[Calpers] projected the Dow Jones would reach roughly 25,000 by 2009…
Suddenly enlightened by the clicking dominoes of near-defaults in Europe, financial pundits are worrying out loud about the states in our own union — in particular, California, Illinois and New York.
California is staring at budget deficits that would terrify any government that wasn’t Californian. Latest estimates are $20 billion a year for the next five years, which sounds like a whopping total of $100 billion plus accrued interest, and that doesn’t even count the untold billions that have been submerged from view by various accounting flimflams.
Calfornians have, however, a wonderful faith in the American economy. According to David Crane of The Wall Street Journal:
In 1999 then California Governor Gray Davis signed into law a bill that represented the largest issuance of non-voter-approved debt in the state’s history. The bill SB 400 granted billions of dollars in retroactive pension boosts to state employees, allowing retirements as young as age 50 with lifetime pensions of up to 90% of final year salaries.
What Calpers failed to disclose, however, was that (1) the state budget was on the hook for shortfalls should actual investment returns fall short of assumed investment returns, (2) those assumed investment returns implicitly projected the Dow Jones would reach roughly 25,000 by 2009 [emphasis mine] and 28,000,000 by 2099.
Now California is staring glassy-eyed into the abyss. But it can always sell more bonds — cant it? Well, that’s what Greece thought.
Then there’s President Obama’s home state, Illinois, whose former governor was booted out for trying to sell Obama’s senate seat to the highest bidder. Illinois is borrowing money as fast as it can to repay the money it has already borrowed to cover the bonds they issued to pay for the things they bought on credit — and if this sounds like an unusual thing to do, you should see what they are doing with their state pension plan. From the New York Times:
Illinois, which has been failing to make the required annual payments to its pension funds for years…borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.
Critics of the President’s apparent largess may now be reassured that, by local standards, he is a model of restraint.
Meanwhile, New York State has a legislature that is the envy of anarchists everywhere: its majority leader was booted out of office for attacking his girlfriend with a broken glass, it can’t decide on who’s a Democrat and who’s a Republican — that’s why a thug who embezzled $3 million from his state-funded “health care” program wound up being the majority leader in the first place — and its members spend more time in court than they do in session.
Add to that a former majority leader also recently convicted of two felony counts, and most recently, another state senator guilty of mail fraud and tax evasion….and don’t even talk about the governor, who stepped in for Eliot Spitzer of the $4000 an hour hooker fame. He didn’t even dare run for reelection, where New Yorkers proved that they are insane by Einstein’s definition. Having just elected a Democratic former attorney general, they promptly sent Andrew Cuomo to the governor’s mansion in Albany. Cuomo, of course, is a Democrat who was formerly attorney general. Well, better luck this time.
And, of course, New York State is nearly broke. Last week, New York City shuttered OTB, its legal bookmaking operation. Can’t pay its bills. Can you imagine the level of ineptitude, bloat and outright theft that would be required to bust an operation that gets a fat percentage of every dollar wagered in its parlors?
Okay, we have been hearing of corrupt politicians, moonbat legislatures and outlandish spending for years now, with doomsayers and scolds all reminding us that we’ll have to pay the piper, and things still seem to chug along. We’ll weather these storms — fiscal restraint, a healthier economy and a stronger growth curve can set everything straight again — right? The piper’s still playing, after all.
Well, the Piper must be a Jackson Browne fan, because right now, he’s tootling “Running on Empty.” Courtesy of the New York Times:
As you can see, investors are losing their appetites for municipal bonds. So far, CA, IL and NY have been able to borrow their way out of their problems, and at rates that make borrowing a very sensible thing to do, from the cost perspective, at least.
And what do you do when the bills come due and no one wants to lend you any more to pay them? Well, you can always raise taxes.
Whoops. Believe it or not, the states with the highest tax rates in the United States are: California, Illinois and New York.
But New York, California and Illinois have a little problem there: they can’t really raise taxes any higher. All three states are at the maximum pain level for their citizens, with New York State leading the pack: a state income tax maximum of 9%, and, if you’re a New York City resident, another 4%, for a whopping 13% additional tax over the federal rate. And with what you have left — an 8.75% sales tax, just to rub it in. California and Illinois aren’t much better. Raising taxes is out.For ears, these baboons have been squeezing the citizenry for all they can mulct out of it. We complained, but we paid. Lazzes le bon temps rouler, and all that. As long as everyone was getting raises, and portfolios were getting fatter, and housing prices kept climbing, we didn’t worry too much about how much fat there was in government. But let the gross-gutted res publica come at us now, and tell us with a sweating brow and beady eyes that “we all have to tighten our belts,” and it might be a step too close to hemp-and-lamppost time for our increasingly isolated rulers, who come up a little short of breath when we ask:
“What the hell did you do with all the money we already gave you? You mean, after the biggest boom in all of recorded history, you didn’t put anything away for harder times? Did you really think this was going too go one forever?
“Why — we thought the Dow was going to 25,000!”
It may well be that the Feds will be asked — relied upon, actually, to step in. Imagine the national outrage.
Can you see the good folks of Nebraska sitting still for their tax dollars going to bail out Berkeley? Or Georgians sending dollars to Times Square? Ohio backstopping Illinois? There’s going to be hell to pay, not subsidies.
If bailouts are required, look for two things:
1. The Feds busting every state and local employee union contract. That might be the only solution to our current mess in high-density states.
2. Bondholders being told that they’re going to take a haircut. It’s already pretty much given in Europe that any further full guarantees to existing bondholders are a thing of the past. I don’t see the Feds telling everyone who swooped into high-yielding risky debt that they really had no risk at all. Not this time.
Usually we navigate our way through these crises one way or another without such extreme measures. This time? Maybe not. Especially when the “Let no crisis go wasted” folks see a chance to undo all those fat contracts they agreed to when we knew that everything was just going to keep on going up forever. All the way to 25,000.
In the meantime, we leave you with this sentiment from a noted Californian, the late Warren Zevon:
“And if California slides into the ocean
Like the mystics and statistics say it will,
I predict my hotel will be standing
Until I pay my bill.”
Every last cent of it. Listen to Warren. You’ll be glad you did.