Additional spending leads stops fiscal discipline in Cali

Additional spending leads stops fiscal discipline in Cali

(Matt, “California Gov. Jerry Brown proposes $8.3 billion in spending cuts,” http://www.stanforddaily.com/2012/05/15/ca-cuts/)

California Governor Jerry Brown proposed heavy spending cuts Monday to compensate for the state’s $15.7 billion budget deficit. Brown’s proposal, which he presented at a press conference in Los Angeles, would cut $8.3 billion in state spending cuts to public sector employee pay, social programs and prison spending. “I don’t like making additional cuts, and I recognize the impact they have on Californians,” Brown said in discussing the plan, according to The New York Times. “They are difficult — but necessary — in order to get us back on firm fiscal footing until California fully recovers from the global economic recession.”

Spending

States spending leads to fiscal crisis – empirics prove

(Stephen and Stephen, “The Good Governors Guide,” http://www.cato.org/publications/commentary/good-governors-guide, October 3^rd 2002)

First, the state fiscal crisis that governors are now confronting has been a result of excessive spending, not insufficient tax receipts. In the decade of the 1990s state expenditures soared by $176 billion. Between 1996 and 2000, for example, state spending grew at roughly twice the rate of federal spending. The governors managed to make Bill Clinton seem like a penny pincher. Governor Owens said it best: "The states don't have a revenue problem, they have a spending problem." Gary Johnson, the combative governor of New Mexico, has remarked that "in the 1990s many governors believed that government was the solution to every problem."

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Key to the Global Economy

California is key to the US and global economy

(Jean, “Yes: The State Means Too Much to the Nation,” http://www.utsandiego.com/news/2009/jun/05/lz1e5ross21510-bailout-california/?page=1#article, June 5^th 2009)

Yet the rest of the country cannot afford to stand by idly as the Golden State drowns in red ink. In the same way that the federal government has deemed Chrysler, General Motors and the nation's largest banks and financial corporations too big to fail, California – the world's eighth largest economy – is too big and too important to the nation for failure to be an option. Since World War II, the state has been an economic driver of the country. A fiscal meltdown in California would have reverberations throughout the country and the world. Legislators and the state treasurer are already looking to the federal government for loan guarantees to help fend off a looming cash crisis. California needs more assistance and, in the best interest of the nation, the federal government should give California more. Loan guarantees alone would lower the state's short-term borrowing costs, an important, but inadequate, stopgap measure. California needs direct federal assistance in order to buy time for an economic recovery to kick in that will boost state revenues, as well as to allow the state to enact a much-needed restructuring plan. What form might that assistance take? A direct infusion of cash, of course, would be desirable. However, if federal officials don't trust California to spend wisely – and there are plenty of reasons to be doubtful – Washington could further increase its investment in health programs such as Medi-Cal and the Healthy Families Program, where the federal government already pays the majority of costs. To leave California to flounder would hinder not only the future of the state's economy, but the national and potentially even the global economies as well. California is and will be the economic engine of the nation's future – a hotbed of innovation and a 38 million-strong market whose purchasing power will be needed to turn recession into expansion.

Key to the US Economy

California economic collapse leads to US economic downturn

Herbst (Staff writer for BusinessWeek) 2009

(Moira, “California's Economy: Too Big to Fail?” http://www.businessweek.com/bwdaily/dnflash/content/jun2009/db20090616_615065.html, June 16^th 2009)

California's economy is in deep distress. Political gridlock is preventing tax increases and spending cuts, and the recession has pushed its deficit over the edge. Governor Arnold Schwarzenegger's proposals to fix the mess have been rejected by California voters, most recently on May 19. On June 16, put California's credit rating—already the lowest among states—on watch for a downgrade. Golden State residents are all too aware of the cuts in essential services that may result, or that some businesses or taxpayers may have to accept IOUs as payment from the state. But will the rest of the U.S. have to share California's pain? In May, State Treasurer Bill Lockyer sent a letter to U.S. Treasury Secretary Tim Geithner urging him to consider helping cash-strapped municipalities. The pitch by Lockyer and other California Democrats is a play on the "too big to fail" argument made on behalf of bank bailouts: If you don't save this bank (or in this case, state), the financial markets and the national economy will be thrown into turmoil. "This matters for the U.S., not just for California," Representative Zoe Lofgren (D-Calif.), who chairs the state's Democratic congressional delegation, told The Washington Post. "I can't speak for the President, but when you've got the eighth biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not." The Obama Administration is now seeking to answer that question. So far the Administration has declined to bail out California. At a June 16 press briefing, White House spokesman Robert Gibbs underscored that stance, saying California's budgetary problem "unfortunately is one that [the state is] going to have to solve." Governor Isn't Asking for Help Later, in the evening, Republican Governor Schwarzenegger issued a statement denying he was seeking any such help. "We are in complete agreement with the White House that California should be solving its budgetary problems on its own without a bailout from the federal government," said the statement issued by Communications Director Matt David. But there remains concern that the deeper California's woes get, the more it will delay the potential U.S. recovery. A report released by the University of California at Los Angeles on Tuesday projects the $24 billion annual state budget deficit will translate into 60,000 job losses by the middle of 2010. At the same time, the state could institute massive cuts in public services such as its welfare program, which serves 1.3 million people. The worry is that these efforts to balance California's state budget would work in a direct cross-purpose with the $787 billion U.S. stimulus package Obama signed in February. Though few experts think California will default on its debt—following the example New York City set in 1975 and Cleveland in 1978—the mere possibility is troubling for the credit markets. "If California truly defaults, I am sure it will shake the faith of bondholders and noteholders in the overall municipal finance system," says Don Boyd, senior fellow at the Rockefeller Institute of Government. "That would undoubtedly lead to higher issuance costs to additional state and local government loans." The Bond Perspective Investors in the municipal bond industry are monitoring the situation. "California is one of the largest states in the municipal bond market, so we have to follow it and make sure we get the call right as an investor," says Hugh McGuirk, head of municipal bond investments for T. Rowe Price ( (TROW)), an investment firm. California is not alone in its fiscal misery.

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