I suppose the only good news to come out of last night, and indeed this entire cycle of budget nightmares, is that we are not alone.  Several other states missed their fiscal year deadlines.  Illinois has no budget and no plans to enact one; Pennsylvania may not be able to pay state employees due to a failure to reach agreement; Arizona got a budget in under the wire, but the Governor has not indicated whether or not she’ll sign it, because it doesn’t include a sales tax increase she sought; Ohio approved a temporary 7-day budget as legislators continued to wrangle; Mississippi left their utility regulatory agency unfunded; Connecticut’s Governor signed an executive order to keep the government running despite no budget.  We can take little solace in these difficulties other than to note that the national erosion of tax revenues combined with balanced budget agreements make the situation almost impossible for many states, particularly the large ones, and because of the threat to any economic recovery that would result from massive reductions in state spending and services, the door may crack open for a second federal stimulus package that specifically targets state budgets.  I don’t think we’re quite there yet, but the crisis reaches a whole new level starting today.

First of all, this is the first day that budget cuts from the previous agreement in February take effect for fiscal year 2009-2010.  These include major reductions in health and human services:

SSI/SSP grants for low-income seniors and people with disabilities will drop by 2.3 percent, cutting the maximum grant for an individual from $870 to $850 per month. A previous SSI/SSP grant cut took effect in May, reducing maximum monthly grants for individuals from $907 to the current $870.

CalWORKs grants for low-income families with children will be cut by 4 percent, reducing the maximum grant from $723 to $694 per month (the same amount as in 1989) for a family of three in high-cost counties. CalWORKs grants have been frozen since 2004-05.

Dental services for most adults in the Medi-Cal Program will be eliminated along with seven other benefits, including eye exams and incontinence creams and washes. (Last week, a trial court judge in Sacramento County ruled against a group that sued to stop the cuts from taking effect.)

Grants on those who make the least are the most stimulative to an economy, because that money gets spent quickly.  Now it’s drying up.

Of course, there’s also the matter of the still-yawning budget gap here in California, which just got $7 or $8 billion dollars larger, depending on your math.  This means that even more damaging cuts, likely to the most vulnerable elements of society, will ensue, leading to another wave of job loss, foreclosures, and pain.  The Governor and Senate Republicans are completely responsible for that addition to the deficit – consider that $7 billion is MORE than the money at stake to the near-term budget in the May 19 special election – and for the issuance of IOUs, which will add billions in unnecessary interest obligations.

In a nutshell, under the governor’s IOU plan the state pays vendors and others it owes with the equivalent of a post-dated check that is good for the face value of the amount owed plus interest. IOU recipients, for the most part, “sell” their IOUs to a bank for the face value of the check for quick cash. The bank holds onto and then redeems the IOU at a later date, earning millions of dollars in interest.

This type of borrowing is nothing like pulling out the state’s credit card to pay the bills. Rather, this is more like the state going down the street and getting an expensive payday loan.

The Governor’s payday scheme not only makes California the laughingstock of the credit markets, but it unnecessarily puts a black eye on the state’s long-term credit rating.

This means that, for years to come, millions of taxpayer dollars get shoved into the pockets of Wall Street bankers every time we issue long-term debt to build schools or roads, or other needed public projects.

Somewhere in the neighborhood of $6 billion dollars in additional interest alone will be added to the cost of selling bonds that voters have already approved.

Of course, by that time, Schwarzenegger will be out of office, so what does he care?

Harold Meyerson has the must-read of the day about this disaster, pinning the blame where it needs to go – on shock-doctrinaires like the Governor who demand to use this crisis to destroy the public sector.  Read the entire thing, but here’s an excerpt:

Right-wing ideologues see the crisis as an opportunity to shrink government regardless of the consequences. Schwarzenegger is proposing to end welfare, not just as we know it but altogether, and to throw 1 million children off the rolls of the state’s healthy families program. But the consequences of closing the deficit simply through cutbacks will be felt by more than the poor. Already reeling from $15 billion in cutbacks that the state put through in February, many school districts, including that of Los Angeles, have canceled summer school this year. Scholarships that enable students of modest means to attend California’s fabled university system have been slashed. Most of the state’s parks may have to be closed as well.

The terrible irony in decimating the public sector to save the state is that the California that was the epicenter of the postwar American dream was fundamentally a creation of government. Fighting a Pacific war during World War II compelled the federal government to spend billions on California industry and infrastructure, and the state was the leading beneficiary of Pentagon dollars during the Cold War. As Kevin Starr, California’s leading historian, points out in “Golden Dreams,” his brilliant new history of the state in the 1950s and early ’60s, fully 40 percent of all defense dollars for manufacturing and research in 1959 went to California, anchoring the state’s booming economy in a well-paid workforce that was either unionized or professionalized, and seeding an electronics and high-tech sector that was to blossom in the following decades. Building on that prosperity to create more prosperity, Earl Warren, Goodwin Knight and Pat Brown — two Republicans, one Democrat — invested state dollars in schools, universities, freeways and aqueducts that were the best in the world. The Golden State was never more golden.

Today, its governor seems determined to turn that gold to dross. On Monday, the Democrats in the legislature passed a budget that included cuts of $11 billion, levied a tax on oil companies and tobacco, and raised auto registration fees by $15 per car to keep the state parks from closing. Schwarzenegger reiterated his refusal to raise any taxes or fees and said he would veto the budget.

There’s still a chance to avoid IOUs, though I wouldn’t call it likely.  There is no chance to avoid the devastating impact of a broken political process and irresponsible legislating which at this point can only slide California into depression.

Dan Walters had a funny column a few days back, excoriating anyone who use “numbers” and “projections” to theorize about the impacts of budget cuts.  As if it’s some kind of novel idea that an economy dominated by government spending would rise or fall based on the amount of that spending.  Mr. Walters, 1937 called and wants a word with you.

Anyway, let’s look at the heart of Walters’ complaint.  First he says that we must have a hefty budget reserve because the economy is likely to go south, and because it will signal to bankers that “we’re solvent so they’ll buy our short-term notes.”  As I noted earlier, this is nonsense given the clear Constitutional duty to repay debt before practically everything else.  Then he says this:

Democrats and Republicans are equally guilty, meanwhile, of emitting self-important nonsense about the impacts of their actions on the state’s recession-wracked economy. While Democrats claim that cutting “safety net” programs and/or public payrolls will worsen the recession by taking money out of circulation, Republicans claim that raising taxes will retard recovery by discouraging investment and/or consumer spending.

Both practice voodoo economics. The entire deficit on which they are working, $24.3 billion including Schwarzenegger’s desired reserve, is well under 2 percent of the state’s economy. The lesser cuts and taxes they are debating would merely shift relatively small amounts of money from one form of spending to another, all within the state’s economy, so the macro economic impact would probably be nil, no matter what they do.

That’s a strange opinion, especially because in the next sentence, he argued that a budget filled with gimmicks would threaten our economic future, even though such gimmickry would effect the same small amount of cash, from a macroeconomic perspective.  But to his main point – cutting spending for state services, cutting jobs, cutting salaries for public employees and their related vendors, has a multiplier effect that in fact does weaken the prospects for economic recovery.  You don’t have to take my word for it.  John Myers ran a story on this just today.

“It’s hard to see how the country recovers if California does not,” says U.S. Rep. Zoe Lofgren (D-San Jose). Lofgren says she thinks congressional authorization of loan guarantees for any state will happen. But no one thinks it’ll happen in time for California, which needs to go to market — assuming a budget deficit deal is agreed to in the state Capitol — early next month.

Lofgren says she’s particularly troubled that the national stimulus and recovery programs… which are expected to benefit California by as much as $80 billion… could be drained of their help by the cuts needed to balance the state budget. “It is contrary to the efforts that we’re making,” she says.

This is a fact neglected by Walters, the very real possibility that certain spending cuts would result in the forfeiture of stimulus funds as well as regular funding, multiplying the effect of the cuts.  Many of the programs that Schwarzenegger wants to eliminate, like Healthy Families,  CalWorks and Medi-Cal, have their funding matched by the federal government.  Clearly any dollar cut there would mean $2 in practical cuts to Californians.  And losing out on stimulus dollars could number in the tens of billions.

This UCLA Anderson Report also speaks to the impact of state spending on California and the nation at large.

According to UCLA Anderson Forecast senior economist Jerry Nickelsburg, there is nothing happening in California that will help pull the state out of recession in advance of the nation.

“California,” Nickelsburg writes, “is in for a continued rough ride for the balance of 2009 and is not going to see economic growth return until the end of the year, shortly after the U.S. economy begins to grow.”

The dire conditions surrounding the state budget will contribute to prolonging tough conditions in California, according to the report.

In his essay, Nickelsburg notes that Gov. Arnold Schwarzenegger is attempting to close the state’s $24 billion budget gap with a combination of fee increases, forced borrowing from local government, the sale of state assets and, primarily, budget cuts.

Yet that the real risk for California, Nickelsburg writes, is the possibility that there will be no budget agreement at all and that the chaotic and inefficient spending cuts that would likely follow would have an even more severe impact on the ability of California to stem the downturn in economic activity this year.

The rhetoric has risen to the extent where a prolonged stalemate, like every year given our broken governmental structure, is possible.  But clearly, Nickelsburg is demonstrating that state spending does have an impact on the economic picture at large, especially at a time when there’s 11.5% unemployment and a growing dependence on state services.

That one of the top political reporters in the state would deny this economic reality is just baffling.

Arnold Twitters in that he got “permission” to enact the budget cuts on home health care workers and still qualify for all federal stimulus money in the health care sector.  Cap Weekly has more.

The state of California has received permission from the federal government to cut wages of home healthcare workers without fear of losing federal stimulus dollars.

The ruling comes as a victory for the Schwarzenegger administration, and a defeat for the Service Employees International Union  which had sought federal intervention to stop the cuts.

Cuts in home healthcare worker pay were part of the budget solution passed by Gov. Schwarzenegger and legislative leaders in February. As part of his May budget revision, Schwarzenegger has proposed further cuts for in-home support workers. The Legislature cut IHSS worker pay by $2 per hour, lowering wages from $12.10 to $10.10 per hour. The cuts saved the state an estimated $74 million.

It’s important to note that, while these cuts suck and will really hurt IHSS workers, they are relatively minor compared to the cuts in health care and education Schwarzenegger wants to enact, while still qualifying for stimulus money.  So the Administration can still wield some power here.  But obviously this is a bad sign.  The Governor should not be allowed to essentially reverse the effect of the stimulus on his own.  In fact, he ought to just resign.

…Arnold takes the flawed message from the election that it was a tax revolt.

Schwarzenegger said he received the voters’ message “loud and clear: an overwhelming majority of people told Sacramento, ‘Go and do your work yourself, don’t come to us with your problems….”

“The message was clear from the people, go all out and make those cuts and live within your means,” he said.

Voters were so worked up, in fact, that they turned out in the lowest numbers in state history, and they voted down the same borrowing gimmicks and spending cuts for successful programs that will now compose the Governor’s agenda.  Let me suggest that I don’t believe in his message-taking ability.

Marc Cooper actually has a decent column on Arnold’s total failure.

The CA-32 race to replace Labor Secretary has less than six weeks to go until the primary.  We know about the two major candidates; Board of Equalization member Judy Chu (not to be confused with Betty Chu, who will appear directly above her on the ballot and surely cause some errors among voters) and State Senator Gil Cedillo, whose extreme spending of campaign contributions on shopping, meals and lavish hotels made the LA Times this weekend and caused a stir.

Somewhat less remarked-upon has been the candidacy of Emanuel Pleitez, a product of East Los Angeles and Woodrow Wilson High School, who matriculated at Stanford, joined the advisory board of Voto Latino (a group that encourages voter registration and engagement for the Latino community), worked for Democratic lawmakers like Antonio Villaraigosa, Tom Daschle and Hillary Clinton, and worked on the Obama transition team at the Treasury Department.  On Friday I had the opportunity to chat with Pleitez about his life experiences, the financial crisis, housing policy and a host of other issues.  A paraphrase of that conversation follows.

(As a side note, this story about one of the volunteers on the campaign, who traveled all the way from Santiago, Chile to work on it, is pretty amazing.)

Calitics: Tell me about your experiences that have brought you to this run for Congress.

Emanuel Pleitez: You know, after college and working in the private sector at Goldman Sachs, I was able to travel a lot.  And I think visiting 27 countries gave me a new perspective on what the challenges are out there in the world.  When I would go to South Africa or India, China, Brazil, I would visit the universities, and the slums, and see their struggles, and it really made me think about the issues of global poverty.  I even drove a taxicab in Myanmar!  And what I took away from all that is that the best way to create change is to start in your own backyard.  And that’s what we’re doing in this campaign.

Calitics: So how are things going?

EP: Well, we have 25 full-time staff working every day.  And our main focus is door-to-door, face-to-face contact.  We’re out canvassing every day.  A lot of people tell me that they think we’re the only candidate in the race, because we’re the only one they see.  So we feel pretty good about our position.

Calitics: Now, you worked on the transition in the Treasury Department, and one central concern that a lot of people have had with Treasury is the lack of staffed positions at the undersecretary level, and the belief that Tim Geithner has basically had to go it alone over there.  How should people look at the transition’s performance in that respect?

EP: I agree with that criticism of Treasury.  I had nothing to do with personnel, I worked in other departments.  But there are many reasons for the lack of senior staff, and I wouldn’t discount the ability and importance of the career civil servants working in the Department, who are doing a fantastic job.

Calitics: This week, the Congressional Oversight Panel released a preliminary report on the TARP program and Treasury’s performance, and they were highly critical of the lack of transparency and clarity over some of these programs, as well as a lack of accountability for the big banks.  How would you assess the various programs offered to this point?

EP: I don’t have all the details of the COP report.  My inclination is to defend Secretary Geithner, but I want people to be critical.  I think what he’s trying to do is return confidence to the markets and get credit flowing again, and we’re seeing signs that the plans are starting to work.

Calitics: How would you approach the situation with the banks.  Would you just recapitalize them forever, or seek a Swedish-style receivership or a liquidation of the insolvent firms?

EP: I would consider a receivership, but I wouldn’t make that the first thing on the table because of the expense involved and the danger to the markets.  But clearly, recapitalization alone won’t work, that’s just making capital disappear.

Calitics: What’s the biggest problem in the economy that we’re facing at this point?

EP: The biggest problem is the foreclosures right now.  Some of them are in rural districts are suburbs and they’re second, third and fourth homes, but for families in urban districts like mine, a foreclosure means the loss of everything you’ve got.

Calitics: Would you support bankruptcy judges being able to modify the terms of a primary loan for borrowers?  Isn’t there a problem with modifying securitized loans, in that the people holding the securities that have been modified can sue the loan servicers for illegally changing the terms of the security?

EP: That is a problem.  But as I understand it, cram-down is more of a threat to incentivize loan modifications and keep people in their homes.  Which is what we have to do.  Investors will get hurt anyway if the loan forecloses.  Somehow, the lenders and the investors and the home-owners have to come to an accommodation, and in that process the primary goal should be keeping people in their homes.  I wasn’t initially open to principal write-downs, but I am more so now, because we’re seeing that the interest-only modifications are not working, and people are being forced into foreclosure just a few months later.

Calitics: What are some of the other challenges facing the economy that you want to deal with in Congress.

EP: Obviously, we still need major stimulus to save jobs and transition into a new economic future.  A large part of my district is at or near the poverty rate, and we need help in these tough economic times.  I expect another trillion dollars to be spent by the government.  In my district, we need investments in public transportation and clean energy programs to reduce emissions and create manufacturing jobs.  There’s a program here called “La Causa,” which targets the high school dropout rate, and gets those kids into vocational programs for green jobs, whether it’s solar panel installation or something like that, so that they can be prepared for the 21st century economy.  We need more of that.  And we need investment in education, because any dollars spent get the greatest return in education.

Calitics: Do you plan on joining any ideological caucus in Congress?

EP: I haven’t really given it much thought, but I don’t think so.  I think all political is local, and I’d rather focus on helping my local community and responding to the concerns of my district.  Maybe I’ll join the Congressional Hispanic Caucus, that should be safe for me.  (Laughs.)

Calitics: Well, thank you for talking to us today.

EP: Thank you.

A couple quick updates to stories we’ve been following:

• The State Senate today approved two bills relating to unemployment insurance on a near-unanimous vote.  The bill  (AB 23×3) to extend benefits for an additional 20 weeks using federal stimulus money passed 38-0, and the bill (AB 29×3) changing eligibility requirements to allow seasonal workers to benefit from unemployment benefits, also with federal money, passed 37-1.  The latter bill needs to go to the Assembly for concurrence; the former will go right to the Governor.  Sen. Gil Cedillo remarked in his release:

“Our immediate action on this issue was necessary to help almost half a million unemployed Californians stay afloat. These bills put to use the estimated $3 billion dollars in federal stimulus monies made available by the American Recovery and Reinvestment Act (ARRA),” remarked Cedillo. “We have a tremendous opportunity to turn our economy around and put federal dollars to work for California. The bipartisan leadership today highlights what we are able to accomplish when we focus on results,” Cedillo added.

At least 76,000 people whose benefits would run out on April 11 would see immediate relief.  It appears the Governor, after hedging, will sign both bills, but we shall see.

• As early as tomorrow, says Marty Omoto, we may have a decision from the Finance Director Mike Genest and Treasurer Bill Lockyer on whether the state will receive enough stimulus funding to “pull the trigger” that would reduce some of the worst cuts in February’s budget, and eliminate some of the tax increases.

The determination by the State Treasurer and Department of Finance Director is crucial on whether major permanent cuts happen or not to several critical programs that serve hundreds of thousands of people with disabilities, mental health needs, the blind, seniors and low income families. While there has been no official word on what the State Treasurer or the Finance Director will report, most observers feel that the likely news will not be good.

If you want the details on the cuts at risk, read Marty’s post.  Given the fact that the Legislative Analyst already foresees an $8 billion dollar hole in the budget, and that the special election poll numbers are tanking, which would add another $5-$6 billion hole, I would expect the bad news as well.  Because of the murkiness of what money counts toward the General Fund and what doesn’t, there’s a fair bit of room for politicking in there.

(Assembly Bill 23xxx, the employment benefits extension bill, passed the Assembly. I added the Speaker’s video discussing it. – promoted by Brian Leubitz)

There are two bills likely to come up for vote this week that would allow California to receive billions in stimulus funding, both of which have been subject to Yacht Party obstruction thus far of the Mark Sanford, Sarah Palin variety.

First up is the unemployment benefits extension bill which Republicans rejected last week.  There are actually two separate measures, one which would extend benefits and one which would increase the pool of people eligible for those benefits, but the extension is the one that will be voted on as soon as today.  Kudos to the SacBee for noting that the Governor has taken no position on these bills, despite the bromance rhetoric about the President and the stimulus.

The Assembly is expected to vote this week, probably today, on a bill that would pave the way for California to extend its lifeline for out-of-work residents by five months at federal expense.

The measure would ensure an extra $2.5 billion to $3 billion in federal funds for emergency benefits at a time when California is mired in recession, with an unemployment rate above 10 percent.

Passage would mean $6,140 in additional benefits for an out-of-work person receiving the state’s average benefit of $307 per week. Benefits range from $65 to $475, based on previous income earned […]

Gov. Arnold Schwarzenegger supports both concepts but has not taken a position on specific legislation, aides said.

Schwarzenegger has “no position” because the Chamber of Commerce doesn’t like anything that could lead to higher corporate taxes, and they hold the puppet strings on our last action hero.  The vote on this has yet to be recorded in the Assembly, so we shall see what the Yacht Party decides.

The second bill, currently in the State Senate, concerns Medi-Cal eligibility requirements that would open up even more federal funding.

Although California is slated to receive more than $31 billion in federal money, a change in eligibility rules for Medi-Cal made as part of this year’s budget prevents California from qualifying for more than 25 percent of those  federal funds.

In order to do so, the state must have the same Medi-Cal eligibility rules today as those in place July 1, 2008.

The problem was caused by an attempt to save $70 million by changing eligibility rules for children receiving care from Medi-Cal was contained in the 85-day record late budget signed by Gov. Arnold Schwarzenegger last September.

Under the change, children must fill out a report every six months confirming their continuing eligibility along with their parents who were already required to fill out such a report prior to the change in law.

Critics of the requirement say that most of the children who lose eligibility do so because they forget to turn in the paperwork, not because they actually lose eligibility. Sorting out such issues increases Medi-Cal costs to counties, who administer the program locally.

To get the federal money, the state must change the law before July 1, 2009 so that kids don’t need to fill out the report. The bill would do that.

Let’s be entirely clear – the Administration was banking on oversights from poor families who qualify for Medi-Cal to save the state money.  That’s borderline immoral and it ought to be addressed.  Elaine Alquist is carrying the bill in the Senate, and on this one, Schwarzenegger has seen the error of his ways and promises to sign it.  Will the Yacht Party follow suit, or prefer budgeting by forcing bureaucratic red tape on the poor?

Now that you’re truly titillated, allow me to explain.  Today, Director of Finance Mike Genest and Treasurer Bill Lockyer meet to discuss the amount of money California can expect to receive from the federal stimulus package.  The meeting is public and will begin at 10am.  Some of our Twittering favorites like Anthony Wright and John Myers will be on hand.

Why is this important?  Well, if you’ve been following things, at issue is the budget “trigger” that would be reached if the state meets a threshold of $10 billion dollars collected from the federal government that can offset General Fund spending.  That trigger would reduce tax increases and eliminate some of the worst cuts from the budget deal in February.  While there lurks the spectre of a continuing deficit for FY 2010, meaning that any cuts and taxes saved by the trigger would just increase that deficit, the consequences of particularly these cuts are very real as well.  They are almost all focused on health care for the very neediest members of society.  The aforementioned Anthony Wright explains:

More directly, about three million low-income California parents, seniors, and people with disabilities will lost dental, optometry, podiatry, psychology, and other benefits. A full run-down of the lose benefits, and their economic and human impacts, is available in a handout on our website.

As the chart shows, the list of Medi-Cal benefits to cut share one striking characteristic: elimination of these benefits is not cost-effective and instead is likely to cost the state more to provide care to the same population. For example, the elimination of optometry services means that Medi-Cal beneficiaries will go to ophthalmologists.

The elimination of podiatry means more expensive and less expert care from physicians. The elimination of incontinence creams and washes will lead to Stage 3 and 4 bedsores—bedsores that would be reportable as adverse events or “never events” if they occurred in a hospital. But because they will happen to persons with disabilities trying to live in the community, they will result in the institutionalization of those who could otherwise have remained in the community. Penny-wise and pound-foolish does not begin to describe these cuts.

Those cuts could be entirely offset by the massive corporate tax cut which could go as high as $1.5 billion dollars a year, so I suggest the legislature look elsewhere for their pound of flesh.  Not to mention that a failure to get the most out of the stimulus funds would do a disservice to the state.  It is unacceptable at this critical time that any money gets left back in Washington.  And the tools are in place to cross the $10 billion dollar trigger point, as The California Budget Project has ably shown.  

It sets up to be an interesting meeting, as the Treasurer has not made many public comments about the trigger, while Finance Director Genest’s reports show the state falling short by $2 billion dollars.  Thanks to the poor drafting of this provision, there’s no telling the outcome if Lockyer and Genest disagree.  Don’t expect a resolution today – the participants have two weeks before a final solution.