California Implodes In Multiple Ways

Inquiring minds are investigating the rapidly deteriorating economic conditions in California. Let's take a look at the lowlights starting with Schwarzenegger May Order Unpaid Leave for Employees

California Governor Arnold Schwarzenegger today ordered all state workers to take two days of unpaid leave each month to conserve money amid a record budget deficit and a legislative impasse over how to fix it.

The furloughs will begin in February and will last through June 2010, Schwarzenegger said in an executive order. He also ordered all departments to cut 10 percent of their workforce costs, through firings if necessary.

“Every California family and business has been forced to cut back during these difficult economic times, and state government cannot be exempt from similar belt tightening,” Schwarzenegger said in a letter to state workers.

The furloughs would amount to a 10 percent pay cut, Chris Voight, executive director of the California Association of Professional Scientists, a group that represents about 3,000 scientists working for the state. The association and the Service Employees International Union announced they will sue to block the furloughs and any layoffs, which they said would violate collective-bargaining deals.

“We don’t think it’s right, and we’re prepared to file an unfair practices charge against the governor,” Yvonne Walker, SEIU Local 1000 president said today at a news conference in Sacramento. “We think it’s regressive bargaining. For him to do this outside of existing negotiations is improper.”

California, the biggest borrower in the municipal-bond market, has $54 billion in general-obligation debt. It’s rated A+ by Standard & Poor’s and Fitch Ratings, the fifth-highest grade, and an equivalent A1 at Moody’s Investors Service.

Last week, Standard & Poor’s said it may cut the rating on $54 billion of California bonds because of the fiscal problems, and investors have pushed down prices on the debt.

A California bond maturing in 2038, which pays 5.25 percent interest, traded at 79.4 cents on the dollar yesterday to yield about 6.89 percent. That’s 1.8 percentage points more than similar trades three months ago, according to Municipal Securities Rulemaking Board trade data.

These unions just don't get it. They should be thankful to have a job. The budget needs to be cut. Raising taxes as the Democrats tried to do is not the answer. But all the California employees should participate. The legislature should pass a bill to reduce their own wages and the wages of the Governor and judges. The legislature should also privatize as many services as possible. That will get the unions' attention. California has all these propositions floating around every election. It's high time for one that makes some economic sense.

Proposition Mish

• Privatizing as many jobs as possible, starting with the prison system.
• Cutting all unessential services to the bare bones
• Reducing pay and benefits across the board for all government employees starting with the governor and the legislature

More ideas can be found in Mish's California Budget Proposal, about a year old, as the California legislature did nothing in a year's time to address a budget crisis that has now reached critical mass.

Ridiculous Democratic Proposal

Please consider Democrats find end-run solution to budget

The California budget in a word can be summed up as a mess. Late Wednesday night, state Democrats are making an end-run around Republicans, but it is a plan that will cost taxpayers money. Among the proposals are sales tax increases, added fees at the gas pump, and a surcharge when you pay your income taxes.

The plan contains $9.3 billion in new fees and taxes, while cutting $7 billion. Democrats say they can pass it with a simple majority, instead a of two-thirds super majority, because it doesn't raise the amount of taxes overall, it just shifts them.

The creative maneuvering includes dropping all state taxes in gasoline and replacing it with a 39-cent-a-gallon fee and adding a 2.5 percent surcharge on state income tax. The proposal also includes a sales tax hike of up to three quarters of a cent and an economic stimulus plan demanded by the governor. Democrats added the economic stimulus Wednesday evening after hours of back-and-forth negotiations.

A Tax Hike By Any Other Name Is Still A Tax Hike

The Democrats want to abolish the gas tax and replace it with higher fees. That way they do not need a super majority as is required to pass a tax hike. Sheeesh. Fortunately Schwarzenegger announced he would veto such a ridiculous scheme. A tax hike by any other name is still a tax hike.

Los Angeles County shelters brim with families

Michigan, Ohio, and Florida are already in an economic depression as far as I am concerned. California is well on the way. Please consider Los Angeles County shelters brim with families.

With her 5-week-old baby asleep face-down across her lap, Erica Richardson settled into a chair at the Union Rescue Mission and reviewed her strategies for staying sane while living with an infant in a homeless shelter.

The key is to get away from the shelter during the day, the tired-looking 33-year-old said. Head to the park, to a friend's house, to any place where she can pretend, for a while anyway, that she is just another mom on an outing.

The economic crisis and cold weather have created a larger than usual influx of families to shelters in Los Angeles County this year, according to shelter officials and other service providers.

On Wednesday, officials at the Union Rescue Mission, which runs the county's cold-weather shelters, held an emergency meeting to figure out what to do when they run out of hotel vouchers for families, which could happen this month.

"This is, as far as I am concerned, a disaster of Katrina-esque proportions," said Tanya Tull, chief executive of the nonprofit Beyond Shelter. A variety of negative economic forces are contributing, she said, from job losses to an uptick in foreclosures.

The signs, Tull said, are everywhere: from the father who pretends to work through the night at a computer at a 24-hour office supply center so his child can sleep safe and warm in a stroller to the mother who takes a baby to the emergency room at 11 p.m., knowing the odds are they won't be called until morning and can pass the night in the waiting room.

Even in good times, Los Angeles County -- the most populous in the nation -- has more homeless people than any other metropolitan region in the country. According to a count taken almost two years ago, before the recession began, there were 73,000 people without homes on any given night.

More California Towns Face Bankruptcy

The city of Vallejo bankruptcy was the warning shot. Now, More California Towns Face Bankruptcy.

The city of Vallejo, Calif., gained national attention earlier this year by filing for Chapter 9 bankruptcy protection. Now, two neighbors are fighting to avoid the same fate, as the state's economic crisis spreads.

Isleton and Rio Vista, small towns roughly 50 miles northeast of San Francisco, say they have begun consulting with bankruptcy lawyers as they draw up plans to deal with their mounting budget crises. The towns' leaders say they hope to avoid bankruptcy, but concede the move may eventually be their only option.

Vallejo instantly became the nightmare scenario for towns across the state facing a similar toxic mix of foreclosures, debts, pension obligations and the inability to raise money on bond markets.

"We're strapped for cash and by the end of March or early April we may not have enough money to pay for payroll," says Hector De La Rosa, Rio Vista's city manager.

"California's fiscal house is burning down," State Treasurer Bill Lockyer said in a statement.

Rio Vista began to see the trouble last year, when property-tax revenue began to falter. The city lacks revenue sources such as big-box retailers and depends heavily on two auto dealerships for sales-tax revenue, Mr. De La Rosa says. But the dealerships have hit hard times.

The thought of bankruptcy doesn't sit well with some residents. "When I first heard the council was considering bankruptcy, I was all for it," says Howard Lamothe, owner of Foster's Bighorn restaurant, whose family has lived here for seven generations. "But after I learned about what it means and how it affects business and service, I changed my mind," he says. "I can't support that."

Business Owners Better Think Again

Howard Lamothe, owner of Foster's Bighorn restaurant, better start thinking again. The only way to postpone bankruptcy is to raise property taxes and taxes (or fees) at restaurants, gas stations, etc. Notice I said postpone, not avoid. Raising taxes will overburden the citizens to the point they stop doing things such as paying their property tax bills and eating out at restaurants.

Wages and pension promises in these cities are simply too high. The unions have a choice: they can dramatically lower pension benefits and wages, or a bankruptcy court will do it for them.

I suggest the city take its chances in bankruptcy court and the sooner the better. There is no point in wasting taxpayer money in the meantime given that raising taxes is doomed to fail and unions are unlikely to face reality until they hear that reality from a bankruptcy court.

Speaking of bankruptcy court, unless something along the lines of "Proposition Mish" passes, the state will be facing bankruptcy as well. Without a doubt, California is insolvent. And just in case you did not know this already, there is nothing remotely inflationary about this mess.

Addendum:

Here is one more for the road that I missed earlier:
California posts 8.4% jobless rate, third highest in U.S.

Reporting from Los Angeles and Sacramento -- A loss of nearly 42,000 jobs last month pushed California's unemployment rate to 8.4%, a 14-year high and the third-highest jobless rate in the country.

California's November unemployment figure lagged behind only Michigan with its crippled automobile industry at 9.6% and Rhode Island at 9.3% after job cuts this year in retail, manufacturing and services.

"I don't at the moment see any kind of turnaround," said John Husing, a Redlands private economist who focuses on Southern California and its international ports. "My instinct is 2010. I think 2009 is going to be the worst year we've seen in many moons."

Finding work doesn't look as if it's going to get any easier in the months ahead as seasonal sales wind down and some stores reduce operations or go out of business. Large employers have filed legal notices with the state that they intend to cut about 9,000 jobs, with big hits expected at airlines, high-tech companies, food processors and manufacturers.

Even once-strong hiring in healthcare and government is showing signs of weakening next year. A projected $41.2-billion state budget deficit could lead to involuntary furloughs and wholesale firings of workers at state and local government agencies, school districts, community colleges and public universities.

California's real unemployment picture is darker than the state's 8.4% unemployment rate indicates, economists caution. "People believe there are no jobs to be had, and they are simply dropping out of the labor force and don't get counted," said economist Sung Won Sohn of Cal State Channel Islands. California's real or "effective" unemployment rate is probably twice the official number, Sohn said, meaning "the pain in the marketplace is much greater than 8.4% would show."

Addendum II:

Pimco Muni Funds Down as Much as 60% to Buy Back Auction Shares

Pacific Investment Management Co. plans to redeem preferred shares from six closed-end municipal bond funds that lost as much as 60 percent this year.

The Pimco funds, which plummeted after suspending dividend payments to common shareholders, said yesterday they will redeem $407 million in auction-rate shares next month, after declines in the municipal market drove their holdings below minimums relative to the amount of money they’ve borrowed.

Plunging debt prices have pushed closed-end funds to defer dividends and reduce borrowing to comply with U.S. securities law. Funds that issue preferred shares are required to maintain net assets of at least 200 percent of the amount of leverage. Municipal-fund investors are likely to show little patience for those that miss dividend payments, said Jeff Laverty, a closed- end fund analyst at Oscar Gruss & Son Inc. in New York.

The funds are Pimco New York Municipal Income, Municipal Income Fund II, California Municipal Income Fund II, Municipal Income Fund III, California Municipal Income Fund III and New York Municipal Income Fund III.

Closed-end funds, unlike the open-end variety, issue only a fixed number of common shares that trade on an exchange like stocks. Investors in the funds have suffered a series of blows this year that have pushed share prices to record discounts. In February, the auction-rate market collapsed, eliminating a source of new financing and leaving holders of preferred shares unable to sell. In recent months, falling prices on the bonds in their portfolios have forced the funds to cut their borrowing.

“When Pimco suspended their dividends on six of their municipal funds because of asset coverage issues, their share prices tumbled,” Cecilia Gondor, a closed-end fund analyst at Thomas J. Herzfeld Advisors Inc. in Miami, said in an e-mail earlier this week.

It is fitting that California is involved in another mess. Two of the Municipal Bond Funds that collapsed are California Municipal Income Fund II and California Municipal Income Fund III. Consider this a warning shot about investing in anything related to California.

Addendum III

In case you missed it please consider Calpers To Report Losses of 103% on its Residential Investments.

CalPERS, the California Public Employees' Retirement System announced a new milestone in pension plan incompetence today by admitting losses in Risky, Ill-Timed Land Deals.

Calpers in recent weeks said it expects to report paper losses of 103% on its residential investments in the fiscal year ended June 30. That's because Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. ....

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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