Brown Planning Pay Raises for State Workers

At least that's my take on these comments, as quoted in the U-T article headlined "NOT ALL PROP. 30 TAX HIKE MONEY GOING TO SCHOOLS."

Brown’s proposed $97.7 billion general fund budget assumes no state employee raises beyond those already required in union contracts. But contracts for all but two of the state’s 21 bargaining units are set to expire by July 2, and the Legislature now has a supermajority of labor-friendly Democrats.
At a news conference, Brown said he didn’t budget raises for fear that it could set an expectation for any specified amount.
“Collective bargaining means you got to meet in good faith, listen to the other side, and you go back and forth,” he said. “We have to enter those negotiations with an open mind, though we have to live within our means. So, I don’t want to put too many of my cards on the table.”

The Governor is signaling that he is ready to grant pay raises by these comments.  How could anyone with a shred of common sense think otherwise?  His comments about a specific amount remind me of an old and bad joke about an older profession than politician.  The only question we are debating now is how much; how much will the governor pay back the unions for their support of him.

Meanwhile all those commercials about strict accountability to ensure that Prop 30 cash went to the schools are swept into the dustbin  like so much election day confetti.

Towards the end of the article Brown equates government spending with investing and argues that government is how a free people act together.  He claims that he will spend the increased tax revenue wisely.  Unfortunately, the budgeting process in this state is largely illegitimate.  Big chunks go to education, but the state continues to rank low in educational attainment.  Further, huge amounts of education spending never makes it to the classroom, only 61% in fact.  Higher education spending has the effect of perpetuating a left wing ideology and to stifle dissent.  How is that legitimate?

The state has made the cities and counties its vassals, providing insufficient funding for required programs, loading another $5.3 billion on them, another source of illegitimacy.  Health and Human Services is the second highest category, behind K-12, yet California never participated in the welfare reform that the rest of the nation underwent in the Clinton years.  How is unreformed welfare spending legitimate?

Here is the actual budget summary, note all the hikes in spending:

Greek Default and Leaving the Euro

One of my favorite economists, John H. Cochrane writes in the Grumpy Economist:

Why does everyone equate Greece defaulting on its debt with Greece leaving or being kicked out of the euro? The two steps are completely separate. If Illinois defaults on its bonds, it does not have to leave the dollar zone -- and it would be an obvious disaster for it to do so.

I would agree with him, except that the problem in Greece runs deeper than just a sovereign default. My response from the comments.

But the Greeks seem unwilling to vote for a government that would take the actions needed to stay in the euro zone. If the Greeks default on their euro debt, they will get no new infusion of capital, because they will have broken all trust with their neighbors. Their only way out would be real structural reform. Such reform would include reducing the wages of workers, payments to pensioners and hiving off state businesses. There is no political will to do so. The leftists actually think they can threaten/blackmail the Germans into giving them an endless supply of euros. That's not going to happen. Result, Greece leaves the euro; not because of the debt default, but the refusal to deal with its root causes.

So back to Illinois. What would happen if a state defaulted and did nothing about, continuing deficit spending? Is there a precedent? In the 1840s several states in America defaulted on their debts after investing heavily in canals and railroads. Why can't Jerry Brown learn any history? Arkansas, Florida, Michigan, Mississippi and Louisiana all defaulted on their debts to some extent. But life went on, the states were forced to retrench their spending, and most states passed reform measures that limited debt and gave priority to debt repayment. The difference today, is that states are in debt from high operating expenses. If they were to default, then only a reduction of operating expenses would save them. Even if the federal government were to bail out Illinois or California, such a bailout would be unsustainable without real reform, because the state governments of these two deep blue states have the Greek problem, an overpaid, burdensome state workforce. But a default would force real reform, because these states aren't leaving the dollar zone.

Finding That Cloud in the Silver Lining

Well poor Jerry Brown, rising tax revenues are complicating his plans to raise taxes. Headline from the Mercury News:

Higher tax revenue complicates Brown's tax pitch
California's tax revenue is running well ahead of projections, but the governor's office said Friday that has not simplified the challenge of closing the state's $15.4 billion deficit.

Of course it hasn't, because the Governor wants to raise your taxes, no matter what.

Meanwhile, teachers unions and their allies demonstrate the height of hypocrisy by holding a prayer vigil at a Catholic church?

About 300 teachers and other advocates, organized by the California Teachers Association, staged a religious-themed rally and prayer vigil Monday on the steps of Sacramento's historic Cathedral of the Blessed Sacrament.

This, from a group that opposes both prayer in schools and any form of private school? Oh well, I oppose prayer in public school also, but these people are absurd. They claim they are protesting "for the children."

As Roger Hedgecock pointed out today, if these teacher unionists really cared about the children, they wouldn't oppose vouchers. They would allow school choice, even within the public school system. They wouldn't cling to a seniority system that requires layoffs of the most recently trained teachers. They actually care only about their own power as union officials and the teachers that support the unions care only about their job security and children can go hang.

The public education system is less and less effective. It does nothing to engage parents in the teaching of children and thus fails utterly. It costs more than the equivalent Catholic systems which are similar in size. We need vouchers and choice, because if parents and children were consumers of education, innovation and improvement would follow.

Brainstorming Reducing State Pension Obligations

I have been thinking for some time about legal ways to reduce state pension obligations for current retirees. This is important in California, because it is obvious that this Democrat controlled government won't do anything about the problem until the crisis is so immense as to be impossible to solve. The problem with just unilaterally reducing pension payouts and health care support for retirees is that the pension obligations are a form of contract, at least according to most legal readings I have reviewed. Further, the constitution appears to forbid action which would limit reduce pensions. There are prohibitions against bills of attainder and states may not pass a Law impairing the Obligation of Contracts. Finally, since state's have sovereignty, it is widely believed that they cannot discharge their obligations through bankruptcy. There has been some debate on Volokh on this, but this is my understanding of the consensus today. So it looks like all those pension benefits granted to state employees are a drain on the state's coffers forever, correct? Maybe not.

However, in the debate over Obamacare it became obvious to me that the federal government's power to tax is almost unlimited under the constitution. Ditto for the states. Everyone seems to agree that if the individual mandate had been passed as a tax, Obamacare wouldn't be on its way to the Supreme Court. So that got me to thinking about the state pensions. California could easily place a special tax on state pensions to reduce their burden. Further, the pensioners couldn't escape the tax because the California tax code treats retirement income earned while in the state as taxable by the state of California. State employee retirees could run but they couldn't hide, since the state could collect the tax revenue before they cut the checks.

Alternately, if this method was considered to be a bill of attainder, although I don't see how it differs from any other special taxes in the code, another approach suggests itself. The state could increase the marginal rates, but then exempt all sorts of income from the increase. Earned wages could be exempted for the purpose of job creation. Capital gains could be exempted on the basis of "encouraging investment." Social Security income on the basis of "fairness to the elderly" until all categories except state pensions were exempted from the tax increase. If necessary, the Tea Party should consider putting up such a measure on the ballot when the Governor and his Democrat cohort in the legislature fail to deal with the issue. Even if the measure were struck down by the courts, which I am hard pressed to see what reasoning they would use, it would have the salutary effect of showing that there is a limit on the capriciousness of the tax code.

Looking for input from fellow Tea Partyers or even lefties explaining how my plan might not pass constitutional muster.

Math Meets Political Power

Math is winning, what a surprise. (This is a recurring theme at The Scratching Post.) Today's U-T headline about the California budget dilemma is a case in point:

Democrats Confronted with the Limits of Power

In last November's election, voters removed the requirement for a two-thirds majority to pass California's budget. Democrats control both legislative houses and the governor's mansion, so their job should be easy, right? Just pass the budget for crying out loud. But wait: Democrats can pass a budget without Republican support. But they cannot pass tax increases.

And the Democrats don’t want to use their newfound clout to push through a budget that gets by only on the revenue projected for the coming fiscal year, especially after the expiration of $11 billion in temporary tax increases.

But shouldn't they be able to close the budget gap without tax increases as has been done in other states? Not if you lack the will to confront the unions.

But Brown and his allies have come under pressure from interest groups, especially the public employee unions, to oppose any spending limits or changes to the pension system. This has led to a recurrence of the same kind of partisan frustration that has marked past budget stalemates.

This is why I want the Republicans to prevent any ballot measure for tax increases to even come to a vote, Governor Brown refuses to deal with the main cause of our budget deficit, union pension promises. Don't believe me? Read Adam Summers' excellent summary at Reason. A snippet:

California’s public pension and retiree health and dental care expenditures have quintupled since fiscal year 1998-99, from about $1 billion to $5 billion this year. Retirement spending is expected to triple again - to $15 billion - within the next decade.

Since 1998, California’s state workforce has grown by 31 percent and taxpayers now pay for more than 356,000 state workers.

Since 2008, California has added over 13,000 employees to the state payroll during this recession.

California taxpayers are paying pensions that exceed $100,000 a year to over 12,000 former state and local government workers, including more than 9,000 state and local employees covered by the California Public Employees’ Retirement System (CalPERS) and over 3,000 former school administrators or teachers covered under the California State Teachers’ Retirement System (CalSTRS).

Without getting employees to contribute more to their retirement and medical plans and getting retirees to contribute to their medical, this will bankrupt the state no matter what cuts and tax increases are imposed. Unless Jerry Brown deals with the union pension mess, our state is doomed. The situation is little changed from the Schwarzenegger administration:


We should be contacting our Republican legislators to demand that they keep tax increases off the ballot until the unions negotiate on pension and medical care reform.

Cross posted to sdrostra.com.

Jerry Brown and the State of the Budget

Despite calling his address the State of the State, Jerry Brown's speech was really first, foremost and only about the looming budget deficit. It is unlikely to be papered over one more time, but who knows politicians are such good liars. I missed the speech, but am reading from the transcript.

The governor makes some good points.

My plan to rebuild California requires a vote of the people, and frankly I believe it would be irresponsible for us to exclude the people from this process. They have a right to vote on this plan. This state belongs to all of us, not just those of us in this chamber. Given the unique nature of the crisis and the serious impact our decisions will have on millions of Californians, the voters deserve to be heard.
. . .
But I also understand that redevelopment funds come directly from local property taxes that would otherwise pay for schools and core city and county services such as police and fire protection and care for the most vulnerable people in our society.
. . .
We have the inventors, the dreamers, the entrepreneurs, the venture capitalists and a vast array of physical, intellectual and political assets. We have been called the great exception because for generations Californians have defied the odds and the conventional wisdom and prospered in totally unexpected ways. People keep coming here because of the dream that is still California, and once here, their determination and boundless energy feeds that dream and makes it grow.

I knew it was unlikely that the budget deficit would be closed with spending cuts alone, even though they should be much higher priority than new taxes, or even extensions of temporary taxes now in place. But the governor mentions pensions exactly once in the speech, at the end, with a vague promise of fairness. The pensions are a big cause of the current mess; his failure to address pension reform is irresponsible. Unless this issue is addressed, any plan will not be a long term success. From Adam Summers writing in the OC Register last December:

California's public pension and retiree health and dental care spending has quintupled since fiscal year 1998-99, increasing to $5 billion in 2009. And retirement spending is expected to triple again – to $15 billion – within a decade. The coming wave of baby boomer retirements and steadily increasing health care costs ensure that this burden will continue to grow rapidly. California will be spending more and more for state retirees' benefits, leaving less and less for other budget items such as public safety, education, and transportation.

The state budget passed in October takes state pension benefits back to 1999 levels – for future/new state employees – and the Schwarzenegger administration estimates the tweak will save up to $100 billion over time. That's a minor fix at best.

The state has tried this before. In 1991, California created a second tier of lower benefits in an effort to stem rising public pension costs. Less than a decade later, the Legislature passed, with virtually no opposition, the infamous Senate Bill 400, which not only massively increased state employees' pension benefits but also made those increases retroactive. It would simply be too easy for legislators, with the support and pressure of government workers' unions, to do it again.

The Republicans are right to demand that the Governor not hold a special election on extending the current, temporary, tax increases unless he is willing to put forth serious pension reform. A crisis of this magnitude shouldn't go to waste. I know that sounds facetious, but a failure to address a crisis' root causes while it is in the forefront in the minds of the public, is a failure of leadership.

Cross posted to sdrostra.com

At Least They Didn't Call It a Promise

. . . or the acronym would be too revealing. California is launching $14 billion in bond sales called "revenue anticipation notes," supposedly funded by future revenues from the businesses now fleeing the Golden State. Calling the bonds "California Revenue Anticipation Promises" seems more appropriate. From the LA Times:

The budget deal of Oct. 8 already looks out of date: The state’s chief fiscal analyst on Wednesday estimated that Sacramento will have to plug a total of $25.4 billion in deficits by mid-2012.

That may make some bond investors nervous, but many have gotten used to scary fiscal headlines about California for the last decade. The recurring budget mess hasn’t affected the state’s ability to make interest or principal payments on its debt, and Treasurer Bill Lockyer has repeatedly reminded Wall Street that the state Constitution mandates that bond investors must be paid.

(The same can’t be said for vendors and other creditors who once again this year were stiffed by the state until a budget was in hand, 100 days late.)

I am amazed that credit rating agencies have given the bonds their highest ratings, when the link in the article points out that the budget deal is already coming unraveled.

KT has more here on the last progressive who will hold high office, Jerry Brown.

Furloughs Upheld

In some rare good news for taxpayers, the California Supreme Court ruling that furloughs for state employees are not a violation of the state constitution. (Some workers get every other Friday off as unpaid leave.) This will give Meg Whitman an opportunity to have some tough negotiations with the unions, because she will have a good hand. She can threaten more furloughs if the unions aren't reasonable over salaries. If Jerry Brown is elected, forgot about it.

From the U-T article:

The latest furlough order exempts departments that collect revenue, such as the Franchise Tax Board, and provide public safety protection, including the California Highway Patrol.

It also exempts about 37,000 workers in six unions that recently reached tentative labor agreements with the Schwarzenegger administration. Those unions agreed for their members to contribute more of their salaries toward their pension benefits and to take one day of unpaid personal leave a month, the equivalent of a nearly 5 percent pay cut.

Is there any doubt that those concessions would not have been won without the furloughs?

I have been thinking about how to deal with the pension issue for a while. Couldn't the state negotiate new agreements with current employees to immediately reduce the burden of pensions on the state budget? Of course they could, but what about negotiations over pensions earned in the past for employees who have not yet retired, could a retroactive change be lawful if their union agreed to it?

Took Only One Day

Yesterday I predicted that the new California budget would stink. If rumor is to be believed, I was wrong, it stinks to high heave. W.C. beats me to the scoop with this great synopsis:

Step 1: Assume robust revenue growth.

Step 2: Assume huge federal bailout.

Step 3: Sell off state assets to plug this year's budget, and don't worry about the fact that you'll increase future deficits by having to lease back those same assets.

Proof that no serious budget cutting will be forthcoming comes from the AP article:

Democrats said they were able to minimize cuts to schools, child care, welfare and other social programs, without giving details even to rank-and-file lawmakers who were briefed during conference calls Friday and Saturday.

So we aren't cutting back on any of the big ticket items that load up the budget. It's just a matter of time before the state defaults on some debt. The only good news is that both sides appear to acknowledge that pensions are a big part of the problem.

Both sides claimed victory on one of the biggest sticking points: pension reform.

Democrats expect the Republican governor to complete negotiations within days to win pension concessions from Service Employees International Union Local 1000.

The 95,000-member local represents nine of the 15 state bargaining units that lack a contract. If it agrees to benefit rollbacks, Democrats expect the remaining bargaining units to go along.

Once they do, Democrats could meet Schwarzenegger's demand that they repeal an 11-year-old law that authorized increases in public employee benefits.

The above paragraphs are all speculation, so I don't expect results soon, but at least there is an acknowledgment of the biggest problem.

Decriminalization of Marijuana

By now, you are probably aware that Governor Schwarzenegger signed a bill to decriminalize marijuana possession of less than an ounce. While I support the measure, I have to ask, why in the heck is this a legislative priority a vastly overdue budget and a state struggling with a ballooning pension problem? Some other fabulousness from your state legislature you may have missed, while they were busy not passing a budget. (Much like the Federal congress, and both institutions have heavy Democrat majorities, hmmm.) Some examples from the WSJ:

• A bill that would ban filming cows in New Zealand.
• A long debate over whether to save "serpentine" as the state rock.
• Motorcycle Awareness Month.
• Cuss free week. (I shit you not).
• Finally, and without any sense of irony, April was Financial Aid and Literacy Month.

Rumor is out there that a budget deal has been reached, but it is being kept secret. Easy to predict that it will stink, use gimmicks to close the budget gap and kick long term problems down the road where they will only get worse. I got five bucks on this, any takers?

Fixing the Deficit.... With more debt

Democrats in the California State Assembly have a brilliant plan to avoid spending cuts and tax increases to close California's $19 billion budget deficit, borrow money! Dang, why didn't I think of that? Because when I'm in a hole, I don't keep digging. Here are the basics of this brilliant plan:

Perez's proposal was anchored by a nearly $9 billion loan from the state beverage recycling fund, along with borrowing from the state disability insurance fund. The state would repay the loans over several years, largely using a new tax Perez is proposing on companies that extract oil in California.

Under the plan by Perez, the state would get a one-time revenue of $8.9 billion from Wall Street by securitizing the California Beverage Recycling Fund for 20 years. The fund comes from recycling deposits collected on glass, aluminum and plastic beverage containers.

Securitizing? As in borrowing? So who is going to buy these bonds from a state that is theoretically bankrupt, because tax receipts don't cover ongoing programs? I'm just asking. There is also an increase in the "severance tax" for oil taken out of the ground in California. If oil prices collapse again, can we really count on this revenue?

This is the kind of creative accounting that got Greece to it's current state. Meanwhile the Democrat state Senate is proposing an additional $5 billion in taxes, largely from an extension in the "temporary" increase in vehicle license fees, and delaying corporate tax breaks. Neither Assembly nor Senate Democrats are proposing any reforms to pensions nor any real spending cuts. California is famously known for its Mediterranean climate, I guess in more ways than one.

California and the B Word

And no I don't mean one of those cuss words, recently outlawed in the Golden state, I mean bankruptcy. I have heard the idea of bankruptcy as a way to get our dysfunctional legislature to deal with the gaping deficit the state faces. As best I can tell, a state, unlike a municipality, cannot declare bankruptcy. It can certainly fail to pay its obligations, but it can't seek court protection from creditors and work out a settlement. This is because each of the states have sovereignty under our federalist constitution. I just want to make sure that we don't believe that bankruptcy is an option that will force the state to cut spending, the way it has worked in some municipalities.

The inability to declare bankruptcy doesn't mean the state can't be bankrupt in the popular sense that it has no means to pay its obligations. Steven Greenhut has an invaluable article on the current state of the state's finances that points out that we are probably already there. He points out that the current union dominated legislature is not going to solve this mess on its own.

As I pointed out earlier, maybe some reasonable solutions could be put into place. Best to have them at the ready if fate offers us a chance to push them forward.

I agree with Greenhut that the state is headed for a financial melt down, the debt ratios are unsustainable, and the eventual tightening of monetary policy will have a downward spiral effect. As interest rates rise, the state deficit will increase, then the bond raters will downgrade the state's credit rating. This will lead to increased costs for short term borrowing, eventually to prohibitive rates. The end result will be an obvious de facto bankruptcy. Workers will be furloughed, and state bonds will go unpaid. Beyond that, I can't really predict the future, but I pray to God it happens near November, so we have a chance to dislodge all those legislators who believe they represent the SEIU and not the voters of the state.

Don't Give Up On California

At San Diego's Tea Party rally last Saturday, Dawn really jolted me when she said not to give up on California, adding "Remember, this is the Golden State." It made me realize that I had. I figured the state needed to "hit bottom" like a drunk, before it collectively came to its senses. The spread of a vibrant Tea Party movement within the state attests to the truth of what she said.

But how to fix it? Right now the state legislature is unable to cope with a $21 billion budget deficit. It is dominated by Democrats who would rather outlaw cussing or pass a veto-ready universal health insurance scheme, rather than deal with the reality of this crisis. This deficit is 1% of the state's GDP, making it sound small, but the state is already known for having both a high sales tax and a high income tax, so where the hell is the money going?

California Tax Revenue by type, Source Red County, California

My research has shown that overall spending as a percent of personal income has fluctuated up and down for the last decade. Unfortunately, in the good years the legislature spends every nickle of it, saving nothing for a rainy day.

Looking at this graph, things don't LOOK so bad. But notice that spending ramped up from 1997 to 2007 and that despite a recent downturn, we are still way up. Also, these figures are adjusted for inflation. There is no reason to believe that per capita spending, adjusted for inflation should vary from year to year. Here is the scarier unadjusted picture:



But it still doesn't answer where all that swag is going.

But here is a clue:

Approximately 85% of the state's 235,000 employees (not including higher education employees) are unionized. As the governor noted during his $83 billion budget roll-out, over the past decade pension costs for public employees increased 2,000%. State revenues increased only 24% over the same period. A Schwarzenegger adviser wrote in the San Jose Mercury News in the past few days that, "This year alone, $3 billion was diverted to pension costs from other programs." There are now more than 15,000 government retirees statewide who receive pensions that exceed $100,000 a year, according to the California Foundation for Fiscal Responsibility.

Amazingly, even Willie Brown, seems to agree there is a problem. From the same article:

My hope is that these and other reforms find support in unlikely places. Former Assembly Speaker Willie Brown, a well-known liberal voice, recently wrote this in the San Francisco Chronicle: "The deal used to be that civil servants were paid less than private sector workers in exchange for an understanding that they had job security for life. But we politicians—pushed by our friends in labor—gradually expanded pay and benefits . . . while keeping the job protections and layering on incredibly generous retirement packages. . . . [A]t some point, someone is going to have to get honest about the fact."

So what's to be done? Amazingly I found this Deloitte Research Study that had some good ideas. (I usually have a low opinion of consultants.) Here are a few that I like:

• Curtail abuses of policy primarily in pay raises and sick leave that allow inflation of benefits.
• Raise employee contribution requirements. After all these are generous pensions, state employees should contribute, the way I do for my federal pension.
  
• Develop a plan and stick to it. Stop shifting the burden to future generations.
• Put newly hired workers into lower cost programs.
• Limit cost of living raises to actual inflation.
• Scale back generous early retirement programs.

But the one thing they don't say that would give short term relief is: REDUCE THE NUMBER OF STATE EMPLOYEES. (Sorry for shouting).

By shifting work to contractors, who usually have a defined contribution plan and away from the defined benefits plan the state provides, it will immediately start reducing the burden of future pensions on the state. Further, there are many areas where the state could contract for services and save money, because, as Willie Brown points out, state workers are paid above the private sector average.

These are things that could be done without cutting state "services." Cutting actual programs is a blog for another day. But I just want to point out one quick win. About 25% of the state budget is for "health and human services," much of which is for welfare. From the Fox & Hounds blog:

In 1996, Congress took much-needed action to reform the federal welfare program. The reforms tore down the old federal entitlement program and empowered states to implement genuine welfare-to-work programs. Caseloads across the country, including California’s, began to decline.

But we didn’t go far enough. While other states tightened their time limits and sanctions, California’s program remained lax, with extended time limits and weak sanction policies. The direct consequence of the state’s failure to clean up the system is the disproportionately high welfare rate we face today.

And we’ve tolerated these bloated welfare rolls despite the fact that most CalWORKs recipients aren’t following the rules. The law requires welfare recipients to meet a minimum level of work participation, but only 22 percent of work-eligible welfare recipients in California actually do so. Incredibly, of California recipients required to work in 2007, 64 percent didn’t work at all—not a single hour. This must change.

My link to that article is not an endorsement of Steve Poizner for Governor. I am still sorting out my options.

Summary of my overly long blog post. Fix spending by reforming pensions, reducing the number of state workers and running our welfare system like the rest of the country.

Cuss Free Week in California?

The California legislature, apparently feeling pretty good about themselves and how they are handling California's finances, passed a law to make the first week in March a "Cuss-Free" week.

What the f***?

I have spent a life time trying to unlearn bad habits I picked up from close association with sailors, so I am sympathetic to the idea that we shouldn't swear. But dang, you really think this law is going to help? And aren't you causing enough trouble, passing a Canadian style health care bill for California in the midst of its worst budget crisis ever?

It's enough to make me swear like a sailor.

Fighting Back on the California Budget Mess

I don't normally give financial advice in this column, but California's budget mess provides a perfect opportunity to take personal action to protect your finances in a way that also sends a political message. As you may be aware, the State of California is actually bankrupt, and has started issuing IOUs, except that they are called "registered warrants." Here is a little Q&A from my financial institution:

Q. What is a state-registered warrant? How is it different from other warrants or checks issued by the State of California?

A. State-registered warrants are essentially IOUs that are serialized and distributed to customers in lieu of actual payment. They can be deposited only at financial institutions who agree to receive them. California-registered warrants will be identified with "REGISTERED" printed on the face of the warrant and a special endorsement stamp on the reverse side. Both the issue and the maturity date will appear on the warrant. Registered warrants bear interest and are redeemable by the State Treasury only when the General Fund has sufficient money.

Q. Who is impacted by State of California's registered warrants?

A. At this time, the state has indicated it will issue registered warrants to state business vendors, local governments, for tax refunds and certain others. We understand that state employees will not receive registered warrants at this time. For more specific details about the state's plans, please visit the state treasurer's Web site (www.treasurer.ca.gov) or call the treasurer's registered warrants hotline at 1-888-864-2762

Here is where the personal collides with the political. Note that not all banks are accepting these IOUs. Note also, that tax refunds are among the categories of checks that are no longer being issued by the state. So even though a taxpayer has overpaid the state, he or she won't get a refund. In response, I have significantly changed my state withholding and urge everyone I know to do the same. This way, you won't lose out next year when the state is unable to pay you the refund you are owed. Further, this will starve the state government of cash now, putting more pressure on them to solve this budget crisis. I count on the Republicans to hold steady against new taxes (I could get burned, I know) so this is an opportunity to force spending cuts on our bloated state government. If you are nervous about having to pay a big tax bill next April or you count on that refund, I suggest that you increase you federal withholding by the amount you decreased your state withholding. The Feds will just print enough cash to cover your refund, so no worries there. The other worry is that you might underpay by too much and incur a penalty. Since I don't know your personal tax situation, you'll have to work that one out on your own. I have typically overpaid every year, so my course of action was an easy decision to make.

Hope my readers find this advice helpful. It is an easy quick way to fight back, that might save you some grief down the road.

Try Not Paying THEM

So, my state is broke. The controller, John Chiang, announced today he would stop paying tax refunds on February 1. I guess that's what bankrupt firms do, stop paying their just debts. I just wonder what would happen if I stopped paying taxes.

However, this situation reminds of the advice that every tax professional has ever given me, don't over-pay your taxes just to get a fat refund, your just giving the government an interest free loan. Now I've got another reason to follow that advice. Hopefully, I was smart enough to owe a few bucks this year. More likely, I was not.

Meanwhile, the state failed to run a surplus and save for a rainy day when the revenue was pouring into the treasury. I pray the Republicans keep up the good fight and force steep spending cuts during this crisis. Rahm Emmanuel is reputed to have said, "We can't let a good crisis go to waste..." That can cut both ways.

Of course the usual suspects are crying about how their interest group can't stand to give up any of their government funding. For example:

"Cutting crucial health and human services for the poor while demand for those services skyrockets during this recession is simply the wrong approach to solving the financial crisis," Jeffrey Luther, president of the California Academy of Family Physicians, said in a statement.

Meanwhile in Texas, where the legislature meets for about five months, every other year, (H/T Dean), a state almost as big and with as many difficulties as California, their budget problem is vastly less. They are facing a $9.1 billion shortfall compared to California's $41 billion. The California budget gap is actually bigger than every state's budget except New York's, (H/T San Jose Mercury News.)