Wednesday, February 24, 2010

California - it's worse than you think...

The new Great Seal? (Graphic/POLITICAL VANGUARD)

The big talk right now is that California has a $20 billion-plus budget gap. Not only is that not true, but it also is misleading when it comes to the bigger picture.

To begin with, the budget deficit actually tops $36 million. Here's the breakdown:

-$21 billion in general fund
-$7.3 billion in money owed Unemployed Insurance Fund
-$3 billion in unsold assets, like San Francisco's Cow Palace, the LA Memorial Coliseum and the State Compensation Fund.
-$5 billion in lost lawsuits, unable to pay due to lack of cash (there is at least another $5 billion in lawsuits pending)

The bigger problem, though, is California's debt. Currently, the state is at least $600 billion in DEBT (not deficit). Some state officials - on both sides of the political aisle - actually put the number above the $650 billion mark.

This debt includes:

-More than $200 billion in unfunded liabilities at CalPers (the public employees retirement system).
-$48 billion in unfunded liabilities in CalStrs (the state teachers retirement system).
-$110 billion in unfunded health care.
-In addition, there are billions owed to state trust funds (the state Recycling Fund, for instance, is owed $500 million in money that's been borrowed by the governor to cover deficits).
-California owes $8.8 billion in short-term loans that have to be paid off by June and almost $120 billion in outstanding bonds and interest that will be paid over decades.

In his lame duck State of the State address, Gov. Arnold Schwarzenegger noted that the cost of state employee pensions rose 2,000 percent during the last decade, while state revenues have increased only 24 percent. In addition to this alarming figure, government itself is one of the few "growth industries" in the state. The private economy has to deal with high unemployment and small business bankruptcy rates that grew 81 percent (2008-09) but f"at and happy state workers" were able to grow their ranks (by 1 percent).

"California is deeply in debt. You could say that it's bankrupt," Attorney General - and presumptive Democratic gubernatorial candidate - Jerry Brown told a group of young Democrats earlier this month. Likewise, GOP U.S. Senate candidate Carly Fiorina talked about the possibility of bankruptcy during a recent chat with SoCal business owners.

This isn't new territory: last year, the state issued close to a half-million IOUs to vendors as well as to residents waiting on their state income tax returns. It also halted construction on thousands of infrastructure projects. Another cash shortage this summer will result in additional IOUs and delayed payments.

The state has the lowest credit rating of any state in the nation, although it still is above junk-bond status. If the state falls to junk status, some investors would be unable to buy state bonds, making it even more difficult for the state to borrow money and infuse cash into its coffers. Either way, it now costs the state more to borrow the money it needs to function. The state Constitution mandates that debt service has the second highest priority for payment, after only education, and the state continuously receives tax revenues. The state treasurer plans to sell $10 -$14 billion in bonds this year, with the first sale of $2 billion scheduled for early March.

If states weren't prohibited from declaring bankruptcy, California would have (had to) long ago.

It is, however, for all intents and purposes...insolvent.

(Sources: CA Political News, Sac Bee/Dan Walters, LA Times, governor's web site, KSFO, SF Chronicle)