Has a hallucination-inducing version of Legionnaire’s disease struck the heating/cooling system at the office building at 55 Water Street in Manhattan that is headquarters to Standard & Poor’s? Does Jerry Brown have embarrassing pictures of S&P analyst Gabriel Petek? What brings these questions to mind is the two upgrades in California’s credit outlook since last summer. What good news is S&P pivoting on that has somehow escaped those of us who live in California?
I’m not saying this out of a reflexive desire to express disbelief at good news. I’m honestly saying I just don’t get it. Yes, as S&P notes, state spending has been reduced — real cuts, not reductions in projected wish-list spending. That’s great news. But I don’t know anyone who honestly believes we have anywhere close to a balanced budget this year or will have a balanced budget next year. The budget is built on shabby and silly presumptions that would be called lies outside of polite society. This is not normally the sort of government behavior that a credit rating agency would tolerate.
And there is no reason to believe this picture has gotten better over the past eight months, since S&P began getting bullish on California. Here’s the short list of things that have gone wrong since then:
1) The state budget built on phony revenue estimates fell apart, as widely predicted, but Jerry Brown still refused to fully pull the trigger on allegedly automatic budget cuts, meaning the state, as noted, is running a deficit in 2011-12 — another one.
2) Democrats in the Legislature balked at meaningful pension reform, and state Attorney General Kamala Harris sabotaged two ballot initiatives meant to allow voters to curb generous benefits. The result will be a big drain on state coffers and a devastating drain on many local governments, which may have to be propped up by state government.
3) The state continues to offer no suggestions at all on how it plans to pay back the $10 billion-plus it owes the federal government for loans to cover the cost of unemployment benefits.
4) The state revenue picture is grim. Just two weeks ago, we were told ….
California is running out of cash, the state controller warned in a letter to lawmakers Tuesday.
Controller John Chiang said lawmakers need to scrape together $3.3 billion by March — assuming the state’s financial situation doesn’t get any worse.
5) Jerry Brown’s tax hike proposal probably will have two rivals on the November ballot, making it likely that all will fail, per the conventional wisdom.
6) Brown is committed to the high-speed rail project, the project that objective critics say could prove the biggest public works boondoggle in world history. He sounds increasingly passionate in his commitment even though the total amount of state and federal funds now available for the project — about $13 billion — is less than one-seventh of what’s needed to build even a limited version of the statewide system. Where is the rest of the money coming from? Beyond the usual myths about private investment, Brown says maybe from state coffers, specifically the fees from cap-and-trade pollution auctions that will start rolling in during coming years. You can barely make this stuff up — California may be in awful shape fiscally, but the gov is eager to devote funds to a project that every objective evaluator calls an epic nightmare.
7) A federal judge has blocked hundreds of millions in state cuts in payments to Medicare providers, exactly as predicted by budget observers last June as Brown pushed them through.
This list could easily go on. But I will wrap it up with the unlucky seven above, and note that I’m not the only one who thinks S&P is insane in the membrane. This is from a Bloomberg News analysis:
S&P’s action ignores concerns about California’s liquidity, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey.
Brown’s budget for the fiscal year starting July 1 assumes voters will pass tax increases in November, without which the state would cut $4.8 billion from public schools, the equivalent of taking three weeks from the academic year.
“S&P’s rating action is either vastly forward-looking or oblivious to real-time cash-flow problems,” Larkin said by e- mail.
California collected $528 million less in taxes in January than Brown estimated in his latest budget, Controller John Chiang said Feb. 10. Most of the shortfall was in income taxes, down $525 million, or 6.3 percent less than projected Chiang said. Corporate taxes were down $127.9 million, while sales taxes were up $42.8 million.
California’s fiscal situation doesn’t “warrant consideration of an upgrade until their budget is truly stabilized,” Larkin said. “I am at a loss as to what prompted today’s decision.”
Larkin isn’t the only one. S&P has gone bonkers. Or maybe it’s just succumbed to political pressure.
But whatever your theory, based simply on known facts, the credit agency’s decision is almost impossible to fathom.