So Very Screwed In California

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.

UPDATE: Bass and Steinberg didn't give away everything but they've incorporated some of Schwarzenegger's "economic stimulus" ideas (read: screwing California workers), and they're plowing ahead with the work-around without knowing if the Governor will sign it. Yikes.