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Don't Forget America's Failed States

London is burning. Greece is in receivership. Nobody wants Italian bonds. France's AAA rating is at risk. The headlines do seem to be a bit Euro-centric lately. But that's temporary. Before long the spotlight will swing back to America's failed states, beginning, as always, with California. Consider:

Signs point to California facing new budget gap

(Reuters) - California's summer vacation from its state budget woes didn't last long.

California's latest monthly revenue report shows revenue weaker than expected even before the stock market, a key source of revenue for the state, began sliding in response to Standard & Poor's downgrade of U.S. debt, anxiety about Europe's finances and the risk of the U.S. economy slipping back into recession.

For officials in California's capital, underwhelming July revenue and Wall Street's hard times suggest they will have to draw up plans for cutting more spending early next year.

Beyond Sacramento, if revenue swoons in coming months, it will assure renewed headlines of how the government of the most populous U.S. state is facing yet another budget shortfall.

Californians, and the state's bond investors, should brace themselves for that in light of how a choppy stock market can hurt the state's revenue, said Neil Hokanson of Hokanson Associates, a family wealth manager in Solana Beach, California.

California is like a household where one spouse is a sales person, Hokanson said, noting: "It has good years and it has bad years."

This year was supposed to be a not-so-bad year for California, with revenue improving after a few years of declines sparked by the housing crash, recession and plunge in stock prices following the Lehman Brothers bankruptcy.

Governor Jerry Brown and state lawmakers closed a roughly $10 billion deficit in June with a plan that balanced California's books with spending cuts, deferred payments, some fees and, most important, the assumption that an additional $4 billion in revenue would flow into state coffers.

The money would be generated by the state's gradual economic recovery and wealthy taxpayers who pay the bulk of personal income taxes, the state's most important revenue source, as their capital gains increase with the stock market extending its climb from its March 2009 low.

That plan may soon need to be revised.

Even before volatility struck the stock market this month, California's revenue was not meeting expectations: July revenue was $538.8 million, or 10.3 percent below its projected level in the state's recently enacted budget, the state controller said on Tuesday.

New California wildfire fee may drain agency's firefighting budget

(Mercury News) - A California law that imposes an annual wildfire fee on rural residents may have an unintended consequence -- sapping the state fire agency of money it needs to fight wildland blazes, officials said Wednesday.

Concerns about the $150-a-year fee, which is contained in the state budget Gov. Jerry Brown signed earlier this summer, were raised Wednesday by the California Board of Forestry and Fire Protection.

Democrats in the Legislature passed the fee and said it eventually would raise $200 million a year. That would allow the state to transfer an equal amount of money from the California Department of Forestry and Fire Protection to the general fund budget.

Under the law, proceeds from the fee must go to local fire-prevention efforts through local fire districts, fire councils or the California Conservation Corps -- not the state fire department.

George Gentry, chief operating officer of the Board of Forestry, told The Associated Press that will leave the department with a hole in its firefighting budget this year.

Court halts dismantling of CA redevelopment agencies

(San Francisco Chronicle) - The state Supreme Court put the brakes Thursday on a plan to dismantle redevelopment agencies in California, posing yet another challenge to California's ability to keep its budget balanced.

The court said it would decide by mid-January whether the state's plan to eliminate the economic development program is legal, and allowed redevelopment agencies to continue to exist while the case is pending. But it also barred the agencies from starting any new projects, issuing bonds or purchasing or transferring any property until the suit is resolved.

If the case is successful, it will punch a $1.7 billion hole in the state's budget for the current fiscal year and cause a $400 million annual shortfall in future years.

Stock market turmoil a bad omen for California budget

(Reuters) - The stock market's recent slump is reviving bad memories for California's government and raising concerns about revenue estimates for its budget, a perennial concern in the U.S. municipal debt market.

The concern in the state capital of Sacramento is the slump hints at the potential for a stock market meltdown like the one in 2008. That sent California's finances into disarray.

Heavy market losses could force California to trigger spending cuts to politically popular programs and revive calls for tax increases, both sure to spark rows in the legislature that cause many investors to stay clear of the state's debt.

Governor Jerry Brown and lawmakers in June notched a budget plan that closed a multibillion dollar deficit and balanced the state's books in part with a rosy revenue outlook.

Critics said the forecast was too optimistic given the state's weak economy and the potential for reversals in financial markets. When they swoon, California's revenue shrinks because it relies heavily on wealthy taxpayers and their capital gains to provide a large chunk of the personal income tax receipts.

And finally this from Douglas French of the Mises Institute:

Los Angeles, America's Harbinger

In a piece for the Wall Street Journal, Joel Kotkin tells of the demise of Los Angeles. No, you won't see Snake Plissken or Rick Deckard racing through the City of Angels just yet. But the city's political machine is doing all it can "to leave behind a dense, government-dominated, bankrupt, dysfunctional, Athens by the Pacific," explains Kotkin.

...The unemployment rate for Los Angeles County was officially 12.4 percent in June, after peaking a year ago at 13.4 percent. However, the worst is likely not over. As Kotkin explains, the Panama Canal is planning to widen and there are plenty of ports on the eastern seaboard looking for business. Also, the Golden State's renewable-energy mandates are estimated to increase energy costs by 20-25 percent. Californians already pay 53 percent more than the national average.

And the taxman is especially brutal in California, with a top rate of 10.3 percent, which kicks in at a $1 million in earnings. Sure, not many are pulling down that much, but the second highest rate, 9.3 percent, applies to those making $46,766 and above. The state's minimum wage is $8 an hour, 75 cents above the federal rate. And restaurant employers may not use tips earned as credit toward this obligation as is the case in many states. California employers are required to pay "exempt" employees double the state minimum, putting these employees in the 6 percent tax bracket.

What once was believed to be a city of destiny (paradise on earth) is being destroyed by government looting; and now its saviors, the state of California and the federal government, have been looted as well.

Some thoughts:

After spending a recent week in Los Angeles, I now understand the concepts of Peak Oil and road rage: Tens of thousands of cars, most containing only one person, going 75 miles an hour for a really long time to get anywhere. Besides being stressful, this system is fragile. It will grind to a halt on the day gas hits $6 a gallon.

California tends to lead the way for other US states, which in the past was mostly good. But now the Golden State is about to become a Third World country, complete with deteriorating public services and a permanent, volatile underclass. Those "London burning" pictures will be replicated in LA before too long.

The sad truth is that it's simply impossible to run a major US state with the current public sector pay/benefits structure. The process of scaling back pensions and salaries will hurt a lot of cops, teachers and social workers who don't deserve pain. But there's no mathematical alternative to a dramatic lowering of state/local operating costs.

This is the inevitable result of three decades of lies told to public sector unions and taxpayers. The people making the promises (lifetime pension/health care for 50-year-old retirees, for instance) either knew they were lying or were really, really stupid. Either way, they're the villains in this story.

The muni bond market has held up amazingly well considering that many of them are loans to bankrupt states in a soon-to-be bankrupt country. But in the coming year Meredith Whitney's prediction of "hundreds of billions of dollars of muni defaults" might come true, again with California leading the way.


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