California Sinking

For several months, I have noticed a lack of context from the press when discussing California's housing situation. Sales of new and existing homes were rising, yes, but for a very good reason - all the bargains created by a spate of foreclosures. In fact, the correlation matches up perfectly - the regions with the highest sales also have the lowest prices. An example is the High Desert region, with a 203.1% increase in sales year-over-year, but a median price of $121,970, the lowest in the state. The latest data on home sales shows a 41% decline in price year-over-year. Bloomberg's story reinforces the theory that only foreclosures are selling. Does this mean that property values have decreased by a concurrent amount? Not necessarily. But it does mean that a non-foreclosed home in this distressed market has virtually no chance of selling, making it impossible to find the bottom of the market. The price of foreclosures does affect the price of all homes, which is why stopping foreclosures is so important.

But that effort will be stymied by the continued erosion of the job market, leading to more unemployed and more people losing their homes.

California unemployment will peak at just over 12 percent late this year, setting a modern record, according to the latest forecast from the University of the Pacific.

Recovery will come slowly. Unemployment won't sink back into single digits until late 2011, or some two years after the recession is expected to officially end, according to a forecast released Tuesday by UOP.

There's typically a considerable lag between the beginning of an economic recovery and a drop in the unemployment rate, as companies are slow to re-hire even after business perks up.

We're talking about two more years, at least, of significantly reduced revenue collection rates. All the homes selling for pennies reduce the overall property tax revenue. No projection of future revenues can reasonably be believed in this environment. And so we'll continue to see yawning gaps, with a governmental structure woefully equipped to deal with them. The so-called "reform" of Prop. 1A, to hoard revenue in positive economic years to use in down years, will be inoperative for the foreseeable future, and even when the economy retains balance, the revenue forecasts for any spending cap will be increasingly based on these horrible years, leading to a disaster without end.

In years when revenues fall short, the state could use the reserve to cover spending up to the prior year's level, plus an adjustment for growth in population and the Consumer Price Index.

But increases in the state's senior population and health care costs have been outpacing both those measures, said Jean Ross, executive director of the California Budget Project, a nonprofit organization that focuses on the effect of budget policies on low-and middle-income Californians.

Moreover, Ross noted that under Proposition 58, the 2004 ballot measure, the state will continue to send 3 percent of revenues to the reserve, which would be subject to the tighter controls of Proposition 1A.

“It takes 3 percent off the top of the budget, and we don't have that,” Ross said.

Ross and Michael Cohen, a deputy legislative analyst who studied the measure in depth, both said Proposition 1A could force revenue into the reserve even in years in which the state faced deficits.

My guess is that this is why the AFSCME local 2620 voted to support the measure and others on the ballot, while the overall union called for rejection. The lure of easy money might sound nice for the locals, but unions with experience with spending caps in other states know that they accompany disaster.

Simply put, the state's in an enormous amount of trouble and has no structures to deal with it. This argues strongly for blowing up the boxes, for real this time, and starting over, by repealing the rules that subject the budget to tyranny and building a new vehicle for reform.