Sen. Lieu And The River Called Denial

Commentary

MAY 19, 2011

By STEVEN GREENHUT

California’s fiscal problems are only front-page national news thanks to the state’s structural deficit, unfunded pension liabilities and other problems that stem from a Democratic-controlled government that loves nothing more than to tax, spend and regulate. One of the few possible checks on the state’s fiscally irresponsible ways is Standard & Poor’s, the prominent credit-ranking agency.

As the Sacramento Bee reported today, “Standard & Poor’s said Thursday that California sits at an ‘important crossroad’ for its credit ranking depending on how it deals with its structural deficit problems in the coming weeks. California has never defaulted on general obligation bond repayment, but the state’s A- rating already ranks lowest in the nation in the wake of annual budget woes.”

This is mild stuff. Obviously, the state always is at a crossroads, especially with a budget due and all the debate over how to close a large gap even after unexpected revenues have filled state coffers. But to the state’s leading Democrats, anyone who points out budget problems or the role the government plays in exacerbating these problems must be ill-informed or motivated by ill will. The California brand of exceptionalism epitomized by California’s legislative Democrats is based on the idea that California is not bound by the normal rules of economics. High taxes and punitive regulations don’t matter. Overspending doesn’t have consequences. Unfunded liabilities will miraculously disappear when subsidized green industries sprout up like windmills covering the desert floor.

Here’s a statement in response to the S&P comments from a prominent Los Angeles-area Democratic senator:

Sen. Ted W. Lieu, chair of the Senate Labor and Industrial Relations Committee and author of numerous bills relating to the California economy, released the following statement in response to Standard and Poor’s analysis today that concluded the state’s ‘negative balance sheet’ has an adverse impact on the state’s credit rating:


  • “As a matter of fiction, it is an interesting read,” Lieu said. “As a matter of truth, it fails miserably.  California never has, and never will, default on any of its state bonds.”

 

  • “There are at least three reasons why California will never default on its bond obligations.  First, unlike cities and counties, California cannot go bankrupt and absolve itself of debt obligations.  There is simply no legal mechanism that allows this event to occur.”

 

  • “Second, the California Constitution explicitly guarantees bond debts will always be paid.  Making bond debt-service payments is the highest priority after education payments, and bond debt cannot be repealed. Article 16, Section 1 of the Constitution specifically states that bond debt ‘shall be irrepealable until the principal and interest thereon shall be paid and discharged.’  The state Controller’s office makes these payments automatically.”

 

  • “Third, the numbers simply don’t add up.  For example, for the 2009 fiscal year, California’s general fund exceeded $84 billion.  Education payments constitute about half of the payments depending on any given year’s actual revenues.  That means the entire remaining other half of the general fund is always available to make debt-service payments.  In 2009, the debt payments amounted to approximately $5 billion out of an $84 billion general fund account.”

 

  • “Short of a massive outbreak of chicken pox that keeps employees in the state Controller’s office from coming to work, bond payments will be paid every time.  That is why in California history, regardless of the size of the deficit or the lateness of the budget, the state has never defaulted – and never will – on any of its bonds.”

 

  • “S&P’s failure to understand California and its Constitution is unfortunate, but not surprising.  This is the same ratings agency that failed to understand mortgage securities, leading to one of the worst fiscal meltdowns in American history.  It is time for S&P to clean house and get new leadership.”

 

His arguments come down to this: California won’t default because the state never has defaulted and is not legally allowed to go bankrupt. That is an argument of sorts. But what happens when the money runs out? He then demands new leadership from S&P, which by all accounts is carefully discharging its oversight duties. Really, California’s Legislature is the place that needs new leadership.

Sen. Lieu denies the obvious. But the state’s reckless fiscal policies do have an impact on financial markets. The state can run out of money. We can’t keep taxing our residents and businesses into oblivion. There’s much concern in the state Capitol as the state’s majority party continues to pass its continuing slate of government-expanding bills. The Republicans have little power to stop them and with Gov. Jerry Brown in office, many bills that would have been vetoed even under the governorship of liberal Republican Arnold Schwarzenegger will be signed into law.

Granted, Standard & Poor’s has virtually no credibility after they gave Strategic Investment Vehicles and other bum investments top ratings. S&P hasn’t done much of a job. But Lieu is criticizing it for starting to do its long-neglected job. If S&P didn’t exist, California would still have a fiscal mess. That’s the doing of legislators such as Lieu, who happens to be a big public employee union supporters (pension liabilities anyone?).

California is heading into uncharted territory. The financial markets are right to worry. All Californians should have second properties in other states.

 

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  1. John Seiler
    John Seiler 19 May, 2011, 16:43

    According to Lieu’s Web site, he attended “Georgetown University, where he received his law degree magna cum laude after serving as Editor-in-Chief of the law review.” So he sees things through a legal lense.

    But there’s nothing to stop California from not paying its bills. If the state can’t pay its bills, the Constitution doesn’t matter. Economic reality trumps a piece of paper commonly ignored anyway. (How often does the state meet the requirement to pass a budget by June 15? About once every 20 years.)

    And although the payments are $5 billion now, they could rise much higher after inflation kicks in.

    So, here’s a scenario. I’m not predicting this. I’m just saying it could happen. Another recession hits. General Fund revenues drop to $60 billion. Inflation pushes up bond payments to $15 billion — 1/4 of the whole budget. Meanwhile, pension payments, currently about $8 billion, soar to $15 billion. Total of pensions and bond payments: $30 billion, half the budget — for no CURRENT benefit to anybody.

    Even in this liberal state, you would see a revolution. The bonds and pensions would not be paid — bankruptcy by whatever name you call it. The California Constitution would become as pointless as the Soviet Constitution, if it isn’t already.

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  2. GSL
    GSL 20 May, 2011, 07:51

    I would differ with one thing in this (otherwise excellent) piece: your second-to-last paragraph makes it sound like S&P is largely irrelevant and can safely be ignored. I’d put it differently: S&P (and the other rating agencies) tends to be very cautious, and to lag the market as a result. So, if a security is a piece of crap, the rating agencies will generally be the last to say so. Which is important here: if even they’re concerned about California’s solvency, that only reinforces your point that Lieu is a fool to brush them aside.

    In any case, this is a great piece; we’ll be linking to it at our blog.

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  3. Karen Renfro
    Karen Renfro 15 June, 2011, 14:33

    This is just another sad tale that shouldn’t surprise anyone. But how many public officials believe there is such a thing as The Law of Cause and Effect? Or care? Even more to the point, do the people who put them in office believe there is such a thing? There is no place on earth where a society has taxed-and-spent its way to prosperity, and government debt is just a postponement of the unavoidable day of reckoning.

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