Is California Dying?
Jul 6, 2009
Posted by Jody Eisenman | Filed under Uncategorized
In the wake of a worsening fiscal crisis, the state of California has now resorted to printing IOUs to creditors in lieu of payment. Essentially, the government is telling vendors that they have no money now, but they promise to pay them at some point in the future. Does anyone think this argument would work when trying to pay your income taxes or utility bill? The controller, John Chiang, issued 28,742 warrants totaling $53.3 million. If state lawmakers fail to reach a budget agreement by the end of August, the amount would grow to $4.8 billion.
Unlike a corporation, it is illegal for a state to declare bankruptcy. As the largest state in the country, California is now facing some very hard choices in facing of a budget deficit of $26 billion. However, just like a corporation, California must balance its’ budget. In the wake of overspending and reduced revenues (from real estate and other taxes), the state is facing a crisis that is similar to the one facing the United States. However, states cannot print their own money. As such, this method of issuing IOUs is rather extraordinary.
In order to balance the budget, the state must do one of two things, either increase revenues to decrease spending. Increasing revenues almost always comes down to the same thing: raise taxes. The only question is who bears the brunt of this. Of course, increasing taxes is always unpopular politically. This is especially true in a recession. On top of this, the employment situation is getting worse. While the national unemployment rate hit a 26 year high of 9.5% recently, this is dwarfed by California’s rate of 11.5%. So, the next alternative is to cut spending. What this means is an almost certain loss of jobs in a horrible climate, as well as cuts to social services. As what seems to be the case these days, the Democrats and the Republicans continue to battle each other without reaching an agreement.
There are now many states that face a fiscal crisis. However, due its’ sheer size, California is now front and center on the nations’ minds. If push comes to shove, will California actually default? If that would to happen, their credit rating, which is already down to single A, would be devastated. This would almost certainly impair their ability to finance future revenues via bond issuance. Would Obama bail out the state as he has with the banks? It could happen.
