Time Catches Up With California’s Finances

The great California financial meltdown is reportedly getting closer. D-Day is on or about July 28 according to John Chiang, the state’s Controller.

From Reuters, here are the grim numbers:

California’s government risks a financial “meltdown” within 50 days in light of its weakening May revenues unless Governor Arnold Schwarzenegger and lawmakers quickly plug a $24.3 billion budget gap, the state’s controller said on Wednesday.

Underscoring the severity of California’s cash crisis, Controller John Chiang, who has previously warned the state’s government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.

Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger’s budget plan by $827 million, Chiang said.

He warned California’s state government is speeding toward a financial disaster unless officials act urgently to balance its books.

“Without immediate solutions from the governor and legislature, we are less than 50 days away from a meltdown of state government,” Chiang said in a statement.

Most observers are postulating that either California will have to massively cut programs or rely on a federal bailout. Given the dysfunctional nature of its political system any belt tightening is probably out of the question so that would theoretically leave federal assistance as the only alternative.

There may indeed need to be some sort of assistance from the feds in order to get through a short-term cash crunch but don’t discount the possibility that some accounting gimmicks stave off any ajor disaster. I live in Arizona, arguably in almost as bad financial shape as California, and I continue to be amazed at the budgetary shenanigans that legislators come up with to kick the can out a fiscal year or two. I think the hope is that the world returns to 2006 status, revenues flow in and all is well.

There would seem to be three questions surrounding federal assistance to California.

  1. One would it come with strict conditions?
  2. How many other states would get in line?
  3. Where does the money come from?
Ithink that the government would try and attach conditions but whether they’re strict is another issue. The federal government can’t dictate that states adopt policies that either go against their constitutions or require the votes of legislatures or citizens of the state. That alone is going to limit the range of conditions that may be imposed. There are also going to be significant political considerations — do you insist on deep cuts in highly unionized state employees’ compensation, for instance. Overall, it might be relatively difficult to attach strings with much clout.
I don’t need to say much about question #2. You can probably start ticking off the list of those that will be in line.
The money will be there regardless of how strapped the government might be. No Congressperson is going to withhold funds for fear of retaliation if his state needs to get in line. Most likely, a new meaning to the TARP legislation will be divined and that pot replenished by the bank repayments will be used to service the states. We probably should come up with a new name for TARP, though. Send me any recommendations.
The California meltdown should at least keep us amused for the next month or so. Face it, you’re hooked on all of this melodrama. Remember how boring the Clinton years were? Isn’t this a lot better than sex scandals?
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