Browsing the papers today, I’m noticing quite a bit of confusion between the parallel crises California faces with respect to the budget.  Jean Ross explains the difference pretty nicely between a cash flow crisis and a budget crisis in this post.  The Legislative Analyst identified a cash crisis that arises out of the difference between when payments are due and when revenues enter the state’s coffers.  Because of that disparity, California and most other states must go out into the bond market and sell “revenue anticipation notes” to cover short-term cash needs, to be repaid when the revenue comes in.  The budget crisis exacerbates the cash flow crisis, but the two are not the same thing.  And the Legislative Analyst himself appeared to conflate them by claiming in his report that California faces $17 billion dollars in borrowing needs, but failure of Prop. 1C, 1D and 1E would require $23 billion in borrowing.  Well, so would passage.  Prop. 1C enables the government to BORROW against lottery revenue.  This may not be short-term notes, but borrowing is borrowing, and due to the state’s horrific credit rating, the interest rates will remain high no matter what kind of borrowing it is.  

That borrowing will cost the state money and widen the deficit somewhat, but a decent amount of that is known beforehand, and baked into the cake of any budget deal.  As Ross notes, the Legislative Analyst did not update his projection that the state faces an $8 billion dollar shortfall through July 2010, based on lower revenues than the projection in the February budget.  However, John Chiang today estimated that current revenues through April are $2.1 billion out of balance with budget projections.  According to the Legislative Analyst, this shortfall can be added to the $8 billion, because most of that referred to the next fiscal year.  Doing the math…

Meanwhile, the Public Policy Institute of California just released a poll showing Propositions 1C, 1D and 1E trailing. Those measures would provide $5.8 billion in budget cash in 2009-10. Of particular concern for budget officials is that Proposition 1C is failing badly (32 percent for, 58 percent against), since it would provide $5 billion in cash.

If the ballot measures fail, the state would be looking at a $16 billion deficit (the LAO’s $8 billion plus Chiang’s $2.1 billion plus the ballot’s $5.8 billion). But the LAO number came in March, after which economic indicators grew worse, which means the overall deficit figure could be higher than $16 billion.

Meanwhile, in the above-linked LA Times piece, the Schwarzenegger Administration floats a proposal to significantly address the prison overcrowding crisis:

As the ballot measures lag in the polls, the administration of Gov. Arnold Schwarzenegger has begun revealing the cuts it is weighing as an alternative.

On Thursday, the administration advised law enforcement officials that it was preparing plans to commute the sentences of 38,000 state prison inmates, including all illegal immigrants. It also is considering closing some prisons and sending inmates to county jails, according to a copy of the proposal obtained by The Times.

Under the plan, 19,000 illegal immigrants — 11% of state prisoners — would be turned over to the U.S. Immigration and Customs Enforcement Agency after having their sentences commuted. An additional 19,000 “relatively low-risk offenders” would have their sentences commuted as well.

The Governor tried this late last year and nothing really happened with it.  Some of these ideas are OK and some are horrible – overburdening county jails won’t exactly help either fiscally or from a public safety standpoint.  But if the crisis can actually start a dialogue about our insane prison policies, I’m all for it.

At last count, the California Teachers Association has dumped $10 million dollars or so into a FAIL whale of a special election, so they could secure their out-of-court settlement for $9.3 billion dollars in education money.  It’s important to understand what that money at stake in Prop. 1B represents.  It’s OWED to the schools.  Not a gift, not a reward for good behavior, but owed.  Under Prop. 98, the state must provide a minimum level of baseline funding to education, based on an algorithm that can be calculated in a number of ways.  This Governor has consistently tried to under-calculate Prop. 98, and most recently, his Administration determined it in such a way that shortchanged the schools by $9.3 billion dollars.  The education community could have demanded payment under statutory law, but instead the CTA decided to enter into what ultimately appears to be a failed bargain, whereby schools would receive money down the road from Prop. 1B if Prop. 1A, the funding mechanism for those payments, passed.  The California Federation of Teachers, which unlike CTA has opposed Prop. 1A, yesterday did what would have been much cheaper for CTA to do, which is sue the state for the money owed the schools.

“Proposition 1B is going to fail, and besides that, we still have to worry about funding for 2009-10,” said Marty Hittelman, CFT president. “We need to do this right away so we can take care of 2009-10, since they’re already debating that. We want to make sure they understand they have to repay us.”

After revenues sharply declined, the state cut 2008-09 school funding by $7.9 billion, and Gov. Arnold Schwarzenegger believed the state did not legally owe that money back to education. School groups disagreed and threatened to sue the state before Schwarzenegger and lawmakers put Propositions 1A and 1B on the ballot to repay that money, plus another $1.3 billion owed from 2007-08.

CFT also wants the courts to resolve for good whether the state owes schools money in similar budget situations in the future.

Arnold Schwarzenegger has simply been untrustworthy when it comes to education, and has repeatedly broken the law when it comes to funding.  You don’t bargain with that, you fight it.  Eventually, CFT and SEIU Local 99, also on the lawsuit, will win in court.  And by the way, they’ll end up getting the money faster than under Prop. 1B, which doesn’t pay out until 2011-12.  Not to mention that Prop. 1B is, you know, losing.

Jackfolsum alludes to it, but I wanted to highlight it as well.  Arnold got tripped up a little bit today in front of the Jesusita Fire, caught in between telling Californians what they wanted to hear, or telling them they’re all going to die.  It’s pretty amusing:

One of Schwarzenegger’s strengths has been to respond to emergencies and assure local residents he will provide all support necessary. But that message clashes with his statements earlier this week that fire services would be jeopardized if voters reject the ballot measures on May 19.

Because he declared a state of emergency for the Santa Barbara fire, he said he was able to get the federal government to pay for 75 percent of the costs.

“This is very helpful for us because as you know, we have a financial crisis in California,” Schwarzenegger said. “But I wanted to make sure you all know, even though we have this crisis, we will not be short of money when it comes to fighting these fires.”

Oops!  But Arnold’s “strong leader/warrior/protector” shtick clashes with his “vote for my spending cap or you will BURN BURN BURN!!!” shtick.  So he backpedaled.

“First of all, let me just make it clear, because there’s always the question that comes up, what happens to the fire departments and to the budget if those initiatives don’t pass,” Schwarzenegger said. “The first thing you should know is, I will always fight and get every dollar I can for public safety, that is the important thing you should know.”

“No. 2, it is very clear that when the initiatives fail there will be $6 billion less that will be available, so therefore there will have to be additional cuts made, if it is in law enforcement, fire, education,” he added. “…But I will fight for every dollar, and will always make sure we have enough manpower and enough engines and helicopters ready to fight those fires.”

Interesting use of “when the initiatives fail,” not “if” there.  Arnold reads the polls, I guess.

He really has no idea what he’s doing.  He wants to scare and please at the same time, so it comes out like mush.

Come to think of it, Arnold sounds a lot like the Californians seduced by the Two Santa Claus Theory, who want to cut services in general but protect services in particular.  So maybe he’s just giving the people what they want.  

In this edition of “Did you know?” we take a look at Prop. 1C.  Sure, the ballot statement, the legislative analyst’s report, and every public utterance about Prop. 1C to date asserts that it would allow the state to borrow $5 billion dollars against future lottery revenues.  But did you know that, according to Darrell Steinberg, it would actually allow the state to borrow twice that?

Trailing badly in the polls, Proposition 1C would infuse the state budget with cash by borrowing against future California Lottery revenues. The February budget assumed that it would provide $5 billion for the 2009-10 budget. But Steinberg said he now believes the state could borrow $10 billion from the Lottery and use it all in 2009-10.

Consider it something of a “Hail Mary” argument for Proposition 1C.

“In my view we can triage our way through an $8 billion problem,” Steinberg said. “That doesn’t mean that there won’t be some difficult choices. But, you know, we have a $2 billion reserve. There may be other opportunities with federal economic stimulus … If 1C passes, you know, it’s actually a $10 billion one-time securitization. It was just contemplated as being spread across two fiscal years. You could bring the second $5 billion into the budget year.”

What fun things you learn when your proposition trails in the polls!

Let’s go to the summary of Prop. 1C, shall we?

Impact on 2009-10 State Budget: Allows $5 billion of borrowing from future lottery profits to help balance the 2009-10 state budget.

Hm, no mention of future state budgets there.  But yes, the Senate President Pro Tem is correct.  In the analysis by the Legislative Analyst, he mentions that “the state also could borrow more from lottery profits in future years.”  In fact, the $5 billion dollar figure appears nowhere in the text of Prop. 1C.  Here’s the relevant portion of the text:

(2) Notwithstanding any other provision of law or this Constitution to the contrary, the Legislature is hereby authorized to obtain moneys for the purposes of the California State Lottery through the sale of future revenues of the California State Lottery and rights to receive those revenues to an entity authorized by the Legislature to issue debt obligations for the purpose of funding that purchase.

Well, that would be interesting to know before voting, wouldn’t it?  That this proposition basically opens up a new state credit card for the potential purpose of endless borrowing?  Borrowing that would have to be paid back, with interest, for the next several decades?

California’s reliance on borrowing to cover the budget deficit has been part of the landscape for 30 years.  Debt service currently costs the state $5 billion a year.  If you think this is a good idea, I invite you to enable it by voting to allow basically limitless borrowing against the lottery.  Surely that won’t be abused.

…by the way, the depiction by Steinberg of $8 billion dollars as a niggling problem not to be trifled with, but $14 billion as simply insurmountable, is another new one.  Considering that Steinberg and the Senate passed a majority-vote fee increase of around $9 billion last year, more than the $6 billion allegedly at stake in the special election, and his description of how to fill the budget gap did not include this, forgive me for saying that his beliefs don’t hold up to scrutiny.

I think the general consensus on the economy from the grand poohbahs of the establishment is that we’re contracting less slowly, that we’re easing toward the bottom and will be able to improve as the year goes on.  This optimism depends on no further “unforeseen” downturns in key economic sectors.  But that just doesn’t seem plausible.  Zillow.com’s estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline.  Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall.  And thus we will not see much of a rebound in equity in the short term.  Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.

Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation’s economy to its knees last year.

Here’s another sign that California’s foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.

The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.

The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.

Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter.  As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners.  We all understand that bad loans caused this crisis in the first place, right?  Well, a lot of bad loans are still out there.  At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006.  Loans made in 2006 have an 8.5% default rate statewide.  These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates.  And this includes jumbo loans.

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

If you think this is over, particularly in California, duck.

The Budget Reform Now folks, on the heels of one ad narrowing their focus to Props. 1A & 1B, have released yet another, basically with the same script only substituting a teacher for the firefighter, warning of $16 billion in cuts if 1A & 1B fail to pass.  1A & 1B do NOTHING in the current budget year or the next.  Nothing at all.  Arnold Schwarzenegger and his cadres are exploiting a crisis with fearmongering tactics to gain a spending cap they can use to ratchet down state services forever.

This is very simple.  If 1A’s spending cap would immediately limit state services $16 billion dollars below the baseline funding needed to provide services at the current level, then $16 billion in services aren’t at risk with the failure of 1A.  They’re at risk with passage.  And that risk would be permanent, and would increase every year, well and above the two year extension of tax increases.

Arnold obviously doesn’t give a damn about the current budget gap.  Heck, he probably enjoys it; he can use his new furlough tools and threaten to set the state on fire and a host of other right-wing options.  The golden goose for him and his rich supporters is the spending cap.  And those Democrats who enable him in this effort ought to understand what they’re supporting – a permanent reduction in services for the state’s most vulnerable citizens.  “What’s your solution,” is the phrase thrown around at us.  The problem is we know theirs.

UPDATE: The latest brilliant idea from the Governor: raid local governments if the Props fail, a direct contradiction of his deal with cities to stop raiding their budgets five years ago.  Under yet another Prop. 1A from 2004, the state can borrow 8% of property tax revenues (about $2 billion), which would have to be repaid with interest in three years.  The credit cards are open for business again!  While this measure represents 10-15% of the total projected budget gap, it would decimate services at the city and county level, services that – voila! – the state would need to step in to provide.  Also the Governor cannot pull this off unilaterally: it would require a 2/3 vote of the legislature.

Roger Niello has found a use for the special election – to deny the SEIU a contract they bargained in good faith with the Governor.  Enough Yacht Party members joined him to delay the deal.

A local Republican on Monday helped defeat an Assembly bill that must be passed to enshrine the new contract the Schwarzenegger administration signed this year with its largest state workers’ union.

Roger Niello, R-Fair Oaks, urged legislators to oppose or abstain from voting on AB 964, saying it was “awfully inappropriate” to vote right now on the agreement with the Service Employees International Union, Local 1000.

Niello said legislators should wait at least until May 19, when Californians vote in a special election on six propositions to shrink the budget gap.

“We should not pre-empt the voters by dealing with this issue today (Monday),” Niello told the Assembly. “It can wait until June or after.”

Of course, voters have no say in government labor contracts; they appear nowhere on the May 19 ballot.  But Andrew McIntosh explains what’s really going on here, something the Sacramento Bee saw fit to put on their website but not in their print edition.

Niello appears to be using Republican clout to offer the governor some leverage – holding out on the contract approval as long as possible so that the SEIU doesn’t mount a major attack-ad campaign on propositions he favors, such as 1A.

That proposition would give the governor new power to unilaterally make mid-year cuts in spending to some programs and extend certain tax increases by two years.

That’s hardly speculative.  Niello voted for the budget and supports the ballot measures that resulted from them.  He knows that SEIU has already dropped $500,000 into defeating Prop. 1A, the long-sought spending cap, and has decided to use the leverage of the contract vote to blackmail SEIU into keeping quiet.  Even Republicans who don’t support the special election have no problem taking time out of their busy day to shit on workers, so they are happy do the Governor’s bidding, hoping that, in the aftermath, they can knuckle the union down for more concessions should the measures fail.  Which would be absurd – the Governor made a deal, which includes major concessions from the union, separate from the passage or failure of any ballot measure.

No surprise, by the way, that the Bee doesn’t go into this level of detail in their print edition – the editorial board basically threatened SEIU in exactly the same way as Niello a week or so ago, arguing that the passage of their contract should be tied to Prop. 1A’s passage.  And they have the audacity to call out the SEIU for duplicity, while rooting on legislative blackmail because SEIU’s parent organization disagrees with the editorial opinion of the Bee on how to best serve the long-term interests of the state.  And this shows in them leaving the underlying reasons for legislative deals out of their news articles.

Last week, Robert Cruickshank offered the special election advocates some pretty good advice – focus on Prop. 1C, which covers 83% of the short-term budget hole that can be gained from the passage of the ballot measures, because the state party approved it, because it’s the only measure that matters in the near term, and because they need to focus their energies, since very little good is likely to come of the election at this point.  Of course, Arnold Schwarzenegger controls the Budget Reform Now Campaign.  And he has shown himself to be completely indifferent to the short-term needs of the state in favor of writing a long-term, right-wing spending cap into the state Constitution.  Because instead of abandoning all the other measures in favor of 1C, Budget Reform Now has jettisoned everything in favor of 1A & 1B.  I saw this ad a couple days ago, out of nowhere, and Budget Reform Now dropped it without a press release.  The ad tries to use the 2005 special election imagery which killed Arnold’s Prop. 76 (substantially the same proposal) in favor of this spending cap, with the firefighter warning of “$16 billion in cuts” without bothering to mention that those “cuts,” really lost revenues, would be two years off.  And the new “Yes on 1A and 1B” logo makes an appearance.

I think we can finally figure out what Arnold Schwarzenegger wants from this election.  He could care less about the $6 billion in short-term budget solutions – but his corporate partners want that spending cap, and his new pals in the CTA want their out-of-court settlement locked in (it would’ve cost them less just to take the Governor to court for falsely calculating Prop. 98 revenues, with more of a chance of winning).  So all this talk about how we have to vote Yes or the budget hole will grow deeper was a ruse.  The Governor clearly supports the deeper budget deficit, or at least he could give a crap with coming up with a solution.  He and his Chamber of Commerce puppet masters want that cap.  They have wanted it for four years.  Anyone lining up with these interests should understand what they really support.  Good job, Democratic leadership.