The California Conundrum

Posted by Michael A. Kamperman on June 13, 2009

The burning question of the day is whether or not the federal government should bailout the State of California?  The California State Treasurer is predicting the state could run out of cash before the end of the summer.  Sacramento is in shock at the speed of the economic downturn and its ravishing effects on the state budget.  Unlike the federal government, the State of California cannot print money.  And, unlike the federal government, the State of California does not have the luxury of an AAA credit rating to borrow seemingly unlimited amounts of money and let the next generation worry about it.  In April, California state income tax revenues dropped nearly in half from a year ago.  Real estate values are collapsing so much that the effects of Prop 13 may soon be a moot point.  International trade is down at the ports, as is tourism.  Sales tax revenues will continue to trend lower as consumers with money remain cautious and those without money remain shutout from the credit markets.  No more gladly paying on Tuesday for a hamburger today.  Only an upturn in the global depression will turn California’s fortunes around and that is not in the cards.

I absolutely believe the federal government should throw California a lifeline.  If GM and Bank of America can be bailed-out, then so should California.  But, the federal government should keep the ultimate burden for fiscal responsibility on California’s leaders in Sacramento.  The federal government should offer to guarantee all new debt issued by the State of California.  This way California would have its cash, yet it would still have the responsibility of one day paying it back.  The state would be given time to work out its problems.  And what’s good for California is good for the rest of the country.  All 50 states should have federal guarantees placed on new debt issues until the credit crisis is over.  Borrowing costs remain very elevated for most municipal borrowers.  The market for private municipal bond insurance guarantees dried up when the bond insurance companies dabbled away their reserves by backing subprime CDO squared junk.  Another option is for the federal government to just mail out a bigger bailout check to all 50 states.  The federal government has already mailed out billions of dollars to the states as part of the stimulus bill to help them cover growing Medicaid and unemployment insurance costs.

I am doing my part to help California.  I am spending this week on vacation in California.  The car I am renting for the week has $173 in municipal taxes tacked on to the bill.  I’m sure the state has other surprising opportunities available for me to provide them with even more assistance.  The choice of not bailing out California is to then treat them like the world is treating Latvia, Iceland, and Ireland right now.  We could tell California to make whatever austere budget cuts are necessary to stand on their own two feet.  State budget cuts mean more layoffs, wage concessions, and fewer contracts for private firms.  This in turn will further lower real estate values for all of us and deepen the depression.  I plan to swing by Hollywood this weekend.  Soon the horror movie playing out in the State of California could be playing in your state capital too.