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Don’t Forget America’s Failed States

London is burning. Greece is in receivership. Nobody wants Italian bonds. France’s AAA rating is at risk. The headlines do seem to be a bit Euro-centric lately. But that’s temporary. Before long the spotlight will swing back to America’s failed states, beginning, as always, with California. Consider:

Signs point to California facing new budget gap
(Reuters) – California’s summer vacation from its state budget woes didn’t last long.

California’s latest monthly revenue report shows revenue weaker than expected even before the stock market, a key source of revenue for the state, began sliding in response to Standard & Poor’s downgrade of U.S. debt, anxiety about Europe’s finances and the risk of the U.S. economy slipping back into recession.

For officials in California’s capital, underwhelming July revenue and Wall Street’s hard times suggest they will have to draw up plans for cutting more spending early next year.

Beyond Sacramento, if revenue swoons in coming months, it will assure renewed headlines of how the government of the most populous U.S. state is facing yet another budget shortfall.

Californians, and the state’s bond investors, should brace themselves for that in light of how a choppy stock market can hurt the state’s revenue, said Neil Hokanson of Hokanson Associates, a family wealth manager in Solana Beach, California.

California is like a household where one spouse is a sales person, Hokanson said, noting: “It has good years and it has bad years.”

This year was supposed to be a not-so-bad year for California, with revenue improving after a few years of declines sparked by the housing crash, recession and plunge in stock prices following the Lehman Brothers bankruptcy.

Governor Jerry Brown and state lawmakers closed a roughly $10 billion deficit in June with a plan that balanced California’s books with spending cuts, deferred payments, some fees and, most important, the assumption that an additional $4 billion in revenue would flow into state coffers.

The money would be generated by the state’s gradual economic recovery and wealthy taxpayers who pay the bulk of personal income taxes, the state’s most important revenue source, as their capital gains increase with the stock market extending its climb from its March 2009 low.

That plan may soon need to be revised.

Even before volatility struck the stock market this month, California’s revenue was not meeting expectations: July revenue was $538.8 million, or 10.3 percent below its projected level in the state’s recently enacted budget, the state controller said on Tuesday.

New California wildfire fee may drain agency’s firefighting budget
(Mercury News) – A California law that imposes an annual wildfire fee on rural residents may have an unintended consequence — sapping the state fire agency of money it needs to fight wildland blazes, officials said Wednesday.

Concerns about the $150-a-year fee, which is contained in the state budget Gov. Jerry Brown signed earlier this summer, were raised Wednesday by the California Board of Forestry and Fire Protection.

Democrats in the Legislature passed the fee and said it eventually would raise $200 million a year. That would allow the state to transfer an equal amount of money from the California Department of Forestry and Fire Protection to the general fund budget.

Under the law, proceeds from the fee must go to local fire-prevention efforts through local fire districts, fire councils or the California Conservation Corps — not the state fire department.

George Gentry, chief operating officer of the Board of Forestry, told The Associated Press that will leave the department with a hole in its firefighting budget this year.

Court halts dismantling of CA redevelopment agencies
(San Francisco Chronicle) – The state Supreme Court put the brakes Thursday on a plan to dismantle redevelopment agencies in California, posing yet another challenge to California’s ability to keep its budget balanced.

The court said it would decide by mid-January whether the state’s plan to eliminate the economic development program is legal, and allowed redevelopment agencies to continue to exist while the case is pending. But it also barred the agencies from starting any new projects, issuing bonds or purchasing or transferring any property until the suit is resolved.

If the case is successful, it will punch a $1.7 billion hole in the state’s budget for the current fiscal year and cause a $400 million annual shortfall in future years.

Stock market turmoil a bad omen for California budget
(Reuters) – The stock market’s recent slump is reviving bad memories for California’s government and raising concerns about revenue estimates for its budget, a perennial concern in the U.S. municipal debt market.

The concern in the state capital of Sacramento is the slump hints at the potential for a stock market meltdown like the one in 2008. That sent California’s finances into disarray.

Heavy market losses could force California to trigger spending cuts to politically popular programs and revive calls for tax increases, both sure to spark rows in the legislature that cause many investors to stay clear of the state’s debt.

Governor Jerry Brown and lawmakers in June notched a budget plan that closed a multibillion dollar deficit and balanced the state’s books in part with a rosy revenue outlook.

Critics said the forecast was too optimistic given the state’s weak economy and the potential for reversals in financial markets. When they swoon, California’s revenue shrinks because it relies heavily on wealthy taxpayers and their capital gains to provide a large chunk of the personal income tax receipts.

And finally this from Douglas French of the Mises Institute:

Los Angeles, America’s Harbinger
In a piece for the Wall Street Journal, Joel Kotkin tells of the demise of Los Angeles. No, you won’t see Snake Plissken or Rick Deckard racing through the City of Angels just yet. But the city’s political machine is doing all it can “to leave behind a dense, government-dominated, bankrupt, dysfunctional, Athens by the Pacific,” explains Kotkin.

…The unemployment rate for Los Angeles County was officially 12.4 percent in June, after peaking a year ago at 13.4 percent. However, the worst is likely not over. As Kotkin explains, the Panama Canal is planning to widen and there are plenty of ports on the eastern seaboard looking for business. Also, the Golden State’s renewable-energy mandates are estimated to increase energy costs by 20–25 percent. Californians already pay 53 percent more than the national average.

And the taxman is especially brutal in California, with a top rate of 10.3 percent, which kicks in at a $1 million in earnings. Sure, not many are pulling down that much, but the second highest rate, 9.3 percent, applies to those making $46,766 and above. The state’s minimum wage is $8 an hour, 75 cents above the federal rate. And restaurant employers may not use tips earned as credit toward this obligation as is the case in many states. California employers are required to pay “exempt” employees double the state minimum, putting these employees in the 6 percent tax bracket.

What once was believed to be a city of destiny (paradise on earth) is being destroyed by government looting; and now its saviors, the state of California and the federal government, have been looted as well.

Some thoughts:
After spending a recent week in Los Angeles, I now understand the concepts of Peak Oil and road rage: Tens of thousands of cars, most containing only one person, going 75 miles an hour for a really long time to get anywhere. Besides being stressful, this system is fragile. It will grind to a halt on the day gas hits $6 a gallon.

California tends to lead the way for other US states, which in the past was mostly good. But now the Golden State is about to become a Third World country, complete with deteriorating public services and a permanent, volatile underclass. Those “London burning” pictures will be replicated in LA before too long.

The sad truth is that it’s simply impossible to run a major US state with the current public sector pay/benefits structure. The process of scaling back pensions and salaries will hurt a lot of cops, teachers and social workers who don’t deserve pain. But there’s no mathematical alternative to a dramatic lowering of state/local operating costs.

This is the inevitable result of three decades of lies told to public sector unions and taxpayers. The people making the promises (lifetime pension/health care for 50-year-old retirees, for instance) either knew they were lying or were really, really stupid. Either way, they’re the villains in this story.

The muni bond market has held up amazingly well considering that many of them are loans to bankrupt states in a soon-to-be bankrupt country. But in the coming year Meredith Whitney’s prediction of “hundreds of billions of dollars of muni defaults” might come true, again with California leading the way.

33 thoughts on "Don’t Forget America’s Failed States"

  1. It certainly seems CA is in for a rude awakening.

    I live in Long Beach and can report that bread & circus for the masses is the cities response to keeping a lid on things … not to mention the 45% of the budget that goes to police and the omnipresent police helicopter flying close overhead making one feel they live in a prison camp.

    Time to ditch the public unions and their pensions, ditch a 70+ year old governor who’s a relic from disco years. Finally get a handle on illegals and the immense medical bills they rack up (and their “anchor babies”).

  2. I know dozens of people in California who have finally woken up and are ready to leave that tax farm. There is no way to turn this around…especially when retirees realize that there are much more realistic places to live like here in the Philippines.

    Where I live there are already dozens of Americans building houses and digging wells. All of those who think that people are going to wait around to be raped are in for a rude awakening.

  3. Public sector unions aren’t the problem. California spends over $12billion per year complying with unfunded Federal mandates.

  4. You cannot fix the problem, because the system is based on fraud. Fractional reserve banking is lending money you don’t have. Remember the scene from It’s a Wonderful Life? Jimmy Stewart explains that deposits are not in his vault, they are lent out in this guy’s mortgage and that guy’s car loan etc. So that fact of the matter is the banks take your deposits and promise you can have them any time you want, then lend them out to someone else at higher interest than they pay you. If everyone wants their money at the same time, (bank run) the banks don’t have the money and the customers get stiffed. But it’s actually worse than that, because today fractional reserve banking means that if they have a million dollars in deposits, they can lend out an additional 9 million that they don’t have. This is the root of the problem. Banks (especially central banks) lend money that they don’t have, creating this mountain of debt that eventually (like now) becomes so large that it cannot be paid back. The only thing that can be done is to create a new system in which you can only lend money that you have saved, and no new money can be created out of thin air to be lent. Unfortunately, there are too many special interests involved to change the system now, so we must wait until their unsustainable system collapses and hope we come out on the other side and can make a new and fairer system that leads to prosperity and peace.

    1. If banks could only lend out what they have on deposit, this country would implode. Companies need access to capital and that’s what banks do. Banks are better capitalized now than they were a few years ago.

  5. The french banks are in deep trouble. There is a MASSIVE, massive housing bubble there; especially in paris outskirts. 400,000 EURO’S (thats euro’s, not dollars) for a 2 bed 2 bath suburb dingbat. To think the french banks made any type of loans on these properties makes me think there is big trouble ahead for france…

  6. To be fair, the free market should decide what someone is worth, not the government. How many free-market jobs offer defined pensions and healthcare to the grave after retirement? Yes, private schools tend to offer much better student results at a lower cost per student vs public schools. As Ringo Starr stated, “everything the government touches turns to crap.” By the way, having a police state does not insure the protection of our civil rights. With a federal reserve and a public school system, we are only a few more bullet points away from having a completely communist country according to the Communist Manifesto. Only a currency free from government control and manipulation combined with strict adherence to the U.S. Constitution will allow for the protection of civil liberties.

  7. Cut the wages of teachers and police officers because THEY make too much? Last time i checked movie stars/singers/sport athletes are making millions and millions of dollars….we as society are doomed when those protecting our civil rights and teaching our children are deemed less worthy than those who perform for our entertainment.

    1. Jack –

      Movie stars, singers, sports athletes and various in sundry ‘entertainers’, derive their income from the pleasure of those who seek their entertainment. Unfortunately, those who ‘protect our civil rights’ (?) and teachers are subject to the amount of tax revenue the state brings in. Double unfortunate, is that California’s politicians – like most politicians, can’t seem to save – and when revenues are high, they tend to save even Less. So then, it stands to reason that because the economy of California is trending down, that cuts across the board have to be made.

  8. “The process of scaling back pensions and salaries will hurt a lot of cops, teachers and social workers who don’t deserve pain.”

    If anyone deserves to feel pain, it is those who derive their income, inflated pensions and healthcare from the fruits of the productive economy’s labor. Go out in the real economy and get a real job. Or better yet, use your life savings to start a business in this country and actually employ other people. With all the permits, licenses, and regulations, what a challenge that would be. No one knows how to be (or wants to be) a seed sower. We have at least 2 generations of seed eaters now in this country.

    Is it fair for a government to promise lifelong pensions and healthcare to government employees (and unions in the form of bailouts) at the expense of the productive members of society? Life isn’t fair. Yes, it’s the shrinking productive economy vs the non-productive economy.

  9. It should be noted that defined contribution plans (401k’s) will be just as unable to fulfill retirement “needs.” Both types of plans invest in the same types of things. Assets that are backed by paper only or assets — such as office buildings and “power” centers — that will be obsolete in a contracting economy. The entire investment paradigm of the past thirty years is flawed. It is simply not possible to work for 20 or 30 years — consuming mightily all the way — and expect that the system will permit you to live well without working for another 30 or 40 years. We will need to set up some sort of psychological trauma centers once the consequences of reality finally hit home for tens of millions who thought that they were going to live the rest of their lives doing nothing more strenuous than washing their late model vehicles in the driveway.

  10. “Meredith Whitney’s prediction of “hundreds of billions of dollars of muni defaults” might come true”… Haha! Of COURSE it will “come true” cuz the bill will come due. Just like the housing bubble when it popped, all the herd was running towards real estate until they got popped in 2007-2008!

  11. This whole system is in its last breaths and right now instead of waiting around for doom and gloom and stocking up on canned food and silver bullion, devote your energy to fighting for the solutions! Your physical existence means nothing if you did not leave something behind for the next generation, and the thing that will define this species is how we respond to this crisis. First thing we must do is remove Obama NOW! His allegiance is not with the United States, he is working on behalf of a foreign enemy. Once we do that we can restore Glass-Steagall (H.R. 1489) and start rebuilding and putting America to work in some of the largest re-industrialization works ever before imagined! This is Lyndon LaRouche’s Plan and I trust that his leadership is all that exists to get us out of this mess as his forecasting has been spot-on for decades strong. Him and the Larouche PAC are ready to move, join them and fight for this Republic.

    Heres the latest call from Lyn and Helga LaRouche and Jacque Cheminade read it and circulate it to your circles! The war is on! http://larouchepac.com/node/19019

    1. With all due respect PeacefulPat, our debts are not payable, and playing musical chairs with the top banana won’t change that. There are two options. Continue to kick the can down the road until the whole house of cards topples over, or conduct a well organized default, where creditors are engaged and a settlement is negotiated.

      The latter is impossible within the present framework. You saw the circus surrounding the debt limit debate. They can’t reduce the deficit, much less balance the budget and pay down debt.

      We are going to need a second constitutional convention. The constitution would be rewritten to ensure a balanced budget, install sound money, reach a settlement with our creditors, and limit the size of government. People and organizations don’t give up power so easily, however. It will probably take another two or three years of the Bush-Obama depression to get the convention organized.

      1. The Constitution doesn’t need to be rewritten…it needs to be enforced. That would solve everything. Short term pain is unavoidable but the sooner it happens the less painful it will be.

  12. The Swiss government discovered that buying bonds is risky business. Korea is stocking up gold as reserves. Soon bonds may not be that risk free anymore. Printing money will only increase inflation and inflation feeds on itself very quickly as money is a matter of faith. This is why central bankers try to keep inflation low so that it will not flare up. In the past China helped to keep inflation low and somehow oil price did not pose a problem, probably it had been manipulated. Now there is noway of manipulating as real and huge demand is there to keep up the prices. Imagine the growth of car ownership not only in China but in all the emerging countries. Oil price is very cheapnow. Why is Saudi planning so many nuclear plants. So more money printing or QE or some other manipulating big jargons will not help the situation but only make the day of reckoning more destructive. Let market forces decide and have a mitigation plan like feeding the unemployed and slash the pay of all CEOs, private and public companies.

  13. Two unpublicized things are happening that are deadly to the states.First block grants to states will drop as a result of the debt ceiling deal.Second is the very low yield that the pension funds will receive on the bond portion of their investments.Inevitably ,assumed rate of total returns in future will have to come down ,thus making it necessary for the states and municipalities to contribute more to their .pension funds.Th result will either be higher taxes and fees,more layoffs and last the bankruptcy or receivership of almost.all states and municiaplaites

  14. California has one of the most generous packages available to illegal immigrants, while sucking the working American population dry. The unions run that state… into the ground. When looking for work, you have to be aware that wages in California and the East Coast have to be more than double everywhere else just because of the taxes. Literally, a person making a quarter-million dollars a year cannot afford to own a modest 3 bedroom/2 bath home. There’s “California” wages and “everywhere else” wages!
    A while back they did their level best to de-industrialize, sending their industrial base down to Mexico. A friend of mine was foreman at a glass bottle making plant that was closed in CA and sent to Mexico, after which he lost his job and had to move from that state.

    1. Ridiculous. I am a fifth-generation American, a California native and life-long resident, and am well-traveled. There are two things I want to point out:
      1) California is a large, diverse country. Generalizations cannot be made about any part of it.
      2) People who live outside California seem to enjoy bashing it. You have to wonder how many of them have actually ever even been here. But I say if you don’t know your subject well, don’t attempt to criticize it. You just end up looking like a fool.

      Yes, California is not perfect. We have serious problems that we are working to fix. But there is a lot to like about the state. So here we’ll stay – all 37 MILLION of us.

      1. I lived and worked in CA for most of the 80’s and 90’s, and I would tend to disagree with Suzanne’s take on the employment situation there. If I were to make a broad characterization, I would say that public unions in CA are stronger than in the USA at large, but that private sphere unions are much weaker. Of course private sector unions across the land are getting weaker by the minute, to match those of CA.

        One example would be the shipyards of San Diego, where much of the Pacific Fleet is serviced by Navy personnel as well as private contractors. In the 90’s there was a union presence on the waterfront, but union workers made much less than the same trades would make under a union contract elsewhere. Of course when half your workforce pays $100/month rent to live in Tijuana, BC and crosses the border every morning, it is easy to keep pay rates low.

      2. Been to California, but that’s not my point. Here in Florida, we have a number of people who left there and won’t go back. Taxes are too high. So yes, they’ve been to California and regularly criticize it. It’d not just a bunch of naysayers from elsewhere.

  15. “Three decades of lies told to public sector unions and taxpayers” are only a part of the bigger picture. The real story is decades of marxist cultural ideological subversion distracting attention away from a didactic paradigm to a dialectical one. The bottom line is that a dialectical (i.e., hegelian-dialectic) government must protect immorality or government can’t grow.

    1. Exactly, setting up a left vs. right wing hegel’s dialectic, where they move the goal posts until Demoblicans support Obama going into Libya. Republicraps love it, too, cuz they’re getting paid by Goldman Suchs, too.

      Course, I don’t have a Phd in EKO-NOM-ICS, so I giss I don’ know so much. I don’ sold my house in 2005 so I gots sum common see-unse. My momma done tolted me, “Forest, life is like a box of deflationary depression, ya never know how much hyper inflation ya git till it happens.

    2. I think you’re giving the recipients too much credit (and the “benefactors”, for that matter). Rather than getting lost in a soup of Heraclitus/Kant/Hegel/Fitche/Chalybaus, I suggest Occum as an antidote and a simpler explanation: Promising something one does not own to be delivered in the future by government fiat is an easy way to gain power in the present, and thus being due something for “nothing” from the government in the future becomes a legal right.

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