Ruled By Neo-Hooverists

What leaped out of last Friday's pathetic jobs report for a lot of people was the significant drop in employment for government workers, particularly at the state and local level:

The latest jobs numbers from the Labor Department are out. In the past, we’ve noted the protected status of government workers. While private sector payrolls were falling like a stone, government employment at every level was growing. In recent months it had been falling slightly, but still remained above its pre-recession levels.

No more. In September, state and local government payrolls fell below the levels of December 2007, when the recession began. The declines indicate the pain that state and local governments are feeling from severe budget shortfalls, despite the $787 billion stimulus package last winter.

There's a very good reason that the stimulus package failed to avert this drop in state and local government payrolls. During the stimulus debate, Presidents Ben Nelson and Susan Collins decided to drop $40 billion dollars in state-based aid that would have gone directly to saving these jobs. Presumably faced with no choice to clear the 60-vote cloture hurdle, Democrats and the Administration went along, and that state aid vanished. So unsurprisingly, as a result, state worker jobs have vanished right along with it. That translates to hundreds of thousands of jobs all over the country that would have meant hundreds of thousands more consumers with spending money, hundreds of thousands more people off the unemployment insurance rolls and contributing to state budgets rather than taking from them, hundreds of thousands more people providing help and aid to others who have trouble getting it due to scaled-back state workforces.

It was a terrible, terrible idea. Especially because the woes for state budgets are only beginning, and what aid did come with the stimulus will probably run out before state economies recover.

History suggests it could take six or more years for sales and income taxes — which make up roughly two-thirds of states' revenue — to return to pre-recession levels. That augurs deeper cuts to state jobs and services in order to maintain funding for core programs such as public schools and Medicaid.

What's different from the three previous recessions, which took states three to five years to recover from, is that employment and consumer spending aren't expected to bounce back as quickly.

To balance their budgets in the meantime, states are likely to further raise taxes on the money people earn and spend; increase college tuition; reduce funding for the arts and other cultural programs; and push costs into the future by delaying pay raises for employees and repairs of government buildings. Some states, including Massachusetts, Missouri and Arizona, already are making or considering fresh cuts just months after lawmakers agreed on new budgets.

I would say that $40 billion dollars in direct aid could have gone a long way right now and in the future. But instead, we are ruled by neo-Hooverists.

Remember These Moments

True to the reality of a weak political media and an inattentive public, the chatter over the results of the July budget revision, despite major cuts to the social safety net, has completely subsided. No taxes got increased and nobody "important" got hurt, so it was just time to move on. Politicians just move on to the business of raising corporate money, special interests can move on to the business of writing laws that help their bottom line, and everybody in Sacramento can praise everybody else for "sacrificing" to get things done.

Only, for the people living under the consequences of these budgets, created through a choice not to properly pay for needed services, the budget battle is not forgotten. And it doesn't consist of a group of numbers in a column. It's entirely real and it hits them every single day. Here's just one example.

Six domestic violence shelters in California have been forced to close while dozens more are scaling back services after Gov. Arnold Schwarzenegger eliminated all state funding for the program that supports them.

Shelters in the Central Valley town of Madera, the Sierra foothill town of Grass Valley and in Ventura County in Southern California have closed. Others in the San Francisco Bay area, Los Angeles and Bakersfield are on the verge of closing.

Many centers are laying off staff and closing satellite offices that serve remote areas of the state as they cope with the budget cuts. A national domestic violence group describes California's as the deepest cuts to such programs nationwide, even as other states have reduced funding.

In Madera County, officials have turned away six domestic violence victims and eight children since the county's only shelter closed Aug. 7, said Tina Figueroa, the shelter's director. The Martha Diaz Shelter served about 100 victims a year, many of them low-income and with no place else to turn, she said.

So 100 victims of domestic violence in smallish Madera County now have truly nowhere to turn, and will either suffer under the boot of their abusive partners or, in many cases, be killed by them. The director of domestic violence policy in the LA City Attorney's office pretty clearly calls these programs "homicide prevention." It also saves money relative to what you spend prosecuting the eventual homicides. I've seen "tough on crime" conservatives over the years invoke the name of victims and stir up public support for laws in their name. They go curiously silent when hundreds of domestic violence victims are put at risk of death because they want to save rich people and corporations from having to pay for their fair share of the commons.

These closures are the direct result of line-item cuts by the Governor. So the blood is on his hands. Leland Yee has a bill that attempts to cover the domestic violence shelter budget with cash from a crime victims fund, but under 2/3 rules, it's not likely to pass this week.

Kudos to the AP for doing a story on this; but there need to be many more. There's a human face on the budget cuts that has completely been lost and forgotten. Those suffering are right to suspect that nobody in Sacramento cares about them.

Parsky Commission Looking To Spring A Surprise On California?

When business groups began to object to various provisions in the Parsky Commission effort to upend the tax structure in California, including anything that even smelled like an increase (even though the plan had to be revenue-neutral to clear the Legislature), I figured the effort was dead and buried. It appeared that the entire effort was a complete waste of time, and the effort to Latvia-ize the state by shifting the tax burden from the upper class to the lower class had been sniffed out and extinguished. However, the recent secrecy on the part of the commission, after a pledge of transparency, has many wondering if the shock doctrine is alive and well.

The plan is that, just about 24 hours from now — or 11 a.m. Thursday, to be precise — a state commission will consider and potentially adopt a proposal for an entirely new tax system for the state of California.

It would be a radical undertaking, slashing some taxes, eliminating others and establishing a new tax about which no one in California is familiar. No one can say with anything approaching certainty how much it would cost businesses and consumers or how much revenue it would generate to finance state services.

Yet, despite the significance of the task, despite all the unanswered questions and despite the imminence of a decision, as of this writing — midafternoon Tuesday — the details of the proposed new tax plan have not been made available for public review.

A spokeswoman told me a little after 3 p.m. there was still hope that the detailed proposal would be posted on the commission’s Web site before the day was out.

The Legislature has made no indication that they would take up whatever plan the Parsky Commission votes out, even after the Governor orders a special session to deal with it. And with both sides of the aisle condemning aspects of the plan, liberals for the tax burden shift, and conservatives for the unknown tax increases that may be part of any deal, I wouldn't call the prospects likely for a Parsky Commission plan to become law. But the secrecy is certainly troubling, as well as the revival of provisions voted down by the people on multiple occasions.

But members of the tax commission are reviving the rainy-day fund idea once again. Most notably, the idea has had some of its strongest support from Democratic-appointed commissioners.

Former Assemblyman Fred Keeley said recently that while many commissioners believe the state can reduce its budget volatility through changes in the tax system, he believes the tax system isn't so much the problem.

"My belief is that volatility of the general fund, to the degree it's a problem, is due to the governor and Legislature with regard to spending," Keeley said. "That can be solved by way of an appropriately designed rainy-day fund or lockbox."

Another Democratic appointee, University of Connecticut law professor Richard D. Pomp, reminded the commission this month that he has long believed the reduction of volatility was a spending issue.

"From the outset, I have argued, and continue to believe, that volatility, which is a feature of every state's tax system, is a spending problem and not a tax problem," Pomp wrote. (That comes awfully close to the oft-used GOP line that California's budget problems are "a spending problem, not a revenue problem.")

I think these Democrats are trying to argue that volatility in the tax structure is a good thing, which it is. But the leap from that to a spending cap doesn't follow. There's a difference between spending wisely in good years and a third-party mechanism that limits the ability to restore chronic budget cuts from bad years, which is what a cap would inevitably do. (A rainy-day fund without a cap would be different, but may end up serving the same purpose.)

I stick with my prediction that the commission is doomed, but it still bears watching.

...Kevin Yamamura has more.

Insurer-Assisted Suicide

The Washington Post today becomes yet another media outlet to detail the practice of rescission, whereby insurance companies go through your application form with a fine-toothed comb and look for any excuse to drop you from your coverage - but only after you try to use it to get treatment. They're perfectly fine with what they call "medical fraud" as long as you're just paying them your premiums. It's when you want to receive health care that fraud becomes the greatest threat facing the Republic.

The problem is that rescission just isn't a snappy enough description of the actual circumstance. I prefer "insurer-assisted suicide":

The untimely disappearance of Sally Marrari's medical coverage goes a long way toward explaining why insurance companies are cast as the villain in the health-care reform drama.

"They said I never mentioned I had a back problem," said Marrari, 52, whose coverage with Blue Cross was abruptly canceled in 2006 after a thyroid disorder, fluid in the heart and lupus were diagnosed. That left the Los Angeles woman with $25,000 in medical bills and the stigma of the company's claim that she had committed fraud by not listing on a health questionnaire "preexisting conditions" Marrari said she did not know she had.

By the time she filed a lawsuit in 2008, she also got a diagnosis of pancreatic cancer and her debts had swelled beyond $200,000. She was able to see a specialist by trading office visits for work on the doctor's 1969 Porsche at the garage she owns with her husband.

"I've had about 10 visits," Marrari said of the barter arrangement that has proved more reliable than her insurance. "The car needs a lot of work."

And where would Mrs. Marrari be if she didn't have a garage that could work on Porsches?

Nobody knows how much money has been saved through insurer-assisted suicide; three insurance companies admitted in a hearing this summer that they've cancelled 20,000 over five years at a savings of $300 million dollars. Given that amount of money, the fact that California's five largest insurers have paid around $19 million to deal with rescissions seems like a drop in the ocean. Here's something that's not in the article: when Anthem Blue Cross challenged the fine placed on them for rescinding policies, state regulators never even tried to file suit because they figured they would be outgunned in court.

"This is probably the most egregious of examples of health insurers using their power and their resources to deny benefits to people who are most in need of care," said Gerald Kominski, associate director of the Center for Health Policy Research at the University of California at Los Angeles. "It's really a horrendous activity on the part of the insurers." [...]

In the only case to go to trial in California, an arbitration judge awarded $9 million to a beautician who had to stop chemotherapy for her breast cancer after Health Net dropped her policy. Company officials declined to comment.

In a pending case, Blue Shield searched in vain for an inconsistency in the health records of the wife of a dairy farmer after she filed a claim for emergency gallbladder surgery, according to attorneys for the family. Turning to her husband's questionnaire, the company discovered he had not mentioned his high cholesterol and dropped them both. Blue Shield officials said they would not comment on a pending case.

You might be wondering whether there's a mechanism to stop rescission in the current plans on the table. The President and Democratic leaders would certainly tell you that's the case, if only by banning the refusal of coverage for pre-existing conditions. However, as seen from the paragraph above, the fines they may incur as a result will either be seen as the cost of doing business or a fine that will never be enforced. In addition, there are plenty of additional ways to evade responsibility.

If federal health-care reform bars companies from screening for preexisting conditions, insurers note that cancellations will no longer be an issue. But Melinda Beeuwkes Buntin, an economist at the Rand Corp., said that unless for-profit companies are compensated for taking higher-risk patients, the firms will continue to look for ways to unload them.

"They wouldn't be able to overtly kick you out, but that doesn't mean that they might not put, for example, more onerous preauthorization requirements on services that people who are at risk might need, and that might discourage you from re-enrolling next year," Buntin said.

As long as insurers' incentive to make a profit diverges from caring for their customers, insurer-assisted suicide will always be a reality. And as we've seen, balkanizing the enforcement to the state level instead of having a federal regulator cracking down on this will put the enforcement at the mercy of fragile state budgets and haphazard state regulators. Here is the entire enforcement mechanism, as far as I see it, in the Baucus draft plan from the Senate Finance Committee:

Ombudsman. In 2010, states would be required to establish an ombudsman office to act as a consumer advocate for those with private coverage in the individual and small group markets. Policyholders whose health insurers have rejected claims and who have exhausted internal appeals would be able to access the ombudsman office for assistance.

Yay, the states get an ombudsman! And he or she can only be tapped if individuals "exhaust internal appeals"; that is, beg their insurers to stop cheating them. And since the states will be establishing the office themselves, they'll set the budgets and choose the staff - meaning that we'll potentially be leaving enforcement of insurance regulations in Texas and South Carolina, for example, to Rick Perry and Mark Sanford.

Ultimately, those fighting for a public option are fighting for some way out of this Chinese box, where insurers have control over the health care you receive, and can just as easily deny your coveage as they can allow it. All of the regulations in the world won't mean a thing without proper enforcement, and this won't cut it.

A California Economy In Free Fall

Whether it's the continued foreclosure crisis, the impact of state budget cuts or the cumulative effect of depressed consumer spending, it's now extremely clear that the state's employment picture shows no sign of bottoming out, reaching an all-time high in the post-war period.

California's unemployment rate took an unexpected leap in July, reaching a post-Word War II high of 11.9%. The increase contrasts with the national rate, which declined slightly over the same period, and reflects ongoing weakness in the state's battered construction and financial services industries.

The state lost a net 35,800 jobs last month, more than any other state, the U.S. Labor Department said today. It has lost 760,200 jobs over the last year.

Every category of nonfarm jobs in the state except education and health services experienced year-over-year losses. The construction sector was the hardest hit, shedding 18.6% of its jobs. Manufacturing jobs fell 8.7% from the same time last year.

Job loss did slow relative to the previous two months. But I don't think anybody believes that 11.9% is a floor. Los Angeles, where the jobless rate jumped 0.7% in just a month, is one of the worst big cities to find a job in America. The city has 15,000 homeless veterans. And areas of the Central Valley and the Inland Empire are in far worse shape. It's basically a depression in those parts.

And we are just starting to add a round of painful state budget cuts to increase the economic shortfall. Whether it's closing parks that provide economic benefits, or dropping or cutting aid to 100,000 IHSS recipients, or wiping out the entire domestic violence budget, the cuts will not only force the poor and infirm to slip through the cracks and cause mass suffering and even death, but the economic impact will be profound. Caregivers will lose their jobs. Relatives will shift their schedules to care for their families. Productivity will reduce. It's just a plain fact that lowering public spending during a deep recession will negatively impact the economy. Consumers aren't spending, companies aren't trading and businesses aren't investing. Government is the spender of last resort. And that spending has been slashed.

I honestly don't know where the bottom is.

Department Of National Pundits Who Know Nothing About California, Aug. 3 Edition

We've already seen a trend of national columnists using California's budget woes to conveniently push whatever obsession they want. Two more of these land on the nation's most august op-ed pages today, both of them inaccurate and out of touch with the nature of the situation here in the Golden State.

First we have fiscal scold Robert Samuelson trying to use California's budget crisis to make a larger point about a national "fiscal reckoning." He claims that California has "made more promises than its economy can easily support," as has the nation, and only fiscal austerity can remedy the problem.

On paper, the state could solve its budget problems by raising taxes further. But in practice, that might backfire by weakening the economy and tax base. California scores poorly in state ratings of business climate. In a CNBC survey, it ranked 32nd overall but last in "cost of business" and 49th in "business friendliness." Information technology (Intel, Google, Hewlett Packard) and biotechnology remain strengths, but some traditional industries are struggling. High costs, as well as tax breaks from other states, have caused movie studios to shift production from Southern California. In 1996, feature films involved 14,500 production days in the Los Angeles area, says FilmL.A.; in 2008, the figure was half that.

So California is stretched between a precarious economy and a strong popular desire for government. The state's wrenching experience suggests that, as a nation, we should begin to pare back government's future commitments to avoid a similar fate. But California's experience also suggests we'll remain in denial, prisoners of wishful thinking, until the fateful reckoning arrives in the unimagined future.

Ezra Klein does a pretty good job with this column, noting it provides a lesson for the difference between fiscal responsibility and fiscal conservatism. Samuelson, of course, is the latter, wanting a low-tax, low-spending country. Rather than arguing for a balanced solution, Samuelson eschews taxes due to the "business climate," even though many businesses cite the lack of investment in education and infrastructure that Samuelson is CALLING for as a reason for their concern about their future in the state. In addition, the "businesses are leaving California" argument is a myth applied to all states by fiscal scolds as a means for them to race to the bottom and provide as many corporate tax breaks as possible. Which California has done, to the tune of $2 billion a year, at a time when funding for state parks and domestic violence shelters and poison control units gets slashed. Ezra adds:

Samuelson implies otherwise, but California isn't a particularly high-taxing state. Total state and local taxes take up 11.73 percent of the average Californian's income. The national average is 11.23 percent. And it's been like that for many years [...]

Nor is California's spending on education somehow out of the ordinary. The state ranks 29th in the country on education spending (much lower per pupil; try 47th -ed.). And recent tax cuts haven't been helping the Golden State out. This graph from the California Budget Project shows the contribution that decades of tax cuts have made to the state's current fiscal crisis. It's a pretty depressing story [...] The budget deal that Arnold Schwarzenegger just accepted contained $15 billion in spending reductions. Absent the tax cuts of the last few decades, most of those reductions wouldn't be needed (add the vehicle license fee increase and you're talking about a surplus -ed.).

Samuelson is essentially making an argument about the kind of government he likes, using the California situation to illustrate it, the facts be damned.

Next up is Ross Douthat, who uses the California mess and contrasts it with Texas to create some notion of red states faring better in the recession, also at odds with the facts:

Consider Texas and California. In the Bush years, liberal polemicists turned the president’s home state — pious, lightly regulated, stingy with public services and mad for sprawl — into a symbol of everything that was barbaric about Republican America. Meanwhile, California, always liberalism’s favorite laboratory, was passing global-warming legislation, pouring billions into stem-cell research, and seemed to be negotiating its way toward universal health care.

But flash forward to the current recession, and suddenly Texas looks like a model citizen. The Lone Star kept growing well after the country had dipped into recession. Its unemployment rate and foreclosure rate are both well below the national average. It’s one of only six states that didn’t run budget deficits in 2009.

Meanwhile, California, long a paradise for regulators and public-sector unions, has become a fiscal disaster area.

Douthat also throws in the "rich businesses and rich people are fleeing California" canard, which as stated above is untrue about businesses and even less true about rich individuals.

Steve Benen deconstructs the argument about Texas being a great economic steward and California a basket case, and the reasons why. As Benen says, Texas is the worst state in America for the uninsured and the second-worst state for poverty rates. To conservatives who judge the progress of a state by the budgetary balance sheet and not the prosperity of the citizenry, I'm sure they are a model citizen.

Meanwhile, calling California a "liberal laboratory" and not recognizing the source of the crisis, namely the conservative veto on the budget process, speaks to Douthat's complete ignorance about the nature of the state. In addition, as Paul Krugman notes, there is no correlation between a state's perceived ideology and their economic performance (two of the highest-unemployed states are South Carolina and Tennessee), nor is there any correlation between the level of taxation and the current unemployment rate.

I know that the dysfunction of what is seen on the national level as a blue state is an inviting target for conservative columnists to spin some wider tale about liberal failure and conservative ascendancy. If only they had any knowledge of the actual facts involved.

The Larger Context

California's troubles have been well-documented. But as I've said on multiple occasions, while we may be an acute example of the problems with state budgets in an economic downturn, we are not alone. And the decisions, some forced, some unforced, of the nation's governors in responding to these challenges are unquestionably threatening economic recovery.

It’s easy enough, of course, to mock state governments nowadays, what with California issuing I.O.U.s to pay its bills and New York’s statehouse becoming the site of palace coups and senatorial sit-ins. But the real problem isn’t the fecklessness of local politicians. It’s the ordinary way in which state governments go about their business. Think about the $787-billion federal stimulus package. It’s built on the idea that during serious economic downturns the government can use spending increases and tax cuts to counteract the effects of consumers who are cutting back on spending and businesses that are cutting back on investment. So fiscal policy at the national level is countercyclical: as the economy shrinks, government expands. At the state level, though, the opposite is happening. Nearly every state government is required to balance its budget. When times are bad, jobs vanish, sales plummet, investment declines, and tax revenues fall precipitously—in New York, for instance, state revenues in April and May were down thirty-six per cent from a year earlier. So states have to raise taxes or cut spending, or both, and that’s precisely what they’re doing: states from New Jersey to Oregon have raised taxes in the past year, while significant budget cuts have become routine and are likely to get only deeper in the year ahead. The states’ fiscal policy, then, is procyclical: it’s amplifying the effects of the downturn, instead of mitigating them. Even as the federal government is pouring money into the economy, state governments are effectively taking it out. It’s a push-me, pull-you approach to fighting the recession.

The stimulus package provided some money for state fiscal stabilization, but that turned a package designed to create jobs and circulate money into the economy into simply a life raft. The states have both sucked up some of that money and directly counteracted it through their actions, so that an already too-small stimulus shrinks even further. State and local governments are 1/8 of our total GDP, and their fiscal austerirty in the midst of crisis has a very damaging economic effect.

In this article, James Surowiecki argues that federalism is starting to crack in the face of extreme economic calamity. Some of the elements of the stimulus that are national priorities - high speed rail, a smart national power grid - must be funneled through an inefficient and often dysfunctional state and local process. It simply makes things difficult to have so much decentralization in projects designed to move across state lines. So what can be done? We can move big items like Medicaid under federal control with local administration. Or we can set up a permanent federal fiscal stabilization fund, maybe kicked off in a second stimulus, to massage the states through tough times. It's almost a rainy day fund at the federal level.

But something must be done. We are destroying ourselves from within by leaving things as they are.

Yay Deal.

You may have heard this by now, but we have a deal. The #cabudget hashtag should get you your fix. The topline stats:

$15 billion in cuts, no new taxes, $11 billion in gimmicks and borrowing
$4-5 billion in local government raids
only an $800 million reserve (initially the talks were for a $4 billion one)
$6 billion in reductions to public schools, but an $11 billion dollar payment somewhere down the road though not in writing
yes, there's new offshore drilling in this deal, going around the Lands Commission, and without an oil severance tax for the producers
$1 billion assumed for the sale of the State Compensation Insurance Fund, which is not only unlikely but would really crush small businesses if sold
no suspension of Prop. 98
basically a reinvention of state government, more austere, and precisely when folks need the opposite.

Story here.

...three furlough days a month for some state employees still in place for the rest of the year
$500 million in cuts to Cal Works
smiles all around from Dem leg. leaders as they cheer that "we did not eliminate the safety net for California." Poking a big hole in it, apparently, qualifies as A-OK.

...we're also cutting $1.2 billion to corrections without releasing any prisoners, as per the actual politics as usual. The only way you can do that is by cutting every treatment or rehabilitation program in the prisons, or eliminating overtime for corrections officers. In other words, we're turning prisons into Public Storage units.

...Just to state the obvious, only the Republican leaders have agreed to this. We still aren't through the process where individual Yacht Party members have to be bribed for their votes.

Of course, we aren't through the process where progressives just say "no we're not voting for that, try again," but I've never seen that process come into play.

...per John Myers, these are the main cuts:

$6 bil K-14
$3B higher ed
$1.3B worker furloughs
$1.2 B corrections
$1.3 B Medi-Cal
$528 M calworks
$211 IHSS

...yes, the Dems gave in on the Governor's anti-fraud measures not associated with the budget, making me wonder what that whole hissy fit from Bass where she refused to negotiate was all about. Background checks and fingerprints for IHSS and welfare recipients are in, with the wholesale goal of kicking eligible people off of the rolls. IHSS salaries remain at $12.10/hr. The Integrated Waste Management Board is el foldo. Some state parks will close. If you're wondering what Democrats got out of this deal, you're not alone.

Deal Talks Break Down Over Prop. 98 Suspension

Hopes for a deal on the California budget faded last night as the Big Five could not agree over the big issue of whether and how to suspend Prop. 98, the mandate for education funding.

The education money discussion is not new; much of it dates back to the February budget negotiations, which resulted in a ballot measure asking voters to offer blessings upon a supplemental payment. Voters rejected that measure, Proposition 1B.

And as with most education financing debates, this one lands squarely back at the maze of formulas and calculations that embody the 21-year old funding guarantee enshrined into the state constitution by voters, Proposition 98.

In a nutshell, the current debate focuses on whether schools are owed money in the future to make up for some of the recent spending reductions, and whether that obligation (the so-called "maintenance factor") should be codified in law as part of the current $26.3 billion deficit deal.

"The Prop 98 law is so confusing," said Senate President pro Tem Darrell Streinberg to a throng of reporters outside the governor's office, "that we want to make sure that there is clarity."

My belief is that education leaders will win this money in the courts, no matter how long Arnold and the gang put it off. The lawsuit has already been filed. The Democratic leadership want to just deal with the $11 billion dollars in essentially stolen money from schools inside the budget agreement by promising the money in the out years, while the Republicans and Arnold don't.

So if you wanted a 2010 campaign slogan, you have the source material.

It looks to me like Arnold is holding out simply so he can prove a point. His effort to insert privatizing social services eligibility at the last minute is flawed enough that even the Yacht Party might have trouble stomaching it. The proposed cuts in the deal are really intolerable but not what the Governor promised at the outset. It's unclear whether the Governor will get his anti-fraud provisions, also inserted late into the process. And it's completely unclear, given the deal likely to come out, why we had to wait two weeks for virtually the same deal.

Whatever budget deal ultimately is passed -- and in this economy it'll only be a temporary fix, at best -- virtually the same agreement could have been reached weeks ago [...]

Democrats produced a stop-gap plan supported by Assembly Republicans that would have staved off IOUs. They proposed $3.3 billion in cuts to education and other programs that would have kept the cash flowing, at least for a few weeks. It would give them time to negotiate more cuts. Schwarzenegger rejected the idea and persuaded Senate Republicans to follow.

That's where the governor began bobbling the ball, although his coaches figured he was playing to his fan base, what's left of it.

Issuing IOUs will cost the state roughly $26 million in interest for July, the state controller's office estimates. The IOUs also prompted Wall Street bond rating agencies to lower California's credit to near junk status. That potentially could cost the state $7.5 billion over 30 years, according to the treasurer's office.

Schwarzenegger, aides say, calculated that Democrats wouldn't negotiate seriously without facing a deadline, such as the latest: most banks refusing to accept IOUs. Negotiating piecemeal would get nowhere, the governor believed.

But he might have dodged IOUs completely. Guess it doesn't rankle much that the state he has governed for nearly six years must now pay bills with scrip.

Schwarzenegger's clumsy attempt at the Shock Doctrine, when the deal Democrats were willing to agree to was painful enough, was about as irresponsible as a chief executive could be.

The Airbrush Of Human Beings From The California Budget Crisis

Peter Schrag is one of the few columnists left in this state who consistently makes sense, and today he attacks that silly NYTimes article about California, in particular the elements of conventional wisdom:

In his passing references to California’s serious issues, many of which have major implications for the nation as a whole, Leibovich collects pieces of the conventional wisdom, even when, as in his facile summary of the causes of gridlock in Sacramento, it’s wrong. Since Democrats have again and again agreed to multi-billion dollar cuts, it is not, as he thinks, just a matter of “’no more taxes’ (Republicans) and ‘no more cuts’ (Democrats).”

And while Jerry Brown, in his prior tenure as governor was indeed labeled “Governor Moonbeam” (by a Chicago columnist) for his space proposals, as Leibovich says, the label applied much more broadly to his inattention to the daily duties of his office and, most particularly to his dithering while the forces that produced Proposition 13 began to roll.

Brown later acknowledged that he didn’t have the attention span to focus on the property tax reforms that were then so urgently needed to avert the revolt of 1978. But to this day, almost no one has said much of Brown’s role in creating the anti-government climate and resentments that helped fuel the Proposition 13 drive.

It was the Brown, echoing much of the 1970s counter-culture, who, as much as anyone, was poor-mouthing the schools and universities as failing their students and who threatened to cut their funding if they didn’t shape up. It is Brown who spent most of his political career savaging politics and politicians, even as he ran for yet another office. Now this is the guy who wants to be governor again. But Leibovich doesn’t tell his readers that long history. Maybe he doesn’t know it.

The line about how those who fail to learn from history are doomed to repeat it can be inserted here. But Schrag hits on the most important failing of the article, and indeed of a good chunk of the political media here in California - they airbrush out the people who suffer for the failures of the politicians.

Where are California and the people who are feeling the pain – the school kids and teachers in hopelessly underfunded schools, the children who are losing their health care, the minimum-wage working mothers struggling to pay their child care, the students who are losing their university grants? Is all this really about nothing?

To far too many, the answer is yes. It's politics as theater, as a sporting event, where winners and losers are checked on a board, and whether or not a leader will keep their position is made the story rather than the principles he or she represents. And yet it's not Governor Hot Tubs and Stogies who will feel the pain of an economic downturn and massive budget cuts, nor well-heeled consultants or columnists who make up the scorecards. It's people.

People like the students in the Cal State system who may see their fees raised 20%, just months after a 10% hike approved in May. This will effectively block higher education for a non-trivial number of students, as will proposed enrollment reductions of 32,000 students.

People like LA County homeowners who have defaulted at twice the rate in May as they have in the previous month, as a foreclosure backlog builds up due to various moratoriums and an increase in repossessed homes entering the market.

People like IOU holders who may have to turn to check-cashing stores to get less-than-full value for their registered warrants after Friday, when most major banks (who have all been bailed out by the federal government, by the way) stop the exchange of the notes.

And people like the elderly, disabled and blind, who rely on the in-home support services that the Governor is trying to illegally cut in contravention of a contempt-of-court citation, at least in Fresno.

These are the great unmentioned in this California crisis, the people who Dan Walters tries to smear in his column today by turning every Democratic concern for the impacts of policy as a sellout to "public employee unions." Behind those unions are workers, and the people they serve need the help the provide, in many cases, simply to survive. But it would be too dangerous to Walters' beautiful mind to consider those faces, so he chooses to make political hay out of the violation of people.

This is the point of the People's Day of Reckoning Coalition. They refuse to have their existence denied any longer.

Stimulus II: The Restimulating

Laura Tyson, an informal advisor to the Obama White House, dared to talk about a second stimulus yesterday. I don't totally agree with her about the focus, but it's good that someone values preparation.

The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy after the $787 billion rescue package launched in February, an adviser to President Barack Obama said.

"We should be planning on a contingency basis for a second round of stimulus," Laura D'Andrea Tyson, a member of the panel advising President Barack Obama on tackling the economic crisis, said on Tuesday.

Addressing a seminar in Singapore, Tyson said she felt the first round of stimulus aimed to prop up the economy had been slightly smaller than she would have liked and that a possible second round should be directed at infrastructure investment.

As Chris at Americablog notes, the first stimulus should have been designed to be sufficient enough, but it wasn't, and the President and his team should just drop the "nobody could have anticipated" crap and start anticipating the reality of a continued shortfall in output.

Where I disagree with Tyson is in the focus of Stimulus II. She says infrastructure investment, which is of course important. Maybe more of our projects could have been shovel-ready if we followed France in recognizing that any construction-creating jobs are valid, instead of disqualifying the building of museums or parks due to nonsense about "pork." But more to the point, we should in a Stimulus II provide relief for the states so they can maintain their budgets and contribute to economic recovery instead of damaging it. The perverse nature of balanced budget amendments and a recession is really stagnating the national economy. We need a permanent state fiscal stabilization fund that kicks in during recessions.

I guess Wall Street doesn't like the notion of a second stimulus, mainly because it turns their green shoots to mud. Tough. We have to look at reality, which is that the economy is not working for regular people, and without consumer spending or private investment only government can provide the kickstart necessary.

Sacramento Blues

State employee jobs cluster around state capitals, where most of the regulatory and social services agencies are traditionally headquartered. When a recession causes a shortfall in state budgets, the consequent program cuts and job loss impacts those capital metro regions disproportionately. Such is the case right now with Sacramento.

Between furloughs and layoffs, the state's budget crisis could cost Sacramento's beleaguered economy more than a half-billion dollars in the next year.

As the state began issuing IOUs last week to help pay its bills, the economic impact on Sacramento became depressingly clear: State government, which normally buffers the region against the harsh reality of recession, could actually prolong the downturn.

"The longer this drags on, the worse it will be for the local economy," said economist Jeff Michael, director of business forecasting at the University of the Pacific. He said state cutbacks could blunt the vitality of the economic recovery, once it starts.

The effect will be most visible when "Furlough Fridays" return next week, turning pockets of Sacramento into little ghost towns as most state offices close for the day. Thousands of workers will take off three unpaid furlough days a month, all on Friday, until next June. For the past few months they've been furloughed two days but not all on Friday.

"It's definitely going to affect us," said Sam England, co-owner of Dad's sandwich shop on S Street. "We won't have that additional person in here, running the register. We'll gear down accordingly."

Indeed, one of the more vibrant businesses in the Sacramento area right now is home repossession.

I'd like to see a study of this done in other states. Clearly, cutting state budgets to the bone has a multiplier effect that increases in those capital regions. Particularly in a state like California, where public employees have become so demonized, and the political process leaves them little protection.

A Stimulus For The States?

Yesterday on ABC, Joe Biden claimed that the Administration misread the severity of the economic crisis, and did not dismiss out of hand the need for a second stimulus package, though he preferred to wait and see how the first one takes once more of its money flowed into the system. If the White House failed to anticipate negative economic results previously, they need to fully anticipate the potential for continued losses this time around, and have some form of stimulus ready sooner rather than later.

Among the most pressing problems right now is the widespread revenue shortfall among the 50 states, most all of which have balanced budget agreements and must resort to mostly cuts to deal with the crisis:

Wait — there’s more bad news: the fiscal crisis of the states. Unlike the federal government, states are required to run balanced budgets. And faced with a sharp drop in revenue, most states are preparing savage budget cuts, many of them at the expense of the most vulnerable. Aside from directly creating a great deal of misery, these cuts will depress the economy even further.

Robert Kuttner details the troubles in the states more directly, finding that California is not alone in its fiscal problems, though they may be more intractable here. Cutting program spending directly runs against the purpose of federal stimulus, to make up for the lack of consumer spending and private investment by providing a money injection into the economy. The Center on Budget and Policy Priorities writes that 39 states have cut programs that go directly to the needy. We are not alone.

The combination of a creeping suspicion by economists about the need for a second stimulus and the crisis in state budgets have led many to wonder whether to combine the two. Though no state, and not California either, has called for a "bailout," there are compelling reasons to believe that fiscal stabilization would make sense at this time so that state government doesn't counter-productively nullify the goals of the federal stimulus. One of the last items cut from the stimulus package was a large fiscal stabilization fund for the states that could have mitigated budget cuts.

The Chicago Federal Reserve wrote a paper examining this possibility for state fiscal relief, by comparing today's situation to other recessions.

The idea of federal support for state (and local) governments in a downturn is hardly a new one. For example, in response to the recession of 1973-75, Congress enacted the Antirecession Fiscal Assistance (ARFA) program, which was combined with general revenue sharing grants and the Local Public Works (LPW) program to provide unrestricted grants and infrastructure funding to the states. In addition, Congress had passed the Comprehensive Employment and Training Act (CETA) in 1973, and in conjunction with these other programs, it became an antirecessionary mechanism for delivering job training. More recently, in 2003, Congress passed the Jobs and Growth Tax Relief Reconciliation Act, as states dealt with a slow recovery from the 2001 recession.

The purpose of such funding is primarily to stabilize fiscal behavior in the state government sector. This aid is intended to smooth the budgetary actions states would be forced to take in the face of declining revenues and increasing demands from programs such as Medicaid and unemployment insurance.

The Chicago Fed criticizes the 1973-75 efforts, but their critiques are primarily ones of timing. They say that the funding for state aid arrived while economic recovery was already taking place, coming too late to stop states from taking their budget actions. When it arrived, the aid "may have contributed to post-recession inflationary pressures."

I simply think we're in a different situation right now. Despite the talk of the "green shoots" crowd, the economy has not bottomed, and in fact may be about to head into a "double-dip," W-shaped recession. Rising foreclosure rates and continued unemployment threaten economic recovery, and many economists feel that the economy will not start to recover until mid-2010. So now seems to me to be the perfect time to work to deliver anti-recessionary aid targeted to the 2010 budget cycle in the states. There is a concern that the money to the states would go simply to building a surplus instead of being spent, but with the tough choices being made across the country right now, the possibilities of that seem remote, and anyway language could be written into any bill to negate that possibility.

Significantly, the 1973-75 aid was triggered by unemployment figures.

In the case of the 1973-75 recession, the federal relief programs used three triggers based on unemployment. Aid under the ARFA program was provided when a jurisdiction’s unemployment threshold rose above 4.5 percent. Aid from the LPW program was based on the total number of persons unemployed, as well as the number unemployed in excess of 6.5 percent, in that jurisdiction. And aid under CETA was prompted by all three triggers.

The use of the unemployment rate as a trigger has a number of advantages. First, the unemployment rate is readily available at both the state and local level, so it can be used to direct aid in a more focused manner – even potentially to steer aid to specific metropolitan areas within states. Second, it is available on a monthly basis. However, in evaluating the effectiveness of the federal government’s aid package of the mid-1970s, the GAO found that the structural change built into national labor markets caused this trigger to turn on well into the downturn and maintain aid well into the recovery.

I don't think this is a bug, but a feature. We hear a lot about unemployment as a "lagging indicator" of economic performance, but to the unemployed, it's the ENTIRE indicator. And given that income tax makes up such a large sum of state revenue (particularly in California), unemployment is intimately tied to state budget performance. The Chicago Fed worried about inflation, but again, this recession is not like all other recessions, and right now we're in fear of a deflationary spiral.

Finally, the Chicago Fed worries about rewarding "bad fiscal behavior" when budget shortfalls are caused by a "structural deficit caused by an inefficient tax system and/or unsupportable public spending." We can expect to hear a lot of this if a second stimulus really kicks into gear, and I would just say that it's not morally defensible to punish individuals for the tangle of their state political structure. I don't want the possibility of federal relief to disable local efforts to arrive at sustainable budget practices, but I think there's a way to provide help to those who need it while also not letting the legislative leadership off the hook for their failures.

That the Chicago Fed is putting out papers about state funding at all is a sign that such a prospect has gained momentum. I think their concerns, while legitimate, are all addressed by the nature of this downturn, and legislation can be drafted to allay those concerns as well. Any second stimulus must include state fiscal relief. My one hope would be that the solution is enduring, so that never again will states be in the position to forestall economic recovery through perverse and ill-timed budget cuts.

... Ryan Avent makes the case for denying California federal aid, or at lest conditioning it to changes in the long-term budgeting process. Like Robert Cruickshank, I don't believe that the federal government would provide such a great, progressive solution with their conditioned aid - it would probably look more like an IMF bailout. I agree in a roundabout way that any federal aid may give Democratic leaders the impression that their problems can be solved from outside rather than from within. But that's a leadership problem separate from the problem of real people's lives getting squandered because of a political stalemate.

Well Then, This Time, Anticipate

Joe Biden went on ABC's "This Week" today and said that his Administration, along with the consensus economic community, misread the severity of the recession:

STEPHANOPOULOS: While we've been here, some pretty grim job numbers back at home -- 9.5 percent unemployment in June, the worst numbers in 26 years.

How do you explain that? Because when the president and you all were selling the stimulus package, you predicted at the beginning that, to get this package in place, unemployment will peak at about 8 percent. So, either you misread the economy, or the stimulus package is too slow and to small.

BIDEN: The truth is, we and everyone else misread the economy. The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

Everyone thought at that stage -- everyone -- the bulk of...

STEPHANOPOULOS: CBO would say a little bit higher.

BIDEN: A little bit, but they're all in the same range. No one was talking about that we would be moving towards -- we're worried about 10.5 percent, it will be 9.5 percent at this point.

STEPHANOPOULOS: But we're looking at 10 now, aren't we?

BIDEN: No. Well, look, we're much too high. We're at 9 -- what, 9.5 right now?

STEPHANOPOULOS: 9.5.

BIDEN: And so the truth is, there was a misreading of just how bad an economy we inherited. Now, that doesn't -- I'm not -- it's now our responsibility. So the second question becomes, did the economic package we put in place, including the Recovery Act, is it the right package given the circumstances we're in? And we believe it is the right package given the circumstances we're in.

We misread how bad the economy was, but we are now only about 120 days into the recovery package. The truth of the matter was, no one anticipated, no one expected that that recovery package would in fact be in a position at this point of having to distribute the bulk of money.

STEPHANOPOULOS: No, but a lot of people were saying that you needed to do something bigger and bolder then, including the economist Paul Krugman. He's saying -- right now he's saying the same thing again -- don't wait. You need a second stimulus, you need it now.

BIDEN: Look, what we have to do now is we have to properly, adequately, transparently and effectively spend out the $787 billion.

First of all, Stephanopoulos was the first to say "misread the economy." So it was kind of a leading question, and a Hobson's choice for Biden between two bad options - a bad read or a failed stimulus. Next, Biden and many of his White House colleagues have been pushing this idea that nobody could have anticipated the depths of the economy for several weeks now. But the truth is quite different. Plenty of people dating back to late last year were saying that unemployment was headed for double digits, and that the stimulus package conceived by the Obama Administration, especially with its 40% tax cuts, would be insufficient. The Administration's white papers and boasts about recovery didn't check out, the same way that their "adverse scenario" for the stress tests didn't check out. The worst thing about Biden's statement is that it's flat wrong.

But beyond that, the White House's touting of the stimulus as a world-historical fix to a broken economy presupposed this backtracking. They knew at the time that it would take months to get the stimulus funds out to people and businesses, and that the economy, which was already reeling, with four straight months of job loss over 400,000 at the end of 2008, would only continue to bleed. And yet the timing of passage, at the beginning of the first term, necessitated touting it as something of a panacea. But we all saw the gruesome legislative sausage-making that went into passage, with Presidents Nelson and Collins pulling this program and that out of the package just to reach some arbitrary number above which we could not spend.

The stimulus package is not bad, and much of it will hit the economy in Q3 and Q4 of this year, so its impact has yet to have been felt. But it was clearly not sufficient to meet the demand shortfall at the time, and the recent job numbers just prove it.

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

It’s clear that even if the recession were to be over anytime soon – and it’s not going to be over before the end of the year – job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over [...]

These job losses are going to have a significant effect on consumer confidence and consumption in the months ahead. We’ve also seen extreme weakness in consumption. There was a boost in retail sales and real personal consumption-spending in January and February, sparked by sales following the holiday season, but the numbers from April, May, and now June are extremely weak in real terms. In April and May you saw a significant increase in real personal income only because of tax rebates and unemployment benefits. In April, there was a sharp fall in real personal spending, and in May the increase was only marginal in real terms [...]

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.

We're just in terrible trouble right now, and the 50 little Hoovers wreaking havoc on state budgets aren't exactly helping, either. At this point, a Japan-style decade of zero growth might be welcome, with a double-dip recession possible.

I think the Administration did a decent enough job reacting to the chaos of a potential depression. But now they need to look at the reality of the situation and recognize that we will need another stimulus, which I would like to see focused on fiscal stabilization for the states. For the second week in a row, a major Administration figure dodged the question when asked, but did not dismiss it out of hand. They need to at least draw up some plans. If nobody could have anticipated the state of the economy prior to the first stimulus, the least the White House can do is anticipate the second round.

...The Shrill One says it better.

The Inevitable Tax Drop

You can almost set your watch by it. The state budget picture is a mess, Democrats ask for a balanced solution, Republicans hold their ground and say no, Democrats don't have the vote so they let it go. It happens practically every single year, and it's happening again, according to CapAlert:

Gov. Arnold Schwarzenegger and Senate President Pro Tem Darrell Steinberg said separately Thursday that they are optimistic a budget deal can be struck within several days.

The tone of their comments marked a stark contrast to Capitol fighting over the last few weeks between Democrats and Republicans over bridging the state's $26.3 billion budget gap.

Steinberg also said Democrats had given up any attempt to increase taxes on tobacco or establish an oil severance tax [...]

The Senate president said that Democrats no longer are pushing for a 9.9 percent tax on oil extraction or for hiking the state's tobacco tax by $1.50 per pack.

"We would like to see an increase in the tobacco tax and the oil severance tax as a solution, but in this chapter that's not realistic and it's not what we're holding out for," Steinberg said.

It's never going to be realistic in ANY CHAPTER. Republicans know exactly how to play this game. Their votes are needed for tax increases, so if they hang together they cannot lose. The Democrats haven't figured out how to shame the Yacht Party or make them pay for their votes, giving them no reason to do anything but hijack the process. You'll notice that as a result of this horrific experiment in governance, California is operating worse than practically every other state in the union.

We've seen this kind of "it's almost over" trial balloon on many occasions, so I wouldn't put on the party hats just yet. But somehow at the end of this process, somebody will step up to a microphone and claim how reaching agreement is a sign of success. No. It's a sign of failure. A failure to responsibly manage the state's finances, reflected by the worst economy in 70 years. The only lesson that can be learned from this process is that it's fundamentally broken.

P.S. You'll be thrilled to know that Schwarzenegger still sleeps well at night.

Schwarzenegger and I then repaired to a tent that he had put up in a courtyard next to his office, which allows him to smoke cigars legally at work (no smoking is allowed inside the Capitol). The tent is about 15 square feet, carpeted with artificial turf and outfitted with stylish furniture, an iPod, a video-conferencing terminal, trays of almonds, a chess table, a refrigerator and a large photo of the governor. Schwarzenegger reclined deeply in his chair, lighted an eight-inch cigar and declared himself “perfectly fine,” despite the fiscal debacle and personal heartsickness all around him. “Someone else might walk out of here every day depressed, but I don’t walk out of here depressed,” Schwarzenegger said. Whatever happens, “I will sit down in my Jacuzzi tonight,” he said. “I’m going to lay back with a stogie.”

This is the guy who dares to chide others for not doing their job.

It's Now A $26 Billion Dollar Problem

According to Mike Genest, the Governor's Director of Finance, the $24.3 billion dollar problem expanded by $2 billion dollars last night. He's not taking into account the interest on IOUs, of course, or the expanded borrowing costs. But he's factoring in the education spending that now cannot be cut below a certain level because of "maintenance of effort laws." Genest said that higher education has agreed to keep their books open an extra month, until July 31, meaning that the $1 billion in higher education cuts to the 2008-09 budget year could still be enacted. This is basically fuzzy math, since the additional expenditures due to the Governor's stubbornness do not get addressed.

What the Governor wants to do now, to recoup those cuts under Prop. 98, is to suspend the law. Once again, the reckless lawlessness of the Governor and his allies, out of an unwillingness to deal with budget reality, exposes itself. In addition, the Governor has backed off on the outsized budget reserve as well as eliminating vital programs like welfare, state park closures, children's health care and student grants. Of course, this has been replaced by unrelated items like cutting public employee pensions and social services fraud inspections, both of which would do nothing to the deficit in the near term.

The Governor has declared a state of emergency, under Prop. 58 rules. This means that the legislature has 45 days to come up with a solution on the budget, and if they fail to do so, they cannot adjourn or act on other bills. This is a moot point, since the Governor has vowed already to veto any non budget-related bill until a solution is reached. This just brings the legislature into special session (the fourth since December, I believe).

In addition, the Governor announced three furlough days a month for state employees to save cash, which amounts to a 15% pay cut. And IOUs will get issued tomorrow. They will have an interest rate for the banks which accept them of between 2-5%.

Here was my favorite part of his press conference:

Guv gets booed by some who watch him leave press conf and walk back to his office.

By the way, there's a new hashtag to find all budget news on Twitter: #cabudget.

Après Aujourd'hui, Le Déluge

I suppose the only good news to come out of last night, and indeed this entire cycle of budget nightmares, is that we are not alone. Several other states missed their fiscal year deadlines. Illinois has no budget and no plans to enact one; Pennsylvania may not be able to pay state employees due to a failure to reach agreement; Arizona got a budget in under the wire, but the Governor has not indicated whether or not she'll sign it, because it doesn't include a sales tax increase she sought; Ohio approved a temporary 7-day budget as legislators continued to wrangle; Mississippi left their utility regulatory agency unfunded; Connecticut's Governor signed an executive order to keep the government running despite no budget. We can take little solace in these difficulties other than to note that the national erosion of tax revenues combined with balanced budget agreements make the situation almost impossible for many states, particularly the large ones, and because of the threat to any economic recovery that would result from massive reductions in state spending and services, the door may crack open for a second federal stimulus package that specifically targets state budgets. I don't think we're quite there yet, but the crisis reaches a whole new level starting today.

First of all, this is the first day that budget cuts from the previous agreement in February take effect for fiscal year 2009-2010. These include major reductions in health and human services:

SSI/SSP grants for low-income seniors and people with disabilities will drop by 2.3 percent, cutting the maximum grant for an individual from $870 to $850 per month. A previous SSI/SSP grant cut took effect in May, reducing maximum monthly grants for individuals from $907 to the current $870.

CalWORKs grants for low-income families with children will be cut by 4 percent, reducing the maximum grant from $723 to $694 per month (the same amount as in 1989) for a family of three in high-cost counties. CalWORKs grants have been frozen since 2004-05.

Dental services for most adults in the Medi-Cal Program will be eliminated along with seven other benefits, including eye exams and incontinence creams and washes. (Last week, a trial court judge in Sacramento County ruled against a group that sued to stop the cuts from taking effect.)

Grants on those who make the least are the most stimulative to an economy, because that money gets spent quickly. Now it's drying up.

Of course, there's also the matter of the still-yawning budget gap here in California, which just got $7 or $8 billion dollars larger, depending on your math. This means that even more damaging cuts, likely to the most vulnerable elements of society, will ensue, leading to another wave of job loss, foreclosures, and pain. The Governor and Senate Republicans are completely responsible for that addition to the deficit - consider that $7 billion is MORE than the money at stake to the near-term budget in the May 19 special election - and for the issuance of IOUs, which will add billions in unnecessary interest obligations.

In a nutshell, under the governor's IOU plan the state pays vendors and others it owes with the equivalent of a post-dated check that is good for the face value of the amount owed plus interest. IOU recipients, for the most part, "sell" their IOUs to a bank for the face value of the check for quick cash. The bank holds onto and then redeems the IOU at a later date, earning millions of dollars in interest.

This type of borrowing is nothing like pulling out the state's credit card to pay the bills. Rather, this is more like the state going down the street and getting an expensive payday loan.

The Governor's payday scheme not only makes California the laughingstock of the credit markets, but it unnecessarily puts a black eye on the state's long-term credit rating.

This means that, for years to come, millions of taxpayer dollars get shoved into the pockets of Wall Street bankers every time we issue long-term debt to build schools or roads, or other needed public projects.

Somewhere in the neighborhood of $6 billion dollars in additional interest alone will be added to the cost of selling bonds that voters have already approved.

Of course, by that time, Schwarzenegger will be out of office, so what does he care?

Harold Meyerson has the must-read of the day about this disaster, pinning the blame where it needs to go - on shock-doctrinaires like the Governor who demand to use this crisis to destroy the public sector. Read the entire thing, but here's an excerpt:

Right-wing ideologues see the crisis as an opportunity to shrink government regardless of the consequences. Schwarzenegger is proposing to end welfare, not just as we know it but altogether, and to throw 1 million children off the rolls of the state's healthy families program. But the consequences of closing the deficit simply through cutbacks will be felt by more than the poor. Already reeling from $15 billion in cutbacks that the state put through in February, many school districts, including that of Los Angeles, have canceled summer school this year. Scholarships that enable students of modest means to attend California's fabled university system have been slashed. Most of the state's parks may have to be closed as well.

The terrible irony in decimating the public sector to save the state is that the California that was the epicenter of the postwar American dream was fundamentally a creation of government. Fighting a Pacific war during World War II compelled the federal government to spend billions on California industry and infrastructure, and the state was the leading beneficiary of Pentagon dollars during the Cold War. As Kevin Starr, California's leading historian, points out in "Golden Dreams," his brilliant new history of the state in the 1950s and early '60s, fully 40 percent of all defense dollars for manufacturing and research in 1959 went to California, anchoring the state's booming economy in a well-paid workforce that was either unionized or professionalized, and seeding an electronics and high-tech sector that was to blossom in the following decades. Building on that prosperity to create more prosperity, Earl Warren, Goodwin Knight and Pat Brown -- two Republicans, one Democrat -- invested state dollars in schools, universities, freeways and aqueducts that were the best in the world. The Golden State was never more golden.

Today, its governor seems determined to turn that gold to dross. On Monday, the Democrats in the legislature passed a budget that included cuts of $11 billion, levied a tax on oil companies and tobacco, and raised auto registration fees by $15 per car to keep the state parks from closing. Schwarzenegger reiterated his refusal to raise any taxes or fees and said he would veto the budget.

There's still a chance to avoid IOUs, though I wouldn't call it likely. There is no chance to avoid the devastating impact of a broken political process and irresponsible legislating which at this point can only slide California into depression.

Late Night With The Legislature, End Of The World As We Know It Edition

It has been truly depressing to watch the Twitter feeds of John Myers and Scott Lay tonight, as the mood shifted from guardedly hopeful to despairing. The Senate keeps voting on things and not coming up with any solutions. They tried to pass the stop-gap solution again, and came up short of the votes needed. They passed the majority-vote budget with some fee increases, and the Governor vetoed them. Let's all please remember that. With a stroke of the pen, the Governor could have ended this.

If SB 64 and SB 80 (the stop-gap) don't pass by midnight (and actually, in an hour or so, because it takes a couple hours to prepare the necessary paperwork), the state will forfeit $3 billion in cuts to the 2008-09 budget year, which they will have to find in the following year, and a total of around $7 billion in total costs, when you add in the costs of additional borrowing, etc.

At some point, a large majority-vote budget (which wouldn't take effect for 90 days), absent the tax increases, passed the Senate and moved on to the Assembly, where it will be voted on tonight. According to Scott Lay, it covers all but $1 billion of the target, which is probably enough for the Governor to veto it. Why, it's almost as if he doesn't want a solution but instead an opportunity to push through a bunch of long-sought goals shock-doctrine style!

The Senate just tried again to get the necessary votes for the stop-gap, and fell short by the exact same amount. They're in recess until 9:30 and will probably get only one more shot.

Welcome To IOU Day!

If no deal is reached between the Governor and the Legislature in the next 14 hours, California will start to issue IOUs to companies that do business with the state (mostly small businesses), taxpayers expecting refunds, and agencies delivering assistance to the most vulnerable members of society - welfare recipients, the elderly, disabled and blind, and college students expecting aid grants.

The biggest variable with these IOUs is whether or not banks will honor them, a decision that they have yet to reach.

The deciding factor could be California's banks. If they're willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They'll be able to cash the IOUs.

But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession. One Rocklin company, a temp firm that relies heavily on state business, has already laid off five workers in anticipation of a cash squeeze.

So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang.

She said banks are probably waiting to see how much interest the state will pay on the IOUs – a figure that won't be decided until Thursday, the same day Chiang is scheduled to issue IOUs. The notes will total $3.36 billion, with about $500 million targeted for the private sector.

In 1992, banks generally honored the IOUs by cashing them on demand. If you haven't heard, banks are in a slightly worse financial picture now than then, and might not be willing to float bridge loans for the state, even with generous interest, this time. And of course, if the banks agree to honor the IOUs, the state will be paying out hundreds of millions of dollars to them in short-term interest.

If the banks fail to honor the IOUs, you can just add that to the severe pain being felt by California residents at this time. The personal bankruptcy filings which soared in Southern California in the first quarter will only increase. The foreclosures, which have not only continued for residences but commercial property like hotels, will expand. With small businesses forced to cut back due to cash flow cutoffs from the state, expect more unemployment and a continued erosion of the tax base, leading to even larger budget shortfalls. This is a death spiral from which we will find it hard to extricate ourselves. California's role as the biggest of the "50 Herbert Hoovers" truly can threaten national economic recovery.

Late Night With The Legislature, Day 2

Something's a-stirring for the second straight night in Sacramento. Scott Lay @ccleague and the indefatigable John Myers @KQED_CapNotes will have the best play-by-play. The Senate has scheduled a session but immediately went into party caucuses for meetings. If they do hit the floor, CalChannel will have it.

Basically, here's the latest: The Senate and Assembly have already passed majority-vote budget revisions that would fill the current deficit, but the Governor has vowed to veto them. The Assembly, with bipartisan support, passed three bills in a stop-gap measure, which would at least provide savings for $3 billion in fiscal year 08-09, which ends tomorrow, and would keep money flowing in state coffers for another few weeks, avoiding IOUs. The stop-gap consists entirely of cuts and gimmicky delays in funding, by the way. The Governor has no plan whatsoever to recoup that $3 billion if passage of the stop-gap fails by the deadline.

What the Governor has done is create a completely new budget plan with a day to go before the deadline. Some would call that deliberate. This "Plan B" budget would not eliminate Healthy Families, CalWORKS or Cal Grants, nor would it cut all funding for state parks, which was apparently a bridge too far. It would accept the one-day delay in state employee paychecks from June 30, 2010 to July 1, "saving" the state $1.2 billion. However, the new plan would borrow $2 billion from local governments, the maximum allowable under the old Prop. 1A; reduce state worker salaries, benefits and pensions; and make broader cuts over various different programs to make up the gap.

Schwarzenegger has appeared to back off from the worst cuts he proposed initially, a win for the grassroots and legislative Dems, but the steady stream of changes to his proposals, along with an insistence on the June 30 deadline for a full solution, have conspired to virtually assure that the deadline will be missed. This is the backdrop for tonight's Senate action. If they can get two GOP votes for the stop-gap solution, they can actually override a gubernatorial veto and set into law something to at least extend the process by a few weeks. I don't know about the likelihood of that, but the choices have become limited.

Meanwhile, the Yacht Party made a tiny ad buy on the budget to try and get people to notice they exist.

I'll monitor if anything interesting happens...

...and it looks like nothing interesting happened. They took a vote on the stop-gap, didn't get the 2/3 required to override Arnold's veto, and adjourned until tomorrow morning. Looks like we'll have late night with the legisature Day 3 tomorrow, as the midnight deadline looms.