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California budget crisis: a genuine tragicomedy

by Bob Morris, published

If it wouldn’t too terribly inconvenience the California legislature when they return from their month-long July vacation - taken in lieu of working together to pass a budget - could they possibly try to pass the budget when they return all sun-tanned and rested in August?  

Don’t bet on it.

Instead there will probably be more frenzied attacks against evildoers on The Other Side for blocking a budget, followed by more paralysis and a continued cratering of California’s credit rating. Surely it’s more important for legislators to work on their sun tans rather than perform the jobs they were elected to do. And forget about that pesky state constitution that mandates that budgets must be passed by June 15.  Anyone have more sun tan lotion?

Truly, our legislators have their priorities right. 

Meanwhile, Gov. Schwarzenegger is threatening to put all but his favored state employees (unions who renegotiated contracts) on federal minimum wage, while State Controller Chiang fights that issue while paying his unfavored state employees (anyone appointed by the governor or legislature) precisely $0 per paycheck.

All of this might be comic if it wasn’t so serious and potentially tragic. The State of California has stopped paying vendors. How long do you suppose it will be before some vendors go out of business or have to lay off employees? That’ll sure help the California economy.  You bet. 

California faces a triple whammy this budget season. The deficit is a whopping $19 billion. All the easy cuts and most of the hard ones have already been made. Borrowing or issuing bonds will solve little, just pushing the problem into the future. 

Besides, given California’s dismal credit rating, the interest on the bonds would be onerous and the Wall Street firms selling them will surely take their pound of flesh in the process. No, make that several pounds of flesh. Because if bankers can’t sell all the bonds, they generally are contractually obliged to buy the remainder, something they would be loath to do. I mean, would you buy a California bond now?

So the bankers will put in lots of expensive upfront fees to protect themselves. Maybe California could borrow from the drug cartels instead. It probably wouldn’t cost much more. 

There is no legal process by which states can go bankrupt.  The authors of the bankruptcy code apparently thought the possibilities of such an event to be non-existent so the law says nothing about it. If California defaulted on its already steep debt payments, the result would be chaos, a multitude of lawsuits, and completely uncharted waters. 

The big unspoken hope of course is that Washington D.C. will gallop in at the last moment, spreading billions of dollars far and wide throughout the state, forestalling the crisis for the moment. But if they do that, then they’ll have to do it for Illinois, New York, and New Jersey too, as those states are in dire financial condition.

Are such states Too Big To Fail? 

Among the budget cuts proposed by the governor is the complete elimination of child welfare, including firing state employees who administer the program. While he may be bluffing, this is a clear example of how any future budget cuts will be extremely painful and, as always, hitting the poor first.  

My guess is the legislature will stumble along for several more weeks before finally passing a budget, and that sooner rather than later, California will default on debt payments or otherwise fail to meet its obligations. Then the tumult will genuinely begin.

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