by JASON | 10:33 PM in |

Update 6/17/2009... bold italics mine...

California lawmakers were poised to miss their constitutional deadline on Monday for a state budget, bringing the state's government closer to running out of cash.

Democrats and Republicans in the legislature's budget conference committee worked through Monday afternoon on a variety of proposals addressing Gov. Arnold Schwarzenegger's plan to close a $24.3 billion budget shortfall, but they failed to find common ground on its most dramatic proposal: eliminating the state's welfare system.

"This meeting is not headed in that direction," Republican Assemblyman Roger Niello said.

California's revenues are plunging amid recession, rising unemployment and the prolonged housing crisis, and the state is unable to borrow its way out of its immediate financial trouble by issuing debt at low cost because of its budget gap.

It will run out of cash within weeks if it does not balance its books, leaving it little option but to postpone a variety of payments, according to State Controller John Chiang, who estimated last week that California was "less than 50 days away from a meltdown of state government."

The latest ultimatums have arrived: State Controller John Chiang is warning the governor and legislators that, unless they act swiftly to balance the budget, the state will run out of cash by July 28. And Gov. Arnold Schwarzenegger is telling legislators that he would allow a government shutdown before he would permit them to bridge the gap with high-interest loans.

"Cash is king now, in terms of our focus," Chiang said, adding that the state's cash flow is about to become so precarious that a wildfire or other natural disaster could accelerate the day of reckoning.

The defeat of the May 19 ballot measures - which would have brought $5 billion from a lottery-finance scheme and another $1 billion in diversions from taxes dedicated to early-childhood and mental health programs - is only one factor in a deteriorating budget situation. The main problem is that revenues continue to fall further and further behind even scaled-back projections.

In May alone, revenue fell $827 million short of an estimate that had been adjusted downward earlier that month.

"Until we have a sign that the free fall is bouncing - which is not the case yet, it will be most likely by the end of this year - until that time comes, we have to assume the worst," Schwarzenegger said.

The Obama administration has turned back pleas for emergency aid from one of the biggest remaining threats to the economy -- the state of California.

Top state officials have gone hat in hand to the administration, armed with dire warnings of a fast-approaching "fiscal meltdown" caused by a budget shortfall. Concern has grown inside the White House in recent weeks as California's fiscal condition has worsened, leading to high-level administration meetings. But federal officials are worried that a bailout of California would set off a cascade of demands from other states.

"This matters for the U.S., not just for California," said U.S. Rep. Zoe Lofgren, who chairs the state's Democratic congressional delegation. "I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not."

Underscoring the severity of California's cash crisis, Controller John Chiang, who has previously warned the state's government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.

Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger's budget plan by $827 million, Chiang said.

The state's revenues from personal income taxes tumbled by 39.3 percent in May from a year earlier while revenues from corporate taxes fell by 52.1 percent and revenues from sales taxes sagged by 7.6 percent, according to a report released by Chiang's office.

California is now on course to spend $24.3 billion more than it takes in through the fiscal year that ends June 30, 2010.

Possible solutions: It is extremely unlikely the Legislature will approve new taxes to bridge the gap, since such increases would require a two-thirds vote, and Republican lawmakers remain adamantly opposed. The governor has proposed deep cuts, including the closure of state parks and the elimination of programs providing welfare-to-work assistance, grants to college students and health care to more than 900,000 children in low-income housing. Democrats are working on an alternative package that is expected to include a blend of cuts and revenue increases - most likely fees that would not require the two-thirds vote.

If legislators fail to act: The state is projected to run out of cash by July 28. Without a balanced-budget plan in place, the state would have two options: borrow at high interest rates to maintain its cash flow - assuming Wall Street would be willing to lend billions in the face of such uncertainty - or defer payments and run the risk of insolvency. Last week, Gov. Arnold Schwarzenegger said high-interest borrowing was not an option he would consider.

The outlook is bleak as I think we are still near the beginning of the correction. Here is my prediction...

I think the proverbial crap will hit the fan between August and October as unemployment payments dry up and social nets (& credit cards) disintegrate...which will make for one ugly Christmas and blow away the retail sector by Feb/Mar...

Update 5/28/2009...
Faced with a ballooning deficit and a clear signal that voters won't pay more to fix it, California Gov. Arnold Schwarzenegger released a budget plan Tuesday that would eliminate welfare, drop 1 million poor children from health insurance, cut off new grants for college students and shut down 80 percent of state parks.

In a state that long has prided itself on its social safety net, it could well go down in history as the most drastic reduction in social programs ever. And billions in further cuts will be unveiled later this week.

The governor's proposal to whack an additional $5.5 billion from state programs stunned even longtime Capitol-watchers with its blunt force. Ending cash assistance for 1.3 million impoverished state residents, for example, would make California the only state with no welfare program.

"Every single first-world nation has a safety net program for children," said Will Lightbourne, Santa Clara County's social services director. "This would return us to the era of Dickens — you'd have to go back to the 19th century to find a comparable proposal."

The governor's office reiterated that the cuts were painful but unavoidable, with the proposed budget for the 2009-10 fiscal year already outdated before lawmakers even begin debate. Schwarzenegger's finance team now says the deficit will grow to $24.3 billion by July 1, up from the previous $21.3 billion projected shortfall.

So, in the wake of the resounding "no" that came from a disillusioned electorate, he has held true to his promise and then some:

# The budget proposal would eliminate vast swaths of programs, including CalWORKs — the welfare program serving more than 521,000 families who now receive $526 average monthly grants — and Healthy Families, which subsidizes health care for low-income children whose families don't qualify for Medi-Cal. Those cuts would also cost the state billions in federal matching funds.

# Medi-Cal coverage for dialysis and for breast and cervical cancer treatment for those over age 65 would be cut. Undocumented immigrants would lose nonemergency health care.

# In the prisons, rehabilitation, education and vocational programs would be hacked. So would the sentences of nonviolent, non-serious offenders, who would go free a year early.

# More than 200,000 college-bound students would lose some or all of their tuition assistance under the Cal Grant program. New grants for students to attend college would be eliminated, and existing grants would be reduced. All of that would come on top of $335 million in cuts for the University of California and California State University systems — which already have seen $415 million in cuts this year, forcing student fee increases.

California voters have rejected five budget measures in a special election, forcing Gov. Arnold Schwarzenegger to face a $21 billion deficit, Jerome Corsi's Red Alert reports.

Just to drive the point home, the day after state voters rejected Schwarzenegger's spending ballot measures, the California Citizens Compensation Commission voted to slash pay for the governor, legislators and statewide officeholders by 18 percent.

The California taxpayer revolt evidenced in the rejection of the five budget resolutions by margins approaching two-thirds of the voters was consistent with the spirit of the April 15 tea parties held around the nation, in which average Americans protested the Obama administration's trillion dollar deficit spending and the move to increase federal and state taxes to finance the deficits.

The shortfall follows a February fix in which California legislatures closed a $42 billion California budget deficit by a series of step cuts and new taxes.

This time, Schwarzenegger may be forced to fire 5,000 of the state's 235,000 workers and engage in a series of additional cuts that involve slashing education by $5 billion, selling key state properties such as the Los Angeles Coliseum and borrowing $2 billion from local governments, according to the Los Angeles Times.

The newspaper also reported that a worst-case scenario could call for the release from state prisons of up to 19,000 illegals who would face deportation, plus the transfer of up to 23,000 state prisoners to county jails.

"The problem faced by states such as California is that the economic recession has lowered anticipated tax revenues at a time when a strategy of raising state taxes to increase state revenue is almost certain to be self-defeating, further depress economic growth rather than simply increasing state revenue," Corsi wrote.

Anticipating the bad news, Schwarzenegger traveled to Washington where he requested an Obama administration bailout in the form of a government guarantee on $6 billion in proposed California loans.

WND reported Rush Limbaugh's prediction that Schwarzenegger would argue to the White House that like the U.S. auto industry, California is "too big to fail."

"If the Obama administration concedes to blue state political pressure to bail out California, the request is certain to be followed by virtually every other state," Corsi noted. "Meanwhile, all signs point to the recession deepening in California."

In April 2008, foreclosed homes made up 38 percent of all homes sold in California; in April 2009, one year later, that figure increased to 54 percent, according to the Los Angeles Times.

April 2009 was the seventh consecutive month in which most homes sold in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties had been foreclosures.

Sales taxes were $452 million lower (-50.9%) than last April, and personal income taxes were down $5.7 billion (-43.6%).

California is responsible for thirteen percent of the total US GDP and if it were an independent nation it would be the tenth largest economy in the world.

The idea that we can have some sort of economic recovery while the sales tax receipts - which are a direct measurement of consumer activity - are down by half is pure insanity. Where is the economic activity that is going to create this "recovery"?

And let me remind everyone - sales tax receipts are not a lagging indicator, they tell you what is going on right now.

Reporting from Sacramento -- California could run out of money as soon as July, the Legislature's chief budget analyst warned Thursday, as a new poll showed voters poised to reject five budget-related measures on the May 19 ballot.

If the propositions do not pass, the state could find itself as much as $23 billion short of the money it needs to pay its bills over the next year, according to a new forecast by Legislative Analyst Mac Taylor.

On Thursday, the administration advised law enforcement officials that it was preparing plans to commute the sentences of 38,000 state prison inmates, including all illegal immigrants. It also is considering closing some prisons and sending inmates to county jails, according to a copy of the proposal obtained by The Times.

Under the plan, 19,000 illegal immigrants -- 11% of state prisoners -- would be turned over to the U.S. Immigration and Customs Enforcement Agency after having their sentences commuted. An additional 19,000 "relatively low-risk offenders" would have their sentences commuted as well.

Earlier in the week, the administration warned local officials that it may raid their budgets for $2 billion and close firehouses.

Adding to the fiscal woes, the Obama administration is threatening to pull $6.8 billion in stimulus funds from California in a dispute over an earlier state budget cut.

Even if the measures succeed, Taylor said, the state faces serious and immediate financial problems. California's credit rating is so weak that the state is unlikely to be able to borrow money to buy time to address them, he wrote. Lenders have signaled to California that they may not be able to make loans on the scale the state would need.,0,7342537.story

California’s budget shortfall grew last month, according to new figures released Friday by Controller John Chiang. The state’s cash deficit grew to $20.5 billion on April 30. California started the fiscal year on July 1, 2008 with a deficit of $1.45 billion. General Fund revenue was down $1.89 billion, or 16 percent, in April from budget estimates. Personal income taxes were down $1.06 billion, or 12.6 percent, and corporate taxes were down $831 million, or 35.6 percent, from estimates. Year-to-date revenue is $2.1 billion below expectations.

“The state’s last shortage and the resulting payment delays in February hurt California taxpayers, businesses, local governments and public works projects — and yet the crisis looming could be at least three times as bad,” Chiang said in a news release.

“Beginning this summer, we face a cash problem unseen in nearly eight decades, and the magnitude of that problem grows with every projected revenue dollar that fails to appear,” he added.

California’s sales-tax rate increased April 1, however revenue from the rate increase will not start to arrive until the end of May. The state’s sales-tax receipts were down $108 million, or 19.9 percent, in April compared to budget estimates.

With a May 19 special election less than two weeks away, a Public Policy Institute of California poll shows five of the six ballot measures well below the 50 percent mark needed to pass. The one proposal that is faring well — to curb pay raises for elected officials — would do virtually nothing to boost the state's financial fortunes.

One of the biggest stories in politics earlier this year was about California's budget teetering on the edge of a $42-billion deficit abyss. It only staved off insolvency when its legislature ended three months of gridlock to pass a budget with steep tax hikes and spending cuts. Guess what the Obama Administration is doing? It is telling Governor Arnold Schwarzenegger that it will revoke nearly $7 billion in federal stimulus money unless the state restores legislated wage cuts for unionized health-care workers.

Obama Administration to federalism: Drop dead.

California will have to borrow more than $20 billion unless state leaders close another multibillion-dollar deficit that will deepen if voters reject budget-related ballot measures on May 19, according to a report Thursday by the nonpartisan Legislative Analyst's Office.

The amount the state needs to borrow is unprecedented, according to the report, far outpacing California's record for short-term borrowing of $14 billion in the 2003-04 fiscal year. In recent years, such borrowing has floated between $5 billion and $7 billion a year.

Gov. Arnold Schwarzenegger and the Legislature could ease the crunch by quickly balancing the budget, which is projected to be at least $8 billion in the red, or $14 billion short if voters reject the ballot measures - which appears likely, according to a poll released Thursday.

If state leaders become mired in another months-long budget impasse, however, California will find it difficult to borrow "anywhere close to the needed amounts," the report said.

In addition, California may have to pay hundreds of millions of dollars in additional borrowing costs as a result of the banking crisis. In previous years, the state was able to secure lower interest rates by purchasing loan guarantees from commercial banks.

But banks have told state finance officials that they can at best back about $1 billion in loans, far short of the state's borrowing needs, said Tom Dresslar, a spokesman for state Treasurer Bill Lockyer.

Without sufficient cash, the state may be forced to delay or defer scheduled payments to schools, local governments, service providers and vendors doing business with the state.

Californians got a taste of delayed payments earlier this year when the state came close to running out of cash and Controller John Chiang withheld about $3 billion in payments, including tax refunds, in February. Funding for thousands of public-works projects was put on hold for months because of the cash crisis.

The latest report is yet another sign that California's finances continue to be in disarray as the state's economy struggles in the recession.

The study published Wednesday on the Center for Public Integrity's Web site analyzed government data on $1.38 trillion worth of subprime mortgages made from 2005 to 2007. The analysis found that about 56 percent of those loans were originated by 15 lenders from California.

"The size of the industry in California was massive," said John Dunbar, lead reporter on the six-person team that spent more than six months analyzing millions of mortgages.

Dunbar said his team still isn't sure why California was home to so many subprime lenders. The group's list of the top 25 subprime lenders was led by Countrywide Financial Corp. and included IndyMac Bancorp, which was seized by federal regulators last year. Wells Fargo Financial, a unit of the San Francisco banking giant, was ranked eighth in the group's tally, with at least $51.8 billion of subprime mortgages during the study period.

Consumer and industry experts said one reason lenders in California were so big in subprimes is that the state is the nation's largest and, arguably, costliest, real estate market, making it a natural home-lending center.

But Norma Garcia with the Consumers Union said California law doesn't protect people against lending practices that allow them to get in over their heads.

"California was a very comfortable place for these subprime lenders to do business," she said.

Redwood City mortgage broker Steven Krystofiak said divided oversight is one reason subprime loans got out of control. Krystofiak, an industry whistle-blower, said the Department of Corporations and the Department of Real Estate oversee different aspects of state-chartered mortgage lenders. Nationally chartered lenders are overseen by the Office of Thrift Supervision and the Comptroller of the Currency, as well as the Federal Reserve, which sets many basic rules for all lenders.

"No one regulator could have solved this," Krystofiak said. "It would have had to have been a group effort of numerous federal and state agencies."

Gov. Arnold Schwarzenegger, who vetoed the Democrats' $18 billion partial solution on Jan. 6, said last week he wants legislative leaders to consider his "four-legged" proposal: reducing spending by $16.5 billion with cuts in education, prisons and social services; increasing revenue by $14.8 billion mostly through a 1.5-cent sales tax hike; creating jobs by relaxing environmental regulations; and making state government more efficient by eliminating/consolidating unnecessary programs.

SACRAMENTO, California (AFP) — The giant calculator outside Governor Arnold Schwarzenegger's office adds nearly 500 dollars each second as California's budget deficit balloons inexorably toward 40 billion dollars.

The California governor's "deficit clock" calculator is a graphic reminder of what the State Legislative Analyst's Office calls "the fiscal crisis that has put our state on the edge of disaster."

And there soon might be much more painful examples for Californians, whose state ranks as the world's eighth-largest economy.

As Schwarzenegger and state legislators battle over proposed new taxes and spending cuts, state Controller John Chiang has warned the state could run out of cash as early as next week, saying payments may be deferred from February 1.

Chiang has already imposed a delay on tax refunds and has threatened to stop paying some bills. Aid to students and the poor could be halted, and some state offices will have reduced hours.

California faces a large budget gap, while at the same time, the state and national economies are struggling. California’s unemployment rate is the highest it has been in 12 years and forecasts project it will climb even higher in coming months. As the economy continues to worsen, California’s budget gap continues to widen.

The state’s failure to provide funding for increases in counties’ basic operating costs – such as gasoline, rent, and employees’ health coverage – adds up to a funding
shortfall that now exceeds $1 billion per year when forgone federal funds are taken into account. Because the state’s population and the cost of delivering services continue to rise, these cuts contribute to a funding squeeze on county-operated
programs. In some cases, counties have used local dollars to help make up for a portion of state funding cuts. However, counties’ ability to maintain this funding is eroding as local revenues, particularly property tax and sales tax collections, stagnate due to the turmoil in the housing market and the economic downturn.


As officials in Sacramento County – and counties statewide – head into the midyear budget review this month and next, they must answer a daunting question in the face of dwindling revenue and an increased need for mandated social services.

How much can we cut without getting sued?

"You can be sure somebody is going to object as soon as (social services) get cut and there's going to be litigation," said Daniel Mitchell, a UCLA professor of public policy and management.

In Sacramento County, enrollment in CalWorks – California's main public assistance program – is up 10 percent from the year prior; food stamp enrollment is up 20 percent; general assistance up 30 percent; and Medi-Cal enrollment up 12 percent, according to Bruce Wagstaff, director of the county's Department of Human Assistance.

At the same time, revenue – much of it coming from the state – is falling. Sacramento County already cut almost $15 million in the fall, mostly from social service programs, as a result of reduced state aid.

With the state still struggling to close a massive budget shortfall and the controller proposing to defer some payments to counties, Sacramento County officials are worried. "If the state sneezes, we catch a cold pretty quickly," said Nav Gill, chief operations officer.

As California grapples with a fiscal crisis, state lawmakers are facing painful choices about where to cut spending and how to increase revenues this year. California is one of only three states that require a "supermajority" vote to pass a budget, a constraint that results in deadlock and chronically late budgets. The economic downturn has contributed to a massive budget shortfall now estimated at more than $40 billion -- roughly $15 billion for the rest of the current fiscal year and $25 billion in 2009-10. Even in good times, California's outdated tax system does not bring in enough revenue to support the schools, universities, programs and services that Californians want and expect.,0,2053416.story

This power struggle at the Capitol holds the entire state ransom while the political parties battle things out. In many ways, state officials face a Solomon's choice. The longer the budget battle drags on, the less time there is for budget cuts to have their cost-saving effect, so the deeper the cuts will have to become.

The state budget deficit is projected at nearly $42 billion by the end of June, 2010. Reliance on inaccurate revenue projections, at a time when it should have been clear to legislators that the economy was much more likely to go down than up, has made the situation even worse than it would already have been.

We need a legislature and a governor who are willing to put California ahead of their own political power. Tell the Governor and your state legislators that they shouldn't make the whole state suffer for their political differences.

The state is insolvent. They are now pushing the counties and cities to take on additional debt to cover services and the state will at some point in the future reimburse them. Counties and cities have 1 to 6 months before they go under!