Sunday, September 14, 2008
California in Crisis
"Arnold Schwarzenegger floated to the governor's office in California on the foam of a fiscal crisis in 2003. ... Everyone knows that when the nation is going to hell in a hand cart, California usually gets there first. But for those who have failed to notice the looming crisis shaping up--not just in California but in a number of states--we provide a summary. ... Meanwhile, the productive, private part of California's economy has been cyclical for decades, while the unproductive government part keeps growing, and spending money it doesn't have. The size of the gap is not a record, but $15.2 billion is nothing for Sacramento to sneeze at. ... The state constitution requires a two-thirds majority in each legislative house to pass a tax increase. ... Schwarzenegger hasn't even been with the Republicans in spirit. He has been more interested in a package of long-term 'reforms,' such as giving the governor power to make budget cuts by decree if deficits loom in the middle of a fiscal year. In addition to the sales-tax hike, his other idea for fixing the immediate crisis was to borrow $15 billion against the putative future profits of the state lottery. ... The Republican legislators, meanwhile, haven't proposed any spending cuts to take the place of the tax increases they so abhor", Thomas Donlan at Barron's, 1 September 2008.
Consider what this portends for California muni bonds.