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Kansas and California and the race to U.S. state insolvency

California’s problems are well-known. They have been in the making for sometime. When I predicted a U.S. state would go bust this year, California was very much on my mind. But, frankly, Kansas was nowhere on my radar screen. Now both states have gotten my attention.

First Kansas (hat tip Marshall):

State tax refunds, Medicaid reimbursements and payments to local schools are all on hold because of a political showdown between Kansas legislative leaders and Gov. Kathleen Sebelius.

The Kansas Finance Council was to meet at 1 p.m. today to vote on whether to borrow $225 million from healthy state funds to cover expected payments to schools, state workers and taxpayers. The state did the same thing last December when it ran into a cash-flow problem.

But Republican leaders said they wouldn’t authorize the new loans until Sebelius, a Democrat, signs legislation designed to erase the state’s current year budget deficit. That bill, passed Thursday, cuts statewide school funding by $32 million and makes millions more in cuts to other state agencies.

If you recall, Kathleen Sebelius gave the Democratic rebuttal to the 2008 State of the Union Address. She was tipped as a potential running mate for Obama. And her name had surfaced after Tom Daschle withdrew his name for the post at Health and Human Services. Her ambitions for national office are not looking very good.

Update: Sebelius got the deal done and is decamping to DC as head of HHS. President Obama has faith in her skills. This is a great outcome.

But, then there is California. If they don’t get revenue up or spending down, bankruptcy is certain. They are looking to raise taxes in the teeth of a downturn to prevent a bad outcome — not exactly a good way to jump-start the economy. Note the highlighted section below.

California’s legislature adjourned from a marathon budget debate after falling one vote short of a $40 billion package of tax increases, spending cuts and borrowing aimed at reducing a record deficit.

Lawmakers went home at 9 p.m. yesterday after spending 28 hours in session while Republican Governor Arnold Schwarzenegger and Senate leaders worked to secure an additional Republican vote for the package of 27 bills. Schwarzenegger made rare appearances at closed-door party caucuses and urged a quick solution to the impasse.

“We are just searching for that one more vote that we need in order to get that budget done,” Schwarzenegger told reporters after the meeting.

Failure of the package would prolong a four-month stalemate over how to counter a record $42 billion deficit that drained California of cash, left it with the lowest credit rating among U.S. states, forced officials to delay paying bills totaling $3.7 billion and halted $3.8 billion of bond-financed construction on schools, roads and other public works.

The draft bills include plans to raise the state sales-tax rate to 8.25 percent from 7.25 percent; boost vehicle license fees to 1.15 percent from 0.65 percent of the value of an automobile; add 12 cents to the per-gallon gasoline tax; reduce the dependant-care tax credit to $100 from $300 and impose a surcharge on income taxes of up to 5 percent.

If you are investing in municipal bonds, you might want to do some serious due diligence on the creditworthiness of the issuers. The state and local bankruptcies are coming.

Sources
Kansas budget crisis: State tax refunds on hold – Kansas City Star
California Lawmakers Fail to Pass Budget Package by One Vote – Bloomberg.com

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.