The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available.
In the first quarter of 2009, "California had the most mass layoffs with 115,014 workers let go, followed by Michigan with 46,817, Illinois with 41,887 and Texas with a more modest 33,005," according to an article in Forbes. More than Michigan? After all, the same article reported that in Detroit "57 mass layoffs snuffed out 14,781 jobs in the first quarter of 2009." But California had 2.5 times the number of mass layoffs than Michigan.
We could comfort ourselves with the fact that California has 3.6 times the population of Michigan. But thing is, Michigan lost 285,000 reported jobs between April 2008 and April 2009. California lost 543,300 jobs in that same period. Most significantly, California lost 428,400 of those jobs in the first quarter of 2009.
In October 2006 when things had recovered from the "dot com bubble" burst, California had 857,500 folks on it's unemployment rolls. In March 2009, the Employment Development Department reported 2,091,800 unemployed.
By February of 2009, the state Unemployment Insurance Trust Fund ran out of money. According to a Sacramento Bee article published at the end of January, California will "rely on a $1.84 billion federal government loan to pay benefits through March." Of course, that's old news.
The State of California should have filed for bankruptcy in March, not because the Unemployment Insurance Trust Fund is empty, but because the General Fund is overdrawn.
There aren't many old enough to remember when during the depression, along with banks going under, state and local governments including schools started paying vendors and employees with "warrants" which were IOU's based on the hope that someday enough cash would come into the treasuries to cover them.
The State of California is about to start massive layoffs beginning with about 6,000 employees in the next month with the initial largest layoffs in the Department of Corrections (yes, prison guards).
While most Californian's don't see the magnitude of the problem, the State and local governments of the world's 8th largest economy will suffer a financial shock over the next 6 months. I mention local governments, because the State is considering "borrowing" property tax revenues and will be unable to remit sales tax revenues to local governments because the State is again getting low on cash. The State's deficit is now 25% of the State General Fund and rising.
State spending on everything from cars and computers to food and toilet paper is going to have to be cut by a minimum of 15% (although it should be double that number). This is a surprisingly large amount of money that is going to cease to enter the private sector. The ripple effect in the national and world economy will be noticed by the economy's statistics keepers.
It's just the way it is unless Congress decides to intervene to bail out another poorly managed "too-large" economic entity within the American economy in order to reduce the impact on the world's economy. The Los Angeles Times, in discussing the likelihood that private investment in California's economy will dry up, noted:
Business Week called California a "basket case" in an article noting that 47 states face budget gaps. Writer Christopher Palmeri explained:
"We lose competitive advantage by being the state that can't solve its problems," economist Stephen Levy said. "Regardless of what we think the solution is, the fact is we can't find a solution."
The budget crisis threatens to further weaken the state's job market, which lost 63,700 more jobs last month, according to figures released Friday. The state's overall unemployment rate actually fell slightly, to 11% from 11.2%. But new job losses could prolong the vicious cycle in which the California economy is now trapped, with rising joblessness reducing consumer spending and delaying a housing rebound, thus leading to more layoffs.
That would be true, of course, if Californians were able to switch their fundamental political orientation back to the social compact of the mid-1950's when they attempted to tax themselves sufficiently to provide governmental services and infrastructure for all. But there isn't time to avoid an overall collapse of the economy within the state.
The California state legislature will now have to consider many more cuts. They'll range from relatively smaller items—a $4 million-a-year poison-control hotline that gets 900 calls a day—to sweeping cuts in health-care spending that will reduce coverage for 2 million poor state residents. "These are folks who may go to the emergency room, but they'll face the bills afterward," says Anthony Wright, executive director of advocacy group Health Access California. "If you're trying to lift yourself out of poverty, that won't help you."
California legislators had already passed $16 billion in spending cuts and $12 billion in fee hikes to tackle the current fiscal year's budget. Schwarzenegger says his own office has been reduced by 27 positions, to 147 people, and remaining staffers are taking a 9% pay cut. State legislators, though, say the governor's decision this week to stop pursuing short-term borrowings came as a surprise to them. Noreen Evans, a Democrat who chairs the budget committee in the State Assembly, says she was against borrowing more money to begin with. She thinks the fix lies in a number of spending cuts and tax increases—everything from putting a sales tax on tickets to sporting events to the $750 million a year that could be gained from taxing oil production in the state. "We should think about taxing oil producers before we cut health care coverage to 200,000 children," she says.
Some see California's fiscal crisis as an opportunity to address structural problems with the state's government....
California's economy is too large for the federal government to ignore. But things may already be out of hand. Before California became the state with the most mass layoffs in the third quarter of the 2008-2009 budget year, the Legislature working with the Governor put together a budget that included $15 billion in spending cuts, $12.4 billion in borrowing, and $12.8 billion in tax hikes. But tax revenue continued to drop dramatically, costs for programs like unemployment, MediCal, and health care for children climbed, and the voters overwhelming turned down ballot measures that were needed to balance that budget. Within 48 hours after the May 19 election, State Legislative Analyst Mac Taylor placed the deficit at $24.3 billion and growing.
What we all know is that a realistic take on the 11% unemployment rate reported this month is that it is more likely an 18% unemployment rate because of those who have fallen off the bureaucratic radar with another 7% of workers who became underemployed in the last 18 months.
As the State reduces its purchases of supplies, equipment, and services from the private sector and starts laying off employees whose families stop spending, the multiplier effect will put more private sector workers on the unemployment roles. This will result in reduced sales tax and income tax revenue which will increase the State budget deficit.
Actual cash income from property taxes will drop as people miss their payments. Local government will begin to face cash shortfalls. The problem is that the State has already experienced one cash crunch when it had to delay paying it's bills this fiscal year and will likely experience a similar problem again soon. So the State is not going to solve the problem for local agencies. In fact it will worsen the problem, for that last budget included borrowing $692 million from cities, $960 million from counties and $330 million from special districts which supposed has to be paid back over the next three budget years, beginning in July with the budget year 2009-2010 which is impossible.
As things started getting bad in 2008, the Legislature and the Governor cut school funding by $7.9 billion claiming that the state's education finance formulas the money doesn't require the money to be repaid in future years. School groups such as teacher's unions disagreed arguing that the schools were owed $1.4 billion from the 2007-08 fiscal year. Argue all you want, it is a moot point.
These issues cover current cash flow only which is only part of the picture. The budget proposal for the 2009-2010 fiscal year includes "accelerating" collection of $2.3 billion in personal income and corporate taxes which would have accrued in the following budget year, taxes that are at least 30% overestimated. And there are issues like $48+ billion the State is behind in contributions to cover health and dental benefits for retired state workers, a picture that sounds ominously like GM and Chrysler.
Some said the recession in California got going in earnest in 2008. Not really. It started to ramp up to earnest in November 2008. The real picture looks like this "monthly new unemployment claims" graph:
California's Great Recession likely will begin "in earnest" in July 2009. And unfortunately for the Obama Administration and the world, what was the world's 8th largest economy will drag everyone else down with it.
California will need to reorganize as a bankrupt entity. It would be wise to seriously consider the Three Californias Proposal.