What Would It Mean If California Went Bankrupt?

[Parsad]

I think the possibility of municipal bankruptcies is enormous in the U.S. today, and the possibility of state bankruptcies is very real, although I think the government would step in at the state level.  Jack Cafferty from CNN discusses the possibility of California going under...I thought this would make an interesting debate. 

 

Even the best case scenario is that there will be massive layoffs and huge reductions in services across the state.  If you thought DMV lines were long before, you ain't seen nothing yet.  And California isn't unique here, others will follow.  Cheers!

 

http://caffertyfile.blogs.cnn.com/2009/05/20/what-would-it-mean-if-california-went-bankrupt/

 

http://money.cnn.com/2009/05/20/news/economy/california_budget_crisis/index.htm?cnn=yes

[Packer16]

You are right about alot of potential bankruptcies especially in states that have high taxes in the US.  Folks in the US have a choice to move to a low tax state and save alot of money.  Tom Galisono, who founded Paychex, just changed his residency to Florida from New York and will save $5 million in income taxes alone per year and more if you include property taxes.  Tom tried to reform a corrupt NY state system and was hoping the new governor was going to stand up to the special interests in the legislature but he did not.  He also supported Democrats and Republicans who wanted to slow down the growth of spending but in many cases unions would bus folks into lobby against these candidates and they lost. 

 

In NY, we pay $20,000 per student per year for schools (alot of money) that is close to $500,000 per year per class.  My kids go to a private school whose cost are close to $10,000 per year per student.  Where is the extra $10,000 per student per year going?  We don't need more $ for education and services, we need a better accounting of the $ we spend.  Another example is the schools around here build Taj Mahal sports facilities which in my mind are nice to haves.  If the schools in NY are any indication there is alot of fat that can be cut that has been protected by special interest groups. 

 

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[ragnarisapirate]

Maybe with a governmental bankruptcy, they will get more efficient and let us be more free! :-)

 

A wise man once said 'it isn't the lack of representation that I mind, so much as it is the taxation', in regard to the phrase "no taxation without representation".

 

 

 

[Parsad]

Vallejo has already files bankruptcy, but they say there are roughly 10-12 municipalities in California alone that are on the brink, as well as another ten or so that are fighting for their lives.  And that's just California!  What about Florida, Michigan and Georgia?  Cheers!

[Guest kawikaho]

Well, I can speak with some experience, since I've lived in California for 10 years before recently relocating to Seattle.  State services have been getting cut for about 2 years now, and it's getting worse.  My wife has still not received her CA driver's lic., and it's almost been a year.  I know they've already been laying off police officers, firefighters, teachers for a year, but now the shit will really hit the fan.  This is the second round of budget deficits the state has had to work through in the past year.  In the county hospitals where my wife used to work at, they are in the process of letting go tons of nurses.  I'm estimating they will need to cut atleast 20,000 jobs to meet the budget deficits.  My friends in L.A. have been out of work for quite some time too.  A bunch more have recently been laid off.

 

With all that being said, I think the Federal gov't will throw them a lifeline.  What's $21 billion dollars compared to the massive bailout $$ for the banks, auto manufacturers, and stimulus?  If they give California $30 billion, that should give California a year or two to fix their budget holes.  But, then you now have 49 other states to worry about.  And why stop at the state level?  Why not help the cities and counties as well?  There's the rub. 

 

BTW, if your job and salary is mobile, then moving to a no income tax state makes sense; however, I wouldn't relocate to a job in a no income tax state just because.  Even with the 10% tax shelter, lower cost of living, we still did much better in San Francisco.  If I took real estate taxes into consideration, we would even be better off. 

[Parsad]

Thanks Kawikaho!  Also, obviously lifestyle plays a part as well.  Unless things get horribly worse in the job market, most people will continue to want to live in the LA or Bay area, since the quality of life is so good.  While people will leave, over time more people will come back.  I'm sure at the state level, most will get help from the federal government, but municipalities will fail except where the state's will intervene if they can afford it.  Cheers!

[Packer16]

I agree that it is a tradeoff between savings and cost of living (including taxes) and most folks will stay even if taxes are higher to a point.  I just think that point has been reached in Calif, NY and other states.  Unfortunately, most of the folks who the states are relying on for more tax dollars (the large wage earners) have the largest incentives and ability to move.  In addition, the lobbying efforts of some unions (that are paid for by all in gov't positions whether they believe in this or not) needs to be changed.  I find it ironic that more money now is being spent on lobbying than ever before when what is needed is not lobbying (which leads to poor economic outcomes) but smart spending of what we have. 

 

I just finished reading Lords of Finance and the second wave of the depression was caused by a currency crisis in the Mark and Pound.  The Germans and others borrowed money from other countries to fund their economies and when an Austrian bank failed a run on their currency system caused a collapse in the Mark and Pound.  Today, both Europe and the US are the German position today with the Chinese in the US position then.  With all this debt, it will be interesting to see how the $ can do.

 

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[Guest Broxburnboy]

All the states facing bankruptcy will require financing from the Federal government, as no one else in their right mind would buy their bonds. The fiscal situation of the state (and many local) governments are in is a subset of the federal government's... taxes must be raised and services cut to balance the budget,. These necessary actions however, if implemented, will further depress the economy and curtail the ability to raise taxes, further stoking the downward spiral.

 

Since Reaganomics and the adoption of "supply side economics" by both political parties, governments have been idealogicaly free to borrow money in the taxpayers name and redistribute it to corporate America in the belief that this would stimulate investment and create even more tax revenue than that which had been cut. Unfortunately, corporate America simply paid out the largesse to its executives and shareholders, "lobbied" legislators to further increase their subsidies. Under Obama, trickle down economics continues to be the working philosophy... bail out the banks and the economy will follow. There is no substantive difference in the meaningful policies or executives of either political party

 

It has been obvious for quite some time that trickle down economics doesn't work to improve the lot of the average American, but works to create economic inequality and an increasingly rigid class structure. The playing field

is tilted in favour of the haves at the expense of the have-nots to the extent that a huge debt has been incurred by all taxpayers, which eventually will impact everyone... even the haves.

 

The least painful way out is to inflate the money supply and inject the money at the bottom of the economic pyramid... to homeowners, students, small business.. those who will spend the money on basic goods and services, pay their mortgages and engage in productive (possibly infrastructure building) work. This money will then filter up, create tax income  and get the economy moving again. Any public expenditure that does not create wealth, must be immediately curtailed (foreign wars, "war" on drugs, counterproductive bureaucratic and regulatory costs). It goes without saying that the standard of living of all Americans will take a hit, as the next few years must be spent paying off the excesses of the last decade.

 

[woodstove]

Does anyone have a handle on what Calif "bankruptcy", ie some interruption of paying bond interest,

might mean to Berkshire's municipal bond insurance exposure?  I suppose there is some criterion that

an interruption of interest payments constitutes an event of default under a bond insurance policy?

Even if fed govt steps in later, after defaults have started to cause system-impact consequences?

 

[Guest Broxburnboy]

I guess the real question is.. can America go bankrupt? .. as the Federal government is the lender of last resort for the banks, states, municipalities, etc.

 

How much debt can the government balance sheet carry? The latest stats show the revenue side of the government's balance sheet deteriorating:

 

http://www.321gold.com/editorials/casey/casey052109.html

[JEast]

Yes, as Buffett hinted their will be a mess in the Municipal bankruptcy arena. Below is just a small taste of what is down the road.

 

Jefferson Cnty Ala    Sewer Rev $3,811M

Greenville, SC  Connector Toll Rd. $289M

Vallejo CA        Various $279.8M

Edinburg TX    Duke Energy $192M

South Bay FL  Comm.Dev $98.7M

St. Louis MO    Convention Center $98.0M

Santa Rosa FL  Bay Bridge $95.0M

 

Cheers

JEast

[Parsad]

Geithner discusses California...no TARP funds, but they will assist California only in certain ways.  The bulk of the effort has to come from the Californians themselves.  Buffett talked about Prop 13 a few years ago, which has created some of this mess as well.  Cheers!

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaizmTjKpTlw&refer=home

[Aberhound]

The problem California faces is no worse than the problems faced by the US in 1919. President Harding had the problem solved in 18 months and his inaugural address shows how he did it:

 

"A regret for the mistakes of yesterday must not, however, blind us to the tasks of today. War never left such an aftermath. There has been staggering loss of life and measureless wastage of materials. Nations are still groping for return to stable ways. Discouraging indebtedness confronts us like all the war-torn nations, and these obligations must be provided for. No civilization can survive repudiation.

 

We can reduce the abnormal expenditures, and we will. We can strike at war taxation, and we must. We must face the grim necessity, with full knowledge that the task is to be solved, and we must proceed with a full realization that no statute enacted by man can repeal the inexorable laws of nature. Our most dangerous tendency is to expect too much of government, and at the same time do for it too little. We contemplate the immediate task of putting our public household in order. We need a rigid and yet sane economy, combined with fiscal justice, and it must be attended by individual prudence and thrift, which are so essential to this trying hour and reassuring for the future."

 

http://www.vlib.us/amdocs/texts/34hard1.htm

 

[Guest kawikaho]

Sanjeev,

 

California has a pretty good lifestyle, but there's a price to pay for being around so much people: traffic, lots of noise, LOTS of crime (and it seems to be getting out of control lately), more rat race, too much people every where you go, etc...  I honestly did not like it in the Bay Area after a couple years of living there, but I realize it's because I'm from Hawaii and like smaller environments--really love places like Kelowna, BC.  I agree that there will always be people that want to move there, but there are also lots of people that want to move out.  I've read in the Mercury News that the census shows locals have been moving out of California for the past several years.  The only growth California is experiencing is from immigration--primarily from Mexico.  That fits with my experience of the place too.

 

Anyways, I think that California's fiscal crisis is presenting some good oppty's in the muni bond market.  I've seen some bonds being sold from certain California institutions with pretty good yields. 

 

 

[Guest kawikaho]

Packer16,

 

I just read this and thought of what you said:

 

http://online.wsj.com/article/SB124260067214828295.html

 

However, when my wife and I looked at all the no income tax states, compared to California, the salaries were much lower.  Moving there would still be a hit to our income, even with the savings due to lower costs of living, etc.  There are some other things to take into consideration that might not have been evident, like heating and energy.  Heating and energy costs in Washington are higher than it was in California.  Also, bigger states like California have cheaper services due to all of the competition.  Basic services like the Internet is much cheaper in California. 

[oldye]

Too bad theres no Chapter 11 for states...that only leaves currency debasement which is why Warren is so damn sure we'll see inflation.  A AAA rating in the corporate market used to stand for a .02% chance of default, how can the odds of a U.S default on U.S denominated debt be anything other than 0? 

[Packer16]

We used to live in California also but moved to NY (I guess I am a sucker for high taxes).  We really moved due to the high cost of living and raising a family in LA in comparison to Rochester, NY (where my wife had an option to stay home with the kids or do volunteer work which would be a no-go in expensive LA).  The taxes are about the same but the cost of housing more than makes up for the difference in other costs.  The schools here are also probably better than California but the education is lost as students move out of the state as job growth is slow due to in part the high taxes. 

 

I don't mind paying my fair share, I just get upset about the waste and lack of accountability for the spending and potential costs of other people's plans.  The cases here in NY are just incredible.  I thought that was going to improve with the new President but I am skeptical given his close ties to the unions and grandiose central plans to remake the world in his image and its attendant costs versus letting the market be his guide and providing support where required.

 

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[netnet]

First all states can not declare bankruptcy.  They may default on their debts (Great Depression) but bankruptcy is not an option.

 

California has a particular political problem and revenue problem that has lead it to this impasse:

1) by law (proposition) the legislature has to pass a budget with 2/3 vote.  Neither party can muster that vote alone, currently the Repubs are about 1/3 plus of the legislature.  Demos have voted for tax increases but did not have 2/3 necessary. The Repub, mostly rural or suburban districts, complain about state government nevertheless scream about reductions in education budget and oust legislators who want to compromise and raise taxes and cut the budget.  The suburban districts still find ways to finagle more money for schools.  (Interesting factoid, the tax that led to the ouster of our previous governor and the election of the Terminator (Arnold) would have substantially reduced the current deficient.  One is reminded of Sen Dirkson who said, "Don't tax you, don't tax me, tax that fellow behind the tree.")

 

2) Prop 13 resulted in highly skewed property tax.  Basically you are taxed at the value at which you bought your property.  Politically brilliant, but hideously inequitable.  Furthermore, the state treats commercial property the same as residential. A company's property is not revalued annually, so one local auto dealer literally pays less property taxes than I do on my (modest) house, because they bought the property decades ago.  But the proposition that established this is virtually untouchable politically.

[oldye]

They could spend 40,000$ per child and still not get any kind of results in California, 8th largest economy in the world ranked as the 2nd worst school system in the country.  Keep giving all those tenured twits at the LAUSD more money. 

[Packer16]

I was surprised (maybe not too surprised) that on average only 52% of education tax dollars goes to classroom education.  That means admin/sports and other non-academic costs are almost as high as academic costs.  This is probably one of the reasons why although real expenditures have gone through the roof the outcomes have not changed for 30 years (graduation rates and test scores).  I have no problem paying my fair share but when almost half of it goes to non-educational services with no recourse, I feel ripped off.

 

Packer 

[netnet]

They could spend 40,000$ per child and still not get any kind of results in California, 8th largest economy in the world ranked as the 2nd worst school system in the country.   Keep giving all those tenured twits at the LAUSD more money. 

 

California does not even spend one quarter of that per child.(try $7,500)  They spend more in Mississippi on education than we do in California.

 

I am on the board of a charter school.  The reality is that our teachers are under-paid. (Traditionally "women" work, i.e. lower pay.)

California, not a cheap place to live, is 47th in the nation in per pupil spending.  It is a pitiful pittance.  Plus there are the mandates for special education, (don't misinterpret I used to run a Little League program for special needs kids,) but the mandates for special education are unfunded.  Society should fund an aide following around a developmentally delayed kid on a respirator.  Should that child be in a regular school?  Probably so, but society needs to pay for that aide as well as pay for, i.e. fully fund education for all of the kids in the classroom!

 

Don't kid yourself.  You can not get quality education if you are unwilling to pay for it.

[Packer16]

You are right that California spends about $8,400 per student, however, that amount has increased by about 29% in real terms over the past 10 years (like most states) and achievement has not improved on average.  I think folks don't mind spending money if they think it will improve performance.  If not, why spend more money?  Where else but in gov't would this be acceptable? 

 

However, in the current situation there is the preseption and possibly the reality of union directed expenditures.  What is needed is a third-party accounting of education dollars and union regulation.  The states should regulate union dues (to minimum amount to support operations) because the members are compelled to give them and if the unions want to be out from these rules make their dues voluntary.

 

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[oldye]

There are teachers in the lausd, deemed unfit to be around children, that show up everyday to some building where they sit around  all day doing god knows what and earn a real paycheck.  At the same time young, dedicated teachers in the same system have to worry about losing their jobs due to the budget crisis.  Any union that promotes the interest of child molestors vs.  members of the same union needs to be abolished.

 

I hope charter schools keep performing as well as they have, I think that they're one bright light in a big pile of turds. 

[Guest Broxburnboy]

It's interesting to see everyone put forward their personal favorite boogie man to shoulder the blame for California's financial mess. No one has correctly identified the problem, but everyone is fixing the blame while no solutions have been offered.

California's impending bankruptcy is caused by a long series of deficit budgets, spending more than there is (tax) revenues.. Everyone wants money spent, but no one wants to raise taxes to pay for it. The result is ever increasing debt, the interest on which increases the annual deficit in a self stoking downward spiral towards insolvency. The longer the deficit borrowing goes on, the harder the fall. California will shortly have to lay off teachers, government workers, cut welfare and medicare payments. This will have a depressive effect on everything from house prices to corporate profits until a bottom has been found where tax revenues and expenditures balance. Obviously we have a way to go.

California's problems are simply a microcosm of the country's. The same people who want a forever war with Muslims refuse to have their taxes raised to pay for it (the enthusiasm for the "war on terror" might abate if the proponents were to pay the freight). The same people who insist on lengthy incarcerations for petty and victimless crimes, don't want to pay for the cost of operating more jails and support the families of those who have been incarcerated. Those corporations who are the recipients of TARP and other government largesse still want there taxes reduced and still feel entitled to outrageous compensation.

The list of absurdities goes on and on, but it boils down to a culture of entitlement throughout the whole economic pyramid. Borrow and spend must be replaced by "pay as you go".

[JEast]

Cities and states trying to feed at the Washington trough.

 

http://www.nytimes.com/2009/05/26/business/26muni.html?ref=business

 

Cheers

JEast