What Are They Thinking?

(Image: Source.)

In honor of the fact that household ownership of municipal bonds -- a $2.8 trillion market -- now exceeds $1 trillion for the first time ever, indicating that Americans are extremely comfortable with the credit exposure they have to state and local governments, I bring you the following report from Toronto's Globe and Mail, "California On 'Verge of System Failure,’" which makes you wonder just what those investors -- gamblers? -- are thinking:

Golden State, like many others, is nearly bankrupt and desperately needs a bailout

Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.

Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines.

“People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”

It’s a story that’s being repeated all across California – and throughout the United States – as cash-strapped state and local governments grapple with collapsed tax revenues and swelling budget gaps. Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout.

“We are on the verge of system failure,” warned Jean Ross, executive director of the California Budget Project, an independent think tank based in Sacramento.

None of this would matter much to anyone outside the not-so-Golden State except that California’s budget crisis is a harbinger of a grim dilemma that all Americans will soon confront. The country has built an elaborate and costly government machine, tied to a regressive tax system that can’t generate enough revenue to pay for it all.

Canadians too have a stake in all this. Dramatic cuts by state governments are threatening to derail the U.S. recovery, dampening expectations for global growth.

“This is a classic American dilemma,” explained Peter Dreier, a professor of politics and director of urban and environmental policy at Occidental College in Los Angeles. “Americans expect a lot of their government. But politicians have convinced them they’re not getting what they want.”

Americans have been “brainwashed” into believing they pay a lot of taxes, Prof. Dreier added. In fact, they are among the least-taxed people in the Western World, particularly if they’re wealthy, he said.

After unveiling a grim budget last month that scraps a popular welfare program for a million children and slashes countless other programs for the poor and elderly, California Governor Arnold Schwarzenegger complained that the state’s broken budget process has left him facing a “Sophie’s Choice.” That’s a reference to the story of the Polish Jew forced by the Nazis to choose between saving her son or her daughter from the Auschwitz gas chambers.

Experts say the U.S. government will inevitably have to come to the rescue, using its borrowing clout to save the state from near-bankruptcy or devastating service cuts. Do nothing, and the entire U.S. economy could be put at risk. California, like the country’s banks, may be too big to fail.

California is looking at a gap of $19-billion (U.S.) this year and $37-billion next year on a roughly $125-billion-a-year budget. Local governments, including the City of Los Angeles, are in similarly dire financial straits and are now scrambling to shed workers and services.

“We have to get some federal money,” argued Ms. Ross of the California Budget Project. “The impact [of the Schwarzenegger budget] would be enough to slow down the U.S. economy. It would be bad for the U.S. and, arguably, bad for the world to do the shock therapy approach.”

And California isn’t alone in angling for a bailout. U.S. states are facing shortfalls totalling nearly $300-billion in 2010 and 2011; they also must wrestle with hundreds of billions more in unfunded pension obligations to their workers. “There are a few Greek crises brewing among the United States of America,” said economist Ed Yardeni of Yardeni Research Inc.

The task is made all the more difficult because California and virtually all other states are barred by legislation from running operating deficits, forcing them to balance their budgets annually by slashing spending, raising taxes or both. Typically, states can only borrow short-term funds, or for capital projects.

Billionaire Warren Buffett, who advised U.S. President Barack Obama during his White House run, suggested recently that a Washington bailout of California and other troubled states is inevitable. How, he wondered, can Washington deny California after saying yes to General Motors, AIG and dozens of banks.

“I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations,” Mr. Buffett said.

The alternative for many state and local governments may be default. Mr. Buffett said many state and municipal bonds are only triple-A rated because investors assume there’s a federal backstop. “If the federal government won’t step in to help them, who knows what [the bonds] are,” he said.

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Comments

[MichaelN]

"Billionaire Warren Buffett, who advised U.S. President Barack Obama during his White House run, suggested recently that a Washington bailout of California and other troubled states is inevitable. How, he wondered, can Washington deny California after saying yes to General Motors, AIG and dozens of banks.

“I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations,” Mr. Buffett said."

Mr. Buffet, with all due respect, you are certainly old enough to know this phrase: two wrongs don't make a right.

California? Declare BK and thus reduce existing municipal pensions and municipal contracts for wages and benefits. Next? Stop stealing from your citizens to pay for massive benefits for the millions of illegals that comfortably reside in your state. Begin with education, health care and food stamps. Next? Reduce salaries and benefits for all politicians. Next? Start reducing unemployment pay to 100% for the first 33 weeks to 75% the next 33 weeks and then 50% for the next 33 weeks. If necessary, raise taxes to make up the difference - SHARED SACRIFICE!!!

This great nation has confronted far worse than what we are experiencing today. But never have we been so ill-prepared as we are right now. TOO MANY insist on welfare and entitlements that our society can NOT afford and this is true even if we were in "normal times."

So, let's work together and show ourselves and the world (particularly those that hate and despise us!), that we can put aside our differences and unite to end this stupid and ugly period that we've placed ourselves in to. Period!

[Alex]

I would hope that we would require California to raise taxes beforevthey get any bailouts.

[Elf]

Agree with comment 1 - except raise taxes for unemployment. You must be kidding.

No.More.Bailouts. You don't give more money to bankrupt thieves.
You wanted Big Govt, here it is, your Big Fat Greek Proverbial - I don't mean wedding. Nuptials of a sort, yes.

[Michael]

The USA working together? Hah, after half a century of brainwashing everyone into believing individualism is the only solution, do you imagine anything remotely pinko 'socialist' like working together will take hold? Dream on.

I think those with money are voting with their feet anyway and leaving you to your problems ... Apparently shipping companies are busier than they were before the crisis - but not with business cargo. The drop in business work has been more than offset by people leaving the USA, a lot to south and central America, Australia, and other such places.

[Linda C]

I personally think that California should hold back its tax revenue that it sends to the feds which is then dispersed to states that "don't want big government". The "tea party states" generally receive more in federal funding than they actually pay in. Let those states live within their means and let California keep the extra revenue to help their own. California only receives 81 cents in federal aid for every dollar they pay in federal taxes. We have been on a chronic bailout of states such as Mississippi, Alaska, North Dakota, Alabama, New Mexico etc. for years.

I always am amazed that the solution is always burdened by those that can least afford them and are the most vulnerable in our society. But let us never never.. never close tax loopholes for the wealthy or tax loopholes on business that shield their profits in overseas sham companies. How have those "wealth creators" been working out for you (us) lately?

[Blurtman]

California's senate needs to get their act together. This continual stalling is a ploy to beg bail out money from the USG.

How about repealing Prop 13?

Methinks Californians need to stew in their juices until the elected state officials finally start to live in the adult world.

California can balance their budget, they just refuse to.

Screw them.

[xqqme]

It should be known that at the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.

'Abd-ar-Rah.mân Abû Zayd ibn Khaldûn, The Muqaddimah, An Introduction to History, Franz Rosenthal translation, abridged and edited by N.J. Dawood, Bollingen Series, Princeton University Press, 1967, p.230, quoted by Ronald Reagan [note].

Go ahead raise taxes! Even when the tax rates were 90% on the 'wealthy' the US government never collected more than 20% GDP. (Hauser's Law)
I say 'let the bodies hit the floor'!

[jz]

There is no solution just face the facts. The past 30 years of growth were
predicated upon ponzi schemes. They started out small and only got bigger,
this is how all ponzi schemes evolve. We paid financial advisors 10-20x of
their real worth. Pension fund math was hilariously way off. Whoever levered
up and cleaned up in the past 10 years is the real smart winner. Everyone else
is in the soup. Whoever advocates taxing our kids in order to have a pension is an idiot.
The best thing to do is just stop the charade, stop all this politicizing and
for God's sakes, "no more equivocating" . We have over 200 years of bankruptcy law
built in this country and it is time to face up to all our mistakes and DEFAULT.
The Great Depression was a horrid event but we did manage to survive it. And we
had better morals with a better work ethic as we came out of it.

[William Mcdonald]

I live in California and have had it with the games,the budget smoke and mirrors. Where are the "bond vigilantes" when you need them?

Bill Mcdonald
http://morongobillsbackporch.blogspot.com

[Rick Caird]

I am becoming less and less impressed with Warren Buffett. The error in his thinking is most people did not agree with the bailout of GM and Chrysler and would take it back in a New York minute. Anyone who tried to sell a bailout of California based on the auto bailout would find that pitch had a very negative appeal. All of us who were opposed would simply ask if the bailout would take from all the municipal bondholders and give to the public employee unions.

I really can't see such a bailout getting through the Senate or even the House.

[Independent Accountant]

I read this article. Not one mention of immigration. As far as I am concerned, this article was worthless.

IA

[Rocky]

The Province of Ontario's budget deficit per capita is actually much worse than California's. Ontario just borrows more money (about $20 billion for the current fiscal year) and kicks the can down the road. (Toronto is the provincial capital). Read about a one retired California fire chief's pension here: http://online.wsj.com/article/SB124804047828063059.html
Read it and weep.

[buzzsaw99]

The usa senate will not take kindly to a bailout of just a few profligate blue states.

[JPEEZY]

Buffet is an idiot..he made a fortune during an unprecedented expansion of the money supply aka credit..leveraged up & looks like a genius..more millionares & billionares created in the last 20 years than the previous 100