So What, Exactly, Is California's Budget Situation?

"Proposition 30 win no guarantee of fiscal safety for California"
Los Angeles Times, November 11, 2012

available at http://tinyurl.com/bna272m

One thing that I've been thinking about the past few days is, what, exactly, will California's budget look like, in, say, 2014. California's budget is anything but simple, but people generally discuss the General Fund when they're talking about "the budget."  It's around $91 billion.  The estimated shortfall is $16 billion. Here's an example of an LA Times article that demonstrates the practice of referring to the General Fund as "the budget."

If you ask the California Department of Finance the same question, though, they'll tell you the budget is about $225 billion.

The difference between $91 billion and $225 billion is kind of a lot of money.

"Historical Data / Budget Expenditures"
California Department of Finance,

available at http://tinyurl.com/aog4vk4

The most significant item ignored in California's budget discussion are the federal funds spent by the State.  That number has increased by about $50 billion in the last ten years, to where it now nearly equals the entire General Fund. That's a massive change; between 2004-2008, the Federal Funds were about half of the size of the General Fund.

To be sure, the massive increase in Federal Funds reflects a very unusual economy, including things like unemployment payments when the State's been dealing with 12% unemployment.  But the economic problem is immediate for California; the long term problem is health care.

The Department of Finance's web site is great for throwing light on these kinds of questions. I've pulled up the line item for Health and Human Services, and then the specific line item for Medi-Cal.  The fact that Medi-Cal is a single line item on the spreadsheet must make staffers at DoF laugh on an annual basis -- there's a thousand lines that are minnows, and then there's this whale trying to hide in the middle.

"Comparative Statement of Expenditures"
California Department of Finance, 
available at http://tinyurl.com/b4fd7cf

"Comparative Statement of Expenditures"
(the Medi-Cal Line Item)
California Department of Finance,

available at http://tinyurl.com/b4fd7cf

There are a couple of points to take away from this.  First, California actually cut spending on Medi-Cal in 2012, by about 3%, even when Federal Money is included.  That may not sound like much, but it is unprecedented in recent history.  The "good news" is expected to end in 2013, when spending is anticipated to return to its trend line, and California will spend $56.6 billion on health care.  The General Fund's share of that is expected to be the same (about $15 billion) but $6 billion in Special Funds were expected to show up -- which, they duly have, due to the passage of Proposition 30.

Of course, the idea that there is a State program getting larger is amazing in and of itself, because every other program has been facing budget cuts.

"California to Lose Big if Supreme Court Scraps U.S Health Care Law"

Los Angeles Times, June 20, 2012

available at http://tinyurl.com/akmwp7p

But the interesting number is the one that's not on this spreadsheet - the numbers that are expected for 2014.  While Federal Funds are already a larger part of the Medi-Cal line item than the entire State expenditure, it appears that the Federal Funds are about to increase by approximately $15 billion, due to the Affordable Care Act, also known as "Obamacare" -- an amount equal to the entire "budget" contribution to Medi-Cal, and an amount that's also roughly equal to the shortfall that's caused so much consternation in the last year.

It's impossible to say what consequences of ACA ("Obamacare") funding will be for the General Fund, because facts on the ground are now changing quite fast.  I think it's reasonable to expect a very significant amount will be heading to education, due to the effects of Prop 98 and its progeny.

Michael Montgomery, "California Prisons Are Still Overcrowded"
East Bay Express, November 7, 2012

available at http://tinyurl.com/akhev6b

I think the hope is that the Democratic supermajority, coupled with defeat of staunch labor champions at the ballot box (Michael Allen, you fought the good fight but it's probably time to concede defeat ...), means that, while the actions by the legislature in response are unpredictable, they will at least be different than those taken by the legislature between 1999-2001.

The wild card, though, I think, is the State's prison overcrowding situation.  While the State's realignment (basically, shifting state prison inmates to the county jails) has made some progress towards complying with U.S. District Court Judge Thelton Henderson's order, I don't think there's really room for dispute that the State continues to fail to meet its obligations.

One wonders how much patience Judge Henderson will (or should) have for the State and its claims that it cannot afford to comply completely, if the State undertakes new high-speed rail spending or begins aqueduct construction projects. The functioning of the justice system requires a proper prison system, which is an issue that, one suspects, could engender bipartisan support, even if it is not immediately politically rewarding.

Brooks and Krugman.

David Brooks and Paul Krugman both publish columns in the New York Times on Friday.  I usually read Brooks first, due to habit and nostalgia; Brooks' columns remind me of the Wall Street Journal's editorial page between 1991 and 1997, and while his ideas don't always resonate any more, they're familiar. 

Reading Krugman's column, on the other hand, reminds me of the fourth opera in Der Ring des Nibelungen, Götterdämmerung. Today, his argument is that Obama should "[j]ust say no, and go over the [fiscal] cliff if necessary."

As a negotiating strategy, I can see where Krugman's coming from.  The party with the more stubborn constituency tends to obtain the better results in a negotiation, and Krugman is definitely considered a voice for the Democratic intelligentsia, if not the party as a whole. Thus, his demand for no compromise is likely to be taken seriously, at a minimum, by media observers, if not Republicans.

The problem, though, is that Krugman's argument is that Obama's BATNA is a world where the country will fall off the fiscal cliff, and that the fall won't be that bad.  This is untrue and I think Krugman knows it.  Krugman all but concedes that another recession would be the result, but somehow he (Krugman) thinks the damage that would be inflicted is worth it.

Allowing a recession to occur flies in the face of nearly everything Krugman's been arguing for over the last four years.  He and Brad DeLong have essentially said that the damage to people's lives from the current Lesser Depression could have been avoided by more comprehensive government action. For Krugman to now advocate shutting down the government is not just unbelievable, it's frankly not believable at all.  At best, Krugman's trolling.

Obama, since the earliest days of his presidency, has been willing to reach out and forge compromises. The voters know that (I think), and I think Obama's victory is in part due to his ability to strike deals.  To start pushing the President to abandon that strategy now is a recipe for turning Obama into a lame duck in the first 90 days of his second term (another thing I think Krugman knows).

The Republicans' BATNA is hardly better than Obama's. When the alternatives to a deal are dire for both parties, deals get done, no matter how angry the supporters may be. I wouldn't expect this situation to be any different.

Should we stick fuel cells in our fireplaces?

Sonoma's a bit smoky today. Gianna and I ran into a significant cloud of it on East MacArthur around noon, as we were driving back from school with the girls.  One house had two wood stoves running, and the cloud of particulate made the street look like a bomb had gone off.

Sonenshine, Ron.
"CONCERNS ABOUT POLLUTION"
"Wood-Stove Fad Going Up in Smoke."
San Francisco Chronicle, Jan. 6, 1992.   

Gianna and I engaged in a bit of good natured grousing about self-righteous "back to nature" types and the negative consquences of well-intentioned environmental concerns run amok.  The problems posed by residential wood stoves have been known for some time (at least 1992, judging by the SF Chronicle, which notes that up to 25% of the Bay Area's air pollution is due to these stoves). But they're still installed, twenty years later, causing problems.

However, as we talked about it a bit more, we (well, I) recognized that the people who installed wood stoves were probably making a mistake in the right direction.  One significant environmental problem California faces is the transmission of power, not the generation of it.  One advantage of solar is that it can be installed where's it's needed, reducing if not eliminating transmission costs.  Wood stoves are somewhat similar--the particulate is disconcerting but at least the power's being generated where it's being used.

Halstead, Richard.
"Kent Woodlands resident becomes first in county to power home using fuel cell"
Marin Independent Journal, Feb. 18, 2011.
available at http://www.marinij.com/archivesearch

The problem, though, is that once a "technology" like the wood burning stove gets in place, it's hard to dislodge -- there's a cultural path dependence. Reducing the impact of wood stoves encounters significant political resistance, and the people resisting are quite convinced they're morally right.  And the irony is, they're partially right.  Generating power close to its point of use can be a good idea environmentally and economically.  It doesn't just have to merely be via installing solar (which is not that useful during the wood stove time-of-year), but could, instead, theoretically be accomplished by a home fuel cell. Not many have done this yet -- Bruce Raabe of Kent Woodlands in Marin County is one of the first, as the Marin Independent Journal reported last year.  It's pure speculation on my part, but I wonder whether fuel cell technology would see broader adoption were public policy to more directly encourage it (the programs designed to encourage solar, of course, being quite well known at this point).

So what was the Press Democrat's sale price?

North Bay Business Journal, Nov. 1, 2012
available at http://tinyurl.com/anukn9q

Sonoma Media Investments, LLC, controlled, essentially, by Doug Bosco and Darius Anderson, has purchased the Santa Rosa Press Democrat, The North Bay Business Journal, and the Petaluma Argus-Courier from Halifax Media Group, which had acquired these papers less than a year ago from the New York Times.  These newspapers are a critical source of information for Sonoma County, and their editorial judgment has been generally respected by the community. Puzzlingly, though, the sales price was not disclosed.

Cynthia Gorney, "Battle of the Bay"
in Leaving Readers Behind:
The Age of Corporate Newspapering, p. 355.

I looked into the matter a bit, trying to find out, at least, what the New York Times had paid for the papers in 1985.  The sales price wasn't disclosed then, either.  I did manage to track down some apocryphal information, suggesting the price had been high indeed; Evert Person (misspelled "Everett" in the source), the publisher in 1985, is reported to have said “I got this offer, I just couldn’t believe how high it was, I accepted it.” I don’t doubt there are Sonoma County residents who know how high it was, but none of them are talking, so I decided to consult the numbers.

The New York Times Company

1985 Annual Report, p. 12.

Figuring the New York Times Company is publicly traded, I took a look at their 1985 Annual Report (UC Berkeley allows the public free access to the Historical Annual Reports database on ProQuest).  The report was deliberately vague; it noted that $389 million was spent by the Times in 1985 on acquisitions, specifically to acquire five newspapers and two radio stations.  The report didn’t break the numbers down any further.

Scratching my head a bit, I decided to poke further and see if the purchase price for the other papers acquired by the Times in 1985 was available.  It was—the papers had been owned by a nonprofit, and the sales price was eventually disclosed on their Form 990.  It was $156 million. In 1985 dollars, that was about $1,426 for each paper circulated daily; in 2012 dollars, $4,001 per paper circulated.

Spartanburg Herald-Journal
Jan. 28, 1990, p.10

Did the  New York Times make a similar offer for the Press Democrat in 1985? If so, at $1,426 per daily circulated, the offer Evert Person “couldn’t believe” would have been $107 million (or $299 million in 2012 dollars).

By way of contrast, Halifax Media Group paid $143 million for the Press Democrat and 15 other papers last year, and on a per-unit of circulation price, the Press Democrat would have been worth a mere $18 million in that deal. In effect, the Press Democrat’s value collapsed by over 90% in the intervening 25 years.

"Reflections of a Newsosaur," Mar. 29, 2010
available at http://tinyurl.com/y9xklkw

A 90% collapse in value for the Press Democrat is, disturbingly, consistent with the state of the rest of the newspaper industry.  The Daytona News-Journal, for instance, whose circulation has fallen roughly in line with that of the Press Democrat, was valued at $300 million in 2006; by 2010, its reasonable value was estimated in legal proceedings to be a mere $20 million (a 93% decline in value in the four year period).

The Sonoma Index-Tribune (also owned by Sonoma Media Investments, LLC) has tipped its hand to a degree regarding the purchase price.  Its article noted that the agreement included the Press Democrat’s Rohnert Park printing plant, built for an estimated $30 million in 1986.  A $30 million valuation for the Press Democrat without real estate seems high, but including the facility, it is not wildly unreasonable; a building of the size of the Rohnert Park plant (even if it is 25 years old) certainly seems like it might reasonably be worth $12 million.

Sonoma Index-Tribune, Nov 1, 2012
available at http://tinyurl.com/bjkjhf8

Of course, it is also possible that the value of the Press Democrat was set at zero -- the New York Times has had serious labor problems relating to pensions for several years, and there have been extensive cutbacks at the Press Democrat over the last half-decade.  Perhaps there was also some assumption of debt or other liabilities by Sonoma Media Investments, LLC, or a measure of “seller financing” by Halifax Media Group to make the entire deal go.

However, the main point stands – there has been a complete collapse in the value of the Press Democrat in the last seven years.  However, I think the implications for the community are actually more serious than merely being one of the largest business failures in the County’s living memory. But those are other posts, for other days.

Is Nate Silver a Witch?

Probably. At least, according to "Is Nate Silver a Witch.com?" His last predictions on the 538 Blog appear to have been spot on.

Warm Ups.

Manchester United should be doing better than 0-1 to Braga.