Why Is California Rated BBB?

The fact that Fitch was the only major ratings agency to action with regards to California's general obligation bonds is almost as perplexing as the fact that BBB was the specific rating chosen by that agency. Although we haven't had a chance to peruse the Excel sheets behind this determination, there are several sad realities concerning California that, frankly, won't be going away anytime soon. These realities, when considered in totality, cause us to pose the question: Where will the revenue come from?

It is estimated that 3000 people are leaving California every day; especially relevant due to the State's heavy reliance on personal income tax revenue - 55% of the revenue pie to be exact. More importantly, 45% of that 55%, or 24.75% of all revenue that California exacts, is extracted from those in the highest income brackets. If you don't believe that wealthy individuals establish residency in a State based upon it's taxation policies, then you don't know any wealthy individuals. In a recessionary environment, migration of the wealthy from California should accelerate. As a bit of trivia, this whole dilemma was born out of Proposition 13 (1978), an ill-conceived ballot initiative that placed a upper limit on property taxes. The result is that, while most States derive revenue equally across property, sales, and income taxes, California is stuck relying on the fickle income tax.

The handicap listed above would be surmountable if the State was able to adjust it's spending in recessions to balance it's budgets. The problem is, it can't. The result is the well-known ~$24B budget shortfall, complemented by the recent issuance of fiat currency: the IOU's. This additional handicap would be surmountable if major financial institutions would accept the IOU's. The problem is, they won't.

California is out of money, it's revenue sources are moving away from the State, and nobody is buying the IOU Ponzi-scheme. We predict the situation will end in disaster; the resolving of which can only be accomplished by throwing the entire State Constitution in the trash and creating a new one - preferably one not full of inherent structural deficiencies. Bottom line: California's debts will need to be restructured to accommodate a new, leaner California. So why are those debts rated BBB? Sphere: Related Content

California Lawmaker's Salaries Should Be Paid With IOU's

California lawmakers have failed to reach a budget compromise with Governor Schwarzenegger, setting the stage for issuance of IOU's as soon as Thursday of this week. The AP reported that lawmakers have literally just "walked out" of the Governor's office - likely feeling ashamed about the fiscal catastrophe they have not only created, but subsequently failed to fix. We'd also like to note that if California is in fact forced to issue IOU's, the supposedly compassionate and liberal utopia of a State will be singling out it's most vulnerable and weak population segments to receive the worthless State Fiat Currency - students, low income individuals, the elderly and the disabled will soon be the proud owners of a sheet of paper that promises future payment from a bankrupt State.

Although this whole situation is an atrocity, we have come up with a solution that would not only dole punishment to those who have created this predicament, but also incentivize the folks in Sacramento to bring a speedy resolution to the budget crisis: Replace the cash salaries of every single lawmaker and the Governor with these bogus IOU's. We're quite aware that the salaries afforded to State legislators, even in a state as large as California, are a mere pittance when compared to the posh arrangements that the US Congress have set up for themselves. However, the folks in Sacramento deserve to feel some modicum of pain as retribution for the damage they have caused. Pass it on.

*InfoNgen was used to research the content of this article Sphere: Related Content

California Can Not Print Money

Well, technically the State of California does have the ability to print money. To do so however, would seem to directly contradict Article 1, Section 10 of the United States Constitution. The most inconvenient paragraph of Section 10, at least insofar as California is concerned, states the following:

"Section 10. No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility."

Sure, we understand that certain bits of this paragraph appear slightly outmoded. For instance, the stipulations regarding payments in gold and silver have been ignored for some time now. However, we think there is a pretty strong consensus that a State is forbidden from issuing its own currency, in an official capacity, and replacing the dollar as the chosen means by which commerce is to be conducted. Surprisingly, this is a path that California appears on the brink of heading down. Some readers may ask "Who said anything about California coining its own money?". Well, clearly the State has chosen an alternate set of terminology by which to describe it's actions.

That California is in a state of fiscal disarray shouldn't be news to anyone by now - short sighted tax policy (property tax freeze), profligate spending, serving as one of the epicenters of the housing collapse and a gridlocked State legislature have all but assured an inevitable day of reckoning for the State. Also well publicized is the fact that California may run out of cash by the end of July, at which point the State will proceed to issue IOU's to those it does business with. (S&P eloquently referred to the IOU's as "registered warrants" in its justification for placing California's general obligation debt on CreditWatch negative.) We would argue that these IOU's are tantamount to coining money; after all, a dollar bill itself is no more than an IOU from the federal government. We doubt however that this distinction will ever be brought to light, as recent events (think Chrysler) would seem to suggest that financial distress is ample justification for a government to trample across years of legal precedent.

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