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                  Paul A Drockton M.A.
        California Slides into Red Ink Ocean
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Paul A Drockton M.A.
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"California's economy is the eighth largest economy in the world (2011),  if the states of the U.S. were compared with other countries.  As of 2010, the gross state product (GSP) is about $1.9 trillion, which is 13% of the United States gross domestic product (GDP)." (Source)


The state has a 2012-2013 budget of about $137 billion dollars. (Source)

Sources of Revenue:

"The proposal includes $92.6 billion from the General Fund for most state services, $39.8 billion from special funds—such as the gasoline tax for transportation projects—and $5 billion on bond-funded projects. In addition, the governor’s budget assumes that the state will receive $73 billion in federal funds." (Ibid)


Shortfall:

The Governor of California announced that the budget is currently projected to have a $19 billion dollar shortfall.

"a half-cent increase to the state sales tax—which decreased one cent last summer—and an increase in the personal income tax on individuals earning more than $250,000 ($500,000 for couples). These taxes are part of a planned November ballot initiative, and the governor forecasts that they will generate $6.9 billion through the end of the fiscal year. The LAO forecast is lower, at $4.8 billion. If voters reject the taxes, the governor proposes automatic spending cuts, mainly affecting K–12 schools and community colleges (90%) and public universities (7%)." (Ibid)


Social Program Cuts:

"Governor Brown proposes significant reductions to health and social programs, including CalWORKS (the state’s welfare program)—which would occur no matter how voters respond to the tax initiative. These reductions include decreasing eligibility for work assistance and subsidized child care from four to two years for some families, reducing some monthly cash benefits, and eliminating 62,000 child care slots (a $1.4 billion reduction). Proposed cuts to in-home supportive care ($164 million) and health programs ($929 million) are on top of reductions made over the last few years. These proposed cuts would come at a time of increasing demand and rising caseloads." (Ibid)


Standard and Poors Upgrades California Bond Status:

"Standard & Poor's on Tuesday improved California's bond outlook from stable to positive, a sign the state might be poised for a credit-rating upgrade if the Legislature continues to make spending cuts and tax revenue meets projections." (Source)

Bond Ratings Agencies are losing whatever credibility they had.


Pension Loss Exposure:

"The state has three major pension systems - one covering state and many local workers, one for teachers and one for University of California employees - and collectively assets dropped from $476.2 billion during the 2007-08 fiscal year to $340.2 billion a year later.

That $136 billion loss of value represented 21.2 percent of all state pension fund value declines during the year, even though the state has about 12 percent of the nation's population and had less than 18 percent of the all state pension fund assets." (Source)


Analysis and Recommendations:

An estimated $5-10 billion dollars in budget shortfalls can be attributed to the state's lax stance on illegal immigration. Illegal immigrants in California are eligible for the same benefits as tax paying citizens of the state. Federal mandates without Federal Funding also add to California's woes. The biggest problem California has is its cradle to grave Socialism. Socialism bankrupted Eastern Europe and the former Soviet Union.

The sub-prime meltdown has triggered a foreclosure crisis in the state where 1 out of every 303 homes in is in foreclosure. This means a dramatic decline in property taxes and a looming financial meltdown.

I recommend liquidating Municipal Bond Fund holdings and/or Municipal Bonds. Ratings Agencies can't be trusted and the risk of default is only going to increase.

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