The national media is starting to pick up on the developments with the California budget, and their potentially devastating impact on the larger economy.  Bloomberg has an article on the shutdown of infrastructure projects and the impact statewide:

Just $5 million of work is needed to complete a new California Court of Appeals building in Santa Ana. The state may not have the money, and come July judges may be writing opinions in their living rooms.

“I’ve been on the bench for 23 years, and I’ve never seen anything like this,” said David G. Sills, the presiding justice for the Fourth District Court of Appeals, Division Three, in a telephone interview.

California’s worst budget crisis has held up $3.8 billion in spending on public works, possibly including the courthouse adjacent to Santa Ana City Hall. Sills and his seven fellow jurists had planned to move in before the lease on their temporary offices expires June 30.

“Everyone will have to work from home,” said Sills, 70, “and we’ll have to rent a place for when we hear arguments.”

The story ticks off all of the projects lying unfinished – highway improvements, bridge and levee repairs, a hospital at San Quentin, a middle school in South Gate.  The delays are not only a threat to the soaring unemployment rate and the state’s economic future, but public safety.

South of downtown Los Angeles, a delay finishing a school building could put children in danger, said German Cerda, principal of South Gate Middle School. About a third of his 2,900 students are scheduled to move into the new building a half-mile away in 2012, relieving overcrowding inside and making nearby streets safer, he said.

On Dec. 2, a 14-year-old South Gate student was killed when a car stuck him a block away, an accident Cerda attributed to congestion.

“The biggest complaint we get from parents is what happens when the bell rings at 2:42 p.m. each day,” Cerda said. That’s the time that his students are dismissed and 3,000 more are leaving a high school down the street. “They don’t want to see another tragedy.”

Then there are the expected cuts to state Medicaid programs, at precisely the time when more Californians qualify for services.

Among the states with the gravest financial problems — and pressures on Medicaid — is California. In July, Medi-Cal, as the program there is known, slashed by 10 percent the rates it pays hospitals, nursing homes, speech pathologists and other providers of health care. It tried to lower payments to doctors and dentists, too, but they have sued to block the decreases.

Gov. Arnold Schwarzenegger (R) has asked the state legislature to approve other cuts, including an end to dental care for adults, about 1 million of whom use it now, and a sharp reduction in care for recent immigrants.

At two hospitals run by NorthBay Healthcare, midway between San Francisco and Sacramento, about one patient in five is on Medi-Cal. The rate cuts translate into a $4 million loss this year. In September, the health system closed a rehabilitation program for children that provided physical therapy, speech therapy and other help to about 300 young patients at a time — with 100 more usually on the waiting list.

“It was heart-wrenching to have to go out and announce,” said Steve Huddleston, NorthBay’s vice president of public affairs.

The Obama campaign is weighing options for both backfilling Medicaid for the states and jump-starting infrastructure spending through cash infusions.  However, the biggest thing the federal government could do right now is what John Chiang describes in a letter to the Obama transition team and California’s congressional delegation – guarantee the financing for infrastructure projects.  The reason they cannot be funded right now is that the market for revenue anticipation notes and bonds is locked.  Though California has never defaulted on these securities, investors are nervous that the careening budget crisis will cause them to do so.  So putting the full faith and credit of the US government behind the notes, which if California does repay its creditors would cost the feds next to nothing, would immediately allow the infrastructure projects to begin again.  That’s the short version – here’s Chiang with the greater plan, including incentives for banks to lend.

This proposal is simple, straight forward and cost effective:

1) Develop a federal guarantee program of limited duration for state and local debt issued to fund new infrastructure construction and renovation. Each state could designate a state commission or agency to disburse the state’s allocation of federal guarantees in accordance with the program guidelines;

2) Allocate these benefits, or guarantees, in the amount of $500 to $1,000 per capita to states. The allocations can be based on unemployment or 2000 census population, with a minimum “baseline” allocation to low-population states; and

3) Furthermore, the proposal would greatly benefit from abolishing the limit on the amount of deductible interest costs for commercial banks related to the purchase of these particular state and local infrastructure bonds during the term of the program. This restriction has been in place since enactment of the Tax Reform Act of 1986.

This would mean the restoration of up to 200,000 jobs in California alone, as well as $16 billion in economic activity.  Those are numbers that an incoming Obama Administration cannot afford to lose as they begin implementing a recovery package.

Obviously, the biggest remedy to show confidence to the markets and gets the lending flowing again would be to pass a budget and prove to investors that California is getting its financial house in order.  That is up to the Governor to decide, and 200,000 jobs hang in the balance.

You don’t have to constantly refresh or check your RSS feeds for the next couple days – budget talks have been called off for Christmas.  There is a meeeting between the Big Three tentatively scheduled for Friday.

In my view, just that we’re talking about a Big Three instead of a Big Five is progress, suggesting that the Gov will go along with the work-around budget if he can save face on a few “stimulus” items (like, you know, taking people’s overtime and meal breaks away.  They can eat while working!).  The Governor never appeared in a movie about schizophrenia, but that’s how he’s been acting the past few days, holding press events at key sites where infrastructure improvements are being shuttered (a levee in Sacramento, the 405 Freeway in Karen Bass’ district in LA) blasting the legislature, while at the same time claiming that progress is being made toward a budget solution.

During a press conference along Interstate 405 in Los Angeles, the Republican governor said he and Democratic leaders made “some great progress” Sunday and that it may only take two more meetings of the same sort to reach a compromise this week. Schwarzenegger had been calling for a solution by Christmas, though he acknowledged Monday that a legislative vote would not take place until next week at the earliest.

“It could easily be that before Christmas Eve or Christmas Day that we have an agreement, that the legislators can be brought back between Christmas and New Year’s to vote on it,” Schwarzenegger said.

(UPDATE: Kevin Yamamura reports that the negotiations have come down to three issues: “rollback of environmental review for construction projects, greater use of private investment and contractors, and deeper spending cuts, including those affecting the state work force.”  These have almost no impact on the budget as a whole – you’re talking about cutting two state worker holidays – and are designed only to reward private business interests.  Arnold has always been in the pocket of the Chamber of Commerce.)

You’ll notice that none of these press events are being held in front of any state employee offices.  That’s because, in general terms, people don’t look kindly on mass layoffs and cutbacks right before Christmas.  It gives them the impression that the person making those layoffs is kind of a Scrooge.  Of course, the immediate halt to all public works projects, at a time when we should be encouraging stimulus projects of this type, also have an impact on jobs.  Not only does every contractor working on those projects get fired, but vendors get stiffed for work that they’ve already completed, leaving the state open to lawsuits.  The Governor should kind of be ashamed to stand in front of any backdrop with cancelled projects behind him, considering his epic mismanagement is partly to blame.  This is particularly true when considering that the voter-approved infrastructure work is vital to public safety and the state would undoubtedly be liable in the event of catastrophe.

Communities nationwide have repaired fewer than half of the 122 levees identified by the government almost two years ago as too poorly maintained to be reliable in major floods, according to Army Corps of Engineers data.

State and local governments were given a year to fix levees cited by the corps for “unacceptable” maintenance deficiencies in a February 2007 review that was part of a post-Hurricane Katrina crackdown. Only 45 have had necessary repairs, according to data provided in response to a USA TODAY request. The remaining unrepaired levees are spread across 18 states and Puerto Rico – most in California and Washington.

The Governor is cleverly casting this as a problem of “the legislature” hoping nobody will notice that he performed the veto, he blocked the very plan that could get these projects restarted.

Fortunately, grassroots Californians are noticing, and you can see the contours of a coalition forming, perhaps resembling the 2005 special election coalition only with more staying power.  Groups like Courage Campaign and the local blogosphere have the reach to engaged communities starving for information.  The California Budget Project provides the statistical heft.  Labor and environmental groups have the ear of the legislature.  And there’s a new member of the coalition – former Obama organizers in California who are moving with unusual speed to support a sane budget solution and slam the Governor for his intransigence.  At Schwarzenegger’s 405 Freeway presser, you can hear a small band of protesters in the background noise.  That was organized by Obama volunteers through their new Facebook-like application, CommunityOrganize.com.  Pam Coukos distributed a letter-writing tool urging a budget solution.  California for Obama has done the same in an email blast, asking it to be distributed to the various volunteer teams.  And there is already talk about veterans of the Obama movement running for state and local office.

This is pretty new and early.  But you can see how this network of committed organizers can gradually become a state political force, especially if the coalitions are built and networks made between the groups mentioned above.  I have long said that what is missing in California is a popular grassroots movement that can go around the media filter and whip up support for progressive values through direct action.  It is said that California is too big for such a movement to catch fire, but in political terms, we all know that the state is very small, and a committed movement can make an outsized difference.  This won’t happen overnight, but we’re moving in the right direction.  Now we just need a gubernatorial candidate to ride the grassroots wave…

With the Governor and the legislature still no closer on a special session solution on the budget, Controller John Chiang issued a strong warning about the very near future, finally bringing public the possibility of IOUs for state vendors:

“Specifically, my office will be forced to pursue the deferral of potentially billions of dollars

in payments and/or the issuance of individual registered warrants, commonly referred to as IOUs,” Chiang said in a letter to the governor and other officials.

“In order to ensure that the State can meet its constitutionally required obligation to schools and debt service, the Capitol’s budget paralysis may leave me no choice but to, in full or in part, withhold payments or to issue IOUs to other individuals and entities entitled to state payments. Given the current financial instability of the banking industry, it is highly unlikely that the banks, if they accept the IOUs at all, will be able to do so for any sustained period of time. Consequently, the recipients of the registered warrants may have no apparent options but to hold them until redemption.”

Chiang said his office is also pursuing the issuance of “revenue-anticipation warrants,” a form of short-term borrowing that carries high interest and heavy fees because it’s believed that the state cannot issue “revenue anticipation notes” that would have to be repaid by June.

If it was impossible to sell revenue anticipation notes to lenders, I don’t see why they’d accept revenue anticipation warrants, even if they offered the promise of higher interest rates.

It goes without saying that this stalemate, and the prospect of eliminating vital services, comes at the worst possible time, when California’s most at-risk citizens need a social safety net the most.  The California Budget Project detailed this today in a paper, appropriately titled Proposed Budget Cuts Come at a Time of Growing Need.

More Californians are turning to income support and related programs, such as Food Stamps, WIC, Healthy Families, Medi-Cal, and CalWORKsfor assistance.

Increased demand for public programs comes at a time when policymakers have proposed deep cuts to health and human services programs to close the state’s budget gap.

However, prominent economists argue that carefully chosen tax increases are preferable to spending cuts during a recession because “steep budget cuts will exacerbate the economic downturn and harm vulnerable low-and moderate-income”families.

With unemployment rising to the third-highest rate in the nation, with one in five Californians out of work for longer than 27 weeks, with projections of the unemployment rate rising over 9.3% by 2010, with almost a million Californians underemployed (working less than they’d like), with applications for food stamps up 33% over the past year, and with every county in the Central Valley experiencing double-digit unemployment, including an incredible, depression-era 23.4% unemployment in Imperial County in Southern California, the prospect of losing vital services to those affected would be absolutely devastating.  And yet that’s where we are.  County governments are already expecting the worst, to have their funds raided by the state to eventually fill the budget hole, so they’re cutting back.  The self-sustaining cycle of cutbacks creating job loss creating less revenue creating more cutbacks has already begun.  And that’s why it’s not just bad politics but horrible policy for Schwarzenegger to hold the state hostage for extremely marginal rewards that will almost certainly be overturned once he’s out of office anyway.  His intransigence, perhaps based on his inability to get anyone in state government to listen to him, is puerile nonsense.  But it also really hurts people.

As I’ve said continuously, the budget mess in California cannot be solved under the current broken system without serious help from Washington.  Fortunately federal lawmakers are fighting for state and local government relief for California, done in such a way that we can actually access it without having to put money up front (which is impossible given the current cash-flow crisis).

(As a side note, I want to on behalf of the editorial board thank our friends in the blogosphere for driving attention to our ongoing Calitics budget coverage, in particular paradox at The Left Coaster.  I think I speak for everyone in saying we appreciate the links and support.)

I appreciate Bob’s sentiment that the time is now to fight the Governor and the Yacht Party and bring some sanity into the fiscal process, but my fear is that the time for that was three years ago, when the successful fight against the special election should have been built upon, and at this point, we’re already swirling in the bowl.

Let’s just get you up to date.  All infrastructure projects are currently shut down.  Unemployment nudged up to 8.4% in November, the state lost 41,700 jobs last month, and up to 200,000 more jobs are on the chopping block from the public works freeze if it continues.  Meanwhile the Governor is ordering up layoffs and furloughs for state workers, so just add those on top of the pile.  You’re likely to see a 10% cut in state employees, and a 10% reduction in the salaries of those who remain.  More job loss means less income tax and probably less sales tax, as well as more need for public assistance.

And that’s before a budget which could have further reductions to state employee paychecks, elimination of overtime and meal breaks, etc., is signed.  Not to mention the billions more in cuts that the Democrats included in their work-around plan which the Governor threatened to veto.  Schools, which were slated for $4 billion in cuts in that budget, have already gotten the jump on the state by cutting back their local budgets.  After-school sports, libraries, and new teachers are probably all going to go.

This is a nightmare beyond the ability of many, even myself, to comprehend.  It’s so big that it’ll affect everything, and the idea that a ragtag band of liberals have the power to stop the freight train from coming down the track is precious, but I think wrong.  This is the accumulation of 30 years of bad policy and worse government structure, and that’s not going to be turned around in the time it needs to be to avoid catastrophe.  Even George Skelton, poohbah of all poohbahs, admits that the Yacht Party is so nakedly ideological that they have made the state dysfunctional.  This work-around budget is good for the time being, but Schwarzenegger is clearly committed to hijacking that process.  It’s a large game of chicken that none of us can afford.  And as I’ve noted, even balancing the budget – which the work-around does not do – will not necessarily restart infrastructure spending, and even federal help might not be able to do that.  

Changing the constitution with a convention is a nice idea, but not so easy in practice, as we all know.

Talk of calling a constitutional convention has been banging around California for at least the last few decades – maybe since 1851, for all I know – and it’s gotten a lot louder recently. Here, however, is the rule for calling a convention:

The Legislature by rollcall vote entered in the journal, two-thirds of the membership of each house concurring, may submit at a general election the question whether to call a convention to revise the Constitution. If the majority vote yes on that question, within 6 months the Legislature shall provide for the convention. Delegates to a constitutional convention shall be voters elected from districts as nearly equal in population as may be practicable.

In plain English: you need a two-thirds vote of the legislature to put an initiative on the ballot and then you have to get it approved by the voters. The problem is that no matter how sweetly liberals might croon about what a convention could do, conservatives all know the truth: the whole point of the thing would be to get rid of our insane two-thirds requirements for passing budgets and raising taxes. Unfortunately, our whole problem is that Republicans control (slightly more than) one-third of the legislature. And if we can’t get them to vote for a tax increase in the first place, what are the odds we could get them to vote for a constitutional convention called for the express purpose of making it easier to increase taxes? About zero.

OK, but how about a simple initiative? We could get rid of the two-thirds rule just by collecting signatures and getting a majority vote, right?

Right. And we tried that just a few years ago. Prop 56 was supported by all the usual good government groups and would have reduced the majority needed to pass budget and tax measure from two-thirds to 55%. A bunch of other fluff was added to make it more popular (“rainy day” funds, no pay for legislators if they don’t pass a budget, etc.), and in the end…..

….it got whomped 66%-34%. No one was fooled for a second. Everyone knew the whole point was to make it easier to raise taxes, and so it lost in a landslide.

I think a similar proposition to 56 wouldn’t crash so hard today, but it would certainly go in as an underdog, because the majority of the state still doesn’t understand the consequences of all this failure.  It’s a “dysfunctional electorate,” as K-Drum puts it, as well as a dysfunctional government.

Do we need to fight?  Yes.  But we need some arms shipments from Washington (metaphorically speaking) before we can do that.  A rescue package for the state is desperately needed, and it got a whole lot more so yesterday when the Governor vetoed the work-around.