Employee Ratios

The Sacramento Bee had an interesting editorial last Sunday addressing the historical ratio of state workers per 1000 residents (click here). The editorial noted that over the past 50 years, the number of state workers has consistently been at a level of about 9 workers per 1000 residents. They seemed to defend the current staffing ratio as reasonable.

First of all, the fact that the state has nearly twice as many workers per captia as local government is appalling. Given that the state has delegated the majority of its responsibilities to state and county government, I'm still trying to determine how they justify 358,000 workers. In fact, given the state's skill in shifting its responsiblity to the rest of us, they should have far fewer workers per resident than they had 50 years ago. In addition, I would argue that many of the agencies are now automated--i.e. -- very few of us actually go into DMV to re-register our car--we do it online without any human helping us out.

Hopefully, as resources get tighter and tighter at the state level, there will finally be a day of reckoning when the majority of jobs are eliminated that are duplicative of responsibilities already delegated to other levels of government.

The Bureaucracy Strikes Again

There has been a lot of debate as to whether or not the federal stimulus package passed last year has actually contributed to job creation. After reading dozens of article, there is no doubt that the funds that went back to states for education did help reduce the number of teacher layoffs--or at least put them off for a year.

On the other hand, there has been a dearth of "bricks and mortar" type projects due to the feds insisting on adding their own layer of red tape to every construction project that they have touched across the country. Locally, the Atherton Gap closure project will be delayed by at least 6 months due to the additional red tape and the state's inability to handle all of the addtional red tape imposed by our friends in Washington D.C. All of the additional paperwork is completely duplicative to processes already required by our state government. Thus, while the government is insisting that these projects be fast-tracked in order to help the economy--the same legislation that insisted on speed also imposed an additional layer of duplicative review.

One of the many ridiculous requirements that come with "federalizing" a project is historic review. The feds require projects as insignificant as replacing an air conditioner to go through the state's Office of Historic Preservation to make sure that historic resources are not at risk in the subject project. Those of us that have dealt with federal programs over the years have seen this requirement stall and often kill great projects. The Office of Historic Preservation is not only slow, but incredibly subjective when it comes to determining what is historic.

A recent in the Sacramento Bee (click here) has exposed the Office's role in helping to gum up the process of getting projects approved and getting people back to work. The article notes:

As Gov. Arnold Schwarzenegger prepares to emphasize job creation as his top priority in his State of the State address, his watchdog for federal stimulus dollars says a tiny state office is delaying hundreds of projects that could employ out-of-work Californians.

Laura Chick, state inspector general for American Recovery and Reinvestment Act funds, said Monday that the California Office of Historic Preservation has a two-month backlog in approving federal stimulus projects, some as small as installing a heating and air conditioning unit.
Chick said state-mandated furloughs have contributed to the backlog, and she suggested that the state should allow historians to delay taking furloughs.

She also said the Schwarzenegger administration could shift other state workers as needed to the Office of Historic Preservation to reduce the backlog.

"There are human beings standing on the street, waiting for an employer to say, 'OK, I need you to work, I'm ready to pay you,' " Chick said. "If there's a bunch of paper sitting on somebody's desk, and the review could be 15 days instead of 60 days, that's 45 days of holding up jobs from being created."

Under federal law, the office must review federally funded construction projects to ensure they do not adversely affect historic sites.

Chick estimated that hundreds of projects are awaiting review by the Office of Historic Preservation, many of which she suggested would have no significant consequences on historic properties.

Those of us who work at the local level are finding that the furloughs are becoming the excuse for state agencies not getting back to us in a timely manner. Frankly, most the agencies using this excuse were just as slow prior to the furloughs. After this article appeared in the Bee, a follow up blog was post about a week ago:

The Office of Historic Preservation is quickly clearing an application backlog that delayed billions of dollars in federally-funded stimulus projects, according to California Recovery Task Force Director Cynthia Bryant .

Capitol Bureau colleague Kevin Yamamura last week reported on the backlog of hundreds of applications made worse by furloughs at the OHP. The office has to sign off on federally funded construction projects to ensure the projects don't mess up historic sites. Delayed reviews had stalled billions of federal stimulus dollars. Click here for that story.

Gov. Arnold Schwarzenegger gave the office 30 days to clean things up and sent over extra employees to help. Bryant said in this press release that six projects were left to review that will be finished this week.

More on the State Budget

First for the semi-good news, apparently the state is being realistic in its future budget assumptions. Here is a report from the League of Cities fiscal expert, Michael Coleman:

Down deep in the text and tables of the Governor’s proposed budget released Friday are some revenue estimates and forecasts, some of which also apply to key city revenues. Although the growth patterns of local sales taxes and property taxes depend greatly on the particular economic situation within a jurisdiction, the statewide trends are noteworthy. The State Department of Finance (DOF) is estimating that the assessed value (AV) of taxable real property will decrease 2.9 percent from the FY2008-09 to the current FY2009-10 fiscal year.

DOF forecasts that AV will fall further by another 2.2 percent from FY2009-10 to FY20010-11. As for sales tax revenues, the Governor’s proposal estimates that final taxable sales figures will show a decrease of 12.8 percent for the FY2008-09 over the prior year and a further decrease of 7.5 percent in the current FY2009-10 year. Sensing the beginning of a turnaround, DOF projects a modest increase of 6.3 percent in statewide taxable sales for FY2010-11.

The real question is whether or not the legislature sticks to these numbers when they are trying to complete the budget on the eve of this fall's election.

The grim and insidious part of the budget is chronicled in today's Sac Bee (click here). While this sleight of hand didn't work last year, looks like the Governor is going to give it another shot. Here's how the Bee describes it:

California drivers could save a dollar and change each visit to the gas pump under a tax swap proposed by Gov. Arnold Schwarzenegger.

In an effort to free up money to balance the state budget, the governor wants to reduce the sales tax motorists pay on gas purchases while increasing the gas excise tax, also paid at the pump.

Administration officials say the switch would help California close a $19.9 billion budget gap by nullifying laws that reserve most of the gas-pump sales tax for transit agencies.

That would free up anywhere from a few hundred million dollars to more than a billion dollars for the state general fund. The total amount is disputed by the administration and transit officials.

State finance spokesman H.D. Palmer said the plan has the added benefit of saving motorists nearly $1 billion at the pump in the coming year.

"That's one of the pleasant aspects," Palmer said.

Longer-term, however, the governor's plan calls for increasing the gas excise tax annually for the next 10 years from its current 18 cents to 34 cents per gallon by 2020.

Transit officials, meanwhile, are livid. They're calling it a "bait and switch" move to avoid making good on voter-approved funding for local bus service and rail service.

School advocates also are troubled. The tax swap would allow the Legislature to reduce funding to public schools this year by $800 million, the Legislative Analyst's Office noted.

That represents a 1.6 percent reduction of Proposition 98-mandated school funding.

While the proposal doesn't have a huge impact locally, who knows--this bait and switch could end up impacting more of our road funds as well. More importantly, it is symbolic of the many games being played by the state to attempt to survive another budget cycle with gimmicks instead of hard decisions.

State Budget Blues

I wasn't going to talk about the Governor's budget proposal, but I finally decided it was important at least note that it isn't really even worth analyzing. The final state budget will not even remotely resemble the document submitted last week.

As most of you have read by now, the 2010-2011 budget is banking on $7 billion from the federal government. The Governor went out of his way to basically demand these dollars from our federal officials. This has not gone over well with either of our U.S. Senators or any of our key reps in the House. Here's an excerpt from an article in the Los Angeles Times (click here):

"California's budget crisis was created in Sacramento, not Washington," Sen. Dianne Feinstein shot back. "These problems are not going away until there is wholesale reform of the state's budget process. . . .

Pointing fingers is not constructive."Sen. Barbara Boxer called a teleconference with reporters to rebut Schwarzenegger's assertion that California gets back only 78 cents for every dollar it sends Washington in taxes. That figure is several years old, she contended; Washington currently sends back $1.45.

She accused the governor of "threatening people" with his "trigger" plan.

In fact, his lack of decorum may have guaranteed that we don't get ANY addtional funds from the feds.

Other parts of the plan are just as fantastic. As Dan Walters noted in the Sacramento Bee (click here):

Arnold Schwarzenegger achieved fame and fortune by starring in celluloid fantasies, so it may be fitting that his final state budget proposal would be so disconnected from economic and political reality.

With the state still facing huge deficits, the governor bases his 2010-11 budget on such fanciful elements as persuading the federal government to cough up an extra $7 billion, asking voters to reverse themselves and shift money from protected pots for mental health and children's programs, overhauling transportation financing, and persuading state employee unions to accept pay cuts and increases in workers' pension and health care costs.

For those of us who live in the real world, we realize that he can't unilaterally cut employee compensation plans and is unlikely to find more "efficiences" in other programs. At some point, the legislature is going to be faced with making hard choices, but probably not in an election year. The legislature will likely go through one last round of number cooking to make it look like they've balanced the budget, attempt to take what little is left to take from local government and leave it to the next legislature to clean up their mess.

That is when it is going to get really ugly. The best we can do at the local level is do what we can to protect our local revenues, and hope that the state doesn't take the rest of us down with it.

Ten Events That Shaped State-Local Budget Relations

The State LAO (Legislative Analyst's Office) recently published a report that chronicled the twisted relationship between state and local revenues. Entitled "The Ten Events that Shaped State-Local Fiscal Relations" (click here) it chronicles all of the ballot measures and other actions that help to bring us to the mess we face today.

Here is the "California Special Districts Association (CSDA)" take on the report and related state committee discussions:

It is no secret that the state and local government have not had the best friendship over the years. Last week, the Senate and Assembly Select Committee on Improving State Government examined the twisted relationship between the state and local government and looked at ways to improve both the relationship and ways the state can contribute to local fiscal stability. CSDA had the chance to attend the committee hearing and testify on behalf of its members.

The Legislative Analyst’s Office (LAO) reported on the history that shaped California’s state and local fiscal relationship. Read the report here.

Meanwhile, a panel of local government experts told the committee that local governments do not have local fiscal stability because the state shifts, takes and borrows local revenues which creates an environment of uncertainty for locals, as evidenced by ongoing ERAF shifts and this year’s suspension of Proposition 1A. This coming year will be no different as the state faces an over $20 billion budget deficit and the governor must produce a balanced budget proposal by January 10, 2010, that will no doubt include more borrowing and accounting gimmicks.

In addition to keeping local revenues local, CSDA asked the committee to give local officials the tools, and the flexibility to decide which tools to use, to be able to get local projects delivered efficiently and effectively, like expanding the use of public private partnerships and giving special districts the authority to use design-build contracting as appropriate.

The Select Committee on Improving State Government plans to hold one last hearing on January 12, 2010, where the committee will look at the suggestions from past hearings and decide what actions, if any, to take.

Latest from Sacramento

It is deja vu all over again in Sacramento as noted in today's Bee (link here):

Sure enough, the nonpartisan Legislative Analyst's Office estimated last month that the state now faces a $20.7 billion gap between what it can expect to collect in revenues and spend over the next 18 months.

That figure includes a $6.3 billion hole for the current fiscal year, which ends June 30, and a $14.4 billion deficit in the 2010-2011 year, which begins July 1.

"And as hard as $60 billion was, closing the (new) deficit is going to be even more challenging," said H.D. Palmer, spokesman for the governor's Department of Finance, "for three reasons."

First, Palmer said, the state can't rely on another $8 billion in federal stimulus money, as it did this year, although state officials hope at least some aid from Washington will show up.

"Second," he said, "some of the solutions this year were one-time in nature, and we made that very clear."

Those "one-time" solutions included budgeting maneuvers such as accelerating the collection of payroll taxes, and postponing the last payday of state workers in the fiscal year until the first day of the next fiscal year.

Third, Palmer said, the state is scraping bottom in cutting some major spending programs because of something called "maintenance of effort."

That basically means the federal government sets minimum standards for programs such as education and social services that states must meet to be eligible for federal funds.

For example, the state must have enough money available to pay 90 percent of doctors, pharmacies and other providers of Medi-Cal services within 90 days of being billed. If it doesn't, it risks the loss of billions of federal dollars.

"As we're putting the budget together, we're mindful we are close to the bottom in a number of areas" in terms of more cuts, Palmer said.

In addition to the trio of troubles he outlined, lawmakers and the governor also must confront some legal problems.

Among them are lawsuits challenging the legality of $489 million in budget vetoes the governor made in July; disputing his claimed right to furlough state workers; disputing the "borrowing" of $1.7 billion from local redevelopment agencies; and fighting a federal court order to reduce the prison population.

The state already lost one budget-related lawsuit, when an appeals court ruled that the state illegally grabbed about $1 billion in gas-tax money meant for local transportation issues, diverting it to pay California's general fund bills.

The legislative analyst's $21 billion budget gap forecast assumes that the state will prevail in the still-active court cases. If it doesn't, the hole gets deeper.

Even more from Sacramento...

Here's another interesting study hot off the press on the status of our state finances. There are a lot of future projects -- particularly road and levee construction -- that are dependent on the state's ability to issue bonds. Without the ability to issue bonds, tens of billions of dollars in future job generating infrastructure projects will be delayed indefinitely. Hopefully, the threat of default will force the state to get its house in order and make the same financial sacrifices that all other governments in the state of California are now making. The labor unions are likely the biggest obstacle in the way of the state staying liquid.

Here's the full story just issued by the Sac Bee:

The latest on California politics and government
December 16, 2009

Cal Lutheran forecast suggests state debt default likely
California faces at least another year of recession, and the state budget is so far upside down that it's now "more likely to default than not," on some of its debt, a new economic forecast from California Lutheran University's economists declares.

The director of Cal Lutheran's new Center for Economic Research and Forecasting, Bill Watkins, cites the state's budget problems, its high regulatory and operating costs and its deficit infrastructure as impediments to rapid recovery.

"We expect California's economy to continue to contract, slowly, through the first three quarters of 2010," the forecast says. "However, the contraction will be a bit less each quarter. By the fourth quarter, the state's gross product growth could be mildly positive. Output is then likely to slowly improve, but at an improving rate, through 2011.

"Job growth will lag economic activity. We don't expect to see California gain jobs until the second half of 2011. Consequently, unemployment will probably remain in double digits through 2011. Wages, by contrast, will likely show some gains almost immediately, but we don't expect to see California's average wage reach its pre-recession levels within the forecast horizon."

Despite the state's chronic fiscal woes and concerns about its mounting debt load, its top economic officials have consistently told investors and the public that the state is in no danger of defaulting on its bond payments, which by law have a high priority claim on the state's revenue streams.

Watkins and other members of the Cal Lutheran economic team migrated this year from the University of California, Santa Barbara's Economic Forecast Project. Data from the Cal Lutheran center can be purchased here.

More from Sacramento...

If the Britney story wasn't enough for you today, here's a nightcap from today's Sacramento Bee:

State's revenues running $1 billion below forecast
When Gov. Arnold Schwarzenegger and legislators fashioned the latest version of the state budget in July, they inserted a $3 billion fudge factor on revenues, cutting income expectations by that amount on the assumption that the economy was continuing to decline.

The latest monthly bulletin from the state Department of Finance, however, says that through the first five months of the 2009-10 fiscal year, revenues are running more than a billion dollars under even that lowered expectation.

Personal income, corporate income, sales and vehicle taxes all fellow below forecasts in November, the department said, but the bulletin found "encouraging" news on the employment front, with the first month-to-month increase in jobholders in 17 months. Even so, the unemployment rate increased due to growth in the labor force.

The revenue drop forms one component in the current forecast by the Legislature's budget analyst that the state faces a $6-plus billion deficit in the current budget and a $14-plus billion gap in the 2010-11 budget.

The Department of Finance report is available here.

This says it all...

Just when you thought the folks in Sacramento reached their lowest point in public opinion polls...California City News has a great post about our legislature, to wit:

Public Split on Trusting the Legislature or Britney Spears with Budget Choices

In the latest blow to the California legislature's psyche, a recent poll by Wilson research demonstrates that the public is basically split on whether to trust our elected legislature, or Britney Spears with the budgetary decisions. An excerpt from the poll as shared by CCN friend and political consultant Tab Berg:

Q17: And, who do you think would do a better job handling your family's budget [ROTATE] California legislators or Brittany Spears?

1. California Legislators 35%
2. Brittany Spears 31%
3. Don't Know/Refused 34%

Bear in mind, this is not a website poll or other informal kind of 'push-polling' -- it's a professionally administered poll by a respected firm. Tab Berg wrote an opinion piece reacting to this latest disgrace on the conservative Flashreport blog that is worth a read.

And the longer we look at these numbers, the crazier it sounds. Maybe the most troubling part is the 34% of respondents who can't decide between the two! Maybe they want to go re-watch the clip of Brittany shaving her head before making that call for sure.

How we got into this budget mess...

Here are excerpts from an excellent piece in the Orange County Register (click here) that talks about a state budget being held hostage by our prison system. Here are some of the highlights from the article:

At a time when the state is struggling with its finances, the spiraling costs of California's focus on public safety have tied the hands of budget-makers who want to spend more on education and social services – and have given power, influence and wealth to the state's law enforcement community. Consider:

•California has the most costly state prisons in the nation. But the $8 billion a year system is plagued by inconsistent and outdated policies that have led to severe overcrowding and high recidivism. California's lock-em-up mentality gets criminals off the streets—but New York has cut crime far more by keeping fewer convicts in prison.

•State and local governments are buckling under the weight of generous public safety pensions, which were given to police, firefighters and prison guards without a sufficient examination of future costs. Pension costs have driven one city to bankruptcy and pushed others in that direction. Since the pensions were liberalized in 1999, state pension resources have fallen from a surplus of $32.8 billion to an unfunded actuarial liability of $35 billion last year, according to the state's own numbers.

•California has become more protective of its police than any state in the nation. Police and prison guard unions and other public safety lobbies have secured laws that keep the public from gaining access to police disciplinary records, making it almost impossible to publicly identify offending officers and determine whether they are being adequately punished.

Meanwhile, the services California provides to all its citizens are in trouble:
State spending on primary education is mediocre. A 2008 study by the nonpartisan Legislative Analyst's Office found that California spent $7,673 per K-12 student, 25th out of the nation's 50 states. Budget cuts this year could push the state further down the list.

California roads are among the worst in the nation. A 2009 study by the American Association of State Highway and Transportation Officials and TRIP, a national highway research group, rated 66 percent of California roads as mediocre to poor, fourth worst in the country.

California has the highest general sales tax in the nation, at 8.25 percent, with local governments permitted to levy an additional 1.5 percent. According to the nonpartisan Tax Foundation in Washington, D.C., California has the nation's fourth highest individual income tax rate and the highest corporate income tax rate in the West.

You can't blame public safety for these problems, but California would have more money at its disposal if it could more efficiently fight the war on crime.

While it is an extremely complicated discussion, the bottom line is that we spend far more than any other state in the union--and we still have plenty of crime. It is unfortunate that there isn't more intelligent discusssion about finding more cost-effective ways to reduce crime.

The State strikes again!

The State budget crisis may impact the City’s recycling education program. We have historically received approximately $17,000 for the CRV value of the bottles and cans that are recycled through our curbside recycling program. The State has taken most of the funds allocated for this program to use for other purposes, and the City has been informed that we will only receive approximately $850 this year. The City historically used these funds to purchase bottle/can recycling containers for schools, classrooms, cafeterias and apartment complexes, printing recycling brochures, and to purchase give-away items made from recycled materials to hand out at the Pumpkin Fair, Street Fair and various other community events.

This is an example of the many areas where the state is continuing to skim more away from our local resources and keeping it for their bloated bureacracy. As long as the state continues these sorts of stunts, they will delay reducing their own operating costs.

Layoffs back in the News

I'm sure that most of you are aware that the State of California is beginning to come clean with their budget situation (click here for story). I don't think there was a state budget watcher anywhere who believed that the budget they passed was even close to balanced. As Dan Walters noted:

Anyone with half a brain and a hand calculator could figure out that many assumptions on which the budget was based, both spending and revenues, were unrealistic, some of them conjured out of thin air to "balance" an inherently unbalanced budget for political reasons.

The question now is whether or not the state's labor unions will attempt to come up with a revenue enhancement that continues to put off the inevitable--massive layoffs at the state level. It isn't unrealistic to think that the state will have a repeat performance of last May, when they attempted to extract more dollars out of the voters--who will likely overwhelmingly turn it down.

In the past few days, two of our neighboring cities (Lathrop and Tracy) floated the idea of tax measure for public safety. Both proposals were shot down. Here in Manteca, our Budget Advisory Committee emphatically shut down the idea of revenue enhancements eight months ago.

For some reason, our state government always seems to be the last to get the message.

We've also got a number of cities still coming to grips with our woeful revenue situation. The City of Vallejo, as part of their mid-year budget is looking at laying off seven more police officers (click here for story).

In Fresno, it looks like over 100 layoffs and furloughs are in the works.

Addressing the City Council and a packed council chamber, Swearengin said she understands the pain of those who would lose jobs and the frustration of Fresnans who could see reduced services.

But, she added, "before anything else, our No. 1 responsibility is to be good fiscal stewards."

Swearengin and City Manager Andy Souza outlined a plan to fix a $27.8 million general fund deficit expected to unfold over the next 18 months. The problem is a sharp and unexpected drop in various tax revenues and a jump nearly as sharp in expenditures, particularly retirement costs.

Swearengin's plan comes only about six months after city officials made cuts and layoffs to close a $27 million budget shortfall.
Looking ahead, city officials said an additional $4 million to $9 million in cuts may be necessary to balance the 2012 budget.

"We are an organization that must contract," Swearengin said Thursday afternoon during a meeting with The Bee's editorial board.

Among other things, Swearengin is calling for 125 layoffs, a mandatory 40-hour furlough for many employees, plus the closing of four of the Parks Department's neighborhood centers and two fire stations. The fire stations are Station 10 in east-central Fresno and Station 18 west of Highway 99.

Click here for full story

I don't expect the revenue picture to get any better anytime soon. The real estate market problems are not just a subprime issue anymore as noted in this story:

A rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, adding to concerns about the strength of the economic recovery.

Driven by rising unemployment, such loans accounted for nearly 33 percent of new foreclosures last quarter. That compares with just 21 percent a year ago, when high-risk subprime loans made during the housing boom were the main reason for default.

At the same time, the proportion of homeowners with a mortgage who were either behind on their payments or in foreclosure hit a record high for the ninth straight quarter.

The Mortgage Bankers Association's report Thursday suggests the housing market and broader recovery could be thwarted by the continuing surge in home loan defaults, especially as the unemployment rate keeps rising. Lost jobs, rather than the shady loans made during the housing boom, are now the main reason homeowners fall behind on their mortgages.

After three years of plunging prices, the housing market started to rebound this summer. While optimists hope the worst is over, pessimists say there are simply too many foreclosed properties that have yet to be dumped on the market and expect further price declines.

Click here for full story

Not so cheery news continues...

As a follow up to yesterday's post, here are a couple more articles about the sad state of affairs for state government revenues.

Bloomberg (click here) reports that a survey of fiscal officials predicts diminshed state goverment revenues at least through 2012.

The only thing that kept states from “draconian” spending cuts has been $135 billion of funding under President Barack Obama’s economic stimulus package, according to a report from the National Governors Associations and the National Association of State Budget Officers. Revenue fell 7.5 percent in fiscal 2009, forcing states to close budget gaps of $72.7 billion.

“These are the worst numbers we’ve ever seen,” said Scott Pattison, executive director of the budget directors group, in a news release. “States have been forced to lay off and furlough employees, raise taxes, drain rainy day funds and sharply cut state spending.”

As the U.S. economy emerged from the worst recession since the Great Depression of the 1930s, local revenue will trail an economic rebound and continue its decline in 2010 before slowly returning to pre-recession levels by 2012, the report said.

The story goes on to note that there will be a lot of unmet needs during the recession and it will take years for states to rebuild their rainy day funds and catch up with deferred projects and deferred maintenance. This means that most states will not fully recover from this recession until late next decade.

Capitol Weekly (click here) also notes that California state officials see a bleak budget outlook through 2012 as well. The state's problems are compounded by the fact that many of the revenue fixes this year can't be repeated and some of the revenue enhancements (i.e. the sales tax increase) will expire before the recession is over.

The good news from reading between the lines in the article is the fact that the state may have to break down and actually reduce their spending instead of just punishing state and counties.

I've been trying to stay away from budget doom and gloom in my recent posts, but I felt like it was important to reinforce that we are still in the tunnel--and there is no light yet!

California, Once again on the leading edge...

Today's Sac Bee has the following article which notes how California is ahead of the pack when it comes to fiscal insolvency!

Here it is:

November 11, 2009
California crisis cited as warning for other states

California's state budget crisis is so severe that the Pew Center on the States, a Washington-based policy think tank, is using it as an example of conditions that imperil other states.
Nine other states, the Pew report says, are facing "some of the same pressures that have pushed California toward economic disaster," adding that they also could see furloughs of public employees, severe cuts in education and reductions in the social welfare safety net.
"A challenging mix of economic, political and money-management factors have pushed California to the brink of insolvency. But while California often takes the spotlight, other states are facing hardships just as daunting," Susan Urahn, managing director of the Pew Center on the States, said in a statement accompanying the report. "Decisions these states make as they try to navigate the recession will play a role in how quickly the entire nation recovers."

The report was issued just two days after Gov. Arnold Schwarzenegger acknowledged that the state's current budget, enacted last July, is as much as $7 billion in the red already. He is expected to propose ways to close that gap and deal with the projected deficit in the 2010-11 budget no later than Jan. 10.

The other nine states threatened with California-style fiscal crisis, the Pew report said, are Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin. With California, they represent one-third of the nation's population and economic output.

The report identifies California's fiscal problems as loss of revenue, the relative size of its budget gap, high home mortgage foreclosure rates, legal obstacles to balancing the budget, and "poor money management practices."

Although the nine other states have some similar problems, several of them "already have responded aggressively to their budget crisis, although it is too soon to tell whether their actions will put them on solid fiscal footing."

The full report, titled "Beyond California: States in Fiscal Peril," actually looks at the finances of all 50 states but concentrates on California and the nine states deemed to be in most fiscal peril.

The report is available here.

Election Wrap Up

While there were no elections here in San Joaquin County, many cities across the state held City Council elections while others held special elections to preserve or increase taxes.

As I noted last spring, our city's Budget Advisory Commitee made it painfully clear that there would be no chance of increasing revenues here in Manteca until we demonstrated that we had cut all unnecessary expenditures--including reductions in the labor contracts for all of our employees.

Yesterday, in a desperation measure, the City of Salinas attempted to pass a one cent sales tax for Public Safety. Even during the best economic times, most cities (including Manteca) never asked for more than one-half cent. Not suprisingly, the measure went down in flames (click here for story) and now they must do what the rest of us are doing--cutting beyond the bone. Ventura and San Carlos had half-cent measures that failed while two cities had measures which passed.

Statewide, a number of utility tax measures passed. Most of these were clean up measures to ensure that an existing utility tax was valid under the current state law. There were some upscale communities that were able to pass parcel taxes and some school bonds passed as well. However, there were very few cities that even attempted to get new revenues from their voters.

For an excellent summary of all the ballot measures, click here.

California Taxing itself out of existence?

I spent a great deal of time yesterday seeing what San Joaquin County could do to minimize the impact of the NUMMI closure next March. There are a number of alternate fuel auto manufacturers that have purchased abandoned auto plants in other states and often kept many of the existing workers.

You would think that our economic development experts at the state level would be mobilized and attempt to find some way to keeps autos coming out of the last major plant in Northern California. Well, the silence from the state right now is deafening! I'm not going to rant yet, because it may be that they are working behind the scenes--but publicly there is absolutely nothing the state is doing, which is tragic.

Click here to read a recent article from the Autumn Edition of "City". It basically contrasts the California and Texas state governments. It points out that Texans pay far less to their state government, yet nowadays receive equivalent or better services than their counterparts in California.

How? In Texas, most tax dollars go towards providing services, not towards lining the pockets of state workers! The article provides a link to another dreary article which provides a summary of how the state of New York destroyed its economy a generation ago following the same model California is now operating from...i.e. lots of taxes to run off businesses and little return from those taxes to help the state grow.

I would highly recommend the read, it may be our future.

New Ballot Initiative Proposed to Protect Local Revenues

Tuesday, a coalition, including the League of California Cities, local government, transportation and public transit leaders filed an initiative ballot measure -- called the Local Taxpayer, Public Safety and Transportation Protection Act -- with the California Attorney General’s office.

Specifically, the initiative would:

Prohibit the State from taking, borrowing or redirecting local taxpayer funds dedicated to public safety, emergency response and other vital local government services (including redevelopment). The measure would close loopholes to prevent the taking of local taxpayer funds currently dedicated to cities, counties and special districts. It would also revoke the State’s authority to borrow local government property tax funds or divert local redevelopment funds.

Protect vital, dedicated transportation and public transit funds from state raids. The measure would prevent State borrowing, taking or redirecting of the state sales tax on gasoline (Prop. 42 funds) and Highway User Tax on gasoline (HUTA) funds that are dedicated to transportation maintenance and improvements. It would also prevent the State from redirecting or taking public transit funds.

This measure would eliminate the loopholes in Prop 1A, which was previously passed by the voters to protect our local sources of revenue.

SacBee Series Highlights State Budget Dysfunction

The Sacramento dedicated a three part series this week to the state's dysfunctional budget.

Sunday's Article (click here) clearly the lays out the current situation:

"...It's been a mess for much of the past three decades because the combination of an out-of date tax system, reckless spending and fickle voters has made state government extremely vulnerable to the ebbs and flows of the economy..."

Monday's Article (click here) talks about the out of control spending by the legislature. As stated in the article:

..."The way Dave Doerr sees it, California's elected leaders ran for the wrong offices.
"They really ran to be Santa Claus, and made a mistake and filed for the Assembly and the Senate," said Doerr, the senior tax consultant for the California Taxpayers Association.
Doerr's reference is to a penchant of lawmakers and governors over the past three decades to spend whatever money they have on hand - and promise even more - then let succeeding budget drafters fend for themselves..."

Tuesday's Article (click here) talks about the many ideas currently being floated to try and fix the current disconnect between revenues and expenses.

The articles do a great job of explaining how we got here and how difficult it is going to be to solve the situation. In fact, it further reinforces local government's concerns that they are going to come after for more money before the fiscal year is even over.

League of Cities looks to protect local revenues

Here is a news release from the California League of Cities:

On September 18, the General Assembly of the League of California Cities overwhelmingly authorized its board of directors to evaluate and, if feasible, seek voter approval of a November 2010 ballot measure to provide broad constitutional protection of local revenues.

The ballot measure would constitutionally protect against future efforts to divert, borrow, or steal revenues that fund local government services. This measure would go beyond the protections of Prop. 1A and would include the following revenues: property tax, sales tax, local share of gas tax funds, gasoline sales tax funds, redevelopment property tax increment, UUT’s, TOT’s, and business license taxes.

City officials will be asked to devote personal time to gather signatures, raise private funds, and help organize a statewide grassroots coalition to secure this ballot measure. The promotion of ballot measures or participation in ballot measure advocacy activity cannot occur on city time or using city facilities or equipment.

Once again, the state has left us no other options, as they continue to decimate our budgets instead of fixing their own problems. While this won't solve all of our troubles, it should help reduce the ways in which the state can steal our funds. Hopefully, we can force them into a position where they will actually have to reduce state government instead of taking from us.

State getting ready to pick our pocket again!

Just when we thought we were safe, at least for a couple of months, I was sent this missive from the Capitol:

Local Highway Money is Target Again
By John Wildermuth
Journalist and Political Commentator
Fri, August 14th, 2009

The $1 billion in local highway money the state didn't get in last month's budget agreement could be a target again when the Legislature comes back from its summer recess next week, Darrell Steinberg, the Democratic leader in the state Senate, suggested Wednesday.

Steinberg, joined by local Assemblyman Tom Ammiano, was at a neighborhood health center in San Francisco's Mission District, talking about his suit to recover nearly $500 million Gov. Arnold Schwarzenegger blue-penciled from state health and welfare programs before he signed the budget revisions.

"We could go back to (the highway money),'' he told the crowd of doctors, nurses, patients and various care providers. "That's one way to do this.''

Putting that highway money back into play also would give Steinberg and Senate Democrats a chance to stick it to their colleagues in the Assembly, who tabled the plan to borrow the highway money after Schwarzenegger and the four legislative leaders agreed to it as part of the overall budget deal last month.

More to the point, they dumped the $1 billion in highway funds out of the budget deal after Steinberg had pushed the bill though a reluctant Senate over the frenzied lobbying and loud complaints of mayors, council members and county supervisors from across the state.Not only did the Assembly's decision force the senators to take the heat for a tough vote that ultimately came to nothing, it also opened the way for Schwarzenegger to recover some of that lost money by chopping even deeper into health and welfare programs that Steinberg and other Democrats had fought desperately to save.

Going back to the original budget deal also makes sense because the Senate already has agreed to borrow the highway money, Steinberg said. It would take a simple majority to approve it in the Assembly, which means the Democrats wouldn't need any Republican votes.

If those highway funds could restore the money taken from AIDS prevention and treatment programs, services for battered women and children's health care, what Democrat wouldn't make that choice, Steinberg added, casually turning up the heat on the Assembly. While Schwarzenegger isn't saying yes to any new effort to go after those highway funds, he isn't saying no, either.

"The budget is over, the budget is done,'' said Aaron McLear, a spokesman for the governor.

"But if the economy worsens, we will have to go back to do more cuts and look at other measures.

"Translated from politicalese, that means that while Schwarzenegger won't guarantee to restore any of the current cuts, "other measures" that include another $1 billion in revenues could go a long way toward avoiding additional program trims if - or more likely, when - the Legislature has to go back into this year's budget to deal with more anticipated deficits.

Steinberg and the Democrats already are gearing up to battle any new call for more budget cuts. His suit arguing that Schwarzenegger's vetoes were illegal could go before a judge by the middle of September and he was talking tough to the crowd of supporters in San Francisco,"At some point - and this point is right now - enough is enough,'' he argued. "People who need help have given up enough for the state budget."We're tired of playing defense," Steinberg added. "It's time to go on offense.''

CRA Conference

Yesterday, I attended the California Redevelopment Association (CRA) Legal Issues conference in Sacramento. Normally, the conference focuses on the latest legal rulings and their impact on redevelopment activities (i.e. eminent domain, relocation, development agreements, CEQA, etc).

This year, legal rulings were out and the state budget was the subject of the day. As most of you know, redevelopment agencies had a great day in court earlier this year, blocking the theft of $350 million in revenue by the state of California. Unfortunately, we weren't able to bask in the glow of our victory very long. This year, the state worked with the Attorney General's office to craft what they hope is a litigation proof theft of our funds. They also changed the dollar amount. While they promise to only steal $350 million next year, they decided to take $1.7 billion in the current fiscal year. The City of Manteca's share of the theft amounts to $6.7 million.

Not only will this theft eliminate 164,000 family wage jobs over the next year, it will likely bankrupt a number of redevelopment agencies and force other agencies to completely suspend operations for several years. Luckily, here in Manteca we've got a healthy reserve of RDA funds, so we should be able to survive--but job generating infrastructure projects won't be able to constructed during these hard economic times.

This legislation that implemented this year's taking was deviously crafted to minimize its chances for being overruled in court. On the other hand, like most 11th hour legislation, it is full of confusing and contradicting language. In addition, CRA's legal team strongly believes it is every bit as illegal as the legislation crafted last time.

The legislation creates yet another confusing fund for the County apportion for distribution of property taxes. The money shifted from each redevelopment area is supposed to be paid directly to benefit students living in redevelopment areas or redevelopment-assisted housing. Anyone who actually reads the statue that supposedly implements this shift will tell you that it is completely incomprehensible. It is likely that every County will interpret the legislation differently and there will be lots of winners and losers depending on the County.

I won't bore you will all of the details, but CRA's legal team will be compiling "horror stories" from every redevelopment agency in the state to demonstrate the arbitrary and capricious method that has been devised in this transparent attempt to circumvent the law. Our redevelopment tax increment is protected by statute, and every attempt they make to take our funds should be rejected in court, no matter how they attempt to slice or dice the law.

CRA should be filing the lawsuit in the next month or so, and hopefully we'll have a ruling well in advance of May 10th, when we are required to make the payment. In the meantime, it will have a chilling effect on economic development in California, which will further impact state revenues. I'll use this blog to provide updates on the status of the litigation.

State budget hangover

Most of the politicians and pundits took the week off after the passing of the sham of a state budget. Sunday, the Sacramento Bee was back in the business of focusing lots of energy on the budget. They supplied an op-ed piece, a Dan Walters column and a straight news story. For good measure, they also put together a searchable database which was a compiliation of the hits taken by area cities.

Here are some excerpts from the articles. We'll start with Dan Walters' column:

Gov. Arnold Schwarzenegger assumes the recession will hit bottom late this year with a slow recovery next year. "This is a very uncertain period," Mike Genest, Schwarzenegger's budget chief, said in Fresno last week.

"We think an economic recovery starts in the fourth quarter. If not, we'll be back in a budget crisis."

This recession is not only unusually deep, but unusually wide.

When the housing industry meltdown, centered in California, transmogrified into a full-blown global banking crisis, it affected every segment of the economy, unlike past recessions.
Thus, California has not only seen unemployment skyrocket to levels not seen since the Great Depression – 11.6 percent most recently – but there's been a massive loss of consumer confidence, which has clobbered retail sales. New car sales, for instance, are half of what they were just a few years ago.

"The recovery … depends on the strength and speed of the federal stimulus package and the pace of worldwide economic recovery," said Steve Levy of the Center for the Continuing Study of the California Economy. "There are no indications that private sector activity will turn up soon in the absence of aggressive stimulus efforts or worldwide growth."

Christopher Thornberg of Beacon Economics noted that income taxpayers will be carrying over stock market losses to offset any income gains, and retail sales will be re-benchmarked downward as wary consumers – loaded with debt – divert income, when possible, into debt repayment and savings. Ominously, 10 percent of California's home mortgages are delinquent or worse.

Even were the recession to bottom out statistically in a few months, employment and consumer spending, economists agree, are destined to remain stalled for at least another year. And that probably will mean continuing budget woes for state and local governments, especially the former, whose revenues come primarily from income and sales taxes.

The state Department of Finance is projecting an initial deficit of $7 billion to $8 billion for the 2010-11 fiscal year that begins in 11 months. Even as it continues to struggle with the current year's budget, the department soon will begin drafting its 2010-11 version for the governor to unveil in January.

Click here for the entire Dan Walters column.

Here's the Op-ed piece from SEIU:
As the largest state employee union, SEIU Local 1000 has always advocated for a state government that is effective and efficient while providing quality public services.
But "government efficiency" should not become a code word for frantically decimating services to California residents and throwing money at well- connected private contractors. In the name of increased efficiency, The Bee's editorial accepts as fact the governor's dubious assumptions about privatization, furloughs and the services we provide.
Since January 2008, we have offered plans – largely ignored by the governor – to save hundreds of millions of dollars by reorganizing the state lottery, collecting taxes more efficiently and cutting waste in the state's $34.7 billion contracting process.

Click here for the entire editorial.

There was really no new ground in the news article:
Local governments coping with the shift of billions of dollars to the state of California are eyeing ways to do what consumers have done for years.
They're considering ways to borrow. In the Sacramento region, the state budget's toll on cities and counties is $125 million, a new Bee database shows. That's more than the general fund for the city of Roseville.

Click here for entire article and click here for the searchable database.

Getting our $2 billion back...

The California Redevelopment Association is already preparing to challenge the state's theft of $2 billion in redevelopment dollars ($1.7 billion this year and $350 million next year).

As I've mentioned previously, the state's attempt to steal redevelopment dollars in 2008-2009 was stopped by a Superior Court judge in May. We have every confidence that we should be able to prevail in court again this year. The state believes that they've constructed a new method for stealing our dollars that will satisfy the courts--hopefully any reasonable judge will see through the state's transparent attempts to work around the intent of the law. The law has always made it very clear as to how redevelopment dollars can be spent--which is in ways which help reduce blight and create jobs. Diverting the dollars to protect duplicative bureaucratic jobs in Sacramento is no way to spur the economy.

If the loss of $1.7 billion in redevelopment revenue this year were instead invested in local communities for affordable housing, improved infrastructure, community facilities, and so on, it would support about 164,000 full- and part-time jobs in construction and related sectors of the economy. The $350 million loss next fiscal year would support nearly 34,000 jobs. The California Employment Development Department published a startling summary of job declines by sector over the last year. From April 2008 to April 2009, the construction sector alone lost 150,000 jobs, a number that only stands to grow larger with a taking of redevelopment funds. AB 26 4x is, in effect, an anti-economic stimulus bill!

I would like to note that none of our local state representatives voted to defer the monies, and for that we thank them.

State Budget Wrap - Local Government dodges one of the bullets!

As you probably know, the State legislature finally approved a revised budget yesterday afternoon. Local government's initial hit was expected to be as much as $5.4 billion--$2.1 billion more than they had been proposing for most of the budget session.

Luckily our local officials decided to not let this happen without a fight, and we ended up greatly reducing the impact on our local citizenry. I believe the Speaker of the Assembly, Karen Bass, summed up the role of local government in the budget battle when she tweeted yesterday:
"local govt 'declared war' on Legislature over cuts."

In order to finish the budget, the legislature was forced to eliminate their theft of $2 billion of highway user taxes over the next two years. We were able to convince the legislature that not only was this a bad idea (since it would virtually eliminate all local road maintenance), but it was likely illegal as well. Locally, this means we don't have another $1 million hole in our budget and we'll be able to keep our street maintenance program in place.

While the legislature spent the past month promising not to borrow our property tax funds, they ended up doing it anyway. They claim that clean up language over the next month will allow us to securitize this loss of $1 million locally. In other words, the state will promise to put this debt near the top of their list of repayments, thereby allowing us to go to Wall Street or other sources and borrow money that the state will promise to repay. If the state follows through, there should be no impact on our upcoming budget.

The one area where we failed to show the state the error of their ways was their theft of redevelopment funds. Back in May, a Superior Court judge ruled that the state's taking of RDA funds was illegal and therefore the $350 million they proposed to steal in 2008-2009 was not going to happen. The state went back to the drawing board and came up with a convoluted scheme that they believe will make the theft legal this time. And since they were mad we beat them in court, they decided to increase the theft by 600 percent!

I believe that we have a better than 50 percent chance of beating them in court again--but it will likely take the better part of the next year to wade through yet another lawsuit. In the meantime, there will likely be 50,000 less construction jobs statewide over the next year while these redevelopment funds are tied up in litigation.

It is the loss of jobs that frustrates me the most. As I've noted in recent blogs, the state is foolishly cutting funds in the areas that can help the state the most. Any economist will tell you that capital dollars circulate through the economy multiple times and bring in additional income tax, sales tax and business taxes to the state. It is likely that their $2 billion RDA take will reduce state revenues by a like amount.

In addition, I'm worried that the state workers are going to further depress the economy by reducing services to the state and the citizens. We've already been getting vibes that CalTrans is going to be using the state imposed Friday furloughs as an excuse to slow down their already glacial pace of processing environmental reviews for stimulus projects. They are also going to start charging local entities for the services they are supposed to providing through their own budget. It is likely that many transportation projects will fall behind schedule and hundreds of thousands of road construction jobs will be delayed by a year -- all because CalTrans refuses to find a way to work harder and smarter during these lean budget times.

I'm also confident that we'll be dealing with the budget mess again before the end of the year. It is likely that many of their budget fixes will not result in cost savings to the state and that their cutting of funds that spur jobs will further reduce the state's treasury in the coming year.

In the short run though, we'll enjoy our victories for a couple of days and continue to find ways to keep our service levels up despite the thefts from our state government.

State Budget Mess

As the legislature considers the state budget, I would recommend that every member read the first and last paragraph in Dan Walters' Tuesday Sac Bee column:

Were California a corporation, rather than a state, its officers would be playing tiddlywinks with Bernie Madoff in the federal slammer, having engaged in years of hide-the-pea accounting tricks, under-the-table loans and other gimmicks to cover up the state's perpetual operating deficits…

The most damning aspect of this tiresome situation is that the best budget our political system can produce is deceptive and fundamentally dishonest. It should tell us that we have a much bigger problem than an unbalanced budget.

The rest of us should think long and hard about the “most recommended” comment that accompanied this article:

"Why is it that WA, a “blue” and progressive state, can maintain highways, a ferry system, and three separate university systems without imposition of a personal income tax? Why does that State attract and keep businesses like Microsoft and Boeing, which create high paying jobs and generate significant revenues at state and local levels? Why does WA, where eco-consciousness is paramount, have thriving forest products, agricultural and fishing industries that also provide jobs and revenues for government? Why does CA have none of this? Perhaps it is that WA is governed by a part-time Legislature that convenes bi-annually, composed of citizens who must work for a living, rather than a pack of venal professional politicians whose only job is to put their corrupt interests ahead of the public good. May be it is that WA restricts State functions that duplicate federal governance, eliminating a duplicate tier of regulation that inhibits revenue generating enterprises. Maybe it’s both."

I’m having a hard time disagreeing with anything said in the article or in the reader comment above!

To read the entire article, click here:

http://www.sacbee.com/walters/story/2041808.html

The Wall Street Journal also weighed in on the state budget debacle (click here for story), hinting that the state's solution will likely exacerbate California's staggering unemployment rate:

The budget deal struck by California Gov. Arnold Schwarzenegger and statehouse leaders is expected to hurt a broad band of state residents and crimp the state's recovery from the current, deep recession.

Fiscal experts said the negative effects of the budget plan, crafted in an attempt to keep the state solvent, will offset much of the intended beneficial effects of President Barack Obama's federal stimulus package.

California's economic decline, economists predicted, will last longer than downturns in other states. They said the proposed cuts in the budget deal will compound the continuing impact from other recessionary blows, including an 11.6% state unemployment rate, widespread foreclosures on homes and depressed real-estate values.

In a second Journal article, focusing on the budget's impact on local government, they pointed out:

The state's cut into local funds, economists said, could have an outsized effect in delaying California's recovery.

Los Angeles city officials in said they expect to lose about 2,300 construction jobs because of a proposal in the budget agreement to take $72 million of its funds for redevelopment projects. The city's Community Redevelopment Agency has a $688 million budget, but most of that money goes toward paying off debt service on other projects underway in the nation's second-largest city.

The $72 million represents what is needed to fund new projects, said Cecilia Estolano, the agency's chief executive. Redevelopment funds will be taken from many other cities across California under the budget deal. "We're very concerned the state will be in essence shutting down the one economic-development program the state of California has during the worst recession in 70 years," Ms. Estolano said.

Both articles point out the absurdity of this budget "solution". The state managed to cut the items most likely to dig the state out of its recession, while protecting the wasteful duplicative programs in Sacramento. As I pointed out in Sunday's blog, most of their solutions will actually increase the deficit, leading to more cuts before the middle of the budget year.

This method of budget cutting isn't surprising given who really wears the pants in Sacramento--which is the powerful unions that represent state workers. It is no coincidence that all of the cutting and layoffs are occurring at the local level, while not one state worker has lost their job. Hopefully, they are done bludgeoning local government and will be forced to start cutting the fat in the next round of cuts.

Big 5 comes up with Budget Scheme

The governor and the legislature have finalized their budget that essentially protects state workers and destroys many cost-effective services at the local level.

Since most of their cuts are to programs that actually save the state money (see Sunday's blog), we'll likely see the legislature back in session before the end of the year trying to fix the new mess they just created. In the meantime, it looks like they are going to "borrow" about $1 million of our property tax revenues, steal all of our funds dedicated to road maintenance ($1.1 million a year for two years) and grab $5.5 million in Redevelopment funds that a judge already told them that they can't touch!

Here's a press release from the League of Cities about the budget that will presented to the legislature this week:

FOR IMMEDIATE RELEASE

League of California Cities Condemns Proposed State Budget as Reckless Ponzi Scheme

SACRAMENTO — California’s legislative leaders and Gov. Arnold Schwarzenegger have agreed on a proposal to "balance" the state budget with illegal raids of local government gas tax, public transit and redevelopment funds, according to recent court decisions and a legal analysis obtained by the League of California Cities, as well as a "loan" of local government property taxes that is unlikely to be repaid. By relying on illegal mechanisms and fund shifts, this budget resembles a Ponzi scheme that the League of California Cities condemns in the strongest possible terms.

The classic Ponzi scheme works on the "rob-Peter-to-pay-Paul" principle. Money from new investors is used to pay off earlier investors until the whole scheme collapses. Meeting in secret, the Big Five have put together a state budget that relies on unconstitutional seizures of local taxpayers’ funds or "loans" from local taxpayers to finance today’s state operating expenses. This recipe for disaster passes off responsibility for repayment or complying with future court orders to reimburse local governments to future governors, legislatures and taxpayers.
As they have in the past, courts are expected to enjoin the state from implementing its unconstitutional raids of local gas tax, public transit and redevelopment funds. Further, given California’s negative fiscal outlook, the League believes it is illusory to maintain that the state will be in a position to repay the "borrowed" property tax funds in a few years.

League President and Rolling Hills Estates Mayor Judith Mitchell reacted strongly to the budget proposal. "Cities across the state have suffered deep revenue losses and acted responsibly to cut spending by laying off staff, shutting public facilities, and eliminating programs. While some at the state level will try to pass this proposed state budget off as a major breakthrough, city leaders know it only passes the buck and the problem to the future. As an elected official who took an oath to protect and defend the state constitution, I am embarrassed that any state officials would propose a blatantly unconstitutional budget that promises to fail within weeks of its adoption."

"This budget proposal is a reckless Ponzi scheme because it depends on unconstitutional seizure of billions in local revenues that the voters dedicated to specific purposes and questionable borrowing provisions," said Chris McKenzie, League executive director. "It also puts government’s most important responsibility—protecting public safety—at risk because it takes local property tax revenues that should be used to patrol the neighborhoods of the cities of California and to respond to the many fire, police and emergency medical calls that cities in California receive. We have assured state officials we will see them in court the day after a budget is signed if it contains illegal provisions."

Established in 1898, the League of California Cities is a nonprofit statewide association that advocates for cities with the state and federal governments and provides education and training services to elected and appointed city officials.

State Budget

The reports are coming into us fast and furious as the state budget saga continues. While the state legislature argues over school funding, they are also planning on stealing as much as $3 billion from local government. The form of the $3 billion take is yet to be determined, but the latest discussions seem to be focusing on a huge hit on our redevelopment funds.

The amounts that they are talking about for redevelopment could put many agency bonds into default, so the legislature may be using RDA funds as hostage to force cities to accept a stripping of highway and road funds instead.

We'll try to keep you informed of this fluid situation, but it seems like the scenarios are going to be changing on an hourly basis. The bottom line is that Manteca could be losing over $8 million in funding by the time this horrific budget is passed. Oh and by the way, our lobbyists are concerned that revenue projections are so flimsy in Sacramento, that whatever budget is passed could be out of balance again in a matter of months. There is a chance that we could be looking at a scenario where the budget starts getting revised every 4-6 months until the economy stabilizes, thus leaving us in a state of uncertainty for the next couple of years.

Click here for the latest report from Sacramento.

Distressed City Exemption?

"A lack of planning on your part does not constitute an emergency on my part"

I'm sure that we've all seen this saying posted on someone's cubicle at the office, on a refrigerator magnet strategicaly placed by mom, or on a t-shirt at the ballgame. Well, I'm hoping that the City of Vallejo receives this same message as they walk the halls of the legislature.

Vallejo Mayor Osby Davis met with the Governor's deputy chief of staff and his assembly representative this past week to ask for relief from the state's proposal to borrow or take local government revenues.

According to the Contra Costa Times:
"I explained Vallejo's financial situation, how four years ago, we started making cuts and now we have nothing left to cut," Davis said, shortly after returning from his trip on Tuesday and Wednesday. "Any cuts would be direct layoffs ..."

Schwarzenegger staffer Michael Prosio asked Davis if the city would be able to turn around and borrow any money the state took away. Davis said the city's bankruptcy filing would make such a move next to impossible.

Evans, Assembly budget committee chairwoman, "is trying to keep Vallejo off the table," Davis said. He referred to a plan to enact a "distressed city exemption."

Davis said the problem with that plan is that every city could claim to be distressed.

I find it amazing that Vallejo is asking for special treatment. Frankly, most of their problems are of their own making. They continued to approve generous labor contracts during times that city revenues were contining to tank due to military base closures. They continued to make questionable real estate deals with Six Flags and others. The Council ignored the advice of city staff until bankruptcy was their only remaining option.

Frankly, I believe that any city leader that has the "chutzpah" to ask for a special exemption of this type is probably still in denial and will likely continue to create more financial armageddon. We'll continue to follow this story and let you know if anything transpires. I'm sure every local agency in the state will be watching this closely as well.

To read the full news story, click here.

The latest numbers

While I'm trying NOT to get caught up in the daily grind of the state budget, it is impossible to ignore the ever increasing budget gap. The State Controller's report for June revenues shows that a $1.1 billion shortfall in revenues.

Here's the latest on this issue from the Sacramento Bee:
The state's chief sources of revenue, income and sales taxes, fell in June more than $1 billion below estimates that were scarcely a month old, state Controller John Chiang reported today, exacerbating the state's budget deficit crisis.
Personal income taxes in June were $987 million below what Gov. Arnold Schwarzenegger's administration had estimated in its May revision of the state budget, while sales taxes were down $154 billion.
The two shortfalls were offset, in part, by $1.31 billion in corporate taxes that were 41.2 percent above estimates -- attributed by Chiang to one-time payments by corporations to avoid a new state penalty for underpayment.
The below-expectations revenues make the state's 2009-10 budget deficit, pegged by the administration at $26.3 billion, that much worse. Schwarzenegger and lawmakers are stalemated over how to deal with the gap. Chiang's office has begun issuing IOUs in lieu of checks to many state creditors because of a severe cash crunch.
"California continues to pay for its history of unbalanced budgets," Chiang said, "The state spent $10.4 billion more than it collected last year alone, and is now without enough cash to cover all of its payment obligations. Our major sources of revenue have continued their trend downward, leaving no viable option but to craft a new budget that recognizes California's recovery has yet to begin."
The full monthly controller's office report may be found here.

On the CalPERS front, things aren't much better. Here's another post from the Bee:
California's 40 state and local public employee pension systems vary widely in their assumptions of future earnings and other factors, including inflation, and San Diego-based actuarial consultant Rick Roeder has generated a system to rank them by degree of optimism.
By Roeder's calculations the immense California Public Employees' Retirement System (CalPERS) is one of the most optimistic, while CalPERS-managed systems for legislators and judges are among the most conservative and the state's other big system, the California State Teachers' Retirement System (CalSTRS) is in the middle.
Roeder's explanation of how these assumptions affect the health of the retirement systems, as well as the detailed rankings, are available here.

No end in sight for State Budget mess

Here's a great post from the Sac Bee's Capitol alert, which realistically forecasts a long budget stalemate:

With budget talks breaking down this week and the big June 30 marker having come and gone, the question on a lot of minds is where the next pressure points lie.
Mike Zapler at the Mercury News laid out scenarios today, and there wasn't a lot of good news for anyone hoping for a quick resolution.
Some thought that the next pressure point would be this Friday, the final date banks said they would accept IOUs as cash for customers. But there hasn't been a flurry of talks this week, and Assembly Speaker Karen Bass walked away from negotiations as a form of protest against the governor's position. So it doesn't appear that Friday looms very large as a deadline.
Department of Finance Director Mike Genest said last week the state would lose an opportunity to retroactively cut $1 billion in CSU and UC for 2008-09 after July, making July 31 another potential pressure point.
The Fitch Ratings downgrade release on Monday laid out a long summer scenario, noting that the state can get by on IOUs through September. That means California will have enough cash to make its constitutionally-required priority payments while satisfying its non-priority demands with IOUs. If legislative leaders don't feel like the world will collapse with the current IOU scenario, it could become a typical budget year in which negotiations drag on for weeks.
Dan Schnur, director of the Unruh Institute of Politics at the University of Southern California, said the Capitol atmosphere doesn't feel as desperate as it did when the state last issued IOUs in 1992. At that time, Schnur was working for former Gov. Pete Wilson.
"Back in my day, when the state issued IOUs in the early '90s, it rained hell down on the state Capitol," he said. "There was nonstop media coverage and public outcry which resulted in significant pressure for the relevant players to get back to work. In the absence of that same attention, the negotiators don't feel the same pressure."
There is at least one notable difference between then and now -- California paid state employees then with IOUs, a practice that courts have since banned.
Schnur said he also thought that major news events overtook budget coverage in the last month. Pop singer Michael Jackson died June 25. Republican vice presidential candidate Sarah Palin announced she would step down as Alaska governor on July 3.
"Compared to Michael Jackson and Sarah Palin, the state paying its bills with IOUs just isn't that exciting," he said. "On one hand, it's a little too facile (a point), but on the other hand, there really was a lot more competition for news and media coverage."
Of course, the state lasted two months with IOUs in 1992, and we're still only a week into them this year.
Schnur also noted that after lawmakers nearly reached a deal in the run-up to June 30, it was natural this week for negotiators to retrench and take a step back.
Former Schwarzenegger communications director Rob Stutzman said he thought the impasse would continue for a while. Schwarzenegger seems resolute in his demand for permanent changes, and "at this point, he'd be crazy not to be. He'd look bad by not signing those bills at the end of the fiscal year unless he gets a grander deal in the end."
For now, leaders are meeting sporadically, and Schwarzenegger and Bass are battling for media attention. Bass on Monday skipped Big 5 but held a well-attended press conference to bash the governor's stance on budget talks, while her office produced a video attacking Schwarzenegger and her spokeswoman sent a memo suggesting the governor's press secretary made sexist criticisms.
Schwarzenegger held a press conference Monday to promote his changes to In-Home Supportive Services and held a similar event Wednesday to talk about reducing welfare rolls.

This isn't good news at all for us at the local level. While we've done everything we can to balance our budgets and minimize impacts on both our employees and our residents, we really can't adopt a meaningful budget until the state finishes their budget. In past years, we could just ignore the mess at the state, but our friends in Sacramento are not going to let that happen this year. Every budget solution contemplates picking our pocket and taking away substantial revenues from local government.

While they started out just talking about "borrowing" property tax dollars, they are now more focused on outright thefts such as the Highway User Tax and our Redevelopment Tax Increment. In each case, the takings would be devestating to anyone who lives in a city--which of course is pretty much everyone in the state. The scary part is that the proposals get more outrageous by the day. Previously, they were talking about a $350 million illegal raid of Redevelopment funds. Now they are proposing a $1.3 billion theft. This is a dollar amount that equates to more than $4 million out of Manteca' s pocket--far more than the $1 million we would have lost via the "borrowing" of property taxes.

If the state actually took this huge chunk of redevelopment funds, it would likely put 25% to 50% of all the redevelopment agencies into the red and put a lot of bonds into default. The state's level of irresponsibility is now reaching a level that could take down every other government entity in the state. Let's hope that cooler heads prevail at some point and that the state attempts to clean up their own mess without the huge collateral damage they are now proposing.

Jobs/Housing Imbalance

Since 1980, the east bay cities of Livermore, Dublin and Pleasanton have been one of the epicenters of job creation for not only the bay area, but the entire country. Much of the early employment boom can be attributed directly to Lawrence Livermore Laboratory which created a great pool of highly educated workers in the Livermore Valley. With this base of skilled workers, hundreds of large and small companies were attracted to the area along with many startup companies created by the skilled workforce already residing in the area

Millions of square feet of office and light industrial space was built to house the many employers. Some housing was also built, but not nearly enough to accomodate the huge influx of highly paid workers. The early entrants to the region wanted to preserve the bucolic lifestyle of the area. Due to the nature of local government finance, commercial development--which generates far more revenue than expenditures--was encouraged while service intensive residential development was discouraged through growth limits and sky high development impact fees.

Consequently, much of the region's population growth was exported to east Contra Costa County and San Joaquin County. This exportation has been particularly acute over the past decade. In 1980, there were 97,005 residents living in Pleasanton, Livermore and Dublin. The three cities that have seen the greatest import of commuters (Manteca, Tracy and Brentwood) had a total population of 47,787. During the 1980s, the three job centers added a total of 33,518 residents while the commuter destinations (mostly Tracy and Manteca) added 34,107. During the 1990s, the population growth began to skew greatly to the east with the three job centers adding 36,449 residents and the commuter cities 47,595. Over the past nine years, the commuter towns have added over twice as many residents with a population increase of 71,887 versus 35,456.

In fact, the commuter towns now have nearly as many residents (201,376) as the job cities (202,428). Since 1990, Brentwood has been particularly impacted with its population increasing from 7,563 to 51,908. Most of this increase is due to Livermore's refusal to develop homes in the area north of the 580 freeway. It is just cruel that tens of thousands of Brentwood residents have to navigate narrow and dangerous Vasco Road every day for an hour with the last ten minutes of the commute going through vacant north Livermore land that could have housed every recent resident of Brentwood.

The social cost of requiring all of these commuters to spend most of the time on the road instead of with their families is incalcuable. Our state government, who allowed these cities to ignore their housing needs, has instead paid for billions of dollars in freeway improvements and schools which require huge ongoing subsidies. Our air quality has also suffered from the clogged freeways stretching from the east bay to deep into the valley. Thousands of acres of prime farmland has been gobbled up in order to save marginally useable land in the Livermore Valley.

So where am I going with all of this? Well, it looks like the state is beginning to take steps to address this imbalance. I believe that if there were a level playing field, we'd have a better chance of attracting jobs to the valley. Right now, the job centers collect over twice as much tax revenue per resident due to the huge amount of commercial development in their cities. This revenue advantage allows them to have the funds on hand to attract additional development without impacting their resident's tax bill. In other words, the current situation allows the rich to get richer. Here in the Valley, we are forced to either provide less services or tax our residents more to keep up our quality of life. We simply don't have the resources to compete many times for the high wage jobs.

In any case, a recent article in the "Pleasanton Weekly" gave me some hope. The article, which is mostly discussing a proposed upscale senior housing development, notes the following:

The city is currently under fire for its housing cap, with a lawsuit pending to invalidate it. Just hours before the Planning Commission meeting, California Attorney General Jerry Brown announced he was joining a San Francisco affordable housing coalition in the legal fight, which was filed in 2006.

"Pleasanton's draconian and illegal limit on new housing forces people to commute long distances, adding to the bumper to bumper traffic along (Interstates) 580 and 680 and increasing dangerous air pollution," Brown said in a statement. "It's time for Pleasanton to balance its housing and its jobs and take full advantage of its underutilized land and proximity to BART."

Click here for the entire article. The reader comments are worth reading as they show the anti-growth bent of many east bay residents.

A number of us have been pushing the Attorney General to stop picking on Central Valley planning practices and focus on the genesis of our growth challenges--i.e. the east bay growth policies. Let's hope that this is the beginning of a new day when Valley cities can start competing on a more level playing field. It is up to the state to finally put its money where its mouth is, and force all cities to create a jobs/housing balance.

Groundhog Day

From Sunday's San Francisco Chronicle:

...as the state's finances again head off the cliff, the latest California scenario "isn't 'Thelma and Louise,' " observes Hoover Institution research fellow Bill Whalen. "It's 'Groundhog Day.' "
Now Californians, like the Bill Murray character who lives the same day over and over, may be finally forced to confront the roots of the insanity.

The article (click here to access), does an excellent job of summarizing all of the issues that plague California's state government. Problems include partisanship, ballot box budgeting, term limits, Prop 13 and a host of other challenges. At the end of the day, while the article doesn't come up with any quick solutions, the author does believe that the people of this state have the wherewithal to make its government spend within its means. It notes that it typically takes a crisis to effect change. Given the full blown crisis we are in now, there is certainly no better time to reform state government.

Stop the State Raid of Gas Tax Funds

LEAGUE BOARD VOTES UNANIMOUSLY TO CHALLENGE RAID OF LOCAL GAS TAX FUNDS
Bypass of Voter-Approved Ballot Propositions at Issue

The news media flocked as more than 100 city officials joined with the League of California Cities’ board of directors to announce the board’s unanimous vote to take legal action, if necessary, to challenge the constitutionality of a key component of the budget proposed by the Budget Conference Committee to seize $1.7 billion of the local share of the highway users, or gas, tax that is used to maintain local streets and roads. The press conference was held on Thursday, June 25, at the Sacramento Convention Center during the League’s policy committee meetings.

State leaders have proposed bypassing the voter-imposed restrictions to use local gas tax funds to pay off the state’s highway bonds and reimburse the state general fund—a questionable move that seems designed to give the appearance of having a balanced budget. The action comes as close to 130 have already passed resolutions directing their respective city attorneys to cooperate with the League, other cities and counties in pursuing litigation to have any raid of local gas tax funds declared unconstitutional and invalid.

Nielsen, Merksamer, Parrinello, Mueller & Naylor, LLP, a law firm specializing in ballot measure and election matters, concluded that in both 1974 and 1998 voters imposed restrictions on the state’s ability to use gas taxes for debt service on bonds and to divert local gas taxes for the state general fund. The opinion has been shared with all legislators, the Budget Conference Committee, and Gov. Arnold Schwarzenegger. It is online at www.cacities.org/HUTAopinion

Thursday’s press conference carried a simple yet strong message: DON’T KICK THE CAN DOWN THE ROAD!

The Sacramento Bee’s Capitol Alert shortly after the news conference posted “California cities vow to sue if state siphons gas tax funds” www.sacbee.com/1089/story/1977103.html. The League expects considerable coverage later Thursday and Friday based on press attendance at the event.

During the press event, League President Judy Mitchell was flanked by a very large group of city officials all holding “Save Your City” signs. President Mitchell told reporters that the Legislature should adopt a credible budget that is balanced with a realistic mix of state, not local revenues.

When she finished her remarks she passed Modesto Mayor and League Second Vice President Jim Ridenour a can labeled with Save Your City on one side and a quote from the Governor on the other side that read: "I urged the legislature to take this seriously and to not ... kick the can down the road, as they have done in the past but let's solve the problem." Fresno Bee, June 11, 2009.

Mayor Ridenour said that his city will literally go dark if gas taxes are seized because they will be forced to shut off 12,000 street lights. He told reporters that cities are not a state program but separate governments that have suffered the same drastic revenue losses as the state.

The Modesto mayor ended his remarks by giving the can to Clovis City Council Member Nathan Magsig. The council member explained to reporters how his county’s (Fresno) unemployment rate has skyrocketed to 15.4 percent and that the public works projects funded with gas tax are imperative to keeping folks working. He ended his remarks by urging the Legislature to reject these unconstitutional job killing proposals because the promised savings are illusory and will only cause widespread economic harm.

League Executive Director Chris McKenzie was the final speaker and summarized the League’s position.

Press present at the news conference included:

The Sacramento Bee
Capitol Weekly
KFBK-AM
KCRA-TV
Fox 40-TV
Public CEO
Capitol Television News Service

Capitol Public Radio also conducted a phone interview with Chris McKenzie following the news conference. The Riverside Press Enterprise is running a story on Friday, June 26.

$1.9 Billion hit for State, economic boost for Manteca?

Here is an update on what is happening with the long-standing federal lawsuit over health care for state prisoners. This decision will not only have a major impact on the state budget, but it will also have a major impact on San Joaquin County and Manteca.

If the settlement is approved, the old women's prison northeast of Manteca will be converted to a prison hospital, generating nearly 1800 family wage jobs in the health profession. County officials claim it will negatively impact the County hospital as the state pays far higher wages for health care workers. Others welcome the additional jobs as it will boost payroll countywide--particularly in south County where most of the workers will likely reside.

Judge sets deadline for Calif. prison decision
By DON THOMPSON Associated Press Writer SACRAMENTO -- A federal judge on Tuesday gave the Schwarzenegger administration 15 days to sign an agreement intended to reform the health care system <http://topics.sacbee.com/health+care+system/> for California inmates and end a long and costly legal dispute.
Failure to do so would prompt a potential raid on the state treasury, U.S. District Judge Lawrence Karlton warned.
Corrections Secretary Matthew Cate negotiated the tentative agreement last month with J. Clark Kelso, the court-appointed receiver overseeing prison medical reform.
Benjamin Rice, <http://topics.sacbee.com/Benjamin+Rice/> general counsel for the Department of Corrections and Rehabilitation, said the administration and the state controller's office are reviewing the agreement. The terms haven't changed, he said, nor has it been rejected.
Karlton's patience wore thin when Deputy Attorney General Debbie Vorous said she could not say why the document had not been signed.
"This is intolerable," the judge said.
He gave the state three months to present an alternative if it won't sign the tentative agreement.
"They better come in with a plan with real money. Otherwise, I'm going to start eating into their budget in a real dramatic way," Karlton said during a hearing in federal court in Sacramento.
Seconds later, the visibly upset judge took a breath and said, "Take that back. I'm not threatening anything." It was one of many times during the hour-long hearing that Karlton tried to restrain himself.
"If I sound terribly frustrated, it's because I am," Karlton said at another point after raising his voice.
The agreement would end a series of lawsuits that stemmed from allegations of inadequate care. Federal courts subsequently found the care so negligent that it violated prisoners' civil rights and was a direct cause of inmate deaths.
The $1.9 billion compromise reached by the receiver and Schwarzenegger's corrections secretary calls for building two prison hospitals for 3,400 physically and mentally ill inmates.
It represents a much less ambitious plan than the one originally proposed by the receiver. Under the first plan, the state would have spent $6 billion to build seven hospitals for 10,000 ailing inmates.
Both sides said the compromise was an acknowledgment of fiscal reality, as California faces a $24.3 billion deficit and steep cuts to schools, parks and social programs.
In addition to improving medical and mental health care, the tentative agreement would end competing lawsuits between Gov. Arnold Schwarzenegger and Kelso. The receiver is threatening to seek a contempt of court ruling if Schwarzenegger won't turn over money for prison medical centers. Schwarzenegger is seeking a court order to end the receivership.
At the same time, state Attorney General Jerry Brown has said he will appeal to the U.S. Supreme Court if federal judges seek to raid the state treasury unilaterally.
Under the agreement, the receiver would agree to shift many of his employees and duties back to state control within six months.
Attorneys said they believe the administration has until July 1 to sign the agreement, although the exact date was unclear from Karlton's verbal order.
"We're very close. The state's had this albatross around it's neck for about 15 years," Kelso said in an interview. "The hopeful or good news is we're about a signature away from solving this problem once and for all."
Karlton said he was encouraged by the administration's shorter-term plans, also presented in court Tuesday, to improve care for mentally ill inmates. But he warned that the administration is now obligated to meet the deadlines it has set for itself.
"Those are orders of the court that must be obeyed - not hoped for, not prayed for - obeyed," the judge said. "I'm not kidding."

Revenge of the State

As I noted in one of Sunday's posts, the Governor seems to be backing off of his proposal to "borrow" a couple of billion dollars from local government. The legislature has made it clear that they don't like the idea.

Unfortunately, the state and the legislature are finding other ways to tap the dollars out of us instead. For example, CalTrans has stopped performing certain studies for freeway improvements, that will likely cost Manteca at least $100 grand this year. On the public safety front, they'll be gouging us on booking fees and charging for the crime lab, adding over $130K per year to our costs. I'm sure we'll be learning about lots of other cuts as the summer continues.

All this is in addition to their theft of road maintenance funds. As noted in the Bulletin today, the Council has taken action to support the League of Cities action to litigate this taking of funds. The state is also taking another shot at our redevelopment funds. In early May, a judge ruled that they couldn't take our RDA funds. Here is the latest from our association that protects our redevelopment funds:

On Monday, June 15, the Budget Conference Committee agreed to include language in a budget trailer bill to take $350 million in redevelopment funds as ERAF shifts for each of three years—the current fiscal year plus fiscal years 2009-10 and 2010-11. The total take from redevelopment agencies would be an astounding $1.05 billion!

The Committee apparently believes that language directing the money be spent on schools in redevelopment project areas would address the Constitutional challenge made by the California Redevelopment Association (CRA). CRA’s attorneys disagree.

The vote was 6-0, with 4 abstentions along party lines. All Democratic members voted for taking redevelopment funds for three years as follows: Committee Chair and Assembly Member Noreen Evans, Vice Chair and Senator Denise Moreno Ducheny, Senator Mark Leno (D-San Francisco), Senator Alan Lowenthal (D-Long Beach), Assembly Member Bob Blumenfield (D-Van Nuys), and Assembly Member Kevin De León (D-Los Angeles). All Republican members of the Committee abstained and did not announce their position on the take.

Once again, there is no bill language to review, no bill number, and no author. For the time-being, agencies should assume amounts to be taken are triple the amounts estimated for this year’s ERAF shift that was overturned in court.

This proposal would extract over $1.3 million per year from our Redevelopment Agency. I'm confident that we'll be able to win in court on both ERAF and the road maintenance funds. However, I'm not confident we'll be able to go to court before the state finalizes its budget. As this is a fast moving situation, I'll continue to update the blog as things evolve.

Glimmer of Hope regarding the State raid of City Funds

Here is the latest from the Sacramento Bee:

The latest on California politics and government
June 12, 2009
Governor willing to abandon $2 billion raid -- maybe
Gov. Arnold Schwarzenegger said Friday that he is willing to abandon his budget-balancing proposal to borrow $2 billion from local government -- if lawmakers can agree on an alternative.
Schwarzenegger addressed the issue during a question-and-answer session that followed an Escondido speech he gave about the urgent need to mend the state's $24 billion budget hole this month.
"By the way, this is not yet a 100 percent thing," Schwarzenegger told a questioner who complained about the proposed raid of property tax revenue from cities, counties and special districts.
"My Republican colleagues have said they don't like that idea of borrowing from local government, and my Democratic friends have also said that they don't like to borrow from local government.
"So if both parties don't like to borrow from local government, of course we won't borrow from local government, that's clear," Schwarzenegger said.
The governor said the state's finance director, Mike Genest, has developed a list of potential new cuts - in areas ranging from foster care to state employee health care - that could negate the need to borrow from local government.
Aaron McLear, Schwarzenegger's spokesman, said the governor never has wanted to borrow from local government but wants to impress upon lawmakers the trade offs necessary to replace that $2 billion.
"What the governor is doing is stepping in, saying, 'If you don't want to do that, then here are the cuts it would take to avoid that,'" McLear said.
"This is really just a part of negotiation," he added. This is not him backing off of anything, or him changing anything. We need to start negotiating."

League of California Cities Division Meeting

State Controller John Chiang was the keynote speaker at last night's League of California Cities Division Meeting. This a quarterly meeting of city councilmembers and senior staff from San Joaquin, Stanislaus and Merced counties.

Chiang's address was both enlightening and sobering. State tax collections were $827 million below projections in May--further exacerbating the state's budget and cash crisis. As the Controller, it is Chiang's responsibility for the state to have the cash on hand to pay its bills. With a budget that hasn't been meeting projections all year, Chiang now projects that the state will be out of money by July 28. He noted that education and debt service has first and second call on cash coming into the state. Money that cities and counties receive from the state are further down the food chain.

If a balanced state budget isn't approved within the next few weeks, there won't be time for the state to pull together a financing plan to borrow cash by the end of July. The Governor has also ruled out a backup financing plan that could potentially get the state cash in the event the budget isn't approved shortly (click here for more details).

Chiang noted that we are now paying the price for state budget actions that began in 1999. At the peak of the dot com boom, Governor Gray Davis warned that the spike in state revenues was not sustainable. He recommended that the surplus cash be put towards one time expenditures. Instead, the legislature cut the vehicle license fee and slashed income tax rates to cut $6 billion in ongoing revenue out of the budget. When the boom ended a year later, we had the first of the multi-billion dollar state deficits. The state cash flow has been falling behind ever since and we are now feeling the cumulative effect of ten years of revenue shortages.

Assemblywoman Anna Caballero, D-Salinas also spoke at the meeting. She is contacting all of the former local government officials now in the state legislature (on her side of the aisle) and hoping to get them to oppose the state's "borrowing" of city property tax revenues. She also talked at great length about the broken budget process and its impact on all of California. All local officials in attendance were encouraged to hold face to face meetings with our legislators and let them know the devastating impact their raid of local funds would have on our citizens.

I felt very encouraged that the state officials in attendance understood our plight at the local level. It is now our responsibility to communicate our message to the legislature. They are under a tight timeline to complete a budget, we all need to do what we can to make sure that they don't balance it on our backs. For more information on this subject be sure to go to: http://saveyourcity.net/

Labor Issues in City of Sacramento, and a bit of State Budget News

At tonight's Sacramento City Council meeting, a huge utility rate increase is on the agenda. There is some Council opposition to this rate hike. Coincidentally, newshounds have revealed an internal memorandum noting that 430 utility workers may face layoffs. Click here for more information on the layoffs and click here to read more about the proposed utility hike.

In addition, City of Sacramento firefighters have now proposed to forgo raises until 2012 in exchange for an assurance from city negotiators that no firefighters will be laid off and staffing on fire engines will not be reduced in the next 30 months. 68 positions in the fire department are at risk if a labor agreement can't be reached. Read more about the situation here. Click here for the Bee's editorial today on the issue and click here to read one Bee columnists take on the situation.

There is some good news from Sacramento today--from the state government of all places. Senate President Pro Tem Darrell Steinberg has unveiled a counter to the Governor's budget proposal that eliminates the $2 billion loan from local government. It also proposes softer cuts to many social services and proposes less reserve funds to offset the reduction in cuts. While this is only the first of many counter proposals, it is nice to see that the majority party is not endorsing the short term loan from us locals. Read more here.

Good News, Bad News

While most of the economic news is still negative these days, I try and include a pocket of sunshine every once in a while. So, I'll do the good news first.

As the stock market has rebounded from its 50 percent drop to only a 30 percent drop since last summer, CalPERS has benefited as well. In a news release from Dow Jones (click here), CalPERS states that it gained 12.5% over the past quarter, putting the fund back at $180 billion. Now CalPERS is still tens of billions of dollars below its mid 2008 value, but it is at least a nice reversal of the current trend. Unfortunately, CalPERS is going to need a lot more double digit gains to stave off a huge rate increase next year.

Now for the bad news. The latest state budget proposal not only includes a loan of property tax revenues, but another "loan" of $750 million in gas tax funds from local government. That is 75 percent of all the gas tax funds received by local government--and about a $1.6 million hit for Manteca. These cuts would more than wipe out the gain in local funding from the federal stimulus package. As noted in the story you can access here, maintenance and repair of local roads would be virtually eliminated--which would exacerbate the already deteriorating condition of many of our roadways. Delaying repairs only makes things far more expensive in the future, as road overlays now are far less costly than the reconstruction of roads in the future.

Once again, the state has come up with the worst possible solution to their budget problem. They are once again proposing a short term fix that barely makes a dent in their budget gap. A fix that in the long run will cost ten times the short term budget savings. It is this type of short-sighted budgeting that got the state in this mess in the first place.

To learn more about the potential options that the state is looking at to divert gas tax funds, click on the link below.

Transportation_Overview_05_29_09.pdf

New Website to Save our Cities!

The League of California Cities has started a new website to publicize the state's proposed money grab of city funds. Check out the website
SaveYourCity.net

The State is trying to take money from cities and counties despite that fact that we amended the State Constitution in 2004 to stop them from doing this. As I've noted previously, the state has proposed to "borrow" about $1,000,000 from Manteca. Given that we've already had to reduce our budget by nearly $10 million, this would further devastate our ability to provide services to the community.

As of today, the site includes videos from over 300 local and state officials protesting the State's raid of our local funds.

By the way, the latest budget news out of Sacramento includes a suggestion from the Governor that the State Commission on tax reform consider a "flat tax" of 15%. To quote the story:

Advocates of a flat tax, which applies a single tax rate to all income, say it increases compliance with the tax codes because it is so simple and easy to understand. But opponents dislike that it taxes the wealthy at the same rates as the poor.

Steve Forbes and Jerry Brown both pushed for it during their presidential campaigns.

To read more, click here.

Governor's Latest Budget Proposal

The good news is that the Governor has a plan to close the deficit. The bad news is that the State Controller tells us that this plan needs to be implemented by June 15. After that, the State has a cash crunch of herculean proportions.

As expected, the Governor's plan includes "borrowing" $1.982 billion from local government--which equates to about $1 million from us. It also attempts to divert $750 million in local road funds. The plan also severely impacts every aspect of state funding, including many that will threaten our quality of life here in Manteca. For example, the budget proposal includes a $4.5 billion cut for K-12 education. It also takes over a billion dollars from our community college system and a like amount from the 4-year colleges.

It guts the safety net for the tens of thousands of families living below the poverty line in this County. Programs such as Medi-Cal and Healthy Families are gutted and CalWorks and Child Welfare programs are severely reduced. The State Prison system will release thousands of prisoners and our severely overcrowded jail system will be expected to handle many more recidivists.

Click here to see the detailed listing of all the programs impacted.

While the impacts are devastating, it may lead toward the need to restructure and downsize our state government. As I've mentioned before, those of us at the local level believe there are a lot of areas where state government could just go away--and let the local citizenry run the show. Click here for an op-ed piece in last week's Sacramento Bee that talks about this in more detail.

Budgets in the News

As we approach budget adoption season, we're beginning to see the many different ways that California cities are dealing with this historic drop in tax revenues.

In Los Angeles, 1200 positions are being eliminated and non-safety employees will be taking 26 furlough days. The city is still hoping to cut another $150 million in costs through salary concessions. You can click here to read more.

In San Francisco, they've already eliminated hundreds of jobs and over 1000 more positions are proposed to be eliminated after the City's largest labor union rejected a proposal to reduce compensation for holidays. Read about it here.

Non-safety employees have made concessions in Gilroy, but there are still potential layoffs for fire and police if labor costs can't be reduced. Read more here.

The jobs for half of Norco's firefighters will be eliminated unless their union can come up with $750,000 in budget concessions according to a report you can access here.

At the Sacramento Metro Fire District (which covers part of Sacramento County) they are closing three fire stations. However, they have been able to avoid layoffs due to salary concessions. Click here to read more.

And then we have the State of California and its $24 billion deficit (I think it was $21 billion last week). Click here to review the State's May revise. You can read more about the details here.

On a more positive note, I thought I'd attach a link to Joel Kotkin's website. He is one of the pre-eminent urban/economic geographers in the country. He was way ahead of the curve in predicting the many economic problems now being faced by the Golden State. I'm hoping that his article you can read here is also ahead of the curve. He argues there is still hope for the future economy of our state.

Latest from the Governor

From today's Sac Bee is an interesting article about the Governor's latest comments on the budget:

Schwarzenegger sees 'self-inflicted' budget wounds
Gov. Arnold Schwarzenegger considers himself a glass-half-full guy, and he ended his California Small Business Day speech in Sacramento with a dose of optimism. But it seemed clear the governor has just about had it with California's governance system, especially after last week's special election was a colossal failure. Though he blamed many of the state's budget problems on the current economic collapse, he said part of our woes are "self-inflicted."
"California hasn't had a responsible fiscal system since Earl Warren in the late '40s and early '50s," he said.

The governor ticked off a number of complaints about the system this morning:
-- The state relies too much on personal-income and capital gains taxes.-- The state doesn't have a spending cap, nor a "rainy-day fund" (the latter point is questionable given that Schwarzenegger asked voters to establish a "rainy-day" reserve in 2004, albeit one with weak restrictions).-- Federal judges tell California how to run its prison health-care system.-- Federal stimulus rules restrict how California can cut from its budget.-- California requires a two-thirds vote to approve the budget.-- An "endless list" of ballot-box budgeting requirements, including Propositions 13, 42, 49 and 1A, all of which he has championed in the past.
"Until we fix our system, nothing will ever change," Schwarzenegger said. "This is no way, of course, to run a state."

The last two points were most interesting. While Schwarzenegger did not explicitly say he opposes all of these facets of California governance, the mere mention of Proposition 13 and the two-thirds vote requirement in a list of items he says impinge upon his ability to govern is significant.
It was also notable that he named his own after-school measure, Proposition 49, among those that tie his hands and make it difficult to balance the budget. Schwarzenegger led the campaign for that initiative in 2002, and many believe it played a significant role in helping his gubernatorial aspirations a year later.

Schwarzenegger said voters sent "a very clear message" last week that California should live within its means, slash government and not raise taxes, though plenty of groups on the left would disagree. To that end, the governor's Department of Finance is expected to release more specifics today on additional cuts it would use to bridge the state's $24.3 billion deficit.

Addendum: Schwarzenegger press secretary Aaron McLear says the governor believes California should have a "robust debate" about its budgetary system, but Schwarzenegger does not support revoking the two-thirds vote requirement or Proposition 13.

Election Post Mortem

By now, I'm sure everyone is aware that the State's feeble attempt to address a portion of its budget deficit has failed miserably at the ballot box. No doubt, we in local government will have $2 billion extracted from us in the form of a loan. School Districts and Counties will suffer far more than we will. We'll also indirectly suffer from the State releasing tens of thousands of prisoners early--many of which will be essentially unsupervised due to the cuts that State parole will suffer.

So what is next? And why should those of us in local government care? We've attempted to insulate ourselves as much as possible from the state budgetarily. However, we can't fully insulate ourselves from their dysfunction. As noted above, our local schools will suffer, our county safety net is going to suffer and our police officers will have no way to incarcerate many offenders. Our local unemployment rate will suffer as the schools and the county are forced to layoff local workers. Our businesses will suffer as the government employment ranks shrink and the schools, the state and the county directly purchase fewer items.

Our world economic crisis is now fully hitting home. The end of the bubble economy has also drained the coffers of a bloated and inefficient state government. Now is the time for all of us to demand fundamental changes in the way our state functions. Every aspect must be reviewed. I'm talking term limits, 2/3rd budget approval, legislative district boundaries, and most importantly in my view--the ballot initiative process that allows our State's constitution to be gutted on an annual basis. The system is now broken and beyond repair. The insanity in Sacramento won't end until we come up with a better way to run the state.

Certainly, those of us at the local level would prefer a lot less state control. Cities, counties and schools would be better served to have less interference from Sacramento. But that is just one of many issues that needs to be resolved. The time is now for all of us to demand change. We don't have any other alternative. Now I'm going to shut up. Thanks for listening.

John Myers has blogged an excellent election post mortem. Click here to read.

More Thoughts on the State

All week, I've been telling my staff that I'm done talking about the State and their budget follies. Unfortunately, I just can't help myself and I keep reading more things that I want to share. The Ventura City Manager Blog posted a great essay yesterday on the upcoming election and some of the ideas floating around to reform state government.

He talked about a group called "Common Sense California".

Some years ago, a small group of thoughtful and idealistic activists from both parties (and independents) saw this trainwreck coming. They began meeting and tossing around ideas for heading it off. They adopted the name "Common Sense California." At first, they aimed to "reform" Sacramento. They had sensible ideas, like Redistricting reform to blunt the partisan stranglehold (an idea voters have adopted, but is still years from implementation.) Ultimately, however, they came to the conclusion that democracy needs to be reborn at the local level before we can fix Sacramento.

They preach a simple, sensible message: we are going to fix our monumental self-induced problems only by changing from a "take no prisoners" activism that punishes moderation to an inclusive dialogue that seeks win-win consensus. Common Sense California doesn't claim we can solve our budget, transportation, economic and environmental challenges with a three point panacea. Their mission is "to help solve California's public problems by promoting citizens' participation in governance. We work with city governments, school districts, regional governance associations, and non-profit organizations to both support and promote legitimate civic involvement."It is a long way from the digital OK Corral of virtual bloggers who never listen because they have all the answers. Which is why a revival of healthy civic involvement is so promising. Click here to learn more.

He concluded the blog with a quote that has become one of my favorites:

Winston Churchill said it best: "Americans will always do the right thing, after they've exhausted all the alternatives." Californians have zealously passed initiatives, recalled officials, ousted judges and ranted about the futility of it all. Now it is time to get serious and work together to put our State back on the right track.

You can read the full post here.

Updated Numbers from the State

From today's Capitol Notes Blog:
Late word this evening that will get everyone's attention: Governor Arnold Schwarzenegger has informed legislative leaders that if three of the six budget-related ballot measures fail next Tuesday, the state faces a $21.3 billion deficit between now and next July.
In a letter to the four legislators this afternoon, Schwarzenegger actually offered two new assessments from his budget team of what lies in store for California: a $15.4 billion shortfall if Propositions 1C, 1D, and 1E pass, and the aforementioned $21.3 billion if they fail.

Thus, the best case scenario now has a budget gap in excess of $15 billion! This includes the $8 billion deficit now predicted for next year, along with a $7.4 billion deficit for the balance of this year--up $5 billion from the $2 billion we discussed in Saturday's blog post. To read more about this painful news, click here.

More on the State

The legislature is beginning to pour over the numbers I mentioned yesterday. An article in today's Sacramento Bee mentions the many options that State is considering to close the ever-expanding budget gap. Besides picking the pocket of local government, another frequently mentioned solution to the budget gap is to take $5 billion from our schools--thus potentially putting federal dollars at risk and certainly exacerbating the unemployment problem since most school funding is for jobs.

Other than schools, the big money at the State level is in prisons. Their latest proposal as noted in the Bee article:

Schwarzenegger aides have warned public safety groups he may propose an early release of up to 38,000 prisoners, split between 19,000 undocumented immigrants and 19,000 low-level offenders. The governor may also seek to house those who commit "wobbler" crimes in county jails rather than in state prisons.

The plan would save an estimated $335 million in 2009-10 and $849 million in 2010-11.

This plan would also put those criminals back in our communities. The additional local policing costs would likely be in the hundreds of millions and the property crimes would likely cost us billions!

So it looks like the State's solution to its problems is to make things worse for all of us. As I noted yesterday, we've got a broken system. As one national columnist recently noted:

If, since 1990, state spending increases had been held to the inflation rate plus population growth, the state would have a $15 billion surplus instead of a $42 billion budget deficit, which is larger than the budgets of all but 10 states. Since 1990, the number of state employees has increased by more than a third. In Schwarzenegger's less than six years as governor, per capita government spending, adjusted for inflation, has increased nearly 20 percent.

He also noted that it will likely be very difficult for the nation to get out of this recession if a State with 12 percent of the nation's population continues to struggle. I realize we can't do anything overnight. But I believe it is time for us to seriously consider completely revising our State government. Things are only going to get worse in the meantime!

State Revenue Continues to drop

From "Capitol Alert":

The latest on California politics and government
May 8, 2009
Controller: State's revenues $2.1 billion below estimates
California has received $2.1 billion less this year in tax revenues than projected in the February budget, according to State Controller John Chiang.
In April alone, the state's General Fund revenues were down $1.89 billion, 16 percent below what the February budget projected.

This is on top of the $8 billion hole projected in March. If the ballot measures fail, that would add another $5.8 billion, leaving the State a whopping $16 billion in the hole. This may not be the final number as the Legislative Analyst's Office hasn't updated their numbers since March.

The bottom line for those of us in local government is that we should just assume that the State is going to take another chunk of our revenues next year. The magnitude of the number is not known yet, but for Manteca it will certainly number in the millions of dollars. Hopefully, the number will be somewhat mollified by an acknowledgement from the State that they are going to have to start cutting at the bone, just as we are doing at the local level.

Someday, State government is going to cease to function and then they will be forced to make the fundamental changes necessary to survive in today's world. Until that time, we at the local level are going to have to continue to assume that our revenues are going to take a hit every year and we should plan accordingly.