More Strangeness out of California

Calculated Risk has two sequential posts worthy of a little additional discussion. First posted was an update on L. A. Port Traffic, from which I have reposted the graph nearby.

Note how close imports were to exports at the left of the graph, which is January 1995. We are back near a bubble peak of imports exceeding exports. The difference is that our national financial condition is far worse now than then.

It was one thing when Japan, a defeated occupied nation, continued on for decades as a supplier of goods to its conqueror, the U. S., despite a series of economic recessions and even the semi-ultimate sacrifice of what appears to be an upcoming population shrinkage.

China, though, made whatever deal it made with the U. S. and the West when it moved toward totalitarian capitalism in the 1980s; but it was never defeated and occupied by NATO countries the way Japan was. It thus may well be more independent than Japan and may not accept IOUs in return for manufactured goods indefinitely.

It is hard for me to see other than that the trend toward a weakening dollar vs. trade surplus countries in Asia and elsewhere (Norway, perhaps) is likely a durable one. Meanwhile, the U. S.-based rating agencies insist that despite the enormous current Federal deficit, the parlous state of state finances, the large accumulated Federal deficit, the much larger promises to current and future retirees, and an electorate that is disappointed in its leaders, the U. S. is a triple-A credit.

Now, on to the other CR post, on a California housing tax credit. CR concludes the somewhat lengthy post thusly:

This sure doesn’t seem like a well-run program!!!!!

In addition, my comment is:

What on earth is California doing by giving up tax money?????

As Cole Porter penned, "The world has gone mad today . . ."

Copyright (C) Long Lake LLC 2010

California Controller Ignores Overspending, Sales Tax Rate Increase While Accentuating the Positive

In a press release titled Controller Releases January 2010 Cash Update, Democratic Controller John Chiang refers the reader to the more detailed "summary analysis" linked to at the bottom of the release. This is a nicely produced, informative document which contains the following:

The State’s General Fund revenues improved again in
January 2010. Compared to estimates found in the 2010-11
Governor’s Budget, total General Fund revenues were $1.28
billion higher (18.6%) than expected. Personal income tax
revenues were $930 million better (17.2%) than anticipated.
Corporate tax revenues came in above projections by $189
million (73.4%), and sales taxes were also up by $157
million (17.5%).

Compared to January 2009, General Fund revenue in
January 2010 was up $452 million (5.9%). The total for the
three largest taxes was above 2009 levels by $255 million
(3.4%). Corporate taxes were up by $134 million (42.8%).
Sales taxes were $469 million higher (79.8%), and personal
income taxes came in $348 million below (-5.2%) last
January.

Sounds hopeful, correct? The above positive tone continues throughout the document in what may unfortunately just be more a puff piece than anything else, as I will get to shortly. For example, on page 2, large right-hand box, of this document puts forth the Obama administration's (and MSM's) hopeful prognosis for the economy (no quote, and no argument here for or against a positive outlook for the economy).

Only on page 4 does the bad news get a brief mention. This involves a deterioration in projected cash balances despite the above good news. Why is this so, if revenues were above plan? Well, so were costs:

Local assistance payments were $525 million
higher (1.2%) than the 2010-11 Governor’s Budget
projected, and State operations payments were
also up by $156 million above (1.2%).

Why were State operations a large 1.2% above projections? I would not know, but this smells like mismanagement to me.

The net effect is that on page 4, Mr. Chiang finally comes clean: the state had a worse cash balance at the end of January than projected -- a massive negative $24.1 billion negative cash balance -- $126 million below projections.

Basically, per Table 1, while General Fund revenue was $1.465 B over projections, something called "non-revenue" was $1.00 B below projections. This line item was explained as comprising transfers into the General Fund from other State funds. Why this was so far below projections was unexplained; one wonders if perhaps the other State funds have been sucked dry already?

Amongst the smaller details, one line item stands out. Mr. Chiang says:

Year-to-date collections for the
three major taxes were $1.66
billion below (-3.7%) last year at
this time. However, retail sales
taxes were up $1.21 billion
(9.4%) from last year’s total at
the end of January.

Sounds OK, but . . .

He neglects to point out that the State base sales tax rose on April 1, 2009 from 7.25% to 8.25%. This is about a 14% increase in rate. An increase in sales tax receipts of only 9.4% sounds like a significant shrinkage in real sales volume, both in nominal dollars and assuming mild inflation, an even larger shrinkage in actual transactions.

Full disclosure: I linked to the above through a Calculated Risk post, in which CR called the Chiang reports "good budget news". CR is an immensely valuable blogger, with generally very insightful points of view. In this specific case, I would humbly tend to differ. A medical analogy to the Chiang summary: an overweight patient has been put on a calorie restriction and exercise regimen. She (let us say) points out that she exercised above plan last month, thus burning off more calories than expected. Yet her weight rose. Why? She ate even further above plan than she exercised. This is what Mr. Chiang reluctantly tells us, but well "below the fold".

Until California gets spending under control, it will not have good budget news, in my opinion. Note that the rise in State operations above projections of $156 million exceeds the worsening in the cash balance. If California had actually come in below expectations on spending, then it would have something to crow about.

Why was there no discussion of the overspending?

In California, the controller's office is a partisan elected office.

Per Wikipedia, John Chiang is a lawyer with an undergraduate finance degree. He has worked for Gray Davis (who was controller before he became governor) and for Barbara Boxer. His summary of California's finance as described above appears to be the work of a politician more interested in spin/damage control than in truly holding the rest of the state government's feet to the fire till good fiscal health is restored.

Perhaps California should consider changing the position of controller to be a non-elective, non-partisan job, with a requirement that the controller possess an advanced degree in business or finance. In that situation, one would hope that the public would not get official publications that accentuate the positive but instead would receive the truth/whole truth/nothing but the truth in a way that serves the general good rather than the interests of politicians.

Copyright (C) Long Lake LLC 2010

DC Dems to California: Drop Dead; State's Federal Representatives and Media Take it Lying Down

In a narrative you might not have believed if you read it in a novel, an Administration headed by a Democrat has blithely handed out tens of billions of dollars to Goldman Sachs, Deutsche Bank and other large financial companies (via the AIG conduit) but has left California to financially cut off many working people and the needy and weaken one of the once-great public education systems in the nation. The Democrats who controlled Congress since 2007 were thrilled to give George Bush and Hank Paulson (and their successors, who they expected to be a Democrat) $750 B of TARP money to use with few questions asked, but even California's Democratic Senators appear to have been unaggressive in requesting just a few billion bucks please from Barack Obama and/or their fellow Congresspeople. What's a reliable 55 electoral votes anyway?

Further along the amazement road is the lack of complaint from the major news organizations in the state. Apparently if a Democratic President disses their state, it's OK. Every night lately I have checked in on the LA Times online, and often the SF Chronicle. The LA Times appears to care more about sports and Hollywood goings-on that about this financial crisis. It does feature an amazingly lame interoperable calculator that offers the reader a chance to "fix" the crisis by choosing which cuts to make. For some reason, another news organization headed by an Aussie has some interest in California's plight.

Consider the following from the (non-California-based) Wall Street Journal:

State's Cities Brace for More Sacrifice:

California cities and counties, already reeling from their own fiscal problems, are about to take a new hit: Gov. Arnold Schwarzenegger and legislative leaders plan to take more than $5 billion from them over the next two years under the state's tentative budget deal.

If California's legislature approves the compromise reached Monday, the state will take as much as $1.7 billion out of local gasoline-tax funds, another $2 billion from local property-tax receipts and $1.7 billion in redevelopment funds that now go to cities and counties in a move to close an estimated $26 billion budget shortfall.

Local officials up and down the state were scrambling Tuesday to plan how to further cut their budgets to account for the state's rare move. Meanwhile, some cities and counties began laying the groundwork for possible lawsuits against the state.

The city of El Monte in Los Angeles County just closed a $9.5 million budget deficit for the fiscal year that began July 1 by action including furloughing most of its 375 employees, laying off 17 police officers and shutting down its aquatics center during all but four months of the year. Now the city faces an estimated additional $2 million loss in gasoline taxes and an as-yet-undetermined amount more being taken by the state. "It's devastating," said Jim Mussenden, city manager of the community of 125,000. "We've already worked very hard to reduce our budget, and now we will have to look at more cuts."

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. . .

Further amazing is that the WSJ is running not one but two articles on this topic, leading with Budget Agreement Deepens California's Pain, which begins with the following:

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.

Mr. Schwarzenegger and legislative leaders Monday evening agreed to close the budget shortfall by slashing $15.6 billion in spending. The major cuts include $6 billion from kindergartens and community colleges, $2.8 billion from other higher education, $1.3 billion saved through state-worker furloughs, $1.3 billion cut from a state health-care plan and $1.2 billion trimmed from prison spending.

Another New York paper has taken note with two articles. The Times writes in Denied Tax Revenues, Local Officials in California Are Fuming that (among other points):

. . . the budget would cost 4,000 jobs in public works departments statewide. In suburban Contra Costa County east of Oakland, the public works director, Julia R. Bueren, said her department would lay off more than a third of its staff by the end of August. . .

That situation may be worse in rural areas like Calaveras County, a sprawling triangle that runs from the foothills of the Sierra Nevada to higher elevations. Tom Garcia, the county’s newly appointed public works director, said he was bracing for a loss of about 20 percent of his budget, meaning many snow-packed mountain roads could go unplowed this winter.

“In order to get anywhere in our county, its all on local roads,“ said Mr. Garcia, adding that resorts in the Sierra region could take a hit as well. “If they can’t get to the services in this county because the roads aren’t open, we’ve lost our winter income.”

The Times is also running a news analysis titled Pinch of Reality Threatens the California Dream which is pedestrian. Why are New York papers more interested in California than its own major press organs?

California chronically sends more money to Washington than it receives. Now it's amongst the needy states. It's time for the Feds to help it and other needy states. From a national policy standpoint, money sent to California will help the country more than the same money sent to Michigan (a state I was once a resident of and bear no animus against). Sorry, Michigan, but California routinely changes the world through technology innovations, moving pictures, etc.; Michigan is just too chronically depressed. And it's too cold in winter! A thriving California will help revive America and the world.

Just imagine the outcry if this happened when a Bush was President. This news is breaking the very same week that Neil Barofsky, Inspector General for Congress in overseeing TARP ("SIGTARP") reported that direct and guaranteed expenditures for the financial "system" totaled $23.7 TRILLION dollars. That's TRILLION as in TRILLION. Does the Administration really believe that with all the "stimulus" money not yet spent that it could not allocate more to directly assist states in their time of need?

Of course, California overspent. (But it did not under-tax.) California did not, however, cause the current economic financial crisis. New York-based financial companies, Washington politicians and the Fed, and the big North Carolina banks caused it, with an assist from scamsters and speculators in California, Florida and elsewhere involved in the real estate bubble (amongst other causes).

In my humble opinion, it borders on lunacy to be sending tens of thousands of additional soldiers to one of the most horrid places on Earth and to have sent tens of billions of dollars to non-needy large complex financial companies while simultaneously not assisting a temporarily needy populace of the single most important State in the Union, as well as continuing to back-end a "stimulus", when there are so many needy people throughout this country who have been harmed and at times driven to tent cities because of cheats and speculators linked to the same Big Finance that Barack Obama has aided with the people's money: money that the people now need back.

In addition to being terrible policy, it is bad politics.

Copyright (C) Long Lake LLC 2009

California, Ireland . . . and Florida

A post Saturday on Credit Writedowns compares Ireland to California; to read it, click HERE.

The article argues that each had a real estate bust, each is not in control of its currency (Ireland's currency is the Euro), and each is in or going into a depression.

It's an interesting thesis and comparison.

It however fails to explain why Florida, with an equally large real estate bust as California, has not had as bad a time of it, and why it remains one of the few states with a AAA credit rating.

Perhaps California went a wee bit wild with spending?

Copyright (C) Long Lake LLC 2009

California Does Not Have the Worst State Fiscal Crisis

From Credit Writedowns comes the news that New York and Nevada have budget gaps that are nearly one-third of revenues, which is worse than California's relative deficit. Thought you'd like to know.

However, it is old news that the industries New York and Nevada are best known for (finance; and sin) are troubled just now, whereas Hollywood and high-tech are doing just fine, thank you. Is California, the mega-state, going to be forced to be just another large state rather than a proto-nation so rich and (self)- important that it could, for example, repeatedly try to lead the country to enact tougher laws on all sorts of Good Causes?

There may be a strange parallel between the likely relative decline of the importance of America on the world stage with the possible decline in the relative importance of California as first amongst states.

Copyright (C) Long Lake LLC 2009

Of Green Shoots and Red Ink

Fed Chairman Bernanke espied economic green shoots of economic revival in the U. S. three months ago, in a phrase made famous in part because he said it on Sixty Minutes. Well, here it is almost the ides of June, and the most populous, richest state in the country - California- not only is going to need drastic action to avoid insolvency, but its revenues in May fell well below projections. Thanks to CR, here is an excerpt from a letter from California State Controller John Chiang today to the Governor:

In the letter I sent you on May 29, I indicated we would have a negative cash balance of $1.02 billion at the end of July, and a low point for 2009-10 of $22 billion. The additional deterioration is a result of two factors: (a) May revenues coming in $827 million less than projected by the Governor’s May Revision, and (b) adjustments made by the Department of Finance to its revenue and expenditure projections. Attached is a chart detailing the projected cash low point for each month for the fiscal year starting July 1.

I cannot find the projected revenues for May, but based on information available on the Web, it was expected as of one month ago to equal $7 billion. A fall-off from the estimate of just several weeks earlier of $827 million is- how can we say it- amazing- and distressing.

You don't see an error in revenues to the downside of at least 10% when green shoots are flourishing.

Something is wrong here. It's probably the green shoots story.

Also, the New York Times is reporting that the China commodity story is looking weak, in China's Commodity Buying Spree:

Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak . . .

There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.

Those extra purchases beyond China’s daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound.

Moody’s Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.

Everywhere I look, the forecasters are getting more optimistic and the data looks more and more sluggish.

With so many manipulated markets, having confidence in any special point of view is difficult, but the situation is most consistent with a gradual shift of economic growth to the creditor (underconsuming, export-driven) countries such as Asia from the indebted countries of North America and Europe.

Since the data out of China continues to be questionable, and that out of the "country" of California looks horrible and is "real-time" more or less, it is hard to question Dr. Roubini's view that the economy remains quite weak in the United States of America.

Copyright (C) Long Lake LLC 2009

California's Finance Director Says That It Provides Almost No Services to Most of Its People

The New York Times just cannot resist some purple prose in its headline above an otherwise pretty good article: Deep Cuts Threaten to Reshape California. Reshape the state? Hardly. Major changes? Yes:

Mr. Schwarzenegger, a Republican, is threatening to eliminate the Healthy Family Program, the state’s health insurance program that covers over 900,000 children and is financed with state and federal money, as well as the state’s main welfare program, known as Cal-Works, which provides temporary financial assistance to poor families and a caregiver for the severely disabled. (Ed: Medicaid, for the poorest people, would be unaffected.)

The $1 billion in cuts to programs for the poor would be met with $680 million in new cuts to education and a 5 percent salary reduction for state employees, many of whom are already enduring furloughs.

As the article makes clear, the reality is that:

“Government doesn’t provide services to rich people,” Mike Genest, the state’s finance director, said on a conference call with reporters on Friday. “It doesn’t even really provide services to the middle class.” He added: “You have to cut where the money is (Ed: where it is going, he means).”

So we now know that voters of one of the most reliably blue states has voted its pocketbook. And the state takes it lying down after spewing its own purple prose before the vote:

In less than two weeks, the administration has gone from warning residents that a vote against the budget measures would send the state — some $24 billion in the red — into utter turmoil to sanguine acceptance that “the people have spoken” and that the government must move on.

In fact, it has been reported that if the powers-that-be want to avoid cuts, the state can borrow huge amounts of short-term money, such as for one year, but the rate would be on the order of 3%. (Not so terrible!)

The article concludes:

The Democratic-controlled Legislature has been uncharacteristically silent on most of the cuts, most likely because lawmakers know that tax increases are not politically palatable, that huge cuts in some form are in the offing no matter what, and that any program they wish to spare will quite likely have advocates among their ranks.

“There is no drawing lines in the sand,” said Alicia Trost, the spokeswoman for State Senator Darrell Steinberg, a Democrat and president pro tem. “Everyone knows we’re the majority, and we all know where we stand.”

Where California voters stand is with their heads finally out of the sand and facing reality. Among the reality is of overpaid public officials, as per another NYT article, Industry Fears U.S. May Quit New Car Habit, which describes a prior great new car customer as follows:

The housing and financial crisis has taken its toll on reliable customers like Frank Powell, a school administrator in the East Palo Alto school district in California. He moved out of the house he had lived in since 1983 and started renting a few months ago because of his debt burden, which includes auto loans.

“I used to buy cars all the time and took out loans to pay them off,” he said. “As soon as I paid part of one off I’d get another. I’d buy one for my kids, my wife, myself. I can’t do that anymore.”

He now has a Cadillac Escalade sport-utility vehicle, but he is thinking about downsizing and driving something much smaller — and for longer.

“Something had to change,” he added. “You just can’t keep going with that many cars.”

How did a school administrator get all the money to raise a family and spend tons of money on new car after new car for the whole family, including a Cadillac now? Did he perhaps get paid a bit more than was necessary to incentive him to get up in the morning and go to work? Yours truly was a well-compensated practicing physician and never drove anything more upscale than a Mercury until near retirement.

As Mr. Powell said, something- nay, much- has to change in California.

A start would be for the Mr. Powells of the future to buy small cars or take public transit, to buy as few cars as possible, and to pay for these cars largely or entirely with cash, thus avoiding exorbitant finance charges and helping to keep their financial net worth positive. And what goes for a car goes double for a house. They should buy the least, not the most, house they can afford- as did my parents and those of my wife- and pay off the mortgage as rapidly as possible.

The future Mr. Powells need to ignore the Merchants of Debt who likely upsold him and tens of millions of Americans and begin their own Ownership Society, not the fake "Ownership Society" of the prior President that was based on debt and more debt.

With this sea change toward frugality and balanced state and personal budgets, California can once again lead America to a prosperous future.

Copyright (C) Long Lake LLC 2009