Facebook (FB) Stock Woes: Why the Facebook IPO Disaster Could Take Down the Entire California Economy


Facebook hit a low point in trading yesterday, dipping under the $20 mark midway through the day and then settling just above $20 by closing bell. As institutional investors dump Facebook from their portfolios and Facebook’s executive team continues to bolt, speculators are wondering if the Facebook contagion will spread. 

Had Facebook performed as anticipated, millions of dollars in capital gains taxes would have been generated for numerous states with state income taxes, including California. With the constant downturns in share prices, Californians are left with the question, “Will we be able to fill the gap?”

California’s Department of Finance used anticipated Facebook returns in the overall budget projections, with the assumption that California would receive $1.9 billion during the 2011/2012 and 2012/2013 fiscal years from the IPO and taxable income that would follow; $1.5 billion comes from the existing tax rates and $400 million is based on an assumption that voters will approve Proposition 30 in the November election.    

In a release prior to the IPO, California acknowledged the potentially large margin of error when deciding to include the perceived revenue into the overall budget. They assumed that Facebook’s share prices would rise between May and November. Instead, California is now faced with a potential loss, as investors continue to purge Facebook from their investment portfolio.   

As California’s Facebook gamble continues to unfold, citizens are scratching their heads wondering, “Why would any state include IPO revenues in state estimates?” California’s legislature uses revenue projections to determine how much funding will be granted to schools and community colleges under Proposition 98. 

In general, if California has higher levels of state revenues, then school funding is increased.  Because there was such great anticipation that Facebook would be the next ‘it stock,’ the financial leaders in California’s state government determined it would be best to include anticipated Facebook IPO gains in the budget.

What’s important in California’s Facebook potential miscalculation is the anticipated sell price of $35. What they did not anticipate was the stock value to be much lower than the $35 anticipated share price two weeks before an additional 271 million shares are made available, with an additional 243 million shares coming to the floor in mid-October/mid-November. 

The Facebook gamble has placed hundreds of millions of dollars that are assumed in California’s state budget at risk. 

Another major risk that California has factored into the budget is the Passage of Proposition 30. A continued lag in Facebook stock prices and the failure to pass Proposition 30 will make California’s budget woes more difficult to manage and reign in. The alternative plan involves steep automatic cuts.

Even though California’s anticipated Facebook revenues are about 1% of the projected General Fund revenues, in tough economic times the numbers do add up quickly. Factor in the fiscal cliff uncertainty which all Americans are faced with, and California’s troubles will only continue. 

It’s too bad California failed to learn the hard lessons from the .com bust. Had it learned those lessons, the state would never have included an IPO offering in the budget due to the high risk.