Sacramento Report

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The state's budget impasse continued over the 4th of July weekend. California, as you have heard, has begun issuing registered warrants, or IOU's, because the state legislature and Governor Schwarzenegger have been unable to reach an agreement on how to bridge the budget gap. The IOUs began going out after the 2008-09 Fiscal Year ended on June 30.

Local governments, including the City of Claremont and the Claremont Unified School District, will just have to wait to see how much of a hit they're going to take once all the dust settles. Incidentally, while the bickering in Sacramento dragged on last week, the state's budget deficit rose by a couple billion dollars, from $24.3 billion to $26.3 billion. Hey, guys and gals, you're going the wrong way!

And some of our fearless leaders aren't going anywhere, right way or wrong way. State Assembly Speaker Karen Bass (D-Los Angeles) yesterday boycotted a meeting of the "Big 5" (the heads of both parties in the State Assembly and State Senate, plus the Governor). According to the Sacramento Bee, Bass is complaining that the Governor is pushing things unrelated to the budget crises (things like permanent fixes to avoid this situation in the future):

The Republican governor and legislative leaders are still discussing various permanent changes to state health and welfare programs that would tighten eligibility and Schwarzenegger believes would combat waste and fraud.

Democrats and labor unions insist that the governor is overstating the extent to which the state can save money from such changes, such as fingerprinting In-Home Supportive Services recipients and providers. But Schwarzenegger believes that such changes can bring in real cash, as much as $400 million to $500 million in IHSS alone -- and $2 billion in 2009-10 for all of his various changes to state programs.

Bass boycotted this morning's meeting on grounds that Schwarzenegger is demanding these changes in exchange for agreeing to fewer cuts. She said these reforms are "unrelated" to the $26.3 billion deficit and that leaders should instead work on other solutions that would bridge that gap, with a promise to consider the permanent program reforms later. She also warned she may not attend the afternoon Big 5 meeting.

Bass' concern about any cuts in health services is understandable. Groups like the Service Employees International Union are some of the biggest donors to Democratic candidates, and any reduction in state health spending means fewer SEIU members. So Bass' willingness to tolerate a little waste and fraud makes sense when you see where her money comes from (what's a few billion between friends?). Hence the bait-and-switch: let's just patch things over and work out a real fix at some indefinite future time. Bass (and a good number of Republicans as well) doesn't want to admit that the budgetary landscape has shifted dramatically and that yesterday's political games are so, well, yesterday.

Meanwhile, as the debacle drags on, Fitch Ratings has cut California's long-term bond rating from A- to BBB. As a result, Californians will have to pay much more in interest in order to float bonds for things like big public works projects. The SacBee tells us how much more:

State Treasurer Bill Lockyer last week warned that a rating downgrade to BBB+ -- one grade higher than California's new BBB -- could result in an estimated $7.5 billion in interest costs over a 30-year period. California last had a BBB rating between December 2003 and September 2004, when the state grappled with a significant budget deficit.

Lockyer spokesman Tom Dresslar said that California will pay higher costs the next time it tries to borrow money for public works projects. He said he the state could be saddled with a lower credit rating for some time.

"The last time we got downgraded in this type of environment when we issued IOUs, it took years to recover," Dresslar said. "So even when we adopt a budget solution, our rating probably won't go up magically overnight."

The New York Times Magazine last Saturday surveyed the contenders for California's 2010 gubernatorial election, and the budget impasse formed the backdrop to the piece, which was titled, "Who Can Possibly Govern California?" The NYT Magazine piece described what Californians already know to be the root of the problem:

Passing a budget or increasing revenues in California is dicey in the best of times. The state constitution requires that two-thirds of the Legislature agree on a budget or higher taxes — the kind of overwhelming political consensus, in other words, usually reserved for amendments to the federal Constitution. (California is one of just a handful states that require a two-thirds vote to pass a budget.)

Complicating matters further, the major parties in California are both effectively controlled by their most partisan elements, a byproduct of gerrymandered voting districts that force lawmakers to appeal to their ideological bases. After many earlier failed efforts, a ballot initiative championed by Schwarzenegger finally passed last year that will redraw the districts. But that won’t take effect until after the 2010 census, so for now the two parties are largely controlled by what Bruce Cain at Berkeley calls “the Taliban.” The result? Gridlock in Sacramento, a standoff between the parties of “no more taxes” (Republicans) and “no more cuts” (Democrats).

The Taliban! You have to love that truth of the term and its emphasis on the blame both parties and the interests that back them share for this mess.

State Dems Release Budget Plan

Democratic state legislators unveiled their counter-proposal to Governor Schwarzenegger's budget plan, which relies entirely on spending cuts and raiding local government funds to balance the projected $24.3 billion state budget deficit for 2009-10.

According to an article the Daily Bulletin, the Democratic plan would still cut $11 billion in services, but would also raise taxes and fees to the tune of $2.1 billion. Among these increase would be a $15 hike in the vehicle license fee, a 4.8% charge on property insurance premiums to pay for state-funded firefighting efforts, a 9.9% oil extraction tax, and a $1.50 a pack tax on cigarettes.

Among the cuts are $4.5 billion from K-12 education, $2 billion from state colleges and universities, and $490 million from community colleges. Health care, public safety, and human services will also take hits, though not as much as under the Governor's plan.

The plan also includes some gimmicky proposals, such as deferring state employee paychecks by one day, from June 30, 2010, to July 1, in order to push about $1.2 billion in spending into the next fiscal year.

Props 1A, 1B, 1C, 1D, and 1E Lose

Sacramento Bee Election Results

Prop 1A failed 65.9% to 34.1% statewide

Prop 1B failed 62.6% to 37.4% statewide

Prop 1C failed 64.6% to 35.4% statewide

Prop 1D failed 65.8% to 34.2% statewide

Prop 1E failed 66.4% to 32.6 % statewide

Prop 1F passed 73.9% to 26.1 % statewide

See this link for results from the California Secretary of State. Hover your mouse cursor over the map to see individual county results.

Voter turnout was low, in the 20% range according to early numbers:

From the Silicon Valley Mercury News:
"Statewide numbers also set a record low. With more than 68 percent of California precincts counted, voter turnout was just 19 percent. The previous low for a special election was 36 percent, set in 1993."
Governor Arnold Schwarzenegger was in Washington D.C. on election day, probably looking for alms.

We've already discussed some of the implications for Claremont, here

Cast Your Ballot Today

If you haven't already voted by mail, don't forget to get out and vote in today's special election. For those of you have waited until the last minute to decide, you can find all the information you want about the six ballot measures on SmartVoter's website. You can also look up your polling place by typing in your street address and zip code.

Governor Schwarzenegger, who has already voted by mail, won't be around to watch as voters head to the polls. Politico.com says the Governor will be in Washington, DC, today. Politico's article, by Andy Barr, quoted Claremont McKenna College political science professor John J. Pitney Jr. on Schwarzenegger's woes:

"He's morphed from The Terminator to The Incredible Shrinking Man," said John J. Pitney Jr., a political scientist at California's Claremont McKenna College. "He came to office promising to set our fiscal house in order. Now the house is collapsing and the best he can do is pull bodies from the wreckage."

If successful, the propositions would leave the state with a projected $15 billion budget shortfall rather than the expected $23 billion hole.

While the California governor is staring an electoral beating in the face, spokesman Matt David said the governor intends to fight on.

"This is an important election where the governor will be trying for the third time to fix the state's broken budget system," David told POLITICO. "He believes the state will continue face deficit problems until there is reform."

Schwarzenegger though, won't be present to make much of a last minute push.

After receiving a call from the White House Saturday requesting his presence Tuesday when President Barack Obama unveils stricter fuel-economy standards, Schwarzenegger will spend the day in Washington rather than Sacramento.

Schwarzenegger is not "solely or even mainly responsible for the state's problems," said Claremont McKenna's Pitney. "The political system thwarts reform and the economic system leads to a boom and bust cycle of state finance."

Endgame

If you saw last Tuesday night's Claremont City Council meeting, you heard City Manager report on the current state of the City's budget. There was good news and bad news.

You'll recall that the City scrambled to balance the budget for the fiscal year ending June 30th. The cost savings were met by a combination of across-the-board departmental cuts, reductions in employee compensation, a hiring freeze, and some one-time accounting maneuvers.

So, the good news is the city budget is balanced for the next six weeks, through June 30.

The bad news is that Claremont's projected $2 million budget deficit for FY 2009-10 may grow significantly if the state pulls local funds to fix its own budgetary problems.

You've no doubt read that because of the recession, California's tax receipts have declined significantly, so that the state is facing a projected $15.4 billion deficit in the upcoming fiscal year. And that's without the key ballot measures (1C, 1D, and 1E) passing in this week's special election. If the measures fail, the deficit is projected to grow to over $21 billion.

City Manager Parker also described the budget situation in this in his weekly Friday report posted on the City's website:

STATE BUDGET

On May 14 Governor Schwarzenegger released his May budget revise for the 2009-10 fiscal year. The state is now projecting a $15.4 billion dollar shortfall, assuming the Propositions on the May 19 ballot pass and a $21.3 billion dollar shortfall if they do not. While the majority of cuts to balance this shortfall will affect state agencies and state employees, there are some impacts to local government.

The county is likely to have mental health and other medical related responsibilities increased as the state shifts the responsibility. There also may be reassignment of prisoners from state prisons to county jails.

The largest impact to the City of Claremont listed in the May revise at this time, is a $640,000 loss to the general fund due to the state plan of borrowing $2 billion dollars from local government under the provisions of Prop 1A. Prop 1A allows for the state to borrow 8% of local agencies property tax. It also requires the state to pay back local agencies within three years.

Staff is continually monitoring the state budget situation and will provide updates and more information as it becomes available.

Governor Schwarzenegger unveiled two possible budget plans, one to be used if the ballot measures don't pass, and a more Draconian one to be employed if the measures fail. Besides borrowing $2 billion from local government funds, the later includes: laying off 5,000 state employees, selling off state-owned assets like the Los Angeles Memorial Coliseum (sorry Trojan fans), cutting healthcare spending, reducing the school year by seven days, cutting education spending by $5 billion, trimming the school year by a week, and borrowing $6 billion. Oh, and then there's that release of 38,000 prisoners from state correctional facilities.

That last one smacks a bit of blackmail: Vote for my propositions or I'll loose the howling hellhounds! The Governor isn't really going to release them. He's talking about moving 19,000 illegal immigrant prisoners to federal prisons and transferring another 19,000 low-level inmates from state facilities to county jails.

It doesn't sound as if voters are buying this. Polls show the props losing, and the Los Angeles Times had an analysis yesterday that indicated the electorate is all for forcing Sacramento to take responsibility for the mess. The article, by Michael Rothfeld, said:

Many voters don't understand the propositions' crazy quilt of provisions, drafted to please different politicians and constituencies, and some see them as another empty promise. David Wells, 64, a retired procurement officer from Hawthorne, said the measures seem like elected officials' way of pawning off their responsibilities onto the people they represent.

"What's the governor's function if it isn't to control normal, everyday spending of the state?" Wells asked.

In any case, even under Schwarzenegger's best scenario, there will be a lot of cutting to be done. Maybe at long last we've finally reached the end of rationalization in Sacramento. Governmental budgets at all levels are the last remaining speculative bubbles, and economic realities are bursting those. We wondered for years when voters were going to demand that the politicians they've elected give up their respective ideological ground and face the fiscal facts.

Democrats, that means less spending and more truth about the real costs of services; Republicans, that means higher taxes and an admission that most people like a certain level of government service beyond mere public safety. Both parties need to stop worrying about the proverbial next election and act as public servants.

Lastly, voters of all ilks, stop being stupid about things and take time to actually educate yourselves about real the real costs and benefits of government and then get off your butts and vote. We really have no one to blame but ourselves for the gridlock.

Friday Foto Shop

Friday Foto: Schwarzenegger Passes Obama in Pomona

If the Inland Valley Daily Bulletin can have one First Amendment Friday every couple of years, we figured we could inaugurate an irregular feature--the Friday Foto Shop.

Through technical means available only here, we are able to present a Foto somehow missed by the other media.

We know that President Obama was in Pomona and, well, very, very close to Claremont late last month. And you may recall the fundraiser for Assemblyman Anthony Adams last week in Glendora that was attended by Governor Schwarzenegger. What was somehow missed by everyone (but us) is this apparent and nearly irrefutable fotographic evidence that these two worthies (the Pres. and the Gov.) actually passed each other in their repsective beefy, masculine, heavily-armored and authority-oozing black-vehicle convoys while driving on a Pomona street.

Now there might be some people who maintain this never happened. Who are you going to believe?--them or your lying eyes?

Anthony's Excellent Evening with Arnold

As this is written Claremont's Assemblymember, Anthony Adams, is the feted guest at a lavish fundraiser in Glendora. Governor Arnold Schwarzenegger is the draw. Adams faces a potential recall and in fact was served with the legally-required recall papers this afternoon prior to the gathering of the guests by Mike Schroeder, a leader of the effort.

The drum for this recall effort is being beaten by KFI Radio's John and Ken, who in Fall of 2004 went after Congressman David Dreier (unsuccessfully).

This whole tempest, including the fundraiser, is due to Republican (RINO?) Adams going back on his promise not to raise taxes, and voting with Democrats to allow the recent budget deal and huge tax hike to pass in the Assembly. This action has stirred a hornets' nest of opposition within his own party. As part of the deal, Governor Arnold promised Adams tangible help. Like this fundraising event with himself as the draw.

Adams now has 7 days for to prepare an answer to the recall. From the documents filed by the proponents and Adams' answer, a petition will be prepared. When it is approved, the proponents have 150 days to collect some 50,000 signatures to ensure they meet the legally required number, which is nearer 30,000. They are shooting for an election, which must be called by the Governor between 47 and 62 days after the petitions are certified, sometime around November.

A reader sent some photos taken this evening as a very small group of protesters gathered at the entrance to the estate. No word on whether Sam Pedroza attended, as he co-hosted a fund-raiser for Adams just two years ago (see flyer, right).

There's a lot more to this story and to the personalities, but for now just enjoy the pictures of a pleasant Spring afternoon in Glendora:

The protesters never numbered more than about fifteen.
Leaders Lee Lowrey and Mike Schroeder in middle distance

The protesters might well have been outnumbered by the police

The mansion on the hill where the fundraiser was held

The gubernatorial motorcade approaches

Is that Governor Schwarzenegger?

Is it?

* * * * * *

A H/T to a reader for the photos

Early Spring

The year has cast its cloak away
That was of driving rains and snows,
And now in flowered arras goes,
And wears the clear sun's glossy ray.

No bird or beast but seems to say
In cries or chipper tremolos:
The year has cast its cloak away
That was of driving rains and snows.

From Rondeau
- Charles d'Orleans
Translated by Richard Wilbur

It's hard to believe just a few short weeks ago we had freezing temperatures, pouring rains, and snow down to the top of Potato Mountain. All that's a dim memory now. The sun may still has three more weeks before it reaches the halfway point in its northward crawl, but it sure felt a lot like spring these last few days.

This past weekend we had glorious weather, and it was great to get out and enjoy the warm sunshine before we cool off again in the coming days. The weather reports say we may get a little spritz of rain, though not nearly enough to break the drought we're in, which is why Governor Schwarzenegger last week declared a drought emergency for California. Water rationing for farms and cities appears to be on the way, and a long, dry fire season awaits. But for now, the hills are still green, and the frogs are croaking away in great choruses if you're up for an evening hike.

Might as well celebrate the good weather while it's here.

State Budget Report - UPDATED

UPDATED, 6:35AM: The Sacramento Bee reports that the California State Senate approved the state budget agreement early this morning, winning over State Senator Abel Maldonado, R-Santa Maria, who got the three proposed constitutional amendments he wanted, minus a provision for withholding legislators' pay when they cannot approve a budget. The issue now goes to the State Assembly, where it expected to pass before being sent to Governor Schwarzenegger to sign.

California's budget standoff continues. The holdup remains the State Senate, which is one Republican vote shy of approving the budget patch to fix the state's projected $42 billion deficit through June, 2010.

The State Senate has been locked down, with senators having to bring sleeping bags into their chambers. A couple nights ago, it looked like there might be an agreement in the works, but that all fell apart as the Republican caucus sacked it's leader, Sen. Dave Codgill, and replaced him with a harder-line Sen. Dennis Hollingsworth.

The Sacramento Bee had the story on the leadership change:

Sen. Tony Strickland, R-Moorpark, who was named as the caucus' elections chair, said he hoped the change in leadership would "let California know where we stand on this $14.3 billion tax increase. We believe that tax increases are harmful to the people, the hardworking California families."

But [Sen. Abel] Maldonado said he disagreed with the change in the midst of budget negotiations.

"I just can't believe that in the middle of the night we would oust our leader," he said. "I didn't support Dave Cogdill for leader, but I didn't vote to vote him out today. It's the wrong time to make a change in this process."

Cogdill faced criticism throughout the weekend after negotiating a budget deal with other legislative leaders and Schwarzenegger but failing to secure enough votes in his caucus. Some members, including Maldonado, criticized his leadership skills, but others acknowledged that few members could control such a splintered caucus.

"I certainly wish the new leader all the best," Cogdill said before Hollingsworth was chosen. "It's an extremely difficult job."

Maldonado may prove to hold the single game-changing vote. The Bee reported early yesterday evening that State Senate Democrats were drafting three proposed constitutional amendments that Maldonado sought. The measures would go to the voters as ballot propositions. According to the Bee:

Maldonado, R-Santa Maria, could provide the crucial 27th vote necessary to pass a budget package that has been stalled since Saturday. In a lunch meeting at Spataro with Gov. Arnold Schwarzenegger, Maldonado asked for ballot measures to create an open primary system, prohibit legislative pay raises in deficit years and stop legislators from receiving salaries if they do not pass a budget on time.

Measures containing those three constitutional amendments are being drafted today. Maldonado spokeswoman Brooke Armour said constitutional lawyers are reviewing the three measures.

The sticking point for the Republicans is taxes. The Republican State Senators took pledges to not raise taxes, and going back on those pledges might be a killer for the political careers of a good many of them. They're really caught between a rock and hard place on this one. As L.A. Times columnist George Skelton pointed out on Monday, when you look at the budget math, no matter how much you hate the idea of raising taxes, there's really no way of balancing the budget without some form of tax hikes.

To begin with, there's all those payments on various bonds California voters have approved over the years to finance all sorts of education, healthcare, transportation, law enforcement, and environmental projects. Claremont's own Padua Ave. Park was slated to be partially funded to the tune of $850,000 by money from just those sorts of state bonds, and Claremont feeds regularly at the state bond trough.

All that those bond payments get paid out first because California's credit rating would take a huge hit if the state started missing payments to its bond holders. So, right away you have about a 5% chunk of California's annual revenues that can't be touched. (That ratio is likely higher now that sales tax and capital gains tax revenues have cratered.) The state's Legislative Analyst's Office had a breakdown of the state's bond debt prior to last November's election:



The LAO estimated California's bond payments to be about $4.4 billion in fiscal year 2007-08 on a total bonded indebtedness of about $53 billion. The state also has approximately $68 billion in unsold bonds that have been approved by voters.

So, if you're totally against raising taxes, where do you find the $42 billion in savings? The Times' Skelton wrote:

Well, you could fire every state worker under the governor's control and the savings wouldn't come close to balancing the budget.

According to the state budget document, there is the equivalent of 205,000 full-time jobs controlled by the governor. There actually are more workers than that because some are part-time. Do the math based on 16 months, since that's now the time frame of the projected deficit, assuming a balanced-budget package could be implemented by March 1.

You could lay off all those state workers -- rid yourself of their pay and benefits -- and save only $24.4 billion.

Meanwhile, you would have dumped 160,000 convicted felons onto the streets because all the prisons were closed after the guards and wardens were fired. There'd be no Highway Patrol because all the officers were canned. State parks would be closed because there were no fee-collectors or rangers.

Truth is the savings wouldn't even add up to $24.4 billion because some of those employees are paid out of small special funds that are self-sustaining. It's the big general fund that suffers the deficit. But let's say the books could be shuffled mysteriously and all that savings realized. You'd still need a lot more.

OK, lose the Legislature, you say. It's good for nothing. But it's also not worth much when you're trying to fill that size deficit hole. The Legislature's 16-month cost is roughly $400 million.

So now one branch of government is critically wounded, and another is dead. And we're still $16 billion short of enough savings.

What many people don't realize is that around three-fourths of the state's general fund flows out to schools and local governments, much of it because of voter-passed laws.

But there is another place to look for savings: You could cut off all state money to higher education -- the two university systems and the community colleges. That would save the remaining $16 billion.

Don't like any of the above -- all those firings and slamming college doors on kids?

Instead, you could eliminate virtually all state money for healthcare and social services -- grants for the aged, blind and disabled, assistance for the homebound, medical care for the poor, mental health treatment, welfare. . . . No exceptions.

Of course, you'd then be turning away tons of money from Washington, which shares the costs. And you would be violating some federal laws. But there, it's done. You've avoided a tax increase. What a state!

And those are the choices. Voters, it's time to take responsibility for your past decisions on your representatives and on the debt you've approved. You decide. And those of you who don't vote? You get no say.

Possible State Budget Accord Reached

The Sacramento Bee reports Governor Arnold Schwarzenegger and the states four legislative leaders (the Big Five) have reach a tentative budget agreement that will close the projected $42 billion budget gap through the end of the 2009-10 fiscal year.

The Bee says:

The plan includes $15.8 billion in spending cuts, $14.3 billion in taxes and $10.9 billion in borrowing, according to a budget outline obtained by The Bee.

Leaders are counting on federal stimulus money as the package approaches closure in Washington. If California receives at least $10 billion, more than half of that money -- $5.5 billion -- would eliminate the need for a short-term loan, while $1.8 billion would eliminate taxes and $1.2 billion would eliminate spending cuts.

The plan would raise sales taxes by 1 cent on the dollar, increase income taxes across the board and hike the vehicle license fee from the current 0.65 percent of the vehicle's value to 1.15 percent. The taxes would last a minimum of two years. If the federal stimulus money arrives, the income tax increase would be reduced.

The proposal would cut the state's dependent credit in half, raising taxes for parents and those who take care of elders.

According to the Bee, the state legislature will vote on the agreement Friday, though a few details have yet to be worked out. The Bee's article also states that the deal will rely on $10.9 billion in more borrowing, this time against future state lottery revenues. The borrowing will have to be approved by California voters.

There will also be a $8.9 billion cut in state education spending, though Sacramento will ask voters to change state law to allow the cuts in education to be restored at a later date. $5 billion of education cuts will come from K-12 spending (Claremont Unified better batten down the hatches). The state will also completely cut funding for local transit agencies - this means you, Foothill Transit.

In addition, Schwazenegger would get some of the changes in state environmental laws he has sought to spur construction. Another concession to Republicans is the institution of a state spending cap and the creation of a rainy-day fund.

Games of Chance

The Sacramento Bee's Capitol Alert has an annual budget pool contest. Guess the exact day and time the state legislature and Governor Schwarzenegger agree on a budget for 2009-10, and you win a prize!

You have until noon today to enter. Here's the information from the Capitol Alert website:

"So now we have a situation where we actually have a chance to have a budget five months before the constitutional deadline and that's what I'm shooting for," he said at the Sacramento Press Club last week.

There will be no tinkering around the edges in this contest. We're looking for the exact date and time both legislative houses have passed the 2009-10 budget bill - one ultimately signed by Schwarzenegger. Entries are due by 11:59 a.m. this Thursday.

It could come within a few days, or a week. Or lawmakers could pass a stopgap measure and hold off on tackling the whole enchilada until the summer months. Or the fall.

Your guess is as good as ours. Except with the possibility of a $25 gift card from Starbucks that we'll hand out to the winner.

Send in your guess to contest@capitolalert.com. Pick an exact day and time the budget will have passed through both houses of the Legislature. Include your full name. All entries must be sent in by 11:59 a.m. Thursday, February 5. (Click for the full legal rules.)

Also, Capitol Alert reports that California's $42 billion budget deficit, while by far the worst in the country in total dollars, is exceeded by several states, including two of our immediate neighbors, if you look at the deficit as a percent of general fund expenditures:

California's current shortfall has been pegged by Gov. Arnold Schwarzenegger at $15-plus billion while the new NCSL study says all states are reporting a $47.4 billion problem. Schwarzenegger says the state faces another $25 billion deficit 2009-10 and NCSL says that, too, approaches a third of the national state budget deficit of $84.3 billion.

While California's projected 2009-10 deficit of 22.3 percent of general fund spending is among the nation's worst in proportionate terms, there are states facing more horrendous deficits, including Nevada at 37.6 percent, Arizona at 28.2 percent and New York at 24.3 percent.

This information comes from a report by the National Conference of State Legislatures, which you can read here.

More Budget Talk

As California's leaders continue to fiddle in Sacramento, the state's financial house continues to burn. Today's Los Angeles Times had a front-page article about the bond rating agency Standard & Poors reducing California's bond rating so that it is now ranked last among the 50 states:

Citing the state's prolonged budget impasse and its nearly empty treasury, Standard & Poor's lowered its rating on $46 billion in general obligation bonds, which investors usually consider one of the safest investments because they are backed by taxpayers.

By reducing California's bonds from an "A-plus" to an "A" rating, the agency declared that it now considers even the debt of Louisiana -- whose credit had been ranked equally with California's -- a more trustworthy investment. Most states are rated "AA" or "AAA."

"Our rating recognizes our view of the lack of political progress around the budget negotiations that we believe is serving to exacerbate the state's current and projected cash position," Standard & Poor's wrote in its report.

In other state budget news, the "Big Five" - Governor Arnold Schwarzenegger, State Assembly Speaker Karen Bass, State Senate President Pro Tempore Darrell Steinberg, Assembly Minority Leader Michael Villines, and Senate Minority Leader Dave Cogdill - have been meeting in secret trying to reach a budget accord that will patch (the operative word in any California state budget negotiation) the state's projected $42 billion deficit.

The Sacramento Bee's Kevin Yamamura has an article exploring the reasons for the secret budget meetings in which he writes:

Gov. Arnold Schwarzenegger and the four legislative leaders have continued their negotiations behind closed doors for weeks, bypassing open legislative committees and offering the outside world few details as a precondition of their talks.

They fear special interests will mobilize on every proposal they hear about, ramp up pressure on lawmakers and prevent any possibility of reaching a deal that could secure enough votes.

Those special interests include, on the left: labor unions, environmental organizations, and education lobbyists; and, on the right: anti-tax groups and business group lobbyists.

The Sacramento Bee also reports that the California State Auditor has placed the budget on its lists of high risk issues:

"Based on the current fiscal crisis and a history of ongoing deficits, the Bureau of State Audits has added the state's budget condition to its list of high risk issues," the report says in an introduction. "The record breaking delays in passing the fiscal year 2008-09 budget, the need for subsequent special sessions, and the multibillion-dollar budget gap lawmakers are attempting to close highlight the potential for the state's budget process and condition to add significant roadblocks to the tasks of managing and improving state and local government."

Among other things, the report points out that over the last two decades, the state has faced deficits more often than surpluses and the former have outweighed the latter, $146 billion to $30 billion. It also notes that in closing deficits, governors and legislators have often used expedient, short-term methods that "only deferred the problem into the future."

All these issues, of course, have their local impacts. Money the state has promised but cannot deliver results in local projects being scaled back, as we've seen with Claremont's Padua Ave. Park, which is going forward without $850,000 in state grant money that was supposed to go towards native plant landscaping, walking paths, and low-water irrigation. Claremont, facing its own $3.5 million deficit over the next year-and-a-half, is in no position to make up the project's sudden shortfall.

So, sustainability, you take one one for the team on this one.

No Credito Hoy

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.

Santa to Sacto: Here's Your Coal

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Sacramento's problems, some of which we discussed yesterday, aren't going away easily, and this is leaving us with the impression that our Governator and our state legislators have been decidedly naughty with our state's finances this past year. Elected officials beware: Santa's got a good memory.

The state's inability to fund its short- and long-term debt because of the Great Credit Freeze of 2008 made the New York Times yesterday. The NYT carried an article about states (not just California) having to suspend a variety of highway and infrastructure projects, and the article explained some of California's unique problems:

Last month, when the state tried to restructure existing debt with an additional $523 million offering, it had to reduce the offering by two-thirds, said Tom Dresslar, the spokesman for Bill Lockyer, the California treasurer.

“The institutional investor interest was nil,” Mr. Dresslar said.

Further, the State Legislature’s inability, with the governor, to figure out a way to deal with the state’s $15 billion budget gap has weakened the market’s confidence in California, something other states could face if the fiscal situation deteriorates.

This month, Standard & Poor’s downgraded the $5 billion in revenue bonds issued by California last month and put more than $50 billion of debt on watch for a downgrade.

“The bottom line is we are not viewed as a quality investment,” Mr. Dresslar said, adding that California is not in position to offer the sort of fat interest rates needed to get offerings off the ground.

It turns out that the financial crisis is rippling through all parts of the state. On Sunday, we wrote about the potential problems facing the city of Claremont in its quest for grant money to fund the Sycamore Canyon Park restoration.

And back on December 18th, the San Gabriel Valley Tribune had an article about the San Gabriel and Los Angeles Rivers and Mountains Conservancy (RMC) having to suspend all its projects (including ones for which funding had been approved) because the state has stopped selling the bonds that generate the RMC's grant monies.

The SGV Tribune article explained the RMC's dilemma:

The area's biggest habitat restoration agency has asked all of its partner cities to halt all new construction. "These projects literally had shovels in the ground, or at least they used to be in the ground until we told them to stop today," said Belinda Faustinos, executive director of the San Gabriel & Lower Los Angeles Rivers and Mountains Conservancy (RMC).

A project to beautify and clean up 26 acres of land near the Canyon Inn in the San Gabriel Mountains was put on hold after a planning agency lost $20,000, said Jane Beesley, also of the RMC.

Below we've posted an image of the letter the RMC sent out to its grantee cities advising them of the cutoff of funds for projects that had been previously approved. (Thanks to the reader who forwarded this to us.)

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Item #2 in the letter should be of some concern to the City of Claremont with regards to Padua Ave. Park, which is dependent on an $850,000 grant from the RMC to complete its combined Phases 1 and 1A. Item #2 states that effective 12/18/08 all state entities having expenditure control and oversight of General Obligation bond and lease revenue bond programs shall "Suspend all projects, excluding those for which the Department of Finance (DOF) authorizes an exemption based on criteria described unless the contracting entity can continue with non-state funding sources (private, local, or federal funds)."

In other words, Claremont may be on the hook for the RMC's $850,000 share of the Padua Park construction costs unless the City has an out written into their contract with the company building the park. As the latest sign at the Padua Ave. Park site explains, a good chunk of the project is supposed to be built with RMC dollars:

A funding well runs dry....

The RMC's and the state's money problems may be the reason that the other new sign at the park site incorrectly states that construction began on November 4, 2008. In fact, no construction (other than a ceremonial ground breaking in October) seems to have occurred. Here's that other sign:

City at work?

What all this means is that the city of Claremont may have to retouch that photo of the City Council taken on October 14th showing the Council receiving a ceremonial banner-sized check from Belinda Faustinos, the RMC's executive officer. It's a shame the city didn't cash that big check before the state closed the account.

If the RMC and the City of Claremont want to practice truth in advertising, they might want to use the following photo:

October 14, 2008, Claremont City Council
proudly receives $850,000 rubber check from RMC

Sacramento's Finances in Tatters

California's money woes continue to dominate the local news. California Controller John Chiang has issued dire warnings that the state may run out of money in two months and would then have to issue IOU's to vendors, and the the state legislature and governor's office continue their deadlock over any sort of budget fix.

California is currently facing a $14 billion deficit in the current fiscal year and a $42 billion deficit through the end of FY 2009-2010. And the state's Standard and Poor's credit rating is now tied with Louisiana's for the lowest of any of the 50 states. As a result, the state last week had to suspend the sale of bonds, placing infrastructure projects up and down California on hold.

Who's to blame? It depends on whom you ask. Democrats blame Republicans for refusing to consider any tax increases, while Republicans say Democrats are refusing to cut any spending. The Daily Bulletin today had an article quoting Republican Governor Arnold Schwarzenegger's spokeperson as fixing blame on Democrats and Republicans both:

By the afternoon, Schwarzenegger Communications Director Matt David lashed back on behalf of the governor. He said neither side has been willing to transcend party politics and special interests to make concessions.

"The Democrats want to block cuts to state government spending, and the Republicans want to block revenue increases because they have signed pledges to protect special interests," David said in a statement. "Legislators were sent to Sacramento to fix problems, but now what they're doing is making the situation worse because every day they don't act our problem gets $40 million worse."

If lawmakers fail to pass an updated budget plan, state Controller John Chiang said his office will be forced to defer billions of dollars in payments or issue IOUs to state contractors. He says the instability of the banking industry has made borrowing money to bridge the gap an uncertain possibility.

The state would not be able to pay vendors who provide everything from food for prisoners to nursing care for seniors.

"The state's dire cash position not only jeopardizes and places at risk our ability to meet our financial obligations in a timely manner, it threatens our ability to respond to natural disasters and protect our communities from crime," Chiang wrote.

The Los Angeles Times had an editorial today that argues it's high time to do away with the requirement of a two-thirds majority to pass a budget. The Times piece noted that California is one of only two states (Arkansas and Rhode Island being the others) that has such a stricture. The super-majority budget vote has been in place since 1933. At that time, the two-thirds majority was only needed if the budget was going to increase by more than 5%. In 1962, the law was extended to cover all proposed state budgets.

Some Republicans apparently see the hazards of the super-majority requirement and are arguing for change as well. The Times described two proposals for fixing the problem, one from Democratic State Assembly Speaker Karen Bass and one from Republican State Senator Mimi Walters:

Going back to majority votes for budgets, as was the case before 1933, would put California in the company of most other states, and Assembly Speaker Karen Bass (D-Los Angeles) introduced a constitutional amendment to that effect at the beginning of the current session. It adds a twist: The simple-majority requirement evaporates, and once again becomes two-thirds, for any budget bill not adopted by June 15. That's similar to Illinois, Maine and Nebraska, where, the argument goes, there's an added incentive for the majority to get its work done on time.

But California Republicans, too, recognize the problem caused by the runaway supermajority rule. Sen. Mimi Walters (R-Laguna Niguel) also has introduced a constitutional amendment. Hers would be a pre-1962, but not pre-1933, simple-majority measure. It's actually quite shrewd: Democrats, or whoever is in the majority, would be able to adopt a budget on a majority vote, but only if it represents growth of 5% or less over the previous year. The Republicans would have their spending cap, but it could be breached. That's similar to Connecticut and Hawaii, but it's worth noting that it has been years since California produced a budget with growth smaller than 5%.

However we get it done, we need some grown-up leadership in Sacramento. On the local level we're every bit as bad, spending far beyond our means without setting aside any sort of serious rainy day fund and counting on grant money to rain down from state and federal agencies to subsidize our municipal projects and services. Now that the flow's been shut off, we'll get to see how grown-up our own leaders in City Hall are.