The accounting gimmicks and clever tricks have reached their end.  Sacramento is out of money.

(John) Chiang, whose office writes the state’s checks, says California is about out of stopgap tricks to pay its bills and keep all its programs running.

The controller says California is down to Plan D on its checklist of paying bills. Its cash reserves are piddling; the special funds it borrows from are tapped out, and no one in the private sector is going to lend it any cash at a reasonable interest rate.

That leaves what in state government circles are called “payment deferrals” and what in real life is called “stiffing your creditors.”

In this case the creditors include income taxpayers expecting refunds, college students waiting on state aid, counties that operate public assistance programs, and companies that sell goods and services to state agencies.

Chiang has said he won’t write $3.7 billion worth of checks for those and other state programs if legislators and the governor haven’t reached a deal by next Sunday to close the budget gap.

The overarching problem here is a tax system that is too closely aligned to the boom and bust cycles of the national economy.  That is protected by the 2/3 rule.  And the result is a state that lurches from one crisis to the next, seemingly without end.

Well, the end is pretty much near.  The state may not declare bankruptcy, but that will be functionally the case.  And while IOUs may be a couple months down the road, the payment deferrals are going to put a lot more people out of work.  The counties and various agencies aren’t in the financial position to float by until some revenue floods in.

Of course the fact that IOUs still may be a few months away is of limited consolation to those who will be out of luck if Chiang pulls the no-payment trigger next week.

“For the first time in my career, there are counties facing the reality of just not being able to front the state the money to keep these programs operating,” said Frank Mecca, executive director of the County Welfare Directors Association.

Mecca, who has been in the human services field for 20 years, said counties are facing a double whammy: Revenue is withering while needs are blossoming.

This is at a time when we’re seeing jobless rates as high as 15% in some counties, and over 10% in 31 of the 58 counties in the state.

That stimulus spending from the federal government, perhaps $21.5 billion over two years, can’t come fast enough.  But if there’s not a solution in the next week, it may not matter.  The damage will be done and the pain will spiral out of control.

“Borrowing $23.3 billion for state budget won’t be easy, analyst says”

I would replace “easy” with “possible.”  Banks are hording money from the bailout because they will need to raise fresh capital in 2009.  The short version is that nobody will be investing in fuck-all for the near future.  This is the entire thinking behind the federal recovery package, that government has to be the spender of last resort.  So any budget package that fills the gap with $23 BILLION in borrowing is about as realistic as a budget based entirely on tourism revenue gained from the new unicorn park in Gilroy.

You could potentially borrow some money, but it would either be against ourselves (by pushing the debt into the 2010-11 fiscal year, though at some point that would need voter approval because it’s somewhat illegal) or by giving borrowers a federal guarantee against default, which is the whole reason why investors are wary of California right now.  This is what John Chiang has called for repeatedly.  To Arnold, we can just show up to market with a bunch of worthless “revenue anticipation notes” and scream “COME AND GET IT!!!”

Of course, we could also listen to Rep. Devin Nunes and enact a part-time citizen legislature while throwing every business regulation out the window.  

Five top Democratic governors have called for a larger stimulus package than is presently being called for in Washington, precisely to fill in the gaps created by a loss of tax revenue in the states.

To help offset state budget cuts, a group of Democratic governors urged the federal government Friday to pass a $1 trillion economic stimulus package, significantly larger than the one under discussion in Congress.

The package would help states compensate for cuts to education spending that could cause long-term economic decline, as well as bolster infrastructure projects and benefits programs for the poor, the governors from New York, New Jersey, Massachusetts, Ohio and Wisconsin said in a news conference […]

The governors recommended that the stimulus plan include $350 billion for infrastructure, including transportation, wastewater and broadband projects; $250 billion for anti-poverty programs such as Medicaid, unemployment insurance, food stamps and child care; $250 billion in flexible education spending to maintain funding for programs from pre-kindergarten to higher education; and middle-class tax cuts.

The money, disbursed over two years, would offset cuts needed to balance state budgets and would serve as a “bridge” until 2011, by which time the governors hope the economy will have recovered, said Massachusetts Gov. Deval L. Patrick.

Predictably, the Republican Governor’s Association called it a “bailout” of the general funds of the various states.

Well, yes.  The states, by and large, did not have the ability to get out from under the financial meltdown, and the consequent economic downturn that resulted shouldn’t disproportionately affect the least of their citizens.  Furthermore, given that the road to recovery is massive fiscal stimulus, having states cutting back on spending at this time, be it infrastructure, education or healthcare, is completely counterproductive and will do nothing but prolong the agony.

In the future, it will take more than backfilling state budget cuts in a downturn, but a more structured system, like a “Federal Infrastructure Finance Corporation,” to ensure that state assets aren’t sold off to private interests during a downturn.  The days of creative borrowing and the crossing of fingers are over.  We need new structures to manage economic volatility and avoid fiscal traps, PARTICULARLY in California, where the tax system too closely mirrors the boom and bust cycle.

In the near term, I imagine something like this will pass.  Barack Obama today put out a call for “strategic investments” to create jobs and improve the long-term economic outlook simultaneously.  The question locally is whether California’s plans will actually accomplish that.  CalPIRG is criticizing the state’s wish list, saying that it relies too much on increasing highway and road capacity and not enough on cleaner energy investments:

The California Public Interest Research Group reports that the state plans to spend 31% of road money on creating new capacity instead of addressing long-deferred maintenance and repair projects. By contrast, the group said, Massachusetts would commit 100% of its road funds to repairs.

“We can’t afford to waste precious resources on new highways at the expense of ready-to-go projects to repair and maintain existing roads and bridges and expand public transportation,” said spokeswoman Erin Steva.

The group also faulted the California Department of Transportation’s list, saying that only 37% of the funds would flow to public transportation. The group called for a higher percentage, citing the record ridership on California’s mass transit systems, which have been hit by severe cutbacks in recent years. The proposed percentage is less than what is being planned in Tennessee, Wisconsin and Massachusetts, CALPIRG said.

It is elemental that the stimulus spending cannot prop up an unsustainable growth model based on sprawl.  Experts up and down the state understand this, and one of the best examples is in this Merced Sun-Star editorial, which nicely explains the tension between speed and smarts:

The problem for the planners is that the stimulus must be geared toward putting people to work as fast as possible. That, many believe, argues for the traditional sort of public works, such as highways.

In many cases, plans are already in place to replace crumbling roads, highways and bridges. By contrast, plans for urban transit systems and intercity high-speed rail are less firm, meaning it may take more time to actually start turning dirt and generating paychecks […]

We’re confident that a solution exists that puts people to work right away and also lays the groundwork for a new approach to the nation’s transportation needs.

It won’t be easy, but it has to happen. We can’t continue to simply build more transportation infrastructure on a model that’s now more than a half-century old.

A new model for transportation is part of the change we need.

Read the whole thing.  One good idea calls for phased stimulus spending, giving enough for critical highway and road repairs at the start, with the bulk coming later for transit and rail projects.

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.)

Nobody could have predicted that the Yacht Party wouldn’t budge.

Democrats in the state Assembly on Tuesday countered the plan by Republican lawmakers for deep cuts to help bridge California’s gaping budget hole, putting up for a floor vote a new $19 billion plan through mid-2010 that would adopt Gov. Arnold Schwarzenegger’s tax ideas.

But the Democrats’ latest plan failed to garner the required two-thirds majority support as partisan bickering over tax increases continued and Republicans refused to approve taxes […]

Late Tuesday, Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County) ordered lawmakers to remain in the chambers until the Republican proposal could be written in bill form, with hopes to vote on it. But the night ended without a vote because the bill wasn’t ready, Bass said. She plans to bring the GOP proposal to the Assembly floor for a vote today […]

After more than two hours of debate, Assembly members initially voted 46-27, along party lines, on the Democrats’ tax bill, missing the two-thirds majority threshold by eight votes. A separate budget bill that contained spending cuts also failed to gain the required support, receiving a 48-27 party-line vote in early evening.

But rather than end the floor session, Bass announced that lawmakers were locked in, preventing them from leaving the Assembly floor and nearby meeting rooms.

At nearly 11 p.m., Bass reopened the vote for the two bills, and all Democrats but one who voted “yes” earlier decided to abstain instead, making the final tally 0-26 for the budget bill and 1-27 for the tax bill.

One interesting sidelight – there are 29 Assembly Republicans, yet the “No” vote on the budget never got more than 27 votes.  So two cowards must have taken a walk.  I’d find the bill to note exactly which cowards took a walk, but LegInfo is labyrinthine (UPDATE: Randy Bayne helpfully informs that the culprits are Paul Cook, Cameron Smyth and Sam Blakeslee.  Cook and Smyth in particular were in somewhat tough re-election fights in November, so that’s interesting).  We do have abstentions on the budget and tax votes on the Democratic side as well, including all four of the new lawmakers (Huber, Block, Perez and Buchanan) and Charles Calderon on the tax plan.  Huber and Calderon abstained on the budget cuts, and Mariko Yamada voted against it because of specific agricultural cuts.  The bill was fated to fail, but I’d want to know more about the freshman abstentions.

What this means is that $5 billion in public works projects will likely be shut down, at precisely the time when fiscal spending is needed to jump-start the economy.  It will lead to thousands of layoffs (thanks, pro-growth Republicans!).  This is really not that hard.  State budgets with balanced budget amendments have very little maneuverability.  They can cut spending or raise taxes.  Counter-cyclical spending is CLEARLY preferable.

Almost every single economist agrees, the last thing we want to do in a recession is slash government spending. We want, in fact, to increase that spending so that it is a counter-cyclical force to a deteriorating economy. So the question, then, is how to most safely generate the revenue to maintain or increase that spending. By “most safely” I mean how to raise the revenue in a way that will minimize any negative economic impact. And the answer comes from Joseph Stiglitz:

“[T]ax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.”

So, first and foremost, you don’t want dramatic spending cuts (beyond the usual rooting out of waste/fraud) and you don’t want to raise taxes on middle- and lower-income citizens who both need the money for necessities, and are the demographics that will most quickly spend money in a stimulative way. That leaves taxes on the super-rich, and Stiglitz – unlike anti-tax ideologues – has actual data to make his case. We know Bill Clinton raised top marginal tax rates in a hobbled economy in 1993, and the economy then boomed. We also know the results of a recent Princeton University study, which looked at states that had raised taxes on the very wealthy during the post-9/11 recession. The analysis found that the tax increases were both the most reliable revenue generator and the safest in terms of minimizing any negative economic impact. Indeed, the states that pursued this course of action saw a net job growth, and almost no tax flight (ie. people fleeing the state because of the tax increase).

It’s a no-brainer.  It’s sad to say that David Paterson is making the wrong choice in New York State, and that most of the tax hokes in the Democratic package are regressive, and impact low- and middle-income citizens.  It’s far sadder that we’re now going to shut down infrastructure projects passed by voters at a time when we need nothing BUT infrastructure spending, and fling ourselves into something approaching bankruptcy, solely because of ideology.