Budgeting I.O.U.s

In a recent edition of The Economist there appeared a picture of a woman holding a protest sign that read ‘A Fair and Balanced Budget Does Not Mean Cut, Cut, Cut’. If placed in front of a mirror, the word ‘austerity’ would have reflected a more realistic view of the dire state of affairs of the worsening economy.

From the presumable designer sunglasses, dangling gold earrings and a golden necklace hanging pretty around the neck, the woman appeared to be a well to do resident who doesn’t seem to grasp the frightening circumstances that face California’s economy, necessitating years of spending cuts.

With her mouth wide open as if ready for dental work, in all likelihood she was spewing hot air with a possible risk that her complexion may turn to as deep a purple hew as that of the blouse she was wearing. In protest, she could continue her stance all day long without taking a breath but it wouldn’t do any good.

California, with an astounding $26B budget deficit that grows by about $25M every day, has had to resort to issuing IOUs, an undisciplined action that will continue through September. This includes moneys due for services provided by private sector businesses plus income tax refunds due to the state’s residents.

This is no way to run a business, but there’s no business like government business and it’s no business I know of that can run up such astronomical sums of debt and continue to function – which it can’t. Just like the foolish consumer who looks in his or her wallet and sees a shortage of cash, the state has for too long resorted to increase its debt on a credit line beyond its incoming revenues.

Entrepreneurs need cash to keep their businesses afloat at a time when their very existence is already in jeopardy from the deeply troubled recession. Right on down the line, from owner to employee, these providers of services to the state government rely on a steady income to cover loan agreements, make mortgage payments, satisfy credit card debt and sustain the basic necessities for their families – namely food and electricity.

A marginal increase in bankruptcies, foreclosures and credit card default rates can be expected between now and when the IOUs are satisfied. California is out on a shaky limb but when the bow breaks Washington has said it won’t be there to catch the fall.

This past week, large banking institutions, lead by Bank of America, announced they would no longer cash the vouchers by the end of July, if not immediately. The primary reason for the policy shift is the fear that Sacramento may yet default on the payment of the registered warrants when they’re set to mature in October.

To limit the fraud potential to recipients of the IOUs needing immediate cash from third-party speculators, including offers over the Internet, the SEC stepped in to require traders be registered dealers.

California residents demonstrated how they’re fed up when they voted down measures that would have increased or extended tax hikes approved in February for another two years beyond 2011. Of the six measures on the ballot, only one passed – preventing lawmakers and public officials from receiving pay raises when the state is running a deficit.

In addition to an earlier announcement that 2000 workers would lose their jobs, another 4600 may join the ranks of the unemployed in September. Budget negotiations may also see a 5% pay cut to many state workers and furloughs of up to three days per month, which would result in a 14% loss of wages.

California is the prime example of the worsening economy and the piling up of debt, but nearly every state in the union is faced with similar budget deficits. According to the National Conference of State Legislatures, states currently have an accumulative $121B of debt, next year about $166B and a forecast of up to $180B in 2011.

The Center on Budget and Policy Priorities identifies 48 states facing budget shortfalls in 2010. Montana and North Dakota are the exceptions. Twenty-five states have increased taxes; another twelve may follow suit. No! No! No! This is exactly what deepened the severity of the Great Depression!

California debt will represent about 58% of its 2010 budget. Of the 50 states, at 22.6% of its budget, Florida isn’t expected to fair as badly as ten other states. Reduced funds for healthcare, local governments and a wide variety of services provided by states will require years of unfairly balanced budgets. And that means cut, cut, cut.

May Floridians not be California bound.