Democratic legislative leaders are in Washington today arguing for increased stimulus money for California.  I’ve been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.

However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here.  It’s no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure.  That’s almost $4 billion dollars worth of foreclosures in Stanislaus alone.  In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.

Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.

Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire […]

With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit’s as the highest of any major metropolitan area in the U.S.?

Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while.  But foreclosures have a disruptive effect on the greater economy.  They hurt property values, they hurt banks, and they hurt employment.  The crisis is only slated to grow if nothing is done, with homeowners of every income class affected.  And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively.  By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort.  Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)

Time is of the essence. I commend the incoming Obama Administration for pledging up to $100 billion from the Troubled Assets Relief Program (TARP) to help distressed homeowners stay in their homes. In California, which has the highest number of foreclosures in the nation, we experience one foreclosure filing every 30 seconds to 1 minute. The TARP funds, which the U.S. Senate recently released, should be immediately put to use to rescue homeowners from foreclosure. Our economic recovery will not begin until we slow down the astronomical rate of foreclosures and stabilize the housing market.

Strategic direction is of the essence. The haphazard strategy of the Bush Administration’s use of the initial $350 billion in TARP funds resulted in the following: more foreclosures, less market confidence, and zero benefits for the ordinary citizen. How does giving yet another $20 billion to Bank of America so it can complete its purchase of Merrill Lynch’s brokerage arm help anyone on Main Street? Answer: it doesn’t. The only people this TARP money under the Bush Administration has been helping have been Wall Street firms. It is time for change and January 20th cannot come soon enough.

State efforts are of the essence. Helping our economy recover will require the combined efforts of both state and federal resources. In California, I introduced the California Foreclosure Prevention Act to provide immediate foreclosure relief. This Act imposes a foreclosure moratorium, but allows lenders to avoid the moratorium if they have a comprehensive loan modification program designed to keep people in their homes. Swift passage of this Act will complement and enhance proposed federal efforts. We need action and we need it now.”

However, more needs to be done.  Earlier this month, Democratic Senators got Citigroup on board for what is known as “cramdown” legislation, which would allow bankruptcy judges to restructure mortgages that would give homeowners the ability to pay them.  The lenders take a haircut but it’s a better situation for them than foreclosure, and those who get to keep their homes can continue to contribute to the economy.  It’s a great idea and a major step toward reforming the hideous 2005 bankruptcy bill.  Yet despite supporting it, Obama’s team doesn’t want to include this reform in the economic recovery package, which I think is a mistake.

President-elect Obama and his advisers are resisting attempts to include a provision in the economic stimulus bill backed by congressional Democrats that would allow bankruptcy judges to shrink mortgages.

In a hastily convened Democratic Caucus meeting last week, Obama economics adviser Jason Furman made it clear to lawmakers that Obama thinks the so-called “cramdown” provision would cost GOP votes and endanger bipartisan support in the Senate.

He committed to dealing with the issue after the bill passes, as did House Speaker Nancy Pelosi (D-Calif.).

Lead supporters of the cramdown provision say the time to deal with the issue is now. Rep. Jerrold Nadler (D-N.Y.) said it’s worth losing some Republican support to help homeowners.

“I would take that risk,” Nadler said. “I don’t think you’re going to get a lot of Republican votes anyway.”

This is absolutely correct by Nadler, and risking a few votes on the margins is no reason not to limit foreclosures now.  There is an urgency here, because each foreclosure hurts the housing market more and makes it less liable to recover quickly.  We cannot wait a few months for the sake of political expediency.  Cramdown needs to happen fast, particularly for us in California.

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.

The Schwarzenegger Administration unveiled a new budget plan today, calling for more tax hikes and increased borrowing.  One notable omission from the plan was Arnold Schwarzenegger himself.

“We are facing a major crisis, probably the most challenging budget situation the state has ever faced,” said Mike Genest, Schwarzenegger’s finance director. “The governor believes in acting immediately.”

Schwarzenegger is out of state and vacationing at the family residence in Sun Valley, Idaho.

That’s some amusing juxtaposition from the Sacramento Bee.

On to the proposal, which is little more than just a warmed-over recapitulation of earlier proposals the Governor has made, with some new elements from right out of fantasyland.

That plan called for a temporary increase in the state sales tax, expanding the sales tax to cover some services, a nickel-a-drink alcohol tax, a new tax on oil production and a $12 hike on vehicle registration fees. It also called for $15.4 billion in spending cuts, including requiring state employees to take two-days-a-month unpaid furloughs through June 30, 2010 and give up two paid holidays each year.

The new elements include reducing the dependent care exemption on state income tax returns from the current $309 per dependent to $103; carrying over some of the deficit into the 2010-11 fiscal year; borrowing funds from voter-created programs that service the mentally ill and pre-kindergarten children’s health services; changing the operating rules for the state lottery in an effort to make it more profitable, and borrowing $4.7 billion from the private sector.

If there’s one thing the private sector is desperate to do right now, that’s take it’s carefully guarded cash and give it to the state with the worst bond rating in the country.  They’re really dying to get that done.

The real patterns we see here are familiar to all of Arnold’s budget – a deep lack of concern for the most marginalized elements of society, and a hearty desire to break unions.  Schwarzenegger’s lowest point as a politician as maybe as a person was getting blown out in the 2005 special election.  He still believes the ideas he put forward in that election were sound, and blames unions for his defeat.  Thus you see Arnold going after union members’ livelihoods, insisting on state employee furloughs and generally trying to roll back labor protections that this state has held for decades.

In addition, there’s a recognition that this budget hole is impossible to fill without a magic angel.  The proposal names that angel “private borrowing,” but that’s just not going to happen.  The angel is going to have to be federal relief from a stimulus package.  California reducing its public spending by $10-15 billion at a time when no other entity can pump money into the economy is counter-productive and deeply dangerous to any recovery.  The feds are going to have to make up the gap.

Finally, a new proposal looking at the entire $40 billion dollar deficit suggests that the Governor isn’t interested in going forward with the $18 billion dollar work-around budget which he has been negotiating with Democratic leaders.  That would be a mistake, because of the exponential effect of continuing to do nothing in the immediate term.  Then again, if he were interested in action, the Last Action Hero wouldn’t be in Idaho right about now.

…if you want to go through it yourself, the budget plan is here.

…statements from legislative leaders on the flip.

Steinberg:

If the administration’s point today in putting forward a $41 billion solution is to try to impress upon us the urgency of the situation, it’s not necessary. We feel the urgency of the situation, and that’s why Speaker Bass and I and our staffs have been working diligently throughout the holidays to try to meet the administration halfway or more on their economic stimulus proposals. The fundamental problem, of course, with what the administration laid out today is that they don’t bring a single Republican vote to pass the revenue elements of their proposal.

Bass:

The governor’s proposal released today has one positive message: he may finally be coming around and realizing he needs to approve the responsible package of budget solutions the legislature passed December 18.

That package includes $18 billion in real cuts and new revenues to head off the cash crisis and take a big swipe at the deficit. It includes $3 billion in new funds for transportation projects and $3 billion in expedited projects voters have already approved. That means we’d be creating 367,000 new jobs at a time California needs all the new jobs we can get.

So far, legislative leaders have compromised, but the governor has been holding up these budget solutions and these new jobs. We’ve compromised by easing environmental restrictions for transportation projects. We’ve compromised by expanding public private partnerships. We’ve compromised by putting half a billion dollars in state employee compensation on the table.

The governor’s latest proposal assumes the cuts and revenues from the legislative budget solution package. That’s progress. So let’s get agreement on that package, keep California from going over the financial cliff, and then tackle the next round of hard challenges to find solutions to the rest of the deficit.

There are significant questions about what revenue the lottery can really bring in…there are concerns about whether California can manage the additional borrowing the governor is proposing … and there are problems with cuts that seriously harm the students in our schools.

All those issues can be addressed as we move through the rest of the budget process. Right now the most important step is for the governor to recognize that all his demands aren’t nearly important as the jobs we want created.

I appreciate the governor acknowledging today the necessity of the cuts and revenues the legislature approved and I hope the governor’s first act of the new year will be to sign the responsible package we are putting before him.

Villines:

Republicans believe the Governor took important steps to address California’s growing budget crisis by including budget reform and proposals to streamline government in his latest budget plan. We also join with him in making economic incentives and job creation a top budget priority.

We are also pleased to see the Governor has adopted the Republican’s proposal to let voters choose to redirect billions in existing tax dollars to protect the priorities of working families in these tough budget times. However, Republicans cannot support the Governor’s proposal to impose $14 billion in higher taxes on Californians. We believe this will devastate an economy already in turmoil and will hurt people who are struggling to make ends meet. Before we should even consider raising taxes on people, we need to take action to reduce government overspending starting with the elimination of all automatic increases, and enact an economic recovery plan to grow our economy and create jobs.

We cannot wait until the summer to enact responsible budget solutions for California. When the Legislature comes on Monday, we should vote immediately to pass the over $6 billion in common solutions that were in the special session budget plans put forth by Democrats, Republicans and the Governor. Taking urgent action to pass these reductions can get us through our immediate cash flow crisis. If we also take action now to get Californians back to work and to help stimulate our economy, we will be in a better position to address our state’s budget problem for next year and the years ahead.

(that’s cagey.  “We all agree on $6 billion in cuts, just do them now!”)

Cogdill:

I applaud the Governor for including elements of the Republican budget plan into the proposal released today. During these tough economic times, it makes sense to go back to the voters and ask them to redirect money for their intended purposes, such as children’s health and mental health programs, instead of sitting idly in the bank.

While Republicans have serious concerns about raising taxes during a recession, we appreciate that the Governor’s proposal includes difficult, but necessary reductions to bring state spending closer in line with revenues.

Instead of simply asking taxpayers to send more of their hard-earned money to Sacramento we should focus on economic stimulus. Growing and protecting jobs in California has a direct relationship to a robust state treasury. Stimulating our economy should be the Legislature’s top priority and it is unfortunate that the majority party has blocked these common-sense reforms to get more Californians back to work.

In addition, we need to ensure the state never again faces a deficit of this size by enacting long term structural reforms such as a spending cap and rainy day fund.

Republicans continue to stand ready to be a part of a responsible budget solution. The Governor’s early release of his budget underscores the magnitude of the state’s budget problems and the need for urgent action in addressing this crisis.

Paul Krugman has a good column today about how state balanced budget needs lead to perverse outcomes during an economic crisis that demands fiscal stimulus.

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers – state governors who are slashing spending in a time of recession, often at the expense both of their most vulnerable constituents and of the nation’s economic future.

These state-level cutbacks range from small acts of cruelty to giant acts of panic – from cuts in South Carolina’s juvenile justice program, which will force young offenders out of group homes and into prison, to the decision by a committee that manages California state spending to halt all construction outlays for six months.

As Krugman notes, it’s crazy to cut public spending at the same time that private spending is drying up.  It’s a recipe for a Hoover-esque depression with no investment or economic activity, and no way to increase consumer spending or create jobs.

Krugman acknowledges that balanced-budget rules are only a part of this problem in the states.

The answer, of course, is that state and local government revenues are plunging along with the economy – and unlike the federal government, lower-level governments can’t borrow their way through the crisis. Partly that’s because these governments, unlike the feds, are subject to balanced-budget rules. But even if they weren’t, running temporary deficits would be difficult. Investors, driven by fear, are refusing to buy anything except federal debt, and those states that can borrow at all are being forced to pay punitive interest rates.

Are governors responsible for their own predicament? To some extent. Arnold Schwarzenegger, in particular, deserves some jeers. He became governor in the first place because voters were outraged over his predecessor’s budget problems, but he did nothing to secure the state’s fiscal future – and he now faces a projected budget deficit bigger than the one that did in Gray Davis.

That’s absolutely true.  And the suffocating 2/3 requirement is most of the problem here.  But once we get out of this crisis, hopefully with some assistance from the federal government for Medicaid and public works, we need to think a little more creatively about how to reduce the risk of a state’s fiscal trap on the greater economy.  One idea is allowing state governments the ability to deficit spend, perhaps through the creation of some federal Stimulus fund that states facing certain deficits can tap.  This is the framework behind the National Infrastructure Bank proposed by Sens. Dodd and Hagel last year, but I would broaden it out.  There’s also the option of federal guarantees for state bond markets to increase investor confidence, or allowing states in a fiscal emergency to borrow at lower federal rates in the short term.  These are steps similar to those being used to bail out banks, with the Fed intervening in the commercial paper market, and they should be tools for the states as well.

With structures like this in place, just maybe we can phase out the balanced budget amendments that force these bad choices on the states.  Ultimately, California can’t ask for help until they help themselves.  The bond market will simply not improve until investors are assured that the state can manage its own affairs.  But after the failed Schwarzenegger Administration, the next governor should think seriously about giving the state flexibility in an economic downturn, rather than going along with the necessary steps to making things measurably worse.

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.

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 urge anyone who cares about California to listen to yesterday’s Which Way, LA.  It’ll make your hair stand up.  The program was about the decision by the Pooled Money Investment Board (basically Treasurer Lockyer, Controller Chiang and Schwarzenegger’s Finance Secretary Mike Genest) to shut down almost 2,000 public works projects, from schools for the deaf in Riverside to highway improvements along the 405, from hospital construction to transit projects and fire prevention services in heavily forested areas, affecting the entire state and as many as 200,000 jobs over the next several months.

The problem is that California is out of money. But it’s bigger than that.  The state floats revenue anticipation bonds to cover these kind of public works projects, and indeed the voters approved all kinds of infrastructure bonds in 2006.  The issue is that investors simply won’t buy them.  They believe that California will default on their commitments at some point or another (though it’s never happened before) due to the instability of the budget process.  Coming up with a work-around to get the budget more balanced (at the expense of hard-won labor rights for public employees, it appears) will go some of the way to fixing that, but NOT all the way.  We’re at a point of extremely low investor confidence.  California has the worst bond rating in the country.  So it’s not at all clear that the shovels will be picked up again even if the legislature passes and the Governor signs a budget deal.  The systemic budget cycle of catastrophe is what’s keeping investors away.  And of course, if the work-around falls apart or the courts strike it down, the state will be out of money in February and vendors will start receiving IOUs.

What’s more, if the Obama Administration offers massive infrastructure spending as part of a recovery package early in his term, EVEN THAT won’t necessarily get these projects going.  As I understand it, federal grants of this nature often require up-front money from the states, and the opportunity for matching funds if the state kicks in the first 25%.  At this time we don’t have that money, so we wouldn’t be able to access the match.  I assume Speaker Pelosi knows this, but it will be difficult to alter the standard practice on this kind of federal spending.

We’re talking about 200,000 lost jobs and an infrastructure shutdown at precisely the moment when infrastructure spending is seen as the key to economic recovery, with multiple obstacles to getting them going again.  And the state could be liable for whatever rises as a result of the shutdown:

Lockyer and other members of the Pooled Money Investment Board predicted that unless the state balances its budget, the funding shut-off will further harm the economy and expose the state to lawsuits.

“The likelihood of contract breaches is probably 98 percent,” Lockyer said […]

Also at financial risk is a new levee on the lower Feather River in Yuba County and a planned bolstering of Folsom Dam for flood protection.

Assemblyman Dan Logue, R-Linda, said the suspension of state funding for the Feather River levee project, already under construction, would put 40,000 people at risk in an area that has flooded twice in the past 25 years […]

“This (could) put tens of thousands of people’s lives at risk, and I believe the state will be liable if there is any damage,” Logue said. “The state is responsible for those levees in the first place.”

This looks to me like an unending nightmare.  If I were Hilda Solis or any California politician, I would want to get the hell out of this state too.  It looks like it’ll fall into the ocean.  But hiding from the problem is a mistake.  This has the potential to take down whatever economic recovery we may see come January.  The federal government needs to provide direct relief, not grants, to the state, or at the very least guarantee the bond issues so that we can restart the issuance of revenue anticipation notes.  You can run, but you can’t hide from California.

I want to publicly thank Jordan Rau and Patrick McGreevey for ripping off my “Scared Straight” moniker to describe yesterday’s joint legislative session.  This is par for the course with the traditional media creatively borrowing the work of bloggers without attribution.  Hey, at least our site didn’t send us into bankruptcy.

UPDATE: Mr. Rau, in a somewhat snippy but professional email, tells me he doesn’t read the site and the “Scared Straight” idea was independently his.  Fair enough.

As for the effectiveness of the “Scared Straight” session, which posited that all state infrastructure projects would be shuttered by the end of the year without a new budget, and that the state would be essentially out of money by February or March, and that doing nothing will make the problem substantially worse… well, let’s just say it could have gone better.

The Republicans, who attended reluctantly, refused to accept tax increases, instead emphasizing the importance of limiting state spending and ferreting out waste and bloat in existing programs.

“I didn’t see a lot of productive work there today,” said Senate minority leader Dave Cogdill (R-Modesto). “I think it was more about trying to heighten the intensity around this thing and push people to a place that they have been trying to push us to for a long time, and I don’t think it’s going to work.”

Sen. Dave Cox (R-Fair Oaks) held aloft two weighty yellow tomes produced by the last effort to trim state government — Schwarzenegger’s 2004 California Performance Review, which suggested 279 ways to save money by reorganizing the state bureaucracy. Almost none were adopted.

Look!  The answer is just holding up the performance review and shuffling around the bureaucracy!!!  Ahem…

In his comments, Mac Taylor, the Legislature’s nonpartisan fiscal analyst, described the folly of trying to close the gap either by taxes or through spending cuts alone. A tax-only solution would require increasing the sales tax by 2 cents, adding a 15% surcharge to the personal income tax and hiking corporate taxes by 2% — making all of those taxes the highest in the nation, he said.

Taylor said erasing the budget gap by cuts would require lawmakers to end all funding for the University of California and state universities, welfare grants, developmental health services, mental health and in-home supportive services.

It’s of course a red herring that Democrats are seeking a “tax-only” solution, one that Karen Bass sadly saw fit to perpetuate yesterday by stating “I think some of my colleagues on both sides of the aisle are living in denial, frankly.”  Um, every Democrat in the Legislature voted for a shared responsibility budget that raised revenue and implemented painful cuts.  If Bass doesn’t want to make the fight at all, she ought to let everyone know.  It’s not helpful to try and spread the blame equally.  We have a Yacht Party that has no intention of lifting a finger in the face of crisis.  In fact, they see it as their opportunity to drown government in the bathtub and eliminate the social safety net permanently.

This is why the state GOP is bordering on irrelevancy throughout the state (BTW, if you want to laugh, read Ron Nehring’s prescription for Republicans.  Clueless and pathetic).  Californians have thoroughly repudiated the Yacht Party vision.  However, this is true everywhere but in the legislative chamber in Sacramento, where the 2/3 budget and tax rule allows them to hijack the legislature.  In the long term, there is nothing to do but to capture a 2/3 majority and finish the irrelevancy project.  In the interim, California’s Democratic lawmakers are better off flying to Washington, DC, where at least they’ll have a chance of getting money for state and local governments in the new stimulus package, then staying in Sacramento, where they have no shot at breaking the stalemate.  That’s just reality.

Scared Straight didn’t work.  On to DC.

UPDATE: This is better from Karen Bass.  I’ll put the whole release on the flip, but she is, as she has been doing repeatedly throughout the crisis, calling for specific aid from DC.  A taste:

Meeting with California Congressional leaders and President-elect Obama’s transition staff, Assembly Speaker Karen Bass today outlined specific steps the federal government can take to boost California’s economy and ensure that the state can actually benefit from stimulus packages currently under discussion.

“Infrastructure investment is critical to getting the national and state economies back on track,” Bass said. “But the major spending cuts and tax increases that California and other states will need to balance our budgets could undermine the success of any infrastructure stimulus efforts. Today, I shared with Representative Barbara Lee from the Appropriations Committee and President-elect Obama’s transition office California’s  firm belief that direct federal assistance has to be part of an economic stimulus plan.”

more…

Bass was accompanied by Assemblymember Noreen Evans (D-Santa Rosa), Chair of the Assembly Budget Committee, who noted that California’s budget problems are directly linked to the revenue meltdown that followed the national recession and crises in the mortgage, credit and automotive sectors.

“We need federal aid because our troubled finances are the result of our nation’s economic downturn,” said Evans.  “$25 billion of our $28 billion deficit comes from a revenue drop after the October stock market crash.”

In their meetings Bass and Evans emphasized several specific avenues for potential federal aid:

Maximize California’s Federal Medicaid Assistance Percentage (FMAP). Although California has a large number of low-income and disabled individuals eligible for the program, we receive only the minimum 50% sharing ratio from the federal government.

Reauthorize the State Children’s Health Insurance Program (SCHIP). Most states, including California, are overspending their SCHIP allocation and have exhausted their prior year unspent allocations. Reauthorization by March 2009 is critical.

Increase Food Stamp Funding. In California, roughly 1.7 million people receive food stamp benefits. Increased funding means more food purchasing power for children, adults and senior citizens.

Further Extend Unemployment Insurance Benefits. With an 8.2% unemployment rate California would benefit from a further UI extension, improved UI coverage and increased administrative funding for states to deal with the increasing number of applicants.

Increase State Criminal Alien Assistance Program Funding. California spends approximately $1 billion per year to incarcerate an estimated 18,000 undocumented felons. However, for the fiscal year 2008-2009, the state will only receive $111 million in reimbursement from the federal government.

Increase Pell Grant Funding. The credit crisis has made it much more difficult for families to qualify for student loans, especially private loans. For FY 09, the estimated overall Pell Grant shortfall is $3.5 billion. Pell Grant funding should be increased to ensure that adequate funds are available for all eligible students.

Bass and Evans also stressed the need for infrastructure investments as part of federal stimulus packages, including investment in transportation, housing, flood control and green technologies:

Transportation:  Funding for California’s highways, transit systems, passenger rail and goods movements projects.

Housing: Housing construction related activities, foreclosure prevention and mitigation and housing market improvement policies.

Clean and Green Economic Sector: The economic stimulus infrastructure program should provide funding to help California achieve our renewal portfolio standard (RPS) goals through the siting, planning, and building of transmission lines, as well as funding for green job training programs for displaced workers, at-risk youth and veterans.

Flood Control Projects: California is eligible to receive $15M for flood control feasibility studies and over $112M for flood control projects. Federal funding should be provided for these important public safety projects.

“California stakeholders, including the legislature, the governor, city and county governments and other interested parties, are coming together to develop a list of projects and priorities for immediate federal infrastructure stimulus,” Bass said. “It is in the state’s best interest to speak with a united voice wherever possible in this process, so it’s important to have the stakeholders develop and vet such a list before making the case for individual projects.”

Bass added that the Assembly also intends to work closely with its Congressional partners as reauthorization of the Transportation Act approaches. Because reauthorization has such a potential impact on California and its economy, Speaker Bass will appoint a special Assembly Working Group in 2009 to help advance California’s interests throughout the reauthorization process.

If you want to know why Speaker Karen Bass is talking very loudly about a federal bailout for California, you just have to read the local papers.

The Merced Sen-Star:

At Tuesday’s board meeting Superintendent Terry Brace explained the district will lose $3.5 million under Gov. Arnold Schwarzenegger’s proposed budget plan.

If that passes, the district’s three percent reserve will be pushed to the limit to cover expenses. Brace said the aim will be to maintain educational programs first. After that, “we want to cut things and not people,” he said.

The Hanford Sentinel:

Kings County officials implemented a hiring freeze Tuesday as one of several measures to circumvent anticipated funding cuts from the state in the midst of a faltering economy. The county had already been on a limited or “soft” hiring freeze since July 1, the freeze affecting only positions that won’t affect the basic level of service. No reduction in staffing levels were being considered.

County Administrative Officer Larry Spikes says it’s a necessary measure to protect the county’s fiscal health in light of the worsening state budget crisis underscored last week by the governor’s call for a special session to close the deficit. Never before in California history has a governor called an “extraordinary session” so late in the year.

The Modesto Bee:

Efforts to close an $11.2 billion state budget deficit have shaken up the state’s Healthy Families program, which provides health care to about 13,300 children and pregnant women in Stanislaus County.

Next month, the state is preparing to freeze enrollment in the program, which provides medical, dental and vision care to children whose families earn too much to receive Medi-Cal but can’t afford private insurance. If the Managed Risk Medical Insurance Board approves the proposal Dec. 17, families trying to enroll children will be placed on a waiting list at least until June 30.

This is what’s happening in this state, at precisely the wrong time.  During an economic downturn, with the attendant job loss, people need more services, not less.  It’s the perverse cycle of constrained state budgets with their balanced budget amendments that they need to cut back precisely when they should be expanding.  In a downturn, government must be the spender of last resort, yet the state Constitution doesn’t allow it.  And cutting the budget to get it in balance during this greatest fiscal crisis since the Great Depression would be an absolute disaster.  And frankly, the Yacht Party isn’t going to agree to anything sensible.

It would be better for all involved if the entire Democratic caucus decamped from Sacramento to Washington and sat outside Nancy Pelosi’s office until a stimulus package with aid to state and local governments passed.  Otherwise, the local stories are going to get worse and worse.

So the legislature has scheduled a weekend vote on a new budget plan for the special session.  It could be that they will vote on Governor Schwarzenegger’s plan without modification.  In fact, that’s almost certain, because Denise Ducheny, the chair of the Senate Budget Committee, is in India until next Wednesday, and unless she’s holding hearings in Mumbai, I don’t think she’ll be marking anything up.

So what exactly ARE they going to vote on?

The basic political dynamic that caused a record-long impasse over the state budget last summer – Republicans blocking any new taxes, and Democrats vowing to protect services from deep spending cuts – has not changed. Even so, Schwarzenegger is expected to gather with the Democratic and Republican leaders this morning, after more than three hours of talks on Monday.

“We’re committed to making a dent in this problem with this Legislature and not waiting until Dec. 1,” Darrell Steinberg, the incoming Democratic Senate leader, said after Monday’s negotiations. But asked if he knew what legislators would be voting on Sunday during the scheduled floor sessions, he said, “We definitely don’t know yet.”

The Governor seemed to suggest in this weekend’s interview with George Stephanopoulos that his proposal would be changed before the vote, but I don’t see how that would happen.

STEPHANOPOULOS: Yet, your critics say that this one-and-a-half- cent sales tax is the most regressive form of tax. It’s going to hit the people who are going through the toughest times right now the hardest.

SCHWARZENEGGER: Well, no one should be that worried about any of that, because remember, the way it works is that the governor puts up a proposal, and then the legislative leaders go and start debating over that and looking into it, if they maybe have a better idea or a different idea. So we have a very collaborative kind of approach to the whole thing. So they may come up with different type of taxes.

Get to work, Sen. Ducheny!  Or maybe the hordes of lobbyists can come up with something.

Meanwhile, at this point, it seems like the best option for the state is to beg the Congress for aid.  The stalemate with the Yacht Party is overwhelmingly likely to continue, and the numbers that California would need to survive are dwarfed by the handouts to banks and other industries.  The Governor has been lobbying for support as well, and Speaker Pelosi appears to agree that some aid is needed.  Without that help, we’re going to see cutbacks even worse than lowering future enrollment at CSU by 10,000 students.  And sadly, it’s better at this point to seek help from Washington than Sacramento.