Budget woes in California, and elsewhere

The numbers are certainly bigger than any other state, but the problems are much the same. Actually, budget shortfalls during the current fiscal year have opened up in 41 states. Everybody is facing the same basic quandary: Lower tax revenues as a result of high unemployment and weak consumer spending. And things might get even worse for FY2011, even if a recovery takes hold. See, there's always a lag between the time an economy improves and the time state tax collections begin to increase. A report by Center on Budget and Policy Priorities also points out that assistance from the federal stimulus will probably run out before states are able to recover. When looking at the midyear budget gaps on a percentage basis, California is far from the worst off. Of course, the state's actual budget gap, at $6.6 billion, is highest in the nation, followed by Illinois at $5 billion.

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Tomato caper

There’s quite a backstory behind the arrest of Frederick Scott Salyer on charges of racketeering, fraud and obstruction of justice. Prosecutors say that Salyer and others were involved in a wide-ranging scheme to bribe the purchasing managers at Frito-Lay, Safeway and B&G Foods (maker of Ortega Mexican foods). The bribes allegedly allowed Saylor, former owner of Monterey-based SK Foods, to sell tainted tomato products at jacked-up prices. From the NYT:

"The scheme, as laid out by federal prosecutors, has two parts. Officials say that Mr. Salyer and others at SK Foods greased the palms of a handful of corporate buyers in exchange for lucrative contracts and confidential information on bids submitted by competitors. This most likely drove up ingredient prices for the big food companies. In addition, prosecutors say that for years, SK Foods shipped its customers millions of pounds of bulk tomato paste and puree that fell short of basic quality standards -- with falsified documentation to mask the problems. Often that meant mold counts so high the sale should have been prohibited under federal law; at other times it involved breaching specifications in the sales contracts, such as acidity levels or the age of the product."

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Why the economy stinks

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, offers a pretty good summary during a speech she's giving today:

"While we are likely now in a period of recovery, it doesn't really feel much like one. All types of businesses are continuing to see weak levels of demand - in other words, they don't expect to see a bounce-back in sales for quite a while yet. This in turn creates excess capacity, which leaves businesses having to decide whether to maintain or shut idle plants and offices. In such an environment, firms are being cautious about new hiring and so unemployment persists at a high level, which in turn restrains spending."

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Auto service departments take hit

Car dealers are already reeling from a horrible sales year (worst since 1970), and now they have a new worry: the drop-off in business from their service departments. When folks don't buy new cars, they don't need dealer service.

And when they hold onto their old cars, there are plenty of cheaper-priced mechanics, often closer to their work or home. That's why service departments could see volume declines of around 20 percent between 2009 and 2013, according to a report released today by J.D. Power and Associates.

Repair work is usually one of a dealer's most profitable businesses, more so than actual car sales, so any extended slowdown is a huge problem for the bottom line. Automakers sold 10.4 million vehicles last year, the lowest number since 1970 (and far below the 16-17 million vehicles sold in each of the last several years). Sales will probably rebound this year, but not by much. From the press release:

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