not convince Republicans late on Tuesday night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise taxes.

The state still has some cash, but that will be reserved strictly for its bondholders and education spending (the kids!). But vendors, college students, state agencies will get some paper.

Please, please, please let there be an after-market in these IOUs. We’d love to see how they’re valued and how businesses will conduct exchange using them.

STATE OF EMERGENCY

Gov. Arnold Schwarzenegger has now declared a State of Emergency for the sunny state of California.

Meanwhile, former Gov. Grey Davis was on CNBC saying he wouldn’t expect most banks to take California IOUs.

Oh, if only the constitution Article 1 Section 10 didn’t prevent the state from declaring IOUs a legal tender.

See Also:

California, killing dogs

Bail Out California, Or They’re Going To Kill Dogs

***** 

Hotel California – Eagles

 


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