Ireland should be leading; not following the herd

Ireland has been following the US over the cliff of economic collapse for way too long. It's time the Irish considered a new role model for economic development and growth. Ummmm...the word 'China' comes to mind - but I am sure this strategy has not yet reached the halls of Irish academia or government. What a shame! Ireland should be leading now with innovative thinking rather than following the savage capitalist herd over the economic cliff. Ahem....time to wake up the Irish people and demand a better way to prosperity for all.

Depressionary bust in Ireland is echoed in California

Posted by Edward Harrison on 18 July 2009 at 9:16 pm

For quite some time now I have been of the view that there are a number of striking similarities between the goings on in Ireland and those in California, none of them good. Both locations have seen extraordinary rises in home prices turn to massive busts. As a result, both locales have seen depression-like collapses in consumer demand and the local economy. Unemployment and government deficits are surging in both California and Ireland. But, both California and Ireland have zero control over monetary policy and this is the crucial connection.

Ireland

Let’s rewind a bit to 1999 when the Euro came into being. Ireland was a founding member of Euroland. So, on January 1st of that year, the Irish fixed their currency the Punt to the Euro for good at a rate of 0.7876. From that time forward, Ireland effectively had no control of the monetary spigot. By 2002, Punts ceased to exist as money in Ireland and the Euro was ushered in.

What this change meant for Ireland is that it had the many benefits that go with being part of a large single currency market. Among the many advantages of a single currency are reduced foreign exchange costs, less currency volatility, less chance of a run on the currency, and a greater certainty in business planning that results from those benefits. And these benefits can be huge in times of crisis – just ask Iceland.

There is a problem though which I mentioned before, namely the Irish have no control over their own money. To be sure, hard money types probably see this as a good thing as it prevents countries inflating to get out of an economic pickle. But, the alternative for the Irish has been depression.

Back in February, I mentioned this problem in a post called “The European Problem.”

The Eurozone members have decided to forgo independent monetary policies. Individual member nations have free capital movement and a fixed exchange rate but zero control over monetary policy. That rests with the European Central Bank (ECB) in Frankfurt.

The problems mount in recession. Some members are getting devastated. Spain, for instance, is in depression already with unemployment at 14%. Ireland’s national budget is imploding with estimates for deficit reaching 10-12% of GDP. If you are Spain or Greece, you would like to print money– a lot of it. But that’s not happening in the Eurozone yet.

The result is a potential national bankruptcy for the likes of Ireland, one reason their credit rating is suffering. Will Ireland go bankrupt? Perhaps. It is unclear how willing other Eurozone members would be to support the country were it to run into that kind of difficulty. The Germans are furious for having abandoned the Deutsche Mark for the Euro, which they see as a ‘weak’ currency. Bailing out a Eurozone member would come with many strings attached.

Then, there is the case of Austria. They too are in the Eurozone. They have a weak banking system because of excessive lending to Eastern Europe — reaching a full 85% of Austrian GDP. (Whether the Austrians were mentally re-creating their lost Empire, stripped after World War I, is a case for the Austrian psychologist Freud). If the Eastern Europeans run into problems, Austrian banks will fail en masse, requiring help from other Eurozone members (read France and Germany).

So, Ireland, having no other choice, must cut spending…drastically. Ambrose Evans-Pritchard reports.

Events have already forced Premier Brian Cowen to carry out the harshest assault yet seen on the public services of a modern Western state. He has passed two emergency budgets to stop the deficit soaring to 15pc of GDP. They have not been enough. The expert An Bord Snip report said last week that Dublin must cut deeper, or risk a disastrous debt compound trap.

A further 17,000 state jobs must go (equal to 1.25m in the US), though unemployment is already 12pc and heading for 16pc next year.

Education must be cut 8pc. Scores of rural schools must close, and 6,900 teachers must go. “The attacks outlined in this report would represent an education disaster and light a short fuse on a social timebomb”, said the Teachers Union of Ireland.

Nobody is spared. Social welfare payments must be cut 5pc, child benefit by 20pc. The Garda (police), already smarting from a 7pc pay cut, may have to buy their own uniforms. Hospital visits could cost £107 a day, etc, etc.

California

I hope this sounds familiar to American readers because this is exactly the scenario faced by California. The state does not have the option of going out to the California Federal Reserve Board’s backyard to pick a few ten billion dollar notes off the money tree. This is a privilege reserved for the U.S. Federal Government, one I would add that has the Chinese worried. Effectively, California is to Ireland as the United States is to the Eurozone. And that spells depression for California. Here are a few headlines:

• California prepares to shut 220 state parks to make up budget shortfall
• California’s Crisis Hits Its Prized Universities
• California closes state offices to save cash

Welcome to Reykjavik on the Pacific. Don’t think this train wreck happened overnight. It has been building for months. I first asked in October of 2008 is the State of California bankrupt. Technically, they are not. But, when a state refuses to honor its bills by handing out IOUs, that’s bankruptcy to me.

It is going to get worse for California. That is for sure. The problem here again is the depressionary bust that is likely to take hold as California starts firing workers and cutting spending. Remember, people with no jobs have little income. And having little income means foreclosure, which also means a surge in housing inventory and falling prices. That’s a recipe for still more foreclosures, continued house prices declines and a deflationary spiral. I imagine Wells Fargo and Bank of America would be rendered insolvent by such a scenario. So why is Obama balking at lending a helping hand?

I anticipated a bust in California and a helping hand from the Obama Administration, because I figured they wanted to mitigate worst-case outcomes. As far back as January 2nd, I was already saying this was the likely scenario. I asked “Will federal largesse be countered by state and local cutbacks?”

There has been a general outcry for economic stimulus on the part of the North American, U.K. and Eurozone federal governments to counteract the fall in private sector consumption. In the U.S. and the U.K. in particular, this message is being heard and largesse will be delivered in spades.

But, in the United States, there is a bit of a problem: state and local governments. They will not, and often cannot, spend. In fact some will be cutting. Will local government budget cuts undercut federal fiscal stimulus?

Yes. Yes. Yes. Doesn’t the Obama administration see this? I would argue they did not understand this in January or the stimulus bill would have been larger and more front-loaded. But, perhaps they do now, but have chosen not to act because every state and municipality in America would be looking for a handout if they did try to act in California. So, we’re in bit of a pickle here.

Conclusion

The foregoing analysis can’t leave you feeling like recovery is imminent in Europe or in America. Certainly, it is not in Ireland or California. The problem is the Impossible Trinity of a fixed exchange rate, independent monetary policy and free movement of capital. You cannot have all three. And California and Ireland both lack the monetary escape hatch. Depression will set in.

I see only three choices to solve this problem.

1. Bailouts: Of course, we are going to see requests for transfer payments here. Will Obama bite? Will the Germans block this, afraid that the Austrians and Spanish would be next? Obviously, transfer payments are part and parcel of a monetary union in order to achieve economic harmonization. In the U.S., California gets less in federal largesse than it pays in taxes. This is a fact. However, it is looking ever less likely that this fact will help Schwarzenegger receive the help he wants.
2. Backdoor currency: Marshall Auerback has argued that the IOUs in California are a backdoor currency system. No, they are not legal tender. But, in a note to me, he said “California can turn its warrants into sovereign currency by agreeing to accept them in payments to the state. Note that I AM NOT arguing that California should make them “legal tender, payable for all debts public and private”—this is something it cannot do. But you could basically reduce the cost of CA’s borrowing substantially via this device and essentially reduce the need for muni bond issuance. In fact, the implication that flows from my analysis is that you’d want to buy every single muni bond in sight as the IOU, by giving it an intrinsic value to pay state tax, effectively eliminates the need for muni bond issuance.” Could Ireland do the same?
3. Immigration: People are just going to have to move. As jobs disappear in Ireland and California, the Irish and Californians will need to emigrate elsewhere. They have a huge market to chose from in both cases.

None of these are great options. I wish I had something more uplifting to say here. But, that is the situation we face.

Related Reading:

The Return of Depression EconomicsI

Frommer's Ireland 2009 (Frommer's Complete)

The Return of Depression Economics and the Crisis of 2008

Confronting Southern Poverty in the Great Depression: The Report on Economic Conditions of the South with Related Documents (The Bedford Series in History and Culture)

The Economics of the Great Depression: A Twenty-First Century Look Back at the Economics of the Interwar Era

Carpe Diem - The bogey man IS under the bed.

Carpe Diem People! The time is right to kick the bums out.- all of them.

Not so slowly anymore, panic is spreading across Europe and the United States as it has been globally for some time now. Being the 'developed' world has given Westerners a stay of execution as far as the effects of its ill-fated capitalistic excesses. The other shoe is about to fall tho as millions realise their jobs, homes, pensions, social benefits, health infrastructue and their lives of Riley are about to kick the bucket.

In Europe there are riots from Romania to Ireland, in Greece and Iceland: now, the people of the USA begin to wake up and realise, 'Hey, these bad things are really happening to us!? Maybe we should do something?' The excesses and abuses of power using citizen's money for private elite agenda's and keeping the people mollified with mass marketing, is finally becoming crystal clear for anyone who is looking.

Ironically, the far left and the far right are both radicalising in their focus on bringing down the current system; tho the ideological underpinnings differ, the issues of revolutionary consciousness and their practical expressions can be quite similar. Survivalists and comrades have in common the loathing of the waste of capitalism and a desire to end the current structure of capitalistic oppressions. This is always the problem with labelling political preferences; sometimes one can't tell one from the other - it seems almost any governmental/economic system or doctrine can apply its principles to the detriment of the citizenry it is designed to serve. To simplify for the 'left' or 'right' semanticists, the term 'revolutionary consciousness' will emcompass both sides.

On one thing everyone agrees, the poor are getting poorer, the rich are getting richer and the middle class is going bye bye. Exactly where and how the losers of the capitalist game decide to act is anyone's guess, but no crystal ball is needed to know it will be soon. Revolutionary consciousness is increasing at an accelerating rate; the people know it, and so do the Masters of the Universe.

What to do? What to do? No one has the answers to the problems we have created but, us, ourselves. Organic action based coalitions are springing up everywhere; to stop forclosures, and to protest savage budget cuts to public services, even in Ireland where the Gardai and pensioners have filled the streets of Dublin and made international news. (Let us not forget for a moment that riots in the 3rd world - which we rarely hear of - have been going on for 6-7 months....albeit for food and basic survival needs.)

The first thing we can do is to remove our blindfolds and take the cotton out of our ears...because this time, the bogeyman really is under the bed. Hiding under the covers will not make him go away.

The next best idea is to scream for help: the people who live nearest will be the best source of help. If no one comes, you will have to do some quick thinking...jumping out the window, baseball bat, running as fast as you can. Eventually tho, you will have to do something.

Each person who realises this is a tiny pixel in the picture of revolutionary consciousness. When enough of these pixels come together, left-right, conservative-liberal etc etc, a picture of class warfare will emerge globally; the people taking back their power from those they have trusted who have betrayed them. Here is California's bit of the puzzle and California: Laid-off Spansion employees outraged over execs' pay increases

Carpe Diem - The bogey man IS under the bed.

The California Budget and Class War

Source
By Ann Robertson
February 26, 2009
"Information Clearing House" -- On February 19, the California legislature, after weeks of wrangling, passed a special budget to address the historically high $42 billion deficit. It represents an unadulterated washout for working people who are attacked on almost every front by the Democratic Party, which controls a broad majority in the legislature. For example, public education’s $58 billion budget for K-12 (kindergarten through high school) will be slashed by $8.4 billion, even though California currently allocates less money than almost all other states to education.

The state college and university systems will be cut $163 million and $115 million respectively, resulting in many faculty and staff layoffs, despite the fact that both systems are currently turning away qualified students, due to lack of funding. Meanwhile, student tuition will be raised. Regressive taxes will be imposed, meaning that they will represent a heavier burden on working people and the poor than on the rich, including a sales tax increase from 8.5 to 9.5 percent and a vehicle license fee increase.

But while paying more, working people will receive considerably less from the state. Public transportation will be slashed while health and human services will be gouged by a $1.6 billion cut. And state employees will continue to be forced to take two days off per month, with no pay, of course. But what went unreported by The New York Times and the San Francisco Chronicle is that those on the other side of the class ledger – the corporations – enjoyed a startlingly different fate. According to the Los Angeles Times, “About $1 billion in corporate tax breaks – directed mostly at multi-state and multinational companies – is tucked into the proposal.”

Not only were corporate taxes not raised, they were actually reduced, thereby contributing to the deficit rather than alleviating it. And this corporate welfare comes on the heels of a steady decline in corporate taxes. In the 1980’s, 9 percent of corporate profits were taxed by the states. In 2001, it dropped to 6 percent, meaning that in that year and every year thereafter, California lost $1.34 billion in revenue (see The New York Times, July 16, 2003). Evidently The New York Times and the San Francisco Chronicle viewed the corporate largess concocted by California politicians in this current budget as nothing new and consequently unworthy of reporting.

The moral of this budget is clear. Corporations are well organized and consequently have successfully pressed for their own narrow interests. Lacking any social conscience, which should surprise no one, they fail to pursue the common good but remain obsessively fixated on ever-greater profits for themselves.

In order to avoid a repeat of this disaster and actually reverse this course of events, working people will need to organize themselves in order collectively to insist that society operate in the interests of the majority. This should begin with a demand that the government tax the rich – who have acquired unprecedented wealth during the past three decades – in order to fund social services. Taxing the rich and transferring wealth to working and poor people makes both sound moral and economic sense.

When inequalities in wealth are allowed to grow unchecked, the moral fabric of society is strained. Members of the same society no longer find themselves sharing common interests or goals, due to their starkly different economic positions. When working and poor people have more money in their pockets, they tend to spend it immediately, thereby stimulating the economy. The rich, with their hundreds of millions if not billions of dollars, have a substantial cushion and hence are not compelled to curtail their consumption when their taxes increase.


And many of the rich are the bankers who triggered this economic disaster. They should be required to pay for it. When working people are united, they have the power to take history into their own hands. After all, there can be no corporate profits, let alone business as usual, if workers collectively refuse to work. Now is the time to organize!

Ann Robertson is a teacher at San Francisco State University and a writer for Workers Action
( www.workerscompass.org ). She can be reached at aroberts45@aol.com

Trend Alert: 46 Of 50 USA States Could File Bankruptcy In 2009-2010

By freedomarizona.org
Source
There is a high chance a majority of the States within the United States of America could file for Chapter 9 bankruptcy. There are currently 46 states with high budget deficits, Arizona being one of them.

In fact, Jan Brewer, the newly appointed Governor of Arizona has a major crisis on her hands, one that Arizona and national media isn’t covering. The alarming news is the State of Arizona has 90 to 120 days before they completely run out of money. After that, all bills and tax refunds owed to the citizens will go unpaid.

Before Janet Napolitano left for her new Homeland secretary position, she had a stand-off with Arizona Treasurer Dean Martin. The AZ Treasurer forewarned Napolitano about Arizona’s financial crisis, but she refused to heed his words.

With neighboring California on the verge of bankruptcy this year, many States will follow in their steps.

Many States are already scurrying to cut unwanted costs, cut State-funded programs, raise taxes, not issue tax refunds to their citizens, and borrow money just to survive in 2009. Unfortunately, many banks — the same banks the Fed bailed out — are refusing to loan money to the States and their Treasury agencies.

The article, State Budget Troubles Worsen, at the Center on Budget and Policy Priorities website is an excellent piece to read. It shows where each State currently stands in these challening economic times, and you see 46 of the 50 States are clearly in the financial red.

It’s very possible you’ll see the end of the United States as we know it. If the Fed doesn’t bailout the States when their cash dries up and the banks don’t loan them money, then our States will be left in financial ruin. This would be a tragic and unprecedented event never experienced in the United States.

No State has ever filed bankruptcy, but it could be coming to a State near you this year.

We are on the brink of something far worse than the Great Depression.

UPDATE: Check out the newly published article, Survivalism: How to Prepare for the Economic Collapse. There’s also a printable 4-page newsletter you can download and share with your friends, family, and co-workers. Take action and help spread the awareness of this life-threatening issue.

Good update source Center on Budget and Policy.

Excellent article for those who want the facts here.

California pension funds close to bankruptcy

01-30-2009
Source
The two largest pension funds in California, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), have lost billions of dollars in value. Hundreds of thousands of retiring state employees and teachers now face the stark choice of accepting much reduced pension checks or working past their retirement age.

CalPERS is the largest pension fund in the US and the fourth largest in the world. At its height in October 2007 it had $260 billion in assets, comparable to the GDP of Poland, Indonesia or Denmark. At the end of 2008 CalPERS was worth $186 billion, one of its worst annual declines since the fund’s inception in 1932. It is one of the latest casualties of the financial collapse on Wall Street.

After years of gambling in real estate investments, the state workers pension fund has lost more than 41 percent of its value, after peaking last fall. Its real estate holdings have dropped from $9 billion to $5.8 billion, according to the Sacramento Bee.

CalPERS manages pension and health benefits for more than 1.6 million retirees and their families. The pensions are guaranteed by law, but given the current economic malaise employers may be asked to contribute more from their payrolls. The average employer, a taxpayer-funded government agency, contributes 12.7 percent of their payroll to CalPERS, while workers must contribute 5 to 7 percent of their salaries.

For now, a “rainy day fund” is being used to offset the worst in losses. It is likely, however, that CalPERS will ask for additional funds starting in July 2010 from state employers and July 2011 from local employers. The increases could be from 2 to 5 percent. Since the employers are public entities, the money will have to come from taxpayers or from budget cuts to other social programs.

CalPERS’s losses are intimately tied with the collapse of the housing bubble and the economic downturn in general. The Dow Jones Industrial Average has dropped 39.8 percent during the same period that CalPERS fell 31 percent. Because of the fund’s aggressive purchasing of real estate during the property bubble, CalPERS is now the largest owner of undeveloped residential land in America, much of it purchased in Arizona, California and Florida, some of the states hardest hit by the real estate crash. Many of these properties were purchased when their prices were at their peak.

The pension fund is expected to report paper losses of 103 percent on its residential investments in the fiscal year that ended June 30. It is estimated 80 percent of these investments were paid with borrowed money, which means that CalPERS will eventually be obligated to pay them back at the original market price.

The second largest pension fund in the US, CalSTRS, covers 794,812 teachers. Its value has fallen from $162.2 billion to $129.3 billion. CalSTRS’s pension funds are guaranteed just like CalPERS, but unlike CalPERS, it does not have the authority to ask for increased contributions from employers. CalSTRS is funded by school districts contributing 8.25 percent of its payroll. The state general fund pays 2 percent and a further 8 percent comes from the members’ salaries. Any contribution changes would have to be added by the state legislature and approved by the governor.

While CalPERS’ losses are currently being defrayed by the rainy-day fund, state administrators are hoping that the economic situation will improve, otherwise CalPERS and other pension funds will have to ask for further contributions. California Treasurer Bill Lockyer, who sits on the CalPERS board, told the San Francisco Chronicle that the current crisis means “both state and local government employers would be spending more on retirement than on some immediate program needs. Paying the commitments to pension obligation is a high priority, and it would take precedence over many other spendings.”

He added, “You either cut some other program expenditures or you tax something.” In other words, the pension deficit will be placed on the backs of working people who had no control over the investment decisions made by the government, let alone the recklessness and avarice of the banking executives and Wall Street speculators who are responsible for the crisis.

In the midst of a severe recession, this will only add to social anxiety and financial insecurity, particularly since hundreds of thousands of public school teachers and state employees covered by these massive pension funds have seen the value of their personal retirement savings, including 401(k)s and IRAs, reduced by 25 percent or more.

Pacific Grove, a coastal town north of San Francisco, highlights what cities and towns are being forced to do. In fiscal 2002, Pacific Grove paid less than $100,000 to CalPERS, only 1 percent of the town’s general fund revenue. By 2006, this cost shot up to more than $2.2 million, or 15 percent of its revenue.

The city of 15,000 would have to spend $10 million or more to pay its pension obligations if it were to pull out of CalPERS. The recreation department staff has already been reduced from seven to one and budgets for the library and Pacific Grove Museum of Natural History, a 125-year-old institution, were cut in half.

Joanne Nolan Stewart, a 48-year-old with two children, told the Wall Street Journal, “The people who used to run the recreation programs grew up here and sheltered the kids like they were their own.” Joanne is also an account manager for AT&T and said, “If I were to retire, my retirement would be one-quarter of what I make today for the rest of my life.”

California’s pension and budget defaults are not isolated phenomena. All across the US state pension funds have been collapsing due to the broader economic crisis. According to the Center for Retirement Research at Boston College, state governments have run up pension fund losses totaling $865.1 billion. Assets for 109 pension funds dropped 37 percent to $1.46 trillion in the 14-month period ending December 16. By comparison, the S&P 500 fell 41 percent in the same period.

To return to 2007 funding levels by 2010, the 109 funds would need annual returns of 52 percent, the center found. Alicia Munnell, the center’s director, told Bloomberg.com, “Even if markets recover, this will be a one-time loss that will have to be made up in the future by taxpayers.”

State and local governments contributed more than $64.5 billion to pension plans in fiscal 2005-2006, according to the US Census Bureau, which is about 57 percent of the $113.2 billion spent on police and firefighters. A report by the Pew Center on the States did a survey in December 2007 that found that states owed $2.35 trillion in pension payments over 30 years.

Unsurprisingly, state authorities are attempting to cut benefits for new state hires in order to ameliorate the crisis. In Kentucky, lawmakers set the minimum age of retirement at 57 for employees hired after September 1, and required 30 years of service, up from 27, to receive full benefits. They also capped cost-of-living adjustments, tied to the Consumer Price Index, at 1.5 percent. Democratic Governor of New York David Paterson, trying to close a $15.4 billion gap over 15 months, also wants to reduce new workers’ benefits while raising the retirement age from 55 to 62.

Rhode Island state and local governments were scheduled to make contributions to their pension funds equaling 25 percent of their payroll expenses in 2010, and the contributions may increase up to 30 percent in 2011 with a deepening recession. With increasing membership growth in state pension plans, these defaults will be even more exacerbated. State funds have been experiencing 12 percent growth since 2002, with 23.1 million now participating.

Company pension funds, or so-called defined benefit plans, have also been starved by the economic crash, falling to $1.2 trillion as of December 31 compared to $1.6 trillion a year earlier.

Related
Giant Calif. Land Partnership Files for Chapter 11

California - 1 week to IOUs

California One Week Away from Issuing IOUs…
Which May Not Be Accepted by Many Banks

January 26th, 2009
Source
The controller says California is down to Plan D on its checklist of paying bills. Its cash reserves are piddling; the special funds it borrows from are tapped out, and no one in the private sector is going to lend it any cash at a reasonable interest rate.

That leaves what in state government circles are called “payment deferrals” and what in real life is called “stiffing your creditors.”

In this case the creditors include income taxpayers expecting refunds, college students waiting on state aid, counties that operate public assistance programs, and companies that sell goods and services to state agencies.

Chiang has said he won’t write $3.7 billion worth of checks for those and other state programs if legislators and the governor haven’t reached a deal by next Sunday to close the budget gap.

The controller said he must conserve what little cash the state has to be able to make constitutionally required payments to schools and interest payments to state bondholders.

“This is a very painful decision,” Chiang said. “It pains me to pull this trigger, but it is an action that is critically necessary.”

The state’s cash situation is somewhat analogous to your family emptying its checking account, drawing down the savings account to cover checks, and only having enough left to pay either the mortgage or the utility bill.

Of course you could then file for bankruptcy protection. Under federal law, the state can’t do that, but it can do something you can’t: Issue IOUs.

Known formally as “registered warrants,” the state’s IOUs are just that. Someone – a vendor, a landlord, the water company – who is owed money by a California government agency gets a piece of paper that says the state owes them money, and will pay them the amount plus interest at some point in the future.

The only time since the Great Depression that the state has issued IOUs was in 1992, and it wasn’t a pretty sight. About 1.6 million of them, worth a total of $3.8 billion, were issued during a two-month budget tiff between then-Gov. Pete Wilson and legislators.

Instead of paychecks, about 100,000 state workers got IOUs, which proved somewhat harder to cash. After the first month, many of the state’s major banks quit accepting the warrants, saying the 5 percent interest they were paid wasn’t worth the arduous processing needed to redeem them.

And after state employees sued, a federal judge ruled that paying workers with IOUs violated federal labor law. The state agreed in 1996 to give the affected workers extra paid vacation to compensate.

If IOUs are issued this year, they won’t go to state workers. They also might not be accepted by many banks.

California cancels tax refunds and welfare payments

John Chiang announces that his office will suspend

$3.7 billion in payments owed to Californians starting Feb. 1,
because with no budget in place the state lacks
sufficient cash to pay its bills.

Americans are 'shocked and awed' that they might actually experience third world conditions.
'It can't happen here!' ... famous last words. Read and weep.

California controller to
suspend tax refunds,

welfare checks, student grants

By Evan Halper and Patrick McGreevy
January 17, 2009
Source
Reporting from Sacramento -- The state will suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1, Controller John Chiang announced Friday.

Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state's nearly $42-billion budget deficit. More than half of those payments are tax refunds.

The controller said the suspended payments could be rolled into IOUs if California still lacks sufficient cash to pay its bills come March or April.

"It pains me to pull this trigger," Chiang said at a news conference in his office. "But it is an action that is critically necessary."

The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the elderly, blind and disabled; and $13 million in grants for college students.

Even if a budget agreement is reached by the end of this month, tax refunds and other payments could remain temporarily frozen. Chiang said a budget deal may not generate cash quickly enough to resume them immediately.

Not all payments will stop Feb. 1. Most school and healthcare programs will be paid, as required by state and federal law. The state will continue to pay more than $6.6 billion in such bills.

And Los Angeles County officials said they would cover welfare payments to more than 500,000 local recipients -- for now.

But California is projected to be $346 million short of the funds it needs to pay all its bills in February. By March, the state would be so far in the red that even continuing to suspend payments would not cover the shortfall. California would be insolvent, making the issuance of IOUs likely.

State officials have already designed an IOU template, Chiang said, and have been negotiating with banks over whether taxpayers could cash or deposit them if they are issued. The state could be forced to pay as much as 5% interest on delayed tax refunds if they are not paid by the end of May, Chiang said.

The last time the state issued such IOUs -- the only time since the Great Depression -- was in 1992.

The suspension of payments is the latest radical move by officials to help keep the state from running out of cash as Gov. Arnold Schwarzenegger and the Legislature battle over how to avoid insolvency.

Schwarzenegger, who hopes to speed up public-works projects to stimulate the economy, wants tax increases, spending cuts and legislation to relax some environmental rules and allow private companies to do some government construction.

Democrats are seeking tax increases as well, but fewer spending cuts. Republican lawmakers would only pare spending and have been blocking any tax hikes.

Meanwhile, Schwarzenegger has ordered that most state workers take two days off per month without pay -- equivalent to about a 10% pay cut. The governor also ordered most state offices -- including all DMV field offices -- to close on those two days. The order is being challenged in court by labor unions.

The state has also halted payments of bond money for more than 5,300 public-works projects.

On Friday, the state Department of Finance temporarily exempted 276 of the projects from the freeze, reasoning that because they are nearly complete, it could cost the state more to shut them down than to finish them.

The exemption, through Feb. 1, will allow the continuation of school construction by the Inglewood Unified School District and the construction of a new Court of Appeal facility in Santa Ana. Work on new rail tracks at L.A.'s Union Station and road projects involving Irwindale Avenue, Martin Luther King Boulevard and Imperial Highway in Los Angeles County will also be able to continue.

Some projects were exempted because the state is under court order to do the jobs. Others would threaten public safety if left uncompleted, according to Mike Genest, Schwarzenegger's finance director.

"We're going to take the risk of allowing them to continue a little longer because we are very hopeful will have a budget by Feb. 1," Genest said.

Contractors lined up at a meeting of state finance officials to warn of the consequences of stopping the bulk of the public-works money. They said shutting down projects already underway would ultimately cost the state significantly. According to Caltrans Director Will Kempton, the state would have to pay $350 million in legal costs, claims for contract breaches and expenses for securing sites that go dormant.

"The bulk of those dollars are lost . . . to the taxpayers," Kempton said. "You can't just walk away from a construction project. You have to make sure it is buttoned up."

It is not just the state that would take a hit. Some school districts relying on state funds do not have the reserves in place to cover the payments they will owe builders if work stops.

Counties are also feeling the pinch. They process the welfare payments scheduled to be halted by the controller's office Feb. 1. The state is freezing those payments, along with millions of dollars in salaries to county workers who run the programs.

Some county officials say they don't have reserves in place to cover the state until the budget crisis is resolved.

"We simply don't have the cash," said Pat Leary, assistant administrator for Yolo County. "We are in critically bad times."

About a third of all state welfare payments go to Los Angeles County, where officials said they can shift money around to keep the payments flowing in the short term.

"The million-dollar question is how long this will last," said L.A. County Chief Executive William T Fujioka. "We cannot sustain a huge and very long hit."

evan.halper@latimes.com patrick.mcgreevy@latimes.com Times staff writer Molly Hennessy-Fiske contributed to this report from Los Angeles.

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