California's Budget Deficit and Debt Stephen Levy's Economy Blog, posted by stephen levy, a resident of the University South neighborhood, on May 18, 2011 at 5:56 pm stephen levy is a member (registered user) of Palo Alto Online
First a couple of numbers.
After the spending reductions adopted in March and the additional income tax revenue that was reported in April, California now faces a structural (ongoing if nothing happens) budget deficit of $10 billion per year.
This deficit is tiny in relation to the income of residents and small in relation to the federal deficit as a percent of the economy.
The $10 billion is roughly 1 penny out of every $2 of income for residents. The federal deficit is roughly 20 cents out of every $2 of national income or 20 times as large as the state deficit, which is now a smaller portion of our income than some states including Texas.
The small size of the deficit does not tell residents how to balance the budget or, as is obvious now, make it easy to balance.
But the numbers do tell us that we are dealing with a political not an economic problem.
Moreover, the state does not have an especially high level of debt compared to other states or to our income. And paying off our bond debt and interest is not in danger as it comes before most other expenses in priority.
There are longer term challenges from rising retirement benefits but these are not immediate and are likely to be reduced although again the politics in California gets in the way of reaching agreement.
The economy is improving, which is helpful looking forward but will not be sufficient to erase the %10 billion ongoing shortfall without additional reductions in education and safety net spending or some version of continuing the tax increase adopted in February 2009 for an additional period of time.
The state budget deficit does not rank in the top ten challenges facing us as Californians measured by the actual changes needed to make the deficit go away permanently. However, in a state and nation where people like to make everything an ideological game of chicken, even small challenges can go on for a long time.
For what it is worth at the current level of spending and revenues, we are near the lows of the last three decades in the share of our income that we tax and spend for state services.
The good news is that unlike terrorism or global economic competition, the challenges regarding state deficits and debt is totally in our
hands. It is ours to solve or stay stuck with for our children.
I favor the Governor's plan as the sensible approach and while I favor the tax extensions I do not favor balancing the budget by only putting the responsibility on higher income families and corporations.
Shared participation makes sense to me economically and in terms of fairness.
Posted by Kevin, a resident of the Midtown neighborhood, on May 18, 2011 at 6:37 pm
"The $10 billion is roughly 1 penny out of every $2 of income for residents"
Another way of saying the above is: If the state would limit spending by cutting 1 penny of spending for every $2 of income for residents, our budget would be balanced.
However it is deciphered, and because politics and ideology have always been a part of California budgets, we will be in a multi-billion dollar hole. California already has a terrible bond rating...maybe those bond raters know more than Mr. Levy, ya think?
I can't see anyway out of it, except federal receivership.
Posted by Paul Losch, a resident of Palo Alto, on May 18, 2011 at 7:57 pm Paul Losch is a member (registered user) of Palo Alto Online
What I hope Jerry Brown does in his elder "statesman" role as governor is get the entire State economic model re-structured.
It is one thing to deal with year to year realities. It is another to look at the State's structural fiscal environment and face it down, and develop a new structure that works going forward. This state is a Christmas tree with no tax ornaments and add spending without funding ornaments for prisons, schools, inter alia.
It is folly to think that the recently dire economic times, which may be turning around, will cure the disease.
Posted by stephen levy, a resident of the University South neighborhood, on May 19, 2011 at 2:08 pm stephen levy is a member (registered user) of Palo Alto Online
Jerry Brown is trying to put the state's long term fiscal situation on a sustainable basis.
The numbers in his plan add up. Some people do not like his package of solutions which include some ongoing spending cuts, elimination of some programs and agencies (small dollar savings), some pension reforms to reduce future costs and a five-year extension of the tax increases negotiated by Arnold and the legislature in 2009.
Remember three numbers--1) $10 billion, the size of the remaining long-term budget gap, $100 billion, the size of the state General Fund budget and 3) $2,000 billion, the size of the state economy by 2012. Our state budget shortfall (and debt) is far smaller relative to our economy than then nation's or most countries in Europe. Our political challenge is just as great however.
Most business groups now support the combination of extending the 2009 tax increases with passage of specific reforms. Republicans have proposed a package of additional spending cuts, no extension of the tax increases and more borrowing.
The familiar pattern of suggesting that someone else solve the problem (public employees, affluent taxpayers, corporations and the tooth fairy) is actively pursued.
I can solve the budget problem now with an extension of the 2009 tax increases to match the $12 billion in spending cuts already passed. And making the future secure from a repeat of the past can easily be done with reduced retirement benefits for new state employees, higher contributions from current employees, requiring a new funding source for state bonds like we do for Palo Alto bonds and some reforms in the prison system. In addition after the budget gets back to a normal level, we can require that spikes in revenues be reserved for one time purposes like infrastructure or debt reduction.
I am interested in other ideas that do not blame people or balance the budget through the sacrifice of others.
"But the state has had an insatiable appetite for debt in recent years. In the last decade, the debt per resident has tripled, to $2,362, according to the credit-rating agency Moody's Investors Service.
That means for every household of four, California owes nearly $9,500 — more than the government spends to put a child through a year of school. In the next budget, the amount devoted to debt repayment is expected to exceed the money invested in California's prized public universities."
There will not be a tax increase, and there will be no more bonds to cover ever more debt...and there will not be major budget cuts.
There is only one realistic answer, and that is federal receiveship. A federal judge will cut to the chase. He/she will probably need bodyguards, but that goes with the territory.
Posted by Send-In-The-Clowns, a resident of Another Palo Alto neighborhood, on May 23, 2011 at 8:48 am
> There is only one realistic answer, and that is federal receiveship
That's pretty much the solution that the Obama Administration imposed on General Motors, and AIG, isn't it? Interesting that the "lefties" didn't seem to have a problem with that. Of course, the Feds infused Billions of taxpayer dollars into these organizations to save them--with little hope of ever seeing the money back. So--what's not to like with a Federal judge with several hundred billions dollars of US taxpayer money to infuse into California?
Bankruptcy Alternatives: Receiverships and Assignment
Monday, June 16, 2008
For secured creditors, a federal receivership can offer the quickest and most cost-effective method of gaining control over a borrower’s collateral upon default. A federal receivership maintains the value of the collateral by allowing the business to continue to operate. The receiver will preserve and protect the collateral as well as the financial integrity of the business as a going concern. In addition, the receiver may be able to stabilize the operations to mitigate further potential losses
And a little about the GM fiasaco --
General (Government) Motors Chapter 11 Reorganization:
From a legal point-of-view, the two are different. From a point-of-view of Federal involvement in the affairs of entities that are supposed to be self-governing, the idea of a Federal Receivership for a state that is "bankrupt" is not all that different from the who-really-knows-what-they-did-to-GM by the under-investigation Trust Fund manager Steven Rattner:
Financier Is Said to Accept a Ban in Pension Case:
> Saving hundreds of thousands of American manufacturing
> jobs during the worst economy since the depression
What would have happened under a different course of government involvement is an open question. Had the company gone into a normal bankruptcy, it's unlikely that the plants would have "gone dark". What would have likely happened is a holding company would have taken possession of the company's assets, and reorganized it as they saw fit. The current reorganization is an unknown entity. The unions, one of the two real culprits here, should have been defanged. As it turned out, they are stronger now than before--although the job banks are gone. The problem for the future is that we now have precedent, and every large company that gets itself into trouble will have some reason to expect a federal bailout--GM-style.
> getting paid back in full
That didn't happen! It may, but very unlikely. Moreover, over $20B of (old) GM bondholders had their money, and future interest, stolen from them by Obama (and his people).
> History has shown the naysayers to be wrong
What a crock! How many people supporting Hitler, Mao, Stalin, Pol Pot and a host of lessor villains have turned out to be right! (Oh, and let's not forget that yoyo Jimmy Carter, either!). The naysays of these big government solutions have been shown to be right time and again.
Are you a part of the 28% who continue to believe BO's lies, and distortions of the truth? Like how "I killed OBL"?
But back to the issue at hand .. there probably is no legal basis for the appointment of a Federal Receiver for the State of California. There is, on the other hand, lots of legal basis for a bailout of this badly managed state.
Posted by Send-In-The-Clowns, a resident of Another Palo Alto neighborhood, on May 23, 2011 at 4:55 pm
> Mixing in Carter with Hitler and Stalin was the first clue
You're right. Hitler and Stalin actually achieved their goals. All Carter did was waste our time, embarrassing the nation.
> The rest? a hodge podge of unremarkable links,
> like the fed rec'r link to bankruptcy that has nothing
> to do with California and "Federal Receivership".
Really? Guessing you know nothing about Federal Receiverships. But the links were for the other readers .. who probably don't know much about this rather obscure alternative to bankruptcy. Folks like you just bluster from one post to another .. providing nothing of value to the discussion.
> "When was the last time a state went into receivership?"
Another foolish question. As pointed out in the final comments of the previous posting .. there's no legal precedent .. so .. as they say on the TV at times like this: "Asked and Answered" ..
The question that we should be asking is: "Is it time to craft the appropriate Federal legislation to allow Federally appointed Receivers to take control of bankrupt states, or states so badly managed by its elected representatives, that a Federal Receiver is the only solution to the problem?"
Posted by Kevin, a resident of the Midtown neighborhood, on May 23, 2011 at 5:18 pm
"When was the last time a state went into receivership?"
That is a tiresome question. When was the last time that AIG/Freddie/GM/Fannie were bailed out, before they were bailed out?
Let me clarify. I am not talking about a federal bailout of California. I am talking about federal receivership. Very different things. A federal recivership judge can only adjust the credits/bills vs. creditors...he/she cannot inject new money...just redirect the available monies. This means that the California bond rating will only get worse (yes, it is still possible to get even worse). The creditors will charge more for the same product, IF they are still willing to do business with the state.
Federal receivership is the only way avaialable. It will be painful, but it will mean a that an adult would be in charge. A sober federal receivship judge would cancel many state spending, and he/she could not impose new taxes. The California political process does not allow for such crisp decisions.
Posted by Alfred E Newman, a resident of Atherton, on May 23, 2011 at 5:19 pm
So fun to talk with tin foil hat conspiracy theorists.
Your links were unremarkable because they do not apply, as you stated: "Guessing you know nothing about Federal Receiverships" or you would have made a salient point rather than a lame, clownish statement.
"this rather obscure alternative" When was this alternative last used for a state to declare bankruptcy?
"Is it time to craft the appropriate Federal legislation to allow Federally appointed Receivers to take control of bankrupt states, or states so badly managed by its elected representatives, that a Federal Receiver is the only solution to the problem?"
No, it's not. Why do you want to take away our government functions from the elected officials who must face the consequences of any actions (see WI's recall campaign against 6 state senators for their actions) and hand it over to an unaccountable, non-elected individual?
Why do you hate the democratic process?
On top of that, right now, President Obama is a favorite to beat any contender; are you saying you want him involved in the appointment process? Talk about tinfoil hat conspiracy time!!
Why does the fringe right want to do this? Because they can't get enough control through normal electoral means to roll back existing laws protecting working families, our seniors, veterans, the environment, regulation limiting the wall street banksters, etc..
First state it will happen? A red state.
First target, if it ever happened in a blue state? Union busting, per the orders of the GOP's corporate overseers.
Posted by Alfred E Newman, a resident of Atherton, on May 23, 2011 at 5:26 pm
"A federal recivership judge can only..."
Where does it say what actions a judge can take if s/he is appointed to take over a state?
Where's the precedent?
""When was the last time a state went into receivership?" That is a tiresome question. "
No, actually, it points out the absurdity of your position. You've been on this rant for several threads and have yet to outline the existing laws or precedents for it. You speak in generalities and link to information that doesn't apply.
On the other thread, you begged for Stephen to intercede in your behalf. He does post, above, but it shows facts that do not support your chicken-little approach.
Mostly, you're tired of getting your butt kicked on election day in California and want to give power to an unelected, unaccountable czar.
Posted by al norte sm, a resident of another community, on May 24, 2011 at 10:42 am
AEN is correct when he implies Clown & Kevin are a bit "off". It's gotta be tough these days to be a tin foil hat conspirator when facts are so easily available. Your assertion that GM hasn't paid back the loans is totally FALSE. They paid it back early. According to your own link.
You don't even read your own links, then lie about it!
send Clown: "> getting paid back in full.... That didn't happen! It may, but very unlikely. "
From your link:
"Although the Obama administration had initially provided the automaker five years to repay the money in full, in March 2010 GM made more than $2 billion in payments to the U.S. and Canadian governments and promised to pay the full balance of the loan portion by June. The company beat that self-imposed deadline when on April 21, 2010, GM CEO Ed Whitacre Jr. announced that the company had paid back the entire amount of the U.S. and Canadian government loans, with interest, a total of $8.1 billion."
AEN was wrong in one thing when he said your links were unremarkable; they are useful in disapproving your false claims. Your own links!
Posted by Kevin, a resident of the Midtown neighborhood, on May 25, 2011 at 1:41 pm
"okay, I'll bite: How will that happen, with your fantasy?"
It's not a fantasy. The bond rating agencies will downgrade our bonds to superjunk status, and the market will demand out-of-sight interest rates on those bonds. It is already happening.
The fantasy is on the part of those who think federal receivership is a fantasy. There is no political way out of this mess, because all sides will cancel out the other sides. For example, there will be no change in Prop 13, nor will there be a major tax increase, nor will there be major budget cuts...no surprise, but it is no longer possible to kick the can down the road...the markets will no longer allow it to happen.
Posted by Kevin, a resident of the Midtown neighborhood, on May 25, 2011 at 4:01 pm
"How will it happen?"
The governor will declare that California cannot pay its bills, then ask for federal receivership. He will blame the mess on his political opponents, but he will still ask. The feds will oblige, but with no promise of additional funds, and the solution will be receivership, which is a type of bankruptcy.
Posted by stephen levy, a resident of the University South neighborhood, on May 25, 2011 at 5:49 pm stephen levy is a member (registered user) of Palo Alto Online
This week the Supreme Court ordered California to reduce the state prison population by 33,000--roughly 20%. In addition the state will have to upgrade medical care for prisoners.
On option is to release 33,000 prisoners. Another option suggested by the Governor is to house these prisoners in local facilities--selecting the non-violent offenders to be moved.
Or the state could try to build and staff additional state prisons before the court deadline.
Options besides releasing prisoners back into the community will cost more money and the Governor in his budget proposal links the tax extensions to providing funds to local governments to cover the costs.
As I understand the court ruling there would not be much, if any, savings from releasing the 33,000 prisoners as we need the facilities and staff to adequately serve the remaining state prisoners.
Posted by Kevin, a resident of the Midtown neighborhood, on May 26, 2011 at 6:01 pm
"I recommend releasing all the prisoners who have been convicted only on the use of illegal drugs - Not drug dealers and not violent offenders"
This is the old canard that non-violent, drug users are loading up our state prsions. Wrong. In order to make the big time pen in CA, one needs to be a multiple offender of selling, not using drugs. Selling drugs means violence, either implied (threats) or actual. I challenge Peter Carpenter or Stephen Levy to name a few examples of what they are talking about.
A much better way to lessen costs of prisons is to put them in tent camps, at hard labor, and they only eat if they work...but sentences would be MUCH shorter. BTW, they would not be allowed to get their way...crew cuts are mandatory (part of the prison work crew force), out to work by 8 AM each morning, planting and growing their own food...if they fail, they starve. California could probably reduce its prsion charges by 80%, if it accepted this model. The main benefit, though, is that no prisioer would want to return for a second 'treatment'.
Having offered this sober model of reform, it won't happen. After all, even though Peter and Stephen want to argue about misplalced compassion, they don't want those released prisioners living in their neighborhoods. Hypocricy...of course, but they have their estates set, and they are quite willing to pay to have the cons living next to somebody else.
The main question, related to this thread is:
The California state budget will not be balanced, period. It will be in the hole by many $B. Tax rates will not be increased, and the budget will not be cut, significantly. Our state constituion requires a balanced budget. This means federal receivership.
Posted by Alfred E Newman, a resident of Atherton, on May 26, 2011 at 6:29 pm
Kevin: You must HATE living in solid blue California. Dude, you're opinions would be on the far fringe in ALABAMA!
Your: "This is the old canard that non-violent, drug users are loading up our state prsions. Wrong. In order to make the big time pen in CA, one needs to be a multiple offender of selling, not using drugs." IS WRONG. Prove it, if you think otherwise.
In California, too many possession charges are rung up as felonies. (been in all the papers this week) Such as:
"Make possession of a small amount of drugs for personal use a misdemeanor instead of a felony. Keeping 9,000 people locked up on that charge is costing taxpayers like you and me $450 million per year." Look it up, this suggestion's on the ACLU's site.
I know you have a great affinity for civil liberties' sites. Enjoy that one!
- - - - - - -
your: "Tax rates will not be increased, and the budget will not be cut, significantly. Our state constituion requires a balanced budget. This means federal receivership. "
Like: Plants require water and air. Biology has rules. This means the moon will crash into earth.
Your logic: (a + b, x) = polka dot unicorns
The first three parts may be fact, your conclusion is a totally unrelated, false premise.
But you've been repeating it for weeks, on this thread and others, so it must be true in your mind.
But not here.
Or even in Alabama.
btw: Is Al Norte correct? Where are you getting this receivership trash from?
Posted by Alfred E Newman, a resident of Atherton, on May 27, 2011 at 9:49 am
Kevin, poor Kevin: You're losing it, buddy. Clue or no clue.
Glad you were born here. So were many of us, including my parents. Others may be third generation, or more. That and a buck gets ya a cup of coffee.
(wow, did starbucks prices ruin that line, or what?)
You were asked to substantiate yet another of your falsehoods ("This is the old canard that non-violent, drug users are loading up our state prsions. Wrong.") and you can't, so you lash out.
So read slowly, and try to understand the clues. I'm still waiting for you to back up your statements. Here's mine:
your: "Please provide an example of a state pen convict who is in there, soley on the basis of possesion" Can't give you a specifc name, but then, you can't spell "solely" correctly, can you?
How about: "Of the total inmate population, 94,413 were incarcerated for crimes against persons; 31,707 for property crimes; 26,657 for drug crimes; and 13,142 for other offenses. ... Hashish possession was the crime responsible for the least amount of inmates, 45. Web Link"
your: "It is puerile to call this a "blue" state."
Juvenile? Really? How about you provide a link to the legions of folks who call CA a red state? Make it easy for you: during the 2010 GOP tsunami that swept the country, how many republicans won CA statewide office? How many hold CA statewide office? (hint: same number as is the number of states that have gone through receivership)
What is the percentage of dem vs repub seats in CA's House delegation? Senate delegation? Number of times that CA has voted for a GOP presidential candidate in the last couple decades? (hint: same number as is the number of states that have gone through receivership)
Dude! "puerile "?!? Was that dictionary.com's word of the day, but maybe you forgot to read the definition?
Kevin: You are among the bluest of blue's, as far as states of any significant size are concerned. You have chosen to surround yourself with Californians, who with great consideration and forethought, reject your opinions and by majority, vote BLUE!
Welcome to California! We, of open liberal minds and hearts, welcome you!! ;-)
That must just eat you (with your receivership fringe ideas) up. Guys like Norte come on and tear you up, and you can't offer a decent link to substantiate your claims.
Lastly, your: "The current palpable issue is how this state will pay its bills" That's funny. Yes, that's what this thread is about, but you and Clown have hijacked it at every turn in each of your postings, simply claiming it can't be done and INSISTING on federal receivership.
So, with your last statement, is that an admission that receivership was a ridiculous idea and you are coming around to rationally discussing possible solutions?
That's great. Leave behind "puerile."
Most of us see the solution being a blend of more cuts and some increased revenues.
Posted by al norte sm, a resident of another community, on May 27, 2011 at 7:37 pm
He gave you info on possession only numbers. "Hashish possession was the crime responsible for the least amount of inmates, 45." Prove otherwise. If you are so adamant, you must have some sort of link.
A simple google yields similar findings: "About 9,000 inmates in California prison are there on charges of “simple possession” of an illegal drug."
Posted by al norte sm, a resident of another community, on May 28, 2011 at 10:32 am
We'll do the research and get you the name of one of these prisoners when you or clown give us the name of a state that has gone into, or is considering going into federal receivership - your point all along.
For the time being, any thinking person is satisfied the point is closed with data such as:
- "Hashish possession was the crime responsible for the least amount of inmates, 45."
- "About 9,000 inmates in California prison are there on charges of “simple possession” of an illegal drug."
As previously said, and you ignored: Prove otherwise. If you are so adamant, you must have some sort of link.
Contrary to what Krugman lied to us about a few months ago, not only is Texas not broke, it keeps 6 Billion in the rainy day fund of their budget. Krugman, true to form, failed to mention the every 2 year budget process Texas has, vs. and looked at numbers in the "yearly" manner...which brought bogus conclusions.
Proof that a PhD or "Nobel Prize" means diddlysquat for the ability to think.
Nobody will starve on the streets, die from lack of access to life-saving health care or do without school.
So..California, when are you going to live within your means? Or are you going to keep driving away business/economy producers and attracting parasites?