Let’s go slightly off-topic on Friday, and wonder how budget cuts will affect housing in the future. Hat tip to Daniel for sending along this opinion piece from the latimes.com:
It’s a seldom discussed fact how heavily dependent Sacramento is on Washington’s borrowed money.
The same goes for California schools and local governments.
They’re all huge targets as Congress takes aim at federal debt.
It’s unlikely the Obama administration would have defaulted on U.S. Treasury bonds even if Congress had remained gridlocked on debt ceiling legislation. Stiffing bondholders would have irreparably tarnished the nation’s image abroad. Instead, Washington would have slammed it to the states and federal contractors.
That’s the sort of thing Sacramento habitually has done after failing to pass a budget on time. It has stuck it to local governments, schools, nursing homes, vendors — almost anyone except bondholders.
There’s a lot of federal money for Washington to retrieve in state capitols, especially California’s.
The dirty little secret is that California’s current state budget is not $85.9 billion, the size of the much-debated, deficit-plagued general fund. You’ve got to add in the special funds ($34.2 billion) — much of them fed by fees dedicated for specific purposes — plus bond money ($9.4 billion). That totals $129.5 billion, but it still ignores federal dollars.
The real state budget includes an additional $79.2 billion in federal largesse, representing 38% of total state spending. This brings the grand total to $208.7 billion.
So the state of California is getting a nearly $209-billion spending program while putting up less than $130 billion itself.
“It’s extremely significant,” notes state Assembly Budget Committee Chairman Bob Blumenfield (D-Woodland Hills). “If it were not for federal spending and the stimulus package, the recession in California would have been dramatically worse. The impact on schools and state services would have been devastating.”
Most of the federal funds come with strict rules attached. Much of it is what’s known in government lingo as “pass through” money — it’s automatically passed on by Sacramento to local entities. The state does take a 2.5% administrative fee.
There’s little opportunity for games-playing — and much less than there used to be — although Capitol politicians try their best.
“They’ve done plenty of very creative things to get the benefit out of federal money, like with the stimulus funds,” says Mike Genest, state finance director for former Gov. Arnold Schwarzenegger. “Sometimes the federal government has rules that can be exploited and they don’t mind…
“In the ’80s and ’90s, we were among the most creative states in making federal costs go up.”
Where does the federal money go? You have to dig deep into state budget documents, looking hard at the fine print, to find out.
Currently, nearly $41 billion is spent on health and human services. Of that, about $29 billion —almost twice what the state puts up — goes for Medi-Cal, California’s version of Medicaid healthcare for the poor.
Medicaid is exempt from initial federal spending cuts. But who knows what might be on the chopping block if Congress really gets serious about controlling spending.
Another $3.2 billion in federal money goes to the state CalWorks welfare program. That’s $1.1 billion more than Sacramento kicks in.
The state Employment Development Department takes in $19.7 billion from Washington, practically all of it for unemployment insurance benefits.
The Department of Education receives $6.9 billion for K-12. Of that, $2.2 billion pays for poor kids’ lunches, $1.7 billion provides other services for low-income students and $1.2 billion helps fund special education. There’s also $700 million for child care and after-school programs. And there’s money to lend to new charter schools.
The University of California pulls in $3.5 billion and the state universities $1 billion, mostly in research grants.
Caltrans rakes in about $4.3 billion from Washington, much of it for highway construction. The feds generally pay 88% of an interstate project.
The state Emergency Management Agency gets nearly $1.1 billion. Virtually all of it is shuffled out to local entities for disaster aid, homeland security, hazard mitigation, public safety and victim services.
All programs are in jeopardy. It’s a good bet much of their federal funding will be trimmed or terminated in the future.
And it’s not like Sacramento already hasn’t been whacking away. This year’s general fund is down roughly 6% from $91.5 billion last year. It’s about 17% lower than three years ago.
Genest, a longtime numbers cruncher for Republican politicians, says that future federal cuts would have a huge impact on state services, and he adds: “Personally, I say so what?
“We’re going to have to cut these services. It’s not that we can afford everything that people want. I’m a ‘tea party’ guy. I think they should have cut a lot more than they did. We’re spending a lot more than is coming in, and that’s got to stop.”
On the other side, state Senate Budget Committee Chairman Mark Leno (D-San Francisco) says: “My greatest concern is that [the cutting] may have a recessionary impact on the overall economy and cause more damage. The result could be double-digit unemployment in California for years.
“Many economists look back at 1937 when the Great Depression had a second dip and Congress did just what it’s doing now. It retrenched on government spending.”
It took Nazi Germany and Imperial Japan to end America’s depression by forcing us into war.
Unlike former President George W. Bush, however, FDR did not cut taxes for the wealthy while financing a war. But that’s for another day.
What Californians — all Americans — need is an honest debate over which services we want to pay for and how do we go about it. And the answer is not mindless borrowing.
I think they might try to nibble on Prop 13, but other than that there won’t be many ways that they can directly impact real estate. There won’t be an appetite for loan-mod programs much longer.
It’s the indirect impact to the overall economy that could hurt, but I think people are willing to live with less as long as taxes don’t go up.
The discussion of the overall economy is not off topic, as jobs, and stock market really do impact decisions. I feel poorer this morning after a 10% drop in the value of my IRA over the past week, and am looking to cut holiday expenses, etc.
The sugar-high of the Federal Stimulus is over, and we will all have to live with less (Federal, State, and individuals). Agree – higher taxes would be insult to injury at this point. The bright spot is that mortgage rates will stay low for a long long time. Sorry not to be upbeat this morning, but the market crash is getting to me.
Jim,
I read somewhere that if an out of state resident sells property in California, he/she is subject to a 3% transfer tax on the sales price of the property and that there is no such tax for in state residents. Is this true?
Here in Arizona a few years ago, a ballot proposition was passed banning government entities from collecting real estate transfer taxes. Perhaps something similar is needed in CA.
The tax base in America is shrinking while the government keeps growing. Like I said before, this will not turn out well.
Happs,
Yes, the escrow companies in California are instructed to collect 3.33% of the sales price on behalf of all out-of-state sellers of real estate.
But it isn’t a separate tax, it is a early collection of tax you might owe. It encourages the seller to complete their California state tax return next year, and pay any tax due. They’ll get a refund if the 3.33% collected is too much.
this will not turn out well.
If the government is forced to shrink, it’ll turn out OK.
It’s hard to believe that we spend $2.2 billion in California on school lunches, $4.5 billion on research grants, and $4.3 billion on highways.
What is missing is leadership.
If somebody would grab a hold of the wheel and steer this Ferrari down the road, it would make all the difference.
The biggest impact to San Diego I can see from deficit cutting would be a defense spending reduction. San Diego has quite a few military contractors and jobs that support or are related to defense spending. In general these are jobs that could support buying a home in a middle class neighborhood. If they go away or are transferred to other regions of the nation I can see an impact on home prices and sales in the middle class markets. It may or may not work it’s way into the prime NCC market. It’s difficult to estimate the indirect impact.
Do some research on Big Ed., Big Mil., Big Poverty, Big Health and all the other government programs. There are huge administrative staffs in all of them. Just the department of education has boatloads of economists who do no teaching, yet get paid very well to crunch numbers.
I am not a Red or Blue team member. I believe both parties are at fault for the current situation. But watch this and understand the magnitude of the problem.
http://www.c-spanvideo.org/program/SenRe/start/14756/stop/16376
And it is at the Federal, State and Local level.
FYI, “they” want to get rid of Prop 13, but only the people via a vote can change that.
This is the NUMBER 1 reason “they” will try and have a California Constitutional Convention. The excuse for the convention will be to stream line a non-functioning structure that “hurts the people of California”. But the real reason is to get rid of Prop 13.
Over the coming years you will hear about the “need” for a convention. Can you imagine the special interests orgy (govt included) if such a convention was to take place???
We need a good revolution?
Any family that has a cable bill should be in-eligible for the CA School Lunch Program–I wonder how many households that are taking advantage of this program have cable bills!
Many of the school districts are now forbidding students from bringing food from home. They claim it a “safety” issue what with all the food allergies. I call BS.
Prop 13 has two parts. Part one is the real estate one. Erasing thay would be a small help. Erasing the part that requires a 2/3 majority in the Assembly before they can raise revenue would go a long way to fixing the broken nature of the state. There’s enough military and rancher Republicans to stop all taxes, but not enough to stop new spending.
California state residents pay more Federal taxes than the state gets back in Federal money. Most Southern (ex-Confederacy) states have the opposite pattern.
Oh, and as for prop 13, I think it should be drastically scaled back (but not eliminated). The two thirds thing should be eliminated. There should be an income cap (say $1 million yearly salary for an individual, $2 million for a couple), and it should not apply to commercial, industrial, or rental income properties, or non-primary residences. This would result in it’s superficial goal remaining (preventing Grandma on a fixed income from losing her house of 30 years because the value and property taxes are now 20 times what she paid for it) and it’s actual goal (lowering taxes on the rich) being removed.
I believe budget cuts will reduce average home prices. High end homes might not be affected , but everyone below will feel the cuts.
I remember asking about prop 13 getting repealed a couple of years ago on this blog. I felt it would eventually get nixed, while most passionately felt it would stay due to it being the third rail of politics in CA. The writing is on the wall. Fight it if you must, but it will be nickled and dimed into obscurity. The camel’s nose will soon be in the tent. I’ve seen the budget numbers on both CA and our federal gobmint. If you think I am wrong, then you must believe there is a feasible way to grow out of this mess. There isn’t. Not only that, but we are going to be paying dramatically more at all levels of taxes here soon, and the mortgage interest deduction will be curtailed as well. And the gov will eventually stop backing mortgages to the extent is does now, along with lower conforming loan limits. It really is simple mathematics. We can’t afford it anymore. NONE of it. We are beyond broke, if the numbers are to be believed. Everyone is going to fell the pain. It won’t happen overnight, but the fat lady is warming up. And for those that think “this time is different”, please remember that the market will always revert to the mean. RE is no different. Although Jim was smart (and good) enough to work in truly resilient area. Good going Jim!
Only two things can be done. Cut the government or go inflationary. Does it feel like the 70’s to anyone?
I am a supporter of prop 13, but I also think we are overdue for a California Constitutional Convention. The current California Constitution is over 500 pages long and full of imbeded interest group protections.
I am of the view that the solution to California’s budget problem is mainly political, not economic.
#11 – I’m having a hard time figuring out how ensuring adequate child nutrition is related to the parents’ misplaced priorities.
$2.2 billion for school lunches is a big number, but what purpose does it serve? Is it reasonable? The goal of ensuring child nutrition seems admirable, but is the cost appropriate? Lets do a little analysis of the numbers, leaving aside the question of whether this ought to be a governmental function at all.
There are over 4 million elementary students in the state. According to some sources, about half qualify for subsidized lunches, so 2 million. It seems odd to me that half of the elementary school population is poor enough to qualify, so maybe the state is subsidizing at least some who don’t need it.
If we assume that the lunches are for school days, that would be about 180 days per year per student. That makes for about 360,000,000 subsidized lunches per year for $2.2 billion. So it’s costing us somewhere around $6 in subsidy to feed a lunch to a child that the MIGHT otherwise go hungry. $6 for a child lunch in an institutional setting seems a little high, too. I can get a full adult buffet lunch for $8 to $12 at any number of adequate local eateries.
After a very brief look at it my conclusion is that more public funds are going into the school lunch program than my simple analysis seems to justify, but not by a huge margin. It’s impossible to completely eliminate waste while still getting anything done, but there ought to be a way to squeeze some money out of the program without inducing significant amounts of additional child malnutrition.
School lunches at $2billion? Below shows the state reimburses $2.70 for each. That means either we cover either 820 million lunches (approx 4 million kids per year) or there is HUGE overhead in that program. Gee, wonder which it is…
http://www.cde.ca.gov/ls/nu/rs/rates1011.asp
I vote overhead. Multiply that overhead on countless programs throughout government and you begin to see the problem.
One of the programs Brown did target is community redevelopment. There is a ton of waste and fraud sloshing around with virtually zero oversight. Here is an example.
http://latimesblogs.latimes.com/lanow/2011/08/montebello-bank-account.html
I mean, why are they giving a million dollars to some guy to build a restaurant?
Another example is this case.
http://www.courthousenews.com/2011/04/25/36066.htm
Pasternack discovered the fraud in the development in a divorce case and brought it to the attention of the family law judge. Before it could be referred out, the case was dismissed, the wife fled back to India and the husband is not prosecuted.
The mere fact the California Redevelopment Association does not let you or me onto all of their website is enough to say shut them down.
This is their page for RFPs.
http://www.calredevelop.org/External/WCPages/WCPortal/PortalLogin.aspx?ReturnURL=%2fjobs%2fView_RFPs-RFQs.aspx
How much waste and fraud do you think travels through that site?
How about making prop 13 values not pass on if a house is inherited. I could see letting the current owner keep the value but when it passes it goes. In addition if you buy a new house you get the then current value for tax purposes.
Alternativly if the concern is for the elderly freeze taxes at 65.
Props 60&90 already do that.
The Blue team up in Sacramento seems to be getting a little pissy.
http://www.sfgate.com/cgi-bin/blogs/nov05election/detail?entry_id=94646#ixzz1UCAD0aEJ
Guess that’s why Sacramento doesn’t want San Diego County to split off…all those Electoral votes gets us Fed cash.
If you think I am wrong, then you must believe there is a feasible way to grow out of this mess. There isn’t.
They’ll default when the time comes.
In three years they’ve cut 17% off the budget, which is a start, but the first is the easiest part.
When it gets down to kids eating or defaulting on faceless bond investors, there will be some legal mumbo-jumbo, and a pre-structured settlement to make everyone happy.
Look at Wells Fargo today, getting away with settling with investors for $590 million – this from the plantiff’s attorney:
“We estimated actual losses to be proven at trial to be around $1.5bn -2bn. So we think a 25-40% out of court recovery like this is very successful,” said attorney David Kessler of Kessler Topaz.
Settling is the new lottery – with a win-win for everyone?
ANY politician monkeying with residential Prop 13 may as well chain their wrists to a cross tie on the commuter rail tracks.
Their political career will be dead anyway.
Keep dreaming.
p.s.: Nobody cares what YOU think.
Prop 13 has allowed the property tax revenue to remain constant during downturns such as this one. Revenues from property taxes have fell only a few percent this time around while values have dropped probably 35%. Could you imagine the nightmare in California if tax revenues had dropped 35% along with property values. Can you imagine the shortfalls and budget cuts we would be facing, not to mention the additional administrative fees revaluating everyone’s property (there was enough of that even with Prop 13 in place).
Without Prop 13 property tax rev would still remain constant – they’d just jack up the rate to compensate for the loss in valuations!
Independent California now!
I wish I had saved a link to repost, but a while ago someone added up San Diego County jobs that were funded directly or undirectly by government budgets, such as:
Military personnel
Civilian employees of the military
Employees of government contractors (military or other)
Federal, state, county and local government employees
Public university and college employees
They added up to somewhere between 60-65% of all jobs in the county. And that excluded private businesses like restaurants (and, presumably, realtors) who derive part of their income from servicing the people in the above list.
So you’re saying that we’ll be heavily affected by budget cuts, especially since the administration is looking to target the military hard?
One man’s pork is another man’s bacon.
I don’t know what a cut in military budgets will do to home values. What proportion of our uniformed service members are paid enough to buy homes here?
I’m 7 weeks late to the party, but in 1937, when the government spending was rescinded, it just revealed that the country was still in a recession, and the government spending was just a “high tide”.
When the high tide goes out, you can finally see who was swimming naked.
Same thing now…most of our GDP growth is due to government growth. If you scaled that back, you’ll see that the private sector is still in recession/malaise.