California is back in the hole and digging deeper. It is now $21 billion in the hole again and digging deeper every day.

In response to the growing problem, Schwarzenegger Seeks Obama’s Help for Deficit Relief

California Governor Arnold Schwarzenegger, anticipating a $21 billion state budget deficit, plans to ask President Barack Obama to ease mandates and minimums on social programs to save as much as $8 billion.

The Republican governor plans to seek the relief, according to a California official who asked not to be identified because details haven’t been resolved. Instead of seeking one-time stimulus money or a bailout, the most-populous U.S. state wants the federal government to reduce mandates and waive rules stipulating expenditures on programs such as indigent health care, the official said.

“The problem is that there are no easy solutions left,” said Jean Ross, executive director of the California Budget Project, a Sacramento-based research group concentrating on issues facing the poor. “Where do you go to cut that doesn’t permanently compromise the level of public services that this state needs to remain economically competitive and to have some semblances of a safety net left for vulnerable populations.”

“We’ve already gone after the low-hanging fruit and the medium-hanging fruit and the higher-hanging fruit, so it’s going to get tougher and tougher now to balance the budget,” Schwarzenegger told reporters in November.

The governor has said he won’t increase taxes again to close the gap. That means more cuts, complicated by mandated expenditures for programs such as Medicaid health-care for low- income residents. With reductions already made to programs for the poor, additional trims jeopardize those federal funds.

Biggest Issuer

“In terms of programmatic reductions, we have to keep an eye on the fact that in some areas — be it education or health and human services — if you run afoul of federal maintenance of efforts requirements, you risk the loss of federal dollars,” said Schwarzenegger’s budget spokesman, H.D. Palmer. “As tough as 2009, these factors are going to make 2010 even more challenging.”

Moody’s Rating

California’s general-obligation debt rating from Moody’s Investors Service is Baa1, the company’s eighth-highest investment grade, and A from Standard & Poor’s, the sixth- highest. By comparison, Greece, the poorest member of the 16- nation euro region, is rated two steps higher at A2 by Moody’s and two lower at BBB+ by S&P.;

“California, which is more than three times bigger than Greece, is running out of money,” T.J. Marta, chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey, told Bloomberg Radio today.

A Standard & Poor’s/Investortools index of California state and local debt has returned 13.1 percent this year through Dec. 23, about 1.5 percentage points less than the national average.

Investors have demanded higher interest rates from California, compared with other borrowers. The state’s 10-year bonds yielded 4.6 percent by the end of last week, 1.51 percentage points more than top-rated municipal borrowers, according to Bloomberg indexes. Three months ago, that difference was as little as 1.06 percentage points. Greek 10- year bonds yield 5.72 percent, Ireland’s 4.78 percent and Spain’s 3.93 percent.

“When you are looking at a deficit in the size we have, everything needs to be on the table,” Assembly Speaker-Elect John Perez, a Democrat from Los Angeles, told reporters on Dec. 11.

If “everything” is on the table, then why isn’t anyone mentioning union contracts, pensions, prisons, privatizing services, property taxes, proposition 13, state mandates, and illegal immigration?

California is in a mess because in practice “nothing” is on the table. Democrats do not want to cut services. Nor do Democrats want to address unions, pension problems, or illegal immigration.

Meanwhile Republicans do not want to raise taxes and I certainly cannot blame them on that score.

Schwarzenegger’s idea to ease mandates and minimums on social programs is a good one. It should apply to every state. However, if Obama goes along, California will only save $8 billion but the hole is $21 billion and rising every month.

Jean Ross, executive director of the California Budget Project, says “there are no easy solutions left”. Jean Ross is not phrasing the problem correctly. There are many easy solutions starting with illegal immigration, cutting pension promises, cutting union benefits, and privatizing the prison guards.

The problem is there is no political will to do what absolutely must be done.

Mike “Mish” Shedlock
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