Broke California Could Lose Billions in Federal Funds

It's hard to decide some days which straw will finally break California's back. Will it be a municipal default leading to a sharp hike in borrowing costs for the state's debt-addicted governments? Will it be a tidal wave of pension debt? Or will the state destroy its own spending base by taxing and regulating its private economy to death? Interestingly, today brings us a pair of stories suggesting that disaster may come from a new source: the federal government.

First up, the Contra Costa Times reports that the pseudo-austerity being implemented in Washington as part of the debt-ceiling deal may have dire effects on transportation programs in the Bay Area. You see, House Republicans are proposing deep cuts to discretionary spending later in the year, and want a third of these cuts to hit federal transportation spending. Moreover, the re-authorization of the federal gas tax is not yet a done deal: if Congress is unable to reach an agreement by September 30, the tax will expire, and businesses and consumers will get to enjoy an 18.4-cent drop in gas prices. These cuts would mean a loss of $1.7 billion in annual federal funding for various projects, including a large number of highway repairs and expansions and BART's plans to extend service down to San Jose and replace its fleet of train cars. We've already noted California's worrying dependence on federal dollars, but it's sobering to consider how the state's employment numbers might look without the thousands of jobs that depend on DC's tendency to spend money it doesn't have.

Second, the Orange County Register reports that California may be about to learn the hard way that the ARRA "stimulus" was never intended to be a permanent program. According to a report from the state Auditor, the Golden State may have to return $8.6 billion in unspent stimulus funds to the feds, because the deadlines for using them properly have passed. As the recipients are all state-level agencies, this would open up yet another large hole in a state budget that already has too many. To use our President's laugh line, it does indeed look like "shovel-ready" wasn't as shovel-ready as we'd hoped.