The California housing and finance driven economy is coming to a destructive end. On Monday February 2nd 2009, California’s chief accountant will start delaying payments totaling approximately $4 billion. In this pot of money, the state will be postponing income tax-refunds, college grants, and welfare checks. Now we really see the pickle of this budget mess. This is almost a reverse stimulus. Much of the money is actually coming from postponing income tax-refunds, which I imagine is going to go over well. After a historical housing bubble which still has many in a state of denial that the gig is over, another kick to the shin is that many people may have their income tax checks delayed.

This week on Thursday, a Superior Court ruled that Governor Schwarzenegger has the right to institute furloughs since the state is in a fiscal emergency. This has the potential of impacting 238,000 state workers. These furloughs amount to 2 days off a month, the first and last Friday of the month; this effectively is a 10 percent pay cut for tens of thousands. Again, this is a sign that the California housing market is only half way through a very long and painful correction.

The stimulus package passed by Congress includes a large amount of money allocated to California:

“SACRAMENTO-California stands to get as much as $32 billion from an economic stimulus package approved Wednesday by the House of Representatives.

The preliminary state share of the $819 billion federal package is welcome news for lawmakers struggling to fill a projected $42 billion budget shortfall over the next year-and-a-half. But Gov. Arnold Schwarzenegger cautioned that California should not rely on the federal handout to fix its fiscal crisis.

“There’s a lot of people at the Capitol running around saying, ‘Oh, the federal government and the Obama administration is bailing us out and is helping us,'” Schwarzenegger said Wednesday during an appearance before the Sacramento Press Club. “And I always make it clear that we will not use that money to bail us out because we have to bail ourselves out.”

Yet before you jump with joy thinking this will take care of the entire problem, think again:

“(LA Times) Some of the money would help ease California’s budget crisis, although officials in Sacramento say it would cover only one-quarter of the nearly $42-billion deficit.

A large chunk would go to fund shovel-ready projects, from old-fashioned street resurfacing to energy projects aimed at spurring a “green” economy.”

So what you have is a state that makes up nearly 13% of the nation’s GDP receiving a smaller portion of the stimulus package. You also need to remember that California has the largest population in the nation. California is the 8th largest economy in the world with a GDP of $1.8 trillion. Yet many per capita workers are now struggling, many earning the median national income of $46,000 a year. Our state unemployment rate is skyrocketing:

California’s unemployment rate now stands at 9.3% in December of 2008, a massive jump from the 8.4% in November of 2008. With the massive amount of bad news hitting in January and the poor retail season, we can expect the number to go into the double-digits either in the following or subsequent data release.

California has 1.7 million unemployed with 785,000 of these people being laid off involuntarily. 655,445 people are receiving unemployment insurance that is another draw on the already limited resources of the state and federal government. What is happening is more and more money is going out with less coming in. This is the equivalent of a debtor’s spiral and is another reason why we have the U.S. Treasury and Federal Reserve trying to do their best to devalue the U.S. dollar.

The fact that we just started out with the worst January ever is another sign that market volatility is here to stay with us for another year in 2009. Given the size of California and the penetrating problems of housing, I think most of the nation will be looking very closely to how the 8th largest economy deals with a $42 billion short fall. So far the California government has done absolutely nothing and is virtually a deer in the headlights. They have been stalling the tough decisions and now, they are out of money and February is the end game of it all even though they knew this was coming since May of 2007. In fact, the furloughs were discussed back in September of 2008.

Yet understanding the state problem requires us to look at the state budget:

I think this is where the problem really becomes obvious. First, revenues fell off by over $18 billion in one year! At the same time, expenditures went up by $6 billion. You don’t really need to be an economics professor to see that this is a problem. Keep in mind we are still battling with the 2008-09 fiscal year. We haven’t even touched upon the 2009-10 fiscal year which begins on July 1st. And as you can see from the chart above, 2009-10 will be a much tougher year since the short-fall almost triples. Keep in mind that we are only entering tax season so this is best guess estimates. It could be that once taxes roll in, revenues may fall shorter. Where does the money come from? Let us take a look:

By far, the biggest revenue source is the personal income tax. Remember what is going to happen on Monday? That is right, income-tax refunds are going to be delayed. Don’t you think this may impact how people adjust their withholdings for the following year? Of course! It also doesn’t help that many more people are being unemployed which obviously a person that isn’t working isn’t paying taxes. The perfect storm is brewing. You’ll also see that sales tax is up there yet people aren’t buying so you can expect that number to fall. Corporation tax? Good luck. There is going to be a very painful contraction in California.

Let us look at the GDP figures for the state:

We still haven’t seen the full statewide data for 2008 although we do know that nationwide we contracted in the third and fourth quarter. But given the current situation we can easily figure out that economic activity has fallen drastically here in California. This will only cement the idea that housing will continue to fall and we have yet to face the option ARM wave that has yet to hit in full force and will only highlight the menace of deflation even further.

We have painful choices to make but no one can survive by spending more than they make. At least not in the long run.

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