Munis, Munis, Munis

Long-time TILB readers know that we are very concerned about the muni-market (click here for our coverage of the bankruptcy filing for Harrisburg, Pennsylvania - that fine state's capital city).

Certain states, like Texas and Virginia, appear to be in fine shape and are resonable credits (though you aren't getting paid enough to care, in our opinion). We'll call citizens of these states Future Subsidizors. Other municipalities - like California, New Jersey and Illinois (aka Future Subsidizor Supplicants) - will go through stress or outright distress.

Many of these Future Subsidizor Supplicants may at some point be great investments, if you know what you're doing. But the vast majority of the muni-market lender base (which is largely doctors and lawyers retail investors) have no idea what they are doing - nor do their advisors (e.g., muni mutual funds or private wealth advisors).

In the last few days the muni-market has become spooky. Examples - a small town outside Detroit, Michigan called Hamtramck has begun the process of seeking state permission to file for bankruptcy (link here). Additionally, some much bigger munis (like the state of California - which would be one of the largest sovereign issuers in the world if it were a standalone country) have pulled some offerings due to "tepid demand". At some point these municipalities are going to have to start issuing again in order to fund their deficits and - TILB supposes - many will have to fund at rates that far exceed their budgeted cost. This of course will lead to further strain on those government budgets, leading to higher interest rates, further budget cuts, more local economic straing, yet further strain on those government budgets, leading to higher still interest rates, etc., etc. ad nauseum...default (or restructure).

Beware. Skillful investors willing to take an active role in helping these munis "solve" their debt problems will be able to make money (Jenny Hedge Fund Manager will buy California's debt at 40c and selling back to Cali at 60c, thus making itself a quick 50% while helping Cali reduce that issuance by 40%), but Johnny Retail is about to get rolled.

Caveat Emptor - get ready for more Schwarzies.

Below are some excerpts from today's Wall Street Journal A1 page (all emphasis added):

America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.

The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn—and unlike the federal government, most are barred constitutionally from running deficits.

"The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers," Tom Dresslar, a spokesman for the California State Treasurer, said late Wednesday. He added that the state decided to cancel another $267.3 million bond sale it planned to price next week "in light of market conditions."
California's $10 billion bond sale this week was seen as a test of access for governments to the bond markets, and the middling interest signaled that municipalities could have to pay more to attract investors. The state further jolted the market by delaying the close of the bond sale, citing a lawsuit filed Tuesday that challenges a separate tactic the state is using to raise funds.

"California's timing unfortunately couldn't be worse," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management. "This creates a fear among individual investors and probably could hurt the state in terms of paying a higher borrowing cost than if they'd done a deal at a different time."

After pouring billions into municipal bond funds most of the year, investors pulled $115 million out of the funds last week, the Investment Company Institute said Wednesday. That was the first weekly outflow in seven months, ICI said.

The fragility of government finances was also evident in a move by Moody's Investors Service to downgrade the city and county of San Francisco, as well as the city of Philadelphia, and by a request by Hamtramck, a small Michigan city, for permission to file for bankruptcy.

California, facing a projected $25 billion shortfall through June 2012, aimed this week to sell $10 billion in so-called "revenue anticipation" notes. Over three days, it reported total orders of about 60% of that amount, or $6.06 billion, for the securities, according to the Treasurer's office. In September 2009, California sold 75% of a similar offering to retail investors. The remainder of an offering is typically bought by big institutional investors.

...

The short-term notes mature next May and June and yield 1.25% and 1.5%, roughly what California paid a year ago, though higher than other states. "It's still an incredibly low rate, and it's an awful lot of bonds," said Matt Fabian, senior analyst at Municipal Market Advisors. [TILB note: Basically commercial paper for California - keep not extending maturities and rolling it short Cali, it will work out just fine...]

...

At the same time, concerns have been mounting over whether, after the double whammy of 2008 market losses and the economic downturn, municipalities will be able to maintain their reputation for always paying their bondholders.

Average yields on 30-year municipal bonds rose 0.13 percentage point Wednesday to 4.77% and are up roughly 0.5 percentage point in recent weeks. Yields on 5-year bonds rose 0.06 percentage point to 1.58% on Wednesday.

About $700 million worth of bond sales were pulled this week, according to Thomson Reuters. That is roughly 3% of the week's planned sales, according to data from Ipreo. Many of the bond sales were to refinance outstanding debt at lower rates, meaning the governments didn't need the money.

But postponed deals are atypical, market watchers say, and they attribute them to investor demand for higher interest rates amid a glut of bonds as well as the impact of the move in 30-year Treasurys.

...

Moody's cited "continued weakness of the city's finances" in its downgrade of Philadelphia, affecting $3.85 billion in outstanding debt. Rob Dubow, the city's finance director, said, "We understand we face fiscal challenges, and we have, but for us the timing is odd, because we feel like we have stabilized." As for San Francisco, the bond rater said the "city ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior ten years."

A spokesman for San Francisco's mayor said the ratings downgrade was "not unexpected" given the challenging economy, and that the city still had a better rating than many other local governments.

As a brief aside, this whole thing is very sad. Most municipalities could handle their debt if they were willing to make hard choices. However, in a culture where homeowners now making "strategic defaults" on their mortgages, it does not surprise us that rather than cut back on trash service or government size, our municipalities are choosing to renig on their contractual and moral obligations to their lenders.

We think lenders - broadly - are not requiring enough compensation for this sea-change in risk.

SCHWARZIES!!!!

Ah, it feels so good. Long time TILB readers know that last year we had something of an obsession with California's 2009 vintage scrip, which we named Schwarzies.

Well, today we read an article (linked here) from Bloomberg which says California is not close to passing a budget and it will run out of cash by end of August. The article goes on to discuss how state legislators will (yet again) violate the state constitution and not provide a proposed budget to the Governator by midnight tonight (June 15th). This is perhaps our favorite quote of the year:

“We’re working on it,” said Alicia Trost, a spokeswoman for Senate President Darrell Steinberg, a Democrat from Sacramento. “The most important thing is that we have a fair and balanced budget instead of getting it done by a constitutional deadline.”

I know, right? I mean, like, who needs, like, to follow the constitution thingy?

In any case, in honor of hints of renewed Schwarzie issuance, the author of Directive 10-289 and friend of TILB sent along this song to celebrate the moment. Enjoy.

You are now about to witness the strength of Wall Street knowledge

Verse One: Arnie

Straight outta Sactown, crazy governator with his lats blown
From the gang called IOU
When I'm called out I get politically put out
Flex the pecs and raise the Tax no doubt
You too boy if don’t pay me
The police are gonna hafta come and get ya out of Cali
Off yo ass that's how I'm goin out
For the punk Kalifornians that's showin out
SoCal start to mumble, NoCal wanna rumble
Mix em and cook em in a pot like gumbo
Goin off on a governator like that
with a gat that's pointed at yo cash
So give it up smooth
Ain't no tellin when I'm down for a jack move
Here's a financial rap to keep you dancin'
with a debt record like Greece Athens
Schwarzie is the tool
Don't make me act the no payin' fool
Me you can go toe to toe, no maybe
I'm knockin' playas out tha box, daily
yo weekly, monthly and yearly
until them dumb democrats see clearly
that I'm down with the capital I.R.S.
Boy you can't play with me
So when I'm in your neighborhood, you better duck
Coz Arnie is pumped up like a buck
As I leave, believe I'm issuin, something missin'
but when I come back, boy, I'm comin straight outta Sactown.

Genius.

In case anyone wants the original, it's Ice Cube's opening verse to Straight Outta Compton.

Pennsylvania's Capital City, Harrisburg, Faces Bankruptcy

Somehow we missed this news during January. Hopefully it continues to develop toward a filing.

Awesomely, Pennsylvania's capital city - Harrisburg - is insolvent and on the brink of filing for Chapter 9 bankruptcy.

As reported in this link to WGAL's website, you can see that Harrisburg's new mayor is dealing with all sorts of tough decisions in her first few weeks in office.

TILB's advice to Mayor Thompson: take a page from Arnold's book and start issuing your own scrip. Seems like s no-brainer.

Emphasis added [and comments added in brackets]

WGAL.com
Harrisburg Facing Bankruptcy; Mayor Proposes Tax Hike, Leasing Assets
Official: Incinerator Primary Cause Of Financial Woes

HARRISBURG, Pa. -- After just a few weeks in office, Harrisburg Mayor Linda Thompson is facing financial problems that could put the city in bankruptcy before the year is out.

City officials blame the incinerator facility, now over $228 million in debt, for the city's financial troubles.

That's not an option she even wants to consider at this point, but any successful plan must solve the financial drain of the city's incinerator.

The incinerator is currently $288 million in debt and is the primary cause of Harrisburg's financial problems.

Officials said it doesn't begin to produce the revenue needed to pay off the debt of repairing and operating the facility over the years.

Former City Council vice president Dan Miller said it's been a financial drain for decades.

"It's such a problem because for 25 years, the true problem of the incinerator has never been addressed," said Miller. "It's been refinanced repeatedly and pushed down the road, always waiting for someone else to solve the problem."

Now, he said, the city must solve the problem.

Miller said he believes the city should consider going into Act 47, the first step before bankruptcy. That would allow the city to negotiate with the people it owes to come up with realistic plans to settle debts.

Miller said raising taxes and other fees, or selling off revenue-producing city assets like the parking garages and water and sewer operations, will only create new problems.

Mayor Thompson Proposes Budget Amendments
Thompson addressed City Council Tuesday night with her own plans to fix the financial crisis.

City council member Wanda Williams said Thompson's proposed tax hike is "an outrageous amount" to increase any taxes. [TILB - I love this! "We can't cut spending" and "we can't sell our precious assets" and "we can't raise taxes"! Guess what you can do, loser: File BK.]

Thompson is proposing to increase water rates by 40 percent and cut overtime funding for the police and fire department.

At the meeting, Thompson also proposed what she called tough decisions, which include:
A 20 percent property tax increase
Cutting costs for trash collection
Merging Harrisburg dispatch with the Dauphin County 911 center

Thompson said her cuts would save the city about $8 million. She said her proposals will close the nearly $4 million gap in the budget, allow the city to make payroll next month and help ease the financial pain of the incinerator debt.

But not everyone is happy with the mayor's recommendations.

"I'm disturbed by it," said one taxpayer. "To me, a property tax increase as well as a water rate increase would be something I find objectionable." [TILB - while we totally agree, Johnny Taxpayer needs to recognize that these are symptoms of the debt and spending problem. It's like getting herpes from unprotected but enjoyable sex and then saying you find the sores "objectionable".]

Thompson said she is also considering selling or leasing the city's assets, including parking garages and City Island. [TILB - Honestly, this is a great idea...I mean, other than the fact that this is a horrible time to sell these sorts of assets. Maybe some public REIT with overpriced equity financing will provide the necessary bid. Why should municipalities be in the business of managing parking garages anyway?]

City council will look into the mayor's budget proposal at Thursday's budget and finance committee meeting.

Expect more of this sort of thing.

The Final Countdown: Greek Sovereign Default

The aptly named band Europe brought us the epic music video and song "The Final Countdown" about 20 years too early (I mean, who cares about the countdown to the end of communism - let's talk about the PIIGS sovereign default).

As I read all these articles about Greece's impending doom, it's hard not to hear in the back of my head the implied complaint, "why won't they just lend us the money for free? This doesn't make any sense. Just lend us the money for free!"

[emphasis added and comments in brackets]

Europe Weighs Possibility of Debt Default in Greece
New York Times
By STEPHEN CASTLE and MATTHEW SALTMARSH

European leaders are quietly considering whether to come to the aid of their troubled neighbor Greece amid fears that the nation might default on its debts and unleash another round of financial crisis.

Only a month after Dubai was rescued by its neighboring emirate Abu Dhabi, Germany, France and other European powers are discussing whether Greece might need a bailout too.

After a decade of debt-fueled profligacy, Greece is confronting what amounts to a run on the bank. And, despite repeated assurances from Athens, the nation’s strained finances have put already jittery financial markets on edge. On Thursday, the worries stretched all the way to Wall Street, where the stock market sank 1.1 percent.

Some economists worry that Greece’s troubles could have deep and lasting repercussions for Europe. The crisis poses complex challenges for the euro, which Greece adopted in 2001. The currency sank to a six-month low against the dollar and yen on Thursday.[ironically, TILB thinks letting Greece go could be an incredibly strong event for the euro]

“Greece failing is not an option, and lots of people think that we will have to intervene at some stage,” said one European finance official, who was not permitted to speak publicly on the matter. “It doesn’t have to happen, and we hope it won’t, but it would be better than seeing a default.”

...

But doubts have intensified over the credibility of the drastic austerity measures put forward to try to get Greece’s budget under control, in spite of concerted efforts by the Greek government to calm the markets.

Investors worry that the crisis in Greece could touch off a domino effect across Southern Europe. Many are fleeing bond markets in Portugal, Spain and Italy out of concern the troubles might spread. [TILB - Collectively known as the PIIGS when Ireland is included]

The market’s judgment has been swift and brutal. On Thursday, the difference between the interest rates on Greek and German bonds — a measure of the risk investors perceive in the Greek debt — rose to nearly four full percentage points, its highest level since the euro was adopted.

Officials in Athens, Frankfurt and Brussels remained adamant that Greece was not at risk of being forced to abandon the euro. [TILB - of course not. Could you imagine if they said, "hey, we're thinking of going back to the Drachma so that we can print our way out of this debacle?" That would be amazing.]

As a condition of any aid package, the Greek government led by Mr. Papandreou would be asked to provide a more detailed program to bring the country’s deficit — currently equal to 12.7 percent of gross domestic product — under control. European Union rules call for a maximum of 3 percent. Officials insist that any bailout must not put into doubt the credibility of the euro.

Another condition of any aid would be further guarantees over the reliability of Greece’s economic data. Last year the newly elected government in Athens announced a sharp upward revision of its deficit figures, which have since been exposed as seriously flawed.

Next week, the European Commission is expected to propose greater powers for the European statistical agency, Eurostat, to audit the accounts of national governments. [TILB - watch Czech president Vaclav Klaus give this interview where he presciently assesses the fact that the EU and the Euro are forfeitures of sovereignity and freedom, then watch the slow leech of powers from the states to the centralized United States of Europe]

The latest moves reflect a continuing skepticism among euro-zone members over the practicality of the plans put forward so far by the Greek government. Athens wants to reduce the deficit to 3 percent of G.D.P. by 2012, an objective described as unrealistic by one European diplomat, also speaking on condition of anonymity. These plans are also to be assessed by the commission next week.

Greece’s budget deficit is four times the E.U. limit, while the country’s debt amounts to 113 percent of G.D.P. But officials insist that, because Greece is not one of the euro zone’s larger economies, the problems created by its grim public finances can be absorbed. The Greek economy represents about 2.5 percent of the euro area’s G.D.P. [TILB - Japan is over 200% sovereign debt to GDP and the US is a bit over 80%. Carmen Reinhardt and Kenneth Rogoff show that 90% is the threshold past which few survive, as well as 60% externally financed debt to GDP - this latter point has been Japan's saving grace, though that is likely over]

...

For Greece’s neighbors, there is the possibility of a domino effect, with investors subsequently moving on to test the resilience of another heavily indebted member of the euro area — possibly Italy, whose debt is also 113 percent of its gross domestic product.

...

One option, deemed unlikely, would be issuing a sovereign bond for the entire 16-nation euro area. That would probably require complex legal changes among members. [TILB - see prior Vaclav Klaus reference]

...

On Monday, Greece paid a hefty 6.22 percent rate to borrow money in the bond market, underscoring investors’ concern. [TILB - and it's much more expensive for them already, just five days later. If memory serves us well, they have a number of huge maturities in April/May that will be challenging to finance affordably without German backstop...]

In an interview this week, the Greek finance minister, George Papaconstantinou, acknowledged that the high rates were punitive but asked that investors keep faith. Greece needs to raise at least 53 billion euros this year, much of it this spring.

People think this is news?

As we've been saying for a year, just wait until Japan blows. It's situation is nearly twice as bad as Greece's. Despite having 40% of the U.S.'s GDP, it has as much debt. If its blended cost of funding goes up from 1.5% to a bit over 3%, 100% of its tax revenue will be absorbed by interest expense. We're talking about the second largest economy in the world and it literally has no other options than massively debasing its currency or defualting on its debt (or, more likely, both). That's what they get for following Bernanke's wicked advice.

The sooner Japan blows, the better for the U.S. - I suspect our only hope of not suffering the same fate is to witness Japan's meltdown after having followed a similar prescription.

And as to Europe, just wait until Greece's implosion lights up Italy, which is a very large economy. That is the real worry the EU is facing: do we let Italy go?

Which brings us full circle, to The Final Countdown...

California Debt Is Downgraded: Schwarzies Prepare For A Comeback!

TILB is so incredibly thankful that - as we informed our readers over and over again last spring and summer (click here for all TILB posts referencing Schwarzies) - California has not at all fixed its budget woes. It has another $20 billion deficit expected in the coming 18 months.

It seems as if California lawmakers think this problem might solve itself. That somehow, they are going to miraculously bring in another $14 billion in tax "revenue" - annually mind you - over any reasonably near term period.

Spoiler Alert: Ain't gonna happen. In fact, the more you raise taxes when you are already a high tax regime like California, in the long run, the less tax "revenue" the state can expect to receive. It will actually worsen its problem by driving out marginal growth and productive investment.

The obvious solution is not to try to raise another $14 billion per year - it's to cut $14 billion more in spending per year. Free that capital up so that your citizenry can productively deploy it rather than having a bunch of proven morons in Sacramento deploy it destructively.

As we promised back in July 2009, TILB stands ready to laugh in California's face as their legislature acts like a political set of keystone cops.

Below and linked here is a Reuters article discussing the S&P downgrade [emphasis added and comments in brackets are TILB's].

UPDATE 4-California debt rating cut as cash crunch looms
8:03pm EST* S&P sees budget solution possibly crimping economy

* $19 bln shortfall tougher to close than last year's-S&P [no shit - you can't cut the fat you already cut, so it's all new fat here]

* Cash crunches seen in March, July, but RANs to be paid (Recasts, adds debt insurance costs and comparison)

By Jim Christie and Peter Henderson

SAN FRANCISCO, Jan 13 (Reuters) - California's main debt rating was cut on Wednesday by Standard & Poor's, which said the government of the most populous U.S. state could nearly run out of cash in March -- and another rating cut might follow.

The state government's budget gap of nearly $20 billion over the next year and a half leaves it in a precarious situation, requiring tax increases or spending cuts, either of which may slow economic recovery, the agency said in a statement.

"If economic or revenue trends substantially falter, we could lower the state rating during the next six to 12 months," S&P said after cutting the rating on $63.9 billion of California's general obligation debt one notch to A- from A.

The new level is four notches above "junk" status, a level at which many investors refuse to buy debt.

"The big question is, is there any fear they will get downgraded out of investment grade (so) you may have to sell ... that's where I think it would get interesting or hairy," said Eaton Vance portfolio manager Evan Rourke.

Bond prices did not move much, though, since many expected the downgrade, he said.

S&P's downgrade was overdue because the state's revenues have been so weak, said Dick Larkin, director of credit analysis at Herbert J. Sims Co Inc in Iselin, New Jersey. "Frankly I can't understood why it took S&P so long," he said. "They could have made that decision back in September." [September? Try March.]

$1 BILLION SHORT IN MARCH

California already had the lowest debt rating of any U.S. state before the downgrade, and 39 state governments are struggling with shortfalls this fiscal year, according to the nonpartisan Center on Budget and Policy Priorities.

Many are begging for more federal funds and caught between cutting social programs, raising taxes, or both.

The housing market implosion was felt especially strongly in California, a subprime mortgage lending center. Its double-digit unemployment rate, one of the highest in the United States, is expected to endure for a year or more.

California's government resorted to issuing IOUs last year for the second time since the Great Depression when it nearly ran out of cash. Officials are scrambling to raise $1 billion for March and the shortfall could be worse in July, S&P said. [sounds like Schwarzies are coming back; we're almost giddy with excitement!]

State Treasurer Bill Lockyer's spokesman Tom Dresslar said S&P's downgrade "highlights the critical need for the legislature and the governor to produce a swift budget resolution that is credible to the market."

"Standard & Poor's makes it clear the failure to act in a timely manner and with credibility threatens to further lower our GO rating," Dresslar said, adding that a further cut would hit taxpayers already paying higher interest rates than people in some emerging economies.

The cost to insure California's debt with credit default swaps is now higher than debt of developing countries, such as Kazakhstan, Lebanon and Uruguay. It costs $277,000 per year for five years to insure $10 million in California debt, compared with $172,000 for Kazakh debt. [phenomenal]

George Strickland, a municipal bond mutual fund manager at Thornburg Investment Management said S&P still has California GOs rated too high. Moody's Investors Service has a Baa1 rating on the debt and Fitch Ratings rates the bonds BBB.

"There's another notch to go before they hit bottom," Strickland said, adding that he expects another long and ugly battle to fill the state budget's shortfall.

Governor Arnold Schwarzenegger less than a week ago unveiled a plan to balance the state's books, largely with spending cuts that he described as draconian and which leaders of the Democrat-controlled legislature sharply criticized. [I can't wait to see the Donkey-proposed alternative - Lord willing it involves more unconstitutional minting of Schwarzies by Sacramento]

S&P said "timely progress" on a budget fix would be impeded by previous reliance on one-time measures, fewer choices for one-time cuts, extraordinary reliance on federal aid in Schwarzenegger's plan, and California's unusual requirement for a supermajority of lawmakers to pass a budget.

The Republican governor's budget plan also said that while the state government faces cash challenges in March, it will have sufficient cash to repay $8.8 billion in revenue anticipation debt in May and June as scheduled. [whether true or not, what else can they say? Any other statement would be a hand delivered invitation for the ratings agencies to slash the G.O. rating further]

State Finance Director Ana Matosantos along with Lockyer and State Controller John Chiang said on Monday they are working together so the state government honors its RAN debt.

Bond payments are by law a top state priority and state Finance Department spokesman H.D. Palmer said they will be honored: "Even though we've got to make some decisions in managing March we absolutely have ample cash on hand to make our RAN payments in May and June on time and in full."

Larkin said the three major rating agencies will hold off on more downgrades to California's credit rating to avoid roiling the municipal debt market, even in the event budget talks between Schwarzenegger and lawmakers drag on.

"They'll give the state an awful lot of rope," Larkin said. "For a state to go below investment grade would cast a pall on every state and local issuer out there." [at least market participants publicly acknowledge that the ratings agencies are pussies]
(Reporting by Jim Christie, Peter Henderson, Karen Brettell and Joan Gralla; Editing by Andrew Hay, Gary Hill)

Happy Holidays: California Decides To Increase Income Tax Withholdings By 10%

In one of the stronger indications in a while that Schwarzies are likely to make a comeback, California decided to increase state income tax withholdings by 10%. As with all income tax withholdings, this is simply an involuntary tax-free loan to the government, since it's money that you wouldn't typically legally owe until April and you certainly would not choose to send to Sacramento in the meantime.

Laughably, California is positioning this as "temporary". For those of you that are unaware, the federal withholding was also enacted as "temporary." That was 1943...

The good news, of course, is that California's citizens were already swimming in cash, so this shouldn't cause any problems for them. Hell, why even borrow from the markets at an interest rate when you can issue Schwarzies and siphon off someone's income in the form of an involuntary loan at 0%?

Link to article here [emphasis added].

Starting Sunday, cash-strapped California will dig deeper into the pocketbooks of wage earners -- holding back 10% more than it already does in state income taxes just as the biggest shopping season of the year kicks into gear.

Technically, it's not a tax increase, even though it may feel like one when your next paycheck arrives. As part of a bundle of budget patches adopted in the summer, the state is taking more money now in withholding, even though workers' annual tax bills won't change.

Think of it as a forced, interest-free loan: You'll be repaid any extra withholding in April. Those who would receive a refund anyway will receive a larger one, and those who owe taxes will owe less.

But with rising gas costs, depressed home prices and double-digit unemployment, the state's added reach into residents' regular paycheck isn't sitting well with many.

"The state's suddenly slapping people upside the head," said Mack Reed, 50, of Silver Lake. "It's appalling how brash that is."

Brittney McKaig, 23, of Santa Ana said she expects the additional withholding to affect her holiday spending.

"Coming into the holidays, we're getting squeezed anyway," she said. "We're not getting Christmas bonuses and other perks we used to get. So it all falls back on spending. The $40 gift will become a $20 gift."

The extra withholding may seem like a small amount siphoned from each paycheck, but it adds up to a $1.7-billion fix for California's deficit-riddled books.

From a single taxpayer earning $51,000 a year with no dependents, the state will be grabbing an extra $17.59 each month, according to state tax officials. A married person earning $90,000 with two dependents would receive $24.87 less in monthly pay.

California will probably continue to collect the tax at a higher rate for many years -- or find an additional $1.7 billion to slice from a future budget, an unlikely occurrence.[editor's note: love the snarky, passive aggressive voice from the L.A. Times] All workers who have state taxes withheld will see their paychecks shrink.

"Many families are sitting at their kitchen table wondering how they're going to make ends meet," said state Sen. Tony Strickland (R-Thousand Oaks). "At the same time, the state of California is taking a no-interest loan."

The provision is one of numerous maneuvers state lawmakers and Gov. Arnold Schwarzenegger approved in the summer to paper over the state's deficit. Many of the changes, including the extra withholding, were little noticed outside of Sacramento.

Savvy taxpayers can get around the state's maneuver by increasing the number of personal withholding allowances they claim on their employer tax forms, said Brenda Voet, a spokeswoman for the state's Franchise Tax Board.[editor's note: have to love the incentive to encourage people to think about how to legally cheat the state]

"People can get out of this," she said, noting that most people would have to change their allowances through their employers. California's budget leaders are banking on the hope that most won't.

The increase is coming at a bad time for store owners, many of whom depend on the holiday shopping season to keep their businesses alive.

"I don't think there's any question it's going to impact consumers' spending," said Bill Dombrowski, president of the California Retailers Assn. "Any time you reduce people's disposable income, there's going to be a negative effect on the retail sector."

But Stephen Levy, director of the Center for Continuing Study of the California Economy, wasn't so sure.

"It's having a relatively small impact on people's income," Levy said, pointing out that many families will receive only $12 to $40 less each month.

Yet Erika Wendt, 28, of San Diego said she already lived on a tight budget: She rides her bike to work, for instance, to save on gasoline and parking costs.

"I am frustrated as this directly impacts my weekly budget -- what groceries I buy, how much I drive and can spend on gas," she said. "Now money will just be tighter, and I'm not sure where else I can cut back."

The extra withholding comes in addition to tax hikes the state enacted this year.

In February, state income tax rates were bumped up 0.25 of a percentage point for every tax bracket. The dependent credit was slashed by two-thirds. The state sales tax rate rose 1 percentage point. The vehicle license fee nearly doubled to 1.15% of a car's value.

Lawmakers and the governor also approved deep cuts to schools, social services and prisons to fend off one of the steepest revenue losses in California history.

Temporary budget bandages, such as the increase in withholding [editor's note: ha!], were included at several points this year to avoid higher taxes and deeper cuts, said H.D. Palmer, a spokesman for the state Department of Finance.

Sacramento, meanwhile, is awash in red ink again. The state controller recently said revenue in the budget year already had fallen more than $1 billion short of assumptions. Outsize deficits are projected for years to come.[editor's note: these assumptions were revised this spring in the heart of the recession and they're already under by $1 billion? SCHWARZIES ARE A COMIN'!]

Such temporary measures as the withholding tax increase don't really fix the budget gap, "they just more or less hid it," said Christopher Thornberg, a principal with Beacon Economics in Los Angeles. "I call it a fraud."

[HT: Directive 10-289]

WSJ Acknowledges California IOUs As A Currency; Schwarzies Take A Place On The Podium Next To Clamshells

As California announces a budget that gets them out of crisis...for nine months...it is likely that Schwarzie issuance will soon take a temporary respite (TILB already predicted that this budget will not hold for a variety of reasons).

It is at this juncture in history that the WSJ has decided to reflect on the implications of Schwarzies. The article even goes so far as to employ an uncited use of our phrase "Schwarzenegger Scrip" (we challenge you to find a similar reference older than ours to said currency). The Journal talks about where Schwarzies stand amongst the various scrips that were issued by state and local municipalities during the Great Depression, including certain places that issued clam shells with hand written denominations (if only TILB could have been there reporting...).

Ironically, clam shell currencies held their real value much better than our shitty fiat dollars (lovingly referred to by TILB as "Bernankes"). Per the WSJ:

Two towns in California -- Crescent City and Pismo beach -- circulated scrip printed on clamshells. [The] 10-cent note was issued by the Crescent City Chamber of Commerce. It's worth about $500 today.

And do you know why it held its value (obviously a 5000 bagger is better than "holding its value", even adjusted for dollar debasement/inflation)? Two related reasons explain the return: 1) novelty, which we do not hope for modern currencies to replicate; and 2) scarcity. Sadly, Comrades Obama, Bernanke and Geithner do not seem to fully appreciate the latter reason (or, perhaps more accurate and frightening, they do understand). Rather than talking about holding the volume of dollars somewhat stable, they speak of dropping freshly minted dollars on the populous from the cargo bed of helicopters.

Gold, a currency that has been accepted throughout time fairly universally, allows natural supply/demand forces to function as its central bank. In essence, gold has a built in scarcity function - finding, mining, refining, certifying, and establishing a reputable "brand" are expensive. As such, these functions (which increase gold supply) occur in modest, fairly stable amounts over time, leading to a dependably scarce, value protecting, and widely accepted currency.

The article goes on to inform us that California State Controller Chiang may continue to issue a few more Schwarzies as the implications of the budget are digested:

Since California ran out of cash early this month, it has issued more than 194,000 IOUs, with a total value of $1.03 billion. They are redeemable in U.S. dollars on Oct. 2, or sooner if the state comes up with the money. The legislature on Friday approved a plan to close a $24 billion budget gap, but officials say it could still take a few weeks to analyze the state's cash situation and resume giving creditors checks instead of promises.

Prediction: the state will not come up with the money sooner than Oct. 2nd. Paying them off early would be a negative arbitrage and thus they'd never do it.

If they had half a brain and a good sense of humor, they'd finance old Schwarzies with new Schwarzies and really establish them in circulation.

Is The End Of California IOUs Nigh? Schwarzies, We Love You

The NY Times is reporting that California has reached a budget compromise, potentially imperilling new Schwarzie issuance. This is a sad day for America (not really) but an even sadder day for TILB (really).

Our friends at Directive 10-289 sent us this link which provides great detail on Schwarzie issuance, etc. We were going to cherish posting this graph:



But alas. The NY Times tells us that focus was all for not.

As an aside, all this budget does it get California to June 30th of next year...maybe their credit ratings and tax base will have stabilized by then allowing them to avoid further cuts (HAHAHAHAHA...not fucking likely). Further, it screws localities by forcing them to funnel money up to the mothership in Sacto, effectively passing the buck.

The NY Times reports the following (all emphasis added by TILB):

California lawmakers, their state broke and its credit rating shot, finally sealed the deal with the governor Monday night on a plan to close a $26 billion budget gap.

The plan, which is certain to be viewed with trepidation among legislatures across the country also facing huge budget gaps, distributes pain through nearly every aspect of government services. While the Legislature pushed back on Gov. Arnold Schwarzenegger’s proposal to eliminate health care programs for children and the state’s generous welfare program, both took large cuts. So did public education, universities and local governments.

All told, the deal contains $15.5 billion in cuts, about $2 billion in borrowing, $4 billion in new revenues and about $3 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Mr. Schwarzenegger had claimed he would not brook.

Under the new budget, which runs through the 2010 fiscal year, localities will basically serve as unwilling lending agents to the state. It will raid their coffers and repay them over time as the state’s fiscal situation improves. [any day now!]
...
As a result, the state’s deficit continued to grow, and the controller has been forced to issue millions of dollars in i.o.u.’s [Schwarzies] to vendors and taxpayers in lieu of payment because the state is short on cash.
...
Local governments will lose millions of dollars that are used to build housing, among other purposes, and the state plans to borrow roughly $2 billion in property taxes from localities, which would have to be repaid within three years. Lawmakers believe that cities and counties could in turn borrow against that borrowing; localities bankrupt or nearly so would be exempt.

One of the biggest sticking points was over the $11 billion already cut from public schools. The budget deal calls for roughly $650 million more in cuts.

We suspect this is not the last we will hear of California's budget woes. When California budget does finally break, you can be sure we'll be there, laughing in their face.

What is truly sad about all this is that California has actually taken a big step in the right direction, but it still is not a big enough step. In the end, legislators basically decided it was too much pain to take all at once.

We understand even if we disagree.

Cali's pain will continue until they finish out the process of establishing actual fiscal discipline. Our suspicion is they may not even be able to make it to the fiscal year end as tax "revenue" will come in well below forecast blowing an even bigger hole in the budget than forecast.

As a final aside, California had better pray to high heaven that its credit rating does not take that last downgrade to junk. That would set loose all hell.

Stand For California: Arnold Schwarzenegger The Road Stops Here

As LB said in an email to me earlier today, "The unintentional comedy of this is very high."

Indeed.

While Schwarzie issuance continues unabated and the likelihood of the federal government being forced to show its hand vis a vie letting state finances collapse, Arnold has this inspiring and soul affirming video to share with his citizenry.

Good news Californians, "the road stops here." Lord willing, Arnold.

Schwarzie Bids Are Flying! California IOUs Begin To Take Hold As A Currency

Last Friday TILB said it was prepared to fulfill all offers of Schwarzies at 80 cents on the dollar. As an existing Bank of America customer (we know, we know), we were eligible to exchange Schwarzies for Bernankes at par. We have been promoting the notion that as the decisions of banks go, the success or failure of Schwarzies goes.

As the bloggers over at Directive 10-289 (perhaps the best named blog in the entire blogosphere) have highlighted, the WSJ is reporting that "big banks don't want California IOUs".

A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

...

Amid the budget deadlock, Fitch Ratings on Monday dropped California's bond rating to BBB, down from A minus, the latest in a series of ratings downgrades for the state.

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.

...

Wells Fargo's head of community banking, Lisa Stevens, said: "We're very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of payments to some businesses and individuals."

State officials said they were disappointed by the banks' decision. Garin Casaleggio, a spokesman for Mr. Chiang, said: "We don't want anybody to suffer who can't redeem them when they need cash."

We are shocked, shocked that California banks, already choking on legions of souring loans, do not want to take billions upon billions of dollars of California's newly issued Schwarzies backed by the state's recently downgraded triple B (with negative watch!) credit risk in return for 3.75% interest. I mean, they already happily take Bernankes offering nil interest no questions asked!

These unpatriotic bastard bankers apparently forgot that as TARP recipients and permanent beneficiaries of government subsidies via the Federal Reserve system and under priced FDIC insurance they are not in charge of making lending decisions, The Administration makes those decisions now. Resistance is futile.

With big banks walking from the Schwarzie market, we hereby lower our bid to 60 cents on the dollar.

It should be noted that states are legally prohibited from filing bankruptcy. We are not sure what the alternative is, but it sure feels a helluva lot like the Feds will have to step in with a guarantee at some point. TILB is sure that somehow Steve Ratner will end up being governor.

In any case, a marketplace for Schwarzies is beginning to take hold. While we believe TILB was one of the first, if not the first, mass bidder for Schwarzies in the country, others have begun to follow suit.

For example, this posting on Craigslist appears to be the Schwarzie equivalent of Cash4Gold (need money fast?!?!) whereas Dealbreaker reports of folks setting up unofficial Schwarzie bidding exchanges.

While optimists may say that each and every day Controller Chiang is improving the Schwarzie system by printing additional liquidity, TILB takes the view that every new batch of minting both adds Schwarzie selling pressure and devalues existing Schwarzies (not unlike our worries about Bernankes). For those that hope our sixty cent bid will improve, do not hold your breath.

I suppose we could leave it unsaid, but we at TILB could not be more pleased with this progression...

California IOUs Have Arrived: TILB's Schwarzie Bid Is 80 Cents On The Dollar

TILB stands prepared to take out any Schwarzie holder at 80 cents on the dollar. Contact us at investmentlb@gmail.com if you have some for sale and you are prepared hit our 80 cent bid. Price is non-negotiable.

Today is a day that will live...in infamy. The Governator and Controller Chiang issued 28,742 "registered warrants", better known as Schwarzies, in TILB parlance. We believe this is the camel's nose under the state issued currency tent and we could hardly be more excited. In a strange sense, the worse California's fiscal situation is, the more likely Schwarzies are to be successful which means the more likely they are to be imitated by other states. Ideally, this will undermine the entire fiat currency system and lead us back to better days.

Amazingly, Schwarzies have received very little in the way of national press during the lead up to their issuance. But tomorrow morning, the front page of The New York Times will have Arnold's stern mug under the headline "Short of Cash, California Will Start Paying With I.O.U.s". The article alludes to the fact that the state will basically issue $2-3 billion of Schwarzies per month until a manageable budget is passed ($4.8 billion by the end of August). This will all be tacked onto the already massive $24 billion budget deficit.

Here are several highlights from the NY Times article:

So California is now just like a family that spends more than it takes in and holds off on the cable bill while paying the mortgage: its expenses are greater than its revenues. The state, which previously used i.o.u.’s in 1992 and 1933, will issue them rather than checks to those it can get away with not immediately paying.

Most warrants will go to Californians waiting for tax refunds, vendors doing business with the state and local governments, especially in social service areas. Federal and state laws prohibit i.o.u.’s from being issued to state employees, schools or Medicaid recipients.

While it is against federal law for a state to declare bankruptcy, California’s move Thursday will not go unnoticed by Wall Street or escape consequences.

The state’s credit rating is already shaky, and any further downgrades from rating agencies could send interest rates on its bonds soaring, forcing deeper service cuts.

Furthermore, if California comes up short on cash this fall, other creditors will have to wait behind the warrant holders, who would most likely end up in superior credit positions.

...

“In evaluating potential registered warrant acceptance, banks have been advised by regulatory authorities to consider such issues as credit quality, capital requirements and concentration limits,” the bankers’ association president, Rod Brown, said in a statement. “Given the poor credit rating of California, the worst in the nation, banks may be hesitant to extend credit to the state.”

At the White House, which has seemed flummoxed by California’s woes, President Obama’s spokesman, Robert Gibbs, said Thursday, “We’re going to continue to watch the situation in California and in other states throughout the country.”

Lord willing, this will go on until mid-Fall and beyond. Both sides of the debate have used very strong, unapologetic rhetoric which will make backing down all the more difficult.

It should make for some fun fireworks over this holiday weekend. It harkens back to the revolutionary period debate of state vs. federal rights. Much has trended toward federal over the past few decades; perhaps Schwarzies will unwittingly provide some slowing of that trend.