Economic crisis clobbers California

Less than a month after California’s legislature and governor finalized the state’s budget after an 85-day delay, that budget — patched together with accounting sleight-of-hand and optimistic guesswork — may be headed back to the drawing board under the impact of the growing economic and financial crises.

An immediate problem is the state’s annual need to borrow through short-term “revenue anticipation” notes to cover spending until tax revenues flow in next spring. This year the state is seeking $7 billion in such short-term loans. Without them, California is in danger of running out of cash by the end of the month. But the global financial crisis has made lenders reluctant to make the usual loans to California or other states in similar fixes.

In response, Gov. Arnold Schwarzenegger has put out feelers about the federal government becoming the “lender of last resort,” though he expressed more optimism about commercial borrowing after Massachusetts was able earlier this month to get short-term loans.

But the bigger, longer-term problem is the sharp drop in overall revenues, reflecting the impact of the economic crisis. State Treasurer Bill Lockyer last week projected that the 2008-9 budget might see an over $4 billion shortfall. Speculation is growing that the governor may call the legislature into special session before Nov. 30. At the same time, less than three months now remain before Schwarzenegger must present his 2010 budget proposals.

Nursing homes, health clinics and other organizations serving poor and unemployed people, children, seniors and the disabled now face further cuts on top of those they suffered in the just-completed budget process. They could also at least temporarily be plunged back into the dire situation they faced during the long budget delay, when they had to scrape and borrow to cover their expenses until their state payments resumed.

As a state which, if independent, would have the world’s sixth largest economy, what happens in California has a great deal to do with what happens across the country.

In a post to californiaprogressreport.org last week, Assemblyman Ted Lieu (D-El Segundo), head of the Assembly’s Rules Committee and former head of the Banking and Finance Committee, called the relation of the state budget crisis and the foreclosure crisis “a straightforward matter of cause and effect … We cannot solve this unprecedented budget shortfall without mitigating foreclosures and reforming the broken and dysfunctional mortgage system.” Lieu, whose bill to reform the mortgage system was vetoed by the Republican governor, is calling for a special session on mortgage and foreclosure reform.

Lieu is being joined by a coalition of consumer, research and policy organizations who are calling for a 180-day foreclosure moratorium, mandatory affordability-based loan modifications, transparency and accountability.

Adding to California’s problems, a federal judge is ordering the state to come up with $3.5 billion to upgrade its seriously decayed prison health system.

Analysts are also calling attention to the potential impact of two propositions on the ballot Nov. 4. Prop. 6 would make some 30 changes in criminal laws including expanding conditions to try juveniles as adults and create entirely new crimes, some of which could result in life sentences. Estimated initial costs come to nearly $1 billion, while its mandate for automatic funding increases linked to inflation could make future deficits worse.

Prop. 9 would give crime victims much greater influence in criminal cases and would make prison overcrowding worse by cutting back on early-release programs, with a potential cost of hundreds of millions annually.

California is not alone in suffering growing economic woes. Some 15 states say they have midyear budget shortfalls, among them Arizona, Connecticut, Florida, Georgia, Ohio and New York. Even before the Wall St. crisis, states reported laying off some 7,000 workers and slashing services — many of which are needed more urgently than ever as joblessness soars.

New Jersey plans a special legislative session this month. Arizona has frozen state contracts larger than $50,000. West Virginia’s governor is thinking of suing Wall St. firms like AIG to regain funds lost in its state employee pension fund.

“The bottom line is that states are facing a very difficult fiscal outlook over the next two to three years,” Raymond Scheppach, executive director of the National Governors Association, said in a commentary on stateline.org. “This economic downturn will likely be longer and more severe than any states have experienced since the downturn of 1982-1983.”

mbechtel@pww.org