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California May Pay With IOUs for Second Time Since Depression


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#1 RockECU

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Posted 05 December 2008 - 01:18 PM

..and some people still seem to think we're not even in a recession??.. bwah haa

http://www.bloomberg...id=a2TUhalNFDds
California Eyes IOUs for Second Time Since Depression (Update1)

By Michael B. Marois and William Selway


Dec. 5 (Bloomberg) -- California, the world’s eighth-largest economy, may pay vendors with IOUs for only the second time since the Great Depression, State Finance Director Mike Genest said.

In a letter to legislative leaders Dec. 1, Genest said the state “will begin delaying payments or paying in registered warrants in March” unless an $11.2 billion deficit is closed or reduced. California, which approved its budget less than three months ago, may run out of cash by March, state officials say.

Governor Arnold Schwarzenegger warned that the state may issue the warrants, which are a promise to pay with interest, to suppliers and contractors as the seizure in credit markets may make it too costly to borrow.

“It’s getting worse very quickly,” Schwarzenegger, a 61- year-old Republican, told reporters Dec. 1 after declaring a fiscal emergency and ordering the Legislature into a special session to find ways to close the deficit. “It’s like an avalanche in that it gains momentum. And that’s what we’re in right now, so it’s a real crisis.”

California is reeling more than any other state from budget woes that pushed the nation’s governors to seek help from Congress. States say federal money is needed to ease the pain from spending cuts and tax increases that would be a further blow to an economy in the throes of a recession.

The warrants would be given to landscapers, carpet cleaners, construction firms, food-service companies and other state vendors. They would pay an interest rate of as much as 5 percent, based on state law. California last issued the IOUs in 1992 when lawmakers and then-Governor Pete Wilson deadlocked on a budget for 61 days past the start of the fiscal year.

Higher Yields

Investors are souring on the state. California 10-year bonds yield 0.73 percentage point more than top-rated municipal bonds, according to Bloomberg indexes, the highest since the depths of the last budget crisis in January 2004. By comparison, the difference for New York is 0.27 percentage point.

California Controller John Chiang said that the state’s cash account will decline to $882 million by February, below its preferred cushion of $2.5 billion, and will be negative $1.9 billion by March.

Tax collections have been hammered as the collapse of the real estate market eliminated 136,000 construction jobs in the state in the past two years and led consumers to curb spending. California leads the nation in home foreclosures, its 8.2 percent unemployment rate is the third-highest in the U.S., and the wealthiest 1 percent of citizens pay almost half its personal income taxes, making it sensitive to swings in the stock market.

Stock Losses

“When the market tanks those people sneeze and we in Sacramento get a cold,” said H.D. Palmer, a spokesman for Schwarzenegger’s finance department.

California’s two-year budget shortfall is about $28 billion, accounting for one-third of the deficits faced by U.S. states, according to figures from the National Conference of State Legislatures in Denver. U.S. states may collect at least $97 billion less than they need to pay their bills over the next two years, the group reported yesterday.

“If the state’s having budget problems and they’re about to run out of cash, that limits their opportunity to raise money in the capital markets,” said Terry Goode, who heads municipal bond research for Wells Capital Management in San Francisco.

The Port Authority of New York and New Jersey attracted no bids from investment banks to manage a $300 million taxable note offering this week.

Biggest Borrower

California, the biggest borrower in the municipal-bond market, has $51.9 billion in general-obligation debt. It’s rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grades, and an equivalent A1 at Moody’s Investors Service.

Even if the state runs out of cash, constitutional law stipulates that holders of California general obligation bonds are first in line for payment by the treasury after education.

The budget deficit has grown even as California cut spending on health care, universities and welfare programs. Schwarzenegger proposed a tax increase for the first time since he took office in 2003 as Democrats agreed to slash $8 billion in spending. Republicans, who have enough support to block a two-thirds majority needed to pass a tax increase, have made sure the measure has failed.

“This is not blind ideology on the part of Republicans, but our sincere belief that higher taxes will hurt the economy and lead to more uncontrolled spending,” said Assembly Republican leader Mike Villines.

Schwarzenegger’s declaration of a fiscal emergency gives lawmakers 45 days to plug the shortfall. If they fail in that time, they are barred from doing any other legislative work until they do. The declaration came after lawmakers were unable to agree on a plan to close the gap during a three-week special session that expired Nov. 30.

“We’re just barely hanging on right now,” Chiang said. “We need strong legislative action immediately.”

To contact the reporters on this story: Michael B. Marois in Sacramento, California, at 1612 or mmarois@bloomberg.net ; William Selway in San Francisco at wselway@bloomberg.net .
Last Updated: December 5, 2008 12:59 EST

#2 Jase

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Posted 05 December 2008 - 03:36 PM

Who the heck thinks we're not in a recession at this point?

The "official" report released this week (I think) stated that we've now been in a recession for a year.

Edit: Here it is...

http://www.washingto...8120101277.html

Recession started in December 2007: panel


By Emily Kaiser
Reuters
Monday, December 1, 2008; 4:28 PM




WASHINGTON (Reuters) - The U.S. economy slipped into recession in December 2007, the nation's business cycle arbiter declared on Monday, and the downturn could be the worst since World War Two.


The National Bureau of Economic Research said its business cycle dating committee members met by conference call on Friday and concluded that the economic expansion that started in November 2001 had ended. The previous period of economic expansion, which ended in 2001, lasted 10 years.


The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.


"I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC television. "It could be the worst post-War recession. We don't know yet."


Edited by Jase, 05 December 2008 - 03:42 PM.


#3 RockECU

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Posted 05 December 2008 - 03:41 PM

Who the heck thinks we're not in a recession at this point?

The "official" report released this week (I think) stated that we've now been in a recession for a year.


I remember reading from mulitple sources over the past 3 months that no one wanted to admit that we were in a recession because it hadn't been officially called one, for lack of a better explanation.

#4 Jase

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Posted 05 December 2008 - 03:44 PM

That's because there is a reality of being able to "talk yourself" into a recession.

#5 StepandFetch

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Posted 05 December 2008 - 04:12 PM

it takes a great deal of fear mongering and scare tactics for congress to open up the treasury for the taking... the first time the bailout was voted on, it failed... soon after, many went to work ( Paulsen) trying to scare the sh*t out of every man/woman in congress.. they threatened the very worse... martial law, bankruptcy, economic collapse, etc.. and they folded.

So now, the Fed got their blank check bail out, and the money is printed, backed by nothing but paper and green ink.

Short term prosperity over long term suffering... those responsible will have lined pockets in the end, and we, the population, will have to pay for it, every penny.

It will happen again, soon...

The nation is run by a group of thugs. Paulsen and Bernanke told us all that the world was going to end unless the bail out was passed and taxpayers gave them X amount of money to do with what they pleased...

So now, the only real plan is to throw money into some other guy's bottomless bucket to try to fix something... that isn't acceptable... and if continued, we'll be carrying wheelbarrow loads of money to buy bread soon enough.

Ahnold should be fixing the leaks, not sitting on his knees, begging for billions in Fiat currency. In this case, money isn't the solution. Money just allows the same problems to continue and fester. The other states in the union have managed to survive, or are managing to survive in the economic climate- Ahnold has no excuse for this bullsh*t.

Edited by StepandFetch, 05 December 2008 - 04:17 PM.


#6 RockECU

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Posted 05 December 2008 - 05:10 PM

it takes a great deal of fear mongering and scare tactics for congress to open up the treasury for the taking... the first time the bailout was voted on, it failed... soon after, many went to work ( Paulsen) trying to scare the sh*t out of every man/woman in congress.. they threatened the very worse... martial law, bankruptcy, economic collapse, etc.. and they folded.

So now, the Fed got their blank check bail out, and the money is printed, backed by nothing but paper and green ink.

Short term prosperity over long term suffering... those responsible will have lined pockets in the end, and we, the population, will have to pay for it, every penny.

It will happen again, soon...

The nation is run by a group of thugs. Paulsen and Bernanke told us all that the world was going to end unless the bail out was passed and taxpayers gave them X amount of money to do with what they pleased...

So now, the only real plan is to throw money into some other guy's bottomless bucket to try to fix something... that isn't acceptable... and if continued, we'll be carrying wheelbarrow loads of money to buy bread soon enough.

Ahnold should be fixing the leaks, not sitting on his knees, begging for billions in Fiat currency. In this case, money isn't the solution. Money just allows the same problems to continue and fester. The other states in the union have managed to survive, or are managing to survive in the economic climate- Ahnold has no excuse for this bullsh*t.



I couldn't agree with you more!


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