Sunday, January 24, 2010

The California Politician Split Personality Poster Boy

State Controller John Chiang is the perfect reflection of California politics. This month he has offered both optimistic statements about the State General Fund and almost catastrophic predictions.

In other words, he supports both those in denial and those in fear for the State of California. His is the poster boy of the current California Politician Split Personality.

On January 7 his office released the December 2009 financial statement and a summary analysis. In the news release accompanying these two documents we were offered this meaningless statement:

“December receipts showed signs of improvement, but the State continues to face tremendous fiscal challenges,” said Chiang. “At best, this is the beginning of a long and gradual recovery.”

Within the summary analyis section labeled "What The Numbers Tell Us" he provided us with this Hallmark Card language:

California’s economy is beginning to see rays of sunshine through the clouds that loomed heavy over the State for more than two years. This can be seen in the State’s revenues, which improved again in December.

On the same day, he told KPIX veteran newsman Hank Plante that the State General Fund deficit could likely reach $35 billion (to put this in perspective in 2008 the General Fund revenues were $98 billion).

Four days later he joined State Treasurer Bill Lockyer and Finance Director Ana Matosantos in a statement that read:

California will have the cash resources necessary to repay the revenue anticipation notes on schedule in May and June. To execute its normal cash flow borrowing this summer, the state will need not only budget solutions, but cash solutions as well.

As California's finance team, our three offices will continue to work together to ensure California has sufficient cash resources to meet its constitutional and legal obligations.

Friday, just 15 days after issuing his Hallmark Card monthly report and 11 days after the joint statement, he sent a letter to the Governor and Legislative leaders stating:

...On April 1, the State will be in the red by $197 million, and our resources to pay bills are not expected to return to safe levels until April 21.

Barring any unforeseen circumstances, such as a spike in expenditures or precipitous decline in revenues, $2.7 billion in cash solutions are necessary to avoid a cash shortage in the current fiscal year.

Attached to his letter was this graph.

Notice the blue line - the one that shows what happens if the Legislature were to actually adopt a budget resembling the Governor's proposal which essentially was been rejected by the Democratic majority as it was being announced.

(What's missing is information with regard to cash is the increase in delinquent property tax payments and how that might affect the State's school funding obligations. But hey, those numbers are on the books of 58 counties and no one wants to look at the whole picture.)

What Chiang offers are projection numbers that tell us the State General Fund is a few calendar quarters away from complete devastation. Unfortunately, this latter information reflects the truth except for those who live in some fantasy virtual California that hasn't lost 1.2 million jobs since November 2007. That includes the public face of most California politicians who are in full "running for office" mode.

At some point someone in an elected statewide office is going to have to acknowledge the State of California entered a bare bones period in 2008.

In the meantime, the Legislature's most recent action - urged by the Governor - is to submit to the voters a proposed new General Fund supported $11.1 billion bond issue to provide low cost water to the corporate farmers and the corporate land developers of California. And right now, Legislative hearings are being held which will determine if the State should proceed to sell $9.95 billion in state bonds to fund the initial cost to build a high speed rail project.

Oh, and among the states, California, now has the worst-in-the-nation credit rating.

Thursday, January 21, 2010

The Latest Round in the California Water Issue

While generally not doing anything meaningful about the budget crisis, the Legislature and the Governor worked closely to put what may become a very unpopular water bond measure before the voters.

While we're all waiting for the opportunity to vote on the matter, a "discussion" continues which illustrates why the water "debate" is becoming another matter on the list of things California voters are disgusted about.

In what appears to be a reasonable approach in the debate over Delta water, the National Academy of Sciences appointed a panel to review rules adopted by federal wildlife agencies to protect endangered Delta fish species. This was requested by Senator Diane Feinstein.

At the simplest (or simpleton) level, the problem has been portrayed as a battle between hard working American farmers (who are an endangered species themselves) and liberal environmentalists who care more about smelt than people.

This review lays out clearly the kind of players involved on the agriculture side. Feinstein acted in response to a letter from Stewart Resnick, owner of Paramount Farms. To quote from the Paramount Farms web site: "Paramount Farms is the largest grower and processor of almonds and pistachios in the world." In fact, its processing facilities occupy more acres than what one might think of as "a farm." Again, from their web site:

Ah yes, as Ma and Pa Paramount, their eight kids, and their trusty farmhand Jethro struggle to keep the family farm....

In fact, this is a political arena battle between large corporate farmers and large corporate real estate developers on one side against the interests of California's remaining fisherman who are in truth the only small businessmen and women who have a survival stake in the battle (yes, the Delta wildlife have a survival stake also, but can't vote) joined by those who value the Delta ecosystem - the environmental community and federal wildlife agencies.

According to the Sacramento Bee, this review will cost American taxpayers $1.5 million and it will be the third such review, as the Bee notes: "Two separate independent science panels have affirmed the importance of fall flows for Delta smelt." Will the third review be enough?

Senator Diane Feinstein, the Senior Senator from California and a Democrat, is the epitome of the American survivalist politician dependent on large corporations and whose conservative politics look and smell like dead fish.

Monday, January 11, 2010

California: The Bear Bones Era

Facing a $35 billion General Fund deficit, a State Debt equal to 5% of the U.S. National Debt, and a continuing economic decline, California government is about to enter "The Bear Bones Era" (excuse the pun).

In his last year of office, The Gubernator has revealed his budget proposal for 2010-11. And it's as political as one can design for a bankrupt State of California in an election year.

The Gubernator is a Republican in a State where Democrats have dominated a totally ineffective Legislature. The ineffectiveness of the Legislature cannot be completely blamed on the Democrats because Republicans can, with one-third plus one vote in either the Assembly or the Senate, block the budget approval process and any tax revenue increase proposals. The blame for this situation lies with the voters of California.

Facing a State General Fund deficit that State Controller John Chiang said on January 7 may reach $35 billion, hard choices had to be made. What the Gubernator has proposed as a budget for the State General Fund appears on the surface logical, if you consider long term economic recovery a goal.

He has proposed restoring hundreds of millions in state funding to California's state colleges and universities. He also has "pledged" to keep K-12 funding at current levels with some downward adjustments aimed at administrative cost and specific programs (but in fact has had to call for $2 billion in general cuts).

Education is good for economic growth. But if you take a look at his higher education proposals, they include a proposal eliminating the competitive Cal Grant program that funds the education of tens of thousands of students, students who tend to be lower in income and higher in grades. And in the higher education arena, that's the indicator of the election year political dilemma - what to do about the poor.

The Gubernator has focused his deepest cuts in health and human services as well as prison spending and wages for state workers. He knows, of course, that the Democratic legislators depend on a coalition of teachers' unions and other education interest groups, plus advocates for the poor and for health services, plus state employee unions. He also knows that the federal courts have blocked any attempt to cut the cost of prison operations, so in the end those cuts will have to be shifted to the only other large budget outlay, education.

By appearing to favor education, he is pitting one major source of Democratic reelection support against the others.

Of course, he's also included such gimmicks as asking the federal government of an extra $7 billion and pet proposals such as a 4.8 percent surcharge on all residential and commercial property insurance to raise $0.5 billion for fire and other state emergency response. He's also back with his proposal for coastal oil drilling leases, with funds to be used to support California State Parks.

His budget proposals do not constitute leadership for a shift in policy - California has no politicians calling for policy shifts. Instead, he has thrown his support behind the California Forward group which has developed proposals to tinker with the California Constitution and financial system, something that will not help but which might appeal to the voters who look for quick and easy answers. (For more details on this proposed tinkering see my August 19, 2009 post.)

No proposal on the table in Sacramento offers any real solution to the problem that even in the best of times California is ungovernable. None will solve the problems associated with The Great California Slump. As I stated in that August post:

In 2013 when (1) The Great California Slump ends and the economy starts to recover, (2) legislative districts are redrawn by an independent agency, and (3) legislators will be chosen in a process that includes open primaries (assuming the open primary measure is approved by the voters in 2010) then California State Government may appear less desperate. But the state will not really be governed more effectively. And more tinkering between now and then won't help.

There are really only two ways to make California "more governable": (1) adopt a completely new constitution limited to government structure with a bill of rights or (2) divide California into three states each with its own new constitution.

Since neither of those two things is going to happen, we are facing bare bones budgets for the State of California which could last well into the next decade. And it is hugely ironic that at this point the two people considered most likely to be the major party candidates for Governor this fall are:
  • Democrat Jerry Brown who is the public official most responsible for march toward the ultimate collapse of our State Government when he stubbornly presided over the adoption of Proposition 13.
  • Republican Meg Whitman who in the past 12 years was one of the two most significant players in developing a way for Californians to avoid paying sales tax on retail purchases.
Neither so far has offered one concrete suggestion as to how they are going to deal with financial and legal morass that is California government.

Tuesday, January 5, 2010

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.