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California Budget Talks Falter As Treasurer Warns Of Junk Debt

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California Budget Talks Falter as Treasurer Warns of Junk Debt

California Governor Arnold Schwarzenegger and lawmakers failed to resume talks last night over how to solve a $26 billion deficit, even after the state’s Treasurer said crippling penalties from Wall Street loom.

Negotiations between Schwarzenegger and legislative leaders stalled late July 15, mostly over proposed cuts to school funding. That prompted Treasurer Bill Lockyer yesterday to warn that the impasse could leave the state with a junk rating on its debt and unable to borrow money.

“With every passing day, the state’s credit rating moves closer and closer to the junk pile,†Lockyer said in a statement. “If the Governor and Legislature dump us on that pile, they will end indefinitely the state’s financial ability to build schools, highways, levees - all the critical public works we need to rebuild California. If our credit rating sinks to junk status, the state will find the door to the infrastructure bond market locked shut.â€

The deficit in the $100 billion annual budget brought on by the longest recession since the 1930s and a political stalemate over how to fix it has drained California of cash, forced it to pay some bills with IOUs and caused credit assessment companies to cut their ratings on the state’s bonds.

Schwarzenegger told reporters yesterday he thought they might be able to “close the outstanding issues very quickly.†A meeting of the so called “Big 5,†consisting of the Governor and top Democrat and Republican lawmakers from both the Senate and the Assembly, never materialized by day’s end.

School Funding

At issue is the Governor’s proposal to suspend a constitutional amendment that sets a minimum level of funding for schools, which absorb more than 40 percent of the state’s general fund. Democrats want legislation to ensure that schools are repaid all the money that is cut, as well as guarantees spending would be increased when the economy recovers.

“We are close, but until Democrats find a way to fund education without constitutional changes that lock the state into future spending, we will remain stalled,†said Schwarzenegger spokesman Aaron McLear.

Controller John Chiang this month began issuing IOUs to businesses and others set to receive state payments to ensure enough cash remains to meet bond payments and others given high priority under the constitution.

Rating Cuts

Faced with the impasse, Moody’s Investors Service lowered California’s credit rating two steps to Baa1 from A2 on July 14 and said the ranking may be reduced further unless legislators solve the cash crisis quickly. Fitch Ratings on July 6 lowered its evaluation of California’s general obligation bonds by two steps to BBB from A-, placing the debt two grades above so- called high-yield, high-risk junk status.

A California bond maturing in 2037 traded for as little as 89.5 cents on the dollar yesterday to yield 5.76 percent. The difference between a 10-year California bond and top-rated municipal bonds jumped as high as 1.71 percentage points on July 1 and has since slipped to 1.6 percentage points, according to data compiled by Bloomberg.

“Sophisticated buyers will still buy the state’s credit, but they just want to buy it as cheap as possible. I would like to see the bonds trade down in value so we can buy more,†said Ken Naehu, who oversees more than $2 billion as head of fixed income at Bel Air Investment Advisors in Los Angeles. “There’s a lot of market timers that are trying to buy California bonds when they hit the low point in terms of rating-agency press. They want to take advantage of the maximum headline risk.â€

Schwarzenegger and Republicans have ruled out raising taxes, as was done in February in an unsuccessful attempt to eliminate the budget deficit.

Democrats, who control both chambers of the Legislature, have sought to limit cuts to state programs, including those that provide aid to the unemployed and health care to children. Democrats lack the votes to reach the two-thirds majority needed to enact any solution immediately.

I suppose a lot of Californians can just go back in university and ride it out. Oh...

California's state colleges are in peril as fall semester approaches

In just under two months, students will start the new academic year at 23 California State University campuses across the state. They’ll encounter a new university, one that shows the effects of cutting $584 million from the budget.

If they are lucky enough to get the courses they need and want, those classes will be more crowded than ever before. Teachers and support staff will be less available and more stretched and tired, as they educate and advise more students with fewer resources.

The latest money-saving proposal from the chancellor would add two “days off†a month — the equivalent of four weeks of campus closures for the school year, with all services except emergency management and the dormitories shut down.

The students’ 2009-2010 fees, which already have been increased by 10 percent, are likely to go up another 15 percent to 20 percent. Cal State will put 33 percent of that increase into student financial aid. Still, most students will face a real tuition increase of 16 percent to 20 percent this year, even as they’re expected to pick up the slack and teach themselves while their access to professors, libraries and technical support is decreased.

Given California’s budgetary crisis, there is no doubt cuts can and should be made in the CSU system. And structural adjustments will continue to take place in the wake of the changing (and challenging) California economy regardless of what the Legislature and Gov. Arnold Schwarzenegger do.

But the depth of these cuts means we’re facing more than simply modifying Cal State’s approach to education; we’re looking at the potential wholesale abandonment of the master plan, California’s commitment to providing a college education to all its young people who qualify.

Enrollment alone won’t take the hit, but it’s instructive to see the cuts in those terms: Cal State’s loss of $584 million is the equivalent of cutting 95,000 of the system’s 450,000 students. As a department chairman, I spend day and night trying to determine the best places to slash our very modest teaching budget to balance the needs of students with the realities of decreasing resources. What can be sacrificed? What must we protect at all costs? Trust me, the faculty can and already does teach with the bare bones. But what happens when there is no money to replace failing technology or retiring experts in our fields? What happens when this institution’s greatest assets — its people — either drift away, demoralized, or are shunted aside as the system downsizes? All because the state can’t manage its affairs and fulfill its own policies and goals.

So what is the cost of gutting the Cal State system? Fewer nurses. Fewer teachers. Fewer engineers. Fewer poets and artists. Fewer film and electronic arts experts. Fewer MBAs. Fewer people to drive the future of California, including fewer geographers trained in my department. These reductions in educated human capital will hit California at a time when the state needs 2 million additional college graduates by the year 2020.

I have always looked forward to the first day of classes, but not this year. This year, I am going to have a hard time looking students in the face as I have to tell them: “Sorry, you probably won’t graduate this year. We don’t have the money to run all the classes you will need to complete your degree.â€

How do you explain to students that the state has given up on them? Governor, any good one-liners I might use?

What a nightmare. But at least the citizens can hold up in their houses, brandishing 9mm's and sniper rifles without hassle.

Right to arm public housing California's budget crisis

Congress continues to do the gun lobby's lethal bidding, delivering a bipartisan boost in a House committee to a reckless proposal that would allow residents of public housing projects to keep guns in their homes. The measure would endanger projects in major cities that have adopted the common sense precaution of declaring public housing to be no-gun zones.

The gun amendment was perversely attached to a much-needed measure widening access to Section 8 subsidized housing for families hard-pressed in the current recession. Why these families should be forced to face this latest duck-and-cover mischief from the gun lobby is incomprehensible. Nevertheless, the gun amendment was approved 38-31 in the House Financial Services Committee, with 13 Democrats once more opting for the gun lobby's zealotry over the cause of public safety.

It's urgent that the gun amendment be stripped from the final measure, but do not expect bold or principled action from this Congress on this issue. It burdened credit card reform with an irrelevant amendment allowing visitors to carry loaded guns in national parks. President Barack Obama signed it into law, showing no appetite to take on the gun lobby. Similarly, lawmakers poisoned the historic measure to grant the District of Columbia a vote in the House — yielding to a vindictive amendment striking at the city's home-rule power to control gun traffic.

Congress should be ashamed at its retreat from responsible gun controls. Even statehouse politicians — long a pushover for unbridled gun ownership — are showing more spine. Lately they've been rebuffing the gun lobby's lunatic priority: to force colleges to allow students to pack loaded guns in the classroom.

Far from authorizing the addition of guns to all the problems already rampant in public housing, Congress should be dealing with the national embarrassment that individuals barred from airlines on the terrorist watch list are free to shop for firearms. Sen. Frank Lautenberg has a proposal to let the attorney general block this insanity. Security-minded Americans, however, better not count on action by this timorous Congress.

Edited by cashinmattress

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