Reggie Middleton's Boom Bust Blog

I warned of this as early as September of last year, and in May I issued two verbose reports detailing this distinct possibility and what I believe to be it's likely consequences. Be aware, Lousiana and California are far from the only states in this situation. The recent bull run has set up some of the most vulnerable companies for a devastating cash. I am sitting on almost 66% cash, being forced to take or hedge profits due to the intensity of the bear rally which shocked even me. There is an immense amount of money to be made through this wholesale destruction of faux wealth that has been accumulated over the last decade, (hence transfer of real wealth to those who are properly prepared), unfortunately the occassion is somber and depressing. It is most unfortunate that the actual problems are not being addessed, causing the symptons to gain free reign over our way of life. Read on...

From the San Francisca Examiner:

Gov. Arnold Schwarzenegger plans next week to slash the pay of more than 200,000 state workers to the federal minimum of $6.55 per hour to help ease the state's budget crisis, according to a draft executive order obtained by The Chronicle on Wednesday.

The governor also will order an end to overtime pay for all but critical services, a freeze on state hiring and the immediate layoff of nearly 22,000 temporary, seasonal and student workers.

More from the Wall Street Journal

States Slammed by Tax Shortfalls States are being forced to slash spending and cut jobs in order to close a projected $40 billion shortfall in the current fiscal year. That gap, more than triple the size of the previous year's, is the result of broad economic weakness at the state and local levels that could cause pain throughout this year and into 2010, a report found. (Report)

"As a result of the late state budget, there is a real and substantial risk that the state will have insufficient cash to pay for state expenditures," the executive order states.

Schwarzenegger's staff would neither confirm nor deny that the governor plans to issue the executive order, but sources said he could take action as early as Monday. The state, facing a projected $17.2 billion budget deficit for the fiscal year that began July 1, has not approved a budget...

But administration officials, who asked to remain anonymous, said that about 200,000 of the state's 245,000 workers, both hourly and salaried, will see their pay trimmed back to the federal minimum wage of $6.55 an hour, saving the state up to $1.2 billion a month. Dropping the temporary and short-time workers will save an additional $28.5 million each month.

While the layoffs could be made immediately, the pay cuts might not be completed until mid- or late August.

The proposed pay cut for hourly employees would take their wages well below the state minimum wage of $8 an hour. But a 2003 California Supreme Court decision allows the state to chop workers' pay to the federal minimum when a state budget has not been enacted.

"While we've had late budgets in the past, the critical difference this year is cash," an administration official said. "We have not had a situation in recent years that's the same as the cash-starved situation that we may face in September if we don't have a budget in place."...

While California needs to have about $2.5 billion in cash on hand at any given moment to cover the state's ongoing expenses, the Golden State is projected to have just $1.8 billion at the end of September, the official said.

But the governor's plan could face an immediate challenge from Democratic state Controller John Chiang, who will continue to pay state workers their full salaries, even in the face of Schwarzenegger's executive order, said Hallye Jordan, a spokeswoman for the controller. The governor will have to take Chiang to court if he wants to stop him, she said.

"The controller hasn't seen any executive order, but he would urge the governor to rethink his proposal," she said. "This hasn't been addressed by the courts and if it's ruled illegal, it could cost the state a tremendous amount in damages.

Now, read in full how I feel this will affect the muni bond system, the insurers, and the banks. See Reggie Middleton on Municipal  Bond Market and the Asset Securitization Crisis part 1 (primer) and part 2 (my more intricate thoughts).