Budget dominates new session


What a difference three years makes. In January 2007, Gov. Arnold Schwarzenegger was fresh off his resounding election victory over Phil Angelides, basking in an aura of “postpartisan” triumphalism. The governor even proposed a universal health care system. “We have to aim high and attack the entire system from top to bottom,” the governor enthused in a major speech. “We can create a model the rest of the nation can follow.”

Democrats met his proposal, and raised the ante, proposing a “single-payer” system, insisting that their plan would “save” Californians $12 billion a year, while the governor’s would cost the state that much, paid for with higher taxes.

The housing boom still was booming, so the money seemed to be there for the taking to turn these and other California government dreams into reality. As 2007 began, housing prices were dropping a little from their record highs in 2006, but still were close to record highs.

Then the bottom dropped out.

The year 2010 opens with housing prices in most places a bit above last year’s level, but with no sign of a boom anywhere near that would erase the catastrophic plunge of 2007-09. The national economy remains in the worst recession since the Great Depression. Even the most optimistic economists expect only a modest recovery in 2010. The most pessimistic, such as Gerald Celente, expect that, after a temporary reprieve, the economy will start crashing again.

Budget battles

Whatever the case with the economy, the biggest battle will be over the state budget for fiscal year 2010-11, which begins on July 1. The fireworks will begin in earnest when Gov. Schwarzenegger unveils his budget proposal on Jan. 8, followed a couple of days later by the Legislative Analyst’s examination of the proposal.

A year ago, the state faced a $40 billion budget deficit. To close it, the governor signed into law a record tax increase of $13 billion. In a statement, he promised it would “solve our $42 billion deficit and also find meaningful and lasting solutions to our broken budget system.”

The solution didn’t last.

Less than a year later, the budget deficit stood at $20.7 billion, according to the state Legislative Analyst’s report on Nov. 18, 2009. It may even be higher by the time the governor’s budget proposal comes out.

Outgoing Assembly Speaker Karen Bass, D-Los Angeles, told me that Democrats “continue to fight for sensible budget solutions that don’t burden vulnerable Californians with more problems and more costs.”

“The whole year will be devoured by the $21 billion deficit,” Assemblyman Chuck DeVore of Irvine told me; he also is running for the U.S. Senate in the Republican primary. “The Democrats will be frustrated. They will want to write more spending bills, but there’s no more money in the till.”

More new taxes?

Bass wouldn’t comment on whether Democrats would include tax increases in their budget solution.

The 2009 tax increase was imposed because the Republican leadership in both houses agreed to it. “I don’t see them doing that again,” DeVore said. The 2009 tax increases did not close the deficit and this is an election year.

So where will the money come from? DeVore said cutting government programs is imperative. But Democrats are following Gov. Schwarzenegger in begging for money from the federal government. “The whole session will be dominated by a search for money,” DeVore said. “They will go back to D.C. with their palms extended.”

Given the influence of the California delegation, beginning with Speaker Nancy Pelosi (D-San Francisco), and the way the Obama administration has been throwing hundreds of billions of “stimulus” dollars around, they just might get a few billion.

Education: ‘Race to the Top’ funding

Because it’s the biggest part of the budget, about 40 percent, education also will be a big-ticket item for 2010. Bass said, “Investments in education will be key to training Californians for the manufacturing jobs that every economy needs.”

Federal stimulus bucks already play a part here. As part of his $110 economic stimulus plan for education, President Barack Obama included a $4.5 billion national program called Race to the Top. California could get up to $700 million. It’s supposed to fulfill the president’s appeal to kids, “You can’t drop out of school and into a good job.”

In California, Bass announced progress in negotiations over implementing Race to the Top. She said:

  • Our legislation calls for proven turn around strategies for low performing schools and the tools to help teachers make them work.
  • Educational data will be used to better coordinate classroom instruction and keep parents and the public better informed about student progress.
  • School principals will be evaluated to make sure our schools are working from top to bottom.
  • California will develop higher standards in math and language arts that are internationally recognized.

The Orange County Register reported on Dec. 30 on the status of the Race to the Top legislation, “The deadline for states to apply for Phase 1 of the stimulus funding is Jan. 19. Applications for the second and final phase are due June 1.

“The Assembly’s version of the bill is viewed as harder on charter schools and softer on the lowest-performing of California’s traditional public schools.”

Race to the Top would force states to end limits on the number of charter schools. But California’s charter program already is quite advanced, with 809 charters established teaching 341,000 charter students, about four percent of public-school kids. Charters continue to grow at the rate of about 50 per year.

DeVore warned that parents need to keep close watch on any changes to California’s charter-school laws because the powerful teachers’ unions want to put more regulations on charters. But a main reason for charters, and of their general success, is that they dispose of much of the red tape entangling traditional public schools.

It’s also a big question whether more money – and more federal control, with 3,000-mile strings attached – is what California’s faltering public schools system needs, instead of more fundamental reforms.

It seems every new president has a schools reform bill resembling Race to the Top. President Bush’s similar No Child Left Behind program of 2001 was supposed to produce young scholars, but the results have not been stellar. Detroit’s public schools just recorded the worst scores ever, anywhere, in the National Assessment of Education Progress’s 40-year history.

And students in the Chicago public schools performed almost as abysmally. The man who presided over this Windy City disaster is current U.S. Secretary of Education Arne Duncan, who will implement Race to the Top.

Homeowner assistance

“While focused on creating jobs, Assembly Democrats will also continue to fight for homeowner protections to avoid another wave of foreclosures,” Bass told me.

Last year, the Legislature enacted AB260, which stiffened penalties for mortgage brokers making false claims. The California Association of Mortgage Brokers opposed the law because its language was vague. AB260 goes into effect on July 1.

There already are signs of recovery in the housing market in California. “Single-family home prices in California rose for the eighth consecutive month in October. The median cost of an existing, detached house gained 0.3 percent from the previous month to $297,500. Prices dropped about 3.2 percent from a year earlier, compared with annual declines of 7.3 percent in September and 17 percent in August,” reported Bloomberg on Dec. 26.

“Foreclosures represented 41 percent of sales, down from a peak of 59 percent in February, research company MDA DataQuick said in November.”

At this late point in the housing crisis, the best way to help forestall foreclosures might be to make it easier for businesses to create, and keep, jobs, so folks have the money to pay their mortgages.

Health care

Bass wrote me that “advances in health care must be sustained to improve health and avoid another decade of exploding health-care costs.”

The key here is how the new federal health care legislation will affect California. That will unfold as the fine print in the bill is discovered and interpreted.

DeVore pointed out that more regulations on health care generally raise insurance costs through “mandates” on coverage. In the past, governors have vetoed most, but not all, of these expensive bills to prevent health-care costs rising even higher.

I covered this in an article for The Freeman magazine, where I wrote:

  • Every 1 percent increase in the cost of insurance therefore means 22,222 to 33,333 people lose insurance. In-vitro fertilization coverage mandated by the state raises costs 3 percent to 5 percent. So this mandate alone means 66,666 to 166,665 people lose health insurance.
  • California also mandates mental-health parity, which raises costs 5 to 10 percent. This mandate causes 111,110 to 333,330 people to lose coverage.
  • Put another way, if just these two mandates were repealed in California, from 177,776 to 499,995 people could again afford insurance.

Health Access, an interest group advocating more government involvement in health care, provides a list of legislation it supports. It’s a good indicator of where the debate will be occurring in 2010.

For example, AB1218 “Requires HMOs and health insurer to get approval for increases in premiums and cost-sharing” – a form of price controls. But as anyone aware of the history of price controls knows, there’s a way around them: stop offering the service, in this case by an insurer leaving the state.

AB29 “Would allow individuals up to age 27 to remain on a private insurance policy as a dependent, but employers are not required to contribute to the cost of coverage for dependents over 23.” So now your kids will have another reason for hanging around.

SB316 involves “Capping administration and profit ­– Would set a minimum medical loss ratio – requiring every insurer to spend at least 85 percent of premiums on patient care.” Just as the Legislature is trying to increase administrative costs with expensive new laws, it wants to limit, by edict, the amount that insurance companies can use to pay to comply with the edicts. This would provide another reason for the insurance companies to exit California.

AB722 is the “Pre-existing condition exclusion – Would prohibit individual insurance plans from denying coverage due to a pre-existing condition.” As with similar proposals at the national level, this would kill off the insurance companies. People would just not get insurance until they got sick. So the insurance companies would only be insuring the sickest people, whose expensive care they would have to fund, with healthy people paying nothing (until they got sick), thus defeating the whole reason for insurance.

Era of limits

Back in the 1970s Jerry Brown, the once (and perhaps future) governor, talked about an “era of limits.” He was wrong. California, in part because Proposition 13 in 1978 limited government’s ability to tax productive citizens and businesses, boomed for another three decades. Population and the economy grew at rapid paces.

But 2010 really is an era of limits. There’s no money for anything. Because not enough cuts were made in 2009, even deeper cuts will need to be made in 2010.

More tax increases would just drive businesses and jobs from the state. Nevada, Texas, Washington and other states are waiting with open arms and no state income taxes.

The year also will see the end of the Schwarzenegger Era, with a new governor elected in November. Although Schwarzenegger’s grappling with the Legislature will be what determines the numbers in the budget, the future of the state will be decided by the debates in the race to be his successor, and in the choices made by voters for that office and the legislative offices.

We live interesting, and limited, times.

John Seiler is an independent writer. His email: [email protected].

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