As most of you have undoubtedly noticed, Facebook is trading at a $67b valuation on the secondary market. It is likely to go public in 2011/12, or thereabouts, as will almost certainly a host of other California-based tech high-flyers.
That will have implications in 2011 and 2012 for perpetually financially flailing California. Why? Because California’s budget is hugely levered to capital gains and stock options, as the following California LAO figure shows. Personal income tax is the largest source of state income, and the most volatile component of that source is stock options and capital gains.
When personal income is doing well, California does well (or at least as well as it’s possible for it to do given its budgetary structure). Check the following LAO figure showing California income in billions from stock options and capital gains during and after the dot-com bust. To make the case in an extreme way, at peak California’s capital gains and stock option-related tax revenues would have offset the state’s current $18-billion deficit.
To make things much more realistic and recent, in 2006 California received $11.3b in personal tax receipts, $4.3b more than the previous tax year. A main difference? One company: Google. The newly-public company’s executives and rank & file employees cashed out stock & options at a furious rate, accounting for much of the increment.At the time, Google’s public market capitalisation grew from $70b to $100b. The lower end is approximately the current secondary market capitalisation of Facebook, the current IPO market object d’ardor. There are more California companies coming public, however, almost certainly including Zynga, Linkedin, et al., which would add materially to this total market capitalisation of newly public companies seeing option exercises.
All else being equal, I’m guessing California will report a surprise spike in 2011 and 2012 personal tax receipts. It is over-leveraged to personal income, of course, and, within that, to stock option exercises and capital gains. But those will all jump much higher in the coming 24 months, and seems to have escaped most analysts’ scrutiny as they project California flat-lining into being the next Greece.
Now, will all of this save California? No, of course not. There is a structural budgetary problem in California, one that just becomes more obvious when its personal income receipts collapse. But the path to any future insolvency for California is going to be much more circuitous than most people think.
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