Explaining Southern California's economy

Why this recovery is different for state and local workers

California Budget

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Gov. Jerry Brown discusses the cuts he has already made to help reduce the state's budget deficit. For the state to get its financial house in order, it will need to cut workers, reversing a hiring trend that has taken place in previous recoveries.

At the New York Times' Economix blog, Ben Polak and Peter K. Schott, both of Yale, have written a "Duh, so that's the problem!" post about what they're calling America's "hidden austerity" program. In case you've been on an extended vacation, "austerity" is shorthand for cutbacks in government spending, versus throwing money at various debt and banking crises. Greece, for example, has been suffering through austerity as a condition of the bailouts it's received from the European financial authorities.

In the U.S., we're theoretically not yet engaged in official austerity. We're in more of an in-between phase, with the stimulus packages of 2009 in the rear-view mirror and the potential for deficit-cutting and tax cuts on the horizon. 

Polak and Schott argue that austerity has already arrived, however, in the form of reductions in workers at the state and local level. Neither has recovered at a pace that resembles previous bounce-backs from recessions. This trend is particularly evident in California, where a state-level hiring freeze has been in effect since last year (there have been some workarounds, but there you have it).

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Alert! California will be broke in a month!

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SACRAMENTO, CA - DECEMBER 08: California state controller John Chiang (D) looks on as California governor-elect Jerry Brown speaks during a briefing on California's state budget on December 8, 2010 in Sacramento, California. With less than one month before being sworn into office, California governor-elect Jerry Brown held a bi-partisan meeting on California's state budget. (Photo by Justin Sullivan/Getty Images) *** Local Caption *** Jerry Brown;John Chiang

Thanks to ZeroHedge for providing the grouchy heads-up on this story from the Sacramento Bee. The state needs to find $3.3 billion and find it fast. Or it will run out of money in March. Here's ZH:

If anyone is tired of the daily European soap opera with surrealistic tragicomic overtones, they can simply shift their gaze to the 8th largest economy in the world: the insolvent state of California, whose controller just told legislators has just over a month worth of cash left. From the Sacramento Bee: "California will run out of cash by early March if the state does not take swift action to find $3.3 billion through payment delays and borrowing, according to a letter state Controller John Chiang sent to state lawmakers today. The announcement is surprising since lawmakers previously believed the state had enough cash to last through the fiscal year that ends in June."

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California budget: If you think this year looks bad, just wait until 2012

California Governor Jerry Brown Unveils State Pension Reform Program

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California Governor Jerry Brown announces his public employee pension reform plan October 27, 2011 at the State Capitol in Sacramento, California. Gov. Brown proposed 12 major reforms for state and local pension systems that he claims would end abuses and reduce taypayer costs by billions of dollars.

It's unclear what sort of unicorns-and-moneybags fairyland that officials in California were living in when they projected a $500-billion surplus in the 2011-12 budget. Against 12-percent unemployment and exposure to the housing crisis that ranks right alongside Nevada and Florida, any surplus at all was political and economic wishful thinking. So now come the trigger cuts — $2 billion of 'em.

Education will bear the brunt of this, if lawmakers can't figure out how to dodge the cuts. Not that education hasn't already been pummeled: according to Education Week, K-12 statewide has endured $18 billion is cuts over the past five years. The University of California and Cal State systems will also take it on the chin. Education Week says that some districts are in better shape than others, based on budget planning. But there are some time bombs out there, such as San Diego Unified.

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It's time to say goodbye to the LA business tax

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Los Angeles Mayor Antonio Villaraigosa.

KPCC's Brian Watt reported recently that LA Mayor Antonio Villaraigosa wants to extend the city's business tax holiday "indefinitely." Which could be interpreted as the mayor saying that he wants to get rid of the business tax altogether — rather than simply extend the holiday for another four years, as some city council members have suggested. (Currently, new businesses are exempted for three years.)

LA is facing a budget deficit, of around $250 million, which sounds like a lot but isn't really that bad, given the dreadful nature of the economy. Meanwhile, the business tax is expected to bring in something like $425-$440 million this fiscal year. That sounds pretty good, but the complaint is that LA's business taxes are so high that they actually cost the city money, in terms of lost revenue from other taxes that would flow from increased business activity.

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