Deadbeat California Needs a Payday Loan

JULY 15, 2011

By CHRISS STREET

For the State of California and its counties and cities, tax collections tend to be lumpy during the year due to half of all income, corporate and other taxes being collected in the two months of November and April. Given that the fiscal year starts on July 1 and politicians like to spend money all year long, the state and local municipalities have relied on the sale of short-term municipal bonds to tax free money market funds to even out cash flow. The total amount of this borrowing can run as high as $25 billion.

Unfortunately for California, with the sovereign debt crisis in Europe and the default crisis in the United States government, credit-rating agencies are in the process of downgrading 7,000 municipal bond issuers. California, which has the lowest rating on the continent, could receive a junk bond rating. Such a rating would make the purchase of California bonds, by money funds, deemed to be imprudent investments. Consequently, California is being forced to try to borrow money from banks at interest costs that may be 5 to 10 times higher in cost.

Negative Balances

Starting around the third week in July, California’s Treasury will begin to run increasingly negative cash balances until larger tax payments arrive in early October. With the state continually cash strapped, those nice people at JPMorgan Chase & Co. and their banker buddies bailed California out with bridge loans of $1.5 billion in 2009 and $6.7 billion in 2010 At the time, because there was no risk of the state being downgraded to junk levels, the interest cost on the two loans was less than 2 percent.

But loaning money to government today is perceived as a much more risky proposition. Last week, JP Morgan loaned $2.25 billion to New Jersey, which has a higher rating than California, at a cost of up to 9 percent interest. At a low 2 percent cost of interest, it would take 35 years of compounding before the borrowed money would double. But at 9 percent, the loan doubles in just 8 years.

To instill confidence in the lenders, California voters elected “Moonbeam” Jerry Brown to replace “Terminator” Arnold Schwarzenegger last year. Brown has always been a complicated figure in California politics. In 1975, Jerry Brown became one of the youngest governor in the history of the United States by being elected at age of 37.

After taking office, Brown was widely liberal on social issues, but was actually a fiscal conservative who favored a Balanced Budget Amendment. After the passage of the Proposition 13 limitations on property tax collections, Brown did such a good job balancing the State’s budget that the initiative’s author, Howard Jarvis, actually made a television commercial supporting Brown for his successful reelection bid in 1978.

Two weeks ago, Brown got a chance to begin getting back in touch with fiscal conservatism when he was forced to close the purported $9.6 billion State deficit with $5 billion in spending cuts and promises that the sun will soon begin rising in the West. Brown is to be applauded for implementing the first real cuts in the state budget in the last 20 years. But his job was made easier by strong stock market capital gains and very optimistic projections of strong tax growth for the next three years.

More Cuts

California state and local governments avoided much of the pain of the 2008 Great Recession that seems as if it will never end. But that pain has arrived this year in a big way. It is extremely painful to see large cuts in classroom teachers and active police officers. Nonetheless, California government employee levels have been cut by 62,000 in the last two years.

Unfortunately, according to the UCLA Anderson Business School Forecast, California State and local governments needed to have already eliminated 130,000 positions to balance their budgets.

Over the next three months, California Treasurer Bill Lockyer will need to borrow $15 billion and other local governments will need to borrow $10 billion just to keep the lights on. The combination of irresponsible spending growth and a very unfriendly business climate has left California looking to the credit rating agencies a lot like a deadbeat.

I am somewhat optimistic that California will find a way to borrow huge amounts of money this year, but the costs of that borrowing will be brutal.

The former treasurer-tax collector for Orange County, Chriss Street blogs at Chriss Street and Company.

1 comment

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  1. fletch92131
    fletch92131 5 February, 2015, 10:52

    California really needs to outsource all nonessential/non-decision-making positions, as detailed here, http://bit.ly/10rkHTM

    Reply this comment

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