By Chriss Street
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The State of
California was already facing a $19 billion budget deficit, had shorted K-12
public schools $8 billion and are releasing imprisoned rapists into
“community probation” when the California Legislature’s Democratic majority
voted last week to approve selling $4.6 billion in new state bonds to build
130 miles of railroad track through some of the most uninhabited farm country
in Central California. The arrogance of the leveraging the already insolvent state caused a volcanic public outrage, but the Legislature and Governor Jerry Brown were desperate to get their paws on $3.3 billion in federal grants from the Obama Administration.
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But in a shocking development, Moody’s Investor Services, who was expected to provide the credit rating to justify selling the debt, may have just torpedoed California’s credit rating by tripling their estimate of the state’s unfunded public pension liability from $38.5 billion to $109.1 billion liability and raising the annual cost of state pension funding by $7.3 billion.
California has long been ground zero for financially
dysfunctional government. Under the
California State Constitution, the Legislature is required to approve a
“balanced budget” each year. At the
start of the last year’s budget on July 1, 2011, California had an $8.2 billion
budget deficit carry-over from the prior year. No problem for Sacramento political
magicians to balance a budget, they simply estimated the state would collect $9.7 billion in capital gains taxes from the Facebook initial public
offering. Twelve months
later, the state has collected less than $1 billion from Facebook and the
deficit has grown by another $1.4 billion to $9.6 billion. This year the Legislature passed another
dicey “balanced budget” on the expectations voters would approve in November $8
billion in new sales and income taxes.
The key to California politicians being able to continue
their Ponzi spending far above the state’s revenues, has been the willingness
of ratings agencies, like Moody’s, to dutifully collect huge consulting fees
for providing the state with an “investment grade” credit rating. Armed with the Moody’s “Good Housekeeping
Seal of Approval”, municipal bond investors have been willing to loan
California huge amounts of cash.
But the bogus choo choo bonds may have been so toxic even
for Moody’s high tolerance for government shenanigans; they were the proverbial
“straw that broke the camel’s back”. If
Moody’s issued an investment grade credit rating and the railroad bonds
eventually default, the firm would undoubtedly be sued for billions of dollars
by lots of angry retired people who tend to be the main buyers of municipal
bonds.
This newfound conservatism by Moody’s comes at a very
in-opportune time for the State and its 58 counties and 478 cities. Each year, California governments have
borrowed huge amounts of money by selling low cost municipal bonds in late July
to finance the period until they collect the majority of their tax revenues in
December and April. The State of
California was expecting to borrow $28 billion and municipal governments were
anticipating borrowing anther $50 billion.
But any downgrades of the state or municipality debt from
investment grade to “junk bond”, would send the cost of borrowing up to Greek
like levels of 20%. This appears to be
exactly what just happened to San Bernardino, California and forced the city to file for an emergency Chapter 9 municipal
bankruptcy. According to Los Angeles
Times:
“The city's fiscal crisis has been
years in the making, compounded by the nation's crushing recession and
exacerbated by escalating pension costs, lucrative labor agreements,
Sacramento's raid on redevelopment funds and a city reserve that is tapped out”.
This same
language could apply to most of the cities and counties in California over the
last few years. The real reason for the
collapse of San Bernardino and the growing panic is Moody’s was about to
downgrade the city’s credit rating to junk.
With state and most local governments running out of cash, there will be
more bankruptcies in California. It
looks to me that it was the
train that broke California’s back.
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