California Insolvent as Schwarzenegger's Financial Wizardry is Terminated

By: Mike_Shedlock

Yesterday, in Taxpayers Can Bear No More , we discussed the record public debt problem in the UK. Chancellor Alistair Darling made it "clear that he thought that the only politically viable option was to increase borrowing, rather than to raise taxation."

In the US, states are facing similar budget dilemmas.

New Jersey, whose median household income of $64,470 is second only to Maryland, is one of 29 states that ran short of revenue to balance this year's budget, up from three in 2006, the Center on Budget and Policy Priorities in Washington found. Lawmakers across the country, who previously sought to trim debt and cut taxes, are instead increasing borrowing as the slowest economy since 2001 erodes consumer spending and home values.

California Governor Arnold Schwarzenegger is looking to bridge a $17 billion budget gap by borrowing against future lottery profits. Illinois Governor Rod Blagojevich wants to issue bonds to plug a shortfall in pension-plan funding and cut spending on health care and education. Corzine plans to borrow for school construction, and officials in Arizona may too.

Taxes are already so high that further increases may actually reduce collections, said former U.S. Senator Robert Torricelli, a New Jersey Democrat who recruited Corzine for his successful 2000 Senate campaign.

"People obviously don't want higher taxes," said Torricelli, who earlier this month hosted a fundraiser for Corzine's 2009 re-election effort at his Delaware Township home. "They never want spending cuts, and no one is lining up to make sacrifices."

Inquiring minds may also wish to consider Georgia State Tax Collections Down 9.4% In June .

On January 12 I offered Mish's California Budget Proposal . The budget deficit was $14 billion at the time. The Budget deficit is now $17 billion or $20 billion depending on who you want to believe.

It's interesting that Schwarzenegger is now "looking to bridge the budget gap by borrowing against future lottery profits."

Flashback October 27, 2007

On October 27, 2007 I talked about Schwarzenegger's health care reform strategy being nothing more than a sleight of hand shell game robbing Peter to pay Paul. Please consider Drop in Revenue Growth at State and Federal Level .

Schwarzenegger's latest scheme is to use lottery proceeds to expand health care. Given that lottery proceeds now fund education, the governor's proposal would replace money from the lottery that now goes to education with funds from the state's general fund. Schwarzenegger did not say what would be used to fund the shortfall in the state's general fund.

Schwarzenegger's Financial Wizardry

• Lottery proceeds will be used to expand health care.
• Education that used to be funded by lottery proceeds will instead be funded from the state general fund.
• The question as to what will fund the shortfall in the state's general fund, has now thankfully been solved: Lottery proceeds.

That is one magic mirror use of lottery proceeds. Inquiring minds will note that Schwarzenegger was elected governor of California, vowing to "tear up the state's credit card."

Who needs credit cards when you have a magic mirror?

California Unemployment Rate Hits 6.9%

Silicon Valley is employment slowing as California Unemployment Rate Hits 6.9% .

Silicon Valley posted anemic job growth last month, but in a state that economists say is in a "jobs recession," any growth is good. More than 1.2 million Californians are unemployed, according to figures released Friday by the state Employment Development Department.

California's seasonally adjusted unemployment rate was 6.9 percent, up from 6.8 percent in May; the valley's rate jumped from a seasonally unadjusted 5.6 percent in May to 6.1 percent in June.

Many of the valley's largest companies have been cutting jobs. Layoffs combined with construction and financial unemployment boosted the number of people looking for work and unable to find it.

The state's jobless rate "tells us that the California economy is in a recession," said Stephen Levy of the Center for the Continuing Study of the California Economy. With data not yet in on the quarter for the state economy, Levy called it a "jobs recession."

Jobs Recession?

The last bastion of California economic strength, Silicon Valley, is about to find out what the rest of the state already has: It's a full blown economic recession, not a "jobs recession". And things are going to get much worse when the commercial real estate implosion picks up steam and unemployment soars further.

Any ideas that the economy is still expanding all depend on the same type of magic wizardry that Schwarzenegger is using to "balance" the budget. Many other states are in the same sinking ship, all attempting to postpone the day of reckoning via sleight of hand trickery and magic mirrors. However, the magic mirror is now cracked and such financial wizardry will no longer work. The truth is out. California is insolvent.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

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