Diane – I liked your editorial that was carried in the Union Tribune in San Diego on January 25, 2009 titled “California’s undeclared bankruptcy.” A copy of it is below my note to you. Yes, we need to know our borrowing limitations. More importantly, we need to balance a budget. I am embarrassed to live in a city (San Diego) that is near bankruptcy, a state (California) that is near bankruptcy and a federal government that is on its way to bankruptcy.
As stated in an editorial in the UT on January 26, 2009, California already has the nation’s highest sales tax, personal income tax and gasoline tax. Our corporate tax rate is the highest in the west and our property is at par with the nation. We have a problem and the first place to look is our expenses.
This is not rocket science. This is gut wrenching work and elected officials need to be willing to lose their jobs via a recall of just not winning their subsequent election to office. Special interest groups who receive cuts in government spending will spend millions to defeat you. I for one will support our elected public servants who stand up against the special interests. I for one will support those special interests who understand that the well being of the whole is more important that the well being of the few.
Your editorial was a great start in educating the public. I urge you to continue educating the public and taking bold stands in Sacramento. Be articulate. Be persistent. Be brave. I will stand beside you.
I am a retired CEO of a high tech company. I volunteer my time as Chairman of San Diego Social Venture Partners (SDSVP), dedicated to educating philanthropists and helping San Diego non-profits. I also volunteer my time as President of the Tariq Khamisa Foundation (TKF), dedicated to creating a world free from youth violence.
I have more time available to volunteer. How can I help you?
California’s undeclared bankruptcy
By Diane L. Harkey
2:00 a.m. January 25, 2009
San Diego Union Tribune
Upon being sworn in as a member of the Assembly in December, I promptly met with staff from the Governor’s Office, Department of Finance, Controller’s Office and others to assess the state’s fiscal crisis. Also, I did what I hear is unthinkable for an elected official – I reviewed the state’s last bond offering prospectus (July 2008), the Comprehensive Annual Financial Report (FY 2007) and current debt schedules. The information is available to the public, in writing for anyone who cares to read – the state of California has more than a budget problem, we are in a state of undeclared bankruptcy.
To digress, the state has had a budget problem for years. A budget is a year-to-year anticipated revenue and spending plan tracked on a quarterly basis, using detailed, technical forecasting. If there are shortfalls or overages, the state may make midyear adjustments. Short-term borrowing from banks is usually available to fill a temporary shortfall. For instance, the state is typically short on cash twice a year while awaiting receipts from property, sales and other tax revenues. The state borrows short-term using RANs, or revenue anticipation notes, which are repaid as soon as the tax receipts arrive.
Compare this to a family that counts on receipt of a semi-annual bonus to help pay property taxes. The property taxes are due by Dec. 10 and April 10, but the bonus arrives in January and July. The family might decide to use a credit card (short-term debt) to bridge the gap.
However, if the family’s credit cards are maxed out, and they need cash, what do they do? They might take out a home equity loan to be repaid over time. This is similar to what the state did in 2004 when the voters approved the governor’s request for $15 billion in emergency revenue bonds.
Then, let’s assume that one of the family’s income earners loses his/her bonus or job, similar to the state hitting a recession. The family was living month-to-month, as many families are these days. They needed the bonus and/or second income to stay afloat financially and repay the mortgages on their home. Our state was likewise living month-to-month, spending every anticipated dollar, and then – crash – the stock market tumbled, people lost jobs, incomes declined, homes went into foreclosure, and in essence the state lost its “bonus” or second income.
The hypothetical family noted above could try to reduce expenses, make arrangements with lenders, or as a last resort, even file for bankruptcy protection while they work things out. Orange County, you may recall, filed for bankruptcy protection just over 14 years ago, and managed to work with its creditors for a solution. However, states cannot file for bankruptcy protection like people, businesses, cities and counties. Also, states cannot print money like the federal government (as it currently is doing by the boatloads).
The problem we face in Sacramento is not “partisan bickering” in the Legislature. It is that the real problem is either not understood, or not being addressed by other than a few “under the dome.” The reality is that even if the parties did agree on new taxes and spending cuts, the bankruptcy dilemma would remain without true reform.
Certainly, we must learn to live within our means on an annual basis. The Democrats suggest raising revenue (aka taxes). Republicans believe reducing expenses should come first. The governor and even some Democrats agree on spending cuts or a combination of both taxes and cuts to solve any future “annual budget” issues. Our creditors (banks and bondholders) really don’t care what course we take – they just want assurance of repayment.
However, with a potential $41 billion shortfall looming in the future, credit markets and lenders also want to see a package of real fiscal reforms, so they know we are serious about fixing our structural deficit – before they will lend to us for anything again. We need their help in the near term, and we must improve our “junk bond” credit rating to do so. This is one of the reasons the governor vetoed the latest Democrat budget.
The governor and the Republicans have proposed a variety of sound reform measures, reserve requirements and a spending cap that I support. However, we have $115 billion in “voter-approved” bond debt yet to be funded. And with the state’s priority of funding, this future debt could drown out our ability to fund other services we expect government to provide. Therefore, we should go one step further and reform our business practices and debt/bonding procedures.
Speaking as a former banker, a little discipline in the state’s finances would be a good thing. It would be nice to know our borrowing limitations, before our banks and financial partners cut us off.
Harkey represents the 73rd Assembly District in the coastal regions of southern Orange and northern San Diego counties.