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Californians Should Stop Flirtation With Unthinkable
Bloomberg terminal, no url | 7/2/3 | Joe Mysak, columnist

Posted on 07/02/2003 10:18:08 AM PDT by NativeNewYorker

     July 2 (Bloomberg) -- California is the scariest place in the

U.S. municipal bond market.

     The state is looking at a $38 billion budget shortfall -- a

gap bigger than the budgets of all other states except New York --

for 2003-2004. The state's lawmakers are deadlocked over what to

do about it.

     This is the same state that only two years ago surpassed

France as the world's fifth-largest economy, at $1.33 trillion,

and gave Britain (at $1.4 trillion) a run for its money. Now some

Californians are talking about bankruptcy.

     States can't declare bankruptcy. James Spiotto of the law

firm Chapman & Cutler in Chicago, the nation's foremost municipal

bankruptcy specialist, says so. Bruce Bennett, who helped engineer

the bankruptcy of California's Orange County, says so. John

Moorlach, who blew the whistle on Orange County's investments and

is now the county treasurer, says so.

     And yet. And yet. There is an old expression about how new

ideas in public finance blow in from the West. John Hallacy, head

of municipal research at Merrill Lynch & Co., put it another way:

``Isn't California always the test case?''

     States toying with insolvency isn't a good or new idea.


                       Try to Remember


     ``The posturing of no new taxes is not helpful in finding a

solution,'' Dan Heimowitz, then director of public finance at

Moody's Investors Service, told the New York Times.

     A financial adviser had another take. ``They don't want to

raise taxes, that is not a viable option,'' said Thomas Hayes,

former California state treasurer. ``It will take a two-third's

vote to enact more taxes and that is not going to happen,'' he

told the Times.

     They aren't referring to what's going on in California now.

They were saying that in 1994 when Orange County declared

bankruptcy, a move that stunned everyone in the municipal market.

     Perhaps you remember. Here was one of the wealthiest counties

in the nation bankrupt, the result of the county treasurer's wrong-

way bets on interest rates.

     This kind of thing just wasn't done. Bankruptcy was the

refuge for the municipal market's sickest cases, not the healthy

and wealthy temporarily caught up short just because they weren't

wise when it came to investments.


                       Lack of Will


     The Orange County bankruptcy rocked the municipal market

because it went against all the rules. The No. 1 rule is that a

municipality must do everything to repay its debts. That's what

the pledge of a municipality's ``full faith and credit'' means,

when it sells general obligation bonds. Orange County had the

ability to repay its debts. It lacked the will.

     California's lawmakers apparently don't have the will to pass

a budget with a little pain.

     What is happening in California isn't much different from

what has been going on from coast-to-coast, although the numbers

are larger and scarier and the legislative inaction inexplicable.

     Government is in the business of providing services. The more

money comes in, the more services government can provide. This is

what took place in the 1990s. The stock market boomed, people made

more money, and tax revenue swelled.

     What did states do? They put aside more money in rainy day

funds. They cut taxes. They increased services. They introduced

new services.


                        Spending More


     Here's what has happened in California, according to figures

provided by the State Controller's office.

     -- Spending: $67 billion in 1997-1998, $72.5 billion in 1998-

1999, $81.9 billion in 1999-2000, $92 billion in 2000-2001, and

$96.9 billion in 2001-2002.

     -- Revenue: Stock market-related personal income tax revenue

declined from $17.6 billion in 2000-2001 to $8.6 billion in 2001-

2002, and to $5.2 billion in 2002-2003.

     Between 1997 and 2002, spending increased by almost 45

percent. The state's population didn't grow by 45 percent. It grew

by 8.6 percent. In 1997, 32.5 million people lived in California.

In 2002, 35.3 million people lived there.

     Let's not even bring up the whole electric power crisis,

which ravaged the state in 2000 and 2001 and bankrupted its

largest utility.

     We all know what has to happen next.

     It's not insolvency.

     It's not a debt moratorium.

     It's not setting up a separate czar to run the state and make

all the decisions.


                     Wall Street Ready


     The state has to spend less, or it has to get more money

through increases in taxes and fees.

     Wall Street will help, if those in Sacramento can pass a

budget. California, which has the lowest state ratings at Standard

& Poor's (A) and Fitch Ratings (A) on its general obligation

bonds, and is tied with New York and Louisiana at Moody's (A2),

still has access to the municipal market.

     In June, the state sold $1.7 billion in bonds. It paid more

to do so, on a comparative basis, than any other state -- 0.64

percentage point more than triple-A.

     The only reason people haven't said more about how much more

California has had to pay to borrow is because yields in the

municipal market are so low. Even with the penalty, California

still paid only 5 percent to borrow money for 30 years.


                       Bad Karma


     And once California lawmakers stop posturing (Republicans

want to cut spending, Democrats, who control the Statehouse, want

to raise taxes), the state will be able to sell $10.7 billion in

bonds to help cure its $38 billion shortfall.

     For all its problems, California began the year with plenty

of capacity to sell bonds, ranking 20th in terms of debt per

capita, according to Moody's.

     That said, California is still the scariest place in the

municipal market. I keep returning to Orange County, and what

Bruce Bennett told the Times in 1995: ``Even though the tax base

of the county is very wealthy, the county government doesn't have

unrestricted access to it.'' Some Californians might say the same

thing concerning the state.

     Joe Deane, who oversees more than $7 billion of municipal

bonds at Citigroup Asset Management in New York, perhaps explained

it best: ``There's just a lot of negative karma going on out there

right now.''


TOPICS: Business/Economy; Culture/Society
KEYWORDS: kali

1 posted on 07/02/2003 10:18:08 AM PDT by NativeNewYorker
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To: NativeNewYorker
wonder how this nation will react when SS, Medicare and the other entitelment programs explode in cost in the not so distant future.
2 posted on 07/02/2003 10:20:43 AM PDT by KantianBurke (The Federal govt should be protecting us from terrorists, not handing out goodies)
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To: NativeNewYorker
Merrill Lynch nevered paid us back after running a game on it's clients. And Merrill is back looking for our business again. CA doesn't need to file BK. CA just needs some intelligent and responsible people to come in and cut the budget. There is no shortage of revenue. The morons in Sacramento are just spending more than the state is bringing in. Heck, my 10 year old nephew could solve the budget problem in Sacramento.
3 posted on 07/02/2003 10:28:06 AM PDT by kellynla ("C" 1/5 1st Mar Div Viet Nam '69 & '70 Semper Fi)
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To: NativeNewYorker
It was reported this am that $500 million could be saved by deferring cost-of-living increases in the state's two biggest welfare programs. So don't let the liberal media snow you on us being broke or there not being enough money to pay the bills. If they have money to give welfare recipients a raise then they can cut the budget and balance the books.
4 posted on 07/02/2003 10:40:34 AM PDT by kellynla ("C" 1/5 1st Mar Div Viet Nam '69 & '70 Semper Fi)
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To: NativeNewYorker
"There's just a lot of negative karma going on out there right now."

LOL!! That's some analysis.
5 posted on 07/02/2003 10:48:44 AM PDT by headsonpikes
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To: kellynla
From way across the country, it seems that Davis & Co. are playing a game of chicken with the taxpayers of California and the capital markets.

These things *usually* end up with a spit-and-baling-wire solution, and folks move on to spin.

If the Dims controlled DC, it is a good bet Uncle Sugar would be picking up some of the tab. With W and the GOP in control, Davis' goose is cooked.

6 posted on 07/02/2003 10:53:03 AM PDT by NativeNewYorker (Freepin' Jew Boy)
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To: NativeNewYorker
one of the wealthiest counties in the nation bankrupt, the result of the county treasurer's wrong-way bets on interest rates.

The county treasurer was a flaming Democrat. They liked him because of his high investment returns but little did they know he accomplished that by greatly increasing risk. The lesson is: never ever trust a Democrat with your money.

Even with the penalty, California still paid only 5 percent to borrow money for 30 years.

Not exactly true. Bond buyers do not pay state income tax on the income from these bonds. The state is really borrowing at about 8 percent, and these bonds compete for buyers in the junk bond market.

7 posted on 07/02/2003 10:57:57 AM PDT by Reeses
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To: NativeNewYorker
Not one state government idiot has mentioned the ugly fact that Californians are forced to spend billions on every entitlement possible for illegal aliens. Not one word. Like George Bush, they don't want to offend the hispanics.
8 posted on 07/02/2003 11:12:19 AM PDT by janetgreen
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To: NativeNewYorker
Not one state government idiot has mentioned the ugly fact that Californians are forced to spend billions on every entitlement possible for illegal aliens. Not one word. Like George Bush, they don't want to offend the hispanics, which might scare illegal alien votes away.

Millions of illegal aliens + welfare state = financial disaster.

9 posted on 07/02/2003 11:14:24 AM PDT by janetgreen
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To: NativeNewYorker
Bankruptcy isn't an option, but all they need to do is to "defer" payment on all of the state's outstanding bond obligations, and then re-negotiate terms.
10 posted on 07/02/2003 11:47:19 AM PDT by PAR35
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To: PAR35
If they publicly **discuss** renegotiating state debt, California's rating would dip below Botswana's.
11 posted on 07/02/2003 11:51:35 AM PDT by NativeNewYorker (Freepin' Jew Boy)
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To: NativeNewYorker
If they publicly **discuss** renegotiating state debt, California's rating would dip below Botswana's.

Yes. Do you consider that a positive or a negative?

Perhaps they could bring Congressman Dennis Kucinich as a consultant. He did such a good job putting Cleveland into default on its obligations.

12 posted on 07/02/2003 12:18:33 PM PDT by PAR35
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To: PAR35
Do you consider that a positive or a negative?

I think of it as an arbitrage opportunity. :)

13 posted on 07/02/2003 12:31:12 PM PDT by NativeNewYorker (Freepin' Jew Boy)
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To: NativeNewYorker
Don't wait too long.

http://www.freerepublic.com/focus/f-news/939500/posts
14 posted on 07/02/2003 4:35:54 PM PDT by PAR35
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