California pension woes just got a lot worse

California government edging toward the brink:

From the front page of Wednesday's Sacramento Bee: "Bruised by heavy losses and wary of the economic road ahead, California's two big public pension funds are considering reducing their official forecasts of future investment results." Investment income is supposed to pay for the absurdly generous pensions enjoyed by government retirees, but when there's a downturn, the taxpayers pick up the slack. So the $100 billion pension losses will result in reduced forecasts, which will "put pressure on taxpayers and workers to support the two retirement systems," the article continued.

My own county already has a 13% expenditure increase to to pay for these losses, and that number is going to go up to 25% if the pension funds declare realistic earnings. Something will have to give, and I think county bankruptcy this year is the most probable result. 48% of the houses are underwater, and most of these homes are not keeping up with their property taxes since they were purchased at the top of the market.

Having three or four counties go belly up is likely to trigger a statewide default and federal receivership. The budget process starts about now and default insurance for California will be close to Greece's penalty, I simply doubt that California can borrow at all. The consensus is increasing that we should expect some form of federally managed receivership for many states. Once a big state, like California hits the rails, many states will follow suit like a cascade as short term borrowing becomes nearly impossible.

She [Assemblywoman Diane Harkey] gave me a chart from the state controller predicting that total state borrowing will hit almost 34 percent of the general fund budget by 2010-11. The state's bond rating has gone from AA to A to BBB, she said, and now almost is not investment-grade.

California cannot maintain debt payments of that proportion with a Junk Bond rating. Unfortunately, one and a half years of "Chase Down the Young and Healthy" debates has left Congress very unprepared for the disaster.