Before you sign on to the theory that California just spends too much and cannot afford the generous services it used to provide, take a look at this excellent work from OC Progressive. These kinds of fiscally maddening deals are a dime a dozen in the failed Schwarzenegger era, because he refused to talk straight with Californians and make them understand that ponying up at the beginning would save tens of billions in the long run.
When the state decided to borrow 1.935 billion from local governments, the local governments were pretty damn skeptical that the state would have the money to pay them back in four years. So the legislature passed a bill, ABX4 15, that authorized bonds with the state’s highest rating, and agreed to pay the fees and interest to issue the bonds so the cities and counties wouldn’t have to try to borrow the money individually.
I was sure I misheard the terms when Noreen Evans was introducing the bill to securitize the borrowing from local government. It just couldn’t be possible that the state was authorizing 340 million in issuance fees on 1.935 billion in four year bonds and authorizing up to 8% in interest.
That would be almost a billion dollars in interest to borrow 1.9 billion for four years. That’s just batshit crazy.
Holy Shit. I heard right, and I calculated it right.
Those are rates that would make a loan shark blush. And it’s not the first time. You can go back further, but reducing the vehicle license fee in 2003 (remember Arnold’s campaign events where he would smash up a car) led to an orgy of borrowing, with interest payments piling up on the back end. Over time, as credit becomes harder and harder to access and people become less and less trusting of the state’s fiscal structure, they have to design elaborate deals like this that just give away billions at a time for no reason. Servicing debt is the fastest-growing segment of the budget, along with prisons.
And these stupid schemes get forced on the public by a process where radical “go into debt and spend” conservatives hold a minority veto over sensible revenue solutions. We handed out two billion a year in corporate tax breaks in February, the repeal of which would have negated the need for this local government borrowing which costs an extra billion dollars on top. The Yacht Party and the Governor refuse to be honest with the public, and tell them “we’re saving your money” while wasting a billion dollars in interest without blinking. This is why we desperately need reform and the restoration of representative democracy where the legislature can reflect the will of the people.
There is a really brilliant post on the rec list that covers almost everything I would have covered if I had spent the same amount of time on the issue. I guess pimping someone else’s diary is ok, right?
The state is not going to come out of this on it’s own. There is going to have to be a bailout. Where do we get that next $15B? Probably not from taxes. And even if the GOP was interested, that’s not a good idea in a deep recession. (Neither are cuts! Must STIMULATE!)
Now remember: 8% state bonds are TAX FREE for Californians. What else can you get out there that’s 8% net of taxes that’s a bond? Probably total junk corporates, emerging markets… stuff that in reality has less chance of a bailout than California does. I doubt they trade for par for very long, so some people will get very rich off those bonds. They’ll go down and people will be getting close to a 9-10% tax free yield out of us!
The Fed needs to open the window to the states sooner rather than later so that we can restructure all of this debt.
Either that or some other magical pony plan… otherwise, this state is going to collapse.
This all sounds really familiar. In fact I’m certain I’ve seen this movie before. Only it starred Dubya in DC, and it was a dud. Betting the box office isn’t any better on the Sacramento version.
Before anything at all can be done, before any kind of restructuring or whatever we’re going to wind up with, we have to get rid of that insane 2/3s…
all they know, and what they always say to newspaper reporters, is that “politicians have run CA into the ground.”
But they don’t know why or how. If they knew about stuff like this, it’d change the whole game.
Maybe even ‘change the Be’ a bit around sacramento…
I prefer “borrow and spend Republicans” to your title.