Wednesday, June 3, 2009

Our Wallet is Empty

From the Sacramento Bee: Schwarzenegger: 'Our wallet is empty'

Declaring that "California's day of reckoning is here," Gov. Arnold Schwarzenegger said today the state should turn its dire budget straits into an opportunity to make government more efficient.

Speaking to a rare mid-year joint session of the Legislature and other constitutional officers, Schwarzenegger acknowledged the billions of dollars in spending cuts he has proposed to close a $24.3 billion hole in the budget will be devastating to millions of Californians.

"People come up to me all the time, pleading 'governor, please don't cut my program,'" he said. "They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice.

"Our wallet is empty. Our bank is closed. Our credit is dried up."

The short-term problem faced by lawmakers is closing the budget gap in time for state officials to go the private investment markets and borrow billions of dollars to get the state through the first months of the fiscal year that starts July 1.

State Controller John Chiang has warned that without such loans, the state's coffers will run dry by the end of July. Chiang said last week that as a practical matter, the budget must be patched up by mid-June in order to give officials time to borrow the money.

Chiang reiterated his warning after the governor's speech, saying whatever plan lawmakers and Schwarzenegger come up with has to be viewed as "credible" by Wall Street.

"I think the governor was trying to light a fire and provide some inspiration," the controller said. "He's offered some specific solutions to help us get to resolving some of the issues."

Schwarzenegger has proposed a plan that relies partially on accounting maneuvers and borrowing funds from coming fiscal years, but mainly on deep cuts in nearly every program funded by state government.

Those range from cutting spending on K-12 schools, community colleges, the University of California; releasing some non-violent prisoners a year early; cutting pay for most state workers and laying off others; closing 80 percent of the state's parks, and wiping out or paring back on health and social service programs for California's neediest residents.

The Sacramento Business Journal adds: Wells Fargo CEO says California in 'financial ruin'

Wells Fargo CEO John Stumpf said Thursday that California’s large budget deficit means state services will have to be cut.

“The state of California is in financial ruin,” Stumpf told those attending a statewide microfinance lenders’ conference at Stanford University. “The budget deficit in California is staggering.”

Stumpf said the recession is taking a toll on some of the loans made to creditworthy borrowers who lost their jobs and fell behind on payments.

“Today we’re charging off loans to people we should have made loans to,” said Stumpf, reiterating that the bank avoided many of the exotic mortgages offered by rivals.

The state of California is struggling with a growing budget deficit after tax and financial measures failed at the ballot box this month. Earlier this year, the state delayed tax refunds and other payments due to what State Controller John Chiang called a “cash crisis not seen since the Great Depression.”

The state recently asked the federal government for assistance in guaranteeing California’s short-term borrowings, fearing that it could not raise the money standing on its own credit.

“This one feels different,” Stumpf said. “It feels different in the respect that the whole world is in recession.”

What does all of this mean for real estate? Expect higher taxes, reduced services, and more cities to go the way of Vallejo. Economic recovery is fighting an uphill battle.