The Housing Bubble: A Lesson from Texas and Vermont

August 20, 2009

On Labor Day, the CBP will release our annual survey of the economic well-being of California’s workers and their families. Needless to say, this won’t be a happy story. Not only is unemployment at record high levels, inequality has risen nationally, and earnings here in California have suffered due to lagging wage growth and a loss of weekly work hours.

Before I give away the whole story, I think it is worth considering one reason why California has fared worse than the nation as a whole: lax consumer lending protections. Earlier this week, the Wall Street Journal published an interesting story suggesting that Vermont’s strong consumer lending laws protected that state from the worst of the housing crash. Now, Vermont is a small state, with little in common with California. Interestingly, it appears that Texas may have also avoided the brunt of the bubble bursting for the same reason. Researchers from the Federal Reserve Bank of Dallas note that:

“Due to the state’s strong predatory lending laws and restrictions on mortgage equity withdrawals, a smaller share of Texas’ subprime loans involve cash-out refinancing, which reduces homeowner equity and makes default more likely when mortgage payments become unaffordable.”

As we’ll soon report, the downturn has spread far beyond the housing sector and the “great recession,” as some economists have christened the current downturn, now calls for a comprehensive set of policy responses. But as California’s legislators think about how to prevent the next boom-bust housing cycle, here’s one lesson that we might learn from Texas and Vermont.

– Jean Ross

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Drawing the Line on Poverty

August 17, 2009

CBP staff and others have long argued that the federal poverty line is an outdated measure for gauging how families are faring economically. Calculated originally at three times what families spent for food in the 1950s, it doesn’t take into account our state’s high cost of living or include the cost of child care in determining families’ needs. CBP staff are hard at work right now updating Making Ends Meet, a report we update and release every two years to show more accurately what it costs to raise a family in California.

Now there’s movement at the federal level to modernize this standard, which is used to estimate how many families live in poverty and determine eligibility for programs such as Medi-Cal and Healthy Families. Senator Chris Dodd (D-CT) has reintroduced legislation that would develop a poverty measure based on the current costs of food, clothing, shelter, medical care, and other necessities. Significant for a high-cost state such as California, it would also calculate regional differences in the cost of living.

As Dodd said recently, “Improving the poverty measure is not just an academic exercise for statisticians, it is essential in helping us identify and implement effective policies that address this (poverty) crisis.”

– Lisa Gardiner

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Despite First 5 Funding, as Many as 800,000 Kids Could Lose Access to Healthy Families Coverage

August 13, 2009

Children who are eligible for low-cost health coverage through the Healthy Families Program got some good news and some bad news today.

First, the good news: Meeting in Sacramento, the First 5 California Children and Families Commission voted to provide up to $81.4 million of its own tobacco-tax dollars to support enrollment of approximately 200,000 children from birth through age 5 in Healthy Families between August 13, 2009 and June 30, 2010. These First 5 funds will partially close a $194 million state funding shortfall (which primarily stems from cuts included in the July budget agreement); reduce the number of children placed on the Healthy Families waiting list (which was implemented on July 17); and reduce the number of children who eventually could be removed from the program.

Which brings us to the bad news: The Managed Risk Medical Insurance Board (MRMIB), which oversees Healthy Families, voted today to remove children from Healthy Families starting October 1 in order to further reduce program spending and help close the state funding gap. Under this action, families would begin receiving notice of this change in early September. According to an analysis by MRMIB, nearly 670,000 children could be dropped from Healthy Families between October 1, 2009 and June 30, 2010, although it is not clear how many of those children will be supported with First 5 funds and thereby avoid being removed from the program. MRMIB also reviewed other cost-cutting strategies, including eliminating certain Healthy Families benefits and shifting more costs to families, but postponed action on those options pending further analysis. MRMIB is currently scheduled to meet again on August 20 and August 27, at which point the timing of or the need for disenrollment could be revisited.

The bottom line: First 5’s funding will allow about 200,000 children through age 5 who were at risk of losing access to Healthy Families coverage to enroll or remain in the program through next June. However, as many as 800,000 other children could end up on the Healthy Families waiting list or be removed from the program unless additional funds are found to help close the state funding shortfall.

– Scott Graves and Raul Macias

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A Recipe for Future Shortfalls Revisited

August 12, 2009

We’ve blogged before on the distributional impact of proposals under consideration by the “blue ribbon” Commission charged with reviewing California’s tax system and we’ll no doubt do so again. While the body has not agreed upon a final set of proposals, it’s clear that they are moving in the direction of recommending changes that would significantly shift the cost of financing state government from high- to low- and middle-income Californians. While we’d argue that this fact alone provides sufficient grounds to send the Commission back to the drawing board, proposals under consideration would also likely lead to larger, not smaller, budget gaps in the future, thereby worsening the very problem the Commission was established to address.

How would this occur? The package of working recommendations would reduce the state’s reliance on the personal income tax, particularly taxes paid by those at the high end of the income distribution, and eliminate the state’s corporate income tax. Revenues lost as a result of these changes would be replaced – the Commission is striving to develop a “revenue neutral” package – with a new tax on the net receipts of businesses and a tax on carbon fuels. The latest draft also proposes to reassess corporate property to market value, although many observers suggest that this proposal may prove controversial among Commission members and that, unlike other proposals, would require voter approval to change the state’s Constitution.

Wider budget gaps would likely arise because these changes would reduce reliance upon or, in the case of the corporate income tax, eliminate the two taxes that have posted the strongest average annual growth rates over the past four decades and replace them with taxes that are likely to grow more slowly.

The Commission’s proposals would provide the largest breaks to those at the top end of the income distribution, which would depress revenue growth by cutting the amount paid by those whose incomes have posted the strongest growth over the past decade.

We’ll be looking deeper into the Commission’s recommendations over the next several weeks as more details become available. For now, however, we see little to cheer about with respect to addressing California’s long-term budget challenges or the state’s widening income gap.

– Jean Ross

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Two Key Meetings on Healthy Families Program Set for Thursday

August 11, 2009

Two meetings taking place in Sacramento on Thursday will likely decide the fate of hundreds of thousands of children who are at risk of losing access to affordable health coverage through the Healthy Families Program. The Managed Risk Medical Insurance Board (MRMIB), which oversees Healthy Families, will meet at 11:30 a.m. to discuss whether to begin removing children from the program in order to address a state funding shortfall of $194 million. MRMIB’s decision will hinge, in part, on action taken by the First 5 California Children and Families Commission, which is meeting down the street at 11:00 a.m. First 5 will decide how much of its own funding to provide to Healthy Families in order to support enrollment of eligible children up to age 5.

An infusion of First 5 funds would help reduce the number of children who are subject to the Healthy Families enrollment freeze, which was implemented on July 17 when it became clear that the program would face a substantial state funding shortfall under the budget agreement then pending before the Legislature. First 5 funds also would give MRMIB officials some financial “breathing room,” which could allow them to delay or avoid removing children from Healthy Families as a way to achieve program savings.

The July budget agreement cut state funding for Healthy Families by $174 million – including the Governor’s $50 million line-item veto – and MRMIB has identified an additional $20 million shortfall, bringing the total state funding gap to $194 million in 2009-10. Without additional funds, well over half a million, and perhaps as many as 900,000, California children will lose access to affordable health coverage through Healthy Families for some or all of the year.

– Scott Graves

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