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MARIN COUNTY'S NEWS MONTHLY - FREE PRESS
(415)868-1600 - (415)868-0502(fax) - P.O. Box 31, Bolinas, CA, 94924

August, 2009


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The Great California Slump Is Upon Us And We Won't Admit It
By Michael O'Faolain

When I wrote in May that California's Great Recession likely will begin "in earnest" in July 2009, I hadn't really thought about a proper name for it.
The term regularly used in describing the current American economy, "The Great Recession," was formalized by Nancy Gibbs of TIME magazine though it had been used in other recessions, most recently in 1989-91 and 1999-2001.

It's a terrific "euphemism," which means "the substitution of a mild, indirect, or vague expression for one thought to be offensive, harsh, or blunt." The term "The Great Recession" has the feel of thinking that pervades the Wall Street of the Ivy League Baby Boomers and Gen X'ers, regardless of individual family background. It is that group that in economics the term "bubble" should be applied, applied to their view of the world.

The problem with relying on "The Great Recession" to describe what's going on in California can be framed in terms of job loss. According to economists, the US as a whole was in a recession at the end of 2007. But California lost "only" 294,185 jobs or 1.71% of its jobs in all of 2008. According to the U. S. Department of Labor, California lost 483,367 jobs or 2.87% of its jobs in the first six months of 2009, which is an annualized rate of job loss of 5.7%. So while in 2008 Californian's may have been experiencing some impact of The Great Recession, the worlds 8th largest economy hadn't crashed.

As I thought about what would best describe what's begun here, the best term I could find is "slump," the first definition of which is "to drop or fall heavily; collapse." The Great California Slump has an appropriate sound. And The Great California Slump began in 2009.

When American's think about a truly depressed economy today, they think of Detroit. Thus one could see considerable irony in the fact that while the California Legislature struggled with adopting a "balanced" 2009-10 budget in July, the news media were reporting that Toyota has decided to liquidate its interest in the Fremont, California manufacturing plant that it jointly operated with General Motors, the last such plant in California.

The plant had employed about 4,600 workers making Toyota Corollas and Tacomas and Pontiac Vibes. Last month when it was learned that GM would be abandoning its interest in the plant to Motors Liquidation Co., the East Bay Economic Development Alliance said the plant closure could impact 30,000 jobs indirectly related to the factory.

Assuming Toyota asks Motors Liquidation Co. to liquidate the plant, the jobs directly and indirectly lost would appear in the job loss statistics in the second half of this year and perhaps the first half of next year. Remember this, as it is important to understand the timing of job losses.

For instance, few of the 7,000 new layoffs announced in May and July by the Governor, and now incorporated the "balanced" State budget, won't occur before September 15 and definitely won't appear in the job loss statistics until the last quarter of this year. The state's layoff procedure takes 120 days from when a worker is notified of a possible layoff.

Most of the layoffs of school employees necessitated by this round of state budget cuts, teachers and other staff, will show up in the jobs loss statistics over the next four months. The local government jobs lost did begin this spring, but many more will also be seen in the next four months.

The State's two university systems this July joined the other State employees taking unpaid furlough days each month for the foreseeable future. Most of the 300,000 employees will be taking three furlough days, representing a 15% reduction in gross pay.

While this $1.5 billion loss of pay hurts the employees and their families, in terms of the impact on the private sector, it is comparable to laying off another 45,000 state employees as this is money that won't be spent on clothing or iPhones or paid in State income and sales taxes. Without this money, the retail sector will lay off additional employees whose job loss will be reflected in the statistics in the remainder of this calendar year and the first half of next year.

Which brings us back to the out-of-balance State General Fund Budget. The May estimate was that the State's General Fund Budget was out of balance by $26.3 billion based upon projected revenues. On July 12 State Controller John Chiang issued a news release reporting that the May estimate for June revenues was $1.14 billion too high because personal income taxes were $987 million below (-18%) and sales taxes were $154 million (-5.8%) below the May estimate.

Nonetheless, on July 24, the Legislature adopted and sent to the Governor a budget based on the May estimates. We'll find out in the second week of August just how badly the July revenues fall short of the May estimates. Maybe they won't.

It's my opinion that instead of $26.3 billion budget gap, the gap was at least $34 billion. However, the National Conference of State Legislatures latest report on the status of budget problems across the nation singles out California as having a cumulative General Fund gap of a "whopping $38.9 billion or 35 percent of the general fund budget." Choose the size of your problem - $8 billion or $12 billion. Let's just agree that it's likely that the revenues shown in the adopted budget will be about $10 billion short by June.

When the U.S. Department of Labor reported that for June "the largest over-the-month decrease in the level of employment occurred in California (-66,500)," it was dutifully reported in the Los Angeles Times with some additional pieces of information.

"'Even more worrisome', said Esmael Adibi, an economist at Chapman University, 'is that the rate of decline in jobs is not slowing. Total nonfarm employment fell 5.1% from last year, dropping at a quicker pace than in previous months. Total nonfarm employment fell 4.8% in May from the previous year.'

"'...There are signs that Californians are increasingly frustrated with the state's economy,' Adibi said. He noted that the state's labor force lost 46,200 jobs last month, indicating that some people have stopped looking for jobs entirely."

We know that in May California manufactured exports were down 28% while agricultural and other non-manufactured exports were down by 23.3%. Year-to-date exports were down by 31% in five months. Imports coming through California's ports in May were down 31.7%.

Both these indicator statistics is that they lag behind the rest of the economy. They are based on orders placed months ago. It is likely that these numbers will continue to drop well beyond when the national economy hits bottom.

The Los Angeles Times reported recently that according to the "Employment Development Department, jobs in movie and television production were down 13,800 in May compared with a year earlier." The article also reported "California's share of U.S. feature film production dropped to 31% in 2008 from 66% in 2003, according to the California Film Commission. That largely reflects a falloff in the Los Angeles area, where feature filming activity in 2008 was nearly half what it was at its peak in 1996."

Ignoring the recent University of Colorado study warning that population growth in the West along with climate changes and poor management of resources could threaten long-term water supplies for Southern California, the drought within California has already impacted Central Valley agriculture.

Much like in The Great Depression where the nation saw a drought (the Dust Bowl) impact its economy, California's agriculture economy is struggling. In many areas of the San Joaquin valley the unemployment rate is above 30%. It is estimated that job losses due to drought will be in the range of 30,000 this year.

Reportedly California's regional banks, which on the surface appeared to sidestep the national banking near-collapse, are showing signs of significant stress. Further, a second round of home foreclosures has begun.

Newspapers around the state have begun reporting the net assessed value drop information from various County Assessor offices. Most local government agencies have anticipated this in their budgets for 2009-2010. But property tax payments during November and December may be significantly lower than previous years.

Some property tax payments will not be made in this fiscal year due to foreclosures or simple lack of money. Many who paid in full each December will take the option of paying half with the remainder to be paid in April. Some will choose to not pay anything in December hoping to be able to afford to pay the whole amount by April. Yes, these will be shown as "receivables" on our governments' books, but the State has a cash flow problem.

These accumulating facts represent the reality that the Legislature and Governor, and the schools and local governments, and the employees of governments and schools, and the taxpayers all seem to be ignoring.

And these folks also seem to be ignoring the facts that: (a) half of the "solutions" for closing the General Fund budget gap were one time fixes and short of some miracle revenue increase by July 1, 2010, the budget will be out of balance $30+ billion, (b) the Unemployment Insurance Fund will likely have borrowed at least $23 billion by the time repayment requirements kick in September 2010, and (c) the two State employee retirement systems have each lost around $50 billion in the past year, more than the approximate net worth of Bill Gates, and there's no way state and local agencies can absorb contribution increases in the next few years sufficient to replace the losses.

California can recover but not rapidly. Even the legendary Silicon Valley has nothing to offer but hope for the longer term. The Sacramento Bee described that situation recently.

"In the Silicon Valley region, unemployment tops 11 percent and investment capital has all but dried up. Here, unemployed tech professionals are showing up in droves at Bay Area mixers - and signing on en masse on career networking sites - to volunteer labor and expertise in exchange for equity shares in Silicon Valley startups that have no money to pay them....

"With a half-million Internet, computer, biotech and financial services workers, the pool of jobless talent here is so deep that Jobnob scheduled separate college-themed "happy hours" for tech professionals from Stanford, Harvard and Berkeley alone."

Virtually no responsible economist thinks California's economy will hit bottom before the middle of 2010 or begin to recover before the middle of 2011. It's difficult to imagine where in California's economy the State will find revenue from sales, income, corporate, and property taxes, and employer unemployment insurance to cover its costs for fiscal year 2010-11.

The Legislature will have to find a way to deal with 2010-11, which won't be easy because to balance the 2009-10 budget, they ordered that June 30, 2010 paychecks for State employees be dated July 1, 2010 "saving" a billion or two in 2009-10. Further reductions in State and local government employment and/or substantial increases in tax and unemployment insurance rates beginning in the middle of 2010 would further worsen the economy.

California's credit rating has already dropped below that of the soundest private corporation. While the Governor, State Treasurer and State Controller plan on the State borrowing enough money through Revenue Anticipation Notes to pay its bills and in October cash in the IOU's already issued to vendors, local governments, and others, someone must have a gnawing in the back of their mind that Wall Street might not think California is credit-worthy.

One of the bills to implement the budget contained provisions "allowing", or "requiring" depending on your point of view, the State Compensation Insurance Fund and the State Lottery to "invest in" state debt, much like the federal government first borrows from its own Social Security fund. One has to wonder if in March or April Calipers and CalSTRS will be required to "invest in" or "bail out" the State government.

The Great California Slump indeed will be "slumping" in earnest for many months to come. Once known for its economic opportunities, for its schools and higher education system, and for its commitment to the social compact, California is slumping into the ashes, the ashes from wildfires and the ashes from Californian's burning through their wealth.


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