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Thread: Chart of the Week - California Sales Tax Revenues fall by 33.5%

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    Default Chart of the Week - California Sales Tax Revenues fall by 33.5%

    from


    (snip)"our detractors were stunned to learn from State Controller John Chaing that California’s July sales tax revenue was down 33.5% from the Budget approved in late June. Even more ominously, the state’s $9.6 billion cash deficit that was rolled over from the June 30th fiscal year has catapulted to $18 billion last month.

    The state has avoided default by temporarily borrowing from state trust funds, but those accounts will soon need their cash back to continue operating. Today California quickly began trying to sell $10 billion in municipal bonds to fund the record $28 billion they need to keep the lights on. With tax revenue plummeting and the state already the second lowest rated credit in the country, if the independent credit rating agencies downgrade the state to “junk bond”, California will be short up to $18 billion and default.

    Governor Brown used his line-item veto authority to strike $128.9 million in spending from the $91.3 billion California general fund before signing the state budget. Brown’s cuts surprisingly hit Democrat priorities, such as spending for child care and preschool for low-income children, and closing 30 state parks. But Republican Senator Tom Berryhill warned Brown: “This budget is a slow-motion train wreck, and you’re driving the bus.” Berryhill criticized Democrats for failing to reign in public pensions, regulatory terrorism and cap state spending that Republicans say are all needed to rescue state government. But by agreeing to sign the budget before the June 30th end of the fiscal year, Brown spared all the California legislators from losing their paychecks under a voter-approved initiative that blocks their pay if a budget is late.

    The governor justified signing the budget based on the twin assumption that the California economy was expanding and the voters would approve his tax initiative that would raise $8.5 billion. Many analysts doubted the voters willingness to vote to raise sales tax on themselves, but we were virtually alone in warning California’s shallow economic recovery had peaked and the state was at risk for a double dip recession.

    State Controller John Chiang tried to rationalize that even though California revenues were “disappointingly” down $475 million in July: “However, because spending appears to be tracking and the funds that the State depends on for liquidity are performing well, California’s cash outlook remains stable.” This is sort of like the pilot of a jumbo jet announcing to the passengers that as a safety precaution they may want to cross your arms over your calves and grab your ankles and to brace yourself for possible impact."(snip)






    As always, sales tax data is one of those 'spin-proof' economic indicators ... because it is directly tied to the amount of money that consumers are actually spending ( or not spending ). This newest data strongly indicates that the California economy is well into 'double-dip' recession mode.


    I would also point out that the author's discussion of a likely downgrade in California's already bad credit rating, with some possibility of default, is a real reason for concern. First off, it is of major concern to California taxpayers in general, since any newly issued muni bonds and any rolled over muni bonds will cost California taxpayers more money in the form of interest payments. In the absence of even higher tax rates, more tax revenues needing to be spent on bond interest leaves less tax revenues for current spending for any other purpose.

    Second, this is of major concern to very rich California taxpayers, who purchased tax exempt California muni bonds in earnest to minimize their tax liabilities after California announced a significant increase in personal income tax rates last year. If California's credit rating gets cut to junk, and interest rates on future muni bonds rise, the present owners of muni bonds will experience a major loss of 'principal' because the present value of their older, lower interest rate, muni bonds will drop. And if a default should actually occur, the present owners of muni bonds may experience HUGE losses of 'principal'. Arguably, the availability of tax free muni bonds involving near zero risk of loss was a major factor in preventing some number of very rich California residents from leaving the state after their personal tax rates were increased significantly last year. But if significant loss risk must now be factored into that equation, some number of very rich California residents may decide to reduce their taxes via relocating out of the state. If that happens, it will be devastating for California's economy and remaining taxpayers - given that the relative handful of very rich Californians contribute some 40%+ of overall state tax revenues ( despite owning tax exempt muni bonds ), as well as contributing some 20+% of overall state consumer spending !!!

    .
    Last edited by Melonie; 08-18-2012 at 09:31 AM.

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    Default Re: Chart of the Week - California Sales Tax Revenues fall by 33.5%

    and right on cue ... from


    (snip)"Stock brokers have often recommended California municipal bonds as very safe investments, due to historically low default rates and relatively stable finances. But Moody’s said that outlook is changing after the Chapter 9 Bankruptcy filings of Stockton, San Bernardino and Mammoth Lakes.

    Moody’s is especially concerned with the growing attitude among many cash-strapped cities that filing bankruptcy to avoid paying bondholders, is politically more advantageous than cutting spending. As a result, Moody’s will re-assess the financial condition of all California cities, which issues about 20 percent of the municipal bond volume nationwide, “to reflect the new fiscal realities and the governmental practices.”

    The Moody’s report said the credit rating service will also examine the outlook for municipal bonds in other troubled states. Robert Kurtter, Managing Director of public finance at Moody’s, would not say which states they will review, though Kurtter mentioned Michigan and Nevada as possibilities."(snip)

    (snip)"Moody’s detailed that over 10% of California cities have already declared fiscal crises, with the most troubled areas lying inland in the middle of the state and east of the Los Angeles area. Mr. Kurtter said the declarations of emergency were “a reflection of the broader fiscal stress in the state” and went on to warn that Moody’s may issue an “across-the-board rating revisions are possible following a review of our ratings on California cities over the next month or two” for all California cities. Chris McKenzie acknowledged that such a move “would have a terrible impact on taxpayers.”

    Moody’s highlighted growing doubts that cash-strapped cities are willing making good-faith efforts to pay their bonds debts in full. Former Treasury official Paul Rosenstiel, a Principal at DeLaRosa & Co municipal bond investment-banking firm in San Francisco stated: “Credit analysis is based on the ability to pay and the willingness to pay. Investors have historically assumed that cities are willing to pay their debts because they want continued access to the bond market” … “What is being considered is whether the willingness to pay is something that needs to be factored in more than in the past — and if so, how would you measure it?”

    California cities already pay higher interest rates to borrow money from municipal bond investors because the state has the second lowest bond rating in the nation, only Louisiana is lower. But if any city’s credit rating is cut to the “junk bond” level, rates would rise so high that the city would be forced to file bankruptcy. Most cities are already are financially deteriorating, because of a steep drop in tax revenue.

    The Moody’s report is raising alarms for city leaders who fear it may trigger a market panic. ”Every city in the state is looking on with some concern,” said Dave Vossbrink, spokesman for the city of San Jose. ”Governments of all kinds borrow money, usually to build infrastructure that lasts a long time. It’s like getting a mortgage to build roads, a sewage plant, whatever it might be.” Mr. Vossbrink emphasized that San Jose has cut laid off cops and closed libraries. Residents also recently voted to cut public pension benefits for city workers, but those cuts may not be enough prevent a downgrade.

    Moody’s said it will conduct in-depth financial stress tests for all California cities in the coming weeks and issue appropriate downgrades in September. The timing of the Moody downgrades may be especially devastating for the California state budget. Governor Jerry Brown kicked off his drive this week to save the state’s solvency by encouraging voters to pass an $8 billion tax increase initiative on the November ballot. But bad press and rising bankruptcies is sure to undermine voter support"(snip)


    Several important take-aways appear to be staring us in the face. The first is bond rating service Moody's general impression that, when faced with a choice of using tax revenues to repay very rich bondholders while cutting public spending, versus stiffing the bondholders in order to keep social welfare benefits and public employee paychecks flowing, those in charge of the tax revenues are now likely to choose the latter.

    The second is that, sometime in September, Moody's plans to release new bond ratings for California gov't entities, with a high probability of lots of ratings being cut to 'junk' status. If and when that happens, very few rich investors are likely to risk additional money on new muni bond 'loans' to California gov't entities which are unlikely to be paid back in full. At that point, much like Greece, California cities and perhaps the state itself will be faced with the dilemma of going 'hat in hand' to Washington for a federal bailout, versus drastically reducing California state and local spending to levels which match their actual tax revenues.

    The third is that, if faced with the prospect of even higher personal income tax rates, while also faced with the 'tax shelter' of muni bonds now becoming a highly risky financial proposition, some number of rich California residents are likely to 'jump ship'. This in turn will significantly reduce California tax revenues, and general California consumer spending, creating / strengthening an economic negative feedback loop.
    Last edited by Melonie; 08-19-2012 at 03:12 AM.

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    Default Re: Chart of the Week - California Sales Tax Revenues fall by 33.5%

    Quote Originally Posted by Melonie View Post
    from http://www.testosteronepit.com/home/...ve-by-335.html


    (snip)"our detractors were stunned to learn from State Controller John Chaing that California’s July sales tax revenue was down 33.5% from the Budget approved in late June. Even more ominously, the state’s $9.6 billion cash deficit that was rolled over from the June 30th fiscal year has catapulted to $18 billion last month.

    The state has avoided default by temporarily borrowing from state trust funds, but those accounts will soon need their cash back to continue operating. Today California quickly began trying to sell $10 billion in municipal bonds to fund the record $28 billion they need to keep the lights on. With tax revenue plummeting and the state already the second lowest rated credit in the country, if the independent credit rating agencies downgrade the state to “junk bond”, California will be short up to $18 billion and default.

    Governor Brown used his line-item veto authority to strike $128.9 million in spending from the $91.3 billion California general fund before signing the state budget. Brown’s cuts surprisingly hit Democrat priorities, such as spending for child care and preschool for low-income children, and closing 30 state parks. But Republican Senator Tom Berryhill warned Brown: “This budget is a slow-motion train wreck, and you’re driving the bus.” Berryhill criticized Democrats for failing to reign in public pensions, regulatory terrorism and cap state spending that Republicans say are all needed to rescue state government. But by agreeing to sign the budget before the June 30th end of the fiscal year, Brown spared all the California legislators from losing their paychecks under a voter-approved initiative that blocks their pay if a budget is late.

    The governor justified signing the budget based on the twin assumption that the California economy was expanding and the voters would approve his tax initiative that would raise $8.5 billion. Many analysts doubted the voters willingness to vote to raise sales tax on themselves, but we were virtually alone in warning California’s shallow economic recovery had peaked and the state was at risk for a double dip recession.

    State Controller John Chiang tried to rationalize that even though California revenues were “disappointingly” down $475 million in July: “However, because spending appears to be tracking and the funds that the State depends on for liquidity are performing well, California’s cash outlook remains stable.” This is sort of like the pilot of a jumbo jet announcing to the passengers that as a safety precaution they may want to cross your arms over your calves and grab your ankles and to brace yourself for possible impact."(snip)






    As always, sales tax data is one of those 'spin-proof' economic indicators ... because it is directly tied to the amount of money that consumers are actually spending ( or not spending ). This newest data strongly indicates that the California economy is well into 'double-dip' recession mode.


    I would also point out that the author's discussion of a likely downgrade in California's already bad credit rating, with some possibility of default, is a real reason for concern. First off, it is of major concern to California taxpayers in general, since any newly issued muni bonds and any rolled over muni bonds will cost California taxpayers more money in the form of interest payments. In the absence of even higher tax rates, more tax revenues needing to be spent on bond interest leaves less tax revenues for current spending for any other purpose.

    Second, this is of major concern to very rich California taxpayers, who purchased tax exempt California muni bonds in earnest to minimize their tax liabilities after California announced a significant increase in personal income tax rates last year. If California's credit rating gets cut to junk, and interest rates on future muni bonds rise, the present owners of muni bonds will experience a major loss of 'principal' because the present value of their older, lower interest rate, muni bonds will drop. And if a default should actually occur, the present owners of muni bonds may experience HUGE losses of 'principal'. Arguably, the availability of tax free muni bonds involving near zero risk of loss was a major factor in preventing some number of very rich California residents from leaving the state after their personal tax rates were increased significantly last year. But if significant loss risk must now be factored into that equation, some number of very rich California residents may decide to reduce their taxes via relocating out of the state. If that happens, it will be devastating for California's economy and remaining taxpayers - given that the relative handful of very rich Californians contribute some 40%+ of overall state tax revenues ( despite owning tax exempt muni bonds ), as well as contributing some 20+% of overall state consumer spending !!!

    .
    Too bad for Jerry Brown et. al. that gridlock in Sacramento keeps him from trying to impose a state version of the Federal Alternative Minimum Tax. He would if he could.

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    Default Re: Chart of the Week - California Sales Tax Revenues fall by 33.5%

    ^^^ be that as it may, ANY form of official state income tax rate increase on California's 'rich', in the absence of the former 'risk free' tax free California muni bond option to legally avoid actually having to pay those higher tax rates, is going to motivate more rich Californians to start 'voting with their feet'. That can have catastrophic future consequences given that the top 10% of earners typically wind up paying something like 40% of all state tax revenue dollars.

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    Default Re: Chart of the Week - California Sales Tax Revenues fall by 33.5%

    Quote Originally Posted by Melonie View Post
    ^^^ be that as it may, ANY form of official state income tax rate increase on California's 'rich', in the absence of the former 'risk free' tax free California muni bond option to legally avoid actually having to pay those higher tax rates, is going to motivate more rich Californians to start 'voting with their feet'. That can have catastrophic future consequences given that the top 10% of earners typically wind up paying something like 40% of all state tax revenue dollars.
    Absolutely. We've already seen this happen. It will only get worse.

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