The California 2010 Hangover

California awoke with a big hangover on January 4 - the first working day of 2010 - due to a climbing State General Fund budget deficit. But never fear, the Gubernator is here.

Last year the Gubernator and the Legislature tackled the problems vigorously using smoke and mirrors instead of knowledge and understanding. Just how much was obscured by the Gubernator's smoke and mirrors was recently pointed out by a Superior Court Judge who said while overturning the State employee furlough plan:

(Judge) Roesch said the Schwarzenegger administration had argued that the emergency necessitating furloughs was the Legislature's failure to pass a budget, yet furloughs continued after it was passed.

Roesch also said furloughs have "interfered with the objectives" of several key agencies supported by special funds instead of state general fund revenue, causing delays at the Department of Motor Vehicles and in Social Security disability reviews.

"When employee positions are funded entirely by non-borrowable special funds or federal funds – as is the case for many of the agencies at issue here – the general fund savings justification for furloughs does not survive scrutiny," Roesch wrote.

The Schwarzenegger administration also had argued that it was furloughing all state workers – regardless of whether state, federal or special funds paid their salaries – because it would be unfair to hand pay cuts to some state employees, but not others.

Spreading the pain of pay cuts across the state work force was not "rationally related to any government purpose," the judge wrote.

"When the only justification underpinning the furlough of these employees that remains is 'labor parity,' the court cannot do otherwise than to conclude that respondents (in the administration) have abused their discretion."

He suggested parity was a fiction anyway because public safety officers and firefighters are exempted, while other agencies with key public safety roles, such as the Department of Health Care Services, were not.

What Arnold did with the furloughs was create the impression that they would go a long ways to "balance the budget" by reducing payroll. That sounds logical until someone explains that the "unbalanced" part of the budget is the General Fund which doesn't fund the wages of that person who should be at the counter at DMV but isn't there because Arnold wanted you to think he was balancing the budget.

The really disturbing thing about this is that I'm not convinced the Gubernator and the people around him understood they were just putting on a show and would have to settle up with the employees later.

The fallout from this stupidity has been significant, but in the "how dumb can we get" category with regard to the furloughs, the Sacramento Bee has offered us this story:

As Gov. Arnold Schwarzenegger prepares to emphasize job creation as his top priority in his State of the State address, his watchdog for federal stimulus dollars says a tiny state office is delaying hundreds of projects that could employ out-of-work Californians.

Laura Chick, state inspector general for American Recovery and Reinvestment Act funds, said Monday that the California Office of Historic Preservation has a two-month backlog in approving federal stimulus projects, some as small as installing a heating and air conditioning unit.

Chick said state-mandated furloughs have contributed to the backlog, and she suggested that the state should allow historians to delay taking furloughs.

It's been confirmed then that the Gubernator and the people around him had no idea what they were doing. But this is a bigger problem than it looks because the Gubernator and others are already holding out the tin cup in Washington while actually doing stupid things that keep bottled up what stimulus money we've been given.

So I'm not reassured to read today that the Governor is calling for the Legislature to start early their name-calling stalemate that will be the budget deliberations for this year:

Gov. Arnold Schwarzenegger intends to call the Legislature into emergency session to confront a nearly $6.3 billion budget gap in the current fiscal year. The governor is expected to outline his proposed solutions by Friday....

The emergency declaration....requires lawmakers to act within 45 days on his proposals or pass their own combination of cuts and revenue increases. There is no penalty if the Legislature fails to perform, although lawmakers are barred from adjourning or considering other issues until they act on the governor's plan....

It would be nice if the Legislature couldn't leave the Capitol Building until the budget is balanced. Then the half up for election this year couldn't run for office.

I'm not alone in my despair over the State of the State Legislature, according to Business Week:

“This is much worse than anyone thinks,” said Marilyn Cohen, president of Los Angeles-based Envision Capital Management Inc., which manages $250 million on behalf of wealthy individuals. She is moving clients out of California debt. “I have no confidence in the state Legislature.”

“We are looking at numbers that are going to be incredibly staggering to resolve,” California Controller John Chiang, a Democrat, said in a phone interview from Sacramento last month.

California last year relied on $20 billion of one-time fixes -- such as accelerated income tax collections and borrowing from local governments -- that are no longer available, according to the Legislative Analyst’s Office. With an election looming in November, Republicans lawmakers may also hesitate to back tax increases.

“The smoke-and-mirrors kind of solutions are not there, if in fact they ever were,” said Assemblywoman Noreen Evans, a Santa Rosa Democrat who heads the budget committee. “We simply can’t cut our way out of this deficit, and it makes matters worse because it is an election year and the governor is a lame duck.”

As I have repeatedly stated, the $21 billion deficit forecast over the next 18 months including the $6.3 billion for the current fiscal year is $10 billion too low.

Today, January 5, our Governor told us on the radio:

Now, as we enter this new year, there are signs that our economy is beginning to stabilize. For example, California's unemployment rate has begun to slowly tick downward.

Nothing could be further from the truth. While I don't expect everyone to understand just how misleading the job statistics are but the Governor's Office has to understand as much as the Sacramento Bee staff who offered this oxymoronic headline last month: Unemployment falls, but job cuts resume.

The State Employment Development Department offers in its news release a variety of statistics for spinning purposes, but one real number that should matter to the Governor was as follows:

In related data, the EDD reported that there were 781,449 people receiving regular unemployment insurance benefits during the November survey week. This compares with 740,272 last month and 593,670 last year.

The one federal Department of Labor statistical survey model (seasonally unadjusted) that I use every month shows that California has lost 1,125,319 jobs since November 2007 when The Great California Slump started, and that we lost 21,178 jobs in November.

But the most significant sign that our economy is in deep trouble is the State financial mess itself. There is no way out of it and it could very well be the straw that exacerbates the second dip in the expected "double dip" recession President Obama worried about last November in Beijing.

When I say "there is no way out of it" I mean that the State will be unable to do anything other than in the near future to significantly reduce buying goods and services from the private sector and in mid-to-late 2010 to lay off employees and force local governments and/or schools to lay off employees. The option of raising taxes doesn't exist and even if it did, the effect would be to pull money out of the suffering private sector.

When the largest State government in the United States cuts purchases of goods and services and lays off large numbers of employees just when an economic recovery is expected, forget the economic recovery.

That's the California 2010 hangover.