Governor Moonbeam or The Overpaid Corporate Bigwig

California will elect a new Governor on November 2nd. Whoever it will be, that person will be following in the footsteps of Gray Davis and Arnold Schwarzenegger towards a greater tomorrow. So let's look at who we have to select from so that we can be depressed.

Meg Whitman and the eBay myth

The online auction website was founded on September 3, 1995, by French-born Iranian computer programmer Pierre Omidyar. Jeffrey Skoll was hired as the first president of the company in early 1996. While eBay was already profitable at the time Skoll joined, he wrote the business plan that eBay followed from its emergence as a start-up to a great success. He remained President until the arrival of Meg Whitman in January 1998.

Meg Whitman was hired as eBay President and CEO in March 1998. At the time, the company had 30 employees half a million users and revenues of $4.7 million in the United States. eBay went public on September 21, 1998, and both Omidyar and Skoll became instant billionaires. eBay's target share price of $18 was all but ignored as the price went to $53.50 on the first day of trading.

Omidyar and his wife in 2004 founded the Omidyar Network, a that invests in and helps scale innovative organizations to catalyze economic, social, and political change.

In 2004 Skoll became the founder, chairman and owner of Participant Media which he created to fund feature films and documentaries that promote social values while still being commercially viable. Its first three films were Syriana, Good Night, and Good Luck, and North Country along with the documentary Murderball. These films accounted for 11 Oscar nominations in 2006.

Subsequent films have included;

• An Inconvenient Truth
• American Gun
• Fast Food Nation
• The World According to Sesame Street
• Charlie Wilson's War
• The Kite Runner
• Angels in the Dust
• Jimmy Carter Man from Plains
• The Visitor
• Chicago 10
• Standard Operating Procedure
• The Soloist
• Food Inc
• The Informant
• The Cove
• The Crazies
• Pressure Cooker
• Oceans

Unfortunately, we are not going to be able to vote for either Pierre Omidyar, the creator of eBay, or Jeffrey Skoll, the person who designed the business plan for the company. So we have to look at Whitman's performance there.

Whitman continued as CEO of eBay until March 2008. She appeared to do well during the company's growth stage, but much less well as the company became large and mature. The state of California, of course, is a large and mature organization. So she decided to run for Governor.

eBay stock price hit its historic price high on December 29, 2004. Here's want happened from that point on until she left, when eBay actually needed an effective CEO, with the NASDAQ for comparison (click here for a large version):

Investors had their reasons for reacting negatively to Whitman's direction of the company those last three years. Whitman's campaign told one news reporter: "The decisions she made during that period were designed to make eBay a stronger company built for the long haul...." Measured by share value, compared to the NASDAQ eBay has underperformed since she left.

Whitman left eBay March 1, 2008. By early April share prices had climbed 23% for some reason. Of course, in the next 12 months the economy crashed and so did eBay's share prices.

If Skoll or even Omidyar were running for Governor based on their apparent wisdom and experience, one might be tempted to vote for them.

Whitman was not an entrepreneur. Prior to eBay a General Manager in Hasbro's Playskool Division where she was in charge of the Mr. Potato Head brand and responsible for importing the Teletubbies into the U.S. How she's avoided being labeled with one of those brands is anybody's guess.

Based on her record, Whitman was a corporate ladder-climber, a typical early 21st Century hired CEO, enriching herself, making bad acquisitions of other companies, outsourcing labor, and generally not contributing much to society. Just another overpaid corporate bigwig. Now she wants to try her hand in politics and government, as the Governor of California. If she wins, she'll be California's first woman Governor.

Jerry Brown: What the Governor Moonbeam label meant

In 1978 then Governor Jerry Brown was nicknamed "Governor Moonbeam" because he proposed the establishment of a state space academy and the purchasing of a satellite that would be launched into orbit to provide emergency communications for the state. In a Rolling Stone interview his then girlfriend Linda Ronstadt referred to him as her "Little Moonbeam." Columnist Mike Royko of the Chicago Sun-Times picked up on it and Brown's proposal, offering the nickname "Governor Moonbeam."

This is, of course, an amusing anecdote with everyone noting that Royko in 1992 commented, while disavowing the nickname, that Brown was just as serious as any other politician.

People remember other such amusing things about Brown. He refused to live in the newly-constructed Governor's Residence, renting a modest apartment. Instead of riding in a chauffeured limousine, he rode in a chauffeured Plymouth Satellite.

But besides being a quirky B-class celebrity dating an A-class celebrity pop star, he was also Governor. Early in his term, he prevented the State of California from building badly needed freeways, a construction freeze that put the state so far behind that when construction began again construction costs had inflated requiring the state to scale down plans that could have been accomplished during Brown's term. This was typical of his ideas, removed from the reality of California. Californian's weren't going to quite driving cars in the early 1970's nor will they now.

Then we get to 1978, when he earned his nickname "Governor Moonbeam." For reasons beyond comprehension, the press seems to not notice that it was also the year Proposition 13 passed. Regardless of the political arguments between the tax cut advocates and those trying to support schools, police, etc. services, Proposition 13 made a significant structural change in California government, a change that did not bode well for the future. As with all government, it takes a long time to see what the full results of such a change will be. Those chickens have come home to roost in the second decade of the 21st Century in the form of a bankrupt state and local government structure.

While Brown was delaying the inevitable construction of freeways and proposing a state space academy, as Governor for three years he became one of the primary reasons Proposition 13 passed. The Washington Post noted:

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 the mid-40s by the 1990s.

And as Governor after Proposition 13, he and Assembly Speaker Willy Brown (no relation) failed to prepare California government for the new reality. Governor Moonbeam had no idea what to do.

Since then, he has run failed campaigns for President. After being elected Mayor of Oakland he discovered the City had a City Manager. So he successfully eliminated the City Manager position, gaining power for himself. It's tough to find a successful program he started and accomplished during his tenure, but he did frequently elevate his celebrity status with publicity stunts like leaving the Democratic Party only to re-register as a Democrat a short while later.

Even though he initially failed the state bar exam, had never practiced criminal law, nor practiced any serious civil law, and was ineligible to practice law because of his voluntary inactive status in the State Bar of California from January 1, 1997 to May 1, 2003, in 2004 having nothing else to do he ran for and was elected Attorney General of California in 2004.

Now he wants to be Governor again. Make no mistake about it. "Governor Moonbeam" is an appropriate nickname. Like moonlight, his brightness is simply a diffuse reflection of popular ideas, political fads really. Like the moon, he appears in cycles as a political celebrity moving tides of fluid voter support that is high at one point and low the next. And while sunlight is the energy that supports life, a moonbeam is only a weak reflection of a sunbeam.

Only because he deserves to be punished for his failures as Governor in the 1970's would I vote to put Jerry Brown in the position of presiding over the financially bankrupt State government for the next four years.

He also would set some dubious records: (1) the oldest governor of California at the time of inauguration; (2) the longest elapsed period (nearly 28 years) between serving two non-consecutive terms as governor; and (3) at the end of a four year term he would become the longest-serving governor.

Other Candidates

Other candidates will be on the ballot. Voting for one of them will be the proverbial "tilting at windmills." While in their respective party primaries, Democrat Brown got nearly 2 million votes and Republican Whitman got nearly 1.5 million votes, American Independent Party candidate Chelene Nightingale garnered 23,272 votes, Libertarian Party candidate Dale Ogden got 16,842 votes, Green Party candidate Laura Wells got 16,654 votes, and Peace and Freedom Party candidate Carlos Alvarez got 1,853 votes (not even a majority in his party). Nightingale and Ogden appeal to different elements of the political right. Wells appeals to the political left.

Since there is only one leftist candidate, a review Green Party candidate Laura Wells, who has tilted at windmills with some effort for awhile now, gives some sense of what's out there. In 2002 and 2006, Wells ran campaigns for State Controller, receiving 419,873 votes in 2002, the most ever for a Green Party candidate in a statewide partisan race in California. She directly focuses on the policy issues which, of course, are never seriously discussed by either major party candidate.

• Regarding property taxes, she says provisions of Proposition 13 must be changed, in part because it primarily benefits corporations over individuals, and favors use of a "split-roll tax" to keep cap residential property taxes while allowing higher property taxes for businesses.
• Regarding the continuing budget stalemate in the Legislature she favors lowering the margin needed to pass a budget and raise taxes in the state from two-thirds to a simple majority.
• Regarding the health care crisis, she supports a Single Payer Universal Health Care solution for California.
• Regarding energy and the environment sh advocates the use of clean, sustainable, local energy, including publicly-owned utilities, Community Choice Aggregation (CCA) and localized (distributed) electricity generation, instead of nuclear power or carbon sequestration.
• Regarding the banking industry, she opposes bailouts of large corporations and proposes the creation of a State Bank for California which could partner with local banks and credit unions, and potentially improve their ability to lend.

These ideas may or may not be perfect, but they address the issues that most affect the collapsing California economy and the bankruptcy of the State. Unfortunately, a Google News Search pulls up not one article about Wells in a major newspaper since the primary. In may she is mentioned in a San Jose Mercury News article headlined Governor's race is full on the fringe.

And so, the media has consigned the two political right candidates and the one political left candidate to "the fringe" even though they talk about issues and offer serious proposals. Of course that is probably best for them, as the Governor cannot accomplish anything without the support of the Legislature. California has not had a third party Governor unless one counts Hiram Johnson. He was originally was elected as a Republican in 1910 but then joined with Teddy Roosevelt to form the Progressive (Bull Moose) Party in 1912 and was re-elected in 1914, but was elected to the U.S. Senate taking office in March 1917.

The next Governor, by default, is going to have a failed term. It seems appropriate that it will be either Governor Moonbeam or the overpaid corporate bigwig.

Coming Up - California's Second Lost Decade of the Century

Is The Great California Slump so systemic that it will become regarded as the two years leading to California's Second Lost Decade?

At one time it was difficult to imagine the Golden State in a situation where economic expansion would remain flat for ten years, barely keeping pace with inflation and population growth. But measured in terms of employment - people with jobs - the numbers in 2010 are roughly the same as in 2000-2001 whether you look at the federal survey data or the actual employment reported to the State Employment Development Department. From an economic growth standpoint, the period from 2001 through 2010 was California's First Lost Decade of the 21st Century.

Right now it is difficult to project a recovery scenario in the next 10 years - 2011 to 2020 -where the California economy not only recovers the 1.2 million jobs lost since November 2007 but adds 2.5 million additional jobs to employ the expected growth in the workforce.

That would require adding 30,000 new jobs a month. That's never happened. In the best years of the last decade, 2005 and 2006, we produced 20,000 new jobs a month and much of that was the result of an asset valuation bubble.

All indications are that The Great California Slump is ensconced deeply into the fabric of the economy. And example is bankruptcy filings:

The year 2005 is a record year because Congress changed the rules effective 2006 - anyone who might need to file for bankruptcy filed that year. While nationally, bankruptcy filings climbed last year, in California the skyrocketed exceeding 2005 by 25%. That is partly because the asset valuation bubble affected Californians more significantly than other parts of the nation.

While people recover from bankruptcy, frequently their confidence doesn't recover, particularly when it was in conjunction with the loss of a home due to foreclosure all due to extended unemployment.

Complicating the situation, Congress is allowing the "safety net" to slip Also, a State budget proposal for the 2010-11 fiscal year that began July 1 is not before either house of the State Legislature. The Gubernator wants some state employees paid minimum wage (those whose unions have not accepted his last-best-final offer for wages and benefits) until a budget has been adopted, a move he thinks will put pressure on the Legislature.

No real incentive exists for legislators to adopt a budget before Election Day November 2. If the State Government continues on without any of drastic measures such as minimum wage, with just a little juggling of expenditures the State may not even have to issue IOU's before then. And there is nothing positive a legislator running for reelection can derive from voting for a balanced budget this year.

In the meantime, local governments and schools continue to reduce staffing and expenditures. That loss of cash flowing into the state's economy will slowly offset any economic gains that might occur. Once the new Legislature and new Governor take a hard look after November, they will be forced to make substantial cuts in "safety net" programs and education, or increase taxes substantially, or some combination of both. That also slowly will offset any economic gains that might occur.

Just as that is occurring, the recent housing sales slump will tamp down any gains in asset value recently made by homeowners and cause employment in construction to remain depressed.

The irony is that after Proposition 13 passed had Jerry and Willie Brown and their successors maintained, the "obscene surplus" (as described by Howard Jarvis) within the State coffers, when a slump like 2008-09 hit, the State could have maintained the safety net and stimulated the economy instead of becoming a drag on it.

But then again, if the Bush Administration had kept in place policies that reduced the deficit then the federal government could have been more effective in 2008-09 also.

Of course, there would not have been enough money flowing in California's private sector economy to support the dot-com bubble and the home mortgage bubble. The former, however, did contribute to some modest economic growth. (Moving retail sales from your local stores to eBay and Amazon contributed nothing real, but other elements have established long-term positive trends.) The home mortgage bubble was a simple ponzi scheme where people were enticed to "buy in cheap" for a return on investment that was never possible.

Without some "asset value bubble" between now and 2020, significant employment growth will not be possible. But any "bubble" growth will be artificial and likely collapse back to near-2000 levels - meaning California will have a Second Lost Decade.

The Embarrassing State of 1970

The Gubernator in 2008 said cut some employees wages to minimum wage. A State Appeals Court this week upheld that order.

The Court noted that State Constitution prohibits paying wages for most state employees without a budget adopted by the Legislature. The Court also confirmed that federal law supersedes state law and requires that the employees must be paid the federal minimum wage.

The Court said to the State Controller, while we understand that the 2008 order is moot, we're dealing with the issues in order to clarify your obligations pursuant to law for the future, perhaps for circumstances such as what has happened this week in 2010 (see the complete ruling).

State Controller John Chiang says he couldn't do it then and he can't do it now. Why? To quote an AP article:

The state's payroll system was designed more than 60 years ago and was last revamped in 1970, Hallye Jordan, state controller's office spokeswoman, said in an e-mail.

A report by the nonpartisan legislative analyst's office said an overhaul of the state's computerized payroll system was proposed by the controller's office in 2004. A year later, the Legislature approved $130 million for the effort, called the 21st Century Project.

...[John Harrigan, a division chief for the state's payroll services from 1980 to 2006] said he was involved with the 21st Century Project when it was conceived in the late 1990s. He said the state fired the vendor executing the project in 2008 because the company went bankrupt.

As the project dragged on, the state has had fewer experts on hand who could thoroughly understand the programming languages used to design the system.

"There's been a knowledge loss with people retiring," Harrigan said.

So the State of California, home to literally dozens of technology giants, among them Intel, Hewlett-Packard, Apple, Intuit (maker of QuickBooks Payroll Enhanced), processes its payroll on a 1970 computer system - a system so old that it preceded the advent of the personal computer.

Unfortunately, it's not surprising because sometime in the 1970's state government ceased to progress sometime in the 1970's.

But it's embarrassing.

The iPad Economy

I love the iPad. It's great. But its huge success - 3 million sold in 80 days - doesn't represent a huge success for the average American. The news media just doesn't get it, so there is no chance for the American public to understand what is about to happen.

Back in April we treated to news stories about the first quarter growth in the Gross Domestic Product. And example is this one in the LA Times written by one of its own reporters headlined Nation's GDP grows at 3.2% rate in first quarter which told us:

The economy grew 3.2% in the first quarter of the year, the Commerce Department reported Friday, another indication a steady, though modest, recovery has taken hold.
The annualized rate of growth of the gross domestic product -- the nation's total production of goods and services -- was down from the 5.6% rate of the last three months of 2009. But that had been expected as the effect of the federal government's stimulus policies peaked during that period.
..."We're still running on the fumes of stimulus in the U.S. economy," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "It's a recovery, but by any standard is still a muted recovery. But we're thankful to have what we've got," given the depth of the recession, she said.
..."I think its well in line with expectations," Swonk said of the first-quarter figure. "The recovery's more broad-based. Although the momentum slowed quite a bit from the fourth quarter, the consumer showed up and we had a lot of demand, which is good."

Yeah....

Except that today the LA Times offers a followup wire service story headlined Government lowers 1st quarter growth estimate that reports "Gross domestic product rose by an annual rate of 2.7 percent in the January-to-March period, the Commerce Department said Friday."

The article does ramble through some information. But it doesn't explain why the growth number was dropped 15.7% from the original estimate. Nor does it point out that the GDP grew less than the population - in other words, the per capita GDP is still a negative number. Nor does it note that the growth rate would have to be above 3.5% the rest of the year to meet the Federal Reserve's forecast for a start to an economic recovery.

That forecast coming to fruition doesn't seem very likely since:

• retail sales in May fell for the first time in 8 months;
• new home sales plunged 33% in May because the tax incentive stimulus expired in April;
• the Republicans in the Senate killed the jobless bill which means that unemployment insurance will disappear for about 200,000 unemployed people each week for the foreseeable future;
• state government, school, and local government spending will dramatically drop over the next 12 months, particularly without the funds that were in the jobless bill.

All of which brings me to the iPad economy. It is possible that sales of the iPad and the iPhone 4 could effectively distort the second quarter results. What's bad about that is the hidden truth of our economy, which the iPad as a product represents.

It is possible that during the April-June 2010 quarter American consumers will have spent $3 billion purchasing iPads and iPhones. That is very different than spending $3 billion on purchasing homes or even cars. The difference is that the multiplier effect of the $3 billion in purchases of Apple products won't be comparable. Nothing in the iPad is manufactured in the United States.

A home is constructed by American workers and the products and many of materials used in the home are manufactured here using raw materials from here. Each dollar spent multiplies in our GDP.

Sure, Apple in America employs the folks who develop a product like the iPad and sure a number of other companies and individuals will add to our GDP developing and selling accessories and apps.

But to be enthused about consumer spending growth as one might be if new home sales jump is not possible. When Apple turns on the production line, it is all in the ether of computerized accounting for Americans, it is money going to China and Chinese workers, it can be seen on the screen but not felt.

That is why people are failing to understand the truth of the report that also came out today telling us that corporate profits increased 8 percent in the first quarter and earnings were up 34 percent from the same time last year. In an iPad economy these numbers can never translate into a corresponding increase in employment. Nor does it mean that the federal state, school, and local government revenues will see a corresponding increase.

When something was designed and manufactured in the United States using materials mostly from the United States, every dollar spent by a consumer to acquire the item was multiplied in our economy. Not only did the store clerk get a piece of the dollar the consumer paid for an RCA TV in 1952, the American who made the cabinet for an RCA TV in 1952 got a piece of the dollar. So the dollar spent, plus all the pieces as they passed through various hands in the system, increased the GDP and became taxable income which helped to support the school the consumer's kids went to.

When I bought an iPad, the employee who made the metal back got a piece of my purchase price, but he or she is in China. My consumer spending just isn't comparable as a stimulus to the American economy as one might think. It most certain isn't comparable to spending on new home purchases.

The hard truth is the U.S. has reached a limit. We as consumers can't spend our way out of The Great Recession. We must start producing things here beginning with the raw materials, to the extent possible, and ending with the final product. And we need to find a way to represent our economy so that a dollar spent on an iPad purchase is not equated by economists and the media to a dollar spent on a new home purchase.

The Great California Slump: Phase 2

In May 2009 I wrote:

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.

It was in a July 2009 post that I suggested calling it "The Great California Slump" in recognition of the fact that California has its own economy, simultaneously integral to and separate from the U.S. economy.

The fact that seems hard to grasp is that the employment level in California is the same today as it was in the period from 2000-2002. In my opinion it will remain at that level through 2015. California is in a depression comparable to that of the mid-1930's.

The only difference is that a "safety net" of extended unemployment insurance and other economic subsidies reduced the immediate impact on individuals. Also federal "stimulus" programs such as the August 2009 "Cash for Clunkers" program and the home buyer's tax credit slowed the overall economic slump.

But we are now seeing a fear of deficit at the federal level that apparently will result in many of the programs ceasing which will further depress the California economy. One shouldn't underestimate the impact these programs had.

For instance, the home buyer's credit expired in April. This week a news article headlined New-home sales plunge 33 pct with tax credits gone reported:

Sales of new homes collapsed in May, sinking 33 percent to the lowest level on record as potential buyers stopped shopping for homes once they could no longer receive government tax credits.

...Analysts were startled by the depth of the sales drop.

"We all knew there would be a housing hangover from the expiration of the tax credit," wrote Mike Larson, real estate and interest rate analyst at Weiss Research. "But this decline takes your breath away."

Reporting on the same data, the Los Angeles Times noted: "Sales in the West were down by more than half."

And now comes The Great California Slump: Phase 2. Consider this comment by UC Berkeley business school dean Laura Tyson, a top economic official in the Clinton administration who is on the short list to become President Obama's budget czar:

Deep cutbacks by state governments such as California have all but obliterated the effect of the nearly $800 billion federal stimulus enacted last year....

As I noted in May 2009:

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.

What has happened is that the government of the State of California has hit a brick wall because it is now clear there isn't enough money flowing in the economy. As noted by one observer:

The governor has a state budget that his fellow Republicans more or less support. Assembly Democrats have a budget whose centerpiece is a complex scheme to borrow billions of dollars. And Democratic senators have a budget that's based on raising taxes and shifting some programs from the state to counties.

...The two Democratic versions of the budget are very much at odds, even if they both agree on rejecting Gov. Arnold Schwarzenegger's slash-and-burn approach to closing a $19.1 billion deficit.

Moreover, Attorney General Jerry Brown, the Democratic candidate for governor, has declared that the massive borrowing envisioned in the Assembly plan probably would violate a 2004 balanced-budget ballot measure.

It is easy to blame ineffective and irresponsible government. But even when I'm doing so, I am fully aware of something recently noted by another observer explaining a recent study:

In the paper, Inman tests factors in states' budgeting practices, politics and economies in order to figure out which correlates most heavily with their economic conditions. The runaway winner is unemployment. "States with a one standard deviation higher rate of unemployment (10.0%) will have a budget gap which is $222/person more than a comparable state with an unemployment rate one standard deviation lower than average (6%)," he concludes. Inman finds this to be a cheering prospect: "The good news from this analysis is that the states’ fiscal crises of 2009 do not appear to be linked to any obvious structural or institutional failures in state finances. It’s the economy."

A few other points from the paper: The states that have survived the recession best are not states with more competent governments. They're states that depend on natural resources – Montana, Nebraska, North Dakota, Texas, West Virginia, and Wyoming – for revenue. Budget cuts, as you might have expected, have hit aid to local education and transfers and services for lower income families hardest. And the stimulus covered, at most, 23 cents of each dollar of state budget gap -- and that's running out this year.

In other words, it may be fun to denigrate our politicians or to point to states that seemingly do it better because they have a different tax structure, but the fact is the more a state and the local governments and schools in each state depend on income and sales taxes rather than income from taxes on natural resources and real property, the worse its budget problems.

Of course, our politicians are deserving of criticism.

Confronted with the current situation, the Legislature didn't even try to meet the June 15 budget deadline and the joint committee working on the budget adjourned for awhile because they can't figure out how much money they have to spend in the next six months.

Meanwhile, in March the Senate passed a proposal sponsored by California Forward that would require the governor to submit a two-year budget plan and a five-year fiscal outlook to the Legislature in odd-numbered years beginning next year.

Really? The Legislature and the Governor have been adopting and significantly revising the state budget every six months for several years now, but someone thinks they can adopt a two-year budget and make serious five-year fiscal projections.

I know, I know, we need all those great business planning practices that will avoid the problems.

But who, again, was the person who in early 2006 offered the projection that in 2009-10 taxable sales would be 16%+ lower than in fiscal year 2006-07, taxable personal income would be 20%± lower than it was in 2006-07, and the Corporation Tax income would be 17%± lower than it was in 2006-07? If no one would have put that in the five year plan, doing the plan would have been an exercise in futility. Worse yet, if the Governor had put that in the plan, he would have ceased to perform a critical role for the State - head cheerleader for our economic outlook.

The Great California Slump: Phase 2 is going to be a worsening of the economy combined with a weakening of the "safety net" at both the federal and state level. And California is not alone. Here's a map of the states this year showing those with deficits in red, the darker the red the worse the problem:

The federal government does need to recognize the depth of the problem. California, New york, Illinois and New Jersey, the four darkest on this map, contain 25% of the nation's population. If you add in the next tier, Florida, Pennsylvania, New Jersey, Washington, Arizona, and Connecticut, 43.5% of the American population located in 10 states will be seeing major cuts in state, local government, and school employment and purchasing and/or tax increases beginning July 1.

This will severely impair any national economic recovery, perhaps delaying a recovery for a decade. And it could cause significant numbers of Americans to experience economic stress not seen in this country for 80 years.

In any event, absent some remarkable strategy implemented in the next three months The Great California Slump: Phase 2 is about to begin.

From an AP news article on line as of around 8 pm EDT tonight headlined Republicans kill Senate jobless aid measure:

The rejected bill would also have provided $16 billion in new aid to states, preserving the jobs of thousands of state and local government workers and providing what White House officials called an insurance policy against a double-dip recession....

The demise of the bill means that unemployment benefits will phase out for more than 200,000 people a week. Governors who had been counting on federal aid will now have to consider a fresh round of budget cuts, tax hikes and layoffs of state workers.

The Evil Reality in the Magic Kingdom

As a government with serious responsibilities related to the well-being of its residents and visitors, the State of California has a twofold problem.

The first difficulty is that based on all available information the state's economy is essentially producing somewhere between 15% to 20% less wealth then it did in the period between July 2006 - June 2007. That was what I described as The Great California Slump last July and we know that a "recovery" will take a very long time. In the meantime, we read about the effects on our workers and families in stories like Jobless without a net , stories subtly warning us that the federal government will not be able to carry Californians through the slump.

The second difficulty is the resulting effect of The Great California Slump on state government revenues.

• In fact, taxable sales are 16%+ lower than in 2006-07. Fortunately for governmental operations, in 2009 the legislature increased the sales tax rate from 5% to 6% - a 20% increase - so sales tax revenues are slightly higher than in 2006-07.
• Though the numbers are harder to calculate, it appears taxable personal income is 20%± lower than it was in 2006-07 which is masked by a 2009 0.25% rate increase and a temporary 10% increase in withholding which makes it seem like income tax revenues have only dropped 7%.
• The Corporation Tax income has dropped 17%±.

The Governor and the candidates for Governor, as explained in the last post, all operate in some Fantasyland where it is believed that the Governor has some powers - sort of magical pills - to reduce spending and make it all better. But, in fact, the pills have side effects that reduce revenue further, cause injuries to residents and visitors, and are simply illegal in some cases, as the Gubernator found out.

The Legislature operates in Tomorrowland - never do today what can be put off until tomorrow. In their case, for 2009-10 they "borrowed" money to avoid cutting expenditures, made one time accounting "adjustments" like moving the June 30, 2010 payroll to July 1, 2010 and what that didn't cover, they chose to budget revenues too high. So after waiting, we will learn in July that the 2009-10 Income, Sales, and Corporation taxes budget line items were in total 7% too high which amounts to about $6 billion.

What we know today about the fiscal year beginning July 1, 2010, is that nothing has changed for the better since the State's CFO, State Treasurer John Chiang, told a reporter that the State General Fund deficit could likely reach $35 billion. Since the total budgeted General Fund revenue last year was $89.5 billion, we're really discussing a potential 40% deficit. The Gubernator in January proposed a budget which was dead-on-arrival in the Legislature because of policy issues and is now dead because the numbers were from Fantasyland.

So far, as the 2010-11 fiscal year beginning approaches, Legislative leaders have proposed to borrow $9± billion to be repaid from beverage recycling fee revenue and to repay the recycling fund from a new tax on oil production, the latter being accomplished without a two-thirds vote by making various sales tax shifts! This was in response to the Gubernator proposing in the middle of The Great California Slump to eliminate medical care for the kids of the underemployed and unemployed whose jobs have disappeared in the past three years and for old people whose retirement nest egg went the way of the State's employees retirement funds.

And in the midst of most of the 58 Counties having to make unprecedented budget cuts for 2010-11 which will involve significant layoffs creating more unemployment, Legislative leaders and the Governor are discussing shifting welfare and prison costs to the counties offering meaningless promises to cover the costs which, of course, would be cheaper.

Let's take a look at the situation at the county level by sampling recent headlines:

Deep Cuts for Alameda County
31 Fresno County deputies let go in cuts
[Contra Costa] County budget proposal would slice $34.4 million
[Sonoma County] Social services brace for cuts
[Santa Clara County] Budget-related transit cutbacks take effect today
State cuts Humboldt County's victim witness support funds
S.F. home value drop, jobless drain city budget
L.A. County sheriff considers major budget cuts
LA County budget cuts to deprive seniors, disabled of homecare service

And to sample an article Yolo County budget includes less spending, more job cuts:

Yolo County has proposed a $271.5 million budget for fiscal year 2010-11, the third-consecutive budget with a dramatic decline in spending....

...Since the county’s largest-ever budget in fiscal year 2007-08, revenues and expenditures have dropped $38.3 million — or 9 percent — and 408 positions (24 percent) have been eliminated. The county’s ratio of employees per 1,000 residents is at the lowest level in more than 20 years.

Sure, why not pass down a few more responsibilities to the counties. Things are bound to improve.

After all, Treasurer Chiang issued a report for May this week indicating May revenues were looking better than estimated by the Gubernator in January just as we are told:

Retail sales in May took their biggest dive in eight months, raising fresh doubts about the state of the nation's recovery and the pace of long-term economic growth...

"Retailers have long recognized that it may be a long uphill climb to full recovery, but [Friday's] report suggests the climb may be steeper than we thought," said Sandy Kennedy, president of the Retail Industry Leaders Assn. "Until the overall economic news improves and those Americans out of work find employment, meaningful retail sales growth will be difficult to achieve."

So it is likely that June revenues, which include sales taxes paid to retailers in May, might not be so good.

Interestingly, to stimulate discussion Chiang included with his report a report on tax policy prepared by economists at the Milken Institute offering a recommendation to cut corporate taxes in the U.S. which could by 2019 "increase total employment by 2.13 million." Do these guys live in Fantasyland with the Gubernator? The U.S. economy lost 7.8 million jobs between November 2007 and April 2010 and we have a huge federal budget deficit, now, not in 2019.

If economists, the Legislature, and the Governor are lost is some fantasy of their own, it's no wonder that those involved in giving care to the poor and elderly, those teaching our children, those who offer "seed grant money" for new businesses under a state program, those who guard our prisoners, those who run our local governments, etc., all behave as if the problem isn't the economic collapse of the state but rather just unaware political leaders in Sacramento who control more than enough money to take care of everything.

Residing in the Magic Kingdom, the Governor and the Legislature both fantasized that the federal government would help. What we saw in the LA Times last week was this headline Congress pulls back state aid package, leaving a $2-billion hole in California budget. Oh well, a billion here, a billion there....

Within our Magic Kingdom an evil reality exists. The evil reality is the basic structure of our government which prevents any effective action that would begin to address the problems. Electing the folks now running for statewide or legislative office this November will not result in improving California government.

We need to replace the State Constitution. And maybe the only real solution, given the political divisions in the electorate, is to replace it with three state constitutions, one for each state created from the existing State of California as suggested here.

The Magic Kingdom

It's fitting that Disneyland was created in California.

It's fitting because we now have two branches of state government that live inside the Magic Kingdom of the late 1950's - in two "lands" far away from reality. The Governor's Office has been relocated to Fantasyland. The Legislature has relocated to Tomorrowland.

Way too many of the voters of California also live inside the Magic Kingdom - in three radically different worlds far away from reality and incomprehensible to each other.

Some live in Main Street USA, a fictional early 20th century Midwest town totally without a corresponding community reality in 21st Century California.

Some live in Frontierland hoping to confront the challenges of the 21st Century with a muzzle loading rifle while wearing a coonskin cap - a reality that never existed in California even when Ronald Reagan was Governor.

Some live in Adventureland where crocodiles, hippos, and other "African Queen" dangers, completely foreign to and absent from 21st Century California, fill people with fear and consume tremendous amounts of their psychological energy.

We have a Governor - well, the Gubernator - who has proposed in his final budget to completely dismantle all care for low income children and the elderly. He has a reason. The State Government figuratively went bankrupt during his administration. He's opposed to tax increases or new taxes to fix things. So he proposes to dump off the increased cost of medical care for the kids of the underemployed and unemployed and for old people whose retirement nest egg went the way of the State's employees retirement funds.

In the meantime, two Republicans, people you might otherwise think are rational, want to become Governor in this situation, a situation that will be worse in 2011 and 2012. Like the Gubernator they have ideas about the budget. Unlike the Gubernator, between them they will have spent over $100 million on the primary election campaign, just to get nominated to run against Jerry Brown, the de facto Democratic candidate.

The candidate spending the most money is Meg Whitman. She has roughly the same understanding of Government as the Gubernator did when he was elected. She proposes to fix the State's problems by managing better. You know. Like she did as CEO of Ebay. Apparently, she doesn't understand that in California the Governor has clear authority over the employees in the Governor's Office, and no others. Apparently she doesn't understand that in California the Governor proposes a budget while the Legislature prepares and adopts one, if the leaders can find support from ⅔'s of the 80 members members of the Assembly and from ⅔'s of the 40 members members of the Senate.

Jerry Brown, of course, was the guy who started California down the road to bankruptcy when he was previously Governor and was dubbed Governor Moonbeam. I guess he thinks he can fix the problems he created.

Now let us move from Fantasyland where Governors and would-be Governors live, to Tomorrowland where the Legislature lives. In this Tomorrowland, if Californians can just get through until tomorrow, everything will be fine. So the Legislature has developed budgets for the last two fiscal years that basically have borrowed against tomorrow's wished-for economic boom to get us through, until tomorrow.

This year the Legislative leaders propose to borrow $9 billion from Wall Street to avoid drastic social service cuts. From the Sacramento Bee we learn:

To pay back the nearly $9 billion loan, Democrats propose ostensibly using container recycling deposits that consumers pay on beverages they consume. But that would cost the beverage recycling fund around $600 million annually, so Democrats propose a new tax on oil production to backfill the recycling fund each year.

In another twist, Democrats want to pass their oil production tax with only a majority vote, using various sales tax shifts to get around the state's two-thirds vote requirement.

They said their proposal not only would avoid cuts but reduce fee hikes at universities and give $900 million in new money to local governments.

But Assembly Democrats offered no projections for what would happen in future years, when the state would not have access to the same influx of money. Because their plan would sustain spending at higher levels, the state likely would have to make deeper cuts in later years unless the economy roars back or lawmakers find another multibillion-dollar source.

To add to this weird borrow from tomorrow vision, Senate President Pro Tem Darrell Steinberg proposes to shift many social services programs to the counties. Today, of course, the state's counties are each trying to figure out how to cut millions from expenditures by July 1 without further gutting county operations to the point they are meaningless, particularly sheriff departments. Again, to quote the Sacramento Bee:

Steinberg said he's identified some of the kinds of social programs that could be shifted more to counties – senior care and children's services among them – but has no details to disclose less than three weeks from the Legislature's June 15 deadline to approve a budget.

One has to admire a vision of how one could believe this might possibly work - tomorrow.

In the meantime, many of the legislators who have sat through a few budget battle years are "termed-out" and will be replaced in January mostly by folks who have no idea how California's Government really operates. The rest are hoping to survive the election - to be there tomorrow.

We all should marvel at the potential of knowing we could have a Governor in Fantasyland who thinks she is going to be the State's CEO and new legislators in Tomorrowland who are equally ignorant in thinking something can be done, tomorrow, by the Legislature, about California's figurative bankruptcy.

On June 8, the George Bailey's, Davy Crockett's, and the Rosie Sayer's will cast their votes to determine ... who they will be able to cast their votes for on November 2. This is so that in January everyone can continue to live inside the Magic Kingdom happily ever after.

Except for a few pesky problems out there in surrounding "realityland" which threaten to darken the Magic Kingdom amusement park. We'll look at those problems next time.

The Fantasy Budget Game

While the "Hopeful Headline Writers Guild" seems to dominate the news media - my latest favorite is Hiring robust across nation; California could follow (you gotta love that "could") - it's time again to play the "Fantasy Budget Game" in California.

The players are the Gubernator Arnold Schwarzenegger and the other 120 goobers in the Legislature. Arnold is in his last few months as Governor. A number of legislators are in their last year in office. It's an election year.

On Friday, the Gubernator will release an updated, and presumably thinner, version of his January envisioned 2010-11 plan which included revised revenue estimates for the last six months of 2009-10. Since January every month politicians and all the news media have been comparing the State's monthly income numbers to those revised estimates. This avoids facing the farce that was the result of last year's Fantasy Budget Game.

This time last year the same goobers were working on a budget for 2009-10 and they did finally adopt Fantasy Budget. Last July I wrote:

Choose the size of your problem - $8 billion or $12 billion. Let's just agree that it's likely that the revenues shown in the adopted budget will be about $10 billion short by June.

Now, at the end of 2009-10, we learn that the income tax revenue expected in that budget was a mere 12% too high. Fortunately, Sales Tax revenue will have been only 2% too high partly because of the federal government's Cash for Clunkers program. And it appears that the manipulations-by-threat regarding the Corporation Tax will have resulted in the actual revenue being around 1% higher than the budget - a this-year-only result. So last year the goobers missed the big three revenue sources by only around $6.4 billion or by 7.5%. Add in the too-high budgets for other revenue, it appears that the General Fund revenue figures will have been $8 billion too high.

So, what do we know going into the new season of the Fantasy Budget Game?

The available numbers tell us a great deal about California's economy. The Sales Tax revenues adjusted for the 20% rate increase in April 2009 tell us that taxable sales are down about 20% from 2007. Income tax collections are down about 18%. And, adjusting for the manipulation, it appears that Corporation taxes are down around 17%.

Reportedly over the past 28 months California has lost around 1.2 million jobs or 7% of the jobs it had in November 2007 while the labor force has grown by about 2%. These number come from the federal survey data. But the State's reported number of "Unemployment Insurance covered jobs" support the 1.2 million jobs lost number.

This is the year that the State needs to determine how it can educate its children by spending 20% less per student than it did five years ago without losing federal funds. Or it needs to determine how to raise taxes to cover the reduced tax revenue.

This is the year that the State needs to determine how it can provide services to the disabled, the poor and the elderly spending 20% less per beneficiary on average than it did five years ago without losing federal funds. Or it needs to determine how to raise taxes to cover the reduced tax revenue.

Instead, for the next few months, the press will dutifully report the activities of the goobers as they play the Fantasy Budget Game. This will carry us through to the November election when the voters will elect those who will discover in January how bad things really are. By May 2011 everyone will understand that all the hard decisions delayed for the previous three years will have to be made. Right now they think that many hard decisions have already been made.

The Great California Slump is economic reality. And California is caught in a trap of its own making. By pretending that it is better to have a fully handicapped Legislature unable to respond to financial collapse, the voters created a Fantasy State Government. By adopting Proposition 13 and term limits, the voters confirmed the governmental style they preferred - avoid making hard choices.

We are determined to not be limited to selecting between candidates who point out we cannot afford the "free lunch" mentality. We don't want to choose between candidates who (a) promise to reduce services by leaving many children without medical care and education or (b) promise to increase taxes thereby reducing the amount of cash individuals have to buy necessities ranging from iPods to houses twice as large as our grandparents were comfortable in.

This California cannot continue beyond 2012 without entrenching into its soul many of the problems of a third world nation where the population is divided between:

• 50% who are always below, or are barely above, minimum poverty level, unable to educate and elevate their children, but hoping the latest lottery ticket will carry them to financial heights, and many of whom live in neighborhoods controlled by gangs (warlords, really) as government has failed to maintain a security presence;
• 45% who are middle class and in constant fear of losing that status but still thinking they could become wealthy with a little more effort; and
• 5% wealthy people mostly in secure communities with their own police forces, schools, and privileged lives and many of whom think they are sincerely trying to help the other classes.

And so the current goobers in Sacramento begin the 2010-11 Fantasy Budget Game. Other goobers run to become the new Gubernator. Meg Whitman, the likely Republican nominee, believes she can do something under a corporate (government) structure that leaves no room for creativity. Jerry Brown, the likely Democratic nominee, believes he can work with the State's financial problems he created the last time he was Gubernator.

It is time to take a hard look at dividing California into three states as I outlined a few years ago. Only by doing something that radical will California stop its plunge below mediocrity.

The iPad and Me

My wife bought an iPad, putting in an order directly through her iTunes account on the second day it could be ordered. She said she bought it mostly for me because I was going into the hospital for major surgery. (I'm now home recovering.)

The iPad arrived directly from China a couple of days after its promised delivery date because, as anyone but Steve Jobs would know, UPS doesn't do residential delivery in many areas on Saturdays including that all-magical April 3rd. It is the non-3G version with the maximum RAM 64 GB.

I come from a different perspective than the average iPad early adopter.

I first began working on computers in 1970 when a computer (now known as a mainframe) filled a room, had 32 KB of RAM, and punchcards were still being used for input. In the early 198o's we started a computer consulting and services business using Tandy Model II's which a were marvel - an 8 bit computer with 64 KB of RAM that fit on a desk. In one sense we have grown from early middle-age to senior citizen status owning and depending upon personal computers as the field advanced.

But we've never owned an Apple product. We don't have an iPhone. In fact, to us, phones are for making phone calls and we don't like compromise devices for taking photos or videos. Nor do we like being "on call." We know we aren't that important to anyone that we must be available to them during most every minute of every day. We also know nobody else is that important and that kind of living is destructively intrusive and not conducive to making good choices in the real world. So we are not among those embracing the iPhone and its clones.

The iPad comes into our world not as a general purpose computer. We own a first generation Sony Reader carrying a few downloaded books. It was almost a very good product, almost. And even though we are regular Amazon customers, the initial Kindle just didn't quite seem to make it either. The larger screen Kindle DX looked promising but too expensive for what it is. And it still had that totally worthless Sprint 3G hardware built in which I refuse to pay for.

Then Steve Jobs and the iPad came into view. We learned that the base price without 3G was competitive with the Kindle DX. And it could do some things that a computer can do - not necessarily well, but "good enough" as a supplement to an ebook reader. When we learned that Amazon offers a free Kindle App giving full access to the Amazon Kindle Library, well let's just say we could see the perfect ebook reader.

Having used ours now for a few weeks, I can say with full confidence that it is the nearly perfect ebook reader. And when we have access to WiFi, I can take a break from reading and browse the web keeping up to date. It also has a more than adequate notepad to take notes using the adequate touch screen keyboard, a calculator app (which I downloaded), and a few other conveniences.

It also plays music (as an iPod although we use the Pandora App when wifi is available), handles photos and plays videos on an adequate sized screen. (I'm not a gamer, but they say it does some of those well.)

In other words, it is a handy ...well... it's a ideal-sized-screen ebook, and with a notepad, calculator, web access point (when wifi is available), background music player, etc.

It isn't a techie toy. It's specifically not a personal computer. I think that Steve Jobs has been trying to make it clear that it is not a next-generation or niche computer. It is not a phone, thank God. It is what it is.

It is an extension of your individuality.

To a satisfactory degree apps make what it is "customizable" for each person. Hence, for our home it might become "the cookbook" as it theoretically could replace hundreds of cookbooks. And in our home when the Slingbox folks finish the iPad App (they have an iPhone App), it might be a handy portable TV.

It is the first "touch screen" in our home and it works. It doesn't take long to get used to it. Yes, I have to clean it frequently because my hands are inherently above-average oily. But it cleans up nicely.

Which brings me to "the competition." For over 25 years we have been using computers Microsoft operating systems, and we've never owned another Apple product and don't see any other Apple product in our future. And all four computers active in our home (two desktops and two notebooks) are Hewlett Packard. So keep in mind we would normally be inclined to HP and Windows.

Apparently HP is coming out with something called the Slate using Windows 7 to compete and the tech/business community is excited. I don't know why. Who would want to prepare complex documents like spreadsheets and PowerPoint presentations on a flat touchscreen? The notebook computer works just fine for that, when you can't get to your desktop. I don't want to fight the Windows operating system to read a book, open a cookbook, or some other simple task. And if I must buy and lug around a Bluetooth keyboard and mouse to make the stupid thing become a viable notebook computer, I might as well use a notebook computer.

In other words, I don't see the absence of teleconferencing features on the iPad a negative. It isn't intended to be another way your employer can control you 24/7. The iPad is about you as an independent person and if you are barely more than your job, don't get one. It is totally inconvenient for that environment.

The iPad is an individualistic extension of my life. And I like what that is - not about work, not about social networking, not about others - because it's not a computer or phone.

Oh, ...sigh... by the way - and I really hate to mention this - you can check your email if you choose to. And now that the ATT 3G version is out, you can keep up minute-to-minute with your 10,000 closest Facebook friends, if you must.

Brangelina Data and The NASDAQ

Regular swings in excess of 4% within a calendar quarter in the value of American wealth as represented by the stock market is a relatively new thing. Graphs can distort statistical information, but being an old guy my reality check with regard to American wealth is this graph of the Dow, the S&P, and the NASDAQ:


All that it shows is that something happened that resulted in the creation of wealth by the mid-1980's, if one uses the term "wealth" per its second definition in Dictionary.com: "an abundance or profusion of anything." The "anything" in this case appears to be the NASDAQ Composite, which IMHO is an index of stocks ...well... let me offer Wikipedia's explanation instead of my opinion:

Launched on February 5, 1971 with a base value of 100 points, the NASDAQ Composite (which was the National Association of Securities Dealers Automated Quotations) is a broad based index which is calculated under a market capitalization weighted methodology that began trading with median quotes for 2,500 over-the-counter securities. As of 2009, the index has grown to include over 3,000 companies.

With the creation of the NASDAQ, "over the counter" trading - what was thought of as the "iffy" securities trading in the category of placing a bet on 17 at the roulette table - suddenly became an index of wealth reported in the press along with the Dow Jones Industrial Average and the Standards & Poors 500 indices.

Psychologically this new index created an "enthusiasm" carefully cultivated by the financial industry and given credence by new economic theories and politicians.

When one sees distortion in wealth to the extent represented by the graph, you know you are dealing with the "anything" definition, but if you take a long-term historical view you likely need to substitute "nothing." It is not a coincidence that the "information age" came to be part of the economic jargon.

It has reached a point that "wealth" is being created by exchanging and storing information about "Brangelina" (that's a Wikipedia entry), and that is when "anything" is really "nothing."

The creation and sale of the servers that store Brangelina data created nothing of value, in that if those servers disappeared tomorrow it would not alter the human condition in any meaningful way. For those servers to start dying would in no way be comparable to a new potato blight or wheat leaf rust which might result in people starving.

When I look at that graph, I remind myself that much of that new post-1980 wealth is Brangelina data. I also remind myself the some of it is data on how to grow rice more effectively, which is data that has an inherent value to mankind.

This is why I think the world's economy still has a long way to go before it can stabilize and why I feel California's economy is in for a long "difficult" period. After all, we staked our economic well being on the technology being used to track the NASDAQ and being used to store and share the Brangelina Data. Even a major chunk of our economy is historically dependent on the success of marketing Brangelina data - Hollywood.

Unfortunately, we also appeared to believe in that marketing when we elected The Terminator as our Governor.

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.

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.

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.

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.