Thursday, December 31, 2009

Celebrate the New Year now - 2010 will be worse in California

Get tipsy on California sparkling wine (aka erroneously as champagne which is produced exclusively within the Champagne region of France) and wish California a Happy New Year with glowing optimism.

When you sober up you'll be entering a sobering new year, 2010. It will be the Year of the Tiger in the Chinese Calendar, but in the California Calendar it appears it is going to be symbolized as the Year of the Missing Sea Lions.

The Missing Sea Lions are a good symbol of 2010 in California. They symbolize the 2+ million missing jobs that will plague California for the next decade.1

The signs indicate the next dip in the double-dip is approaching. The fallout from the commercial real estate market collapse is about to be felt in the financial sector, particularly in California. Daily Finance summarized the situation:
Reports that commercial real estate (CRE) is suffering from a double whammy of soaring vacancies and declining valuations have been making news recently with sobering regularity. DailyFinance addressed the risks that CRE meltdowns pose to banks in early December. And in a stunning confirmation, just weeks later Morgan Stanley announced it was "walking away" from five San Francisco office towers, giving them back to the lenders. These accounts address the impacts on real estate investors, banks and hard-hit locales such as Southern California. But a bigger, often-overlooked, risk is the potential for CRE to remain a drag on the U.S. economy for years to come, or its potential to trigger a slide back into recession -- the so-called double dip that many fear.

Four primary factors are behind the tumble in CRE prices -- and they're eerily similar to those that powered the residential housing boom and bust:
  • Overbuilding in marginal locales that lacked adequate jobs and services to support massive new commercial construction (malls, hotels, business parks, resorts, etc.)
  • Excessive valuations fueled by low interest rates and easy credit
  • Highly leveraged bets on future appreciation
  • A banking sector that's extremely vulnerable to write-downs and losses from foreclosures
How much have prices tumbled? According to Moody's/REAL Commercial Property Price Index, CRE prices have plummeted 41% from the peak in 2007. Or in many cases, even more. For example, a hotel in Hawaii that sold for $250 million with a $230 million mortgage a few years ago is now only worth about half that amount.
Companies small and large that service other businesses are now in the process of learning they are holding worthless receivables or their customers' phones are disconnected. Trucking, for example, is an industry that is just now showing significant signs of distress.

This past week Arrow Trucking shut down operations stranding about 900 of its drivers across the U.S. and Canada after the company canceled its fuel credit cards. It sent two short text messages to the drivers telling them to turn in their trucks to the nearest dealer and offering a bus ticket to get home. According to the Tulsa World
Arrow failed to pay employees, failed to reimburse their expenses, failed to forward medical insurance premiums to insurers for the three to four weeks leading up to the shutdown, and failed to make pension and 401(k) contributions.

Also this past week, the nation's largest U.S. trucking firm handling less-than-truckload shipments under other names like Reddaway, New Penn, Holland, YRC, YRC Reimer, YRC Glen Moore, and YRC Logistics barely avoided bankruptcy according to Reuters.

Over the next quarter we're going to see just how shallow The Great Recovery really is. The President, armed with the best economic research available, has already admitted we will have a double-dip recession which he and Congress are trying to mitigate.

I wish the President well, but the actions of the federal government beginning in 2008 have slowed the inevitable arrival of the double-dip second crash effect in the financial markets only. In the real world where people work for a living, labor statistics keep reporting net job losses for each month.

The second dip will create its own ripples. Sometime in the next few months2 it will become apparent to everyone that the nation's largest State, California, is truly. essentially, and totally a bankrupt operation, that all it can do from its General Fund is (1) pay it's debt payments, (2) fund the programs partially subsidized by the federal government if in some cases the administration waives maintenance of effort rules and (3) maybe sustain minimum levels of public schools, public health, and public safety services.

Courts have already taken over supervision of some some of the State's operations, but the lack of legal methods for states to file for an orderly bankruptcy will create further problems. According to a throrough Bloomberg report on California published Christmas Eve:

California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.

The Republican governor plans to seek the relief, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the most-populous U.S. state wants the federal government to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.
Of course, we Californian's aren't alone with our troubles. The Bloomberg article notes that 35 states and Puerto Rico have deficit problems. But California has the most intractable political problems.

In the meantime, we continue to read in December about the reality of The Great California Slump in newspaper articles:

At the present time, everyone in power says we are facing a $21 billion State General Fund deficit to be covered in the 2010-11 fiscal year. I believe they are $10 billion low, but in the spirit of Everett Dirksen "a billion here, a billion there...." It really doesn't matter as there is nothing that can be done about it given the split in the Legislature where a two-thirds vote is required to do anything meaningful.

So, enjoy the New Year's celebration now.

1 Before dismissing the idea that California is missing 2+ million jobs, let me explain. In November 2007 California had 17,209,617 people working according to the U.S. Department of Labor. In November 2009 California had 16,084,298 people working or 1,125,319 fewer jobs.

In addition, to maintain its economic growth at minimal levels California had to create about 210,000 net new jobs per year or about 420,000 more jobs since November 2007. That puts California in the hole as of November 2009 about 1.54 million jobs and counting. By this time next year California will be in the hole at least 2 million jobs that it will not recover in the next decade.

How can I be so sure those 2 million jobs can't be recovered in a decade? The math is simple. The first 210,000 net new jobs created each year don't count as they are the jobs needed to maintain minimal economic growth levels. We need to create 410,000 net new jobs each year to achieve full job recovery by the end of 2019. That's an average of 34,000 net new jobs a month. Indeed, we have done that for limited periods. But that is an average number that won't happen 120 months in a row.

The one thing that might save us is a population loss. If we lost 3 million job seekers, things would actually be better though State revenues would still be down.

2 The Governor will outline the nature of his request for help in his January 6 State of the State address and we'll see just how bad he thinks things are in his budget to be delivered January 8.

Sunday, December 13, 2009

California in 2010 - Democrats in trouble

The East Coast Ivy League Obama Administration isn't paying attention. The result could be trouble in California in 2010.

First-time voters and young people were the edge-voters that gave Obama an edge. In California, these young people are going to community college instead of the University of California or a California State University. They know the reason is not The Gubernator, but the liberal wing of the California Democratic Party that put the State on the road to bankruptcy during Governor Grey Davis' term.

And they know that the Obama Administration made a deliberate and considered choice to not bail out California and its state universities while bailing out a bunch of East Coast bankers who graduated from the Eastern Ivy League schools with the President and his wife. And they are now pushing community college as a solution to something.

Senator Barbara Boxer better hope these young people don't turn out in 2010 in large numbers similar to 2008. Community college is not the new home for liberal thinking, it's the new home for desperate job seekers.

And Jerry Brown - Governor Moonbeam. And now Candidate Vulnerable. From Wikipedia with footnotes:

Voters passed Proposition 13 during Brown's tenure as governor, and Brown has been criticized for not offering tax relief to homeowners and thereby paving the way for the success of the proposition. Wrote Harold Meyerson in the Washington Post, "As incomes and property values rose, Sacramento's tax revenue soared—but the parsimonious Democratic governor, Jerry Brown, neither spent those funds nor rebated them. With the state sitting on a $5 billion surplus, frustrated Californians grumped to the polls and passed Proposition 13, which rolled back and then froze property taxes—effectively destroying the funding base of local governments and school districts, which thereafter depended largely on Sacramento for their revenue. Ranked fifth among the states in per-pupil spending during the 1950s and '60s, California sank to Mississippi-like levels—the mid-40s—by the 1990s.

Surely I'm not the only older registered Democrat who remembers that Proposition 13 passed at the end of Governor Moonbeam's first term - that he, in fact, is the public official most responsible for march toward the ultimate collapse of our State Government.

In mid-2010 the State will be in a severe budget crisis for which the Democrats in the State Legislature will have no solutions. Jobs will scarce. Those most dependent on State aid will be feeling abandoned by the Democrats. The working poor will be feeling abandoned by the Democrats. Students are already feeling abandoned by the Democrats. State and local government employees will be feeling abandoned by the Democrats. Teachers will be feeling abandoned by the Democrats.

Yes, the wealthy liberals - in itself an oxymoron - in places like Marin and Silicon Valley will still be attending those fund-raisers with Barbara and Barack.

But what Barbara and Barack need to do is send CIA Director Leon Panetta back to California to take stock of his home State. It's in deep trouble and so are the Democrats. They are going to have trouble keeping a majority in the U.S. Senate, much less the 60 votes they need.

Saturday, December 5, 2009

Impaired Vision

On Saturday, December 5, 2009, I stopped at my favorite optical store to pick up my sunglasses that I dropped off to have new lenses put in. They were moving in a bunch of cabinets and cases which I learned came from their other store located in a city in another county. They had closed that store. It was fallout from the state budget cuts as the population in that county is poorer than in ours. So I did a bit of research and came up with a story in the San Jose Mercury News which explained:

California's budget fiasco this year resulted in the elimination of optometry and optical services for adults 21 years and older, though there are exceptions for residents of nursing homes. As a result, those who least can afford health care coverage are no longer covered for low-vision evaluations and aids, leaving them at greater risk for injuries, accidents and depression.

And so the State saves money. And the store lays off employees. And the State loses income tax revenue and has to borrow money from the federal government to pay unemployment benefits to the employees because the State already spent all the unemployment insurance money it had collected from the store as an employer.

On May 26 I wrote here that California was experiencing an economic collapse later than the rest of the nation, a collapse I termed "The Great California Slump." I indicated that the collapse would begin in earnest in July.

I warned in August that some of the minimal "trickle down stimulus programs" could hide the imminent state budget disaster. I have repeatedly explained why the California economy will not recover during the next five or more years even if the national economy does make some recovery.

The fact is that the U.S. Department of Labor/California Employment Development Department statistics not seasonally adjusted raw data indicate that the California economy has lost 1,104,681 jobs since November 2007. If you add the net number of new jobs that needed to be added during the same period, we are down 1.5 million jobs in two years.

In my opinion California will be down 3.25 million jobs by November 2014 even though during that from 2011-2014 about 415,000 net jobs will be created.

As I warned in July, by late 2010 Californians will know that the State is in financial trouble. I didn't use any adjectives in the previous sentence to describe the "financial trouble" because any adjective used would cause readers to discount the true depth of the trouble. So let's turn to the Sacramento Bee's Dan Walters who last Sunday expressed the following:

Just how deeply in debt are our state and local governments?

The answer: No one knows for certain, since debt is scattered through myriad agencies in many forms, but well over a half-trillion dollars is a fair estimate.

...The state's "general obligation debt"...currently stands at $59 billion, and there are an additional $50-plus billion in general obligation bonds that have not yet been sold. The biggest chunks of debt, however, are the unfunded obligations for pensions and health care of retired public employees.

...A reasonable estimate of today's unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion.

...Local government general obligation debt...appears to be roughly the same as the state's, perhaps $50 billion, plus several billion dollars in debt incurred by local redevelopment agencies.

There are tens of billions in specialized state debt, such as veteran home loan bonds, "securitization" of tobacco lawsuit proceeds, and budget deficit bonds.

The interest that must be paid on all that state and local debt is probably an additional $100 billion, so we're already talking about well over $500 billion.

Then there are the off-the-books debts incurred to paper over years of state budget deficits, such as speeding up tax collections that will have to be refunded later, postponing periodic payments to schools, making promises to schools about levels of future financing, borrowing money from special funds and taking local government funds that must be repaid later.

The state's unemployment insurance fund, meanwhile, is about $7 billion in the red, and that deficit is expected to more than double in the next year and quadruple by the end of 2011. The state has been borrowing from the federal government, but sooner or later it will have to repay the feds, probably by taxing employers.

Conservatively, then, California is probably more than $600 billion in debt.

Conservatively, then, the taxpayers of California are on the hook for about $48 billion a year in principle and interest payments on debt. Yes, some of this is from special revenues like gas tax or from local government revenues. But one needs to put the number "$48 billion" into perspective. The sum of $48 billion is not much less than the $56 billion the State collected in Corporate and Personal Income Tax in the 2008-2009 fiscal year. It is somewhat more than all the State and Local Sales Tax Revenue collected in the 2007-2008 fiscal year - $31 billion.

Any way you look at it, we taxpayers have a big debt payment compared to what we pay in taxes.

But that isn't even the problem. Los Angeles Times Columnist George Skelton described the upcoming budget battle as "dreadful:
Here's how nonpartisan Legislative Analyst Mac Taylor gently put it last week in calculating the latest general fund deficit: "Addressing this large shortfall will require painful choices, on top of the difficult choices the Legislature made earlier this year."

But, he added, "It is unlikely that the Legislature can address all of the state's massive, ongoing budget problems with permanent, ongoing solutions in the next year."

I don't have to be so diplomatic. I'll just say that there's no way these people can produce an honest budget that forces Sacramento "to live within its means," as Gov. Arnold Schwarzenegger persistently preaches, while consistently being one of the first to sin

"Dreadful" is an interesting word choice. Dan Walters used the more colorful term "bloody" because the battle lines between tax increases and spending cuts are forming:

We don't know whether the ever-flexible Schwarzenegger will stick with his no-more-taxes mantra or, as he has done before, reverse himself. However, February's temporary tax increases have already stirred a backlash, and hitting taxpayers again in the midst of this record-deep recession would be politically almost impossible.

...They've scraped the bottom of the gimmick barrel, voters are livid and new taxes are functionally off the table. This will be one of the bloodiest skirmishes the Capitol has ever seen – with the only option being that the most populous state in the nation default on its debts.

What's facing the Legislature is the lack of viable gimmicks. Debt payments and further school financing cuts are off the table, the latter because the state accepted federal stimulus funds requiring continued State spending plus the State owes $1 billion more for this year.

Even some of the gimmicks used this year were predictably unusable. Courts have blocked reductions in home care for the disabled, ordered $1.4 billion above the budget in spending on prisons, and said the State can't divert $800 million in gas tax funds to the General Fund. The courts have also overturned the furlough program for thousands of State employees.

Yes, the situation is going to be dreadful and bloody. But they really have no idea how bad it will be. We actually won't know the worst of it until May 2010. From December through April, we will find out just how much the extra income tax withholding and estimated payments plus the obvious corporate tax overpayments will become refunds. In that period, we will also find out, as I noted last July the total of property tax payments that "will not be made in this fiscal year due to foreclosures or simple lack of money."

And for the tax year July 2010 - June 2011, the drop in assessed value will have continued in many parts of California, meaning that there will be less money from that source for schools which will mean that other General Fund monies spent in 2009-2010 on other programs will be diverted to schools. And it will mean that cities, counties and special districts will have less money to spend on public safety, parks, etc.

Oh. And more people like the employees of the optical store will be laid off. One thing for certain. "Those who least can afford health care coverage" likely will not be "covered for low-vision evaluations and aids" before 2017, if ever, "leaving them at greater risk for injuries, accidents and depression."