Saturday, June 20, 2009

California running out of options

The great State of California has been backed into a corner. Here are some recent facts:
  • California's unemployment rate is now at 11.5%
  • Sales tax in LA is now 9.5%
  • Fresno County is a federal disaster area hit by a three-year drought. It's destroying California’s agricultural industry. Fresno county unemployment is near 17%.
  • The rating agencies are threatening to crush the CA bond ratings.

From Moodys:
NEW YORK, Jun 19, 2009 -- Moody's Investors Service has placed the State of California's A2 general obligation rating, as well as the ratings for lease debt and other state-backed debt listed below, on Watchlist for possible downgrade. The Watchlist action reflects the following: an expected budget gap of over $20 billion (or more than 20% of the state's General Fund budget) in the state's fiscal year 2010 budget; the announcements by the state controller that without solutions the state will not be able to meet all its financial obligations in July; the continued political stalemate that has resulted in inaction by the legislature thus far; and the limited solutions available to the state. Although the executive branch has proposed a package of budgetary and cash measures, thus far no meaningful solutions have come out of the legislature.

In addition, Moody's has placed the Aa3 global scale rating assigned to the California Federally Taxable General Obligation Bonds and Stem Cell Research and Cures Bonds, Series 2007A, and the A2 global scale rating on the California Judgment Trust Certificates of Participation Series 2005 on Watchlist for possible downgrade.

The difficulties the state is facing include the following:

* After enacting a budget for fiscal year 2010 in February, the economy has continued to deteriorate and the state is now expecting budgetary gaps for fiscal year 2010 of over $20 billion.

* Budgetary solutions are more limited now that the voters did not authorize the state to issue deficit bonds secured by lottery revenues.

* Without legislative and executive solutions, the state is expecting to run short of cash beginning in July.
A downgrade will significantly limit California in issuing new debt. An impasse over taxes leaves them with very few options. The document below from the governor's office shows just how limited.

Some difficult questions: Should CA be massively cutting the educational system, the prison system, or Medi-cal? Maybe raising the already ridiculous state taxes, putting the state deeper into recession? Or defaulting on their debt? Unthinkable until recently. The impact on various retirement funds will be unprecedented. Will the US taxpayers come to the rescue?

California crisis is looming.

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