Friday, July 15, 2011

Deadbeat Alert: Orange County Ex-Treasurer Puts the Latest Bridge Loan into Perspective

Yesterday, we wrote about the new $5 billion bridge loan that state Treasurer Bill Lockyer is seeking from Wall Street. The fact that California needs this loan to keep the lights on until it can issue more short-term debt in late August, coupled with the fact that it's still paying off a bridge loan that Wall Street gave it last October, is just another reminder of how cash-starved our government really is. Fortunately, just in time for the weekend, former Orange County Treasurer Chriss Street explains at Cal Watchdog just how ominous this latest bridge loan request really is.

According to Street, tax collections throughout the year tend to be "lumpy;" that is, they arrive in chunks in April and November. Governments, of course, like spending money all year long, so they rely on issues of short-term debt to tide themselves over during the lean months. California, however, is so broke that it expects to start running negative cash balances in the third week of July; you know, days from now. Unfortunately for the bureaucrats, a new factor is at work this time around: the combined effect of the sovereign debt crisis in Europe and the ongoing brinksmanship over US debt in Washington is making it harder for state and local governments to borrow money. With Moody's poised to downgrade the debt of literally thousands of municipal governments, there's not much appetite for lending to the worst credit risk on the continent, which would happen to be our fair state. As a result, says Street, the interest rates on any loan to California are likely to be brutal this time. In contrast to the loans Wall Street gave the Golden State in 2009 and 2010, which came at less than 2% interest, he points to the loan New Jersey got last week from JP Morgan, which came at 9% interest. (Yes, New Jersey has a better credit rating than California.)

We've said many times that the bond markets would deliver the rude awakening in Sacramento that recession, population decline, and voter apathy have not stirred up. At a similar or higher rate, the cost of the proposed $5 billion loan would snowball rapidly; in fact, it would double in about 8 years. Given that the state's public pension obligations are about to explode, and that the recession suppressing tax revenues shows no signs of abating, dramatically higher borrowing costs are exactly what our government doesn't need right now. Yet it looks like that's exactly what we're going to get.

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