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Coming in 2010: Bailouts for States


California has the eighth largest GDP profile in the world and is billions of dollars in the debt.

Editor's Note: This article was written by Mark Majka, a portfolio manager and senior research analyst at Fortis Investments.

Not enough people are focusing on what's happening at the state level and how it's impacting the GDP profile of the economy.

California is the front line of this issue. It has twice had to go into budget-cutting mode to close its fiscal year 2010 budget hole and needed to find $60 billion to close it. An article in the Los Angeles Times states that the hole has widened again another $20 billion.

Gov. Arnold Schwarzenegger is expected to call for deep reductions in already suffering local mass transit programs, renew his push to expand oil drilling off the Santa Barbara coast and appeal to Washington for billions of dollars in federal help, according to state officials and lobbyists familiar with the plan.

As noted in the article, 200,000 California state workers are already on a mandatory three-day a month furlough, which works out to a 14% pay cut. Every major program has been squeezed and now social services and mass transit are on life support. The article estimates that the new health-care legislation will cost the state another $4 billion.

California has the eighth largest GDP profile in the world.

The fact of the matter is that all states, but particularly those that benefited from the housing bubble and the taxes and income associated with it, are now experiencing a massive reversal of those golden years. The reversal is so large and swift that it has become unmanageable. It will take several years for the real-estate reset to flush its way through the state and muni budgets.

In my opinion, the dire state of affairs in state budgets will lead to a comprehensive Federal bailout package for the states, coming in 2010. They will take the TARP money returned and funnel it back to the states.

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