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.

It has been truly depressing to watch the Twitter feeds of John Myers and Scott Lay tonight, as the mood shifted from guardedly hopeful to despairing.  The Senate keeps voting on things and not coming up with any solutions.  They tried to pass the stop-gap solution again, and came up short of the votes needed.  They passed the majority-vote budget with some fee increases, and the Governor vetoed them.  Let’s all please remember that.  With a stroke of the pen, the Governor could have ended this.

If SB 64 and SB 80 (the stop-gap) don’t pass by midnight (and actually, in an hour or so, because it takes a couple hours to prepare the necessary paperwork), the state will forfeit $3 billion in cuts to the 2008-09 budget year, which they will have to find in the following year, and a total of around $7 billion in total costs, when you add in the costs of additional borrowing, etc.

At some point, a large majority-vote budget (which wouldn’t take effect for 90 days), absent the tax increases, passed the Senate and moved on to the Assembly, where it will be voted on tonight.  According to Scott Lay, it covers all but $1 billion of the target, which is probably enough for the Governor to veto it.  Why, it’s almost as if he doesn’t want a solution but instead an opportunity to push through a bunch of long-sought goals shock-doctrine style!

The Senate just tried again to get the necessary votes for the stop-gap, and fell short by the exact same amount.  They’re in recess until 9:30 and will probably get only one more shot.

…we’re past 10pm at this point, the Senate has yet to reconvene, and by most calculations the die has been cast.  Enjoy your scrip!  Zed Hollingsworth has been spotted in the Governor’s smoking tent, for whatever that’s worth.  But the Governor remains intransigent and apparently determined to bring the state to complete failure.

…counting down the minutes until the end of the fiscal year is kind of like waiting for New Year’s, only it involves budgets and trailer bills and at the end people die.

…So the Senate is going back into session.  John Myers tweets: “Senate pro Tem Steinberg calls senators back..we’ve watched a lot of “shuttle diplomacy” betwn Dems, GOP, and Guv’s ofc. Still, long odds.”  We’re at T-minus 43 minutes.

…the way this is going from the Twitter feeds, Steinberg looks like he’s desperately trying to pass the stop-gap measures again.  The odds are long.  He pleads to the Yacht Party not to be party to irresponsibility.  I wonder what the response will be?… this: “Reeps still refuse to put up votes.”  Maldonado, in fact, won’t vote at all.  He’s just walking away.  Abstaining his way into oblivion.

…Democrats are spending a lot of time lobbying Leland Yee (who has been consistently voting against this stop-gap solution because it hurts schools too much) and Abel Maldonado (who isn’t voting), but of course even if they switched their votes that would leave the Senate one vote short of being able to override Arnold and put the stop-gap into effect.

…Republicans are playing their usual game of holding back all their votes until all the Democrats vote for something, so they’re waiting on Yee to flip.  But assuming he does in the next 20 minutes, who joins him?  Two GOP votes are needed.  Beyond Maldonado, who would change their vote?

…Yee just came back to the floor, I’d bet he’ll vote with the majority this time around, but time is running out… indeed, Yee votes aye.  Will there be a second Republican?  Or even a first?

…Maldonado still not voting on the three-bill stop-gap package.  10 minutes and counting…

…This is pretty much over.  At midnight, the state loses the equivalent of $7 billion in savings.  I will remind everyone that Senate Democrats, in the end, voted 25-0 for this deal; Republicans, 0-14 with 1 cowardly abstention (Maldo)… and Steinberg shuts it down.  It’s over.  IOUs will go out on Thursday, $7 billion wasted by the so-called fiscal conservatives.

If no deal is reached between the Governor and the Legislature in the next 14 hours, California will start to issue IOUs to companies that do business with the state (mostly small businesses), taxpayers expecting refunds, and agencies delivering assistance to the most vulnerable members of society – welfare recipients, the elderly, disabled and blind, and college students expecting aid grants.

The biggest variable with these IOUs is whether or not banks will honor them, a decision that they have yet to reach.

The deciding factor could be California’s banks. If they’re willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They’ll be able to cash the IOUs.

But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession. One Rocklin company, a temp firm that relies heavily on state business, has already laid off five workers in anticipation of a cash squeeze.

So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang.

She said banks are probably waiting to see how much interest the state will pay on the IOUs – a figure that won’t be decided until Thursday, the same day Chiang is scheduled to issue IOUs. The notes will total $3.36 billion, with about $500 million targeted for the private sector.

In 1992, banks generally honored the IOUs by cashing them on demand.  If you haven’t heard, banks are in a slightly worse financial picture now than then, and might not be willing to float bridge loans for the state, even with generous interest, this time.  And of course, if the banks agree to honor the IOUs, the state will be paying out hundreds of millions of dollars to them in short-term interest.

If the banks fail to honor the IOUs, you can just add that to the severe pain being felt by California residents at this time.  The personal bankruptcy filings which soared in Southern California in the first quarter will only increase.  The foreclosures, which have not only continued for residences but commercial property like hotels, will expand.  With small businesses forced to cut back due to cash flow cutoffs from the state, expect more unemployment and a continued erosion of the tax base, leading to even larger budget shortfalls.  This is a death spiral from which we will find it hard to extricate ourselves.  California’s role as the biggest of the “50 Herbert Hoovers” truly can threaten national economic recovery.

Something’s a-stirring for the second straight night in Sacramento.  Scott Lay @ccleague and the indefatigable John Myers @KQED_CapNotes will have the best play-by-play.  The Senate has scheduled a session but immediately went into party caucuses for meetings.  If they do hit the floor, CalChannel will have it.

Basically, here’s the latest: The Senate and Assembly have already passed majority-vote budget revisions that would fill the current deficit, but the Governor has vowed to veto them.  The Assembly, with bipartisan support, passed three bills in a stop-gap measure, which would at least provide savings for $3 billion in fiscal year 08-09, which ends tomorrow, and would keep money flowing in state coffers for another few weeks, avoiding IOUs.  The stop-gap consists entirely of cuts and gimmicky delays in funding, by the way.  The Governor has no plan whatsoever to recoup that $3 billion if passage of the stop-gap fails by the deadline.

What the Governor has done is create a completely new budget plan with a day to go before the deadline.  Some would call that deliberate.  This “Plan B” budget would not eliminate Healthy Families, CalWORKS or Cal Grants, nor would it cut all funding for state parks, which was apparently a bridge too far.  It would accept the one-day delay in state employee paychecks from June 30, 2010 to July 1, “saving” the state $1.2 billion.  However, the new plan would borrow $2 billion from local governments, the maximum allowable under the old Prop. 1A; reduce state worker salaries, benefits and pensions; and make broader cuts over various different programs to make up the gap.

Schwarzenegger has appeared to back off from the worst cuts he proposed initially, a win for the grassroots and legislative Dems, but the steady stream of changes to his proposals, along with an insistence on the June 30 deadline for a full solution, have conspired to virtually assure that the deadline will be missed.  This is the backdrop for tonight’s Senate action.  If they can get two GOP votes for the stop-gap solution, they can actually override a gubernatorial veto and set into law something to at least extend the process by a few weeks.  I don’t know about the likelihood of that, but the choices have become limited.

Meanwhile, the Yacht Party made a tiny ad buy on the budget to try and get people to notice they exist.

I’ll monitor if anything interesting happens…

…from Myers: “One more night…to search our souls.” -Senate pro Tem Steinberg on Senate floor. No agreement tonite. New fiscal year about 26 hrs away.

…and it looks like nothing interesting happened.  They took a vote on the stop-gap, didn’t get the 2/3 required to override Arnold’s veto, and adjourned until tomorrow morning.  Looks like we’ll have late night with the legisature Day 3 tomorrow, as the midnight deadline looms.

The Senate followed the Assembly today by passing a majority-vote budget, mostly along party lines, that solves the entire current deficit and includes a large reserve.  The Governor has vowed to veto the package.  CDP Chair John Burton is asking for grassroots action to force the Governor into compliance, which I consider unlikely, but it’s worth reposting some of the letter for the perspective of Burton:

Late last night, Assembly Democrats passed a spending plan that minimizes the cruel cuts advocated by the governor by raising $2 billion in new revenue. Just a few minutes ago, Senate Democrats followed suit, passing a plan that requires Big Tobacco and Big Oil to share in the state budget sacrifice.

Speaker Karen Bass, President Pro Tem Darrell Steinberg and their caucuses should be commended for standing firm against the governor’s Draconian cuts.

In order to pass the plan, legislative leaders structured it to require a majority vote. That’s because Republicans have repeatedly refused to provide the handful of votes necessary to pass the plan with two-thirds support.

Disappointingly, Gov. Arnold Schwarzenegger has vowed to veto the Democrats’ budget plan, preferring to play a game of chicken with the budget. He and Legislative Republicans would rather strip health care from nearly one million children and close 220 state parks than ask corporate special interests to pay their fair share.

Now, the onus is on the governor and Republican lawmakers to explain to Californians why they would rather drive the state over a cliff than agree to a budget with a mix of cuts and new revenue.

Please, call Governor Schwarzenegger’s office today at (916) 445-2841 or (213) 897-0322. Ask the governor to sign this budget plan, which minimizes the cuts by sharing the sacrifice.

Echoing the theme, Sen. Steinberg said today, “Shutting down the govt is not the answer to solving CA’s problems.”  He also called on the Governor to “release the Senate GOP” and allow for a bipartisan vote on stop-gap measures, the same that passed the Assembly, to allow for continued negotiations after the June 30 deadline.

What is now at risk, in addition to the distribution of IOUs, are $3 billion in savings from the current fiscal year, savings that will essentially be lost with no deal by midnight tomorrow.

In a nutshell: the deficit solutions pitched by both Governor Schwarzenegger and Democratic legislators rely on a spending reduction of about $3.3 billion in the 2008-2009 fiscal year that ends on June 30.

That’s tomorrow at midnight. Once the new fiscal year begins, those savings are effectively gone.

$3 billion of those savings would come from K-12 and higher education. They are not popular spending cutbacks in education circles, but reflect the larger ‘all options are bad’ narrative that you’ve heard in all circles for the past several weeks. The final $300 million or so of current year savings come from a plan to transfer money away from local redevlopment agencies.

Budget staffers say it matters which budget year to which these spending reductions are attributed (2008-09 vs. 2009-10) — in large part because additional cutbacks in 2009-10 could complicate the already delicate issue of eligibility for federal stimulus dollars.

Immediate savings are important for another reason: they provide some breathing room for the cash-depleted state coffers and might lower or eliminate the need for Controller John Chiang to issue IOUs by week’s end.

With no stopgap, essentially lawmakers will have to find an additional $3.3 billion in the 2009-10 FY budget, on top of everything they’re already doing.  So the Governor not only threatens a government shutdown with his intransigence, he wastes the state an additional $3 billion dollars, in effect.

In case you weren’t following along in the middle of the night, Assembly Democrats passed a majority vote budget that solves the entire $24 billion dollar deficit, as the Governor requested.  Through a maneuver found legal and Constitutional by the nonpartisan Legislative Analyst, the Assembly added a $1.50 per pack cigarette tax, a 9.9% oil severance tax on producers, and a $15 surcharge in the vehicle license fee to fund state parks, in addition to the homeowner insurance fee to fund emergency response systems, which was included in the Governor’s initial budget revision.  The new taxes amount to $2 billion of the $24 billion solution.  The majority of actions in this alternative budget remain cuts.  And according to Noreen Evans, the Senate will take up this majority-vote budget later today.

The majority approach was not our first choice. We spent weeks in Conference Committee pursuing a bipartisan budget solution. But we have hit a wall. And, we cannot afford to wait any longer. We are 48 hours away from the state plunging into financial ruin. The Legislature has a duty to act with or without Republicans for the good of California […]

As the old saying goes: lead, follow, or get out of the way. By voting against cuts and revenues tonight, the basis of any budget, Republicans ran from their responsibility to govern.

We gave legislative Republicans a chance to lead with us through a month of public hearings in the Conference Committee. That was the opportunity to present alternative budget proposals. Republicans squandered this opportunity.

If the Senate passes this and puts it on the Governor’s desk within 24 hours of the deadline to stop the state from issuing IOUs, he will have a simple choice to make.  Will he shut down the government because he failed to get everything he wanted from the legislature?  I suspect he will, actually.  And indeed, he has issued a statement to this effect, saying that he wants a “budget that solves our entire deficit without raising taxes.”

That’s the short-term state of affairs.  Going forward, the process itself is fundamentally broken, a fact that the state’s political media class has decided to notice in a boomlet of “How to fix California” articles over the past week.  I look forward to those debates.  If the Governor vetoes this budget, he will be shutting down the government and forestalling the effort to finally reform the process.

…more from the Governor, as he vows to veto this bill, calling it “illegal,” which is pretty far.  It is worth noting that, since most of this budget revision would not take effect for 90 days because none of them received a 2/3 vote, it is true that such a solution would not completely impact the immediate cash-flow problem.  Although, you could argue that putting such a solution in place would allow the state to borrow from investors.

The Department of Health and Human Services released a report on the current state of health care in California, and the numbers are striking.  It also can help us understand a bit about our budget woes.

19% of all Californians are uninsured, and of those, 71% are in families with at least one full-time worker.  Employer-based coverage has dipped to just 54%, meaning the rest have to either go to the individual insurance market, qualify for a public coverage plan like Medicare or Medicaid, or go without.  The top two insurance providers in California account for 44% of the health insurance market, and such a duopoly make it easy to just jack up rates year over year.  The average family premium has increased 114 percent since 2000.  And this causes families to drop coverage due to a lack of affordability.  This nugget appears in the report:

“California businesses and families shoulder a hidden health tax of roughly $1,400 per year on premiums as a direct result of subsidizing the costs of the uninsured.”

But one other entity suffers from that hidden tax: the state budget.  Health care spending by the state has increased well above the CPI, and Medicare and Medi-Cal spending have ballooned because the cost of health care has ballooned.  Growing ranks of the uninsured and unemployed increase the numbers eligible for coverage under state programs, and one political party, at least, would rather offer those services instead of watching people die in the street.  We hear at the federal level that health reform is entitlement reform; that’s just as true at the state level, as bending the cost curve will put state budgets in a better position for the future.

All of this adds up to create a sense of urgency in doing something about overhauling the broken health care system this year.  This could have been the narrative that Dianne Feinstein brought forward in public statements, not hand-wringing about the difficulty of getting something done in Washington.

In the upside-down world of the California budget mess, the Senate President Pro Tem is now criticizing Republicans for their refusal to vote for cuts.

Senate Leader Darrell Steinberg wants to put Republicans on record today on two political questions: whether they can accept $11.4 billion in cuts that Democrats are proposing, and whether they will vote on $2 billion in new taxes.

On taxes, Steinberg conceded he is unlikely to win a single Republican vote when the Senate takes up the Democrats’ $23.3 billion deficit reduction plan. But that, he said, shouldn’t stop them from supporting his package of cuts, which will be voted on separately.

“If they’re going to stand on the argument that cuts are not deep enough and thereby not vote for $11 billion in cuts, then we have some issues,” Steinberg said at a news briefing next to his Capitol office. “It’s interesting. I’m getting a sense that Republicans are getting shy about voting for cuts. That would be an odd headline: Democrats urging Republicans to vote for cuts.”

Actually, it’s not an odd headline.  It’s the inevitable consequence of a broken political system where you need a simple majority to make cuts and a 2/3 majority to raise taxes.  Period.  

In this case, Steinberg can pass the whole budget, save $2 billion in oil and cigarette taxes, by majority vote, because this is not a budget enactment, but a revision.  If he doesn’t muster 2/3 for the cuts, however, the revision will be delayed 90 days, reducing the effectiveness of the cuts by roughly 1/4, and forcing additional solutions to fill the deficit later.  Even when mostly cuts are on the table, Republicans are using the leverage of undemocratic supermajorities to force more cuts.

Here’s Zed Hollingsworth playing dumb that all he wants is a comprehensive solution.

“We’re willing to vote for the cuts that provide for a complete solution,” said Republican leader Dennis Hollingsworth, R-Temecula. “We’re not willing to vote for a partial solution that has us coming back in the spring having to find more revenues when another calamity hits. We’re not interested in political gamesmanship.”

No, the Yacht Party would NEVER be interested in political gamesmanship, perish the thought.  They’d never want to try to send the state into bankruptcy to make a political point or anything.  By the way, Zed, news flash: you’ll be back in the spring.  The projections from the Legislative Analyst have consistently fallen short of reality, and no matter how big a budget reserve gets baked into this new budget, you can bet dollars to donuts it won’t be enough, especially considering the potentially accelerated Depression that additional cuts to the social services net will force.  The Anderson Forecast estimates 64,000 government jobs lost from this round of budget cuts.  Even in Dan Walters’ world, that’s a significant chunk.

My problem with the Democrats on this is mainly their insistence on working within a broken system.  They miss every opportunity to put the failed governmental structure on trial.  Something as absurd as Republicans voting against program cuts – to ensure MORE program cuts – defies belief without an explanation of how it’s a symbol for a bad process that must be fixed.  The goal of this budget, which was never going to be pretty regardless of the May 19 election, should have been to heighten that reality.  

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.

With Juan Arambula apparently leaving the Democratic Party, a day before both chambers were scheduled to vote on the Democratic alternative budget, it’s striking how little difference this will make.  Because the legislature will not vote to enact a budget but to revise it, on everything but tax increases they need only a majority vote.  And the way that the Democrats structured their version, less than 10% of the bill include solutions requiring a 2/3 vote.   And Assembly Democrats still hold a 49-29-1 advantage even if Arambula becomes an independent.  What’s more, the leadership structured a fallback option should those oil and tobacco taxes go down, along with a couple repeals of corporate tax breaks passed in February.  Presumably they would simply shrink the budget reserve and pass the same budget, and that could also be done on a majority-vote basis – actually they could pass the oil and cigarette taxes through a majority-vote fee swap, if they really wanted to, although I reluctantly agree with this article that Democrats are probably posturing, knowing they don’t have the votes and hoping to at least fork some Republicans on “voting with Big Tobacco and Big Oil.  It’s simply good politics to do so, but that’s a small consolation to those who may see their services cut as a result.

There is a cost to passing these revisions by majority vote, however, because anything done in this fashion will take effect 90 days out, while a 2/3 vote for any revision would take effect immediately.  Obviously, with a 90-day lag the savings will not be as robust on the cuts, requiring yet another go-round of this at the end of the year, which was probably inevitable anyway given the lack of revenue filling state coffers.  And of course, that will be on the heads of those Republicans who don’t vote for these solutions, those “fiscally responsible” types who will cost the state money by failing to fast-track these revisions.  Let’s hope, beyond hope, that actually reaches the headlines.

The point to all this is that the Democrats’ budget will provide a significant amount of pain, which is why they don’t have to put up too much of a fight to get it passed.  The side-by-side comparison of the two budgets shows pretty clearly that Democrats accepted a substantial amount of the cuts, and also some of the gimmicks that the Governor had in his plan.  They added a couple tax increases but not the broad restructuring of government necessary to protect the most vulnerable.  They repealed a couple corporate tax breaks for CEOs but not as many as they could have.  If you’re going to engage in what George Skelton calls Kabuki theater, since you’re delivered a fallback plan, don’t compromise the Kabuki and instead create the real vision for the state that you desire, something that the grassroots, just getting their feet wet in this fight, can rally behind.  Or maybe, the Democratic caucus DID, a somewhat terrifying thought.