The article below seems to indicate the Wall Streeters may have some problems.... Where are the revenues to be anticipated?
California's Economy Could Collapse
State Budgeteers Ignoring New, Ominous Numbers
By Daniel Weintraub
Sacramento Bee Columnist
7-19-2
A little more than two weeks ago I wrote a lengthy column exploring the possibility of a fiscal meltdown in California, a gap between spending and revenues so great that the state might be unable to pay its bills or borrow without supervision from Wall Street.
At the time, I described such a scenario as remote. But developments since June 30, I believe, make a financial debacle more likely than it was when I last addressed the topic. The Legislature and Gov. Gray Davis, while it's the last thing they want to do, need to address the situation before it is too late.
The governor's Department of Finance reported last week that revenues in June came in $407 million, or 5.7 percent, below forecast. And that was a forecast made in early May. If the governor's best prediction was that far off in so short a time, how can he possibly trust anything his advisers are telling him will happen next December, or in April 2003? The June shortfall came on top of a bad May, when revenues were $250 million below estimates that had been finalized even as the month had already begun.
And it's not just the amount but the reason that's cause for concern. Income-tax withholding -- perhaps the best barometer of current economic activity -- was down nearly 7 percent in June from what was expected.
The sales tax also fell short. In May and June combined, revenue from that source is off $214 million, or about 5 percent.
Those numbers are real, and in the books. They confirm anecdotal evidence that suggests California will be lucky to see a broad-based economic recovery take hold by the end of 2002.
Leaders of the state's tech economy told the New York Times in a story last week that they don't expect their sector, increasingly important to California, to recover until perhaps the end of 2003. Intel Corp. announced Tuesday that it would reduce its work force by 4,000 employees this year as revenues continue to slide. Apple Computer confirmed that it had laid off 7 percent of its workers at an Elk Grove plant as earnings fell by nearly half from the same quarter a year ago.
The stock market, meanwhile, continues what appears to be a free-fall. Having already lost 11 percent in the quarter ending June 30, the Dow Jones Industrial Average has slid another 8 percent since that day. The technology-heavy Nasdaq Composite, which fell 20 percent in the second quarter, was down another 6 percent through Tuesday.
The market selloff presents two dangers to the state's fiscal condition. One is direct -- that capital-gains taxes and taxes on stock options, which fueled a revenue boom in the late 1990s, will fall short of even their meager targets in the coming fiscal year. The other fear is that declining stock values will produce a reverse "wealth effect," prompting consumers to pull back on personal spending as they watch the value of their portfolios shrink.
All of this would be bad enough even if the state were not about to pass a budget that contains a structural, $10 billion gap between spending and revenues that has been largely papered over with loans, shifts and gimmicks. But that's what is on the table now, and, absent some dramatic development, that's what will be approved some time this summer.
If the numbers in May and June represent a trend that continues through the fiscal year, the state's shortfall a year from now could be $20 billion or more.
Any sensible manager would be taking steps at this point to guard against further deterioration in the state's fiscal position. At a minimum, the Legislature and the governor should enact triggers that would automatically enact deep and, yes, painful spending cuts if the numbers continue to slide through the rest of the summer and into the fall.
They might want also to consider triggers that would return taxes to the levels of 1998, before they were cut with a sense of bravado amid surpluses driven by the surge of tax revenue from stock market gains that have now disappeared.
If lawmakers fail to take one or both of these measures, the situation could spin out of control before they return after the November elections. But interviews this week with the key players suggest that neither the Legislature nor the governor is in any mood to change course.
Finance Director Tim Gage says he will "continue to watch the numbers closely" in the weeks and months ahead but plans to propose no corrective action. Assemblyman Darrell Steinberg of Sacramento says it would be "very difficult" to reopen the budget even as the Democratic leadership and the governor are seeking to secure the four Republican votes needed to pass the current, flawed version of a spending plan for the fiscal year that began July 1. And while Republican legislators complain accurately that the budget is a time bomb waiting to go off, they have yet to offer a concrete proposal to defuse it.
If this keeps up, the state's budgeting and accounting will make Enron's finances look positively responsible in comparison.
The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at
dweintraub@sacbee.com.
http://www.sacbee.com/content/opinion/story/3621695p-4647717c.html
The final credit rating should be real interesting. It sounds like there was lots of money previously in the stock market that has been pulled out and is not in liquid funds that the investment banking community wants to find a nice moderate term and interest bearing home for.
I find the following rating of Washington state bonds quite interestings on the S&P website.
What follows is for academic interest in the study of interest rates and economic theory.
SAN FRANCISCO (Standard & Poor's) July 15, 2002--Standard & Poor's said today that it removed from CreditWatch and affirmed its double-'A'-plus rating on the State of Washington's outstanding $8.25 billion in general obligation debt based on the state's adoption of a 2002 Supplemental Budget, which balances the 2001-2003 biennial budget and revises revenue projections over February estimates.
In addition, Standard & Poor's assigned its double-'A'-plus rating to the state's $184.46 million in new general obligation debt, to be sold July 23. However, both the new and existing ratings were given a negative outlook based on the state's economy, which appears to be lagging behind the national economy to a greater extent that was thought earlier in the year.
"While the state's budget is now balanced, this reflects the use of one-time revenue and expenditure adjustments for 50% of the $1.5 billion budget gap," said credit analyst Gabriel Petek. "However, the diversity of the state's economy combined with a history of sound financial management gives Standard & Poor's comfort in confirming the double-'A'-plus rating," he added.
Standard & Poor's said that a rating downgrade could result if the state's economic recovery falters or is too weak to restore balance to the budget using recurring revenues rather than one-time adjustments.
The state's rating was originally placed on CreditWatch on March 19 because of the budget deficit, caused by lowered revenues due to the national and state economic slowdown. The new debt will be used for financing various capital projects throughout the state and for housing assistance, weatherization, and affordable housing project expenditures.