FROM GOLDEN STATE TO GREEN STATE TO A STATE SANS ANY LUSTRE, THE STATE OF CALIFORNIA CONTINUES TO TUMBLE. ANCHAL GUPTA UNRAVELS THE DETAILS
The government of California is facing its worst ever debt crisis in half a century, largely due to the spiralling out state spending obligations and also owing to the negligible assistance from the Federal Government ever since the onslaught of global recession. The state faces the prospect of an over $20 billion budget deficit in financial year 2010-11 (July-June) that includes a $6.3 billion budget shortfall for FY 2009-10. And as the figures show, it could reach an eye popping $23 billion in 2012-13 and it will only partially reduce thereafter, that too, if economic recovery takes the pre 2008 trajectory. But for the time being, there are severe roadblocks to hamper the path to spending cuts that not even the ‘Terminator’ Governor Arnold Schwarzenegger can eliminate. The California Department of Corrections and Rehabilitation (CDCR) budget faces a $1.4 billion higher spending than that estimated in the July 2009 budget package. This is largely due to the massive spending required in the prison medical aid receiver programme and the lack of policy adjustments to bring about necessary reductions in the prison and parole budget systems. Secondly, the state failure to sell off the State Compensation Insurance Fund (SCIF), a quasi–public workers’ compensation insurer for the budgeted amount of $1 billion in 2009–10, will be added to the spending side. Thirdly, a nearly $ 1 billion extra spending in a particular minimum school guarantee scheme and $900 million higher than budgeted spending on the Medi–Cal Program – mainly due to the political wrangling with the Federal Government to obtain additional federal funds or flexibility to reduce program costs have only made the state sink deeper in quicksand. And a court decision to restrict the use of “spillover” gasoline sales tax and Public Transportation Account funds has only made matters worse.
Critically, almost all rating agencies like Moodys and Fitch have abstained from downgrading California’s credit rating to junk status and it is still somehow dangling to the investment grade branch. However, stern warnings have been given that if some dramatic steps are not taken, to reduce spending, California would be forced to default on its debt which largely consists of municipal bonds, which are retail bonds held by individuals (as they are tax exempt), while some part is also held by national municipal funds. Till date, assets in California municipal bond funds have been in excess of $46 billion while the state’s overall outstanding obligations on all types of bonds has reached $59 billion.
The government of California is facing its worst ever debt crisis in half a century, largely due to the spiralling out state spending obligations and also owing to the negligible assistance from the Federal Government ever since the onslaught of global recession. The state faces the prospect of an over $20 billion budget deficit in financial year 2010-11 (July-June) that includes a $6.3 billion budget shortfall for FY 2009-10. And as the figures show, it could reach an eye popping $23 billion in 2012-13 and it will only partially reduce thereafter, that too, if economic recovery takes the pre 2008 trajectory. But for the time being, there are severe roadblocks to hamper the path to spending cuts that not even the ‘Terminator’ Governor Arnold Schwarzenegger can eliminate. The California Department of Corrections and Rehabilitation (CDCR) budget faces a $1.4 billion higher spending than that estimated in the July 2009 budget package. This is largely due to the massive spending required in the prison medical aid receiver programme and the lack of policy adjustments to bring about necessary reductions in the prison and parole budget systems. Secondly, the state failure to sell off the State Compensation Insurance Fund (SCIF), a quasi–public workers’ compensation insurer for the budgeted amount of $1 billion in 2009–10, will be added to the spending side. Thirdly, a nearly $ 1 billion extra spending in a particular minimum school guarantee scheme and $900 million higher than budgeted spending on the Medi–Cal Program – mainly due to the political wrangling with the Federal Government to obtain additional federal funds or flexibility to reduce program costs have only made the state sink deeper in quicksand. And a court decision to restrict the use of “spillover” gasoline sales tax and Public Transportation Account funds has only made matters worse.
Critically, almost all rating agencies like Moodys and Fitch have abstained from downgrading California’s credit rating to junk status and it is still somehow dangling to the investment grade branch. However, stern warnings have been given that if some dramatic steps are not taken, to reduce spending, California would be forced to default on its debt which largely consists of municipal bonds, which are retail bonds held by individuals (as they are tax exempt), while some part is also held by national municipal funds. Till date, assets in California municipal bond funds have been in excess of $46 billion while the state’s overall outstanding obligations on all types of bonds has reached $59 billion.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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