Friday, December 19, 2008

Chapter 11 for California?

California is facing a massive 40+ Billion dollar deficit over the next 18 months. Unfortunately, our government is sized based on the Stock and Housing Bubbles, and not based on reality. We will likely never see boom times again like the building of those two bubbles, so something obviously must be done. Raising taxes is not a way out of this mess, and I am starting to realize Chapter 11 (or whatever version of bankruptcy a state files) is the best/only solution.

Currently we have a Democratic congress in California who is not interested in cutting spending to get out of the problem. The minority Republicans are blocking any and all tax increases as well. Everyday of this gridlock just puts California further in debt, but I certainly hope the will of the Republicans will not be broken. California (and all governments) needs to be run like a business, and when times get tough businesses do not raise prices (i.e. taxes), to cover expenses. Unless you are a monopoly, raising prices in tough times simply does not work. Yet this is the Democrat philosophy of choice. When facing budget issues you raise taxes. You keep them high until the next budget issue, and then you raise them some more. Rinse and Repeat. Taxes go up, up, up, and never down with Democrats in control. That kind of thinking has made California state taxes about as high as they get among all other states. These other states are competition to California. We are pricing our best and our brightest out of California with excessive taxation. It’s the rich that care the most about this, and when you lose them to another state, they and their tax revenues are gone for good.

California’s bloated budget needs to be dramatically cut, but we face the same issues that the Auto industry is facing. Most of California’s government workforce is unionized. That makes it difficult to cut costs or reduce the workforce. The Unions will ultimately bankrupt California, just like they are bankrupting GM and Chrysler. The idea of unionized Government employees is laughable at best. Unions were originally formed to protect workers from abuses by private companies. Unless we are expecting the Government to abuse its employees, Unions serve no purpose for government employees other than to shake down the workforce, and help force a great state like California into bankruptcy. I would really like to see it made illegal for Government workers to Unionize. Since the congress is controlled by Democrats, and they love unions, there is no chance that any meaningful reduction in Union workforce will take place in California and as a result, no chance that we can fend off an ultimate bankruptcy filing.

A bankruptcy filing for California would be a good thing though IMO. We would get to wipe out a ton of debt that we hold, which is a huge chunk of the deficit. We can also break up the unions, and have a realistic chance at controlling expenses and sizing the government right going forward. Sure our reputation would be damaged, and it would be difficult to raise funds going forward, but we need to stop borrowing period. Why not run a balanced budget? I bunch of bond holders would be burned by this, but buyer beware. If you choose to finance a state with a bloated budget, and stalemated congress, you are taking a huge risk. Let’s face it; investing in California was/is not a good idea. We have not been able to pay our bills for years now. You invested in a sinking ship that was easy to see. You just chose not to look. So the only losers would be the unions and bond holders. The winners would be the non-union citizens of California which are the vast majority. Seems like a no brainer to me, but I expect we won’t actually do it for 6 months or so.

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At 1:14 PM, Blogger kurokitty said...

It would seem a lot harder for governments to burn bridges with borrowing sources, particularly when most state revenue doesn't come in evenly during the year.

At 10:04 AM, Blogger Bayne_S said...

w00t Chapter 11.

Between all the parameters of the propositions and the inability of government to stop other discretionary spending we are screwed.


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