Conservative Watchdog

SACRAMENTO, Calif. (AP) - If AIG was too big to fail, how about the world's eighth-largest economy?  In a move with only one modern-day precedent, California Gov. Arnold Schwarzenegger and Democratic lawmakers are pressing the Obama administration and members of Congress for federal loan guarantees to help the state out of a desperate, multibillion-dollar jam. California is not asking for cash, like the tens of billions given to AIG, General Motors or Morgan Stanley. (MS) Instead, the state with the worst credit rating in the nation is asking that Washington act as a sort of co-signer on the state's borrowing, to be backed up with money from the Troubled Asset Relief Program.

California leaders say that would make it easier and cheaper for the state to borrow money on the bond market, reducing the interest rate by as much as half and saving taxpayers hundreds of millions of dollars. The Obama administration has responded cautiously to the idea, and members of Congress from other states worry that it would put the federal government in the business of backing municipal bonds - a job traditionally held by investment banks.

They worry also that the U.S. government could overextend itself and risk its triple-A credit rating if California and other states or cities in distress start coming to Washington hat in hand. But California leaders warn that without assistance from Washington, the nation's most populous state could fall deeper into a financial abyss and resort to even bigger spending cuts and layoffs, becoming a drag on the economic recovery of the nation as a whole.

"There's simply no better stimulus than guaranteeing state and local bonds, particularly those that are being used to get through the crisis and avoid layoffs," said Rep. Brad Sherman, one of 15 Democrats in California's House delegation who signed a letter earlier this month asking for the federal loan guarantee. Plus, supporters of the idea note that Washington stands to make a profit from loan fees as it did after bailing out New York City in 1975, a move that brought the city back from the brink of ruin.

Because of a steep drop in tax revenue, Schwarzenegger and lawmakers are struggling with a projected deficit of $24 billion, or more than a quarter of the general fund. Come this summer, California will need to borrow money simply to pay for day-to-day operations. The state does that routinely every year. But this time, the amount California must borrow is a lot higher. And the tight credit market and questions about California's ability to repay are likely to make borrowing extremely expensive for the state. "We are not asking for a bailout," said state Assembly Speaker Karen Bass, a Los Angeles Democrat. "We're asking for the federal government to step in where commercial banks can't this year because of the crisis within the financial industry."

So far, no other state has asked for such aid. States such as Arizona and Nevada have proportionately larger deficits than California but do not face the same cash-flow crunch. Michigan is in distress too, but stands to benefit from the Obama administration's rescue of the auto industry. Treasury Secretary Timothy Geithner told a House committee last week that he did not have authority to use financial rescue money to help state governments. But he did not rule out assistance. He said California's request would have to be decided in Congress. The idea's prospects in Congress are uncertain. But California has far more clout in Washington than any other state, with the nation's largest congressional delegation and a San Franciscan, Nancy Pelosi, as speaker of the House. Democratic Rep. Barney Frank of Massachusetts, chairman of the House Committee on Financial Services, said he supports legislation to help California and other cash-strapped cities.

"I think if the federal government can go to the aid of major financial institutions, particularly when state and local governments face short-term liquidity issues, I think helping them out is very relevant," Frank said. California already has cut $15 billion and raised taxes by nearly $13 billion this year. Schwarzenegger has proposed cutting nearly $20 billion more, including eliminating California's welfare-to-work program and getting rid of health insurance for 930,000 poor children. Other members of Congress worry about the precedent if the government agrees to guarantee California's borrowing. Rep. Darrell Issa, a California Republican, said other states would be certain to ask for help, too, and he warned that the U.S. government's credit rating could be downgraded as a result. In 1975, President Gerald Ford rejected a similar plea from New York City, prompting the not-entirely-accurate headline "Ford to City: Drop Dead." With the city on the verge of bankruptcy, the president ultimately relented, signing legislation for federally guaranteed loans. The loans have since been repaid with interest.

California is just as likely to repay its loans, said Matt Fabian, a bond analyst at Municipal Market Advisors, based in Concord, Mass. He and others noted that the state has never been late on a payment, and is always collecting revenue and has the option of raising taxes.

"California's not going to default," Fabian said.

The Obama administration continues to try to facilitate a long-shot debt-reduction agreement with reluctant General Motors bondholders despite the company's fast-approaching bankruptcy deadline, the White House said Wednesday.

[GM  0.75    -0.37  (-33.04%)   ]

With ratification of labor concessions expected this week, bondholders remain the major piece of GM's restructuring puzzle not yet in place voluntarily. A General Motors bankruptcy filing seemed inevitable after a rebellion by its bondholders forced it to withdraw on Wednesday a plan to swap bond debt for company stock. But there is no expectation of a bankruptcy filing by GM this week, a source familiar with the discussions said Wednesday. The source said it was likely that the timing of any next steps would be around the June 1 deadline the government has set for GM's stakeholders to reach agreement on restructuring. GM has until Monday to complete a government-ordered restructuring that includes debt reduction, labor cost cuts and plant closures. But a Chapter 11 reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 percent of the company's stock had failed. GM has received $19.4 billion in federal loans. 

Three of Chrysler’s secured creditors are mounting a fresh attempt to thwart the carmaker’s Chapter 11 reorganisation on the grounds that it violates their legal rights and the US government’s authority under the Troubled asset relief programme. The three – all Indiana state pension funds – are among a group of 46 creditors that had appeared to back away this month from efforts to derail the process under which a “new” Chrysler would emerge from bankruptcy protection by July 1. The new entity would be owned by a union healthcare trust, the US government and Italy’s Fiat.  Chrysler, with backing from the US Treasury, had offered its secured creditors just under 30 cents on the dollar to settle claims totalling $6.9bn. Four big banks, holding the bulk of the claims, accepted the offer following political pressure from Washington.

However, the Indiana State Teachers’ Retirement Fund said on Wednesday that it had a fiduciary responsibility to its members to continue the fight. The fund stands to lose $4.6m under the current settlement proposal and has teamed up with Richard Mourdock, Indiana state treasurer, to try to recover those losses. The latest objections could galvanise other lenders to renew their challenge. “I fully support their motion and believe a number of lenders (including us) will ultimately join their group,” said George Schultze of Schultze Asset Management, one of the creditors that had abandoned an earlier legal fight.

In a court filing on Wednesday, the Indiana funds accused the government of adopting a strategy of “the ends justify the means”.  They also said the Treasury “has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of creditor rights – that first-tier secured creditors have absolute priority”. The Indiana funds say the current plan will strip their collateral into the new company, benefiting more junior creditors. The funds also allege that Tarp funds were meant to be funnelled only to financial institutions.  “Whatever powers the Treasury department may have under Tarp,” the funds said, “it does not have the power to control the entire restructuring of a company to the detriment of the company’s secured creditors and for the benefit of other interest groups so that certain broader policy and political objectives may be achieved.” A US bankruptcy judge on Wednesday denied their attempt to halt proceedings in bankruptcy court, but a district court needs to rule on the funds’ request for the case to be heard in district court instead. The group also can oppose the final sale agreement, which under the current timeline must be approved by May 27.

Reporting from Washington -- The Obama administration has backed off its threat to withhold billions of dollars in stimulus money from California, telling Gov. Arnold Schwarzenegger the state did not violate federal law in cutting pay for home healthcare workers in a bid to help balance the budget.

In a letter that was given to the governor this morning, the U.S. Department of Health and Human Services said the state remains eligible to receive another $8 billion in stimulus money for its Medicaid program, a ruling that may offer some solace for state officials coping with the resounding voter defeat Tuesday of five ballot measures aimed at closing California's huge budget shortfall.

LOVE New York. But how much should it cost to call New York home? Decades of out-of-control budgets, spending hikes and relentless borrowing have made New York simply too expensive.  Politicians like to talk about incentives -- for businesses to relocate, for example, or to get folks to buy local. After reviewing the new budget, I have identified the most compelling incentive of all: a major tax break immedi ately available to all New Yorkers. To be eligible, you need do only one thing: move out of New York state.  Last week I spent 90 minutes doing a couple of simple things -- registering to vote, changing my driver's license, filling out a domicile certificate and signing a homestead certificate -- in Florida. Combined with spending 184 days a year outside New York, these simple procedures will save me over $5 million in New York taxes annually.

By moving to Florida, I can spend that $5 million on worthy causes, like better hospitals, improving education or the Clinton Global Initiative. Or maybe I'll continue to invest it in fighting the status quo in Albany. One thing's certain: That money won't continue to fund Albany's bloated bureaucracy, corrupt politicians and regular special-interest handouts. How did the state get to this point? By spending, spending and spending some more. * New York's budget was $72.7 billion in 1999. Ten years later it ballooned to $131.8 billion. Each year, on average, the budget has risen at an astounding 6 percent compounded annual rate -- more than dou ble inflation (2.8 percent).  * Medicaid spending alone works out to $2,283 for every man, woman and child in the state. That's the highest in the nation and twice the national average. In the last decade, the Medicaid budget grew 50 percent (from $30 billion in 1999 to $45 billion in 2009). In almost every sector (hospitals, nursing homes, medicine, clinics and home and community care), spending per recipient regularly exceeds the national average. Faced with escalating costs and diminishing returns, Albany and its allies -- that is, the health-care unions (SEIU Local 1199 has more than 300,000 members, many of whom are politically active) -- have only one answer: increase taxes.

LOS ANGELES — A smattering of California voters on Tuesday soundly rejected five ballot measures designed to keep the state solvent through the rest of the year. The results dealt a severe setback to the state’s fragile fiscal structure and to Gov. Arnold Schwarzenegger and the state legislators who cobbled together the measures as part of a last-minute budget deal passed in February. The measures, which would have prolonged tax increases, capped state spending, earmarked money for education and involved the state in a complex borrowing scheme against its lottery, were rejected by roughly 60 percent of those who voted. The failure of the measures, combined with falling revenues since the state passed its budget, leaves California with a $21 billion new hole to fill, while foreclosure rates and unemployment remain vexing problems here.

“Tonight we have heard from the voters, and I respect the will of the people who are frustrated with the dysfunction in our budget system,” Governor. Schwarzenegger said in a prepared statement. “Now we must move forward from this point to begin to address our fiscal crisis with constructive solutions,” Mr. Schwarzenegger said. While the governor was a strong supporter of all the measures, he was not the public face of the effort, as he was in 2005 when he took on the budget issues, and well as the state’s unions, in another failed effort at the ballot box. This time the Republican governor let teachers and firefighters do his talking for him in advertisements, and indeed was not even in the state the day of the vote.

Instead, he was a guest of President Barack Obama at the White House, where the president was announcing tough new federal standards on automobile emissions that emulate California’s environmental standards. He updated his Twitter account through out the day ("Just landed in DC. Look forward to updating you tomorrow, hopefully with pictures or video") but made nary a mention of the propositions there. The one measure to pass, which would prevent legislators and statewide constitutional officers, including the governor, from receiving pay rises in years when the state is running a deficit, was approved by more than 75 percent of those who cast ballots, demonstrating the overwhelming disgust many Californians say in polls that they feel toward elected officials in a time of deep budget paralysis.

The central measure, Proposition 1A, would have increased the state’s rainy-day fund but also restrict spending in future years, and extend several temporary taxes. Proposition 1B, which was connected to 1A, would have required $9.3 billion to be paid to education to make up for shortfalls in spending levels set by a voter-approved proposition in 1988. Voters indicated in polls earlier this month that they had a distaste for protracted taxes, caps on spending during inflation periods and general legislative and gubernatorial will. The other failing propositions were 1E, which would have redirected money guaranteed for mental health services to the state’s general fund; 1D, a similar measure using money earmarked for early childhood programs; and 1C, which would have modernized the state lottery and permitted the state to borrow from future profits.

But voters — roughly 10 percent of those registered, according to midday figures — seemed to have lost patience with ideas cooked up by legislators to fix the state’s perpetual budget imbalances. The governor and lawmakers will now be forced to debate yet again what methods will be used to set the balance sheet right and vote on new measures to cut spending. Those proposed measures will be draconian and politically difficult, including large education cuts and reductions in prison sentences. “We face a staggering $21.3 billion deficit and in order to prevent a fiscal disaster, Democrats and Republicans must collaborate and work together to address this shortfall,” said Governor Schwarzenegger. “The longer we wait the worse the problem becomes and the more limited our choices will be.” Lawmakers will regroup in Sacramento on Wednesday. Bill Watkins, an economist with University of California in Santa Barbara, said legislators “have some interesting decisions to make now,” adding: “Education is definitely going to take a hit. The way we finance local governments is a travesty and funds will be taken away this time.”

Arnold Schwarzenegger was so preoccupied with lecturing the national GOP about the need to “rebrand” itself and move left that he forgot to mind California’s own business.

Today, his desperate tax-and-spend ballot measures are expected to all go down in flames at the polls. Tea Party activists of all political stripes have lambasted the deceptive initiatives. The intellectually and financially bankrupt state GOP is in full meltdown, having poured $650,000 into Schwarzenegger’s coffers to promote the phony spending cap measure before the state party waffled, then turned around and voted to oppose it and the other tax hikes.

So, where in the world is the Taxinator now? After making a last-ditch pitch for his $16 billion in tax increases at black churches in L.A. (hello, church/state separation activists?) and attempting to fear-monger voters into approving the measures, Arnie has fled to Washington, D.C. today for a pow-wow with Barack Obama to celebrate — what else? — new eco-regulations on cars that will result in massive new costs imposed on drivers:

Battling anger and indifference on the part of California voters, Gov. Arnold Schwarzenegger implored them Sunday not to make the state “the poster child for dysfunction” by defeating a host of measures on Tuesday’s ballot that seek to restructure the state’s bleak finances.

After years of binge spending, open-borders welfare expansionism, environmental extremism, unchecked unionism (read: SEIU) and hostility to businesses, it’s a little late to try to prevent California from becoming “the poster child for dysfunction,” isn’t it?

You can run, but you can’t hide:

When the going gets tough, the tough get going and that’s what Gov. Arnold Schwarzenegger is doing tonight: going out of town.

Although the governor has been arguing for months that Tuesday’s election features a package of ballot measures that are absolutely essential to California’s financial future, Schwarzenegger is leaving on a jet plane for Washington, where he’ll spend election day. And he’s not coming home in any hurry, either.

The governor will be in DC for what his staff is billing as a major announcement: California is expected to get its long-sought waiver from the Environmental Protection Agency, which will allow the state to set higher standards for car and truck exhaust emissions.

And Schwarzenegger plans to stay in Washington Wednesday to lobby the California congressional delegation for more budget help for the state.

Important stuff. The tougher emissions standards are something Schwarzenegger has been working on for years and is an important past of his plan for the greening of California. And since California is looking at a $15.4 billion budget deficit under the best — and currently unlikely — circumstances, a chance to smooze the DC-based pols isn’t a bad thing.

Still, would Schwarzenegger be making this trip if every poll wasn’t predicting an election night disaster for the governor’s budget reform package? Things are so ugly that Budget Reform Now, Schwarzenegger’s umbrella group for support of the ballot measures, hadn’t decided by this afternoon when, where or even if they were going to have an election night party.

It will be thanks in large part to both the old guard taxpayers’ rights groups (Howard Jarvis) and the new generation of anti-Evil&Stupid Party activists from the Tea Party movement that Schwarzenegger’s ill-conceived measures go down. But the fight is far from over. The Taxinator is in D.C. with his hands out — and his figurative gun to the head of the rest of the country’s taxpayers. As I noted last week, California wants TARP money. They’ll argue, as every other successful bailout recipient has, that the state is Too Big Too Fail. California did itself in. It deserves to suffer the consequences.

Tell your congressional representatives to tell the muscle man looking to pump up his puny state coffers with everyone else’s money:

Not one dime.

***

Karl at Hot Air: “[M]any Americans will chafe just as much at the prospect of paying to bail out California’s decades of inept govenment as they do at paying to bail out GM’s decades of inept management. Obama would bail out California to hold onto those electoral votes, but he will have to worry about how many he loses in the process.”

CK MacLeod: Your official Cali budget initiatives guide. Har.

After a tough week on Wall Street and in Washington, it's important to point out that all economic troubles are not created equal. And it is the red states that are better prepared to weather the crisis. In Texas, Florida and Arizona, life doesn't seem so grim. As Phil Gramm and Mike Solon noted in a Sept. 13 Wall Street Journal column, those three large states gained 1.7 million, 1.4 million, and 600,000 jobs, respectively, from 1996-2006. That's one-third of all US jobs during that period. The states also had per-capita income growth that far outpaced the national averages. Most other red states have done either fairly well or very well. Friday morning's Labor Department report shows at least 15 states that went for Bush in 2004 had seasonally adjusted August unemployment rates below 5%: Alabama, Arkansas, Idaho, Iowa, Kansas, Louisiana, Montana, Nebraska, North Dakota, Oklahoma, South Dakota, Utah, Virginia, West Virginia, and Wyoming.

But if you're looking for economic struggles, visit the blue states.

Begin with big kahuna California, which gave John Kerry a 10% margin in 2004. The now-misnamed Golden State, with its Democrat-dominated legislature and might-as-well-be-a-Democrat governor, had an August unemployment rate of 7.7%, up from just 5.5%, and over 400,000 more unemployed workers, in 12 months. Yet Arnold Schwarzenegger rejects the idea of offshore drilling, and the jobs it will create. Then head east to Michigan (unemployment: 8.9%; 12-month job loss: 70,000). Things have gone from bad to very bad during the tenure of Democratic Gov. Jennifer Granholm, with the help of a too-compliant GOP legislature. Wolverine State defenders point to its "unique" auto industry problems. Baloney - Gramm and Solon noted that while Michigan lost 83,000 auto-sector jobs in the past 15 years, eight Southeastern states, all of which went for Bush in 2004, gained 91,000.

Move on to Ohio (7.4% unemployment). Though it went for Bush in 2004, state government has mostly acted blue since the mid-1990s, thanks to alleged GOP governors George Voinovich and Bob Taft. The Buckeye State moved from pseudo-red to largely blue in 2006, electing a Democratic governor, who has been aided and abetted by a mostly complacent GOP legislature. Finally, head west a bit to Obama's Illinois (7.3% unemployment). Its Democratic governor, legislature, big-city mayor, and US senators have all played a role in creating the Land of Lincoln's economic lousiness. Moving Democratic National Committee operations to Chicago, perhaps Obama's most noteworthy "jobs program," has made little difference.

Within certain states, the red-blue contrast is stark. In Ohio, you'll find foreclosures galore and general economic malaise in bluer-than-blue Cleveland, Akron, Canton, Youngstown, Toledo, and Dayton. Meanwhile, Cincinnati and Columbus are hanging in there nicely, especially in the GOP-dominated ring suburbs. Similar comparisons apply between economically-distressed Southeastern Michigan against the rest of that state, and Metro Chicago versus much of the rest of Illinois. If we're in a recession, blame it on the high-tax, high-regulation, high-giveaway environments of the blue states, blue regions, and blue cities. Red states, and the red regions within otherwise blue states, made the right decisions - but will be left holding the bag. Sadly, the blue environs of New York, New Jersey and Connecticut will most likely vote for Barack Obama. The rest of the country is already paying $1 trillion to bail out Wall Street. Must we pay for the blue states' bad judgement as well?