The Fraud That is California's "Rainy Day Fund" Proposition 2

Jerry Brown has been on the airwaves in California promoting California's Propositionss 1 and 2, more aggressively than his own re-election camapign, against Goldman Sachs flunky Neel Kaskari. Brown is a shoo-in for reelection.

Here is the spot that has been running regularly in California, including during the World Series:



An investment banker friend emails  to set the record straight on Proposition 2:

California proposition 2 is hilariously called the Rainy Day fund.  A little research will reveal something along the following (it has been a few weeks since I looked at this to help my son with a project):

Each year, the state will set aside 1.5% of general revenues and any capital gains revenues over 8% of total budget (you know, living in CA, the wild swings in this due to the mood of the market toward Silicon Valley).

Right off the bat, this is a laughable proposition: the concept of a rainy day fund when you don’t run a surplus.

This money will supposedly be set aside for the lean years – kind of like when Joseph interpreted the dream for Pharaoh.

The best part?  For fifteen years, half of this so-called fund will be used to cover other state obligations: the biggest corker is that “other state obligations” include state-funded pensions.

In other words, the entire thing is a scam to force-fund the underfunded pensions via even larger deficits.  Thus, when the state goes belly-up, those in the pensions will be even more secured.  This may be going on in other states – certainly, if it passes in California, they will try the same in other states.

California Gets Tough: Bans Food Stamps on Cruise Ships

Governor Schwarzenegger is blocking the use of state aid cards from cruise ships and casinos.

UCLA Business School Disses State of California

It's about time.

The UCLA Anderson School of Management is preparing to forgo public funding amid increasing uncertainty about the state’s economic health . It plans to fill the funding gap with money from private donors.

“We have to find a way to educate the future leaders of California, given that the state is unable to do so,” said Judy Olian, dean of UCLA Anderson.

Understanding the Pension Tsunami about to Hit California

"Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives." -Arnold Schwarzenegger via WSJ
 
(htMarkPerry)

How Bad are Things in California for Business?

Here are the words of Austin Beutner, first deputy mayor of Los Angeles and CEO of the city's Office of Economic and Business Policy, and general manager of the Department of Water and Power:

Not only did Chief Executive magazine recently rank California as America's worst state for business, but the publication called us "the Venezuela of North America."

In other words, the Golden State, with its world-class economy, is no better than a dictatorship that can't keep its lights on.

Fighting words? You bet. But sometimes a slap across the face can also serve as a wake-up call. After losing more than 111,000 jobs in the Southland this past year and seeing marquee corporate names head elsewhere, we have to develop smarter ways to retain businesses and attract new investment.

California on 'Verge of System Failure’

The Toronto Globe and Mail reports:

Golden State, like many others, is nearly bankrupt and desperately needs a bailout.

Arnella Sims has seen a lot in her 34 years as a Los Angeles County court reporter, but nothing like this.

Case files piling up by the thousands, phones ringing off the hook, forced midweek courthouse closings and occasional brawls as frustrated citizens queue for hours to pay parking fines.

“People think we’re becoming a Third World country,” said Ms. Sims, 55. “They don’t understand.”....

California’s fiscal hole is now so large that the state would have to liberate 168,000 prison inmates and permanently shutter 240 university and community college campuses to balance its budget in the fiscal year that begins July 1.

Think of California as Greece on the Pacific: bankrupt and desperately needing a bailout.

Schwarzenegger's Revised Budget Plan Is Expected to Eliminate Some Billion Dollar Health Programs

Administration officials declined to reveal which specific programs the governor would eliminate. But officials involved in the budget process, who spoke on condition of anonymity because they are not authorized to speak publicly, said they would probably include home healthcare for the elderly and disabled, a nearly $2-billion program that serves 440,000 Californians, reports LaTi.

Schwarzenegger may also propose the dismantling of the Healthy Families program, which uses federal money to help provide health insurance for about 900,000 low-income children. The administration warned in January that it would try to abolish the program if the state's budget situation did not improve – which it has not.

Schwarzenegger's proposals, meanwhile, would face stiff opposition in the Legislature, where there is limited support for taking apart the state's healthcare system. Providers and advocacy groups that have successfully sued the state to block the previous cuts are also working with the Democrats who control the Assembly and Senate to preserve services.

The state budget deficit remains around $19 billion.

California is a Worse Credit Risk than Iraq or Lebanon

 CMA Datavision is now showing California to have a higher Cumulative Probability of Default than IRAQ or Lebanon!

Here's CMA Datavision 's Risk Monitor based on Highest Default Probabilities. 

The rankings can change during the day in these volatile times but Brian Shelley has captured a  snapshot of California's rating below that of Iraq and Lebanon.

(htBrian)

Here We Go, The Crisis Moves to California: $18.6 Billion Budget Deficit

California Governor Arnold Schwarzenegger will seek “terrible cuts” to eliminate an $18.6 billion budget deficit facing the most-populous U.S. state through June 2011, his spokesman said, according to  Bloomberg.

“We can’t get through this deficit without very terrible cuts,” Schwarzenegger spokesman Aaron McLear told reporters in Sacramento. “We don’t believe that raising taxes right now is the right thing to do.”

In January, the governor said California may have to eliminate entire welfare programs, including the main one that provides cash and job assistance to families below the poverty line, without an influx of cash from the federal government.

California has the lowest credit rating among U.S. states. A taxable California bond maturing in 2039 traded for a yield of 7.08 percent today, up from an average of 6.87 percent on May 6, according to Municipal Security Rulemaking Board data.

The Global Financial Crisis: A Report from the New York State Front

The New York State legislature has approved an emergency budget bill that would authorize Gov. David A. Paterson to furlough about 100,000 state employees, roughly half the state’s work force, without pay for one day.

While some lawmakers, including many who voted for the bill, questioned the legality of the furloughs, they said they had little choice but to approve the legislation because failing to do so would have effectively shut down the state government, reports NYT.

Fiscal woes be damned, public employee unions contended that the furloughs, which officials said would be the first for state workers in New York, would be illegal, and they said they would seek a temporary restraining order in Federal District Court here to block the governor's plan.

Remember, this is all warm up action for the big show in July at the state level in California and local level with Los Angeles.

The big question: What type of new hidden inflationary tool is Fed Chairman Ben Bernanke designing to bailout California and Los Angeles?

An Insider's Perspective on California Unions

Tom H. emails:

I formerly worked for both CAPS and PECG in CA, and I could tell you stories which would amaze you. These people get away with murder and they can’t even be terminated! While there, I spent half of my time on the phone taking calls from union members complaining that they were forced to drive a state-owned truck and couldn’t have a sedan! The time has come to clamp down on these whiners. I have a unique, insider’s perspective.



TLH, Esq., LA, CA

Why California Could Be the Next Greece

California has a $500-billion pension time bomb. Who is writing about this?

David Crane special advisor to Gov. Arnold Schwarzenegger.

Government officials are using the crisis situation to scare the public in an attempt to raise taxes. The size of the problem is so huge, however, that a tax solution would really hurt. In an era of a growing Tea Party movement, it is unlikely that such taxes can be imposed. Further, because the debt bomb is tied in with pensions, they are extremely difficult impossible to cut.

Read the Crane piece, here. Despite his positioning of the story as Arnold Schwarzenegger wanting to do the right thing and the California legislature as not co-operating, the facts are accurate. There is no way out. Like Greece , the politicians can't cut for fear of an uprising, and, thankfully, they can't raise tax for fear of an uprising. Thus,default and bankruptcy, or Federal bailout (with controls) is looming.  

#1 Reason Californians Are Ending Car Leases

They are leaving the state.

(ViaJaneWells)

Californians May Not Receive Tax Refund Checks

Arnold "The Terminator" Schwarzenegger may terminate California tax refunds, for the time being.

Reports MSNBC:

If you expect you'll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a "registered warrant." Translation: an IOU.

"My office has projected that, in approximately 60 days, there will be insufficient cash available to meet all expenditures reflected in the 2008-09 Budget Act," stated a Tuesday letter from Controller John Chiang to the directors of all state agencies. "To ensure that the State can meet its obligations to schools, debt service, and others entitled to payment under the State Constitution, federal law, or court order. California may begin, as early as February 1, 2009, issuing registered warrants...commonly referred to as IOUs...to individuals and entities in lieu of regular payments."

In 1992,the last time California issued IOU's, banks honored them, cashing them on demand, and then receiving an additional 5% from the state when it made good on the obligations.

Unbacked paper receipts (the IOU's) for unbacked paper receipts (the dollar), there's a certain mad symmetry here.

Goldman Sachs Advising Short Positions on California, Wisconsin and New Jersey

Goldman Sachs, one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt, according to Bloomberg.

In the three months since Goldman recommended “shorting municipal credit,” the value of the Markit MCDX index of the derivatives’ price more than tripled, to as high as 278.33 basis points from 87.75. A basis point on a credit-default swap protecting $10million of debt for five years is equivalent to $1,000 annually.

It’s “disturbing” to advise investors to bet against the financial health of a state whose bonds Goldman helps sell,New Jersey Assemblyman Gary S. Schaer, a Democrat who chairs the Financial Institutions and Insurance Committee, said last week in a letter to Chief Executive Officer Lloyd C. Blankfein.

“New Jersey needs to maximize its presence in the credit markets, not to see its presence undermined.” Schaer wrote.

Short sellers borrow securities to sell, betting their value will decrease. Credit-default swaps, conceived to protect bondholders against default, pay a buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to debt agreements. They increase in value as perceptions of credit quality deteriorate.

As part of a September presentation to institutional investors on “Best Long and Short Risk Strategies,” Goldman recommended buying credit-default swaps on “a basket of liquid State General Obligation credits with current and worsening fiscal outlooks,” including California, Florida, Nevada, Ohio, Wisconsin and Michigan.

The firm also recommended the derivatives on states with “significant unfunded pension” and other retiree obligations, including Illinois, Connecticut, Hawaii, New Jersey, Massachusetts and Nevada.

Markets Indicate Growing Concern of Potential Bankruptcy By Some States

The credit default swaps of 5 states are now trading at over 100.

Michigan 192
California 165
Nevada 164
New Jersey 150
Ohio 104

These are not total panic levels, but they are very high. It shows increasing concern about holding paper from these states.

Credit default swaps are often used to manage the credit risk (ie the risk of default) which arises from holding debt. Typically, the holder of, for example, a government bond may hedge his exposure by entering into a CDS contract as the buyer of protection. If the bond goes into default, the proceeds from the CDS contract will cancel out the losses on the underlying bond.

For example, a pension fund owns $10 million of a five-year bond issued by Country X. In order to manage the risk of losing money if Country X defaults on its debt, the pension fund buys a CDS from Derivative Bank in a notional amount of $10 million. The CDS trades at 100 basis points (100 basis points = 1.00 percent). In return for this credit protection, the pension fund pays 1% of 10 million ($100,000) per annum in quarterly installments of $25,000 to Derivative Bank.

Schwarzenegger Proposes California Sales Tax Increase to 10.25%

California Governor Arnold "If My Bodyguards Lets Me" Schwarzenegger unveiled a plan today for a steep sales tax increase, new levies on alcoholic drinks and the oil industry, and deep cuts in services to wipe out a budget shortfall that is expected to swell to more than $24 billion by the middle of 2010.

The linchpin of the plan is the sales tax increase of 1 1/2 cents on the dollar, which could raise $10.8 billion through fiscal 2009-10. ...

Tax hikes during a recession, helluva a move, Governor.

Will the Treasury Start Bailing Out States With Funding Problems?

More evidence we may be headed into a period of remarkable inflation.

California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.

"Absent a clear resolution to this financial crisis," California Gov. Schwarzenegger wrote in a letter Thursday evening that was e-mailed to Treasury Secretary Paulson, "California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing."

Will the Fed print money to bailout states with funding problems? Is there even a chance the Fed, Treasury and the Bush Administration have the backbone to just say, "No"? Unlikely. Very unlikely.

-Robert Wenzel

Pull The Damn Traffic Lights!

Tom Vanderbilt reports:

The idea that made [Hans] Monderman, who died of cancer in January at the age of 62, most famous is that traditional traffic safety ­infra­structure—­warning signs, traffic lights, metal railings, curbs, painted lines, speed bumps, and so ­on—­is not only often
unnecessary, but can endanger those it is meant to protect...

As I watched the intricate social ballet that occurred as cars and bikes slowed to enter the circle (pedestrians were meant to cross at crosswalks placed a bit before the intersection), Monderman performed a favorite trick. He walked, backward and with eyes closed, into the Laweiplein. The traffic made its way around him. No one honked, he wasn't struck. Instead of a binary, mechanistic process--stop, go--the movement of traffic and pedestrians in the circle felt human and organic.

A year after the change, the results of this "extreme makeover" were striking: Not only had congestion decreased in the intersection-- buses spent less time waiting to get through, for example-- but there were half as many accidents, even though total car traffic was up by a third. Students from a local engineering college who studied the intersection reported that both drivers and, unusually, cyclists were using signals-- of the electronic or hand variety-- more often. They also found, in surveys, that residents, despite the measurable increase in safety, perceived the place to be more dangerous. This was music to Monderman's ears. If they had not felt less secure, he said, he "would have changed it immediately."

Downtown Los Angeles has the most totalitarian enforcement of pedestrian traffic laws in the country (probably the world). With no traffic from any direction anywhere, you are apt to get ticketed for crossing against the light, by motorcycle cops hiding from view.

If full totalitarianism comes to America, it will probably start in California.

Via Megan McArdle

The Terminator Is A Wimp When It Comes To Terminating Tax Increases

In fact, he proposes them.

California Gov. Arnold Schwarzenegger proposed during private negotiations over the weekend to close the state's $15.2-billion budget gap with a temporary but immediate one-cent hike in the state sales tax, according to legislative sources, LaTi is reporting.

Schwarzenegger has repeatedly vowed never to raise taxes.

Los Angeles County residents could face a separate half-cent-on-the-dollar sales-tax increase. The Metropolitan Transportation Authority board has proposed such a measure for the November ballot, with the money to fund transportation projects. If both the MTA and the Schwarzenegger proposals were to be implemented, the sales tax in Los Angeles County would jump to 9.75%.

The Terminator isn't very good at terminating spending either. State spending has increased 39% since Schwarzenegger took office in 2003.