Friday, November 12, 2010

The Magic Kingdom of California: leading the nation again

California has been the leader in national trends. We do things in a big way. The current situation with our government is no exception.

We began the angry taxpayer movement in 1978 when we voted for Proposition 13. In 30 years it has resulted in huge tax breaks for some of the largest corporate property owners in the State and established a social policy that keeps our more financially secure senior citizens in large homes where they pay low property taxes while a young family that buys a new smaller home gets to pay 3 to 7 times more taxes. And you thought we were a bastion of political liberalism, right?

It has made the funding of our government and schools unstable forcing government to exacerbate hard economic times rather than smooth out the impacts of recessions.

And now we are about to see over the next few years what it's like to live in a State where the budget for education and fighting wildfires has been cut 40-50% over a period of four fiscal years from 2007-08 to 2011-12.

It is clear that The Gubernator (Arnold Schwarzenegger) and Governor Moonbeam (Jerry Brown) are working together to prepare the denizens of The Magic Kingdom (the State of California) for a shock. What we can hope for is that it will be shock followed by awe.

Normally in December the Legislature meets and each house organizes itself, then everyone goes home until January. But the Gubernator has called The Deliberators (the Legislature) into a special budget session for December.

The Deliberators in the State Senate include 24 Democrats and 14 Republicans with two vacancies. One Democrat has never served in the Legislature, but is a former staffer. One Republican has no experience in the Legislature and will be trying to find the restrooms during the special budget session (in other words will have no idea what's going on).

The Deliberators in the State Assembly include 52 Democrats and 28 Republicans. Of the Republicans, 10 have never served in the Legislature but only 8 will be looking for the restrooms during the special session as 2 have significant lobbying experience. Of the Democrats, 14 have never served in the Legislature, though 6 are former staffers, leaving 8 looking for the restrooms during the special session.

So in January at the beginning of the 2011-2012 two year session, of The 118 Deliberators working with Governor Moonbeam, only 16 will be unfamiliar with most everything except where the restrooms are. So  term limits haven't left us with a totally inexperienced Legislature. We just have one in which nearly no one was in office during the last recession.

The only meaningful problem the State has right now is the budget. Getting The 118 Deliberators to keep focus on that problem will be like herding cats.

How bad is the problem? Well, since 2007-08, no serious effort has been made to deal with what the Legislative Analyst calls "a structural deficit." Instead, stupid budget tricks have been used to create a fantasy image of a balanced budget. But at the same time expenditures have been cut in the past three years, by $20 billion as noted in previous posts, while policy issues were never addressed.

The 2007-08 expenditures were the last numbers before The Great California Slump. While a $25 billion deficit has been identified for 2011-12, here's an example of the cumulative level of cuts that should be reviewed from a policy standpoint (click on the image to see a larger version):

For even Republicans among The Deliberators who are concerned we haven't cut enough government spending, a 42% budget reduction should be somewhat surprising. For Democrats who realize that Governor Moonbeam has said he will not increase taxes except with voter approval, panic should be setting in as more than half those cuts need to put in place in the next six months.

The level of demolition to our educational system will be catastrophic.

With regard to reducing the level of care of children through health and welfare programs, these programs will lose at least two federal dollars for each state General Fund dollar cut. (Forget the elderly and disabled, we have to throw them under the bus.)

State parks and environmental law enforcement will be competing with CalFire and all will lose. Bring out the padlocks for the park entrances. And who is going to spend money on enforcing those environmental regulations the voters just confirmed? In the same election, the voters eliminated the ability of the Legislature to levy fees to support enforcement.

We are about to institutionalize the adage that our late beloved President and Former Governor Ronald Reagan recited about recessions  "government is not the solution to our problems; government is the problem." He was our guy, so I guess we want to try it his way by having less government. (Well, not how he did it, but what he said.)

Other than to make permanent cuts of this magnitude, only one real option exists to improve revenue on a stable basis. Increase the Jarvis-Gann property tax rate from 1% of assessed value to either 1½% or 2%. The only issue is how much do we want to increase revenue - $20± billion or $40± billion?

Whether Governor Moonbeam could persuade the voters to approve such an increase is questionable.

But patches being discussed such as keeping in place the $8 billion from the 20% temporary sales tax increase from  5% to 6% and seeking approval of a 10% surcharge on income tax won't make much of a dent. And relying primarily on unstable sales and income taxes is part of the reason the Magic Kingdom is in this mess.

It is more likely we are going to demolish our State's government and school systems. How we go about reconstructing our governmental services will provide a peak into the future for the rest of the nation.

The Great California Slump has left us with a 1.4 million job loss. In September, nine of the nation's 13 metropolitan areas with an unemployment rate of 15% or higher were in California. Among metropolitan areas with a population of 1 million or more, Riverside-San Bernardino-Ontario had the second-highest unemployment rate in the U.S. at 14.8 percent, just behind the 15-percent jobless rate in Las Vegas-Paradise, Nev.

Nothing about this situation can lead one to believe that things will noticeably improve in this decade. Which leaves the government funding problem a permanent problem. If you have been reading my posts for the past two years, you know I've been saying that. Now the Legislative Analyst is saying it, offering charts like this:

So watch us here in The Magic Kingdom of California. We'll show you just how to put into effect a major government reduction that will be the conservative movement's dream. And Democrats will have to do it.

Thursday, November 11, 2010

State Controller's Report for October: look at the numbers and ignore the spin

The San Francisco Chronicle was the first of the major California newspapers to report on State Controller John Chiang's October financial statement. Partnered with Bloomberg which distributes the same article nationwide, the headline is California October Revenue Topped Budget Estimate by 4.6%, Controller Says.

The problem is nobody in the press seems to know how to compare these numbers to prior years or otherwise use them to see what's going on. A good reason exists for this.

Because of manipulations by the Gubernator and the Legislature of personal income tax withholding tables and the institution of drastic penalties for underpayment of corporate tax estimates, two of the key revenue numbers can't be compared from year-to-year. However, sales tax collections can be compared and can tell us what's going on with taxable sales.

When one adjusts for the fact that the sales tax rate is 6% of taxable sales in 2009-10 amd 2010-11 as opposed to 5% in 2006-07, taxable sales from July through October 2010 are down 18.0% from 2006-07.

It is true that during the same period last year taxable sales were down 19.4%. Yes we may have edged a slight gain during this period. The auto sales factor has to be taken into account because of the Cash for Clunkers program last year. But apparently it isn't a major factor. The California New Car Dealers Association publication California Auto Outlook reported:
...The market increased a marginal 0.2 percent in the Third Quarter. The apparent loss of market momentum was due primarily to relatively strong sales during the Third Quarter of 2009, when the market was given a boost by the Cash for Clunkers program.
So the 1.6% increase in taxable sales in July-October 2010 over the same period in 2009 is a fair indicator of growth in retail sectors other than auto sales. At this growth rate, by 2022 taxable sales will grow to 2006 levels.

Chiang, who knows better, tells us in his summary:
We are seeing indications that California has weathered the worst of the “Great Recession.” However, the road to full recovery is going to be a long one. Although current data on economic output in California is not available, we are fairly confident that the state’s economy has begun to grow again....
He then blathers on about employment and personal income which are not statistics generated by or used in his Department.

One could, like Chiang, spin a tale that the economy is growing again. Of course, the California Department of Finance estimates that the population growth rate between years is about 1%. And the U.S. Bureau of Labor Statistics indicates that, depending upon which index you wish to use, that the consumer price index has increased somewhere between 0.4% to 1.1%. So it's reasonable to conclude that the 1.6% increase in taxable sales means that per capita taxable sales in constant 2009 dollars shows no growth.

The Great California Slump has left us with an economy that crashed from 2008-2010. Based on the one statistic that we can rely upon - sales tax revenue - the California economy will remain at rock bottom for the foreseeable future.

Wednesday, November 10, 2010

The California $46 billion dilemma

Today the State Legislative Analyst issued an outlook for the State General Fund Budget:
Our forecast of California’s General Fund revenues and expenditures shows that the state must address a budget problem of $25.4 billion between now and the time the Legislature enacts a 2011–12 state budget plan.
It is surprising how close that is to what I wrote last Thursday:
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12
And that is on top of the $20.6 billion we reduced cash expenditures from the 2007-08 level. It's our $46 billion dilemma.

It has been puzzling since the election to watch all the players in California State Government already maneuvering for some big positive change that will come about because the Governor is going to be a Democrat and the Democratic majority in the Legislature can adopt a budget by a majority vote in each house.

Doesn't anyone get it? In the San Francisco Chronicle after the election San Francisco School Board Member Rachel Norton blogged:
California faces a projected $21 billion budget shortfall for 2011-12...
As I started reading her post, I thought here's someone who gets it. But it soon became apparent that her education issues discussion was oriented to improvements in the schools, all still on the front burner. This seems to be a general approach to whatever ox or oxen is owned by the writer or speaker.

Hey folks! Your oxen are going to be gored to the point of severe crippling in the fiscal year 2011-12 budget. Look at the numbers. The actual cash spent in 2009-10 was already $20.6 billion below 2007-08. Assuming a need to cut $25 billion from 2009-10 cash outgo, here's what reality looks like (click on the chart to see a larger version):

What don't people understand? Even if by some miracle Governor Moonbeam and the Deliberators discover an extra $10 billion available for the year, the situation in the Magic Kingdom will be stark.

The State of California cannot print money. Nor can we borrow it. Even if we legally could, no one would loan it to us.

And so will Governor Moonbeam and the Deliberators go to the voters for a tax increase? Well for starters, there's that pesky problem of the 20% temporary sales tax increase that went into effect in April 2009 which will expire the end of June 2011. They increased the State's share of  the tax from 5% to 6% which produced $4,443,169,000 in cash in the fiscal year 2009-2010. That's $4.4 billion that will be going away.

So what are we to do? Ask the voters to approve that 20% sales tax increase on a permanent basis? That, along with a 10% surcharge on personal income tax which would generate about the same amount of money, would take care of the $8 billion in revenue losses. Sure, the voters will approve that. Now where will the remaining $17± billion come from? Here's how we will have to cut to balance the budget if the voters approve to continue the 20% sales tax increase and to put a 10% surcharge on the personal income tax:

Then there's the State's economy. The Legislative Analyst forecast is less pessimistic than mine. What supports that less pessimism view I'm not certain.

Nothing is worse for a State's economic future than a collapsing government. That is particularly true when you've cut education expenditures by 40%-50% over four years. What will a prospective employer contemplating a startup in or moving to California think about the situation with the State's previously highly regarded university system?

With regard to the Cal State University system, we learned today:
The California State University Board of Trustees has approved a 15% hike in undergraduate tuition, arguing that the action was an essential step to provide access to the Cal State system by more students.

The two-step increase will raise undergraduate fees 5%: $105 for the rest of the school year, and an additional 10% -- or about $440 -- for next year.
The fees (tuition) will become $4,884 for an academic year. The CSU system receives the same amount of money from the state as it did five years ago even though it has 25,000 more students.

The situation with the University of California is similar:
If approved by the UC regents in San Francisco next week, annual tuition for undergraduates would jump from $10,302 to $11,124 - about double what it was six years ago. Add in the mandatory fees, and the cost would rise to $12,150. Graduate level fees would also rise by 8 percent.

"We're down a billion dollars" from what the state gave to UC in the 2007-08 budget year, [U.C. President Mark Yudof] said Monday, explaining why he is asking for yet another increase. Last year, the regents hiked tuition by 32 percent, an increase that took effect this fall after a year of sometimes violent protests by students.
Already the egalitarian left wing is attacking the folks struggling to keep the Cal State University and University of California systems at somewhere near a respectable level.

And there's a certain irony that the conservative financial folks a Bloomberg news actually act as if this is news. Anyone who doesn't need to take off their shoes to count to 20 should have seen it coming, except perhaps the voters of California who live in the Magic Kingdom.

So what about Wall Street? From Bloomberg News in an article that says we may (?) face this deficit:
The new deficit figure comes as the state is preparing to sell about $14 billion of long- and short-term debt during the next two weeks. Standard & Poor’s rates California general- obligation debt A-, its fourth-lowest investment grade and the worst rating among states.
In other words, our State finances are in such disarray that it is comparable to the family member whose credit rating is so bad he borrows from loan sharks just to live. Now Governor Moonbeam and the Deliberators merely have to keep the State's legs from being broken by creating a solution to a 42.5% reduction in available funds since 2007-08, a problem that looks something:

Oh, and they need to do this by achieving a consensus among all interested parties

One other thing worth noting. California Controller John Chiang, who was just reelected to another four year term garnering 55% of the vote, on January 7 told KPIX veteran newsman Hank Plante that the State General Fund deficit could likely reach $35 billion. Given the problem with the Unemployment Insurance Fund, he was probably correct.

Sunday, November 7, 2010

Déjà Vu the other way around

On Wednesday, November 5, 2008 I posted a thread here with the title Obama's win is not a mandate for liberal social policy - consider California's Prop 8.

This time around Republican's took the House of Representatives. Big deal? Not really. They think it is, but they're wrong.

Not only do they not have a mandate for conservative social policy, they don't have a mandate for pro-corporate conservative economic policy. If any politicians believe the typical American voter wants to see multinational corporations and their executives continue to make more money for themselves instead of using revenue increases to employ more American workers at decent wages and benefits, they're delusional.

Anyway. It appears now that both parties are ready to screw around with the so-called "Bush Tax Cuts." That's because finding someone with any imagination or talent in Congress or the White House appears to be an impossible task.

In my August post Taxing the "rich" and "not-rich" I offered "My Plan" that involves letting the "Bush Tax Cuts" expire and, instead, adopt the following:
  • Triple the exemption for the filer (the "Yourself" box on the 1040 form) from $3,650 to $10,950, double the exemption per additional person ("Spouse" and dependents) from $3,650 to $7,300, and index that credit to the CPI for the future, a policy that has been needed for years.
  • Institute for businesses an Investment Tax Credit for tax years 2011 and 2012 with a carry over of unused credits into 2013 and 2014, up to a maximum total of $120,000, and only on purchases of new business equipment and rolling stock manufactured in the United States.
  • Institute for businesses an Employee Expansion Tax Credit for tax years 2011, 2012, and 2013 equal to the amount paid on the employers' share of Social Security (FICA) on jobs newly created and continuously filled for more than six months (compared to the September 2010 reported positions).
  • Institute for businesses and individuals a Newly Constructed Building Purchase Tax Credit for tax years 2011 and 2012 of $5,000, allowable on purchases of residential and commercial buildings constructed during the period of 2008-2011.
Of course, these are economy-oriented policy ideas. The Washington solution is to argue between the Obama Administration's proposal to keep the "Bush Tax Cuts" except for the highest income group versus the Republican proposal to keep the whole "Bush Tax Cuts" as is.

We won't get any policy changes. Just more name calling.

Thursday, November 4, 2010

The Magic Kingdom 2011: Governor Moonbeam and the Deliberators

The 2010 General Election is over and "The 2010 Meg Whitman Local TV Station Recovery Program" has ceased.

California generally bucked the trend of a Republican tide. Jerry Brown, hereinafter referred to as Governor Moonbeam, will become Governor on January 3, 2011.

At the same time, the new Legislature, hereinafter referred to as the Deliberators, will begin a two-year session. The makeup of the Deliberators changed slightly in that the Democrats actually gained two seats in the Assembly giving them 65% of the membership. In the Senate, they will continue to have 63% of the membership.

The voters in the State of California, hereinafter known as the Magic Kingdom, voted to allow a simple majority of the Deliberators in each house to adopt a State Budget. They also voted to:
  1. Add to the requirement for a 66.7% vote in each house to raise taxes by including more "fees" in the definition of "taxes" and reversing prior increases in conflict;
  2. Prevent the Legislature from borrowing or shifting certain gas taxes and redevelopment tax revenues to balance the State General Fund; and
  3. Not roll-back an existing provision that allows corporations
    • to income average future profits with the past few years losses,
    • to share tax credits among affiliated corporations, and
    • in the case of corporations doing business outside California to determine the portion of its taxable profits on in-California sales as opposed to a formula taking into account in-California payroll, California property ownership, and in-California sales.
Item 1 will increase State General Fund costs by at least $1 billion annually.

Item 2 will reduce funds allocated to the State General Fund by about $2 billion annually.

Item 3 will reduce State General Fund tax revenue by $2.3 billion annually over at least the next three fiscal years.

So, the voters of the Magic Kingdom with their left hands gave Governor Moonbeam and the Deliberators the ability to approve a State Budget with a majority vote. With their right hands, the voters of the Magic Kingdom reduced by $3 billion funds used needed to "balance" the General Fund and confirmed the elimination of $2.3 billion in corporation taxes collected in previous fiscal years.

Oh, and by the way, about $8 billion in revenue will disappear when temporary increases in the vehicle license fee and sales and income taxes expire July 1. And even the most optimistic analysts admit that the "balanced" General Fund Budget for the current year is at least $5 billion short. And, the bill comes due to repay at least $2 billion that the Gubernator and Deliberators siphoned from local governments in 2008. Oh, then there is that other 2010 General Election fact at the federal level, the Republicans took control of the House of Representatives assuring the end of federal stimulus money which provided $6 billion to local schools in 2009.

In a related subject, while the federal government may or may not extend the unemployment benefit period for millions of unemployed Californians next year, the odds that California will not have to start repaying the huge unemployment insurance fund loan beginning in 2012 have all but disappeared. That will result in an increase in direct payments by California employers to the federal government as explained in my last post.

Governor Moonbeam has indicated he will roll up his sleeves and start working. He's been thinking out loud that he doesn't need a Chief of Staff while he personally organizes his administration and prepares a revised General Fund Budget for the current year 2010-11 and a Budget for next year 2011-12.

We know that most of the easy one-time "gaming of the system" budget balancing techniques have been used up, such as shifting the last payroll of the year from June 30 to July 1. And we know, as discussed above, that:
  • The current budget as adopted is at least $5 billion short;
  • The election eliminated $5.3 billion of borrowing from local government and corporation taxes;
  • We are losing $8 billion in temporary revenue increases;
  • We likely won't be seeing about $6 billion in federal stimulus money in the future; and
  • We need to repay a minimum of $2 billion borrowed.
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12. As a basis for budget preparation, here's the financial picture resulting from The Great California Slump comparing 2007-08 spending to 2009-2010 spending (click on the image below to see the table full size):
As Governor Moonbeam knows and you will note, by 2009-10 the State of California had already cut its spending from 2007-08 levels by $20.7 billion or 19.2%. Here's what Governor Moonbeam and the Deliberators are facing:
  • 47% of 2009-10 spending was for education (preschool - university), which many of the voters seem to have said they don't want cut, partly because cutting education is cutting California's chances for future economic growth;
  • 27% of 2009-10 spending was for the State's share of  Health and Human Services, an area which is problematic because for every $1 cut, anywhere from $1 to $3 of federal funds will not be spent in California during the budget year, reducing the State's economy accordingly; most cutting here impacts on children, the disabled, and the elderly and their caregivers, which seems like a good place to cut to avoid raising taxes on multistate/multinational corporations;
  • 9.6% of 2009-10 spending was for prisons and jails; most of this spending is controlled by a federal judge, so one can make more "pretend cuts" like the Legislature did in the adopted current year budget or put in an honest estimate of spending or release a bunch of prisoners;
  • 1.4% of 2009-10 spending was for Resources Protection including State Parks, CalFire, Fish & Game, and EPA enforcement of such things as the new environmental law the voters just confirmed; apparently closing the State Parks to fund enforcing the new law would be OK with the voters based on the election, but really you could eliminate the entire Resources Protection budget and not make a dent in the total needed cuts;
  • 5.7% of 2009-10 spending was for debt payments which will go up in future budgets and you can't do anything about it;
  • 2.1% of 2009-10 spending was for capital outlay - buying or building stuff that has a usuable life of several to many years; that would include things like replacing the 1970 payroll system and other squandering of tax money; and
  • 7.1% is everything else which includes the court system, the various elected official's offices, property tax relief, and a myriad of other things state and local government have to do and which was cut 42.5% already.
The Republicans Deliberators could join with Democrats to approve a $20-$30 billion tax increase. But that won't have to happen because Governor Moonbeam and the Deliberators have a voter mandate to balance the Magic Kingdom's budget with fairy dust, and they can do it on time since it only needs a majority vote now. Yeah, sure, good luck with that.