The New Year begins with our state no closer to a budget resolution than it was a week ago or a month ago.
The Democrats and Republicans in Sacramento continue to hunker down in their ideological trenches, unwilling to do what statesmen and stateswomen do: compromise and lead. In the meantime, California is projected to run out of money in February, at which point the state will have to begin issuing IOUs to balance its budget.
The Sacramento Bee reported a few days ago on the ironic fact that state legislators will be the first ones to get paid in scrip. But before you start rejoicing at that prospective justice, keep this in mind, the Bee's article said:
The bad news is that next in line to get IOUs instead of cash would be state income taxpayers awaiting refunds and companies that do business with the state.
In a letter to state agencies, Chiang said his office was projecting the state would run out of cash around the beginning of March.
Without a deficit-closing deal between legislators and Gov. Arnold Schwarzenegger, Chiang said, his office "has no choice but to pursue the deferral of potentially billions of dollars in payments and/or the issuance of individual registered warrants, commonly referred to as IOUs."
The controller advised state agencies to rework their accounting systems now to take people and firms paid for by direct deposits and eligible to be paid with IOUs off the systems, because the warrants must be issued on paper.
The Los Angeles Times reported yesterday that Governor Schwarzenegger is ready to present another budget proposal to the State Legislature on January 10th, and it ain't pretty, folks:
The new budget plan, which would need approval from the Legislature, again illustrates the kind of painful options that face lawmakers as they try to deal with a disintegrating economy that has left the state treasury bare.
California is now on track to run out of money as early as February. The state has frozen spending on public works projects because investors will not issue short-term loans, fearing the state's finances are in such disarray that they might not get their money back.
The new proposal adds on to the already severe plan he proposed in November. On top of a 1 1/2 -cent sales tax increase and new levies on alcoholic drinks and the oil industry, this plan would also reduce to $103 from $309 the dependent credit Californians could claim on their 2009 income taxes.
The cuts in the proposal are deep, including a reduction of billions of dollars in K-12 education spending from current levels and shortening the school year by five days. State university and community college offerings would also be cut back as tuition and fees go up. Healthcare programs for the poor would be slashed, as would welfare for the elderly and disabled. The fees for affluent people with assets in the state's veterans homes would rise.
The plan also includes reductions in the state workforce, which the governor is already trying to put in place through executive order. Public employee unions have sued to block the order, which would require state workers to take days off without pay, amounting to a pay cut of roughly 10%.
Genest said the state is already so deep in the red that it will not be able to get through this year without purchasing an unconventional $4.7-billion bridge loan that is certain to saddle taxpayers with steep interest charges -- presuming investors can even be found in this tight credit market.
The governor's latest plan, like its predecessor, faces little chance of passage since GOP lawmakers have held firm against tax increases.
It seems to us that lawmakers at both ends of the state's political spectrum (and we're increasingly dealing with only the extremes) have been fundamentally dishonest with voters. Democrats refuse to explain the true costs of programs and projects and use deficit financing to hide those costs. Republicans refuse to see that a majority of Californians like at least some of the services local and state government agencies provide, and they refuse to support the taxes needed to pay for those services.
The financial shell games extend down to the local level, it turns out. The LA Times had an article on December 31st about the debt load California cities and counties have taken on in the form of "creative borrowing":
California cities, counties and other agencies borrowed $54 billion last year, nearly twice as much as in 2000, and governments are straining under the load.
Statewide, 24 cities and public agencies missed scheduled debt payments this year or were forced to tap reserves or credit lines to stay current, records show. That's up from nine in 2006, according to the bond industry's self-regulatory agency.
The city of Vallejo, burdened with huge debt obligations, in May became the largest city in California history to file for bankruptcy protection. Chula Vista, Orange County and Palmdale are among the other cities and counties staring at red ink.
Much of this borrowing binge was made possible by complex financial schemes such as the one Oxnard used. These nontraditional debt vehicles cost more over the long run because they are considered riskier than general-obligation bonds, which governments stand fully behind. Investors therefore demand higher interest rates.
"There are many cities and counties engaging in complex financial deals that they don't really understand," said Michael Greenberger, former head of the trading division of the Commodity Futures Trading Commission. "And now it's starting to catch up with them."
Government officials say such measures were necessitated by Proposition 13, the 1978 initiative that limited property taxes and required a two-thirds vote for future property tax hikes. Local governments can raise various fees or cut costs to reduce their need for borrowing, but many are reluctant to do so, fearing a voter backlash.
"Instead of saying we don't have enough income to do what we need to do, we've resorted to debt," said Jean Ross, executive director of the California Budget Initiative, a nonpartisan group that studies the state's budget priorities. "It's time for elected officials to have an honest conversation with voters about what their tax dollars can buy."
The Oxnard financing scheme the Times article referred to was a type of lease-back arrangement that former Claremont City manager Glenn Southard once suggested to a group of city commissioners as a way of financing Padua Ave. Park. In these sorts of schemes, investors lend a public agency money with public property - City Hall or Claremont's Alexander Hughes Community Center, say - used as collateral.
Of course, as the economy worsens and cities like Oxnard reach a point where they can't keep up with their payments, those investors can take possession of the collateralized property. Get ready for a mini-mall in what used to be Oxnard City Hall or an Orange County Fire Station. The LA County Metropolitan Transportation Authority has already run into some trouble with lease-back arrangements.
As the Times article noted, local agencies resort to these kinds of arrangements as a way of getting around voter approval:
"They're circumventing the intent of the law," said Larry Stein, an Oxnard accountant and longtime city activist. "They're indebting the taxpayers using future revenue streams that may or may not pan out in the long run. But the taxpayers have no say."
Of more than 10,000 bonds and other debt vehicles issued between 1998 and 2007, fewer than 700 went to a public vote, according to the state treasurer's office.
The Times piece went on to say that in 1995 the California Legislative Analyst's Office estimated the added cost for these types of financing agreements to be "as much as $370 million more for every $1 billion in debt than the use of general-obligation bonds." And, as the Times observed, those costs are going to be much higher in today's economic environment.
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