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

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

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

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

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

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

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

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

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

Building off Brian’s post, George Skelton’s discussion of Prop. 1C gets things about right – the choice is between a terrible public policy and deeper debt.  Supporters of the special election will only show you one side of that argument, the expanding budget deficit that would result from failure, wrapping that into a fearmongering message of urgency.  Opposers of the special election prefer to look at the actual policy, which Skelton describes accurately.

Prop. 1C — the “Lottery Modernization Act” — is one of six budget-related measures proposed by the Legislature and Gov. Arnold Schwarzenegger. It is by far the measure with the biggest immediate money impact.

It would authorize significant tweaking and expansion of the state lottery, creating more winners. And it also would allow the state to borrow $5 billion immediately against future lottery revenue.

Those should be separate questions: 1) Should the state expand its gambling operation? 2) Should Sacramento take out a loan for, say, 30 years just to help pay one year’s worth of daily expenses? […]

You could also call it a payday loan. That’s how far Sacramento has fallen.

This is probably the easiest $5 billion the state can pocket, even if it would have to pay back double, including interest.

Put aside the fact that lottery revenues have dropped consistently over the past several years (per capita participation is among the lowest in the nation), and that, even if this scheme of more advertising and bigger payouts worked, you would be balancing the budget on the backs of a lottery-buying constituency composed mainly of the poor.  But borrowing policies like this, as a result of putting off tough decisions and mortgaging the future for 30 years, are why our deficit bursts at the seams relative to other states.  In the long term we will pay far more for this borrowing that could ever be brought in.  The solution from the legislature and the Administration, literally, is to not call it borrowing.  David Crane (Arnold’s economic advisor) initially makes a decent point, then hides behind the word “securitization” to mask the reality.

Crane maintains that both tax increases and government spending cuts slow economic recovery. Government programs are “a way of keeping more people employed,” he says. “In a recession, you want government to be counter-cyclical — the teeter-totter” to a falling private sector.

“The overriding principle is that, at a minimum, you want government to be retaining the same level of expenditures, if not expanding.”

Crane points to President Obama’s economic stimulus package, which is heavy on new spending.

Of course, the feds can run up huge deficits and print money. States can’t. And many California conservatives would rather see state government go belly-up than pay higher taxes.

Part of the distasteful remedy may be the lottery borrowing. Only don’t call it “borrowing” in front of Crane. It’s “securitization,” he insists. Future lottery revenue would “securitize” the state’s repayment of $5 billion in bonds.

This is a semantics game with political consequences. When the “borrow” word is used to describe the lottery proposal, I’m told, voter support for it drops by 25 percentage points.

Of course, it is borrowing – when you issue bonds and promise to pay them back later, you’re borrowing.  But the “securitization” model also masks the fact that California officials will have to go out into the market and find investors to buy debt based on future lottery revenues.  Despite the success of recent state forays into the bond markets, that’s not such an easy sell:

The ballot measure simply gives the state the legal authority to go out into the financial markets and find investors willing to purchase debt backed by a revenue source that has declined since 2005-06.

Before counting on quick cash from the sale of lottery bonds, it is worth reviewing borrowing-related assumptions made in recent budget agreements, such as the $1 billion in proceeds from the sale of EdFund booked as part of the 2007-08 budget agreement, a sale that was never consummated, or the $1 to $2 billion in proceeds assumed in various budgets from proposed, but never sold, pension obligation bonds. Or the $1 billion in proposed, but never issued, bonds for transportation programs that were to be repaid out of tribal gaming receipts. The careful reader may note a pattern here – a pattern that began long before the global meltdown in financial markets that has made obtaining loans more difficult for even the most creditworthy borrowers.

This isn’t a serious funding measure, it’s an accounting trick – a way to take $5 billion off the books quickly and easily with a minimum of pain.  It’s symptomatic of the failed solutions taken by this legislature and this Governor for years, which constantly try to push off solutions and never deal with the consequences (of course, the needy in this state always do).  That anyone would sink money into protecting this status quo speaks to a failure of imagination, and a willingness to delay fundamental reforms that must happen before it’s too late.

There was a report out yesterday about climate change that basically said we’ve reached a point where dramatic changes to the climate, to sea levels and to weather patterns were irreversible, that even if we dropped everything and eliminated every single carbon emission it would take perhaps thousands of years to return to equilibrium.  I feel the same way about California’s finances.  If every Yacht Party member suddenly turned into Paul Wellstone and we changed every revenue source and dysfunctional structural barrier, we’d STILL be in a world of hurt.  A couple stories today make that clear.

First, a coalition of emergency room doctors has had enough and is suing the state for additional funding to stave off a total collapse of the ER provider network.

Frustrated emergency room doctors filed a class-action lawsuit against the state Tuesday, saying that California’s overstretched emergency healthcare system — which ranks last in the country for emergency care access — is on the verge of collapse unless more funding is provided.

Across the state, scores of hospitals and emergency rooms have shut their doors in the last decade, leading to long waits, diverted ambulances and, in the most extreme cases, patient deaths.

Doctors say the situation is only getting worse. State officials, struggling to balance the budget, have proposed another $1.1 billion in Medi-Cal cuts.

“Are people truly suffering consequences? Absolutely,” said Irv Edwards, one of the doctors represented in the lawsuit and president of Emergent Medical Associates, which staffs 14 emergency rooms in California. “This could happen to you or me. We could be traveling through San Francisco or San Jose, get in a car accident, have a broken leg and end up in the ER, where it takes hours to be treated regardless of our screams. Then we get to diagnosis, and they say, ‘There’s no orthopedic on call. I’m sorry.’ “

ER doctors are required by law to treat whoever comes through the door, and rising ranks of the uninsured have stretched the system beyond repair.  Further, specialists are frustrated with the low reimbursement rates and are taking their names off of call sheets for referral in case emergencies require their services.  A physician on KPCC’s “Air Talk” today described the suit as a “canary in a coal mine,” warning that without increases in rates, not just restoration of funding but increases, there will be no emergency room network in California, period.

Then we have Standard and Poor’s downgrading the state’s credit rating for economic recovery bonds once again, meaning that investors will see a lower-than-expected return and will be far less likely to buy whatever else California sells in the future, which by the way is how we fund our state government.

Finally, you have two ignorant lawmakers, Arnold Schwarzenegger and Jerry Brown, asking the US to halt federal oversight of state prisons even though precious little has been done to manage the crisis.  Brown and Schwarzenegger are more interested in saving a few pennies than the Constitutional rights of those incarcerated.  The failure to understand this problem over 30 years have put these disgraced leaders in the position to lie to their own citizens because they can’t face up to their responsibilities.  And as the accountability for this shocking behavior is remote, there is no reason for it to stop.

State Attorney General Jerry Brown feigns to be shocked, outraged and appalled that a proposal to build prison facilities for older, chronically ill, physically impaired, feeble prisoners includes exercise rooms, TV rooms, gardens and natural light.

Taking all this away, as Brown surely knows, wouldn’t save much money – but it would make life difficult for prison workers to manage the prison population. Hey, why not take away air conditioning, too? […]

Brown whines that a federal court-imposed solution would violate “state sovereignty.” Yet he knows perfectly well that the state could avoid any court-imposed solution if it would simply take responsibility for a solution on its own.

One such solution had been proposed by the governor and was supported by legislative Democrats, a bond package for facilities. Senate Republicans killed it last May.

And nothing stops the state from working with Kelso on a negotiated settlement that would reduce the population of older, feeble, chronically ill prisoners or build facilities to house them.

But none of that is happening. Despite all the complaining about the federal courts, the governor, lawmakers and Attorney General Brown seem quite content to let the courts decide – deflecting blame to the judges and away from themselves for the choices that have to be made.

Jerry Brown doesn’t believe that prisoners are human beings and that they lost their Constitutional rights upon conviction, even if they are being held for the medical condition of drug addiction (which he ensured by opposing Prop. 5 in the most dishonest manner possible).  His attitude is retrograde and horrifying and shows a complete failure to account for his own actions.

He’s also the top candidate to be the state’s next governor.

We are past the point of no return.

(KQED here in the Bay Area will be airing live coverage at 10, as well as an hour of “pre-game” coverage on their Forum program at 9.  You can listen live here.  The California Channel will be covering it live as well. – promoted by Brian Leubitz)

Arnold Schwarzenegger delivers the State of the State Address at 10am this morning.  Typically he has done this speech to coincide with the evening news.  This year he’s trying to hide it.

I don’t blame him.  As David Greenwald discusses, people pretty much know the State of the State already.

As Governor Schwarzenegger prepares to report on the State of the State tomorrow, California’s families today declared that “the State of the People” is increasingly grim with a record number of Californians having lost their jobs and health care and their homes. California educators, students, health care workers, seniors and people with disabilities said more state budget cuts are exactly the wrong prescription after they’ve suffered the consequences of more than $16 billion in state budget cuts to critical services over the last 3 years.

“California families are here to report what you won’t hear from the Governor tomorrow: budget cuts over the last three years have deeply wounded our families’ health and well-being, diminished our children’s opportunity for the future, and damaged our economy.” said Evan LeVang, Director, Independent Living Resource Center of Northern California.

Californians who have personally been affected by budget cuts detailed the severe consequences that the cuts, including $10 billion in cuts already this year, have had on California families who have already been hit hard by the nation’s economic meltdown.

“Before our elected leaders slash another dollar from our hospitals, they should think about what health care would be worth to them if their husband, their daughter, or their father needed care. Because every patient that comes to our hospital is someone’s parent, spouse, or child,” said Beverly Griffith, an environmental services worker and SEIU member at Summit Medical Center in Oakland. “While longer hours and staff shortages caused by budget cuts have been rough on hospital workers, they’ve been unbearable for our patients.”

And of course, this is bound to get worse.  It’s important to split the two major problems into their discrete parts – we have a budget crisis AND a cash crisis.  Even if the budget hole is at least partially filled (and with any luck, we’ll be able to access some federal stimulus money, either through direct payments or tax revenues on increased economic activity, by February), the cash crisis would persist, and we could see IOUs even after a budget deal because of the inability for California to go to the bond markets and borrow.  And the converse is also true.  In sum, it’s a different problem which needs a different solution.  The LAO is obscure here, but I believe “restricted funds” refers to Prop. 98 money:

The Legislature’s budget analyst, Mac Taylor, says that schools, colleges and bondholders will have first call on the state’s money if its cash flow crisis hits home in a few weeks.

But Taylor says in a report on the looming cash flow crisis that even if the Legislature fails to reach agreement on closing the state’s budget deficit, the cash crisis could be relieved with some emergency legislation to allow more internal borrowing of restricted funds.

Gov. Arnold Schwarzenegger and legislative leaders have been conducting closed-door negotiations this week on both the budget and the cash crisis, which are related but separate issues. Controller John Chiang has said that the state will be forced to curtail state disbursements sometime in February unless there’s rapid action on the budget and/or cash flow-related legislation […]

The administration has asked the Legislature to approve measures that would free up about $2 billion in restricted funds that could be borrowed by the state general fund and thus stave off the cash crunch. It’s also said that rapid action on the budget would allow the state to defer more than $1 billion in payments to schools that otherwise would have to be made.

As a budget solution would at least have some impact on loosening the bond markets, this could be the intent of Schwarzenegger’s delay – so he can raid dedicated funds for schools and health care.  It’s important for us to start figuring out Arnold’s gambit.  When I talked to State Senator Fran Pavley at one of the election meetings last weekend, she said “It’s hard to negotiate with someone if you don’t know what they want.”  My next several posts here will seek to figure that out.

Anyway, you’re not going to hear it at 10am, I gather.

“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.  

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.