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London is burning. Greece is in receivership. Nobody
wants Italian bonds. France's AAA rating is at risk. The headlines do seem to
be a bit Euro-centric lately. But that's temporary. Before long the spotlight
will swing back to America's
failed states, beginning, as always, with California. Consider:
Signs
point to California facing new budget gap
(Reuters) - California's summer
vacation from its state budget woes didn't last long.
California's latest monthly revenue report
shows revenue weaker than expected even before the stock market, a key source
of revenue for the state, began sliding in response to Standard & Poor's
downgrade of U.S. debt, anxiety about Europe's finances and the risk of the
U.S. economy slipping back into recession.
For officials in California's
capital, underwhelming July revenue and Wall Street's hard times suggest they
will have to draw up plans for cutting more spending early next year.
Beyond Sacramento, if revenue swoons
in coming months, it will assure renewed headlines of how the government of
the most populous U.S. state is facing yet another budget shortfall.
Californians, and the state's bond
investors, should brace themselves for that in light of how a choppy stock
market can hurt the state's revenue, said Neil Hokanson
of Hokanson Associates, a family wealth manager in
Solana Beach, California.
California is like a household where
one spouse is a sales person, Hokanson said,
noting: "It has good years and it has bad years."
This year was supposed to be a
not-so-bad year for California, with revenue improving after a few years of
declines sparked by the housing crash, recession and plunge in stock prices
following the Lehman Brothers bankruptcy.
Governor Jerry Brown and state
lawmakers closed a roughly $10 billion deficit in June with a plan that
balanced California's books with spending cuts, deferred payments, some fees
and, most important, the assumption that an additional $4 billion in revenue
would flow into state coffers.
The money would be generated by the
state's gradual economic recovery and wealthy taxpayers who pay the bulk of
personal income taxes, the state's most important revenue source, as their
capital gains increase with the stock market extending its climb from its
March 2009 low.
That plan may soon need to be
revised.
Even before volatility struck the
stock market this month, California's revenue was not meeting expectations:
July revenue was $538.8 million, or 10.3 percent
below its projected level in the state's recently enacted budget, the state
controller said on Tuesday.
New
California wildfire fee may drain agency's firefighting budget
(Mercury News) - A California law
that imposes an annual wildfire fee on rural residents may have an unintended
consequence -- sapping the state fire agency of money it needs to fight wildland blazes, officials said Wednesday.
Concerns about the $150-a-year fee,
which is contained in the state budget Gov. Jerry Brown signed earlier this
summer, were raised Wednesday by the California Board of Forestry and Fire
Protection.
Democrats in the Legislature passed
the fee and said it eventually would raise $200 million a year. That would
allow the state to transfer an equal amount of money from the California
Department of Forestry and Fire Protection to the general fund budget.
Under the law, proceeds from the fee
must go to local fire-prevention efforts through local fire districts, fire
councils or the California Conservation Corps -- not the state fire
department.
George Gentry, chief operating
officer of the Board of Forestry, told The Associated Press that will leave
the department with a hole in its firefighting budget this year.
Court
halts dismantling of CA redevelopment agencies
(San Francisco Chronicle) - The state
Supreme Court put the brakes Thursday on a plan to dismantle redevelopment
agencies in California, posing yet another challenge to California's ability
to keep its budget balanced.
The court said it would decide by
mid-January whether the state's plan to eliminate the economic development
program is legal, and allowed redevelopment agencies to continue to exist
while the case is pending. But it also barred the agencies from starting any
new projects, issuing bonds or purchasing or transferring any property until
the suit is resolved.
If the case is successful, it will
punch a $1.7 billion hole in the state's budget for the current fiscal year
and cause a $400 million annual shortfall in future years.
Stock
market turmoil a bad omen for California budget
(Reuters) - The stock market's recent
slump is reviving bad memories for California's government and raising
concerns about revenue estimates for its budget, a perennial concern in the
U.S. municipal debt market.
The concern in the state capital of
Sacramento is the slump hints at the potential for a stock market meltdown
like the one in 2008. That sent California's finances into disarray.
Heavy market losses could force
California to trigger spending cuts to politically popular programs and
revive calls for tax increases, both sure to spark rows in the legislature
that cause many investors to stay clear of the state's debt.
Governor Jerry Brown and lawmakers in
June notched a budget plan that closed a multibillion dollar deficit and
balanced the state's books in part with a rosy revenue outlook.
Critics said the forecast was too
optimistic given the state's weak economy and the potential for reversals in
financial markets. When they swoon, California's revenue shrinks because it
relies heavily on wealthy taxpayers and their capital gains to provide a
large chunk of the personal income tax receipts.
And finally this from Douglas French
of the Mises Institute:
Los
Angeles, America's Harbinger
In a piece for the Wall Street
Journal, Joel Kotkin tells of the demise of Los
Angeles. No, you won't see Snake Plissken or Rick
Deckard racing through the City of Angels just yet. But the city's political
machine is doing all it can "to leave behind a dense,
government-dominated, bankrupt, dysfunctional, Athens by the Pacific,"
explains Kotkin.
...The unemployment rate for Los
Angeles County was officially 12.4 percent in June, after peaking a year ago
at 13.4 percent. However, the worst is likely not over. As Kotkin explains, the Panama Canal is planning to widen
and there are plenty of ports on the eastern seaboard looking for business.
Also, the Golden State's renewable-energy mandates are estimated to increase
energy costs by 20-25 percent. Californians already pay 53 percent more than
the national average.
And the taxman is especially brutal
in California, with a top rate of 10.3 percent, which kicks in at a $1
million in earnings. Sure, not many are pulling down that much, but the
second highest rate, 9.3 percent, applies to those making $46,766 and above.
The state's minimum wage is $8 an hour, 75 cents above the federal rate. And
restaurant employers may not use tips earned as credit toward this obligation
as is the case in many states. California employers are required to pay
"exempt" employees double the state minimum, putting these
employees in the 6 percent tax bracket.
What once was believed to be a city
of destiny (paradise on earth) is being destroyed by government looting; and
now its saviors, the state of California and the federal government, have
been looted as well.
Some thoughts:
After spending a recent week in Los
Angeles, I now understand the concepts of Peak Oil and road rage: Tens of
thousands of cars, most containing only one person, going 75 miles an hour
for a really long time to get anywhere. Besides being stressful, this system
is fragile. It will grind to a halt on the day gas hits $6 a gallon.
California tends to lead the way for
other US states, which in the past was mostly good. But now the Golden State
is about to become a Third World country, complete with deteriorating public
services and a permanent, volatile underclass. Those "London
burning" pictures will be replicated in LA before too long.
The sad truth is that it's simply
impossible to run a major US state with the current public sector
pay/benefits structure. The process of scaling back pensions and salaries
will hurt a lot of cops, teachers and social workers who don't deserve pain.
But there's no mathematical alternative to a dramatic lowering of state/local
operating costs.
This is the inevitable result of
three decades of lies told to public sector unions and taxpayers. The people
making the promises (lifetime pension/health care for 50-year-old retirees,
for instance) either knew they were lying or were really, really stupid.
Either way, they're the villains in this story.
The muni bond market has held up
amazingly well considering that many of them are loans to bankrupt states in
a soon-to-be bankrupt country. But in the coming year Meredith Whitney's prediction of "hundreds
of billions of dollars of muni defaults" might come true, again with
California leading the way.
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