Blinders Here, Blinders There

The dysfunctional California legislature was unable to resolve the budget fiasco yesterday. Democrats proposed a plan that would have tripled the car tax and made a few symbolic budget cuts; Republicans refused to vote for it because they want a permanent measure mandating spending limitations.

The new legislature is sworn in next week. Unfortunately, I suspect that the only difference will be the names and Sacramento will be as dysfunctional as ever.

This is having an impact on California’s ability to sell bonds. Interestingly, the prices for bonds may imply that the state has a huge risk of bankruptcy. At least that’s what a British commentator has said.

And California isn’t the only state in such danger. Michigan, Nevada, and New Jersey are on the list, too. Let’s look at each in turn.

Michigan is likely on the list for two reasons: the troubles with the automobile industry and the state’s miserable business climate. The automobile industry dominates Michigan and there’s a real chance that the entire Big Three (GM, Ford, and Chrysler) will declare bankruptcy. There’s even a higher risk of huge job losses as these companies are going to have to restructure. Meanwhile, the government in Michigan raises taxes on all businesses—I’m sure that’s attracting lots of businesses to Michigan….

Nevada has hit a downturn, too. But there’s a big difference between Nevada and California. The legislature in the Silver State and Nevada’s Governor have reached an agreement on a short-term solution (though there appears to be some smoke and mirrors with that). And Democrats there appear to have some sense of fiscal reality. Steven Horsford (D-North Las Vegas), Nevada Senate Majority Leader told AP, “All of the options are very difficult choices…They hurt Nevada citizens in different ways, and none of the options are good ones. But we have to balance this budget in the short term.”

New Jersey has a huge crisis with its pension plan. “New Jersey’s pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows…The latest losses — nearly $9 billion in October, and another $3 billion so far this month — mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.” New Jersey’s pension plan expects an 8.25% return in 2009 and one commentator bluntly said, “That simply is not going to happen.”

Indeed, pension problems are likely occurring in many states. New Jersey invested in the market. That’s great during upturns but not so good during downturns. How many other pension bombs are out there? I’m sure there are plenty.

It’s always better to confront your problems now than to wait until later. At least in Nevada they appear to be doing that. Here in California and in the swamplands of New Jersey the blinders remain on.

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