Should California Get a Bail Out?

Economics / Credit Crisis Bailouts
Mar 25, 2010 - 01:06 AM

By: Mike_Stathis

As some readers might recall, without budget solutions from the Governor and Legislature, the California State Controller was forced to issue IOUs to several State payees last July in order to prevent a $2.8 billion cash shortage.

IOUs began printing July 2, and ended September 3 of last year.

The California State Treasurer began redeeming the IOUs September 4, 2009, and sent out more than 89,000 letters to remind holders of IOUs of the redemption.

Each IOU accrued interest through September 3, 2009, but holders do not earn interest past that date. The letter includes redemption instructions and contact information for any IOU holders who have questions about the redemption process.

It is difficult to imagine why anyone holding these IOUs would delay their redemption, given the state’s worsening financial condition.

To usher in the New Year, California declared a state of fiscal emergency after facing shortfalls of $6.6 billion for the year. This adds to the previous declarations made in 2009.

But that’s by no means the full extent of the state’s deficit. Over the next 16 months, California faces a $20 billion deficit. I expect it to get much worse without radical cuts to the budget.

As you might realize, California has been struggling to close its budget gap for well over a year, using job furloughs, cutting healthcare to families in need and many other methods implemented to save the state money. But the furloughs were overturned in court battles.

Now state government employees have been told they will face a 5% wage cut across the board. And they will have to pay for more of their retirement plan.

There are many more reductions slated for the state, such as:

Employee Compensation Changes: $1.4 billion

State employees will continue their contribution to solving our State budget crisis as we approach another challenging year. The current furlough program will end on June 30 as scheduled and the following employee compensation changes will go into effect July 1, 2010:

5 percent increase in all employees’ monthly pension contribution to CalPERS;

5 percent reduction in all salaries;

5 percent reduction in the cost of the state workforce payroll implemented by executive order S-01-10 which requires all department directors to reduce their payrolls by 5 percent before July 2010.

Note: Approval for pension contribution change and pay reduction will require collective bargaining and statute changes.

Reforming the Federal-State Relationship: $6.9 billion

The Governor was clear in his State of the State address that federal funds must be a part of the budget solution because the federal government is part of California’s budget problem. The Governor is committed to building a fair and equitable financial relationship with the federal government. California must be reimbursed for unfunded and under-funded federal mandates and relieved of the overly restrictive maintenance-of-effort requirements placed on our programs that prohibit us from living within our means. Our state must be freed from unfunded mandates to thrive and continue serving the people who need help the most.

Budget Safeguards: $6.9 billion

The Governor intends on the federal government paying California’s taxpayers the funds they are owed. Because he has a responsibility to Californians to ensure their budget is balanced under any circumstance, his budget identifies spending reductions and extension of revenue increases (listed below) that will go into effect in the event that the federal government fails to provide the $6.9 billion of additional funding proposed in the budget.

These reductions impact spending that is within the state’s control and are allowable under existing federal law:

Savings / State Service Impact
$1.0444 ...... billion Eliminate the California Work Opportunity and Responsibility to Kids (CalWORKs) Program
$847.......... million Fund existing mental health services with Proposition 63 funds
$532 ...........million Reduce Medi-Cal eligibility to the minimum allowed under current federal law and eliminate most remaining optional benefits
$508 million ...Reduce state employee salaries by an additional 5 percent
$495 million ...Eliminate the IHSS Program
$325 million.... Redirect additional county savings
$126 million.... Eliminate the Healthy Families Program
$280 million ...Eliminate non-court required inmate rehabilitation programs, implement banked parole for low-risk serious and violent offenders, expand crimes where convicted felons will serve time in local jails, and increase the number of parolees each agent will supervise
$115 million... Eliminate various health services programs funded by Proposition 99
$111.9 million Eliminate funding for enrollment growth at the University of California and the California State University
$100 million ..Make an unallocated reduction to trial courts
$79 million ...Freeze the level of the awards and income eligibility for Cal Grants
$36 million ...Eliminate funding for the Transitional Housing Placement for Foster Youth Plus Program

TOTAL $4.6 billion

If these measures are passed, you can imagine what it’s going to do to millions of residents of California who are already struggling to combat the most severe recession since the Great Depression.

This economic collapse was trigger by the biggest wave of securities and real estate fraud in world history. To this day, the main perpetrators have not been indicted. And the media has aided these criminals by failing to address blame where it belongs.

Despite making numerous cuts to state programs, (some vital) the state of California has asked Washington for assistance beyond the Recovery Act.

Basically, California wants a bailout.

But the “Governatorâ€