So Just How Bad Is It In California?

California's budget problems have gone from bad to worse. Democrats and Republicans are at a standstill on how to fix the problems, and while they fight nothing is getting done to address the problem. At the current pace California will run out of money in a couple months, which would be an absolute disaster. California has the largest state economy in the country and their pain will surely be felt in all of the U.S. Tim Iacono from The Mess That Greenspan Made looks closer at the latest developments in his blog post below.

News from Sacramento this morning has the Democrats attempting an end-run around their Republican rivals in the latest effort by the California legislature to stem the flow of red ink.

The Sacramento Bee reports that a vote is planned today on an $18 billion package of tax increases and budget cuts, crafted in such a way as to not require a single Republican vote.

By adroitly stitching together proposals that lower some taxes and raise others, Democratic legislators contend the package is "revenue-neutral" and thus could be passed by a simple majority rather than the constitutionally required two-thirds vote for tax increases.

The plan would raise taxes on gasoline, personal income and sales; cut state spending on schools, state universities and programs for the needy; and lower the state's payroll by $657 million.

Whether the attempt is moot will be decided by Gov. Arnold Schwarzenegger, who could veto the plan.

The first comment on this item neatly summarizes the view of many in the state.

They spent like drunken sailors when the State was flush with money. As a former drunken sailor, I would like to point out that at least drunken sailors stop spending when they run out of money.

Yesterday, state officials cut off funding for some $3.8 billion in infrastructure projects in order to conserve cash that may be needed in the months ahead.

Bloomberg provides the details in this report:

The California Pooled Money Investment Board, made up of the controller, the treasurer and the governor’s finance director, took the step to save money a day after the Legislature failed to approve tax increases for a second time. The impasse may hamper the state’s ability to raise funds by selling bonds, and the officials said it may cost tens of thousands of jobs in a state already reeling from the housing market’s collapse.

“California’s fiscal house is burning down,” Treasurer Bill Lockyer said in a statement. “The people still wait for their elected leaders to pull them out of the fire, stop the blaze and rebuild the house on a solid, lasting foundation. Until that happens, the infrastructure work so vital to getting our economy back on track will lie crippled.”

California, the most-populous U.S. state, will run out of money as soon as February unless lawmakers end an impasse over how to replace revenue lost amid the recession. Governor Arnold Schwarzenegger’s administration has said it may begin paying bills with IOUs should the state run out of cash, a measure used only once since the Great Depression.

The Wall Street Journal reports that things are not much better at the local level.

California may soon have more bankrupt towns on its hands.

The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.

Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.

"We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.

Even the state's public retirement system is causing problems lately.

Without its two top executives for the last six months, Calpers (California Public Employees' Retirement System), once admired for their shrewd asset management and stellar investment returns, has nearly run aground as their bad real estate bets get even worse.

The fund is now one of the biggest owners of undeveloped residential land in the country, after placing leveraged bets that, in some cases, have lost over 100 percent of their value. Since July, the giant pension fund has lost nearly 25 percent of its assets with the situation likely to get worse before it gets better.

The fallout is being felt all over the state, particularly in the town of Pacific Grove, as discussed in this story also from the Wall Street Journal.

Pacific Grove, a coastal town south of San Francisco, already faces a budget crisis. Now losses by California's giant pension fund could make the pain worse.

"Calpers could bankrupt us faster than anything else," says Mayor Dan Cort. City officials say other towns face financial stress unless the California Public Employees' Retirement System is able to quickly recover from its investment losses. Says Dan Davis, a former city councilman who has crunched the numbers for Pacific Grove: Other municipalities "are trying to live in denial."

In recent years, Pacific Grove has seen its annual pension costs soar, largely because of increased contributions to make up for losses caused by the last market downturn. Last month, residents voted to consider ditching Calpers as the town's pension provider and look into possible alternatives. But the window of opportunity may have shut. With the market's plunge this fall, the city would have to spend $10 million or more to pay off its widening obligations to vested retirees were it to pull out of Calpers.

The commenter at the Sacramento Bee had it right - worse than drunken sailors.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.