One out of every eight Americans lives California.
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Its economy comprises 18 percent of the domestic gross national product.
California is the world’s fifth largest supplier of food and agricultural commodities. If California was a country, its economic output at approximately $1.9 trillion a year, would be the eighth biggest on the planet, just behind Italy and ahead of Russia, Brazil, Canada and India.
With more than 38 million residents at last count, California is the nation’s most racially diverse state. It also has more televised car chases per capita, high-profile celebrity trials and quirky citizens than any other state with the possible exception of Alaska.
No state embodies greater contradictions. One minute the voters are approving the use of medical marijuana. In the next, they’re rejecting gay marriage. Despite its reputation for liberalism, the seeds of national tax revolution germinated in California.
How Do You Pronounce That?
Only in California could a guy who played second banana to a chimp or a bodybuilding guy who made his bones portraying a cybot with a bad Bavarian accent become governor. Another of its leading lights, Dick Nixon, sought the statehouse job, but had to settle on the Presidency.
Like it or not, California is a trendsetter. If it’s going to happen anywhere, it usually happens in California first.
California is broke.
The state budget is upside down by $26 billion. Statewide, joblessness is nearing 11.5 percent. California is sinking fast, and the federal government appears unwilling to throw it a lifeline.
California is on the brink of issuing IOUs after Gov. Schwarzenegger and state lawmakers failed to strike a budget compromise last night.
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California is the biggest and most influential player in the municipal bond market. No other state borrows more or has a greater impact on the borrowing rates.
Over the past few years, California’s credit rating has slipped. The current budget standoff in Sacramento has made matters even worse.
President’s Surprising Reaction
Where California creditworthiness once held the coveted AAA rating, it now has fallen to BBB-minus, the lowest of all the 50 states. If California was an average Joe, its only borrowing options would be a pawnbroker or loan shark.
For California, this means that it’s not only remarkably more difficult to raise needed funds in the bond market, but the cost of servicing its debt may escalate beyond the fundraising ability of its tax base. In other words, the once unthinkable prospect of a California default on its bond obligations now has become a real possibility.
Although California will get its slice of the President’s stimulus package, Gov. Schwarzenegger says it may not be enough stave off a collapse.
Along with its two senators, its congressional delegation and a cacophony of mayors, the Governator has sought loan guarantees from the feds to enhance the state’s chances to raise funds in the bond market. The White House, however, has steadfastly refused.
The President’s repudiation of California’s request is surprising.
Mr. Obama raised more money in California for his electoral campaign than anywhere else. California also voted overwhelmingly for this President.
On principle, the President’s rebuff to California is understandable. If he accedes, it may set a precedent that opens the door for other states to request the same consideration.
But California is not like other states.
If the implosion of AIG or the disintegration of General Motors warrants federal government intervention, then so, too, should California. Arguably, if California goes bust, the impact will be felt not only in the West but across the nation.
There is no question that California’s lawmakers must reach a budget accord that will require deep cuts and painful compromises. But if California defaults, it could precipitate a crisis in the municipal bond market that parallels the implosion of the nation’s banks.
Like it or not, as California goes, so goes the rest of the nation.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
