As the California economy continues to deteriorate, low- and middle-income Californians are finding it increasingly difficult to make ends meet, according to a report released Monday by the nonpartisan California Budget Project.

They are turning to public programs in growing numbers — at a time when state policymakers have proposed deep cuts to health and human services programs to close the state budget gap. The number of food stamp applications jumped 33 percent between September 2007 and 2008, but rising food prices mean the assistance doesn’t go far enough. The number of families on welfare cash assistance grew by almost 27,000 over the same period.
A Democratic budget proposal would suspend a cost-of-living increase for cash assistance for welfare recipients to save $100 million. A Republican counter proposal would cut the COLA, limit eligibility for assistance and cut cash grants by 10 percent, for a savings of $1 billion.

“We are at a time of extraordinary stress not only on our (state) budget, but on California families,” project director Jean Ross said in a press call reported by the San Jose Business Journal. Not only are more individuals and families applying for assistance, a “very different type of family” historically a couple of steps up the income ladder is asking for help because of rising food costs and rising unemployment, she said. The current budget proposals will put more families at risk, Ross said. “Every dollar that doesn’t go to a family doesn’t go out into the local economy.”

The UCLA Anderson Forecast, an economic think tank, has issues a bleak forecast for the California economy. The only consolation, the Anderson Forecast is often wrong, but if they are right this time there could be some very difficult times ahead – as the forecast says: “There are no bright spots on the horizon”. As reported in the San Francisco Chronicle: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/12/11/BUAP14LM9N.DTL

The recession that has already devastated the Central Valley has started to hurt the Bay Area, causing job losses that will continue through 2009 when the economy should begin a slow and weak recovery, according to a bleak forecast issued today.

“There is no suggestion in the data that we are near that bottom,” was the somber message of the UCLA Anderson Forecast, a quarterly look at the state economy conducted by the university’s business school.

It was with some humility that UCLA economists issued this report, predicting high unemployment through 2010 as the state gradually recovers from the housing bubble. In recent quarterly forecasts they had suggested the state might dodge the recession. But forecast Director Edward Leamer said the financial crisis that erupted in September and October had “unleashed a tidal wave of fear” that caused spending and investment to collapse, confounding all the forecast’s expectations.

“When you do forecasting you look at historical trends and try to project how they might play out,” Leamer said. “But nothing such as this has ever happened. Everybody is relying on hunches.” Now the forecast projects that California will continue in recession until the third quarter of 2009 when economic growth is expected to slowly resume and pick up steam throughout 2010.

The forecast projects that the statewide unemployment rate, currently 8.2 percent, could approach 9 percent next year and stay near that level for some time. Even after output and sales begin to recover late in 2009, the forecast does not anticipate the job market to rebound quickly. Unfortunately, 2009 will be a year of job losses and in 2010 payrolls will be flat,” said UCLA Anderson economist Jerry Nickelsburg.

As Nickelsburg explained, employers now use temporary and contract labor to handle the uptick in sales that signals the end of a recession. This has given rise to what is called a jobless recovery and California should expect that pattern with this downturn.

Nickelsburg said the recession has struck different parts of the state with varying severity. “The inland areas have been hardest hit by the housing downturn and are being hardest hit by the pullback of the retail and the wholesale sectors,” he said. “Here you’re talking about areas of the East Bay and the Central Valley.”

The trade, tech and tourism economies of Los Angeles, Silicon Valley and San Francisco have been less affected so far but will be dragged down by what is now recognized as a global recession. “Imports flowing through U.S. ports will continue to decline, and recessions in Europe and Japan mean the export demand for California manufacturing will be muted,” the forecast says.

Tourism, so important to San Francisco, is also being undercut by the global recession. “Foreign tourism to California will diminish in the 4th quarter and is not expected to come back before next summer,” says the forecast, predicting job losses in the hospitality sector “to continue into 2010.”

Amylin Pharmaceuticals will lay off 340 employees in San Diego, a decision expected to save the company more than $100 million. fter the job reduction, Amylin will have 1,800 employees, about half of which will be in San Diego.   Amylin says its priorities are to increase sales of Byetta and Symlin — its product for Type 1 diabetes.

Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds. According to a report in the Los Angeles Times, the giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California’s deepening financial misery. In Sacramento, officials said they were concerned that Goldman’s strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers. While it is not clear whether this is technically illegal, it is what gamblers call, “playing both ends against the middle” and California has been highly sensitive to the possibility of any major corporation gaming the system ever since Enron ran off with the entire State treasury in 2001. The full article can be read at this link.

Sun Microsystems of Santa Clara has announced plans to shed as many as 6,000 workers in the hopes of returning the company to profitability. The software and server maker has struggled to maintain sales of its servers, which has hurt its stock price and undercut plans of a larger comeback. According to a report in the San Francisco Chronicle, the company’s plan to jettison between 5,000 and 6,000 employees represents a reduction of between 15 and 18 percent of Sun’s global workforce, which should reduce costs by $700- to $800 million annually. Sun will take a one-time charge of between $500- and $600 million as part of the layoffs and restructuring.

In light of the shifting economic landscape, Sun said, the company is realigning its operations to put more emphasis on open source computing. Toward that end, Sun is reconfiguring its software business into three groups: applications platform software, systems platforms and cloud computing and developer platforms. “Today, we have taken decisive actions to align Sun’s business with global economic realities and accelerate our delivery of key open source platform innovations – from MySQL to Sun’s latest Open Storage offerings,” said Jonathan Schwartz, Sun Microsystems’ chief executive. Schwartz said in interviews that the credit crunch has delivered a blow to Sun’s business because customers are unable to secure loans for Sun’s premium servers. In addition, a quarter of Sun’s customers come from the financial services sector, which is reeling from the meltdown on Wall Street. Sun’s stock price has plummeted to a dangerous low, reflecting a dour outlook by investors for the company. Sun shares were trading at $4.11 at mid-day, putting the market value of the company at about $3 billion, a little less than what Sun has in cash on hand. The stock is well off its 52-week high of $21.55 a share and its historic high in 2000 of more than $250 at the height of the dot-com boom.

California may be the next domino to fall in the global financial meltdown, and it has gotten surprisingly little attention. Because of the credit crises, the State my had difficulty arranging financing for the bond sales it uses to generate cash flow to run the government. Governor Schwarzenegger has written a letter to the Secretary of the Treasury, Henry Paulson, advising him that California may need a $7 billion emergency rescue loan from the Federal Government. State Treasurer Bill Lockyer warned that the State’s cash revenues will dissipate completely by the end of the month, and the state’s 5,000 cities, counties, and school districts will face job layoffs and payments for law enforcement agencies, teachers, nursing homes and an array of other services and government entities could soon be suspended.  As reported in Financial Times:

California’s economy, which would be the eighth biggest in the world if the state was a separate country, is teetering on the brink of a financial crisis intensified by the credit crunch. California is weeks away from running out of money. In a letter to Hank Paulson, the US Treasury secretary, Arnold Schwarzenegger, California’s governor, last week admitted an immediate $7bn was needed to pay for essential public services, such as police and fire-fighters.

California would normally generate interim funding by issuing “revenue anticipation notes” in the short term credit markets to tide it over until tax revenues arrive later in its financial year. But the door to the credit markets is firmly closed.   Other states are also suffering from poor economic conditions and declining tax revenues.

Florida, Nevada, Massachusetts and Ohio have dipped into their reserves  to maintain spending, according to Robert Kurtter, managing director of Moody’s US public finance group. But he said California’s situation was unique as it often relied on the capital markets to maintain spending commitments.  “When you have that dependency year-in-year-out you are going to get caught out when the markets are disrupted,” he said. “And that’s exactly what happened.”

Unlike most other states, California does not have a reserve fund and because it depends heavily on capital gains tax and stock option realisations, its revenues can be volatile. The looming cash flow crunch has caused considerable alarm.  “We are two weeks or so away from not being able to pay teachers and fire-fighters,” said Ross DeVol, director of regional economics at the Milken Institute, a Los Angeles-based think-tank.

Passage of the $700bn bail-out bill last week may not have solved the state’s immediate problems. “If we could get through the next two or three weeks without another financial institution being taken over that might restore confidence in counter-parties. But I don’t think the bill will free up the credit markets in the near term.”

Bill Lockyer, California’s treasurer, said immediate cash needs could be met with as little as $3bn.  But to end its reliance on the markets, California must first become better at balancing its budget, said Mr Kurtter. “Typically, when entities get into trouble it begins with cash flow. And when you are chronically running budget deficits, your cash is going to dry up.”

The New York Times has published a long report covering the housing bust in Merced, California entitled: In the Central Valley, the Ruins of the Housing Bust. They noted that while their is plenty of blame to go around, the situation is pretty desperate:

….hardly anyone in Merced planned very far ahead. Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth.

Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.

Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation.

And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed — because who was telling them differently? — that the good times would be endless.

“Owning a home is the American dream,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their dream.” The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.

How long will the economy have to pay the price for that illusion? The experience of Merced, which rose higher and fell faster than nearly anywhere else, suggests that recovery from the national real estate debacle will be painful and protracted.

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home. And so most people do not: three out of four existing-home sales in Merced County are now foreclosures, the highest percentage in the state…

Remember the shipping holiday seasons in 2004/2005? So many imported goods shipments from Asia descended on California Ports that one observer at the Port of Long Beach said “it looks like the invasion of Normandy”. How things have changed, according to a variety of industry reports it appears that port traffic, and also congestion, are way down at California Ports. The reasons include a slowing economy and sinking dollar, more productivity at the Ports and apparently a loss of business to East Coast Ports. As reported in Supply Chain Digest there seems to be serious cause for concern:

In 2005, severe capacity constraints caused many importers to shift volumes from Long Beach/LA and other West coast ports in favor of places like Houston and a variety of East coast ports to gain more consistency in transit times. Now, slowing import growth combined with productivity improvements means West coast congestion issues are long gone – but by most reports, container volumes continue to move eastward for a new set of reasons.

Larry Gross, President of Gross Transportation Consulting, said recently that significant volumes of imports that previously came into the United States through West coast ports and then moved East through rail/intermodal are now coming into the U.S. via the East coast ports. “If you look at region-to-region intermodal flows, you will see that there are certain region-to-region flows that have dramatically dropped,” Gross recently said, as the containers come directly into East coast ports.

Similarly, according to a report last November by the American Association of Port Authorities, the West Coast’s share of Asian imports fell to 58 percent in 2005 from 86 percent in 1999, while the Panama Canal’s share climbed to 40 percent from 11 percent – a stunning shift in volumes. Why? Two primary factors:

* Rising fees that impact total delivered cost comparisons versus east coast ports
* Continued capacity constraints on the rail side to move containers inland

Traditionally, it has been cheaper to bring containers into west coast ports, and move them via rail to distribution centers in the central and eastern regions of the US, where they are distributed to the majority of the US population that lives east of the Mississippi.

But seemingly never-ending proposals for new container fees in California to fund infrastructure improvements and environmental impact mitigation are causing real concern for importers. For example, carriers that deliver cargo to the ports of Long Beach and Los Angeles are facing a combination of new fees that could amount to as much as $100 per fully loaded TEU.

“The cost of these fees is more than we pay to load or unload a container at the San Pedro (Los Angles) ports,” Edward DeNike, president of SSA Containers, recently said during a presentation at the Trans-Pacific Maritime Conference. “This is Southern California and we know that Northern California will follow and the Pacific Northwest won’t be far behind.” He said that his company recently lost handling business of 100,000 containers a year from one customer that shifted import volumes from Seattle to the East Coast.

As an example of the mounting fees, beginning June 1, 2008, a new $35 charge will be placed on every loaded 20-foot equivalent cargo container entering or leaving the Long Beach or LA ports by truck. When the new fees where approved, Long Beach Mayor Bob Foster commented that the new tariffs were “an important milestone for our community. It puts the costs for cleaner air where it belongs — on the prices of goods sold.” Well, that’s the way to attract more port business. As a result of these new fees, which East coast ports haven’t matched, West coast ports become increasing less cost competitive for containers that will ultimately move eastward.

Rail Capacity also an Issue. While West coast port capacity and throughput has definitely not been an issue of late, the rail lines leaving the West coast have not been able to expand their capacities at the same rates. As a result, port efficiency gains have not always results in total transit cycle time improvements. In Southern California, the challenge is getting long-haul freight out of a vast urban area. In the Northwest and Western Canada, the hurdle is dealing with the need to build more tracks and ensure reliable service through regions of heavy weather.

Planned improvements in the Panama Canal to increase throughput and the size of ships that can be handled may accelerate this trend. US West coast ports are being threatened by other change as well – the expansion of Canada’s West coast Prince Rupert port, and plans by Asian interests to invest in ports in Mexico that would move goods by rail to the rest of the U.S., bypassing West Coast urban traffic, are also getting increased attention from importers.

VentureBeat is reporting that Comerica Bank is freezing the money market accounts of venture-backed companies. They could not get Comerica to deny this and instead quoted a bank spokesperson as saying ““At Comerica, we are working with customers on a case-by-case basis to assist them with their liquidity needs.”. The problem can apparently be traced to the auction-rate note market that has been facing a serious disruption. “Those notes make up a $330 billion market that recently came to a virtual standstill. They represent debt from city governments and other tax-exempt organizations, and the rates are reset at auctions every week” according to the New York Times, and VentureBeat noted that in mid-February, the demand for those notes “completely dried up”. They believe this is one of the first examples of the subprime burst directly affecting venture-backed start-ups.

Our famously optimistic Governor thinks we are being too negative about the economy, and that everything will be fine. As reported in the San Francisco Chronicle:

At a time when Sacramento is struggling to balance its checkbook, Gov. Arnold Schwarzenegger gave a robust assessment of the state’s economic strength Thursday and claimed the media is overstating the depth of the national slowdown.

“I don’t like the coverage that I see, because it’s a little bit too negative,” the celebrity-governor said in a speech to a civic group, Town Hall Los Angeles. “The reality of it is, it’s not that bad,” Schwarzenegger said. State finances “did go down with the economy, but we are going to be OK in California.”

Schwarzenegger’s remarks echoed in part an assessment of the national economy by President Bush, who expressed concern Thursday about slowing growth but predicted the nation is not bound for recession. “I believe that our economy has got the fundamentals in place for us to … grow and continue growing, more robustly hopefully than we’re growing now,” Bush said in Washington.

Faced with a troubled housing market and the largest projected budget gap in the nation, Schwarzenegger has called for across-the-board cuts to most state programs and said Thursday his administration “should go after” so-called tax loopholes. There are “tax loopholes out there that we can close that will give us additional money for our budget, so we don’t have to make just cuts,” the governor told reporters after his speech, without committing to specific steps.

The governor argued that the state is better positioned than many others to rebound, because of the diversity of California’s economy, which includes the entertainment capital in Los Angeles and high-tech powerhouses in the Silicon Valley. State income is higher than at this time last year, he said, but falling below projections for growth. But the state’s financial condition is nothing like 2003, he argued, when he was elected in a historic recall election. “We have turned things around,” he argued.

The recent writer’s strike cost the Los Angeles economy an estimated $2.5 billion, according to Jack Kyser, economist for the Los Angeles County Economic Development Corporation. As reported in the Hollywood Reporter:

The ricochet effect from the Hollywood writers strike might be more far-reaching and long-lasting than first thought. So says an influential Los Angeles economist in his annual “Economic Forecast Report” for Los Angeles County and its surrounding areas.

The work stoppage that started November 5 and was settled early this month already has cost the town an estimated $2.5 billion, according to Jack Kyser, the chief economist for the Los Angeles County Economic Development Corp. The figure includes lost wages from TV shows that were canceled and films that were put on hold as well as a plethora of support services, ranging from limo drivers to florists. Kyser suggested that the cancellation of the Golden Globes resulted in a $60 million shortfall for the community.

As reported in Los Angeles Times:

California’s jobless rate jumped to 6.1% in December, up from 4.8% a year earlier, prompting Gov. Arnold Schwarzenegger to move to expedite public works projects in an effort to stimulate the economy. The surge in unemployment, up from 5.6% in November, was the latest sign of the toll of the housing slump, the sub-prime mortgage debacle and production shutdowns during the Hollywood writers strike.

The job figures released Friday by the state Employment Development Department also suggested that the malaise had spread to the retail sector, in which employers shed 2,200 positions in December. That loss in a month when merchants typically post gains brought the total decline in retail jobs for the quarter to 12,200. Some economists said the report was another harbinger of recession; others thought the figures were likely to improve somewhat when more data were available. Most agreed that the state’s budget problems had just begun.

“We’re headed for probably a sharper slowdown than any of us expected two months ago,” said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, adding that it could tilt into a “mild recession.” “That’s going to put a lot of pressure on state and local government budgets,” he said.

Schwarzenegger announced his response to the weakening outlook about the same time the job figures were released, saying he wanted to spur the economy and “keep more people working.” The governor held an emergency Cabinet meeting Thursday, when he told agency and department heads to work to speed the release of $29 billion in 2006 bond fund money for road and school construction and levee repairs.

“The people of California are feeling the hit of the sub-prime mortgage crisis and housing slump,” he said in a statement. “While other sectors of our economy remain strong — creating more than 15,000 new jobs last month — it’s clear that California and the rest of the nation will have to weather this disruption for a while.”

More cheery news from the real estate sector. Housing foreclosures in California are up a stunning 400 percent from the same period a year ago. As reported in the San Francisco Chronicle:

Foreclosures and default notices skyrocketed to record peaks in California and the Bay Area in the fourth quarter of 2007, according to a report released Tuesday. The information was a fresh reminder that the slumping real estate market is continuing to have a serious impact on homeowners, particularly those with risky subprime mortgages.

Lenders repossessed 31,676 residences in California in the October-November-December period, according to DataQuick Information Systems, a La Jolla research firm. That was a dramatic 421.2 percent increase from 6,078 in the year-ago quarter. In the Bay Area, foreclosures rose an equally stunning 482.5 percent to 4,573 in the fourth quarter, compared with 785 a year ago. Contra Costa County, with 1,558 foreclosures, up 533.3 percent from a year ago, had the most, followed by Alameda County with 1,026 (a 514.4 percent increase) and Solano County with 704 (up 528.6 percent).

“Foreclosure activity is closely tied to a decline in home values,” DataQuick President Marshall Prentice said in a statement. “With today’s depreciation, an increasing number of homeowners find themselves owing more on a property than its market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move.” It was the most foreclosures since DataQuick began tracking them in 1988 and more than double the previous peak of 15,418 foreclosures in the third quarter of 1996. The fewest foreclosures recorded were in the second quarter of 2005, when 637 homes were repossessed.

Mortgage default notices, sent by lenders when homeowners are several months behind on payments, also hit record highs. Default notices are the first step of the foreclosure process. Statewide, lenders sent 81,550 default notices, up 114.6 percent from 37,994 in the fourth quarter of 2006. It was up 12.4 percent from 72,571 in the third quarter of 2007. It was the most defaults since DataQuick began tracking them in 1992.

As reported in the San Francisco Chronicle:

The California Employee Confidence Index dropped 2.5 points to 50.3 in December, the lowest level seen in the history of the survey, according to a report released Friday. The latest report, conducted by Harris Interactive on behalf of Spherion Corp., indicates that California workers are becoming increasingly less confident in the job market, economy and in their personal employment situation. Results from the California Employment Report include:

• Sixty-three percent of workers believe the economy is getting weaker, an increase of nine percentage points from November.

• Thirty-five percent of employees are likely to look for new jobs, up seven percentage points from the previous month.

• Forty-seven percent of California workers believe there to be fewer jobs available, a 10 percentage point increase since November.

The bad news in the California real estate industry- at least for sellers, has been relentless. The latest report from DataQuick- a real estate research firm, shows that the medial home price in California is now $402,000 last month, down 14.8 percent from $472,000 in the year-ago period, and home sales in the state have plummeted more than 40 percent from a year ago. As reported by AP, “The state has seen sales decline year-over-year for 27 straight months as the once-booming housing market tanked and a credit crisis forced mortgage lenders to scale back so-called jumbo mortgages that exceed $417,000. That’s helped skew the median home price downward because fewer jumbo loans have translated into fewer high-end homes being sold. The percentage of homes purchased with jumbo loans last month fell nearly 70 percent from December 2006″.

The situation continues to look bleak in the housing industry throughout California, but the Bay Area, with its high home prices faces special challenges. As reported in the San Francisco Chronicle:

Bay Area home sales limped along at a decades-low pace in October, as buyers continued to find few mortgage options. A total of 5,486 new and existing houses and condos changed hands last month, down 35.7 percent from October 2006 and the lowest sales count since at least 1988 Sales of existing, single-family homes in the nine counties that touch the bay slid 41.3 percent, from 5,761 last year to 3,384 in October, the firm reported Thursday. Although it was the 33rd month in a row of year-to-year sales declines, the market has been slammed in recent months by a tightening in the mortgage market, which is making home loans harder to come by and more expensive.

Of particular concern in the high-priced Bay Area housing market is that the number of jumbo loans, or those over $417,000, has slowed to a trickle. This summer, after higher defaults in the subprime sector – where mortgages were given to people with iffy credit – investors stopped buying jumbo mortgages, leading buyers to walk away from deals or avoid the market altogether. “We don’t have liquidity in the marketplace, and that’s creating a drop in market value because people can’t close on a purchase,” said San Francisco mortgage broker Leon Huntting.

California’s budget situation has deteriorated since the summer and the State is now facing a massive $10 billion revenue shortfall, according to state’s legislative analyst Elizabeth Hill. Her report, made to the legislature said the current fiscal year budget situation had worsened by $6 billion since its passage in August, wiping out a hoped-for $4.1 billion reserve and leaving a $1.9 billion deficit. Turmoil in housing markets and the slowing economy that caused a drop in property taxes, was the reason for the shortfall, but the report also noted that forecasted revenues from Indian casino compacts were over optimistic and would be delayed.

When Governor Schwarzenegger signed the state’s current spending plan in August, he called it “a balanced budget”. Even before then, however, the slumping housing and credit markets had begun cutting into state tax revenue and threatening to make next year’s budget even worse. Economists had warned that thedecline in new home sales and construction, layoffs and bankruptcies in the mortgage-lending industry, and a volatile stock market were erasing revenue that lawmakers thought would materialize to cover California’s $145 billion budget.

“Knowing the challenges that we face, throughout the fall, my administration has been examining a variety of options to close next year’s budget gap,” Governor Schwarzenegger said in a statement. ” I have not made any final decisions yet, but it’s clear that the decisions that will be involved will be tough.”

This does not bode well for either California or the administration of Arnold Schwarzenegger. Whenever an executive- in the government or private sector, makes “across the board cuts” it is a pretty good indication that they don’t have a handle on the situation. It is also likely that this will table efforts to provide health care for the uninsured, and will probably delay much needed water projects. As the San Francisco Chronicle reported:

The meltdown in the housing market and slowing California economy are likely to create a shortfall in the state budget next year of as much as $11 billion, according to estimates made Tuesday. In response, Gov. Arnold Schwarzenegger has asked department heads to stop spending what they can today and prepare for bigger cuts next year, according to legislative sources. Schwarzenegger won re-election in 2006 in part because of the perception that he had restored order to the state’s chronic spending problems. But the deepening slump in the real estate market, combined with risky assumptions from this year’s $145 billion spending plan, have resulted in a return of the big imbalance between what the state takes in and what it spends. The governor and Legislature will face yet another difficult budget in 2008 that will require either deep spending cuts across the board or perhaps consideration of new taxes – something the Republican governor has resisted in the past…

The current budget, adopted in August after a two-month impasse, was considered by many a victory for conservatives because of its austerity. The plan provided a record reserve of $4 billion and paid off $2.5 billion in bond debt early, while providing for all major services. But some of the plan’s assumptions have not been realized – such as $300 million in income from the expansion of Indian casinos and the $1 billion sale of the state’s EdFund, an agency that services student loans. There have also been unanticipated costs, such as health care and other expenses at state prisons ordered by the federal court. Meanwhile, collection of taxes from the state’s three major sources of income – personal income tax, sales taxes and corporate taxes – have been sliding downward since spring.

The state ended the 2006-2007 fiscal year more than $800 million below forecasts and started the first quarter of the 2007-2008 fiscal year another $770 million short. Administration officials said they are not ready to comment on how big the deficit will be next year except that it will be far higher than the $6.1 billion estimated in August. The meltdown in the housing market and slowing California economy are likely to create a shortfall in the state budget next year of as much as $11 billion, according to estimates made Tuesday. Administration officials said they are not ready to comment on how big the deficit will be next year except that it will be far higher than the $6.1 billion estimated in August.

Some experts, like Stephen Levy, senior economist for the Center for Continuing Study of the California Economy, a nonpartisan research group based in Palo Alto, said it could be as much as $11 billion. “The order that was restored was temporary,” said Levy, noting that the state was saved from similar troubles two years ago when billions of unanticipated tax revenue arrived as a result of capital gains taxes imposed on big tech stock holders who sold out. Insiders at Google Inc., for instance, sold a total of $3.7 billion worth of Google stock in 2006 and $4.3 billion worth in 2005. “We went through the reserves that were built up in the Google years,” Levy said. “And now with the housing market, we have all major tax forecasts going lower.”

The California Employment Development Department reported that the State added 9,300 payroll jobs last month, but over a million people are now looking for work- the highest number in many years. The new jobs were mostly in the information sector which added 7,900, while the hard hit construction sector lost another 5,000 jobs. The state’s unemployment rate stood at 5.6 percent in September, up from 5.5 percent in the previous month and 4.8 percent in September 2006.

The San Francisco Chronicle attributed this to lenders backing off from “jumbo loans” – those over $417,000, but there are several other factors:

The median price for resale homes was almost steady at $670,000, a scant 0.4 percent more than $667,500 last September. The median price declined in five counties – Alameda, Marin, Napa, Solano and Sonoma. The Bay Area median price has been propped up by a tilt in the mixture of sales – more high-end homes have changed hands, boosting the median. But with the credit crunch making it harder and more expensive to get a larger mortgage, the buoying effect of expensive-home sales was reduced in September. “When you combine the price difference (for jumbos) with the restrictions in underwriting guidelines, that was a double whammy,” said Rob Chrisman, director of capital markets at NL Inc., a mortgage bank in Walnut Creek. “To compound it, buyers were possibly thinking that prices were stagnant or coming down in other parts of the nation and California, so maybe prices in the Bay Area would come down, so let’s wait. So you had three strikes against the jumbo market.” … The rising rate of foreclosures and defaults also hurts sales. When a lender forecloses, it puts the property on the market, often at a slight discount. Before a bank forecloses, desperate homeowners who are behind in their payments often try to unload the property as a “short sale” for less than they owe on the mortgage. Both types of sales further depress prices…. Rising inventory levels are another factor that impact sales. The number of for-sale homes in September rose in seven Bay Area counties compared with a year ago, according to MLS data compiled by ZipRealty…. “This is a cyclical downturn fueled by a lot of really dumb loans made from 2004 to 2005, the so-called subprime loans,” (real estate broker Betsy) Karevoll said. “We’re not in a recession. We’ve got a fairly stable economy. It’s an entirely different correction than it was back in the mid ’90s, for example, when jobs were being lost, people were leaving California, people were making less money. This is somewhat uncharted territory.”