Sen. Lieu And The River Called Denial


MAY 19, 2011


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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