California credit rating cut close to junk

[Adir Pykhtin]

Source: Financial Times

Published: July 7 2009

California’s debt rating was slashed by Fitch Ratings to triple B – two notches above junk – after the state was forced to issue IOUs for certain payments while it frantically tries to agree a budget.

Further downgrades are possible, Fitch said, if legislators and Arnold Schwarzenegger, governor, do not end a stalemate over how to close a $26bn budget gap. “This underscores the urgency to solve our entire deficit,” Mr Schwarzenegger said.

By issuing the IOUs for what is considered non-priority payments, including vendor bills and tax refunds, the state is taking steps to ensure debt service on California’s nearly $70bn in general obligations bonds, Douglas Offerman, an analyst at Fitch, said.

Read more: http://www.ft.com/cms/s/0/50c9fb04-6a82-11de-ad04-00144feabdc0.html?nclick_check=1

[msongs]

1. thanks to arnold and repubs who refuse to pass ANYTHING nt

[wroberts189]

2. But Arnold said he would fix the budget on Leno....

When he announced to great fanfare his candidacy.


"We will look at the budget and fix it"

Davis must be laughing his ass off.

[Psephos]

3. A state goes bankrupt for the same reason a person does - by spending more than they make

As one of the highest-taxed states, California can't exactly argue it's been starved for revenue.

The spending imbalance there has been irresponsible to the point of being immoral, and the day of reckoning has arrived...just as expected. It's been like watching a frame-by-frame train wreck for years now.

[Hulk]

4. And ALL those flag waving repug back during Prop 2..

Nice going. Cut those f*cking taxes, no matter how you rape your own state...as long as YOU don't have to pay taxes.

Pathetic slime balls. So proud of a measure that virtually f*cked California into Alabamahood.

[notesdev]

5. two notches too generous

I don't see any way in hell CA avoids default at this point, its legislators are in outer space and apparently think money comes from trees.

[comtec]

6. *ahem* the Legislatures are TRYING to increase taxes to PAY for everything

however the governator is VETOING EVERYTHING!!!!

so kindly.. S T F U!

[WriteDown]

9. The people voted to not raise taxes though...

The only option now is cut spending. CA is one of the highest taxed states in the nation so that is not the problem. The problem is intrinsically linked to the plummet in real estate prices. The CA housing was one of the hottest in the country and with all the buying and selling coupled with rising house prices, property tax revenue was going through the roof. Now that revenue is gone, but the State is still acting like that money is coming in.

[melm00se]

11. bingo

revenue has dropped (or projected to drop) 16% (2008/2009 vs prior year) and 1.4% (2009/2010) but expenditures have increased 6.2% y/y.

Somethings got to give. If revenues (via tax increases) aren't going to happen, then the other side of the ledger must be addressed: expenditures must decrease.

regardless of political/economic ideology, there are always items in the budget that are luxuries (i don't have the time to pick apart the CA budget but there is no way..as in zero...that every single line item is critical to the functioning of the state) that could be cut in order to close the deficit gap.

Close that gap by 40-50-60% by eliminating waste and pork and the governator would have virtually no choice but to sign on to a far lesser tax increase than he has vetoed.

[slackmaster]

13. Actually, personal income tax is by far the greatest component of California tax revenue

Followed by corporate taxes and sales taxes. Property taxes, which are paid directly to counties, are not really the issue.

[WriteDown]

14. Interesting....

I'm sure it is part of it though. I also think there are probably state tax stamps paid in real estate transactions, but admittedly, I'm not a native.

[slackmaster]

16. Here's a link to the summary for the most recent enacted budget

http://2008-09.archives.ebudget.ca.gov/Revised/BudgetSummary/SUM/8867193.html

Note that property taxes are not even shown as a revenue line item for the state. Please remember that next time someone tells you that our Proposition 13 limits on property taxes are the source of our budget problems.

[WriteDown]

17. Thanks for the link!

Interesting stuff.

[Xithras]

31. The Prop 13 induced dependence on income taxes IS the issue.

Prior to the passage of Prop 13, more than 80% of state revenues were obtained from property taxes, which is the traditional method of funding government services because it's stable and predictable. Following the imposition of Prop 13, the state had to become more dependent on fluxuating and sometimes ephemeral funding sources including sales taxes and income taxes to make up the difference. In the thirty years since, the state has become almost totally dependent on these taxes, which tends to swing wildly with the economy.

As an example, one of the biggest problems here is the collision of our dueling priorities. On one hand, Californian's want to pay income rather than property taxes to the state. On the other hand, we want to soak the rich. The result of this collision is that more than 60% of our personal income tax revenue is paid by the top 5% of income earners. While this sounds like a good thing to progressives, it runs into a serious problem in economic downturns. Where do those 5% make their money, after all? Mostly in stocks, real estate, and business investments. Those income sources are getting hammered, the incomes of the richest are dropping in response to the downturn (I recently read that California lost about 5% of its millionaires last year), and the state coffers, so dependent on that income tax revenue, is getting hammered in turn.

The long term solution is to fund the state using a more stable source of income that is less dependent on the whims of the current economy. The only two models that have proven themselves capable of accomplishing that are the VAT taxation model used by European nations, and the property tax model used by most U.S. states and formerly used by California.

You're pointing to a symptom of the problem as evidence that the Prop 13 problem doesn't exist, when the symptom you cite was caused directly by Prop 13 itself.

Just to be clear, I actually do NOT support a total repeal of Prop 13, but I do think it was the source of our problems and that it needs revision.

[WriteDown]

32. Given California's tremendous drop in property values...

I would argue against the "stable and predictable" statement.

[Xithras]

38. You would actually be incorrect in that assumption. Property tax revenues aren't declining much.

In spite of the economic downturn and plunge in property values, most Californians will pay MORE in property taxes this year than last year. Why? Ironically enough, Prop 13.

Prop 13 caps the base tax rate at 1% of the current assessed value, but increases to assessed values are limited to 2% per year. A person buying a home in Los Angeles in 1990 might have paid $150,000 for a 3 bedroom ranch, leading to an initial tax assessment of $1,500 per year. By the peak of the market in 2004, that home might have increased in value to $650,000. Following the plunge, based on state averages, that home is still worth about $300,000 today.

The 1% tax rate on $300,000 is obviously $3,000 per year. Because of the Prop 13 tax limitations, however, the owner of that home is currently paying taxes on only $181,000 of that homes value. The taxes paid by that homeowner have not only NOT declined, but will increase again in the coming year because the taxed value of the home does not yet equal the appraised value of the home.

The decline in property values is real, and it is impacting some parts of the state, but the declines are largely limited to homes sold since 2001, a relatively small percentage of the states overall housing stock. Some communities are reeling from these hits, but those tend to be communities that grew madly during the boom. The larger and relatively population stable cities are seeing only a minor reduction in revenues.

If California were still dependent on property tax revenues, we would certainly still be seeing shortages and cutbacks, but they would be minor in comparison to the mammoth shortfalls we're facing today.

On edit:
Minor math problem in my post above. The theoretical homeowner would be paying taxes on $218,500 of taxable value per year, and not $181,000. His annual property taxes would increase from $2,185 this year to $2,229 next year.

[Carl Skan]

39. It would also...

...have helped keep the real estate bubble in check.

Unfortunately, it would also mean another huge kick to the nuts of the already struggling real estate market if it were implemented now.

[WriteDown]

40. I was speaking more in terms of sales...

If you buy a home in CA, the property value is reassessed at that time, correct? Also, I know quite a few people who are hit with "special" assessments after they purchase a home.

[Xithras]

42. Base property value is assigned at the time of purchase.

Your taxation rate is limited to 1% of the value of the home at purchase time, but can increase 2% annually if the real value of the home increases.

And special assessments can only be levied by the voters. My own home is in two special assessment districts, which cost me about $400 extra per year. Those districts were created by local voters to build and upgrade local school facilities when state funds weren't sufficient to get the job done. These districts can't be created by the legislature or any other governing body and must be approved by the impacted voters themselves.

[WriteDown]

43. Exactly...

Given the robust real estate market the last few years, property tax revenue went up quite a bit. I remember some friends who were broadsided by property tax bills after they bought a house from an elderly couple that had been there 30+ years.

[slackmaster]

44. I agree with most of what Xithras wrote here, but one aspect is missing

The abuse of property reassessments by county governments to bring in as much money as possible. Property values in many parts of California were rising rapidly in the late 1960s through mid-1970s. People like my parents, who happened to get lucky in their choice of a neighborhood in terms of desirability, i.e. increasing market value, get soaked repeatedly for more and more property tax. It is important to note that wages were NOT rising rapidly at the time.

The San Diego County Assessor's rule at the time was to reasses any particular parcel on average once every four years. My parents' home (in La Jolla) got reassessed almost every year from about 1969 through 1977. The market value of the home quintupled, and so did their property tax. But not their income, and the cost to the county to provide services to our household did not change substantially either. For those who are familiar with the area, other neighborhoods that memorably got reassessed every year included Point Loma, Rancho Santa Fe, and Del Mar. Basically the county was soaking the "rich" in order to bring in as much money as possible.

That's really what led to the groundswell of support for Proposition 13. Many people in those neighborhoods lived on fixed incomes. People want their tax burden to be predictable so they can budget for it. Most families run their finances responsibly. We expect the brilliant, sophisticated minds of our elected officials to do the same for the state.

[glitch]

19. No jobs means no income tax. Skyrocketing unemployment is a huge hit to state revenues. nt

[slackmaster]

12. The people here have made it clear that we don't want higher taxes

Working middle-class Californians pay the heaviest tax burden of anyone in the country.

[notesdev]

15. You can't get blood from a stone

You can't successfully tax a person with no job and no money.

Ironically, you can't successfully tax a person getting paid in IOUs, either. Banks are gearing up to refuse them for deposit (as they should, since an IOU is not money and is likely a false promise to begin with).

CA's revenue shortfall is on the order of 50%. You would need to double every single tax in order to keep revenues steady in this environment.

There's no more money, and the borrowing-to-fund-deficits game has met its ultimate end, the same end that you would face if you ran up the credit cards in the same way.

The ONLY choice is cut spending now, or be forced to cut spending when the money runs out. For CA, the day when the money runs out is here.

[Flaneur]

23. So, what do you cut?

Health care for the poor?

Education?

State workers' pay?

All of the above?

I see the California Bureau of Narcotics is whining because they're having to lay off narcs. Now, that's a cut I can get behind.

[notesdev]

25. Here's one proposal

http://globaleconomicanalysis.blogspot.com/2008/01/mishs-california-budget-proposal.html

[Flaneur]

29. Whew, that's brutal!

So many oxen would be gored you'd be slipping around in a pool of blood the size of Riverside County.

People would die. Literally.

No health insurance for poor people, massive reductions in service for poor people.

Cuts in just about everything, except he's happy with the proposed funding levels for cops and prisons. Maybe that's smart. If all his other cuts were enacted, there would probably be a social revolution.

I notice this guy talks about Austrian economics. Does that mean he's a libertarian-leaning disciple of Hayek? Sure sounds like it.

Also, how many lay-offs does this imply? How does that affect the economy?

[notesdev]

41. Nonsense

That's not what the proposal says at all.

Keep in mind that if cuts are not made then the blood-in-the-streets social revolution comes anyway (no later than October) when the money runs out.

What then? Will you prefer living under martial law?

[Flaneur]

24. How about taxing corporations and the wealthy?

California is a land of fabulous wealth, of private splendor and public squalor.

Tax the rich now, so we don't have to eat the rich later.

[notesdev]

27. And they move out - what then?

Maryland tried that and suffered a massive loss of tax revenue, as their tax targets simply up and moved to other states like Delaware.

Corp taxes are already pretty high and are job killers. Driving corps out of state isn't going to help CA generate more revenue.

Ask yourself: "Who is Bruce Malkenhorst and why does he get $600k/year from the state of California?" and you will be on the road to solving the problem.

[Flaneur]

30. So Lindsay Lohan and Paris Hilton are going to move to Iowa?

to avoid paying slightly higher taxes?

Yes, I understand the negatives of tax increases, but there has got to be room for some targeted increases.

Perhaps a conspicuous consumption tax?

If you can buy a $10 million home, you can probably afford a $10,000 surtax.

If you can buy a $150 steak dinner, you can probably afford a $15 surtax.

If you can shell out $500 for a ticket to a rock concert, let's make it $550.

[Carl Skan]

33. Which is why...

...their tax bracket is already paying the 2nd highest marginal state income tax rate in the nation. Between state and federal income tax, they are paying nearly 45% of their income in taxes. That "tax the rich" mantra is indicative of somebody who hasn't actually looked at the marginal tax rates.

If taxing the rich is the answer, why, with the relatively high income levels and extreme end of the tax rates, is California in this situation?

[WriteDown]

34. For people like that...

changing their legal residence is no problem. You're ideas would not generate much revenue though since the amount of sales of those items is very small.

[notesdev]

36. They'll declare a second home in another state to be their residence

Extremely easy to do, and bam there goes your tax revenue. This just happened in Maryland, and now they're screwed worse than they were before this. Something like 100,000 high-bracket former taxpayers suddenly became residents of Delaware, Pennsylvania, and Virgina... now MD's problem still isn't solved and they lost a significant amount of revenue.

Governments have to start doing business honestly, that's really the bottom line. No more of having 25%+ of everything sucked away directly by graft and corruption. No more promises of gold-plated benefits that can't be made good on. No more Bruce Malkenhorsts.

[Carl Skan]

28. I bet nobody in California thought of that before....

California has the second highest top marginal tax rate the last time I checked. They're also in the top few states for corporate tax rates.

If it's not working now, what makes you think going even more to the extreme would make it better?

[Flaneur]

35. Okay, I give. I'm not an economist. What's your solution?

All I know is I see all the wealth in this state, yet we can't afford to educate our young or care for our disabled.

[Carl Skan]

37. Why are other states?

Why are other states able to make ends meet with lower incomes and lower tax rates? California already ranks 15th for per capita tax revenue.

Revenue is only part of the problem, spending too much is as well and the only way to solve that will mean cutting into programs that people don't want to cut. You can parrot the whole idealist "that's evil to take away social programs" spiel all day long but in the real world you don't get to spend what you don't have just because you have good intentions.

My solution isn't more of the same stuff that got them there like what you proposed. It's common damn sense, don't spend money you don't have. I know that in my business if I keep spending like I'm grossing what I did two-years ago, I'd go broke. What makes government think they're above having to cut back spending in down times?

Please don't think I'm picking on California. It's something we're all going to have to deal with when the Chinese decide they don't want to keep us as their little charity project any longer.

[Winterblues]

22. Not exactly true from what I have heard

I have read it takes a two thirds majority in the Legislature to introduce or increase taxes and Republicans have more than a third minority. I have not heard of any vetoes on the Budget by Ahnold.

[Vidar]

7. Nice job, Governor girlie man.

[Vidar]

8. deleted dupe

[Odin2005]

10. Ahhhnold is an economic guhhly mahn.

[Carl Skan]

18. Leading the nation again

Working in the environmental field, you can almost always tell what's coming down the line for federal regulations by watching California.

The same can be said for the current financial situation and what our nation is going to go through when the Chinese cut us off.

[Hydra]

20. Yup

There are rumbles all over about using the dollar as reserve currency, let alone lending to us endlessly.

People say that we're safe- that they depend on us as much as we do them. I suspect there's a logical limit, though.

[Gregorian]

21. It was better when it was cherries, apricots, pears.

Cue the laugh track.

[Flaneur]

26. Marijuana growers and sellers will kick in $1 billion

...if we only let them. See: http://www.druglibrary.org/taxes/

There is a tax and regulate bill in the Assembly. There is also a looming 2010 tax and regulate initiative. Perhaps the fiscal crisis will result in some rethinking of pot prohibition.

And for those critics of the initiative and referendum process, we'd still be locking up wheelchair-ridden grannies for using marijuana as medicine if we had waited for elected officials to act.