This is a follow-up to Rodney Johnson’s post today on state finances.  In the Wall Street Journal, we read today that “More Pain for State’s Taxpayers, Cities” is on the way.  The Journal writes,

The cost of shoring up Calpers, the troubled $200 billion pension fund for California public employees, will ultimately fall on the state’s 38 million residents, who are already dealing with tax increases and reduced public services.

The state and local governments are contractually bound to increase their payments to Calpers to help it make up for its investment losses of more than $50 billion in the fiscal year ended June 30.

California already had to spend $3.3 billion from its stretched general fund in the last fiscal year to make up for Calpers poor investment performance.  Cities and counties too have had to pour new monies into the fund at a time when they can scarcely afford to pay the electric bills in their offices.

There is no easy way out here…and green shoots or not, California’s problems are just beginning.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

California is in the process of selling $8.8 billion worth of notes that come due next May and June.  That would seem unusual given that just last fall the state couldn’t sell bonds, recently the state had to pay vendors with IOU’s, and starting in November the state will forcibly “borrow” money from taxpayers by over-collecting income tax which will be repaid in 2011.

So why is the sale of notes going so well?  Because the state is paying over 100 basis points more than other state issuances, and is paying 130 basis points more than comparable treasuries.  Now this probably would not persuade a sophisticated investor, since 100 basis points is merely 1%, but the state of California went further.  They advertised.  Using a multimedia campaign that involved radio and newspaper, the state sold itself to individual investors not only in California, but also in Texas and Florida.

For good measure, Moody’s and S&P gave the notes their highest rating.  I’m sure that’s very comforting, unless you are well aware of the quality of these rating services over the past several years.

Clamoring for California Debt

http://online.wsj.com/article/SB125362502390330681.html

Rhode Island is following in California’s footsteps.  The tiny state is suffering economically, with unemployment reaching 12.7%, second only to Michigan.  To deal with their incredibly shrinking tax receipts, legislators have devised a plan that includes having just over 80% of the government workforce stay home a total of 12 days before the end of the fiscal year (June 30, 2010).  That’s amounts to just over a full paycheck for those that are paid twice a month.

The WSJ reported today that Michigan had offered to sell excess prison capacity to California to help that state deal with prison overcrowding.   The deal fell through, as California found cheaper “accommodations” elsewhere.  But this got me to thinking:  how exactly would selling prison services be classified in the state accounts?  Is it an “export”?  Tourism is considered an export business…might prisoners be accounted the same way? Read the rest of this entry »

Turns out people in CA really are creative…not just in Silicon Valley, but in Sacramento as well.

SACRAMENTO, CA - Come November, you may notice your paycheck is a bit smaller. As part of the state budget fix, lawmakers are “borrowing” future income withholding taxes in order to raise $1.7 billion for this fiscal year.

“It’s not raising taxes. It’s just getting the money, borrowing from you for a short period, non-interest bearing, and you’ll get it back later,” explained Sacramento accountant Ken Astle.

Astle said that taxpayers can file a DE-4 form to change withholdings and increase exemptions to compensate for the extra withholdings.

Taxpayers will get their money back come tax time in 2011, unless they underpaid their withholdings.

In addition, the state is also requiring individuals and business that make estimated tax payments to pay more earlier - another accounting move that is designed to help the state balance its budget this year.

Critics charge that the state is only delaying the task of balancing the budget without accounting gimmicks.

http://www.news10.net/news/local/story.aspx?storyid=64236&provider=top

H/T Cal Garvin for pointing this out!

With all the talk of economic recovery — even in these pages — we think it’s a good idea to keep things in perspective.  Yes, nationwide, things are getting less bad.  But the aftermath of the property bust will be with us for quite some time, particularly in Southern California, where there was overbuilding of practically everything — houses, retails, offices, you name it.

This WSJ headline pretty well sums up the situation: “Vacancies Suppress Southern California Recovery.”

How  bad is it?  Office vacancies in San Bernardino and Riverside counties have more than tripled, rising to 24.6% from 8% in 2006.   Orange County’s office vacancy rates stands at a comparable 20%.   The Inland Empire’s retail vacancy rate has more than doubled to 10.6% from 5% in 2006 (and will likely rise further in the sluggish consumer environment we see ahead).  Anecdotal reports tell of new office buildings sitting completely empty and shopping malls defaulting on bank loans.  It is truly a depressing picture. Read the rest of this entry »

The State of California has a balanced budget proposal…sort of.  To close an ever-widening $26 billion gap, the legislature has proposed $15.6 billion in cuts, $4 billion in revenue from sale of property, $3 billion in accounting gimmicks that accomplish nothing, and $2 billion in theft borrowing from local taxes.  Apparently, when the times get tough, the tough pillage their neighbors.

California is using a provision that gives it the ability to forcibly borrow (everyone else recognizes this as stealing, even if you intend to give it back later…isn’t that a joyride in police parlance?) local monies and then the state must pay it back within 3 years.  Nevermind that locales are suffering.  Nevermind that some of the suffering in those locales is being caused by the IOUs the government sent out in lieu of real cash to vendors across the state.  Nope, none of it matters.

Apparently, beyond my thoughts on Monday about consumers being out for themselves when it comes to determining how we run our households, state governments can be out for themselves as well.  Even when it involves ripping off their own constituents so that they won’t have to do the job they were elected to do.

We are almost 2 years into this economic shakeout, and we still haven’t recognized the most basic of notions of where we are - that we must get by on less.  People know it.  Consumers behave like it.  But as soon as we move from private consumers to politicians, we seem to behave as if by some magical force the economic engine of yesterday will come roaring back.  Every day that we beg, borrow and steal in anticipation of this return is another day we have squandered instead of trying to arrive at workable long-term solutions.

On June 25th Charles Sizemore wrote about the impending move of CA to issue IOUs instead of paying their bills as of 7/1.  That move has been implemented.  Now, some big banks are answering Charles’ question with an emphatic, “No!”

The WSJ reports this morning that several of the biggest banks, including B of A, Citi, Wells Fargo, and JPM/Chase were among those that declined to accept the notes.  Apparently this dismayed some state officials, as a spokesman for State Controller Chiang said, “We don’t want anybodty to suffer who can’t redeem them when they need cash.”

It’s really hard to get past the hypocrisy of state that refuses to balance its budget and then refuses to pay its bills blaming banks for refusing to accept the funny paper.

The CA IOU notes mature in Oct and pay 3.75% interest.  Or do they?  What assurance does any holder of these IOUs have that the state will actually cough up the cash in Oct?  Didn’t these same holders, being vendors to the state or some other service provider to whom the state owed money, already get led down the primrose path?

Don’t be fooled, this is a bond offering pure and simple.  Except it was done through force, where the state shoved down the throat of service providers CA issued bonds in the form of an IOU.  Why would they do such a thing?  Because the bond market isn’t so keen on CA paper right now.  In fact the same article notes that Fitch downgraded the state to BBB.

Why issue bonds, going through all of the hassle and trouble with the securities market and their pesky regulations, when you can basically foist your troubles onto your vendors?

Problem solved!  Unless of course, you were one of those vendors who is now stuck with something that nobody wanted in the first place - more CA debt.

In what might be the most shameless grab for revenue by any level of government, many states are now renewing a push to claim unused gift cards as “abondoned property.”   As the Wall Street Journal reports, “Since the recession began, states have been aggressively tapping so-called abandoned property — anything from gift cards to dormant bank accounts and safety-deposit boxes. About half the states collect unused gift cards after a period of two to five years.” (Link to article: “Governments Grab Unused Gift Cards.”)

Many companies book unused giftcards as income  as a certain amount of time has passed, assuming that the cards will never be used.   Home Depot, for example, reported $37 million in revenue from unclaimed cards in the past year, and American Eagle Outfitters collected more than $12 million.  Why the states would think they were entitled to this money is beyond me.  I suppose desperate times call for desperate measures.  And given the horrid condition of state finances — California for one is now officially paying its bills with IOUs — actions like this are only the beginning.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

A quick note on the state that just can’t seem to get out of its own way:

Reuters reports: “California Set to Issue IOUs as Fiscal Crisis Weighs.”

“California’s controller said on Wednesday that he would have to issue IOUs in a week if lawmakers can’t quickly solve a $24 billion budget deficit, and the state’s treasurer plans to tap a reserve fund to meet debt service costs.”

Writing IOUs to pay the bills and meet debt service costs….  This won’t end well.  Californians, one way or another, are about to get hit with a large tax hike even while their state services are cut.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy