October 8th, 2008California’s Exploding Debt Problem
Who exactly is to blame for what future historians will cause the 2008 financial crisis? There is no shortage of answers to this question, just as there is no shortage of questions about how we will get out of the crisis. But one thing that everyone agrees on is that we need more transparency and more effective regulation (not necessarily more regulation) in the financial industry. But if really expect our private corporations to have better transparency, shouldn’t we expect the same from our government?
In a previous article, I reported on the rampant deception in the US Government accounting practices. The US government accounting standards are so morphed, they have even fooled CNN into thinking we are much better off then we actually are. The deception goes far beyond the national government, and extends to state and local government as well. In Washington state, for example, we have political campaign advertisements based on erroneous information related to the fiscal state of Washington. It’s not entirely surprising, given the chaotic accounting and reporting methods employed by the state of Washington, and other municipalities. And California is even worse. I would challenge California treasurer Bill Lockyer to accurately answer questions related to the budget of California. I’ve studied the Califronia treasury reports, and the numbers are anything but straight forward.
As of September 1, 2008, the total outstanding debt of California state is $57.610 billion, according to this California treasury website link. But the total debt is $65.398 billion, according to this other California treasury website link. I called the California treasury office for an explanation, and their response was the following:
The total amount of debt is 57.610 billion. The other figure included lease revenue debt which is not a part of the GO debt. Lease Rev debt is paid with lease revenue.
I’m not entirely sure what type of lease revenue they are referring to, but I’ll just let this one go for now. What about the yearly trend of California’s state debt, determined by their total outstanding and unpaid bonds? Unfortunately, California makes this question very difficult to answer, but the short term trend can be determined by trudging through the Treasurer’s Debt affordability reports, one by one. Unfortunately, there is no rhyme or reason to these reports; each one uses a completely different template, a different set of headings, and obscures the total debt in an entirely different section. Here are the results, as of July 1st of each year listed:
- 2008 – $57.882 billion, from page 36 of this report.
- 2007 – $41.3 billion, from page 10, figure 5 of this report.
- 2006 – $37.066 billion, from page 3 of this report.
- 2005 – $34.644 billion, from page B-4 of this report.
- 2004 – $33.026 billion, from page 4 of this report.
- 2003 – $27.607 billion, from page B-3 of this report.
- 2002 – $28.46 billion, from page 5 of this report.
- 2001 – $26.89 billion, from page 11 of this report.
- 2000 – $24.55 billion, from page 12 of this report.
- 1999 – $22.5 billion, from page 24 of this report.
Just how bad is the fiscal situation in California and the trend of increasing debt? It was bad enough that California issued an emergency request for a $7 billion dollar loan from the federal government, because the market for its own bonds was drying up due to the increased risk. California had $96.38 billion in general fund revenue for the 2007-2008 fiscal year, which gives them a debt to income ratio of over 60%. But California prefers to use the less realistic and less shocking measurement of measuring only the yearly interest payments ($4.42 billion) of their debt as a percentage of their revenue, which came to 4.92%.
California prefers to blame their current financial woes on the rating agencies, and not their own economic policies that got them into the mess they currently face. The 2008 debt affordability report is worth reading cover to cover for hints on their reckless spending, and blame game. One noteworthy excerpt from the report follow below.
Letter to rating agencies – This letter to the rating agencies appears in the appendix of the 2008 debt affordability report.
We, the undersigned representatives of major municipal bond issuers, urge the rating agencies you head to create new rating standards for U.S. municipal debt. For years, municipalities have been held to a higher standard than corporate issuers… For investors, the current system greatly inflates the risk of investing in municipal bonds relative to alternative investments, leading to investment decisions that are not based on the best information…
I can’t decide if I should laugh or cry about municipalities being held to a higher standard than corporate issuers. For all the financial problems being exposed in private corporations, at least they are held to reasonable accounting practices (GAAP), something municipalities have never embraced!
Other Geldpress public finance articles:
- The United States has not had a balanced budget since 1957!
- Canada public finance transparency a model to the world
- Washington state debt history – does Dino Rossi understand it?
- States crumbling under the weight of their debt
October 22nd, 2008 at 9:53 am
[...] on the growth of California’s state government debt can be found in the post “California’s Exploding Debt,” recently published on the excellent website GeldPress. It is probably not unreasonable to [...]
January 9th, 2009 at 2:03 pm
While I agree with your concern about ballooning debt – by local government, state government, national government, private industry, and individuals – I think it’s useful to put things into perspective.
1) If you were looking at your personal finances, would you look at only your total debt to be paid over many years as a ratio to your single year income, or also look at your annual payments as a proportion of your annual income? The latter is also a pretty meaningful figure, closer to apples to apples in terms of annual budgets, not just some sleight of hand to hide the truth.
If you were to say that the amount California is obligated to pay off over coming decades amounts to 60% of this year’s income, it doesn’t sound as dramatic. For me, it’s still a serious concern – especially because of the growth rate, but feels like less of a scare tactic. If California could freeze the ratio today (pretty hard to do during a recession unfortunately), it would probably be affordable if not fun. But if it increases too fast – big problem.
2) By the way, could you give the above table of debt over the years as a proportion of the annual income in each of those years? That would give us a better perspective on the growth rate of debt RATIO, which is more real concern than absolute numbers. It could be better or worse than your first pass analysis.
3) Are you sure that the $4.42 billion annual cost is for interest only as you state, and does not include paying off any principle? If that is true, then indeed it’s a deceptive figure which needs to be challenged. Just paying interest is not fully servicing a debt (as some homeowners with temporary interest-only mortgages are finding out).
4) By the way, another apples to oranges concern: it appears that you may be comparing bond ratings standards with accounting practices standards. While both include the English word “standards” and have something to do with finance, they are in quite different financial areas and are regulated or evaluated by very different entities for different purposes. A business with impeccable A+ accounting can easily be terrible D bond risk, for example. It’s quite possible that municipalities may be held to a tighter standard in one area than are private firms, and to a looser one in the other, without any irony or hypocrisy involved.
Thanks for keeping an eye out! I aim to help your surveillance improve, not to discount your efforts.
February 23rd, 2009 at 12:16 pm
[...] California’s Exploding Debt Problem [...]
May 4th, 2009 at 6:38 pm
Ha! Looking through the 2008 Treasurer’s report, it looks like the only reason the state isn’t even deeper in the hole is that they’ve issued almost none of the bonds authorized in the 2006 $37 billion bond authorizations. Maybe because the state started having problems with its bond rating soon thereafter?
May 19th, 2009 at 10:44 pm
[...] HUD secretary Donovan to recognize that California needs more help (translation: more bailouts for irresponsible government and mortgage borrowers) than the rest of the [...]
May 24th, 2009 at 2:31 pm
[...] on the growth of California’s state government debt can be found in the post “California’s Exploding Debt,” recently published on the excellent website GeldPress. It is probably not unreasonable to [...]
July 3rd, 2009 at 4:28 am
Lease revenue debt is the difference of property tax revenue minus total costs of all leases outstanding which are held on private property. It’s County agencies that usually make up the majority of states’ lease revenue debt and it Counties that usually account for just as much of the municipal bond debt as the local level. The state level of muni debt accounts for far less of an amount than either County or local. Counties are notorious for issuing useless Muni-Bonds all at the expense of taxpayers. In recent years it’s these same useless municipal bonds that make up the majority of most government debt. These useless bonds are loaded with derivatives, excessive broker fees, and outrageous yields. Officials justify these costs by inflated property values and future forecasts on tax revenue. All while lately all these bonds only end up going to pet projects such as parks, public facilities, utility companies, joint ventures, and many times just refinancing old bonds for a fee. Not only in California, but world wide, this new phenomenon of unregulated banks ruthlessly overcharging on the underwriting of the loans for these municipal bonds have by some estimates, account for at least a third of all government debt world wide. With this new phenomenon being unregulated these banks legally rob tax payers blindly with all these excessive charges by simply offering kick backs to officials for not soliciting any public bids by other banks and never finding out what real market costs are for a bond issuer. It has recently been discovered that the total costs paid up front for fees, interest, and derivatives on several bonds issued by California make up more than 50% of the entire loan amount of the bond issue. It’s also noted that never in history has a Municipal Bond in California let alone the entire U.S. except for only two little known cases has ever defaulted. So can anyone then tell me how in the world do these credit rating agencies which in many cases are also the bond issuer justify these low credit ratings on Muni-Bonds that demand such high yields? I would love to know. Thank you.
Keith Kamen
July 3rd, 2009 at 4:32 am
Oh ya, annual interest alone in 2003 on all California Municipal Bond Debt was $9 billion. My guess is more like $50 billion today for just annual interest.
Keith kamen
July 4th, 2009 at 2:32 pm
Never before in history have so many enormous financial institutions failed and gone out of existence – Lehman Brothers, Bear Stearns, Washington Mutual to name a few. Yet the debt of all of these were rated very high by the useless rating agencies right up through the collapse. The muni’s may have never failed because they kept kicking the “can of debt” down the road. This worked as long as the state revenue was increasing over time. But there comes a time when the can is no longer “kickable” and that time is now.
March 30th, 2010 at 9:59 am
[...] reported on California’s exploding debt problem back in 2008. Since that time, the problem has gotten magnitudes worse, not only for California, [...]