Is California Too Big To Fail?

Declan McCullagh: Golden State, In Danger Of Economic Collapse, Turns To Federal Government For Help

(CBS)  California, the state that gave us wheatgrass, the microprocessor and the summer of love, is about to provide us with yet another first: a bailout of a failing state government.

Preliminary returns on Tuesday night show that voters soundly rejected ballot measures calling for higher taxes, meaning that the not-so-Golden State's politicians are likely to take hat in hand and head to Washington begging for a bailout.

Republican Gov. Arnold Schwarzenegger floated that idea months ago, as did Assembly Speaker Karen Bass, a Democrat. Schwarzenegger's visit to the White House on Tuesday surely didn't harm its prospects.

California does have enough cash to survive through June 30, but the state controller estimated in March that another $10.6 billion would be necessary to last the summer.

A more recent report from the state's non-partisan Legislative Analyst's Office offers a higher estimate of what would be needed if the ballot measures failed. It says: "Failure of measures in the May 19 special election would increase the state's cash flow pressures substantially - potentially increasing the short-term borrowing requirement to well over $20 billion. California is likely to have difficulty borrowing anywhere close to the needed amounts from the short-term bond markets based on the state government's own credit."

Ouch. To sum up: Legislators can't easily raise taxes (because of a requirement for a two-thirds supermajority). The Democratic majority is unwilling to go along with serious budget cuts. That leaves capital markets.

But who wants to lend to a debtor with such a bleak future? In February, Standard & Poor's awarded California the dubious honor of having the worst credit rating of any state.

Schwarzenegger has proposed attempting to raise $6 billion by handing lenders what are known as revenue anticipation warrants - the rough equivalent of a subprime loan - but that means the state will pay Wall Street dearly in the form of additional fees and interest. Besides, $6 billion is hardly enough to cover the state's looming budget deficit.

Which is why left-coast politicos are hoping their right-coast counterparts will prove to be an easier mark. Last week, Treasurer Bill Lockyer asked U.S. Treasury Secretary Timothy Geithner for a bailout through the TARP program, which was created to help ailing banks. "I am writing today to ask that you authorize extending TARP assistance to the State of California and other financially strapped states and local governments which face a severe cash flow crunch in the near term due to eroding tax revenues resulting from the current economic downturn," Lockyer wrote in his letter.

Other options include federal guarantees for loans that California takes out - the equivalent of having a co-signer - or a commitment from the U.S. Treasury to buy those loans. A third choice would be funneling stimulus funds to the state faster than scheduled.

An article in Tuesday's Bond Buyer newspaper reported, citing congressional sources, that the U.S. Treasury and Federal Reserve are considering loan guarantees and "other assistance" to state governments. A House of Representatives committee is holding a hearing Thursday on a bill to provide federal guarantees; House Speaker Nancy Pelosi, a San Francisco Democrat, is in a position to make that happen.

Now, it's true that California's fiscal woes are serious, but they're the result of politicians' poor decisions over many years. No matter how it's concealed, a bailout could jeopardize the nation's AAA credit rating - and invite 49 other governors to queue up outside the Treasury building. (The incentive is perverse: The worse shape your state is in, the more cash you get from the Feds.)

Between the 2004 and 2008 fiscal years, total state spending increased by around 44 percent, far outstripping tax revenues. Debt has tripled in six years. All this is true even though Californians enjoy one of the heaviest income tax burdens in the nation.

There was "a pronounced run-up in spending in the four years preceding the recession," says Jason Clemens, director of research at the free-market Pacific Research Institute in San Francisco. "Secondly, the base from which the state is trying to draw revenue is shrinking. People are voting with their feet. Businesses are leaving the state, as are citizens."

Not helping is that neither Schwarzenegger nor Democrats in the legislature are willing to confront public employee unions, including teacher's unions that enjoy the highest pay anywhere in the country. The Obama administration's decision to support demands of the Service Employees International Union, which opposed California wage cuts for home health care workers, is no better.

"Political leaders have said we can have high tax rates, we can have fairly high government spending, and we can have a robust economy," Clemens says. "The economics behind that are just faulty."

So might be the assumption that Washington, D.C. will write a blank check, and that any bailouts will limited to California. One estimate says 47 states are suffering declining revenues, meaning just about everyone's a candidate for a federal handout.

It will be interesting to watch Senate Majority Leader Harry Reid, a Nevada Democrat, explain to his conservative constituents why Sin City taxpayers need to bail out San Franciscans. It will be even more interesting to watch what the Golden State does if the Feds say no.

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Declan McCullagh is the chief political correspondent for CBSNews.com. Previously, he was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, analog and digital photographer, and lives with his wife in the San Francisco Bay area.

[prov1624]

the first thing they are going to do once they get their "bail-out-$" is to give themselves raises for all the "hard" work they've done (a mess-really...)then go on vacation in the bahamas... and write it "off" for some meeting... what they need to do is take "money management 101" and STOP spending money on unnecessary things! keep the basics the absolute, do not go on shopping sprees at tax payers expense! hello? anyone listening!?

I recommend to anyone the following article: Who Wants to Be Governor of the Failed State of California?

http://www.huffingtonpost.com/joseph-a-palermo/who-wants-to-be-governor_b_331014.html

[tuftaurian]

Nice post. I agree with your comments. Your opinions match those of another blogger I follow - Ajay Dayal of mainstreetmantra.com

[Its_Katie]

I mean no offense to anyone especially the Jackson family. However, if CA is in such dire financial crisis then how can the state afford to put on such an elaborate & expensive Memorial service thats supposedly costing 2-4 million dollars? Seems there must be some $$ hiding somewhere to be able to do this. But yet you (CA Government) want the Federal Government to bail you out. If CA was given any monies, whats the guarantee that it would be spent wisely?

[InfearofObama]

I am a simple East Coaster. I am sad for the hard working people of California that are watching their state fall apart. What is most sad is that the Federal Government is following the exact path of California. Catering to unions (don't you folks realize yet that unions don't give one damn about employees), environmental causes to the extreme (I love this planet, but I love people more), and pampering and provision for illegal aliens are what have (yes have, not will) destroyed California. I really don't see how the majority of posters on this site can blame the right for this issue.

Why do the posters on this site feel that they are expected to get back every penny of their federal tax expenditures? I don't know any WORKING American who breaks even on Fed taxes.

People, there is no free lunch and all feel good actions have repercussions. I only hope that the rest of the nation can learn from California's mistakes in spite of Comrade Obama.

I would welcome any true working person to my home state of North Carolina in the event you are ready to leave CA.

[bebgsurg]

The problem is one of entitlement. Democracies fail this way. We have the unions who think they are entitled to jobs and high pay even if there is no money to pay them(see CA and GM) There is the new majority of USA citizens who think they are entitled to super duper health care which costs more in their lifetime than they ever payed in taxes for it. The majority thinks it can vote themselves the economic equivalent of a car which runs 1000 miles on the energy it gets from being left out at night and absorbing moonshine. And our feckless shortsided weak and intrinsically corrupt 'representatives' cater to this nonsense because a generation of ill-education has succeeded in graduating enough morons who actually believe it !

PS, when it falls apart the people turn to a dictator to keep order, since they have failed to govern themselves with any sense.

[noloyalisti]

Remember that Schwarzenegger was a big supporter of the Republican Bushoccio Crime Family and then wanted more of the failed McSame. The CONS fiscal mentality is that of a child. A petulant, misguided and un-educated child. Exactly the mentality of the disaster that was Reagan. At least he is only the 2nd worst president of all time now.

[noloyalisti]

We would not have a problem is the Bush supporting Arnie was not appointed by big corporations to give them welfare. Government is not the problem, out current government run for the profit of the rich and big corporations is the problem. How many times do the wasteful, greedy big corporation have to screw everyone before the idiot wake up. The Republi CON party is a joke and a failure. Don't try to give equal blame, you should blame the subservient, complacent and complicit good Germans of CA for putting up with this junk.

[OregonJames]

When it comes to money, there is only one truth. Spending money you don't have is stupid.

Our nation, our states, and we ourselves have been sold on living on credit for years. Now we are seeing that wasn't so smart after all. California will simply have to stop spending on anything but essentials, just as any individual would. It will be painful, but taxpayers have voted numerous times against new taxes. It is time for the state to act as if the peoples' votes count for something. Stop all unnecessary spending.

[anti-global2]

CA needs to be allowed to fail. Why doesn't anyone bring up the whole Enron affair, that was the catalyst that brought them down. Arnold, junk bond fraudster Malkin,& Bush's energy adviser basiacally shut Gary Davis down when he wanted to go after Enron for the 9 billion they had stolen from CA. They villified Davis and Arnold took over. Schwarzenegger was complicit in this fraud yet the people of CA support him. They deserve wheatever they get.

[myfuelie62]

If California is too big to fail, then maybe it needs to be split into 2 states, North California and South California just like we have North and South Carolina and North and South Dakota.

If a bank is too big to fail because it will have a negative impact on the economy, then why can't it be treated as a monopoly, and by law, be required to be split up into smaller parts so that no one part can damage the economy?

[micheleisfree]

Here's a solution for every failing state:
Tax the Churches!
They are profit-making businesses.
Not taxing churches is NOT separation of Church and State!

[SJC1701]

To pizzanick
your honesty is refreshing.

The powers that be made is impossible for CA to raise taxes, and cutting any more will render the state impotent.

Well Arrrnold you wanted to be "the Governator" do your job.

[armandbeni]

California created their problems let California clean it up. I don't live there, didn't get to vote on these issues and shouldn't be forced to clean it up and I'm not going to pay for the Rich and Famous' maids and gardeners either,

[joule18]

Posted by willyhenail at 12:42 PM : May 21, 2009

Hey nitwit!

We may have had a few Republican governors (I don't count Arnold as he is more Democrat than Republican), but the legislature, for YEARS, has been held by the Democrats. The Governor can't sign legislation unless it is presented to him by the legislature. Liberals in the legislature are the problem. If you don't live here and don't know what is going on than you should not comment.

[sjc_1]

There are enough Republicans in the state legislature to block anything. This is why they are the party of NO. When you call people "nit wits" it just shows what a hopeless, idiotic jerk you are.

[joule18]

California's legislature and the unions who represent the teachers, the state and government workers and correction's officers, etc. have all contributed to this problem. Add the housing bubble that burst and it is a big mess.

California is also not buiness friendly. The amount of regulations, taxes, and the inability to resolve conflicts with the Franchise Tax Board has also contributed. Businesses are leaving the state.

Add the vast amount of services to illegals and their families at taxpayer's expense and it is no wonder all the bills the voters were asked to approve that would tax them further into oblivion failed.

This state spends an exhorborant amount on education, yet the quality of that education continues to diminish. There are too many administrators in the system and the bad and ineffective teachers stay because of union protection.

There is only so long a state can sustain the high 50-90% paid to retired workers and 100% more for their replacements.

The legislature spends like drunken sailors, are continually late at passing the budget, and think that any way out is through taxation instead of curbing their nanny state initiatives.

I love the state, but the government stinks. If my spouse would move elsewhere, I would gladly go because the illegals are taking over and we cater to them by providing for all of their needs on our dime.

[sjc_1]

What would the country be? Let's start with rational and work our way up. Most of the rabid wrong wing nuts should be in straight jackets and on medication. Instead they are on talk radio and Faux Noise nightly yammering on about some idiotic obsession or another.

Take Glen Beck, an admitted former A.D.D. child who became a political talk show host for the right wing. If there is one person that should be institutionalized, it is THAT nut case. But people love to listen to his rants, because it appeals to the child in themselves. All ID and ranting, while never having to use any logic nor reason.

[Ceres6]

The misfits are the idiots that think we owe ILLEGALS something. The only thing we owe them is a swift boot in the rear.
Posted by willyhenail at 12:45 PM : May 21, 2009

What would be of our country without super brave Americans as willyhenail.

[tkremin]

Why isn't any asking the real questions - Why have we allowed our FEDERAL representatives to sell out California for their own political gain? California has for decades payed $20 BILLION+ more to the federal government than we see back from them.

THAT is why we have such a problem. SO we pay all that money to teh Federal government, and then wind up having to pay for all the work in state with STATE taxes, while PElosi, Feinstein, Boxer (et al.) all give away the money to other states in their search for personal power.


Bring our tax dollars home, and there will be no budget deficit in California!

[sjc_1]

"...facilitating the lazy bums..."

I have no idea what you mean by this, nor do I care. You have no idea what you are talking about, because you have no factual information to support that statement. Thus, you are an idiot that no one should even bother reading.