Wasn’t it just a few short months ago California balanced its budget, plugging a $19 billion hole? Indeed it was. Nonetheless, Jerry Brown now warns of a $28 billion hole for the next fiscal year and the state controller warns of more IOUs.

Please consider California Deficit May Reach $28 Billion as IOUs Loom

California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

“I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said.

Brown, a Democrat who takes office Jan. 3, faces a widening gap after negotiators closed a $19 billion deficit for the current fiscal year, which ends in June.

“California is facing a very serious budget crisis,” Brown said. “This latest increase comes from actions that are taking place in the Congress that will have an effect on California.”

The extra yield investors demand above top-rated debt for 30-year general obligations from California issuers reached 105 basis points yesterday, the most since the budget was enacted in October, Bloomberg Fair Market Value data show.

California allegedly “closed” a budget gap of $19 billion this fiscal year and now faces a $28 billion gap next year.

However, and as before, Democrats do not want to cut services and Republicans do not want to increase taxes. I have the perfect solution: Let’s throw a party and give everyone cookies like president Obama just did, with Republicans tooting their party horns in agreement.

Oh wait. I forgot California, unlike the US has to have a balanced budget. In that case, let’s rely on the ol’ Arnold Schwarzenegger Play, this time on steroids, and “balance” the budget for the next three years by floating $3 trillion in bonds all at once.

Hedge funds and pension plans should love the idea seeing that they chased 3-year Walmart bonds a few weeks ago yielding a mere .7%.

Value is for sissies, at least until the bond market revolts (as it is now), with 3-year treasury yields at .94% and rising. This makes saps out of buyers of those Walmart bonds.

Mike “Mish” Shedlock
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