Friday, October 22, 2010

The Great California Continuing Slump

Despite whatever statistics you may have read this week about new weekly unemployment claims nationally, today the government released the state and local jobs data for September showing that California continues to lose jobs.

This confirmed the one meaningful weekly claims statistic reporting that as of October 2010, the number of people reported working in jobs covered by unemployment insurance in California is at the lowest so far in The Great California Slump - 1,177,076 covered jobs have disappeared from our economy since October 2008.

The most job losses during the current period (a) continue to come from the construction sector and (b) now are showing significant layoffs in the public sector. And we know this will get worse as schools, state, and local government layoffs rise.

Economists have been projecting that in the United States no "double dip" will occur in The Great Recession. That may or may not be true, but no doubt should exist that California will experience a "Continuing Slump" made up of a continuing downward trend with minor changes to the slope which can be seen from this graph (click on the graph to see a larger version): offers two definitions for the word "slump." The first is "to decrease or fall suddenly and markedly" which is what happened to California's economy in 2008-09. The second is "to decline or deteriorate" which is what happened to California's economy in 2010 and will continue to happen into 2011. But beginning in 2012 we likely will see a trend matching 2009.

I set up this blog to ruminate about a variety of important issues facing California. It was not the intent to focus almost entirely on the collapse of California's economy and the great failures of those in our State government. Unfortunately, since May 2009 42 posts here concern what I term is The Great California Slump and its corresponding national event The Great Recession (see the list at the end).

It seemed necessary to focus on California's economy because by mid-2009 it became apparent that the State would not be able to address any issues until its economy recovered.

It also became apparent in mid-2009 that even in a "non-election year" that members of the Legislature and The Gubernator were so locked into ideology and so fearful of entrenched powerful economic interests that nothing was going to be done to deal with the State's financial crisis resulting from The Great California Slump.

Finally, it also became apparent that nobody in a State political job seemed willing to describe the depth of the economic collapse, admit the likelihood that there will be no economic recovery in California before  2020, and design a course for the State government, local government, and the State's school system to prosper. And except for "other" party candidates running for office, candidates are not telling Californians what's wrong and what needs to be done with schools and state and local government beyond ideological platitudes.

Yes, a couple of columnists and a few bloggers have expressed concerns about the broad details. For instance, Sacramento Bee Columnist Dan Walters pointed out last November:  "Conservatively, then, California is probably more than $600 billion in debt."

As I noted then, the taxpayers of California are on the hook for about $48 billion a year in principle and interest payments on debt. This is a number that, relative to the General Fund angst we go through every year, is not much less than the $56 billion the State collected in Corporate and Personal Income Tax in the 2008-2009 fiscal year and is somewhat more than all the State and Local Sales Tax Revenue collected in the 2007-2008 fiscal year - $31 billion.

Now, the press is starting to report in news stories that the much-described General Fund budget deficit problem is only the tip of the iceberg. Today the San Francisco Chronicle informed us of a report from the Legislative Analyst's Office entitled California's Other Budget Deficit: The Unemployment Insurance Fund Insolvency which let's us know information about the "off the books" growing debt in the State Unemployment Fund discussed here several times beginning in May 2009, but which is now officially acknowledged in part as follows:
The UI Fund Is Currently Insolvent. The UI fund became insolvent in January 2009 and ended that year with a shortfall of $6.2 billion. Absent corrective action, the fund deficit is projected to increase to approximately $20 billion at the end of 2011 (Employment Development Department [EDD] will soon update these projections). During 2009, the state paid about $11.3 billion in benefits to workers while collecting only about $4.5 billion from employers. This recent spike in benefit costs is due to the recession, which resulted in more workers than ever applying for UI benefits.

Federal Loan Supports Benefit Payments With Interest Costs to the State. Since January 2009, EDD has been obtaining quarterly loans from the federal government to cover the UI fund deficit. These federal loans have permitted California to make payments to UI claimants without interruption. Generally, loans lasting more than one year require interest payments. The federal American Recovery and Reinvestment Act (ARRA) of 2009 provides temporary relief to states from making interest payments on UI loans through December 31, 2010. With the expiration of these ARRA provisions, EDD estimated in May 2010 that California could owe about $500 million in September 2011 and would face growing interest obligations in the out year
Of course, this is just some small part of the debt Walters was discussing.The Chronicle regurgitating the report notes:
The Democratic-controlled state Legislature enacted benefit increases in 2002 that raised the maximum weekly payment from $230 to $450 - a change they were able to make by a majority vote.

But Democrats lacked the two-thirds margin required to increase the employer contribution.

The fund became insolvent in January 2009 and ended that year with a $6.2 billion shortfall....
The report outlines the options available to the Legislature which would involve (a) decreasing benefits which the majority Democrats won't do or (b) increasing the unemployment insurance rates which the Republicans will block. But that's ok, because the federal unemployment insurance loans come with fully enforceable terms that recognize that for three decades California employers have not been paying enough into the fund. From the report:
Employers would face serious long–term consequences if the state fails to address the underlying problem that resulted in this borrowing of federal funds for the UI system. Federal law includes provisions to ensure that a state does not continue to incur loans over an extended period. Specifically, if a state has an outstanding loan balance on January 1 for two consecutive years, the full amount of the loan must be repaid before November of the second year or employers would face higher federal UI taxes. (The current 0.8 percent federal tax would increase each year in increments—starting with an increase of 0.3 percentage points—until the loan was repaid.) Once the fund reached solvency, the annual federal UI tax rate would once again drop to 0.8 percent. As shown in Figure 5, employers could face their first tax increase as early as 2012, which would result in an increased annual cost of about $325 million to employers. Absent corrective action, the federal tax would continue to increase incrementally each year to a maximum of 6.2 percent, resulting in increased employer costs of approximately $6 billion annually. We note that even this $6 billion tax increase would not be enough, at this point, to address the insolvency problem and cover the projected fund deficit. These additional federal administrative taxes are applied to the principal balance of the state’s federal UI loan.
That would, of course, make California an undesirable place in which to employ people. And since this will happen unless Congress let's us off the hook, that is a major problem which legislators are promising to fix right after they balance the 2010-11 current budget and the 2011-12 budget that begins next July. Don't hold your breath.

On the other hand, the State pension funds are discussed in great detail by the candidates for office and the public. Changes have already been approved to reduce pensions for new State employees. Everyone wants to solve this problem with the public employees. This is politically safer to address as opposed to the problem with private employers who have not paid enough into the unemployment fund for 20 years and don't want to pay enough in the next 20 years or cutting unemployment benefits for private sector employees by 40%.

It's good to address that public employee pension problem. So now we can avoid maybe having to worry about the year 2030 and focus on the years between today and 2020. You see, the Business Insider recently announced:
Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America.
You see someone actually did a study. It was published by the Kellogg School of Management or Northwestern University. Someone reasonably smart (not a politician) went to a great deal of work to produce that study which discovered that if policy changes aren't made the pension funds of our many state governments will be bankrupt in the following years:
  • 2018: Illinois
  • 2019: Connecticut, Indiana, New Jersey
  • 2020: Hawaii, Louisiana, Oklahoma
  • 2022: Colorado, Kansas, Kentucky
  • 2023: Alabama, Michigan, Minnesota and Mississippi
  • 2024: Maryland, Pennsylvania, South Carolina and West Virginia
  • 2025: Missouri
  • 2026: Maine, Massachusetts and New Mexico
  • 2027: Montana and Rhode Island
  • 2028: Vermont
  • 2029: Arizona
  • 2030: Arkansas, California, Ohio, Wyoming
  • 2031: South Dakota
  • 2032: Nebraska
  • 2033: Virginia, Washington
  • 2035: Delaware, Iowa, Tennessee
  • 2036: Utah
  • 2037: Texas
  • 2038: Wisconsin
  • 2039: Oregon
  • 2041: North Dakota
  • 2043: Idaho
  • 2047: Georgia
  • Never: Alaska, Florida, Nevada, North Carolina and New York
So you have to give credit to our Gubernator and our Legislature and the candidates for state offices this year. They all agree that the important fiscal issue facing California government this year if not ten years ago is to solve that pension crisis facing us in 2030.

I can't wait until we find out whether it's going to be Former Governor Moonbeam who deserves the name or the overpaid corporate bigwig who brought us Teletubbies (no, she did not invent eBay or even make it a success). I'm sure either can find music entertaining their particular audiences to play on the Gubernatorial fiddle while California continues its slumping.
Here are links to the previous 42 posts on The Great California Slump and The Great Recession:

Saturday, October 9, 2010

Californians Committing Fraud Because We Must?

I'm not intending to pick on the Gubernator (my preferred spelling) as everyone who participated in the compromised budget (yes, I meant compromised) approved this week accepts this, but from the LA Times here's how our State leaders think:
Administration officials said many of the cuts announced Friday would be made in ways intended to minimize the effect on people who rely on state services. A $366-million cut to CalWORKS, for example, will be covered by an advance from the federal government that the state hopes it will not be required to pay back, said Ana Matosantos, Schwarzenegger's finance director.
In other words, the proposal would be termed "fraudulent" except that terms means "having the intent to deceive." In fact, these folks know they aren't deceiving anyone. If  what you're doing is taking money under false pretenses, do you really want to tell the press. Apparently so.

What's depressing is that it completely reflects how the Legislature "closed the deficit." Even if the deficit number itself was not the fraud it is, the budget process was.

I suppose it isn't like these "leaders" had a choice. If they hadn't found the votes the State soon would run out of money. With no budget, its ability to borrow would be severely crippled. The California Constitution says the budget was to be adopted June 15. But hey, that deadline has been met only five times in the last 30 years. So the simple fact that this is the longest the State has gone in a fiscal year without a budget isn't what made them act. The likelihood of running out of cash was the driving force.

Below is a screenshot from the document they presented before the voting:

The "Starting Problem" of a $17.9 billion deficit is a fraudulent number. The real number is more like double that figure. But even if we accept it, the problems buried in the other numbers are beyond imagination. Well, apparently not beyond imagination, as somebody has imagined this.

The silliest one is the "Federal Funds" item - $5.3 billion which is double any real possibility. The Sacramento Bee reporter who attended the presentation noted:
Presentation notes, in italics, "Still more work to do in Washington."
Yeah, right.

Expenditure reductions include interesting things such as reducing prison inmate medical costs by $820 million, a function completely controlled by a federal receiver because the State wasn't spending enough. The federal receiver must be shaking his head in wonderment.

The additional revenue portion of the document says:
More that half of this, $1.4 billion, is from the Legislative Analyst’s revenue forecast, which was $1.4 billion higher than the Governor’s May Revision – three months into the fiscal year, this additional revenue has already been realized.
That would be fine if it were a true number. But reality is that the Legislative Analyst in May predicted that revenue from income, sales and corporate taxes would come in $1.4 billion higher for the entire fiscal year of 2010-11.

In fact, the Controller has not publicly issued revenue numbers for September, but for the first two months sales tax data indicates a stagnate economy at best. Corporation tax revenues were down and Personal Income Tax Revenues year-over-year were flat.

Like last year only more so, much shifting of funds and delays in making payments is buried in the budget. More school districts this year will be borrowing against promised but delayed state revenue owed to them. Money will be wasted on interest. And in some cases, the state is nearly five years behind in payments owed to schools.

Presumably in January 2011 a new Governor and new Legislature immediately will face making revisions in this budget and trying to figure out how to deal with an even worse situation for 2011-12 without committing fraud.

Good luck with that my fellow Californians.