Business Update with Mark Lacter

Inheriting a $25 billion deficit

KPCC business analyst Mark Lacter talks about what's in store for governor-elect Jerry Brown as he inherits a $25 billion state deficit when he takes office in January.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, will the new governor and legislature get real on California's deficit?

Mark Lacter: Well, getting real means permanent budget cuts and permanent tax hikes, and it's hard to see how that's going to happen when so many California voters don't want to cut too much and they certainly don't want to pay higher taxes. You know, there's an interesting L.A. Times/USC poll out that has 70 percent of voters saying that the state shouldn't have to do too much cutting and taxing to close the deficit - just eliminate waste and inefficiency that's supposedly overrunning state government. Now, this waste and inefficiency business has been trotted out many times before, most recently by Gov. Schwarzenegger when he was first running for office, and frankly it's as bogus now as it was then.

Julian: Isn't it more bogus now that the deficit is more than $25 billion?

Lacter: Actually, yes. Even if you're able to save, say, $50 million or $100 million, it's not going to get you very far. But I'm not even sure that many people are paying attention. Every year Californians get told about some monumental budget crisis that's going to totally wreck the state and it never happens. The reason it never happens is that the governor and the legislators come up with various gimmicks that make the numbers balance out. This year, they made some crazy assumptions about the amount of money California would receive from the federal government - and now, of course, the state has to figure out how to make up for the shortfall from those false assumptions.

Julian: You borrow...

Lacter: A lot. But let's face it, most of us still have not felt any direct impact from the billions that have been cut. If you're not poor, you're not losing out on the social service programs that have been decimated. If you're not attending state universities, you don't have to shell out way more in student fees. If you're not a state employee, you're not being forced to take unpaid furloughs. That's the disconnect between voters and government - an unwillingness to take the steps necessary to get these fiscal budgets back in order.

Julian: So the state is relying on municipal bond investors - again.

Lacter: It's a good thing because the state has had to borrow $14 billion this time around. Most of this is through what they call revenue anticipation notes - these are short-term notes that the state sells to investors every fall so that they can get enough money in the kitty to keep operating until the income tax checks start arriving next spring. Investors are usually happy to purchase these notes because they offer a much higher interest rate than a short-term CD or Treasury bill. This year, California officials were forced to offer even more in interest than expected.

Julian: A painful amount?

Lacter: Well, when you're dealing with a $25-billion deficit, another few million dollars in interest expenses isn't going to make much of a difference. And investors are comfortable enough about buying this debt because California has an excellent cash management system and even though it's rated pretty low by the ratings agencies, there's never been a problem about making payments on time. The problem, of course, is that so much debt has piled up over the years. That's why these big bond offerings always lead to chatter about the possibility of some sort of default.

Julian: But, really, is there any basis for that kind of talk?

Lacter: Well, it’s considered very unlikely (and in an absolutely worst-case scenario holders of debt would be near the front of the line of creditors). Certainly, investors don't appear concerned – they’ve snapped up all of the state's offerings. But you do have this massive budget deficit, plus huge obligations for pension funds, plus a legislative body that doesn't exactly get along. So it's not surprising that there would be questions about how much longer California can rely on the financial markets to get bailed out. But so far, so good.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes business blogs at LA Observed.com and at kpcc.org.


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