Explaining Southern California's economy

California's budget: Hostage to the rich

California Budget

Rich Pedroncelli/AP

Gov. Jerry Brown discusses the cuts he has already made to help reduce the state's budget deficit from nearly $20 billion last year to a gap of about $9.2 billion as he unveiled his proposed $92.5 billion 2012-13 state budget at a Capitol news conference in Sacramento, Calif., Thursday, Jan. 5, 2012. California faces a smaller budget deficit in the coming fiscal year but will require nearly $5 billion in cuts to public education if voters reject Brown's plan to raise taxes in the fall.(AP Photo/Rich Pedroncelli)

The Los Angeles Times' Anthony York reports on a...disagreement between the Legislative Analyst's Office and California Gov. Jerry Brown. Brown's budget plan, released prematurely last week, calls for tax increases that would generate almost $7 billion in additional revenue each year, bringing the state deficit down to zero in five years — the time frame for the tax hikes.

Not so fast, says the LAO: it will only be $4.8 billion in 2012-13, then $5.5 billion thereafter.

Here's York:

The wide discrepancy is the latest split over numbers between the administration and the Legislative Analyst's Office. Last November, the Legislative Analyst's Office released a revised estimate for the state’s current budget picture. Less than a month later, Brown’s department of finance came back with estimates that were $1.5 billion higher than the Legislative Analyst's Office numbers.

In its analysis Monday, the Legislative Analyst's Office said that predicting just how much Brown’s tax measure would bring in is difficult because it is dependent on income taxes from upper earners. That money varies wildly from year to year.


California's 'structural deficit': What does it mean?

California Gov. Jerry Brown released his 2012 budget plan yesterday. It contains a lot of numbers, but one set of them is especially important: the size of the "structural deficit." The 2011-12 fiscal year is projected to end up $4.1 million the red. If there are no new taxes or cuts to spending in 2012-13, as Brown has proposed, the shortfall is expected to be $5.1 million. That makes the total deficit for 2012-13 $9.2 billion. 

The chart above shows what this looks like over time. 

So what exactly is a structural deficit? Basically, it's the deficit you can't escape. Here's a snappy defintion, from DaveManuel.com:

In a structural deficit, things are so out of balance that a country (or state, or municipality, etc.) will post a deficit regardless of how well the economy is doing. In a strong economy, revenues (tax receipts, etc) rise due to increased economic activity (more jobs, more spending, etc). With a structural deficit, the strength of the economy is irrelevant - a deficit will be posted regardless.. 

How do countries get rid of structural deficits? 

1. Cut spending. 

2. Raise revenues (usually through tax increases). 

Neither of these options are too appealing for politicians, which is why many structural deficits continue to linger. 


Brown budget makes case for California tax increases

Jerry Brown Introduces January California Budget

Justin Sullivan/Getty Images

California Gov. Jerry Brown revealed his 2012 budget today — earlier than his office had planned, due to an error or technical glitch that caused the budget to be posted prematurely on the Department of Finance's website.

The budget doesn't really sugar-coat the challenges that the state faces, although as the L.A. Times points out, the deficit situation has improved greatly:

[The budget] paints a better fiscal picture than just a year ago, when the state faced a $26-billion deficit. Brown's budget anticipates closing the current gap through a combination of spending cuts and the tax increases, which would kick in at year's end, providing $4.4 billion in revenue.

Ah, the tax increases. Brown laid them out back in December, when he published an open letter on the governor's website. I posted on the plan at the time:


The top 10 California and LA business stories of 2011

Uprooted South Pasadena Tree wind storm

Kevin Ferguson/KPCC

10. A MIGHTY WIND IN PASADENA. Little did the hamlet of Pasadena know that on the night of November 30, hurricane-force Santa Ana winds would howl through the "urban forest" and bring down tree after tree after tree. Houses were damaged. Cars were crushed. The total cost of cleanup could hit $5-6 million. Weeks after the disaster, Pasadena is still hauling away the damage.

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Kevork Djansezian/Getty Images

9. THE DODGERS FEUD. Dodgers owner Frank McCourt's contentious divorce and dispute over who really owned the team rapidly degenerated into a battle between McCourt and the commissioner of Major League Baseball, Bud Selig. MLB assumed control of the Dodgers in April, but by late June McCourt put the team into bankruptcy. His countermove ultimately didn't work, and by November he'd given up. A new owner will now have a chance to pay upwards of $1 billion for one of baseball's most famous franchises.

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Lintao Zhang/Getty Images

8. APPLE IS THE BIGGEST COMPANY IN THE WORLD! On August 9, Apple's market cap hit $337 billion, briefly sending it past ExxonMobil as the world's most valuable company. It was quite a comeback for Apple and an at-the-time still-ailing-and-not-yet-dead Steve Jobs. The company had more than fully recovered from near bankruptcy in the late 1990s. Sadly, Jobs wouldn't recover from cancer. But he did get to experience a brief moment of joy at the company he started in a California garage challenging a pillar of the "old" economy.

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California High Speed Rail Authority

7. HIGH-SPEED RAIL COST OVERRUN. A high-speed rail line linking Los Angeles to San Francisco was slated in 2008 to cost $43 billion. Voters responded to that estimate by voting yes on a ballot measure to fund the project. But by 2011, the cost had increased to a whopping $98.5 billion. Would voters still support the project? They might, if they understood that the cost of additional highways and airport runways could cost $170 billion.

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Karen Bleier/AFP/Getty Images

6. AMAZON TAX DEAL. A spat over collecting online sales tax in California put the state and the giant retailer Amazon on a collision course. Amazon was gearing up for a battle at the polls in 2012. But then the entire thing was settled amicably (sort of) with both sides agreeing to kick the can down the road for a year. Maybe in the meantime Congress will act. Or perhaps California's budget woes will clear up... Want to calculate the odds of either of those outcomes?

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Mario Tama/Getty Images

5. BANK OF AMERICA DEATHWATCH. The banking giant saw its stock price decline 60 percent over the course of the year, at one point in December dropping below $5 a share. The big problem? The neverending challenge of fixing Countrywide, the subprime lender that BofA acquired before the financial crisis. Some bloggers actually started a BofA death watch. Why should Californians care? Maybe because of the $200 billion in deposits in SoCal alone.

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AP Photo/Damian Dovarganes

4. FORECLOSURE SETTLEMENT — NOT! The big banks would very much like to settle with the states on the illegal-foreclosures matter. There's $20 billion on the table, and the Obama Administration wants the states to take it and call an end to the agony. But California's Attorney General, Kamala Harris, along with the AGs of several other states, including New York and Nevada, isn't going along. So it could be game-over for the deal.

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3. SOLYNDRA SOLAR SCANDAL. California solar startup Solyndra flamed out in spectacular fashion in August, declaring bankruptcy and disappearing almost immediately $1 billion is private investment and most of a $535 million Department of Energy loan guarantee. The meltdown of a former greentech high-achiever morphed into a political crisis, with critics aggressively questioning the role of the Obama Administration in "picking winners" involved with campaign donors, as well as whether the DOE had any business acting like a venture capitalist.

Jerry Brown Introduces January California Budget

Justin Sullivan/Getty Images

2. THE CALIFORNIA BUDGET BATTLE. You knew California's budget was going to be a mess when, back in June, Jerry Brown became the first governor since 1901 to veto a spending plan, bucking the Democrats who supported it. By July, a new budget was in place. But by the end of the year, it was clear that hoped-for revenues weren't going to materialize, and so "trigger cuts" would kick it. And this wasn't all she wrote. The state's finances look to be deplorable for the remainder of the decade.

Occupy LA - Deadline Night at City Hall

Eric Richardson / blogdowntown

1. OCCUPY LA STAKES A CLAIM. Following in the footsteps of Occupy Wall Street, Occupy LA took up residence in a tent city on the City Hall lawn. There they peacefully protested, right across the street from police headquarters, as the mayor and the City Council tried to figure out what to do. But by the evening of Nov. 29, the game was up. The 99%ers, demonstrating against inequality in America, were sent packing by the authorities. Will their protest continue in 2012?

Yesterday, I blogged about the Top 10 business stories for 2011, on a national and even international scale.

Today, I'm getting closer to home, with the Top 10 California and Los Angeles business stories. I'm sure I left a few out — the AEG downtown football stadium plan, for example — but it was a pretty lively year. The choices were tough.

From the Great Pasadena Wind Storm right through high-speed rail cost overruns, the Amazon tax deal, a foreclosure settlement that wasn't, the Dodgers soap-opera, and of course Occupy LA, business and breaking news consistently intersected in 2011 in the Golden State.

Could 2012 possibly generate more stories? We'll soon find out...


Bad investors v. good investors in the California housing market

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Justin Sullivan/Getty Images

A foreclosure sign sits in front of a home for sale.

This is from AP (via the Washington Post):

A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states.

Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.

The story goes on to point out that less swashbuckling investors in Nevada are now buying foreclosed, abandoned homes, "fixing them up" and selling them.