California continues to struggle with its debt crisis and is now asking for more money. The state wants to sell $14 billion worth of bonds, but the question is, who is going to buy them and at what price? Adrian Moore of the Reason Foundation joined Varney & Co. this morning to discuss California’s financial woes and how the state got into this mess.
Continue Reading Below
“Here’s what the legislature said in its budget. It said ‘here’s our projection for revenue. Here’s the money we think the federal government is going to give us so everything is fine and we have a balanced budget,’” said Moore. “And of course anybody with two brain cells rubbed together looked at it and said ‘well that’s just a paper game. It doesn’t make any sense’. Here we are three weeks later and the revenues are not coming in anywhere near where they predicted.”
The budget deal reached on October 8 looks like it is out of date. California is counting on investors to buy billions of dollars in new debt over the next two weeks as the state returns to the bond market. It is expected to sell $2 billion of taxable Build America Bonds this week, followed by the sale of $1.75 billion of conventional tax-free bonds next week.
But how long will this go on for? Because the legislature makes its own budgeting and accounting rules, Adrian Moore warns that the legislature can make up the money they claim they have, but only as long as investors are prepared to lend enormous amounts of money.
“Each year it seems like there’s a group of people who say ‘surely we’re going to hit the wall this time,” said Moore. “We can really juggle this almost forever, and only when the debt payments become so large that they can’t, that things start to shut down, are they going to have to make hard choices.”