Oh what joyous news we have been greeted with this week! We’re $20.7 billion short again, says The Bee. And, alas, surprise surprise, the Barbarian says he won’t fix it with taxes, according to Reuters.

Allow me to write the next headline: DEMOCRATS CAVE ON BUDGET DEMANDS, AGREE TO ANOINT SEN. MALDANADO EMPEROR FOR LIFE.

It’s sad, isn’t it? We can already write the story. The Democrats will write a budget that goes against everything they’re supposed to stand for. Hell, there won’t even be DEATH PANELS, they’ll just be throwing the old people straight into the glue factory this time. Something insane like the privatization of the community college system (University of Phoenix for all!) will be thrown in there, but the whole thing will fail because there’s a 50 cent tax on yachts.

Update: Perhaps along the lines I suggested here the last time we had this dance.

The Republicans won’t have to do anything except say ‘no’ to everything, claim that the T-100 isn’t a real part of their party and this is the Democrats’ fault.

I tried to tell people I know in the party that they needed to have it out last time, that making a faustian bargain for one more year was never going to work and you were only going to set a precedent of weakness. I’m no one of consequence, not that they would have listened to me if I were.

When are the Dems in the Legislature going to realize that while they have a majority, they are not in control of the Legislature or the Government. The Republicans control the executive branch and control an overriding bloc of the Legislature for purposes of everything except banning text messaging while driving.

I know this is a metaphor that has been worn thin over the last 10 years, but enough with the Chamberlain negotiating tactics. Let them shut down the government to protect the rich and powerful on the backs of the poor. Ask Newt fucking Gingrich how that worked out! And then realize California is a more liberal state than the US as a whole.  

Update: Maybe along the lines I suggested the last time we did this dance. No real reform = no budget.

The massive cuts to fundamental public services are working a massive transfer of wealth from the less wealthy to the more wealthy. I don’t think this is news to many readers here, but being able to provide a concrete example or two helps win the watercooler wars.  

In Part I, I talked about how slower fire response times will in effect create a “tax” that will disproportionately impact lower earners.

In this Part II, I will discuss how the privatization of State Compensation Insurance Fund will disproportionately impact small businesses.

More on the flip.

One gimmicky aspect of the recent budget disaster was the sale of State Compensation Insurance Fund’s book of business. (ABX4 12)

The California Labor Code requires that all employers carry workers compensation insurance. (Lab. Code §3700.) There are a few very tiny loopholes. The workers compensation system provides for no-fault coverage for on-the-job injuries in exchange for foregoing regular civil suits in tort. Workers compensation benefits include wage replacement, medical treatment[1], job retraining, among others. The system includes its own tribunals which relax the formal rules of evidence and procedure that exist in normal courts.

In the parlance of the ongoing health care debate in Washington, there is a “mandate” on workers compensation. Every employer has to have it. If you look, you’ll see that your home-owners insurance policy covers this in case someone doing work at your house is deemed an employee.

And in the parlance of that same debate, there exists a “public option” (at least for now). That public option is the State Compensation Insurance Fund, not-so lovingly referred to as “SCIF.”

SCIF was established in 1914 to provide a non-profit “public enterprise” insurance agency for workers compensation. The “public option” as recently as a few years ago provided roughly half of the workers compensation policies in California, but now appears to have dwindled to about 25%. Other insurers have fled the market or priced themselves out of most businesses’ range, even after reform.

Now SCIF probably isn’t something we want to hold up as a shining example of “public options.” It has been riddled with massive incidents of fraud lately (I would say, so have private companies, but who would hear that?).

So how would this work? [2] Would the best accounts be sold off leaving SCIF as a high-cost, high-risk vehicle that would streak towards insolvency?

From the Sacramento Business Journal.

Fundamentally transforming State Fund would be a “huge public policy blunder” and “extraordinarily ill advised,” said Steve Young, senior vice president and general counsel for Insurance Brokers and Agents of the West, a trade association. “I really believe it would be catastrophic for California consumers to fundamentally alter the safeguarding role that State Fund has played.”

In other words, we might find ourselves in a workers’ comp cost spiral that the “public option” won’t be there to cushion.

State Fund is often called the insurer of last resort. It brings “a level of honesty and true competition to the workers’ comp market,” Young said, though there’s no statutory mandate for the nonprofit to accept all applicants. The insurer was there for employers a decade ago when other insurance companies fled the market or went under during a systemwide crisis.

Of course, this won’t affect large businesses. Businesses with enough capital can simply self-insure (Lab. Code § 3700(b)) or pay the higher rate. Businesses that can’t afford the coverage will either resort to tricks like changing employees to sham “independent contractors” which could land them criminal penalties, or they may just have to go out of business.

As a result, competition will be eliminated by killing off small businesses making the conservatives scare tactic about businesses leaving California to become a self-fulfilling prophecy.

[1] In conversations I’ve had with experts on the SB 840 project, they told me that workers’ compensation was not included. I wonder how much savings there would be if everyone had medical treatment regardless of employment and that cost was removed from the comp system, where it has to be the hugest component. It seems to me it would not only increase employee mobility, but entrepreneurialism–you know, capitalism. Conservatives actually hate capitalism and competition and want mercantilism, but that’s for another diary.

[2] It won’t. Mark. My. Words. In the next budget go-round, they will have to address the shortfall from this sale ridiculously marked at over $1b.

The massive cuts to fundamental public services are working a massive transfer of wealth from the less wealthy to the more wealthy. I don’t think this is news to many readers here, but being able to provide a concrete example or two helps win the watercooler wars.  More on the flip.

Example 1: Fire Services

I have yet to see in writing what the impact is on fire services in Santa Barbara County, but the rumor is that there will be substantial increases in response times. In the LA Times a month ago, the LAFD warned of this:

Los Angeles’ budget crisis is likely to mean it will take longer for firefighters to respond to calls for help.

Faced with $56 million in budget cuts, the Los Angeles Fire Department plans to enact rolling brownouts that temporarily take fire engines out of service at stations across the city.

Now, how does this transfer wealth to the rich? First, let’s falsely assume that fire stations are equally distributed by response distance across property values and/or average income by area. (They most certainly aren’t.) Second, without delving into specifics of the science of firefighting, let’s assume that there is a roughly linear relationship between property damage and response times. (In other words, there isn’t a massive difference between 4 minutes and 5 minutes but not between 5 and 6.)

Given these assumptions, what happens when response times are lowered? One might think it’s typical of the Darwinian mindset of conservative policy. If you have a fire in your house (and you should, you know, take personal responsibility for that–everyone who has a fire deserves no sympathy unless they have the top rated fire retardant roof, all of their wiring is up to 2009 code, and they have fire alarms every two feet in their house with both land and cellular connections to the fire department–otherwise, they shoulda…), you lose.

But that’s a mistake. Slower response times mean more damage and more injuries. And what does that mean? That means higher insurance rates. And everyone with a mortgage has to have fire insurance.

So, even if you don’t have a fire, your “taxes” just went up. This is like a tax because it’s a payment that you are more or less bound to pay. And given the marginal utility of extra money (another concept that the conservative brain cannot compute) this “tax” will, as usual, fall far harder on those with less cash to spend.

Of course, the rates also go up because now you really do have a higher risk of your house being destroyed by a fire!

Now, universalize this effect to the other cuts in basic services. 40-to-1 classrooms mean the earnings potential of students in lesser funded school districts would be even lower (yet another concept all the “self-made men” can’t handle). Police? Better hope you live in a well funded police district.

People want services. People love socialized schools, socialized fire departments, socialized vector and animal control, socialized police, socialized sewers… and they love their erstwhile “public option” for workers compensation (SCIF), but they don’t want to pay. Well, guess what? Everyone’s paying now–but the check is going to Allstate instead of the state.

The current budget compromise’s “borrowing” of money from state and local governments could trigger a wave of municipal bankruptcies. There is no provision for states going bankrupt. Inasmuch as states are sovereign entities under our federal system, and protected from suit by sovereign immunity and the Eleventh Amendment, states can simply refuse to pay. However, such a move would certainly trigger a crash in the state’s credit rating and might permanently hamper the state’s ability to borrow money. Just like some banana republic, California would require an IMF-style bailout. That may yet occur, but what is happening now will likely trigger municipal bankruptcies across the state.

More on the flip.

Under Proposition 1A of 2004, the state may borrow local government monies in a fiscal emergency. The current budget proposal includes several billion in such transfers. It is not at all clear to me that these are ‘borrowings’ at all, and appear to be permanent takings; as such, they are probably subject to challenge in court. (Not as a “taking” but as a violation of 1A-2004.)

The City of Long Beach claims that the current deal would deprive them of an additional $48m on top of a deficit almost that size. Nearby, in Orange County, the small City of Placentia is saying>:

Placentia city officials are howling in effort to keep state hands out of their coffers. The plan to seize millions could bankrupt the city, they say.

“We may have to declare bankruptcy – that’s how serious this is,” said City Administrator Troy Butzlaff. “This is something the system can’t endure. We just avoided bankruptcy by doing all the right things; by cutting back, by getting concessions from staff, by cutting $4.5 million over last year’s budget.”

Chapter 9 bankruptcy exists entirely for the purpose of adjusting municipal debt. It is much easier for municipalities to rewrite collective bargaining agreements under Chapter 9 that under the normal restructuring-style bankruptcy (Chapter 11).

Since the state of California can simply not pay, it has greater leverage in restructuring its debt, but may pay a higher long term price in its borrowing. (Arguably, the risk of a Chapter 9 is “built in” to the risk premiums on credit extended to municipalities, and, while the risk of sovereign default is built in to loans extended to California, going forward the calculus would be more changed in the latter case than in the former)

Is this a good idea? Would the state of California be more likely to get a federal bailout? (a loan facility, a direct cash payment, or a debt sur-guarantee by the treasury?) Yes, more likely than the cities. I don’t know the answer if it’s a better idea to protect the state’s credit than it is to create a further series of municipal bankruptcies. I think that will depend on whether you live in such a place.

The state’s fisc is structurally broken. Local governments strain under the same revenue strictures. California already has a long list of infamous chapter 9s, such as Vallejo in 2008 and Orange County in 1994.

One could argue that we simply have too many local government agencies. That may be the case. But unless there is a strong overlap of services, there wouldn’t be much savings. Nevertheless, given the current baseline, I would predict we will have between 2 and 6 municipal bankruptcies in 2009, with LAFCOs considering the elimination of smaller cities and districts.

UPDATE:

The Prop 1A-2004 borrowing has passed both houses.

The prospect of over $25b coming out of the California economy-more than was added by the federal stimulus-is a terrifying thought. In addition to the immediate havoc this budget will wreak-for example on the lives of the thousands of people losing their jobs as a result of this-it also stands to work long-term damage to the pillars of California’s economy by, among other things, permanently diminishing our ability to generate the kind of knowledge workers that out tech-heavy economy demands.

It’s bad.

But we’re not even being asked to sacrifice for a better tomorrow. We’re being asked to take it on the chin for a worse tomorrow. I am not writing to vent my spleen about one or even ten aspects of this horrible budget. Believe it or not, almost no matter what your issue is, I agree. Even with the concept that ideally this would include no taxes. That is because I believe that California requires a stimulative budget, not a contractionary one. (That’s for another diary). The point is this: nothing about this grand compromise does anything to address any of the structural problems that face the state. Before I would even consider some of the draconian tradeoffs in this package, I would demand that a number of referenda be put on the ballot addressing real reform.

More on the flip.

Politically, I have never understood why Sacramento Democrats have been so eager to own these budgets. We have an unpopular Republican governor and a Republican minority that wields veto power over the process, even if there are less of them. That we’re always looking to buy three GOP votes seems to be ludicrous, especially when the plan conforms to their chief demand of no taxes.

From a purer policy perspective, everybody knows that the reasons for these Rube Goldberg-machine-style budgets stem in large part from defects in our Constitution. It’s not simply a push-pull on taxing and spending. I believe that, ironically, the problem is that the Legislature doesn’t have enough power. Giving these folks more power is a thought that might scare many Californians, but I think people need to start thinking more seriously about these so-called “down-ticket” races. The fact that we don’t think enough about them-and that contentious issues like gay marriage get punted to the ballot box-gives these folks a pass on everything tough except the budget, where for reasons we are all familiar with, they can’t do much, especially without a 2/3 voting bloc.

The Democratic party has made it a priority to eliminate the 2/3 rule. So why aren’t they demanding that a vote on that be part of the budget deal? This seems like the kind of principled stand that would appeal to voters. I would also ask that a number of other reforms be put on the ballot too: for example, a quorum requirement on ballot initiatives, Prop 13 reform, eliminating term limits, increasing the number of legislators, and un-“lock-box”ing a number of state funds, if not simply an up or down vote on a Constitutional convention. It’s not just that they’re not doing what little old me wants, they’re not doing this at all.

For someone who gave until it hurt, who drove across the country, and who basically put my career in neutral to get Obama elected in 2008 (after supporting someone else in the primary!), I find it hard to get even minimal motivation to support the state level party, when they seem to only do anything when their interest groups tell them to (even if my interests are often aligned with those groups), when they act in a herd-like fashion, and when they show a propensity for playing checkers at a chess match and bringing knives to a nuclear war.

The last time I was at a local party meeting and I addressed the group, I gave what I thought was a forceful speech about the need to fight the GOP at every turn (a la Churchill) the party mandarins stared at me like I was a crazy person. Maybe I am, but I doubt I would do a much worse job at this.

The LA Times is reporting that 26,000 thousand California teachers are being laid off today.

26,000.

That figures to about 1 in 1000 people in California. I know that some people are claiming that these numbers have been inflated for political effect. By whom? By some coordinated effort amongst school districts mostly run by cranky retired people who hate paying taxes for whippersnappers? I don’t think the Teachers Unions were down for that gambit either.

My wife was one of the 26,000.

She is a former county teacher of the year. She has earned tenure in two different school districts. She’s laid off. So, yes, this is personal for me, even though my precious function as an attorney dwarfs her income.

flip

Remember back in the stone ages when the Legislature was fighting over a budget, and arms were being twisted to get votes? And all the responsible folks said this is what we have to do? I called bullshit. I’ve been calling bullshit since last Fall, and now that it’s coming home to roost, I feel vindicated.

No offense to construction workers, but their cry of 20,000 jobs lost during the budget stalling seems to ring a bit hollow now, doesn’t it?

There are few things in education science that routinely show results in controlled studies. One of those is teacher to pupil ratio. This will blow that up.

There are–what–six more bullshit referenda on the ballot this May, and none of them could be a vote on whether it really makes sense to do this? Monetary policy (which the state does not control) has been exhasuted. Stimulus is required. The feds did it. But California? BOOM. Reverse-stimulus.

And here’s the kicker. This wonderful fix, which is subject to these six votes, is already $8 billion short!

I agree that with another diary that there are good people in California but the system is set up to fail. But those good people did nothing to reform the system. There’s no incentive. Safe districts. Party leadership discipline to get on the Waste Board when you’re termed out of the Legislature. Punt on tough issues to “voter initiatives.”

All so what? So you have time to introduce a bill and shepherd it through to censor Google Earth?

Well, here’s what I say to the Legislature, to the spineless Democrats and the meanspirited Republicans and the useless Governor, to quote Jon Stewart this week:

FUCK YOU

You have failed.