“But most of all, securitization failed”

March 31, 2009

Economist Paul Krugman’s column in last Friday’s New York Times brought to mind an interchange at a budget “townhall” I spoke at in South Central Los Angeles last spring. My co-panelist, a representative from Governor Schwarzenegger’s Los Angeles office, took offense when I described the Governor’s proposal to issue bonds that would be repaid out of future lottery proceeds as “borrowing.” “That’s not borrowing,” the Governor’s staffer replied, “That’s securitization.”

A number of members of the audience scratched their heads. It certainly sounded a lot like borrowing to them: the state would issue bonds and then pay them back in the future.

“Securitization” was last year’s catch phrase for describing proposals to borrow against future lottery proceeds. Now that the bloom is off the securitization rose in financial markets more broadly, proponents have adopted a new catchphrase: modernization. Proposition 1C, which will appear on the May 19 special election ballot, asks voters to authorize the sale of bonds that would be repaid out of future lottery revenues — revenues that the measure hopes to increase by encouraging more Californians to buy more lottery tickets. The description that appears in the Voter Information Guide talks of “modernization” of the lottery and increasing lottery revenues, not borrowing.

The Governor, leaders of the Legislature, and editorial writers speak of the $5 billion budgeted from the sale of bonds as cash in the bank if voters approve Proposition 1C. Unfortunately, it isn’t that simple. The ballot measure simply gives the state the legal authority to go out into the financial markets and find investors willing to purchase debt backed by a revenue source that has declined since 2005-06.

Before counting on quick cash from the sale of lottery bonds, it is worth reviewing borrowing-related assumptions made in recent budget agreements, such as the $1 billion in proceeds from the sale of EdFund booked as part of the 2007-08 budget agreement, a sale that was never consummated, or the $1 to $2 billion in proceeds assumed in various budgets from proposed, but never sold, pension obligation bonds. Or the $1 billion in proposed, but never issued, bonds for transportation programs that were to be repaid out of tribal gaming receipts. The careful reader may note a pattern here — a pattern that began long before the global meltdown in financial markets that has made obtaining loans more difficult for even the most creditworthy borrowers.

– Jean Ross

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Following Up

March 27, 2009

The Legislature sent two bills to the Governor yesterday to draw on federal economic recovery funds to help California’s workers. As reported in our recent blog, one policy, Extended Benefits for the long-term unemployed, will bring up to $3 billion to California’s workers – money that will likely be spent immediately in local communities. The other, the Alternative Base Period (ABP), would allow an estimated 30,000 low-wage and seasonal workers to qualify for Unemployment Insurance (UI). However, instead of acting immediately, the Legislature delayed the deadline for implementation of the ABP until April 3, 2011, thus delaying receipt of UI benefits by Californians who lose their job through no fault of their own.

In addition, the long saga of the 2009-10 “budget trigger” came to a screeching halt today. State Treasurer Bill Lockyer and Department of Finance (DOF) Director Mike Genest concluded that California will not receive sufficient federal funds by June 2010 to prevent, or “trigger off,” a $1.8 billion personal income tax increase and $948 million in cuts, mainly to health and human services programs and higher education. The DOF estimates that California can only count $8.166 billion in federal funds – mostly from the economic recovery bill signed into law last month – toward the $10 billion threshold, a finding the Treasurer did not dispute.

– Scott Graves and Vicky Lovell

1 Comment | State Budget, Work, Wages, & Incomes | Permalink
Posted by cbporg

Tax Volatility Is a Good Thing

March 27, 2009

How you frame a problem very often determines the solution. Over recent months, “revenue volatility” has been singled out by many policymakers as the problem in California’s tax system in need of a solution. But as Betty Yee, chair of the State Board of Equalization, and Alan Auerbach, a professor of economics and law at UC Berkeley, discuss in a talk they gave at the California Budget Project’s annual conference last week, revenue volatility is actually in itself a good thing. It’s a result of California’s progressive income tax system, which requires those with more income to pay a higher percentage of their income in tax than those with less income. As Yee states, a discussion about reducing volatility very quickly turns to “solutions” like reducing taxes on capital gains and stock market income. That would mean shifting more of the costs of public programs onto low- and middle-income Californians, whose incomes come almost entirely from work, rather than investments. As Yee mentions, if Californians want to avoid exacerbating the income gap between high- and low-income Californians, any discussion of tax fairness must also include a consideration of another kind of volatility: the daily uncertainty many low- and middle-income Californians are experiencing about their jobs, their houses, or the choice to put food on the table or pay the energy bill.

“Volatility is what they’re experiencing day-to-day,” Yee said.

You can listen to Betty Yee and Alan Auerbach discuss reforms to California’s tax system here.

– Lisa Gardiner

Comments Off | State Taxes | Permalink
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Catching Up

March 25, 2009

The CBP is catching up after our big conference last week. We’ll be sharing some of the content from the conference over the next couple of weeks here, through our newsletter, and on our website. So check back soon. The California Channel is webcasting economist Brad DeLong’s plenary speech, which placed the current economic and financial crisis in historical context.

Under the dome, talk has turned to implementation of the federal economic recovery bill. The Administration unveiled a website providing links to information on how funds will flow to California. For a “one-stop” overview of the impact of the ARRA on California, there’s always the CBP’s recent brief. And if you aren’t triggered out, the State Treasurer’s website includes links to a range of materials. The Treasurer and Director of Finance are required to determine whether the state will meet the threshold established as part of the recent budget agreement. The trigger, as we’ve blogged about before, will determine whether nearly a billion dollars in spending reductions will be rolled back.

– Jean Ross

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More Grim News on the Economy

March 20, 2009

If you can stomach more bad news about the economy, read on. Data released today by the Employment Development Department show that California’s job market continues to weaken. The state’s unemployment rate reached 10.5 percent in February – up by four-tenths (0.4) of a percentage point from January and 4.3 percentage points from February 2008. Of the nearly 2 million Californians who were unemployed in February, more than one out of five (23.1 percent) had been without work for 27 weeks or more, compared with 16.9 percent 12 months earlier.

Today’s data release also shows a rise in the number of Californians who are working part-time “involuntarily” – either because they’ve had their hours cut or because they can’t find full-time work. More than 1 million Californians fell into this category in February, up by 368,000 (52.0 percent) from one year ago.

On top of the grim labor market news, data from the Department of Finance show that in the fourth quarter of 2008, California’s taxable sales were down by 16.3 percent from the same quarter of the prior year – the largest decline on record, and the data go back to the 1960s. This drop in taxable sales is particularly troubling because the less people buy, the less businesses produce, and the fewer workers those businesses employ.

In light of today’s news, this new CBP publication on the federal funding available to expand Unemployment Insurance in California couldn’t be more timely.

–Alissa Anderson

Comments Off | Work, Wages, & Incomes | Permalink
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