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Our View: The sad state of fiscal affairs

Tthe Signal Editorial Board

Posted: December 11, 2010 8:51 p.m.
Updated: December 12, 2010 4:30 a.m.
 

Twenty-five billion dollars! That is California’s current stated deficit.

What many do not understand is that this number is an annual operating deficit, which means every single month, the state’s outgoing expenses exceed incoming revenue by more than $2 billion.

But there is more.

On top of this ever-increasing $25 billion is the unfunded and seldom-mentioned $75.5 billion in pension and health benefits owed to public employees — $40.5 billion to the California State Teachers’ Retirement System, or CalSTRS, and $35 billion to the California Public Employee Retirement System, or CalPERS.

For years, the conversation we all have heard has been: “If the state doesn’t do something soon, we will be broke.”
Legislature after legislature and governor after governor failed to do anything about our pending financial calamity other than pay it lip service.

Democrats argued we had a revenue problem, Republicans a spending problem. This is like the coach saying, “We didn’t lose the game, we just ran out of time.”

Well, California is out of time. We are flat broke!

Now it is Gov.-elect Jerry Brown’s problem. Once again, the governor is saying the right things. Right after the election, he said he would take some time to scrutinize every element of state spending.

“I want to lift up the hood and show the good, bad and the ugly,” Brown said. “We have been living in a certain unreality about what government is and how we want to pay for it.”

California has funded its deficit with bond money and a willingness to pay an ever-increasing interest rate to lure money.
But now California’s credit rating is so low the bond market is nervous.

In mid-November, California went to the bond market wanting to raise $14 billion. It came away with only $10 billion — and had to raise the interest rate being offered in order to do it.

But is it fixable? It certainly is not as easy as some opine.

“Just cut government waste” is the usual refrain. Others are a little more generous: “Waste-cutting and some minimal tax increases will get it done.”

In fact, a recent poll after last month’s election confirmed these views, with 45 percent of Californians wanting the budget balanced entirely by cutting waste and reducing spending. Another 44 percent were willing to add some tax increases to the solution.

Yet more than 70 percent of these same Californians polled would like to see more spending on education, and almost 60 percent want more spending on health care.

The rationale for these opposing views is that 70 percent of these folks think there is more than enough waste in the budget, so all of the above can be done.

This kind of thinking is folly. The Ventura County Star’s Tim Herd had a recent column that provided a good look into the state’s budget, including that 75 cents of every budget dollar is simply a pass-through.

It comes into the state treasury en route to local schools, local government, health care providers and to pay benefits to those entitled to supplemental Social Security.

The 25 cents of every dollar that remains is the state’s discretionary revenue — what the state actually spends.

Is there enough excessive waste in this part of the budget to cover the current deficit? The short answer is “no.”

In fact, if 100 percent of the funding were cut for the two largest services that the state does pay for — our colleges and our prisons — it still would not cover the current $25 billion deficit.

So much for the cutting-the-excessive-waste argument.

In broad numbers, for California to continue spending at the current levels, it needs $103 billion. Revenue projections for the next fiscal year are $84 billion.

That’s another $19 billion deficit, on top of the current $25 billion, and that does not include the unfunded retirement deficit of $75.5 billion.

For far too long, elected officials from both parties have been playing a contemptuous and despicable game of booting state deficits into the future, coming up with seemingly rational but bogus numbers to appease voters, issuing more debt at higher interest rates and pretending everything is fine.

But that future everybody wanted to avoid is now. California is busted. Broke. Insolvent.

The state’s fiscal crisis can no longer be pushed aside. Spurious solutions will no longer suffice. California no longer has the money or the borrowing power to fund its obligations.

So is California facing bankruptcy? Nope. There is no provision in bankruptcy law for a state.

Can we expect Uncle Sam to bail us out?

Not likely.

We are the bluest of states now, with Democrats in charge of all state offices and the Legislature.

With the rest of the country going red, and with the significant Republican gains in the recent election, our financial crisis will not be high on any list in D.C.

Plus, what a precedent it would set for other states seeking a bailout if the feds bailed out California.
The state currently spends $7 billion to service its debt.

Facing insolvency, one step the state could take is defaulting on its debt. Terms would be renegotiated. Bondholders would take a bath.

Wall Street would scream loudly that losing money on the bonds would be too hideous to bear.

But the needs of Californians must come before Wall Street. The restructuring would be very painful, but California must become solvent again.

Bondholders would not be the only ones to suffer. The number of state employees, their salaries and pensions would all take major hits.

Just like Wall Street, the public unions would scream they are being mistreated. There will be lawsuits galore, and virtually all state services would suffer.

For all practical purposes, California is already insolvent, and the financial world already knows it.

With bankruptcy not an option, default looms as a likely first step.

Gov.-elect Brown after looking under the hood, has a number of difficult budget and financial decisions to make, and unlike his predecessors, they will wait no longer.

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