U.S. Refuses To Bail Out California

Washington Post: In Face Of "Fiscal Meltdown," Geithner And Others Decide State Can Hold On, Get Budget In Order

(Washingtonpost.com)  This story was written by Washington Post Staff Writers David Cho, Brady Dennis and Karl Vick.

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The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

With an economy larger than Canada's or Brazil's, the state is too big to fail, California officials urge.

"This matters for the U.S., not just for California," said U.S. Rep. Zoe Lofgren, who chairs the state's Democratic congressional delegation. "I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not."

The administration is worried that California will enact massive cuts to close its deficit, estimated at $24 billion for the fiscal year that begins July 1, aggravating the state's recession and further dragging down the national economy.

After a series of meetings, Treasury Secretary Timothy F. Geithner, top White House economists Lawrence Summers and Christina Romer, and other senior officials have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.

These policymakers continue to watch the situation closely and do not rule out helping the state if its condition significantly deteriorates, a senior administration official said. But in that case, federal help would carry conditions to protect taxpayers and make similar requests for aid unattractive to other states, the official said. The official did not detail those conditions.

California is among several states that have asked for a bailout from the Treasury Department. A few have gotten some traction, notably Michigan, whose economy is among the country's weakest and is struggling to deal with the fallout from the bankruptcies of General Motors and Chrysler. To stave off mass layoffs, Treasury officials are considering helping the state's auto suppliers stay afloat and convert their businesses to support other industries.

California Controller John Chiang, a Democrat, warned last week that the state was "less than 50 days away from a meltdown of state government."

While its fiscal crisis is severe, experts say the state is unlikely to default on what it owes, even if it runs out of cash. It can raise money through taxes and other means to assure repayment of its debt. Most likely are massive cuts in public services.

"After June 15th, every day of inaction jeopardizes our state's solvency and our ability to pay schools and teachers and to keep hospitals and ERs open," Gov. Arnold Schwarzenegger (R) said Friday.

Problems unique to California have made it hard for the state to find a way out of its crisis.

The state entered the downturn burdened with an inflexible budgeting apparatus, constrained by a state ballot initiative approved by voters in 1978 that severely limited property taxes in California. The signature example of "ballot box budgeting" left the Golden State inordinately reliant on the personal income tax, which accounts for half of revenue to Sacramento.

California's budget is also heavily dependent on taxes paid on capital gains and stock options, which have been clobbered during the meltdown of financial markets. State budget analysts made their annual estimate of revenue a month before the crisis spiked in the fall and have been backpedaling ever since.

"Those revenue projections turned out to be wildly optimistic, but nobody was predicting the October collapse of the financial markets," said Michael Cohen, deputy analyst in the Legislative Analyst's Office.

Consider capital gains -- income from sales of stocks or other assets. In California, that income dropped to $52 billion in 2008 from $130 billion a year earlier. It is estimated to be $36 billion this year.

By February, the shortfall was projected at $42 billion over two years. Lawmakers stared at the figure for weeks, stymied by the state constitution's requirement that the budget pass with two-thirds of the legislative vote and their own profound partisanship. The deadlock broke when a moderate Republican defied his caucus's pledge against any tax hike, but it didn't end there.

In April, budget analysts revised revenue projections downward by another $12 billion. And in May, voters overwhelmingly rejected the portions of the February deal that legally had to be put before them, taking $6 billion off the table.

To close an annual gap now put at $24 billion, Schwarzenegger and leaders of the legislature's Democratic majority have put aside talk of tax increases to concentrate on cuts. Most dramatically, Schwarzenegger would eliminate the state's basic welfare program, which serves 1.3 million.

Facing gridlock and few options other than severe cuts, California began to look to Washington for help. State Treasurer Bill Lockyer sent a letter to Geithner in mid-May, urging him to consider helping cash-strapped municipalities.

"A fiscal meltdown by California or any other large state or municipality would surely destabilize the U.S., if not worldwide, financial markets," Lockyer wrote. If the state were to default, it could shake bond markets and undermine investor confidence in a still-fragile financial system.

Tom Dresslar, a spokesman for Lockyer, said California will not default on its general obligation debts. But by late July, the state conceivably could run out of money to operate, as revenue continues to deteriorate while costs keep mounting. "The problem is getting worse, certainly not getting better," he said.

In testimony before Congress, Geithner did not rule out aiding California. But he was far from enthusiastic about such a proposal, instead suggesting that Congress was better positioned to help the states -- and that states should balance their budgets.

"A lot of the burden," Geithner said, "is going to be on them to lay out a path that gets their deficits down to the point where they're going to be able to fund themselves comfortably."

Most members of California's congressional delegation have also been ambivalent about whether to press for federal help.

State officials are "not expecting any help from the federal government," Dresslar said. "At this point, we're on our own."

[seanwar001]

The federal government of the u.s. will give currupt noxious corporations like goldman sachs billions of dollars, yet, they don't give anything to california. This is rediculous, my education is being affected because of this crap! California is obviously not perfect, but it deserves a bail out more than any of the crooked corporations that have gotten their "bailout".

It further shows that crooked corps run some if not all of the show in politics.

If California will not recieve any aid from the federal government, whats the point of being part of the union. Its time we Californians secede from the united states.

[SJoker111]

I'm disabled, I get SSI/SSP, I suffer from depression and anxiety and I'm no drug addict, Nor am I lazy, I was born here in the USA, Do I own My own house and car out right? Yes I do, SO WHAT ya TROLL... It isn't illegal, nor will It ever be. :p I also have concentration problems, Arthritis, Joint problems(legs, ankles and hips) from when I broke My left leg in 2002(I have 3 titanium screws and I use a cane, the cane was Free), back problems, weight(380 currently, Much less before I broke My leg and I had No rehab at all), low thyroid output, bad eyesight, I'm 49yrs old now, I've been disabled since 2003, I pay My bills on time and I vote(I'm an Independent), I breakout in a sweat just from shopping for FOOD once a month, Working briefly on a PC generates huge amounts of sweat even in the winter time(not typing though). Of course I shouldn't have to justify My existence to a TROLL know-It-all.

[airman01]

The US will eventually capitulate to California's budget and bond crisis because it all fits together--the bringing down of the US economy piece by piece until we are no better than a western european country or worse. This is all by design. Make no mistake this is not an unintended consequence. It's been 30 years in the making.
Obama has been selected to nose-dive the US into National Socialism after the Clinton/Bush regimes primed us for it. There are no democrats and no republicans in Congress today-it's all government all the time.

[calcutprograms]

I just bought another home in Oregon to leave California for the 1st time in my life.
The rest of my family is going to leave Calfornia as well.
I can tell you that the money given to Illegals is one of the main causes of the meltdown as is the cash given to Fraud people collecting lifetime SSI.
California made a terrible mistake giving these drug addicts and alcoholics EXTRA cash each month WITH their Federal SSI checks called
SSP-State (of California) Supplemental Payments.
In California a person that has NEVER worked a single day in their lifetime can get $907 and a Couple $1,569.
What MANY people do not know is that SSI & SSP pays ZERO TAXES.
It drains taxes and gives nothing back at all.
Most all other states are smart enough, at least to give these people Food STamps in lieu of the Cash!
They just go endlessly to Food Banks and spend the Cash from the State portion of the SSI on drugs, dive bars, casino's, restaurants, movie theaters, and anything else that they fancy. In other words, these SSI's WASTE that SSP money each month.
Also, most people don't realize that SSI/SSP's can own a home of ANY SIZE or ANY VALUE whatsoever, even if it's Free & Clear, completely paid for, say, thru inheritance.
So, they live very pleasent lives.
When the 'Head of Household' recieves SSI/SSP the ENTIRE family gets a check each month as well, all TAX FREE.
Some households get a thick stack of Tax Free SSI/SSP checks.
There is very very RARELY ever any kind of Checking Up on whether or not these people REMAIN within the Extreme Low-Income Guidelines.
That's why you see them parking Cadallic Escalades in front of their HUD-Section 8 houses. Simple.
No checking up on the Fraud, Misuse, Waste and Abuse of people working and sweating to pay their Taxes each day to pay for these people that literally get paid to sit, eat and watch tv, or take drugs, cause crimes, drink and drive drunk.
Look around on the 1st of each month. Do you see excessive Handicapped Placards hanging from rear-view mirrors or on license plates? That's because it's become a Gravy Train to get on lifetime SSI/SSP checks, for things as silly as "depression" or "anxiety" caused from being depressed or anxious from being a METH addict or ALCOHOLIC, as MOST of the SSI/SSP's ARE.
They are getting paid to waste their lives and the tax payers money.
IF California Democrats would STOP paying these people the SSP portion and just convert it to Food Stamps as other states do, they could save Millions right away.
This program, SSI was created in honest for very poor elderly people and very disabled children and adults. It has turned into a Fraud Gravy Train.
I used to live in a small California mountain community. I did U.S. Census 2000, out of 256 residents, 250 were ALL on lifetime SSI/SSP, and they ALL lived in paid for homes, nice BIG California homes!
They live Very Very Well on that cash and not to mention they also recieve alot of OTHER perks along with the SSI/SSP cash each month.
Heating & Air Conditioning assistance, a new program within the New Stimulus where they will ALL recieve new energy star appliances, insulation, windows, heating systems, air conditioning systems, it's all in the New Stimulus. As well, they will recieve $7,500 in GRANT money for new roofs. Endless Food Bank assistance, Farmer's Market Food Vouchers, they recieve all kinds of "other" assistance besides just the CASH of SSI/SSP checks each month.
They ALL get absolutely free College too, all the family within the 'Household' get absolutely free college. I don't know a single SSI/SSP person that has ever decided to work after gaining a Degree because of their GRANT FREE college because they are on SSI/SSP, NONE EVER. They don't want to give up that GOOD TAX FREE CASH.
Now, when Obama Legalizes the Illegals, and they will Qualify for SSI/SSP, where's the tax revenues going to come from the give them and all their children checks each month?
Also, CAPI is for illegals and it gives them Cash each month.
An elderly couple can come into the U.S. and go to Social Security and Apply & Qualify for SSI/SSP each month! That's why they DUMP their Relatives into the U.S. so they can get them taken care of and paid each month, TAX FREE for them.
This is all going to IMPLODE.
I hope that California NEVER get's a penny of Federal money.
I would like to see the CUTS.
But, the DemoGRANTS will NOT ALLOW that, oh, no, they want MORE Programs!
Looks like ALOT of BIG problems coming California recipients way SOON, and they deserve it too, many of them that have for years,
milked and abused this SSI/SSP system and CAPI needs to be thrown into the garbage heap too!

[Dgunner]

Legalize marijuana tax it heavily uase the money to build prisons to place the new offenders. Make possesion of cocaine meth, heroin mandatory a full five years and take everything the offendr owns and distribute it to the non drug using poverty level citizens. Also if you are caught driving while smoking marijuana? The offender should lose thier vehicle on the spot without recourse either return it to the lien holder or sell it to pay for school nutrition programs.Until the State government starts standing up to dead beat citizens and giving a ultimatum this will only continue to absess as long as holes can be punched in the laws that are suppossed to be free of loopholes.

[rickstas]

Why don't they recall Arnold Schwarzenegger? That's what they did to the last governor when the state was in the exact same situation. I thought Schwarzenegger was supposed to "pump up Sacramento." Looks like the governator has more muscles in head than in his arms.

[WiseWidget]

Making state workers multi-millionaires in their retirement has to go. If a state worker retires, lives 30 more years, and collects even $100,000 per year, the cost is 3 million bucks for each worker. And this does not even consider health benefits, etc. This kind of crap is going on all over the country, so the sooner it ends in California, the sooner the rest of us will be able to tackle this problem.

[pensacola8-2009]

News reporters are hungry for something to report. Organized crime has California on their radar screen and everyone can bet the unrest that is imminent in the next 60 days will be fodder for the country's media appetite.

The NRA is planning to advertise promoting gun sales for personal security in the event that organized crime escalates in California knowing little can be done to oppose them.

Federal Medicare auditors are already scrutinizing claims in California to find frauds and cheats.

The Department of Homeland security is stepping up drug enforcement survellance activities with expectations that international drug trades are planning to pursue weaker paths of resistance expected to occur. Drug gang fighting seen in Mexico in major cities is expected to occur in California major cities as drug gangs fight for increased profit.

The State of California is destined to become the re-enactment of Chicago in the 1930's.

The property values are expected to decline 40% and nearly 80% of all mortgages are expected to be upside-down in California.

The Republican Party in California will struggle for a positive face in the crisis and intensify efforts to discredit the Democrats.

The first political party in California to be confirmed to have affiliations with organized crime will have the biggest burden playing it down. Some feel both parties have already planted their opponents with political discreditation traps.

If California collapses, the political party that survives and revives the state becomes the leading political party for the country in 2012.

[woeisme1]

California always was considered and always will be considered weird.

[sjc_1]

Proposition 13 limited property tax to 1% of assessed value only to be assessed at sale. 30 years of this has caused schools to drop from the top 5 to the bottom 5 and the state to go from one budget crisis to another. There is your Reagan revolution, higher deficits and debts, lower service and budget binds.

[Ceres6]

Once again, whenever the nation has economic difficulties, undocumented aliens are blamed. People have to understand that the financial problems in California, and the rest of the nation as well, was caused mostly by the greedy crooks in Wall Street, and by the voracious business executives who obtained hundreds of billions of dollars in huge bonuses. I am pretty sure that if a big asteroid or a comet becomes a terrible danger to planet Earth, illegal aliens will be blamed and punished for that.

[uopkid]

So you are saying that people that come here illegally SHOULD get benefits?

[gravyboat3000]

by cdegolier June 16, 2009 2:24 PM PDT
One thing that will save 10 billion is cutting off all illegals. Another raise the retirement age for all state employees to 65 and lower the pensions.

Illegal immigration is the FEDERAL GOVERNMENTS RESPONSIBILITY, NOT THE STATES.

Perhaps, if the Federal Govt. took IT'S job in this arena more seriously, California wouldn't be in this predicament?

Come on, Prez, hook a State up, and send an army of Immigration officials to boot the illegals out!

(ALL administratons say they will fix immigration, but NONE of them do)

Meanwhile, if I needed to go to an E.R., here in SoCal, I'm waiting behind a bunch of Mexicans who don't speak english with snotty nosed kids, a bunch of poor white/black/hispanic/ Americans who don't have insurance and a handful of drunks who were arrested for falling down in public.

I'M MOVING TO AMISH COUNTRY!!!

[woeisme1]

I might move to another whole country!

[gravyboat3000]

We should break away from the Republic! Form our own armed forces, and threaten our neighbors!

Works for Lil' Kim...

Arnold to the rest of the U.S. "Who is yo daddy, and what does he do?".

Pay up, beeeyotches, or we'll keep you all from comin to Disneyland, and Knott's Berry Farm, the wine country, and San Francisco!

And don't even think about the San Diego Zoo, or the Wild Animal Park, my boys are there now, makin sure they get anyone with Arizona, Nevada, or Oregon plates...

(Mexican plates are subject to familial affiliation)...

[gravyboat3000]

by stn_sage June 16, 2009 4:49 PM PDT
WHAT?! These guys don't have to pay property taxes?!

Morons are out in force.

Of course we pay property taxes.

Where did you get such a stupid idea?

[stn_sage]

WHAT?! These guys don't have to pay property taxes?!

Well, there's the solution, folks! You can't have it both ways!

California is one of---if not the most liberal---in financing public
services for a long time! If they want to do that, THEY are going
to have to pay for it! If not, reduce services.

Many states assess property taxes and they don't experience the huge
deficits as a result! Suck it up, California!

The federal government SHOULDN'T bail out California, unless they plan
on bailing all the other states, too! I thought not...

[CarolJWright]

The whole thing started with the state trying to equalize the distribution of property taxes, as the property taxes were to pay for local schools. Rich areas got better schools paid with for their taxes, while poor districts got a bad deal. When property taxes were being paid by rich areas, and their direct schools no longer benefited, that caused a ruckus. Also, at the time, real estate values were skyrocketing absurdly high, and retired people were being forced out of their homes cause they couldn't pay peoperty taxes.
This from Wikipedia:
Under Proposition 13, the annual real estate tax on a parcel of property is limited to 1% of its assessed value. This "assessed value," however, may only be increased by a maximum of 2% per year, until and unless the property undergoes a change in ownership. At the time of the change in ownership the low assessed value may be reassessed to full current market value which will produce a new base year value for the property, but future assessments are likewise restricted to the 2% annual maximum increase of the new base year value.

So, my mom (age 88 with Alzheimer's) pays little in property taxes...she's lived in the house since 1950, while the new neighbors pay taxes on the more realistic value. THEN the real estate bust happened, and people bailed on taxes or had their houses reassessed to current lower levels. It's a mess.

Prop. 13 is one of the causes of the problems here. The 2/3 vote issue ends up with just a few (or ONE) legislator dictating the whole budget, holding out for pet projects or legislation.

The budget is over so much that most suggestions here won't touch the problem. Even eliminating all the prisons totally wouldn't balance this state's budget.

[velma179]

You may have noticed two very important points in the article:

One is Prop 13 -- the one passed in 1978 that limits property taxes. The other is the byzantine process of legislation that requires a 2/3 majority to get a budget in CA. These put together make for a financial morass that has just grown and been passed off, and grown and been passed off... yada, yada...

Add to that the fact that state pensions for government workers ARE indeed out of line with the private sector and you can see a lot of work and no small amount of collective sacrifice will need to be done to get the country's most populous state out of arrears.

But it has to be done. You can't jettison an economy like CA and not feel it in all the other 49 states. I hope the Feds don't have to step in, but if they do -- it's not just for the sake of California. Please remember that.

[michigander62]

Let me see this economic problem just happened to CA.....NOT. Ca has known for several years this would happen. This is what a socialist society will look like after the present Washington Admin gets through. Wake up folks there is just so much money from the gov't maybe individulas will have to make their own way. Don't worry we will always have the politicians at the gov't trough suckng away.

[airboatboy]

Maybe Arnold shoulda stuck with acting....

[luke_4u]

I think California has too many state employees, and too many "give away" programs. The CHP for example, put one of them next to every mile marker in the state, and lay off the rest of them. They've got to learn how to trim the fat, and for God's sake stop hiring more and more people. And what about Arnold ? Will he take a pay cut ? Doubtful.

[schadmin]

In actuality, Arnold doesn't take a salary. He has voluntarily forfeited his pay.

[hologram5]

Just quit paying out the federal tax, there is a big chunk of change.