California IOUs

[Americano]

After years of balancing its budget by issuing general obligation bonds (debt), California is facing a $42-billion budget deficit that for the first time it can't just put on the public credit card:

http://online.wsj.com/article/SB123213299391391031.html

Cut spending? The governor mandated all state employees take two days off monthly without pay in this time of fiscal crisis and the powerful civil service unions that actually run California sued the state to put a stop to that idea. California taxpayers might not get their refunds, construction of schools and other public projects will cease but those servants of the public will get their full pay.

The California issue is one common in many states experiencing reductions in tax revenue due to a rapidly declining US economy. Add no demand for their bond issues normally used to foolishly bridge the income/expense gap and the dilemma is complete. If they think this year is getting tough, wait until 2010.

How does a state the size of California plan for reduced tax revenue? The logical answer is to reduce spending, but we all know that's just not the American way. Yet. My state just released its budget planning points (no numbers yet) and the worst-case scenarios are unemployment increasing through the first quarter of 2010 (no statement about what might make it slow down at that point) and up to a 30% reduction in tax revenue.

Anyone have any solutions?

[The Drunk Guy]

After years of balancing its budget by issuing general obligation bonds (debt), California is facing a $42-billion budget deficit that for the first time it can't just put on the public credit card:

http://online.wsj.com/article/SB123213299391391031.html

Cut spending? The governor mandated all state employees take two days off monthly without pay in this time of fiscal crisis and the powerful civil service unions that actually run California sued the state to put a stop to that idea. California taxpayers might not get their refunds, construction of schools and other public projects will cease but those servants of the public will get their full pay.

The California issue is one common in many states experiencing reductions in tax revenue due to a rapidly declining US economy. Add no demand for their bond issues normally used to foolishly bridge the income/expense gap and the dilemma is complete. If they think this year is getting tough, wait until 2010.

How does a state the size of California plan for reduced tax revenue? The logical answer is to reduce spending, but we all know that's just not the American way. Yet. My state just released its budget planning points (no numbers yet) and the worst-case scenarios are unemployment increasing through the first quarter of 2010 (no statement about what might make it slow down at that point) and up to a 30% reduction in tax revenue.

Anyone have any solutions?
Communal living. ;)

[Americano]

Communal living. ;)

You mean like four families living together and they alternate which family is responsible for a criminal action to support the commune?

[partofme]

Decriminalization of drugs would create tax revenue, allow for a decrease in law enforcement spending, and create new jobs. Seriously.

[Michael]

After years of balancing its budget by issuing general obligation bonds (debt), California is facing a $42-billion budget deficit that for the first time it can't just put on the public credit card:
On a GDP/capita basis, that deficit is MASSIVE and larger than the largest deficit recorded in Canada post WW2 (Canada and California are fairly similar size pop/GDP - Cali is just a smidge larger).

That's insanely large money given the scale of the Canadian government (including maintaining a military establishment, albeit a smallish one).

Anyone have any solutions?
That kind of number just defies program-cutting solutions - it is too massive.

Seems like the USA (like everywhere else) has a structural tax-revenue problem built into the government finance model.

In the USA, State finances are heavily dependent upon sales taxes which are extremely cyclical. When the economy booms, so does the State treasuries. When the economy slows down, so does the sales tax revenue, causing significant swings in revenues.

This is very different than the US government which derives its income primarily from income tax (about 75% of federal revenue is income tax) and this is much more stable revenue stream than sales taxes are.

Thus, every time there is an economic downturn, all of the States suffer serious revenue shortfalls very quickly. The emergency budget cuts that kick in tend to make the economic downturn worse. It is a vicious and nasty cycle.

No, I don't know any solution - not a short term fix - only a long term issue of restructuring government finance systems.

Canada has a particularly nasty tax-revenue problem. About 90% of all government tax revenue collected in the country is collected by the federal government - but of course, 75% of all government spending in the form of hospitals, schools, welfare, mass transit, roads, highways, etc, is all done by the provinces or municipalities (or counties). This creates a weird miss-match between the control of revenue and the supply of services that are totally unconnected.

Actually, the US situation is similar to the Canadian example here, only not quite as stark.

[Americano]

Decriminalization of drugs would create tax revenue, allow for a decrease in law enforcement spending, and create new jobs. Seriously.

I agree, but it's far too logical and, unfortunately, politically unpalatable. The first thing that pops into a politician's mind when the issue is discussed is being blamed for wanting to 'make sinful drugs readily available to little johnny and Mary'. Forget the fact that a school kid anywhere in the US can score drugs easier than a can of beer.

[Americano]

On a GDP/capita basis, that deficit is MASSIVE and larger than the largest deficit recorded in Canada post WW2 (Canada and California are fairly similar size pop/GDP - Cali is just a smidge larger).

That's insanely large money given the scale of the Canadian government (including maintaining a military establishment, albeit a smallish one).


That kind of number just defies program-cutting solutions - it is too massive.

Seems like the USA (like everywhere else) has a structural tax-revenue problem built into the government finance model.

In the USA, State finances are heavily dependent upon sales taxes which are extremely cyclical. When the economy booms, so does the State treasuries. When the economy slows down, so does the sales tax revenue, causing significant swings in revenues.

This is very different than the US government which derives its income primarily from income tax (about 75% of federal revenue is income tax) and this is much more stable revenue stream than sales taxes are.

Thus, every time there is an economic downturn, all of the States suffer serious revenue shortfalls very quickly. The emergency budget cuts that kick in tend to make the economic downturn worse. It is a vicious and nasty cycle.

No, I don't know any solution - not a short term fix - only a long term issue of restructuring government finance systems.

Canada has a particularly nasty tax-revenue problem. About 90% of all government tax revenue collected in the country is collected by the federal government - but of course, 75% of all government spending in the form of hospitals, schools, welfare, mass transit, roads, highways, etc, is all done by the provinces or municipalities (or counties). This creates a weird miss-match between the control of revenue and the supply of services that are totally unconnected.

Actually, the US situation is similar to the Canadian example here, only not quite as stark.

I agree CA's problem is far too massive to resolve with spending cuts. That leaves but two options, default or an increase in taxes, and the CA legislature is to this point holding fast against a tax increase. Could get really interesting in 2010.