The Californian economy – the eighth largest in the world – is crumbling.
Per the FT’s Los Angeles correspondent Matt Garrahan in a story today:
Thousands of unsold cars are piling up at Long Beach, the docks that, together with nearby Los Angeles, represent the biggest port complex in the western hemisphere. Unwanted by car dealers who cannot sell them, the Toyotas and Mercedes have turned the port into a huge car park and become an unwitting symbol of the fiscal crisis gripping California.
The state’s economy would be the world’s eighth largest if it were a separate country. Yet it is overly reliant on its high-earning consumers, who generate most of its revenues through taxes on income and share option gains. But those consumers are no longer buying as many cars or other consumer goods. Their reduced income also means less money for California, which is facing the real prospect that it will run out of money early next year.
And it gets worse (obviously). The state’s finance director, Mike Genest, has warned that California may pay have to pay vendors with “IOUs” – for only the second time since the Great Depression.
Bloomberg reports:
In a letter to legislative leaders Dec. 2, Genest said the state “will begin delaying payments or paying in registered warrants in March” unless an $11.2 billion deficit is closed or reduced. California, which approved its budget less than three months ago, may run out of cash by March, state officials say.
Governor Arnold Schwarzenegger warned that he may issue the warrants, which are a promise to pay with interest, to suppliers and contractors as the seizure in credit markets may make it too costly to borrow.
The warrants would be given to landscapers, carpet cleaners, construction firms, food services companies and other state vendors. They would pay an interest rate of as much as 5 percent, based on state law. California last issued the IOUs in 1992 when lawmakers and then-Governor Pete Wilson deadlocked on a budget for 61 days past the start of the fiscal year.
California Controller John Chiang said that the state’s cash account will decline to $882 million by February, below its preferred cushion of $2.5 billion, and will be negative $1.9 billion by March.
“We’re just barely hanging on right now,” Chiang said. “We need strong legislative action immediately.”
Erk.
Related links:
Things government ministers shouldn’t say, Italian default edition – FT Alphaville