This op-ed originally appeared in the Flashreport
With $20 Billion dollar deficits projected for the next 5 years, excessively high unemployment, mountains of debt and declining revenues it’s time to face the reality – our Golden State is not only tarnished, but it is de-facto, bankrupt. Compare our State’s precarious situation to that of a 2 wage-earning, working California family:
- We have spent more than our dual income for years (state expenses > revenues)
- We have maxed out the equity in our home (Long-term bond debt used to plug the hole in 2004 and miscellaneous bonds issued that must be repaid by the state’s general fund – or your tax dollars)
- We have maxed out our credit cards (Short-term bond or RANS that must be repaid with your tax dollars before the end of each fiscal year-end)
- We have borrowed from our family (internal borrowing from over 100 state accounts that must be reimbursed)
- We have lost our bonus income (capital gains tax revenue decline)
- One of our wage earners now has a part-time salary (loss of income tax revenues)
Our home is now in foreclosure, the credit card companies have cut us off, the banks are threatening, but we can’t pay. Even if we suddenly begin to earn more income and reduce expenses, we still will not have enough cash to pull our home out of foreclosure, repay short-term debt and pay our monthly bills. Such is the financial situation in California.
The options for the family would be limited; if they can’t put forth a serious proposal to convince their banks that they can eventually repay what they owe – the family would probably have no option but to file for bankruptcy.
While States can’t file for bankruptcy, our options are limited as well. We can through accumulation of lawsuits or by begging for a federal bail-out, be subjected to federal receivership.
Am I being apocalyptic? You decide. Consider the federal receiver already in place dictating our prison system, the federal control of some of our state parks, not to mention EPA control of our water, and you begin to get the picture. Next, imagine that we could not meet our pension obligations (PERS and STRS), or fund our future $11 Billion liability promised to Education last year? The comparison of California prior to the federal control of New York City in the 1970’s is also striking. Just as California, New York City had:
- Chronic budget deficits for years
- Overly optimistic forecasts of revenues
- Heavy use of Revenue Anticipation Notes
- Underfunding of pensions
- Used funds raised for Capital Expenditures for operating costs
- Appropriated illusory fund balances and begun writing checks late
- Begun selling bonds to “mom and pos” and retirees
For awhile, the banks (bond underwriters) continued to lend to the beleaguered city, but soon lending became too risky, the city’s credit rating fell, and all lending ceased. The city continued to play financial games with the numbers and tried to raise taxes, but finally the feds took control. Considering our state’s credit rating is slipping to junk bond status we are not far behind. So, is there a way out? Certainly, but it requires swift action and a realistic restructure of our state’s finances.
The bottom line – if we don’t get our house in order no amount of swaggering about how special we are will pull us out. Numbers don’t lie, and our Wall Street bankers and investors aren’t stupid. We must:
- Prevent recurrent deficits by establishing a policy for a future Rainy Day Fund to repay our debt and keep the state solvent in down economic times
- Stop playing games with the budget process by using realistic projections and requiring a balanced budget
- Reduce authorized debt; General Obligation bonds and future pension debt, and
- Increase future state revenues by creating employment opportunities for all Californians instituting reforms that reduce regulation and streamline job creation.
It’s past time for the Governor and Legislature to come out from “under the dome” at the Capitol and begin to understand what the investment community has been buzzing about for the past year. California is bankrupt, but with the above reforms we have a chance to pull back from the brink and return the sheen to our Golden State.