California will be Broke in a Week

California’s Controller will withhold an additional $3.7 billion if there is no state budget by Feb 1st:

The controller says California is down to Plan D on its checklist of paying bills. Its cash reserves are piddling; the special funds it borrows from are tapped out, and no one in the private sector is going to lend it any cash at a reasonable interest rate.

That leaves what in state government circles are called “payment deferrals” and what in real life is called “stiffing your creditors.”

In this case the creditors include income taxpayers expecting refunds, college students waiting on state aid, counties that operate public assistance programs, and companies that sell goods and services to state agencies.

Chiang has said he won’t write $3.7 billion worth of checks for those and other state programs if legislators and the governor haven’t reached a deal by next Sunday to close the budget gap.

The controller said he must conserve what little cash the state has to be able to make constitutionally required payments to schools and interest payments to state bondholders.

What can I say, maybe I should move to a different state.


12 Responses to “California will be Broke in a Week”

  1. 1 myphotoscout January 25, 2009 at 10:51 AM

    Ouch. I don’t know the way out, but I dread the day they raise the tax. In the current economic environment that would set the wrong signals and drive out even more businesses. However it seems to be the only way out of this mess.
    What happened to all the promises Arnold made?

  2. 2 Michael Huddleston January 25, 2009 at 2:01 PM

    Granted I am not a political savvy person and economics is new to me, but I thought California was a prosperous state as far as all the goods and services it has to supply. Especially agriculturally. Am I wrong? Or is this the result of water shortages and increased numbers of wildfires affecting the quantity of our goods? Does it have anything to do with our increased numbers of illegal immagrants who may not be paying taxes to the state but reapping the benefits of welfare and EDD illegally? Have they said why the state is broke?

    The uniformed

  3. 3 Ryan Webb January 25, 2009 at 9:26 PM

    The Federal Government will bail out California just like the banks and the car manufacturers. There is always a buyer for U.S. bonds in the form of the Federal Reserve: get ready for another cycle of inflation denial.

  4. 4 pviel January 25, 2009 at 9:32 PM

    Just keep putting people in for years who haven’t committed violent crimes that should keep Cal in the hole for decades to come. Close the State Parks of better yet fence them and expand the prisons.

    It’s a bit like cutting your nose to spite your face.

  5. 5 SurfaceEarth January 26, 2009 at 7:23 AM

    Unlike the federal government, states do not have the option of simply printing more money. California, by itself probably the 8th or 9th largest economy in the world (surpassing France even with half of its population), will start printing the next best thing – IOU’s. Which coincidently is exactly what currency is. If they print enough of them, the capital markets will find a venue to start trading California IOU’s much in the same way trades its bonds or any other currency.

  6. 6 PS January 26, 2009 at 7:38 AM

    For those wondering how things could have gotten so messed up in CA, I suggest you look at a few places.

    1. Tax Law: It takes a super-majority in CA to raise taxes, as a result, to almost no one’s surprise it is fairly difficult to change tax rates in the state.

    2. Property Taxes: CA only resets property taxes when a property sells. Most every other state periodically raises the taxes on property as the property itself is reassesed. So if you have owned what is now a $1.5mil house in San Francisco, but you bought it 20 years ago for 500k, you still pay taxes as if it is a 500k house.

    3. State Budget: The state is extremely generous in its social programs, but because of the two factors above, has a hard time actually raising the money for all of the grand promises that it makes. Eventually (like now) the state will be forced to make some hard choices about which programs it really will be able to continue and which are just luxuries.

    4. State Pension Plans: This is sort of a related issue, it won’t blow up tommorow, but it is looming and partly responsible for why people are lining up to lend the state money. The pension obligations of the state far exceed the money that has been invested to pay for them. Creditors know that these obligations will be coming due soon, and so when they look at the budget problems the state is having now, it is hard to feel confident that when it comes to adding more debt to their burden, that it will get paid back in full and in a timely manner.

    Add it all up and you get a state going nowhere until its financial house is in order. The state lost population last year, which can become a part of the problem as demographics has a large part to do with growth. A state with the kind of financial problems that CA has doesn’t need to be struggling with a shrinking economic base at the same time. The day of reckoning for the state has been kicked down the road so many times, it seems as if it has finally caught up with it.

  7. 7 axcelinternet January 26, 2009 at 10:40 AM

    Wow, it will be interesting to see how this plays out. Thanks PS for providing a few answers for those of us who were thinking “how does this happen?”. California is a very prosperous state from I understand. If it were a country it is one of the worlds top ten largest. Seems bad when that’s going in the tank. “As California goes, so goes the nation”. When will governments consider cutting spending in order to meet budgets? You can’t tell me there’s no government waste going on there.

  8. 8 samandrews January 26, 2009 at 11:04 PM

    I’m new to the analysis of our economic state. I don’t know much yet, but I’m learning. How exactly did we get to where we are today, in this crisis? Was it us as individuals? Spending and saving at the wrong times?
    I don’t mean to sound brash, but as Californians, we’re not the most conscious when it comes to money. We are seen as a different people to the rest of our nation, spending like its water (which right now we’re needing more of). With the dreamy reputation of being all about adventure, flashing lights, and pretty people we seem to have gotten caught up in the mindset of “gotta have it now!” Remember when we used to SAVE UP for things we wanted??? Now we just go buy them, put them on credit, finance them. We have no value. Its become the throwaway society state.
    I have no doubt that we’re the worst off right now, but we need to take a step back. Quit doing things just so people will THINK you’re active. Prius or not, you still have to purchase gas. The more jobs lost the more money we feel we must save. Now how do we get out before California self destructs?

  9. 9 VPD January 27, 2009 at 8:52 AM

    Another reason why things got messed up in California is the crash of the housing boom. People bought houses as an investment, even though they knew that they couldn’t afford the house, figuring that they could sell the house in let’s say two years for twice what they bought the house for two years prior. Banks would give anyone a loan for the house because it had been a great investment for the Banks. It used to be that not anyone could get a loan, until Banks eventually certain banks started approving anyone and everyone.

    Now it’s understandable from both ends, for years California’s housing market has been amazing. We purchased a house for 400,000 and sold the house for close to a 1,000,000, for years this has happened and finally it died down and now you have thousands of Foreclosed homes just sitting there that people couldn’t make the payments on because they couldn’t afford them and Banks are desperately trying to sell the housed at a cheap price.

    So a house that was purchased for 1,000,000 2-3 years ago wouldn’t be worth 1,000,000 at all because right now if anyone has the money they could go buy the same house Foreclosed for 600,000 or less because the Banks are desperately trying to get some money back from what they lent out.

  10. 10 Cristhian Ayvar January 28, 2009 at 11:17 PM

    I agree with all the post so far. I am also new to Economics. So I do not think I will be able to add much to this blog, besides all the questions that have already been asked, and repeated. Thank you “PS” for clearing a lot of things up. It all seem so confusing still. I would think that if California simply raised Property taxes and made some cuts, things might improve. But if things were so simple we would already be out of this situation right? Well I am hoping for the best in the mean time, but it seems as though California has just fallen into the same hole that America has found it self in. I am also fearful that my education might have to be put on hold because of school cost going up.

  11. 11 filing bankruptcy February 6, 2009 at 10:00 AM

    I am not able to understand that what is our government doing while all of these frustating news are scaring us about the future.

  1. 1 <will-bloggs-too> » Blog Archive » why california will be broke in a week. Trackback on January 25, 2009 at 2:13 PM

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