Californians and their government: the deer in the headlights

Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph - we just keep staring at the economy unable to move.

This past Saturday, the California Legislature adjourned. In recent months, much of the press focus was on the struggle with the State General Fund budget for the fiscal year running from July 2009 through June 2010. Basically, the best the Legislature and Governor could do was defer solving most of the deficit problem for a few months.

In the meantime, the Legislature and the Governor spent an incredible amount of time failing to address the looming water shortage, energy conservation policy, and a host of other issues, failing because of the fundamental structural weaknesses imposed by the voters on government in this state.

This is the first year of a two year legislative session. The usual plan is for the legislators to go home to prepare for the second year beginning in January. But the Governor has used his powers to call "extraordinary sessions" on education and the state's tax system, while legislative leaders have asked him to call a session on the water problem.

It's hard to imagine what could be accomplished in these sessions. More than 20 bills that required two-thirds approval were blocked by Republicans in the session just ended because the Democrats lack the votes for "two-thirds" bills. And the only way a water bill will get through will be to include new dams that, correctly, Republicans argue are needed to make the system work, but are heatedly opposed by the state's strong environmental community.

In a weird twist, the United Farm Workers and other unions are already organizing funds to oppose a still non-existent water bond proposal which would require voter approval if it were approved in the Legislature. As usual, the water interests are wrangling over the size of their pieces of a non-existent pie. And the Democrats want to divide the water bond proposal into two, requiring a vote next year and in two years because the numbers are so high.

Finally, in case there were people not locked into ideological positions on this issue, Fox News' Sean Hannity is doing a special on this Thursday - see Water Crisis Bringing Sean Hannity to Valley - which undoubtedly will throw a skunk into the room sending the parties running in different directions.

Meanwhile, back to the budget problems. Governor Schwarzenegger is putting all his legacy eggs into a basket called the Commission on the 21st Century Economy which has proposals to tinker with the State's tax structure (see my August post on this tinkering).

The Governor and the Legislature had great expectations that the Commission would design a new tax structure for an economy that is service based and not get bogged down in the ideological wars that are preventing any solution to any serious problem. Of course, any solution the Commission proposes will by its nature require at least one two-third's vote bill and voter approval of at least one referendum measure, both highly improbable achievements.

So how did the Commission do? From the Sacramento Bee:

The tax commission concluded its final meeting Monday at UC Berkeley and did not take a formal vote, instead opting to pass around a formal document later this week and offer each commissioner the opportunity to sign it for submission by Sunday.

At least three panelists have expressed public opposition to principal parts of the package, while labor and business groups have assailed the plan.

Oh good. The couldn't even agree enough to take a vote. That's an outstanding place for the Legislature to begin a special session.

Meanwhile, The Great California Slump economy continues, the current State General Fund budget continues to be in deficit at a rate of about $1 billion a month, the State Unemployment Fund continues to borrow from the federal government, the two State retirement systems lost billions that must be replenished sometime in the future, the State "borrowed" from schools and local government huge sums to be repaid sometime in the future, and everyone wants to talk about doing some grandiose scheme related to water and energy.

In May I warned:

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse....

...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.

In June I warned about probable future job losses:

The reality is that in May, the state government and local governments hadn't even begun serious layoffs. Those will appear in July-September statistics. School layoffs may start to show up in June, but we won't really know how many cumulative job losses there were in the education sector until September. And the health sector job losses will likely not show up until September-November.

The impact on the private sector may not be felt until after September, but my opinion is that it will be of major significance to the national economy.

In July, I wrote:

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

and I wrote:

Exactly how the State government itself has calculated that over the next 12 months this won't result in major sales and income tax revenue reductions well beyond the May estimates is a puzzle in itself. But when it does, there will be more gnashing of teeth in the halls of the State Capitol.

Economists now are using their crystal balls statistical formulas which confirm my fears of last spring and the press is reporting this as news, but with the usual spin variations. It's almost funny how these forecasts are reported.

The University of Pacific's Business Forecasting Center issued a news release headed Recovery in California Lags Behind the U.S.. The Sacramento Business Journal offered this headline on the news release: UOP: California economy will 'feel like a recession' for another year. But the Sacramento Bee offered two contrasting headline takes, Recession nearly over, UOP says and California's jobs picture will be grim for years, two forecasts say.

If you work for a living, the last headline more accurately reflects the UOP report. It also reflects the numbers in the UCLA Anderson Forecast news release is headed "UCLA Anderson Forecast: Economy Healing But Not Out of Hospital Yet" with a subheading of "California Budget Crisis Will Impact State's Ability to Recover From Recession". The Los Angeles Times headed it's story Southern California's vital signs are improving.

So why is "grim" used in the one Bee story? The devil is in the details. Let's begin with the concept of "recovery" as it is being applied to The Great Recession and The Great California Slump.

Economists do not apply the term "recovery" to a situation where there is job growth in isolation. For instance, if all other indicators show no continuing economic growth but the government hired 6 million unemployed people at near-minimum-wage next month, most economic models would not see that as "recovery." It would register once as a single reduction in the unemployed without much growth in retail sales.

If California's current rice production and Toyota's American car production both increased by 10% using employees working overtime rather than new hires, and both outputs were to show up as increased exports to other countries instead of domestic retail sales, and both resulted in importing more parts to manufacture cars and to repair harvesting equipment, that all would be a part of a statistical sign of a recovery. It wouldn't put anyone to work and that is irrelevant to the models.

To put it simply, if for the next 5 years the U.S. averaged net job losses at a rate of around 10,000 a month but other economic activity increased the GDP 1.5% a year, then economists would say we were in a slow recovery. A level of "net job losses" at 10,000 a month could easily become "acceptable" in economic models and among bankers, brokers, and executives of international corporations because the GDP increase would grow profits for them.

For most of us economically unsophisticated folk, a "recovery" is not seen until the unemployed in our communities, states and nation go back to work. This requires a sufficient net job increase to employ everyone who wants a job, right now a growing labor pool.

Right now the magic number nationally to just keep pace with the increasing work force and put to work 0.1% of those currently unemployed is about 150,000 net new jobs a month. At that rate, it would take 83 years to catch up from the declines of The Great Recession. That would not be a "recovery" in my opinion, I don't care how well the banks and corporations are doing.

In my view, for a recovery the U.S. will need to be creating at least 350,000 net new jobs a month, which would represent getting everyone back to work within 10 years. California would need to create 45,000 net new jobs a month to be in such a recovery.

As it stands, in the past week the nation experienced 407,869 initial claims for unemployment benefits last week according to the Department of Labor. In the corresponding period in 2006 the number was 264,251 initial claims. It is clear that we are still losing jobs at a significant rate.

So what do the expert economists forecast for California? How do the forecasts relate to my discussion in previous posts that it will be 2013 before we see anything like a recovery, as I define the word.

Both forecasters indicate that they believe statewide unemployment will remain at near current levels for two years. The UOP forecast indicates a peak of 12.6% official unemployment next spring, while the UCLA forecast indicates a peak of 12.2% this winter. Since the current rate is 11.9% and we are still losing at least 20,000 jobs a month in California, it's not hard to imagine it will be beyond the summer of 2012 before we see a consistent net job creation level at 45,000+.

Which brings us back to the Legislature and the Governor. Their problem is that because of the economy the State is running a deficit which will become visibly huge when they attempt to tackle the 2010-11 budget.

Never mind that. First they want to reach agreement on issuing some water bonds. Why? And apparently the Legislature even first wants to lock the unemployed masses into buying expensive green energy made in California in the relatively near future. Again, why?

I hope I don't hear the answer that we can't ignore other problems just because the State budget is hopelessly out of balance. If we Californians don't first solve the state and local government budget problem for 2010-11, 2011-12, and 2012-13, we might as well ignore all the other problems.

If the Legislature can't figure it out, they need only step outside the Capitol Building and walk a few blogs over to the County of Sacramento administrative offices for a chat. This week, according to the Sacramento Bee, last Friday the Board of Supervisors and the County Executive's Office thought they were ready to adopt a budget. On Monday they learned that based on a final analysis of the last quarter revenues show sales tax down 27% instead of the 14% originally anticipated and a corresponding decrease in "Proposition 172 Public Safety Augmentation Fund" which comes from a statewide half-cent sales tax rate.

Statewide the counties are adjusting day-to-day (see stories on Tulare County and Orange County) while the City Council of Los Angeles plans to vote at the end of the month on a budget that would eliminate hundreds of jobs and impose more unpaid furlough days.

The University of California Regents, meeting this week, indicated they feel they must approve a 32% hike in student fees, an increase that will not even begin to backfill the budget shortfall projected for 2010-11.

On the other hand, the Legislature and the Governor have no plans to reexamine the budget before January despite the fact that the revenue projections in the current budget are too high. It is clear that personal income tax, sales tax, and property tax revenues will not significantly increase for four years. It is clear that a significant percentage of whatever corporate income increases occur must be diverted to the Unemployment Fund, not to other corporate taxes.

So why not fight over selling some water bonds and fight over where we will buy the already reduced amount of energy we're using that we can't afford.

Right now Californians and their government look like deer staring into the headlights of an oncoming tractor-trailer rig traveling at 70 mph.

Withdraw from Afghanistan & adopt a "guns and no butter" war policy

Even Herman Göring, hardly a international affairs policy genius, knew a clear truth about a nation using war as a policy when he said, "Guns will make us powerful; butter will only make us fat."

As America struggles with a poorly-understood continuing decline of its economy and tries to find a path for an affordable health care system that serves all, it is ironic that we find ourselves with a self-confident, well-educated Democratic President who chooses to follow a losing economic and defense strategy begun by his predecessor, a self-confident, well-educated Republican President.

This strategy was demonstrated to be a loser by another Democratic President, Lyndon Johnson, who was surrounded by well-meaning, well-educated advisers left over from a self-confident, well-educated predecessor. The Johnson Administration's Vietnam policies proved that "guns and butter" cannot work when America commits to a protracted "limited" war with unclear goals in a distant location such as the one in Afghanistan.

To begin with, it is clearly asking too much of the troops on the ground to accept a commitment that says "we'll give you what you need within the context of making economic choices between domestic and war goals." In Afghanistan we now pursue a "limited" war with eerie parallels to Vietnam:

• American soldiers seek to engage an elusive enemy in difficult terrain.
• The enemy hides in plain sight in the villages.
• The enemy has sanctuary across an international border.
• The population has successfully challenged an occupying army in the recent past and has a long history of defeating foreign armies.
• Casualties among the civilian population fuels resentment creating more enemies.
• Corruption pervades the national government America backs in a country that has no experience in complex democracy and in which the population adheres to a strong ideology.

Unlike Iraq which many erroneously tried to compare to the Vietnam quagmire, Afghanistan has no modern history of a stable Western-style economic and social structure. Unlike for Iraq, the the "best and brightest" in the Obama Administration seem to have no clear objective with a planned withdrawal strategy for Afghanistan.

While we put our troops in harms way, we seem to think we can maintain an unrestricted consumer economy supported by debt, both government and private. When will we learn that war doesn't work that way? When will America learn?

If American troops are going to war for more than 30 days, a declaration of war from Congress is the necessary and only appropriate legal step. When such a declaration is made, we agree to the obligation that every citizen to sacrifice. We are saying "draft everyone's kids and send them off to kill and be killed." We are saying "do whatever needs to be done to win at whatever risk to our well-being is involved." We are saying "we'll quite buying iPhones and new clothes and new cars" as we have to put all our economic resources into supporting the war effort. We are saying all this because we believe a war necessary to defend our nation from danger.

Instead, we have repeatedly engaged in "limited" wars. This means that we don't debate whether what we are doing is necessary to defend our nation. This means we don't do what we need to do to win and leave, setting up restrictive engagement rules that get our troops killed. This means that we send someone else's kids to war while we continue to consume the expensive butter that does only make us fat.

Did we have a military goal in Afghanistan? Capturing or killing Osama bin Laden is not a proper military goal, its childish vengeance. Wars are between nations. Disrupting al-Qaeda through military action taken against the Afghan government was a proper military goal. We did that in the first few months. Turning Afghanistan into a Western democracy also is not a proper military goal.

We've been at this in Afghanistan now for eight years, long after we deposed the Taliban government and disrupted al-Qaeda there. All we've done by staying is to make Pakistan more dangerous. All we needed to do was make a statement that warned all other nations that harboring terrorists came with high risks.

Pundits and bloggers on the right and the left are starting to create a noticeable noise about this war. They're correct to do so. Let's take a major step in solving our deficit problem by declaring victory in Afghanistan and systematically removing our troops from harms way there. And let's don't wait until we have years of "peace now" demonstrations in our streets and accumulate much more debt to fight this war to attempt to achieve losing goals.

Finally, let's stop getting ourselves into protracted "limited wars" thinking we can maintain a "guns and butter" economy at home. If in the future we think a war is necessary, let's send the entire nation to war, achieve a defined military objective, and return to peacetime.

Let's overhaul California's bankrupt government, not tinker with it more

According to one definition of "govern" it means "to have predominating influence." For the next three years, the "predominating influence" in government in this State will be its evident financial bankruptcy.

In the meantime, we have "Government tinkerers" who sit outside the halls of government and examine the details of what isn't working. They then propose lengthy and detailed "reform initiatives" supposedly designed to make things better.

The verb "to tinker" means "to busy oneself with a thing without useful results." That's what these tinkerers do.

Rather than dealing with the core political structure issues, the tinkerers' work product is always an attempt to deal with the symptoms of a perceived problem. They never seek to cure the disease that is killing California government - initiatives.

The source of the disease is easy to identify. It's the voters. When members of the Legislature who regularly run for office fail to respond as desired, the voters have every right to vote them out of office. Except they didn't and don't vote them out of office.

By the 1960's, the voters were so unhappy with their elected representatives who weren't responding to their concerns that they began to approve confusing and poorly written initiatives offered by well-funded groups, some sincere attempts to solve a problem others masked attempts to gain benefits for a few or to turn ideology into State policy.

Instead of having the discipline to use the ballot box to elect representatives who would deal with problems, Californians so desired to avoid responsibility for their votes that they even approved an initiative placing limits on the of number terms one could be elected to each house of the Legislature in order to prevent themselves from voting for an undesirable incumbent.

Term limits have not solved any problems, an outcome an informed person could have predicted. It did strengthen the Governor's Office, so much so that a few years ago Californians had to recall their Governor for screwing things up.

Many voters want to believe a complex society can be easily governed with what appear to be simple answers. But the only simple answer is to vote out the incumbent legislators when the Legislature is not doing what is needed. The simple voter won't do that. That has permitted the initiative process to become easily manipulated by interest groups with money. The disease that is killing California is a failure of a critical organ to function properly - the voters.

This fall while the tinkerers are developing more initiatives, they will have to compete for headlines against a formidable group calling for a Constitutional Convention. Let's look at some of the players in this competition.

The Commission on the 21st Century Economy

Naturally, we must begin with the tinkerers appointed by State officials. Though it was created in October 2008, Governor Schwarzenegger on March 27, 2009, issued an Executive Order assigning the Commission on the 21st Century Economy to accomplish the lofty single purpose goal of recommending to the Governor and Legislature a new tax structure for the 21st Century.

The problem is that the Commission. with its 7 members appointed by the Republican Governor and 8 members appointed by the Democratic legislative leaders, failed to meet its July 31 deadline reportedly because it has suffered from the ideological split that stalls policy development in American government generally and in California government particularly.

The Governor, being more like his constituency than someone who's been in politics and government for a significant length of time, became impatient and insisted that the panel submit its report by September 20 when he would call for a Special Session of the Legislature to deal with the fiscal crisis. Jon Coupal, President of the Howard Jarvis Taxpayers Association, has from the beginning expressed fear and trepidation about the Commission. But even amidst all his alarms he says:

"The commission will report its findings in September and the governor has already called for a special session of the Legislature to consider and act on its findings. This is probably a mistake as it would be better to see the report first.

"Calling a special session sets up the expectation for action when, in all likelihood, there will be no agreement on the commission's recommendations."

He's right, of course, since Coupal and his group are always a very effective part of the problem not the solution. He knows that the members of the Commission at best will only agree on proposals that tinker with the status quo and the members of the Legislature will probably disagree with even that.

California Forward

In the middle of all the normal official bickering and name-calling that goes on in California politics arose an organization called California Forward. It's a group that has some smart people with credibility in its leadership. They have submitted a letter to the Legislature and the Governor outlining 11 proposals, divided into three broad areas of Constitutional tinkering, all theoretically designed to help make State and local government work better.

They have essentially said if the Legislature can't get behind their proposals, they'll use the initiative process to get their tinkering into law. Their proposals are tinkering and deserve serious review so that we understand the proposals "tinkering." Remember, the verb "to tinker" means "to busy oneself with a thing without useful results."

The first subject they propose to fix by tinkering with the details is entitled "Responsible Budgets on Time." This implies that the legislators who the voters voted into office pass irresponsible budgets late, which is of course, true.

The voters passed a Constitutional provision requiring a two-thirds vote in each house of the State Legislature for a budget to be adopted. Who wouldn't know other than California voters that if the minority opposition has one-third plus one or more of the votes in either house, the temptation to exercise the only group power the minority has would be too great not to abuse.

So how have the California Forward group of tinkerers dealt with the budget adoption process issue? Let's take a look.

1. Pay-as-you-go. Require that new programs identify a funding source for any new spending they require.

Who could find fault with the idea of requiring the Legislature to find funding sources for new spending. That way the spending over the years will be funded. Yep, really simple. Let's take an example any simpleton can understand. Let's start up a program to maintain our roads at the quality level they were maintained in the 1950's and 1960's. Let's identify a funding source. How about a 10¢ gas increase? There! Wasn't that was simple.

No one wants simple solutions confused by thinking. For instance, a thinking person would realize that by 2025 it may be possible that 50% of the vehicles on the road are electric and that someone then might ask: "Why the heck are Californians not maintaining the roads at the level of the 1950's and 1960's? They aren't even doing it at the level of 2006." The thinking person might anticipate the answer: "Gas tax revenues have dropped 70% and the voters won't authorize a 40% tax on electricity to fund road maintenance."

You can take every simple tinkerers solution to a budget problem, add more complex long term thinking, and you will discover why the simple solution never works.

"Pay-as-you-go" is a tinkerers solution. The right solution would be to adopt the new or expanded program and allow future Legislatures to adopt by majority vote whatever taxes it would take to pay for the program if it is still needed. That way you won't have to tinker in 2025 to undo the damage done by tinkerers in 2010.

2. Base Budgets on Results. Require the Governor and lawmakers to set clear goals for programs, measure their results and effectiveness when making budget decisions, monitor performance to improve efficiency, and consider eliminating outdated and duplicative programs.

This is a "really good idea" that has been in vogue at least three times in the past 50 years within the halls of government, particularly at the federal level, using different buzzwords in one form or another. But there is one basic flaw in the idea. The process emphasizes effectiveness in achieving results without questioning the policy achieved.

For example, Performance Budgeting linked with a Planning, Programming, and Budgeting System (PPBS) is a perfectly engineered rational approach to a goal such as developing a fighter aircraft for the Air Force that Congress has authorized.

Successfully achieving the results - purchasing a high performance fighter aircraft that meets all goals - is not irrational within the concept of Performance Budgeting linked to PPBS. The policy decision regarding whether to develop the fighter aircraft at all was made in an irrational environment.

The fact that members of Congress are invested in keeping jobs in their states has nothing to do with the performance of the aircraft or the effectiveness of the budgeting process. Members of Congress want to get reelected by bringing and keeping jobs in their districts. The irrational environment is the voting constituency that sees the fighter aircraft policy decision in the context of the jobs, not in the context of defense needs. Those pesky irrational voters again.

If results were all that were needed, in the early 1900's the Legislature could have started an effective ongoing jobs program by each year buying large quantities of buggy made in California. We'd still have a significant buggy whip industry producing large quantities of quality buggy whips worth every taxpayer dollar. Measuring the results of a budget supporting a stupid policy doesn't in any way solve the problem of stupid policy decisions.

Remember. The verb "to tinker" means "to busy oneself with a thing without useful results." That thing can be results oriented budgeting.

3. Two-year budget. Require the Governor and Legislature to craft two-year budgets with midcourse correction authority, and provide long-term revenue forecasts and capital investment plans.

In the abstract, this sounds like good policy. But why two years? What is the real difference between that and what is happening now? The economy is so unpredictable that one cannot adequately project what will happen six months from now. In fact, in February 2009 the Legislature and the Governor approved a 15-month budget, but to make it work they had to submit complex measures to the voters reflecting compromises between ideological differences within the state. The voters vetoed that compromise budget by turning down all but one of the measures - predictably the one that cut legislator's pay.

4. One-Time Use of One-Time Revenues. Reduce future budget shortfalls by prohibiting the use of unexpected spikes in revenues to increase spending on programs that continue year after year.

What exactly is an "unexpected spike?" And does "to increase spending" on continuing programs mean covering an increase in the cost of programs? When the cost of gasoline "spikes," gas tax revenue "spikes" along with it. But the cost of fuel and materials used in the maintenance and construction of roads also spikes almost proportionately. Do we cut back the miles of highway maintained when gas tax revenues spike? That is just plain weird.

I'm sure someone could tinker with the language of the proposal so it would be less weird.

5. Reduce the Budget Vote Requirement. Reduce the likelihood of budget stalemates by changing the legislative vote requirement for state budget approval to a simple majority (to be adopted in conjunction with the plan’s other fiscal reforms, and while retaining the two-thirds majority vote requirement for tax increases).

Here's a case of "the devil is in the details." The proposal has two parts. First, we shift to a majority vote in the Legislature for budget approval. But then we retain the two-thirds-vote-in-each-house requirement for approval of any increases in taxes. This really is a California tinkerers' solution. Let the majority approve spending. Let the minority veto revenue increases to cover it.

But heck, as long as are just tinkering, addressing half the problem is fine and we Californian's have a love affair with our government spending money it doesn't have.

6. Provide Certainty Regarding Passage of Fees. Clarify the circumstances in which the Legislature and the Governor can impose fees without a two-thirds majority vote to those areas with a clear and justifiable nexus to the service provided.

This is really just to assure that a two-thirds vote in each house is required for approval of any fee increases that cannot dollar-for-dollar be tied to future spending. See 5 above.

The tinkerers in California Forward also have proposals to solve the problems of local government within the State. They head it "Government that’s Closer to the People." Here's a review of the three proposals.

1. Protect Local Revenue. Give communities more control over community-related services and prevent the state from siphoning off local revenue by giving local governments legal ownership of specific funds for community services.

Prior to Proposition 13, local government had control over property tax revenue. Each county, each city, and each special district, all governed by voter-selected representatives, had control over property taxes. In fact, the State had no role in allocating property tax revenues.

If the voters hadn't approved Proposition 13, local government still would have legal ownership of specific funds for community services. Of course, the California Forward letter offers no details. What funds are we talking about - property taxes? What does "more control" mean? Are we going to return to local government the power to set tax property rates?

2. Remove Barriers to Local Government Coordination. Encourage community-level governments to coordinate, consolidate districts when this makes sense, and give county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results.

This is an interesting two-parter that demonstrates the arrogance or ignorance of the members of California Forward, I'm not sure which.

The first part is "encourage community-level governments to coordinate, consolidate districts when this makes sense." Ok. But within every county in California is a Local Agency Formation Commission (LAFCO) formed to do exactly this under the Cortese-Knox-Hertzberg Local Government Reorganization Act of 2000 (Sections 56000 et seq. of the Government Code).

The Act, which was a derived from the the Knox-Nisbet Act of 1963 which created LAFCO's in each county, was combined with some other laws in 1985, and was subsequently updated and expanded into the Act of 2000.

In other words, these tinkerers are unhappy with the way the voters' elected representatives in the Legislature and on the 58 LAFCO's have tinkered with this apparently simple problem for 46 years. The California Forward folks have some significant insights that would solve the whole "inefficient district" problem, insight which they want to submit to the voters.

The second part shows even more ignorance about California local government. The proposal is to give "county governments authority to redistribute local property taxes to improve efficiency, improve services and deliver better results." Counties are an administrative arm of the State. Though they are authorized to provide some local services based on local policy many political scientists argue that California counties aren't even local governments.

And counties throughout the State are starved for revenue to provide even the most basic of locally controlled services because of the demands of State mandates. Suddenly, your County Supervisor and his peers are going to be authorized to redistribute property tax revenue between the County, the cities, and special districts? How does that represent creating "Government that’s Closer to the People?"

Cities and special districts have locally elected city councils and locally elected boards of directors who are "closer to the people." The proposal would take from them control over what little revenue they have. The county is, in the end, obligated to spend most of its tax money on state mandated services many of which (welfare, for instance) are subject to federal requirements. I can hardly wait to hear how giving counties access to the money formerly controlled by cities and special districts is likely to bring government closer to the people.

3. Foster and Fund Long-Term Regional Collaboration. Allow cities, counties and school officials who craft long-term flexible plans to address community needs, to seek majority vote approval to provide funds to pay for them, while retaining the vote thresholds established under Proposition 218.

I don't even know what this means other than it appears to suggest that local taxes could be approved by less than a two-thirds vote required by Proposition 13 for special taxes if done through some regional collaboration. I guess the California Forward members think the voters made a mistake 30 years ago when they approved a two-thirds vote requirement for special taxes?

Let's move on to California Forward's next big area of insight - "Constituent Access and Accountability."

Apparently they have decided that the 80 Assembly members each representing about 460,000 people and the 40 Senate member each representing about 920,000 people aren't sufficiently accessible and accountable.

To put these legislative constituency numbers into perspective, the entire State of Wyoming has about 530,000 people which is only 15% larger than a California Assembly member's constituency. The Governor of the State of Alaska has a constituency of about 650,000 which is 30% smaller than the constituency of a California State Senator.

One might conclude, as I have, that California is too big to be a single state. But the tinkerers of California Forward have two proposals that would solve that problem.

1. Term Limit Reform. Reducing the total time newly-elected state legislators are allowed to serve from 14 years to 12 years, regardless of whether the time is spent in the Assembly or Senate.

The existing term limits approved by the voters in 1990 are among the most limited in the nation - six years in the Assembly and eight years in the Senate. The proposal would allow someone to serve in either house for 12 years, which is longer than the current provisions, or to serve in both houses for a total of 12 years which is shorter than the current provisions.

The only problem I see with this proposed tinkering (other than it won't solve any of the State's difficulties) is that it appears that an identical proposal was rejected by the voters in February 2008.

2. Constituent Access and Accountability. Requiring legislators to spend part of every year in their district, in consultation with constituents and local leaders.

It sounds like the proposal is to send the legislators home to mingle with their 920,000 (or 460,000) constituents for a defined period of time somehow forcing them to do what, exactly?

They all do go home now. They are politicians. They are always running for office. And because of that they are always seeking campaign funds from "local leaders," which is a euphemism for leaders of special interests in the legislator's district.

In fact, an Assembly member, if he or she were half-time as another group is proposing, could theoretically spend 15 minutes with about 4,000 "non-local-leader" constituents over the six months taken off. That's 0.4% of his or her constituency. And that's assuming "local leaders" don't get more than 30 minutes.

Achieving Consensus

After reading these recommendations, I wondered what was going on in the California Forward discussions. Then I read the end of the letter. It says: "We are eager to share with you the results of our efforts, the best thinking of many Californians, and the many options we explored in achieving consensus on this package."

Got it! The California Forward members also could not agree on any significant reform without running into the ideological divides that split California. So their best thinking, around which they could achieve consensus, are solutions that tinker with the Constitution a bit. They like the Legislature and other broad-based groups have run into the truth that California as one state can't be governed except in the most fumbling ways because of the size of, the divisions among, and the irresponsible selfishness of its citizenry.

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.

repaircalifornia.org

California's Constitution has been called the perfect example of what a constitution ought not to be. It is the third longest in the world. Tinkerer's initiatives have made it the basis for California's "ungovernability."

Jim Wunderman, head of the Bay Area Council, a year ago called for a complete overhaul of State Government in an op-ed piece in the San Francisco Chronicle. That has evolved into repaircalifornia.org sponsored by the Council which proposes a Constitutional Convention to write a new constitution for the State. The idea has gained momentum with endorsements by most every major newspaper in California, including the L.A. Times which calls it "The Devil We Don't Know." If you enter the words "California constitutional convention" in a Google News search you can find hundreds of articles.

As every student of history knows, calling for a Constitutional Convention has significant risks, particularly in a society ideologically and ethnically divided. To "achieve consensus" on a system that works requires giving up on the economic and social interests of each group. If we do this, my recommendation is that at the beginning and end of that new Constitution the statement that "The voters get the government they deserve."

Three Californias

Another way to make California "more governable" is to divide the state into three states, more or less as proposed at http://3cals.phrelin.com/ which, though an unlikely option, makes the most sense if we are going to start over. California is clearly three states geographically, politically, and economically.


Whatever choice we Californians pick, the "reorganization" of the now bankrupt California won't accomplish much until the economy begins to recover 2013. When personal income and property values are depressed, no reform proposal will fix the unavailability of money.

It would be better if during the time between now and 2013 everyone stopped the tinkering. We have time to write a new Constitution free of goofy policy details and restoring representative goverment. We even have time to divide our state into three states.

How "Cash for Clunkers" could hide the imminent state budget disaster

California State Controller John Chiang Monday afternoon issued his monthly Statement of General Fund Receipts and Disbursements for July 2009. This Statement did not get much press today though, perhaps because it contained confusing and misleading information.

Despite some cautionary statements, Chiang couldn't help but comment:

While the State’s General Fund Revenue came in below last July, there are signs that California’s economy is feeling for the bottom.

Yeah right. California's most carefully conservative state official finally read the memo - "regardless of the numbers, give it an optimistic spin." Yes, the revenue numbers were higher then previous months compared to the prior year. But....

Chiang, who has been hypercritical of the budget process, carefully points out that as of April the legislature had raised the sales tax rate from 7.25% to 8.25% which is a 14% increase. He also notes that the last week in July was the great "Cash for Clunkers" sales marathon. What he didn't explain is that if you adjust for typical monthly changes, for the rate increase, and for the possibility that extra cars were sold in time to be reported, the sales tax revenue increase was in line with May and June declines between years.

He just had to place the July bump in sales tax revenue in some context by saying "any encouraging signs in the economy were virtually nonexistent six months ago" without adding "and July sales tax revenue number is also not an encouraging sign."

Chiang also noted that personal income tax revenue came in 11.5% lower than in July 2008. He didn't mention the increase in the personal income tax rates this year regarding which a caution appeared in the San Jose Mercury News Sunday:

Johanna Sweaney Salt, a certified public accountant with Kaufman, Schmid, Gray & Salt LLP in Claremont, recommends...workers who do not want to be stuck with an unexpected tax bill next year or one that is higher than anticipated should make sure their employers are withholding enough on their state income taxes. That's because the 0.25 percent personal income tax hike went into effect in the second quarter of 2009 but applies retroactively to January.

In other words, people have increased their withholding and quarterly estimates which is showing up in the 11.5% lower personal income tax revenue. So that revenue is also not an encouraging sign.

And even Chiang won't comment on Corporate Tax revenue changes because of the 20% underpayment penalty that went into effect last October. Corporations are probably overpaying their monthly and quarterly payments.

Chiang office indicated that it has not been able to compare the actual revenue to the revised budget approved just two weeks ago. In fact, his office is struggling with these numbers to determine if it can quit issuing IOU's (Registered Warrents) in payment of the State's bills. One thing is for certain, these numbers are going to be hard to use to project what will happen by October when I expect The Great California Slump to hit another "rough patch."

The real danger lies in the fact that the revised unbalanced General Fund budget may not get the attention it needs until the damage to the State is horrendous. Simply because the "Cash for Clunkers" program resulted in a General Fund revenue bubble for July, members of the Legislature may be further encouraged to ignore the problem "elephant in the room."

Another gloomy job forecast for the Great California Slump

We Californians can expect that the state will have lost a significant number jobs during the period of July-September 2009, according to the latest analysis of Chapman University's Anderson Center for Economic Research. According to the Orange, California, university's press release issued today:

The third quarter’s California Index of Leading Employment Indicator is virtually unchanged from the second quarter reading of 73.4. This suggests that the pace of job losses in the third quarter should remain at about the same rate as the second quarter. This marks the fifth consecutive quarter that the index remained below 100 and an index value below 100 signals negative payroll job growth. The primary factors causing the index to hit a low reading of 72.1 are a sharp drop in California’s residential and nonresidential construction spending and continued decline in real GDP and export growth.

This forecast can be put in the pile of gloomy job loss forecasts including the UOP long term forecast reported below.

The MARE policy: what economic recovery?

The Obama Administration's financial gurus are continuing the huge gamble with our future - what I call a Maintain the Appearance of a Recovering Economy (MARE) policy, which has two elements:

• A "talk about it enough and they will come around" philosophy designed to reinvigorate the American consumer economy with the optimism that a recovery is underway.
• The "trickle into" theory of economics involving the short-term use of government debt (instead of private debt) to infuse money into select businesses and the banking industry hoping the money will trickle into the rest of the economy.

According to the press the economy is nearing recovery. Most economic pundits experts appear to believe that what's important in the economy is how upper level employees of banks and brokerage firms are doing. At least that is the core of the current economic optimism as presented in the media.

And as that optimism is repeated, stock prices rise which immediately benefits (1) individual corporate executives and large shareholders (mostly over 50 years of age) and (2) a greatly reduced number of retirees and baby boomers over 60 still holding stocks as part of their retirement investments. (That's "the old gray" MARE benefit.)

What's this policy doing for ordinary people with children under 22 who are going to school? At some point, after all, the economy is not about banks or brokerage firms or any corporation or business. It should be about people having money, money to spend on food and money to pay their bills.

Right now it appears that the "trickle into" MARE policy has trickled in enough money so upper level and mid-level employees still employed by banks and brokerage firms may be reasonably assured of an income, perhaps huge incomes in the firms that received the most federal bailout money directly, or indirectly from AIG.

Swell. Now about the remaining 300,000,000 Americans, many of whom are in families that have greatly reduced or no income, including those who worked for brokerage firms and banks who were laid off in 2007-2008....

One in six Americans are unemployed or underemployed. Here in California are being told that in terms of jobs we "will have lost more jobs - over 1 million - than any other state in the union" and that we should "be prepared for the long haul" as the employment will not be recovering at least until 2013. But we'll not be alone as many states will be waiting until "after 2015."

What will happen in the meantime? A pretty good indication is being reported:

About 1 in 10 Californians with a home loan is now in default, and there's growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate -- the percentage of borrowers who have missed several payments and are in the first stage of foreclosure -- climbed in June to 9.5% in California and 9.9% in Los Angeles County....

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

Oh. The millions unemployed won't be making payments on their mortgages, or on other loans and credit cards. And they won't be buying much which results in delinquent lease payments from retail stores to mall building owners, causing delinquent payments on commercial mortgages....

But we keep reading that things are getting better. Certain economic indicators tell folks that in some parts of the country the economy is stabilizing. After all the housing sector showed a significant gain in the number "newly-built home" sales and the third straight monthly increase in the sales of previously owned homes. Oh sure sales are still near all-time lows, but things are improving.

Or maybe the jump is simply short term because buyers are taking advantage of federally subsidized record-low interest rates, the new temporary tax credit for first-time home buyers, and the close-out-sale-prices in areas hit hard by foreclosures.

After all there is a glut of existing "inventory" in most urban areas and "newly-built homes" doesn't necessarily refer to homes the construction crews finished last week. The term "newly-built homes" means homes that have not been occupied since construction was completed.

There are thousands of "newly-built homes" across the country that no construction worker has been in during the last six months. And there are thousands of construction workers in the home building industry unemployed or underemployed who won't be seeing their economic recovery any time soon.

How is the government stimulus program working out for the ordinary family? It being reported that IHS Global Insight, one of the more reliable economic forecasters, still expects infrastructure spending to decline 4.3% in 2009, to decline 1.6% in 2010, then increase 2.4% in 2011 when both state government tax receipts increase slightly and the federal $120 billion stimulus package becomes fully implemented.

Statistics like this can be misleading. If one makes the big (and incorrect) assumption that the 2008 infrastructure spending level was not below a desirable level, with the one time stimulus 2011 infrastructure spending will still be 3.6% below 2008.

Therefore employment in infrastructure construction in 2011 will still be significantly below 2008 levels. In other words, without continued borrowing by the federal government to expand state and local government infrastructure spending over the next three years, it will be nearly impossible to see the employment levels in infrastructure construction industry recover to 2008 levels until at least 2014.

The "Great Recovery" headlines are misleading unless you accept that an increase in Gross Domestic Product is great without jobs - a "Jobless Recovery," Federal Reserve Chairman Ben Bernanke is calling it. A jobless recovery means that the difference in economic well-being between economic classes will increase further. If workers continue to be unemployed or underemployed, they aren't sharing in the "recovery" so it isn't a recovery for the middle class and poor.

Sure, it helps the grinning car salesman whose commission income past year has been a disaster to have the so called "Clunkers" subsidy program, which quite literally is a transfer of money from the grandkids mostly to corporate interests. After all, the bloated inventory of new cars on dealers lots around the nation was reduced by 250,000 in one week by people applying for the $1 billion in borrowed federal money. Unless you work for or own a car dealership, it's no big deal. Comments from those in the auto industry still are pessimistic:

"There's nothing here to support a major change in the forecast," said Gary Dilts, senior vice president of global automotive at J.D. Power & Associates.
Dilts, whose former employer, Chrysler Group L.L.C., went through bankruptcy this year along with General Motors Co., does not expect vehicle sales to even flirt with the 17-million-a-year level they had reached four times since 2000. He is holding firm to a forecast of 10 million for this year.

In other words, it isn't going to alter the recovery for former auto workers and laid-off workers in related industries. It was money given to auto dealers, perhaps shared with employees and perhaps resulting in new car orders, hopefully benefiting US. Government owned Chrysler and GM or at least American-owned Ford.
AutoNation is the largest U.S. dealership chain by sales operating 264 dealerships in 15 states and sold more than 3,000 new cars in the week. AutoNation's President and Chief Operating Officer Mike Maroone commented in the company's recent earnings call:

Our observations are that the majority of our ‘Cash for Clunkers’ volume is incremental, a larger percentage of the trade ins are domestic, and on the sales side the majority are imports. In aggregate credit scores for our ‘Cash for Clunker’ customers are better than normal and the program has not negatively impacted our used vehicle business.

So the customers are mostly people not in financial difficulty who are trading domestic clunkers for new imports. The company's Chairman and CEO Michael J. Jackson said:

"It's been a huge success. "I think there has been a psychological effect and gotten consumers to start buying cars again."

It's an interesting take, and it illustrates what's really going on.

Ignoring the paperwork snafu's and the fact that the first billion is theoretically gone (Congress is trying to provide a couple more billion), what is happening is that dealers will now have to decide how many of the cars to replace with new ones. The options before dealers are to reduce their debt (they borrow to "floor" their inventory) or gamble that after the pent-up demand flushed out by the subsidy program is gone, they'll find customers with the money to buy cars.

Since 2007, an estimated 5 million overdue car buyers are waiting to find out if the value of their home will recover, if their 401(k) or kid's college fund will regain some of the losses that occured over the past two years, and/or if they will have a job next year. It's hard to believe that many are saying because of high auto sales in July 2009 could signal a bottom to the worst sales slump since 1976. If you want to buy a car, it's hard to ignore a $4,500 government gift. But this is hardly a good example for creating a responsible economy:

So even though it was the last day at his job as a production controller for a West Columbia, S.C., manufacturer Mr. Dunn took his severance check, his 1989 pickup with about 300,000 miles and headed to Dodgeland.

With the help of the rebate and cash from his savings, he bought a red, 2009 Dodge Caliber. "The economy is picking up," he said Friday. "It seems like it is anyway."

This is the worst example of the MARE effect. Even though Mr. Dunn lost his job, with an optimistic outlook he took his severance check and some savings to buy a new car. And if he doesn't have job two years from now, then what?

Within that question is the more critical one. A brief job retention effect will occur at car dealerships through the fall of this year, but not new hiring. Auto financing banks and auto dealership inventory financing sources generally have been bailed out - banking again. But even if dealers do order some new cars, manufacturers cannot sustain plant operations without continued retail growth.

As noted in the previous post, over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. Nationwide, the National Employment Law Project estimates that that 540,000 Americans will exhaust their unemployment insurance benefits by the end of September, and a whopping 1.5 million will run out of coverage by the end of the year.

Congress is likely to extend their benefits for a second time, by borrowing from the beneficiaries' grandchildren of course. This is the safety net that hopefully keeps the beneficiary families from having to live in their cars. These benefits don't produce anything nor help morale. These benefits won't turn the beneficiaries into conspicuous consumers. These benefits won't turn the beneficiaries into believers in the "recovery."

Nor should anyone forget that after the stock market hit bottom mid-November 1929 there was 48 percent bear market rally that peaked mid-April 30 1930 followed by the real crash that bottomed out mid-June 1932 after which no beginning of a real sustained similarly steep long term bull market appeared until May 1953. No one should think that the recent bear market is based on a "recovery."

A "recovery," meaning the end of the Great Recession and the end of the Great California Slump, can be declared when employed workers numbers exceed mid-2007 numbers increased by the percentage increase in the workforce and unemployment rates fall below 6%. The MARE policy of talking optimistically about a recovery doesn't make it so. Borrowing from our grandchildren to infuse money into banking and select businesses in the short term won't result in enough money trickling into the economy to create a significant increase in jobs.

It's the ordinary people's economic lives that have to improve for a shared recovery. That won't happen by borrowing from our grandchildren unless the money is spent by government hiring enough ordinary people directly to create enough of a multiplier effect within the economy to create confidence at the retail level so that businesses will create new jobs for ordinary people.

It's the ordinary people's economy that counts.

As the economy improves?

As I watch talking heads explaining hopeful signs in the economy, I'm glad the economy is doing well for bankers and brokers. As today's news reports that job losses climb more than the idiots economists expected, KPIX (CBS 5) ran a story on the fact that over the next four months 137,000 Californians will run out of unemployment benefits, with 62,000 losing them next month. (View the story here.)

This had to be happening nationwide, so I did a Google News search on "unemployment benefits run out" and came up with 135 results in the past month. I can't imagine this story on the WRAL (Raleigh-Durham-Fayetteville, N.C.) web site in 2007:

Durham, N.C. — More than 460,000 people in the state received unemployment benefits in the past month, according to the Employment Security Commission of N.C. But what happens when those benefits run out?

...Turning to the local social services office may be a good place to start.

“You can come and apply for any of the services we provide. Work First is the program that helps folks with cash assistance and will help you do your job search,” said Sharon Hirsch, a spokeswoman with the Durham County Department of Social Services.

Yes folks, welfare is available unless you're in California where Arnold and the Republicans are trying to shut down the "overly generous" back to work program.

Pot and Movies: Wouldn't Cheech and Chong be pleased

As Mendocino County's experiment with embossed zip ties for legal medical marijuana plants seems to be proving effective even raising some revenue, Oakland marijuana legalization advocates have taken the first step towards a broader legalization.

The pro-legalization Richard Lee, president of Oaksterdam University has filed a proposed ballot measure with the California attorney general's office. It would allow persons over the age of 21 to possess up to an ounce and homeowners could grow marijuana for personal use on garden plots up to 25 square feet.

This comes fresh on the heels of an overwhelming favorable vote in Oakland Wednesday on a 1.8% gross receipts tax on sales in permitted medical marijuana dispensaries within the City. This should raise about $300,000 a year for the City's tight budget.

Medical marijuana sales generate about $18 million a year in state sales tax. The cash-strapped status of the State of California has caused serious discussion about further legalization and taxation of what is considered the North Coast's largest (in value) agricultural crop. It is expected that the Assembly later this year will take up a bill that would further legalize and tax marijuana.

Perhaps this approach should be considered at the national level in order to aid Mexico in the fight against the drug cartels by reducing their income. According to a recent article in the San Francisco Chronicle headlined Mexican growers having big pot year in state:

Mexican drug traffickers have expanded their marijuana-growing operations in California parks as state and local governments have tightened spending and slashed jobs and services.

Law enforcement officials say the traffickers, taking advantage of the fact that there are fewer sheriff's deputies and rangers monitoring parks, are cultivating more pot than ever before. This year's multibillion-dollar crop is on pace to be the largest in history, said state officials.

In the meantime, efforts to reduce the outward flow of jobs in Hollywood are apparently producing some dividends. According to a Los Angeles Times article headlined 25 film, TV productions among first to get California tax credits:

The state is awarding $67.5 million in tax credits for the 25 productions. Amy Lemisch, director of the CFC, said those movies and TV shows will spend $347 million on below-the-line employees. Lemisch said she was confident the vast majority of that money would otherwise not have been spent in California.

"Based on my talking to these producers for some quite some time before they even applied, I'm confident most of these would not have shot here without the incentives," she said.

As previously noted here a very large number of jobs in California in and related to movie and TV production. California's share of movie production dropped from 66% in 2003 to 31% in 2008.

Stimulating growth in an old California industry and acknowledging the growth in a newer California industry are two ways to grow tax revenue. Pot and movies - wouldn't Cheech and Chong be pleased.

Figures don't lie, but the media sure do mislead

The home builder stocks jumped today. Why? Because of these headlines:

• New Home Sales Surge 11 Percent in June
• Home sales rise as housing market tries a comeback
• Shares of Home-Building Cos Spike On US New-Home Sales Data

I don't get it. Who's cheering up the headlines? Somebody is and it wasn't the Census Bureau. Their news release simply says:

Quote:

Sales of new one-family houses in June 2009 were at a seasonally adjusted annual rate of 384,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.0 percent above the revised May rate of 346,000, but is 21.3 percent below the June 2008 estimate of 488,000.

The Wall Street Journal had one article with a more cautious observation, but perhaps too cautious:

Quote:

Many investors celebrated Monday after June's "surge" in U.S. new-home sales. Alas, it was largely wishful thinking. True, the Census Bureau reported sales up 11% from May. That's a big number, at first glance justifying Monday's 4.5% leap in the Dow Jones U.S. Home Construction Index. But it fails a close inspection. First, home sales quite often jump in June, the height of the spring selling season. When trying to gauge the strength of home sales, then, it makes more sense to compare them to the same month a year ago. That comparison is less kind -- sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982, notes Richard Moody, chief economist at Forward Capital.

My question is: Do most casual investors just read the headlines and think things are looking up? I guess if you glance at the Washington Post headline you'd really think new home sales "surged" in June as opposed to down 21% over a year ago.

If you did your homework, you'd know that the May 2009 sales of new one-family houses was down 32.8% from May 2008. So the June news is good. But not good enough to run out and buy shares in a home builder. Maybe next month or August if the trend continues.

The Great California Slump is upon us and we won't admit it

In May I posted:

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse.

Now that the California Legislature has adopted an out-of-balance "balanced" budget for the State General Fund, it's time to wrap up the ongoing discussion of The California Great Slump and make room to comment on other issues. This post summarizes the situation as it stands now and as described in detail in the 17 posts since May.

---

When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it.

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine though it had been used in other recessions, most recently in 1989-91 and 1999-2001.

It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." The term "The Great Recession" has the feel of thinking that pervades the Wall Street of the Ivy League Baby Boomers and Gen X'ers, regardless of individual family background. It is that group that in economics the term "bubble" should be applied, applied to their view of the world.

The problem with relying on "The Great Recession" to describe what's going on in California can be framed in terms of job loss. According to economists, the U..S. as a whole was in a recession at the end of 2007. But California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. According to the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. So while in 2008 Californian's may have been experiencing some impact of The Great Recession, the worlds 8th largest economy hadn't crashed.

As I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse." The Great California Slump has an appropriate sound. And The Great California Slump began in 2009.

When Americans think about a truly depressed economy today, they think of Detroit. Thus one could see considerable irony in the fact that while the California Legislature struggled with adopting a "balanced" 2009-10 budget in July, the news media were reporting that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors, the last such plant in California.

The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be abandoning its interest in the plant to Motors Liquidation Co., the East Bay Economic Development Alliance said the plant closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to liquidate the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year. Remember this, as it is important to understand the timing of job losses with The Great California Slump.

For instance, few of the 7,000 new layoffs announced in May and July by the Governor, and now incorporated in the "balanced" State budget, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year. The state's layoff procedure takes 120 days from when a worker is notified of a possible layoff.

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs loss statistics over the next four months. The local government jobs lost did begin this spring, but many more will also be seen in the next four months.

The State's two university systems this July joined the other State employees taking unpaid furlough days each month for the foreseeable future. Most of the 300,000 employees will be taking three furlough days, representing a 15% reduction in gross pay.

While this $1.5 billion loss of pay hurts the employees and their families, in terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones or paid in State income and sales taxes. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in the remainder of this calendar year and the first half of next year.

Which brings us back to the out-of-balance State General Fund Budget. The May estimate was that the State's General Fund Budget was out of balance by $26.3 billion based upon projected revenues. On July 12 State Controller John Chiang issued a news release reporting that the May estimate for June revenues was $1.14 billion too high because personal income taxes were $987 million below (-18%) and sales taxes were $154 million (-5.8%) below the May estimate.

Nonetheless, on July 24, the Legislature adopted and sent to the Governor a budget based on the May estimates. We'll find out in the second week of August just how badly the July revenues fall short of the May estimates. Maybe they won't.

It's my opinion that instead of $26.3 billion budget gap, the gap was at least $34 billion. However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California as having a cumulative General Fund gap of a "whopping $38.9 billion or 35 percent of the general fund budget." 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.

When the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)," it was dutifully reported in the Los Angeles Times with some additional pieces of information.

"'Even more worrisome," said Esmael Adibi, an economist at Chapman University, 'is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year."
"...There are signs that Californians are increasingly frustrated with the state's economy,' Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely.

We know that in May California manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports were down by 31% in five months. Imports coming through California's ports in May were down 31.7%.
Both these indicator statistics lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." The article also reported that "California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996."

Ignoring the recent University of Colorado study warning that population growth in the West along with climate changes and poor management of resources could threaten long-term water supplies for Southern California, the drought within California has already impacted Central Valley agriculture.

Much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling. In many areas of the San Joaquin valley the unemployment rate is above 30%. It is estimated that job losses due to drought will be in the range of 30,000 this year.

Reportedly California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home foreclosures has begun.

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices, in some areas as high as 26%. Most local government agencies have anticipated this in their budgets for 2009-2010. But property tax payments during November and December may be significantly lower than previous years.

Some property tax payments will not be made in this fiscal year due to foreclosures or simple lack of money. Many who paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. Yes, these will be shown as "receivables" on our governments' books, but the State has a cash flow problem.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the employees of governments and schools, and the taxpayers all seem to be ignoring.

And these folks also seem to be ignoring the facts that:

• half of the "solutions" for closing the General Fund budget gap were one time fixes and short of some miracle revenue increase by July 1, 2010, the budget will be out of balance $30+ billion,
• the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010, and
• the two State employee retirement systems have each lost $50± billion in the past year, the approximate net worth of Bill Gates, and there's no way state and local agencies can absorb contribution increases in the next few years sufficient to replace the losses.

California can recover but not rapidly. Even the legendary Silicon Valley has nothing to offer but hope for the longer term. The Sacramento Bee described that situation recently:

In the Silicon Valley region, unemployment tops 11 percent and investment capital has all but dried up. Here, unemployed tech professionals are showing up in droves at Bay Area mixers – and signing on en masse on career networking sites – to volunteer labor and expertise in exchange for equity shares in Silicon Valley startups that have no money to pay them....

With a half-million Internet, computer, biotech and financial services workers, the pool of jobless talent here is so deep that Jobnob scheduled separate college-themed "happy hours" for tech professionals from Stanford, Harvard and Berkeley alone.

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

The Legislature will have to find a way to deal with 2010-11, which won't be easy because to balance the 2009-10 budget, they ordered that June 30, 2010 paychecks for State employees be dated July 1, 2010 "saving" a billion or two in 2009-10. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 would further worsen the economy.

California's credit rating has already dropped below that of the most sound private corporation. While the Governor, State Treasurer and State Controller plan on the State borrowing enough money through Revenue Anticipation Notes to pay its bills and in October cash in the IOU's already issued to vendors, local governments, and others, someone must have a gnawing in the back of their mind that Wall Street might not think California is credit-worthy.

One of the bills to implement the budget contained provisions "allowing", or "requiring" depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if in March or April CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for many months to come. Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is slumping into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.

The Great California Slump

The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine. It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." It has the feel of thinking that pervades the Wall Street of the American Baby Boomers and Gen X'ers.¹

When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it. But as I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse."

The Great California Slump has an appropriate sound. According to the chart available from the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. Though according to economists, the U..S. as a whole was in a recession at the end of 2007, California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. So while it may have been experiencing some impact of The Great Recession, The Great California Slump began in January 2009 and continues.²

Presently the Legislature's staff labors to assemble and the members ponder the 31 bills needed to adopt a $10±-billion-out-of-balance "balanced budget" (some of the bills are posted here for downloading and the Floor Report of the 2009-10 State Budget was made available late tonight).

While they were doing that, The Los Angeles Times and the Associated Press are reporting that this morning a Japanese news agency learned that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors. The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be leaving its interest in the plant with Motors Liquidation Co., the East Bay Economic Development Alliance said its closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to sell the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year.

Few of the 7,000 new layoffs announced in May and last week by the Governor, and now incorporated the State budget proposal, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year as the state's layoff procedure takes 120 days from when a worker is notified of a possible layoff. (Some positions may register earlier as jobs lost as a few hundred of these employees have transferred to other departments and some jobs were vacant when the announcement was made.)

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs lost statistics over the next four months. The local government jobs lost did begin this spring, but more will also be seen in the next four months.

It appears that with the two state university systems, at least 300,000 state employees are going to continue to take three unpaid furlough days a month for the foreseeable future. While the loss of 15% of gross pay hurts the employees and their families, it also means that $1.5 billion will not be put into the state's economy through spending and taxes. In terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones. As each "furlough friday" goes by, some $4,000,000 is not spent by furloughed state employees. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in future months.

Exactly how the State government itself has calculated that over the next 12 months this won't result in major sales and income tax revenue reductions well beyond the May estimates is a puzzle in itself. But when it does, there will be more gnashing of teeth in the halls of the State Capitol. Although....

Break out the fireworks! Tomorrow California may become ever more like a nation on its own. One of the bills to implement the budget "allows" or "requires", depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if next year CalPERS and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for a number of months to come.

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¹That several recessions, most recently in 1989-91 and 1999-2001, were termed by some as "The Great Recession" is more indicative of a total unawareness of what it takes for an economic slump to become "great," than of what is going on. What's going on now viewed with any sense of history is a "depression" preceded by a "panic."
²A "slump" in economics is considered "any mild recession" so it seems reasonable to couple the term with "Great" to indicate that it is a significant, major slump.

"The best we can do" budget - more details

First, the big news. Five important Californian's have agreed on a compromised compromise budget for the fiscal year July 2009 - June 2010 that closes the estimated (in May) $26.3 billion gap between revenues and expenditures - the Governor plus the four leaders of the Senate and Assembly Democrats and Republicans.

On the other hand, while the Governor's "vote" is his alone, the other four have to sell the budget to enough of their peers in each house to get it passed. They are going to have to sell it as "the best we can do" because every major interest group is going to bleed some.

I called it a "compromised" compromise budget, that is because it isn't balanced for 2009-10 and doesn't even begin to deal with the reality of the 2010-11 deficit, as less than half of the changes constitute sustainable spending cuts. Thus while these leaders have reached a "compromise", meaning "a settlement of differences by mutual concessions," the settlement is "compromised" meaning the settlement is "impaired, unable to function" because the budget is known to be out of balance.

Let's face it. It is an interim budget. If adopted it could permit State Controller John Chiang to stop issuing Registered Warrants (or IOU's as they are called by the press) in payment of obligations to vendors, local governments, and even employees (expense reimbursements) in lieu of actual money. It could further permit Chiang to actually redeem the several billion dollars in Registered Warrants he has already issued.

But this will only work if "Wall Street" accepts the budget as a basis for buying State revenue anticipation notes. "Wall Street" will have to be willing to ignore the truth. The difference between the agreed budgeted expenditures and what are now expected revenues is at least $10 billion. For instead of a $26.3 billion gap, as I indicated last Friday the budget was likely is out of balance by at least $34 billion and as I indicated yesterday the National Conference of State Legislatures reports that the deficit is actually $38.9 billion and growing.

If there is any truth to these numbers, by sometime between December and March, State Controller Chiang again will be issuing Registered Warrants.

A clearer picture is forming of what's in the compromise.

Schools. New cuts total $6 billion for K-14 on top of the $1.5 billion cut in 2007-08 and an added retroactive $1.6 billion cut for 2008-09. A total repayment of $9.8 billion has been promised at some future date when the economy rebounds, perhaps beginning in 2012. Higher education budget cuts total $3 billion. The deal allows school districts to reduce the school year by five days.

School districts are attempting to find out what this means in terms of detailed numbers. The Los Angeles Times reported today regarding the Los Angeles Unified School District, the nation's second largest school system of 688,000 students:

Pollard-Terry said the school system of 688,000 students thought it had made sufficient — and painful — cuts to get through the next school year. But some conflicting media reports have put the size of the education reductions at levels that could require another round of tough budgeting decisions, she said. And getting a clear answer from officials in Sacramento has been difficult.

Budget actions in L.A. Unified have slashed about $1.29 billion starting with the 2008-09 school year, which ended June 30. On that date, the district laid off about 2,000 teachers; it has since been trying to determine which non-teachers to lay off and how many. The district's general fund, before the wave of cuts, was about $5.9 billion.

The district also is engaged in intense negotiations with its teachers union over compensation concessions that would, if successful, result in hiring back some laid-off teachers. District officials also have talked of placing a parcel tax on the ballot to fund ongoing operations. Until now, the district has asked voters only to approve school-construction bonds, which have to be reserved for building, repairing and upgrading school facilities.

The district’s budget plan, which includes many future reductions, was supposed to take the district through June 2012.

The State's two university systems already have staff, including professors, on mandatory furlough schedules. The California State University system has stopped taking new student applications for mid-year enrollment. Fees and tuition have already been increased.

While the smaller of the state's two major teachers unions, the California Federation of Teachers is urging legislators to vote against the compromise, the 340,000 member California Teachers Association President David Sanchez is supporting the compromise according to the LA Times:

Sanchez and his union had been particularly concerned about an earlier proposal by Gov. Arnold Schwarzenegger to suspend Proposition 98, which guarantees base levels of funding for education. And he was relieved that the budget deal includes a payback of some lost revenue to education.

The settlement “protects the state’s minimum school funding law and restores much needed funds to education once the economy improves,” Sanchez said. “California educators are calling on both houses of the Legislature and the governor to quickly approve the budget plan.”

Local Government. The actual impact on cities, counties and special districts is probably in the neighborhood of $4.7 billion. About $1 billion in gas tax revenues, $1.9 billion in municipal funds (mostly from counties), and at least $1.7 billion in redevelopment agency money will be shifted. It appears that some may be "borrowed" as indicated in yesterday's post, but the details are fuzzy. Discussions apparently included certain exemptions from the shift for small cities and counties.

The shifting of redevelopment tax increment funds could be extended into future years.

According to the San Francisco Chronicle, Paul McIntosh, executive director of the California State Association of Counties, said the plan to take money from counties would be devastating and called it "one of the largest takes of local government monies ever in the state." The LA Times reporteds that the Los Angeles County Board of Supervisors today voted to sue the state.

The Times also reported that the City of Los Angeles likely will join statewide lawsuits to block the taking of redevelopment and gat tax funds. Chris McKenzie, Executive Director of the League of California Cities called the budget proposal a "Ponzi Scheme" and stated: "We have assured state officials we will see them in court the day after a budget is signed if it contains illegal provisions." Judith Mitchell, Mayor of Rolling Hills Estates and President of the League stated:

While some at the state level will try to pass this proposed state budget off as a major breakthrough, city leaders know it only passes the buck and the problem to the future. As an elected official who took an oath to protect and defend the state constitution, I am embarrassed that any state officials would propose a blatantly unconstitutional budget that promises to fail within weeks of its adoption.

Lawsuits would, of course, put the $4.7 billion in doubt. It is unclear if that would affect the State's ability to issue Revenue Anticipation Notes.

Health and Welfare. Dealing the health and welfare programs was a difficult task. The primary problem was not to take action that would result in the loss of federal funds. Still, the budget agreement offers $850 million in cuts to In-Home Supportive Services, CalWorks, and Healthy Families which means many seniors and children will lose access to health care while the safety net for families in a major recession would become out of reach for many.

That part of the budget deal is confusing and odd, and has future elements. For instance, apparently there was an agreement to look at a proposal to centralize enrollment possibly using a private contractor even though other states have experienced higher costs and operational problems. Republican leaders are assuring their members that increased sanctions to enforce welfare recipients into work will take effect in July 2011 including more interviews as well as benefit reductions. And In-Home Supportive Services providers and recipients would be fingerprinted to facilitate new background checks, though the deal would exempt amputees with no hands from the fingerprint requirement.

Apparently $1.3 billion is to be saved in the Medi-Cal system.

Prison System. Supposedly $1.2 million will be cut from prison system spending, but no information on how that will be accomplished. Law enforcement groups say that could only be accomplished by allowing the early release of up to 20,000 prisoners. But reports indicate that would not be part of the deal.

Gimmicks. About $1.2 billion will come from changing the date on the June 2010 payroll checks to July 1.

While taxes are not increasing, withholding will go up 10% beginning January 2010 as will quarterly estimates. This will not generate any new tax revenue, but result in some increase in collections from January through June. However, lower than normal revenues in 2010-11 will make up for it when those who didn't opt out receive a large refund in April 2011. It is unclear how much revenue will be shifted into 2009-10 as one can opt out of the increased withholding and income tax revenue has already dropped faster than projected in May.

The deal includes the sale and leaseback of 17 state office buildings and the Orange County Fairgrounds, but did not allow the sale of CalExpo or San Quentin Prison as proposed by the Governor.

An effort would be made to sell of part of the State Compensation Insurance Fund which would supposedly generate $1 billion. But complications with that idea may delay that a year.

State Employee Furloughs. The Governor has already ordered many employees to take three unpaid furlough days per month, reducing their salaries by about 15% and saving $1.3 billion. The budget deal effectively institutionalizes that practice which likely will be carried in to 2011-12.

Other Items. Only a few state parks will be closed rather than the 220 the Governor indicated in May. And those will be offered to local and federal governments and others to keep them open.

The High School Exit Exam will not be suspended except for special education students.

The Integrated Waste Management Board will be eliminated saving six figure paychecks to political appointees but staff would operate as elements of other departments.

The Board of Geologists and Geophysicists would be eliminated.

HIV/AIDS programs would lose some, but not all, funding.

The Bureau of Narcotics Enforcement task forces are cut as are National Guard educational benefits.

Then there is the Santa Barbara coast oil lease mentioned yesterday. Apparently it will bring in $100 million. No mention is made of an oil separation tax.

"But what about" items

As pointed out in previous posts, the State's Unemployment Insurance Fund will be billions in debt by the time repayment has to be made beginning in September 2010.

And then there's this article in today's Los Angeles Times:

The California Public Employees' Retirement System, the largest in the nation, today posted a preliminary drop of $56.2 billion for the fiscal year ended June 30. The second-ranked fund, the State Teachers' Retirement System, reported a preliminary loss of $43.4 billion.

...The tremendous drop in value is expected to have a direct effect on the amount of money that the state and about 2,000 local governments and school districts must contribute in coming years to pay for pensions and healthcare for 1.6 million government workers, retirees and their families.

As income from the pension investments fall, the governments would have to make up the difference to meet the state's pension obligations.

This isn't a "smoke and mirrors" budget proposal. It is a "put on the blinders and vote" proposal for the Legislature.