I’ve seen a bit of confusion in traditional media accounts of California’s budget situation, and whether or not the state should receive a federal bailout.  This seems to go toward the idea that without federal aid, California will default on its creditors and go bankrupt, and the federal government has a compelling interest in keeping that from happening.  You can argue whether or not it would actually make sense for the state to default – it certainly worked pretty well for Argentina, despite neoliberal fuming to the contrary.  And as noted by Peter Schrag in the above-linked entry, the Governor has never asked for any help of this kind, and given his status as a born-again Friedmanite, would probably reject it.  But Paul Kedrosky, who has read the relevant law, explains in a piece supporting default that California really cannot do so.

The root issue, of course, is that California is insolvent, and irritating people like S&P analysts keep noticing. The state — let’s call it Latvia by the Pacific — has a $24-billion budget gap that must be closed for it to continue operating (and I use that word advisedly). Without a clear sense of how that will happen rational creditors are going to be increasingly skittish about filling the hole. Now, does that mean California can’t sell enough bonds to backfill the gap this time? You bet it can, and it will. This is part Schwarzenegger/Lockyer Financial Theater, and partly a laughably transparent attempt to demonstrate budgetary semi-competency in hopes of a few basis-points of relief on the inevitable bond sale. That’s all.

Because California has $5.7-billion in debt servicing obligations. And while that will grow, debt occupies pride of place in California’s constitution — only education must be paid off before the next slug of cash goes to creditors. Get that? Healthcare, prisons, and other frivolities can all go to rack and ruin, but creditors must be paid, constitutionally speaking. That means, if you’re looking at this through the gimlet eyes of muni-bond ghouls, that California has something like $50-billion in budgetary space to make its $5.7-billion in payments. It’s pretty easy to calculate that California can make the payment nut, even if it has to close hospitals, release prisoners and stop patrolling the highways to do it.

Now, Kedrosky thinks this is theatrical and should not be rewarded.  I say it’s the perfect reason for California, and actually all states with this kind of constitutional arrangement, to receive those federal loan guarantees to stop gouging from Wall Street for short-term bonds.  Not only do Schwarzenegger and Lockyer know we have to pay back all out debt, so do the bondholders and the rating agencies.  It’s almost literally impossible for us to default on those bonds, short of the entire state’s residents spontaneously getting fired at once.  If those loans will obviously get paid back, the interest shouldn’t be set at payday-loan rates.  And the federal government could very easily remedy that situation, at no cost and probably at a profit, as they reaped from the loans to New York City in the 1970s.

Is it a problem that California operates at the mercy of its creditors?  In a sense.  Is there a remedy?  At the least, there’s a way to get some equitability into the process so that we aren’t blowing money on Wall Street firms who have been bailed out by those same Feds ten times over.  In addition, this kind of thing weakens the municipal bond market, and the federal government has an interest in keeping credit flowing through that.

…H/t to John Myers for tracking down the obviously dubious story about Washington rejecting California officials clamoring for a “bailout”.  Nobody was doing any such thing.  They were asking for loan guarantees, which they’ve been doing for months and months.  Horrible reporting from WaPo.  

We had, and continue to have, an unfortunate situation where a good deal of our staff, including myself and Robert, were out of town at a crucial time for California and its budget problems.  Robert will return at the end of the month.  For myself, it’s good to be back and delving into this all again.

I have about 30 posts I want to write about the developments of the past week and a half, but I want to try and alleviate the confusion over that Washington Post article stating that the Obama Administration spurned a request for aid for the state.  Outside of Zoe Lofgren, a Congresswoman, nobody is named in this request, nor is the request defined.  It refers late in the article to one letter from Bill Lockyer to Tim Geithner that appears to reference federal loan guarantees, which is, again, not a bailout.  And the Governor has tried to rule out borrowing to deal with the cash crisis anyway.  So I question whether anyone has discussed any kind of dollar transfer from the federal government to California at all.  I think this article hangs on an extremely thin reed.

Now, I do think the government should consider offering loan guarantees, to stop the gouging of California going on from Wall Street.  But I do not think that California progressives should WANT a “bailout” in the more traditional sense.  It sounds like it would be a nice and tidy solution, and maybe the strings attached could make it easier for the state to get its business done.  But that’s very speculative, and so we have to consider who such a solution would bail out.  Clearly, it would bail out the failed Democratic legislature for refusing to lead and take a long-term view on reforming the state governmental process to allow a return to stability.  We know that, with revenues dropping like a rock, in six months the projections will fall short again.  They have for about 15 straight months.  Which means what, another bailout?  That simply isn’t a long-term, sustainable solution.  Some may say that it would keep the poor from dying, but it seems to me it would only delay such an outcome.  Heck, we know that California last issued IOUs during a budget crisis in 1992, during a MILD recession.  The structure of state finances simply means that we will lurch from crisis to crisis forever without a permanent fix.

We have solutions and we know what they are; there’s really no mystery, other than the fact that legislative Democrats refuse to dare speak their name.  A federal band-aid would delay those solutions once again, as they have been delayed for 30 years.  We simply will never fix this if we keep deferring the California dream and persuading others to mop up the mess caused by failed leadership.

More generally, a while back on Calitics (can’t find it right now) I argued for a permanent federal fiscal stabilization fund that could be tapped if deficits hit a certain percentage.  States could contribute with a federal match at 6:1 or something.  We need to permanently end the paradox of state budget cuts during an economic downturn, and it should not be a stopgap fix.  If people want the federal government to help, it should be mechanized and durable, and enhance economic recovery by kicking in when recovery is needed.

This may be a contrarian view, but I think a bailout would delay the changes desperately needed, nor would it even help the most vulnerable in society over the long-term or even the short-term.  We need to deal with the problem at hand.

Robert makes quick work of the new and not improved Gov. Schwarzenegger prescriptions for disaster, trying to fill an entire $21 billion dollar deficit (which is now more like $24 billion according to the Legislative Analyst) with cuts.  I cannot completely argue with the decision to cancel the RAW (revenue anticipation warrants), because bad borrow and spend policies, as Noreen Evans explained, part of the problem in Sacramento, not the solution (“Like paying your bills with your credit card when you don’t have the money to afford it.”)

But to replace that entirely with cuts to things like CalWorks, Cal Grants and Healthy Families would place a massive hole in the social safety net.  This would, for example, roll back children’s health coverage at the moment that the federal government would expand it.  And nobody ought to look forward to being the only state without emergency poison control services.

This is going to get worse, by the way.  The offshore drilling plan Arnold proposed lost a key environmental supporter this week, threatening that $1.8 billion solution.  And Tim Geithner’s apparent suggestion that loan guarantees require an act of Congress, while immaterial to the budget at this point, really hinders the ability to solve the short-term cash crunch.  Basically the entire budget would have to get passed before one dime of borrowing could take place, otherwise the borrowing is unlikely to even happen, and even when it does it will be prohibitively expensive.

So, what to do?  I think Greg Lucas is on to something.  It’s time to embarrass Governor Hoover.  Put his bill on the floor and watch it get a half-dozen votes.

Bringing the GOP governor’s plan to a vote accomplishes several things.

It establishes how many initial votes exist for the plan. Not many, presumably. Will Republicans vote for it or are the cuts too deep even for them? Or should they choose to dismiss the action as a “drill” and not participate, an opportunity is presented for Democrats to score some coup on their political opponents.

A somewhat simplistic example: “All we hear from Republicans is that they want to cut state spending. Well, here’s a chance to do so and yet they sit on their hands.”

Bringing the proposal to a vote also attracts the media spotlight. Parents might be interested to know about the $6.3 billion in payments to public schools the governor would defer for one year, a figure that doesn’t include the $8 billion the state already owes schools.

What the plan does to immigrants, the developmentally disabled, the elderly who receive in-home care also might be of interest to the public which so recently decided to make the fiscal problem worse.

The public might also like to know that $12 billion of the governor’s $21 billion worth of actions are one-time and that embracing them makes it harder to solve future budget messes.  

Essentially, it’s time to build a set of facts and put people on the record.  There has to be some long-term thinking here, and some public explanation of the implications of a Hoover-like budget.  Like there was no reason for Democrats to play nice with George Bush when he was at 28% in the polls, there similarly is no reason to play nice with Arnold Schwarzenegger.  He is basically despised.  

Time to kick sand in the face of the bully.

I heard a bunch of California Republicans yesterday talking about the effort to get the US Treasury to backstop state borrowing as a “bailout,” and the media has fallen for it, using phrases like “California is too big to fail” and other snickering.

This is ridiculous.

Let me explain this fairly clearly.  California will need to borrow billions of dollars to cover their cash flow issues, the same way they do every year.  Traditionally, the money comes in at different times then the money goes out, necessitating short-term borrowing.  Because of the state’s miserable credit rating, the interest rates that investors charge for this borrowing are ridiculously high.  Usually, banks guarantee those loans, but this year they are balking because of the severity of the state’s fiscal picture.  So the state has asked the Treasury to step in and guarantee the loans instead.

This would cost the Treasury Department approximately $0.00 dollars to perform.  Providing loan guarantees simply means that you are insuring against default, which has never happened in the history of California.  Not through the Depression or at any other time.  What this would do is stop Wall Street from gouging the state with abnormally high interest rates, pure and simple.

Here are the words of an idiot:

Rep. Jerry Lewis (R-Redlands) predicted little sympathy for the Golden State on Capitol Hill. “I have the feeling that it’s going to be a long time before Washington decides that they’re going to ask Kansas or Wisconsin to help with California’s funding problem,” he said.

Nobody would be helping anybody.  The federal government would guarantee loans that California would pay back.  This is about lowering interest rates to make the price of short-term borrowing lower.

I understand that President Ford rejected these types of loan guarantees for New York City in the 1970s.  But later he approved them.  By the way, after that so-called “bailout,” every single dollar was repaid by the city of New York.  How on earth could this be characterized as a bailout?  

The Ford Administration, under the direction of Treasury Secretary William Simon, imposed certain conditions on the loan guarantees (which will actually delivered directly by Treasury, so this is somewhat different).  That could also happen here, and the Shock Doctrine possibilities are not pleasing.  Still and all, this savings (which would only represent about $1 billion dollars in all, 1/20 of the current deficit) would not cost the federal government one red cent and thus shouldn’t be used to cram down California in a punitive way.  The possibility exists, but it’s worth the risk.

UPDATE: Presumably because reporters still don’t understand this, Tim Geithner gave an answer today to a question no state was really asking which is being spun as the end of this option, when he plainly states its possibility.

Treasury Secretary Timothy Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington today. Among the hurdles: Money from the Troubled Asset Relief Program is reserved for financial companies, he said.

The Treasury chief said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

He added that cities and states need to “get deficits down” to aid their credit worthiness, but absolutely did not take the option off the table.