Mish: Budget avoids structural reform

From Mish’s Global Economic Trend Analysis blog (his posts are crossposted with permission):

Tonight, with much fanfare, Schwarzenegger released his proposal to fix California’s $19 billion budget deficit. It was a huge disappointment.

Schwarzenegger had a golden opportunity to propose radical changes like privatizing the prison system, privatizing work in general, sending illegal aliens home, or getting rid of defined benefit plans. Instead, Schwarzenegger wimped out on many key issues.

Budget at a Glance

Please consider some highlights from Schwarzenegger’s revised state budget at a glance

Close the $19.1 Billion Deficit Through:

  • $12.4 billion in spending cuts.
  • $3.4 billion in federal money.
  • $3.3 billion in other measures, primarily through borrowing from other state funds.

Spending Cuts

  • $1.1 billion through the elimination of CalWORKS, the state’s primary welfare program, which serves 1.4 million people, two-thirds of them children.
  • $750 million in unspecified cuts to the state’s in-home supportive services program for the disabled, achieved through reductions in wages and services.
  • Cuts $532 million from Medi-Cal, the state’s medical program for the poor, by reducing eligibility, limiting doctor’s visits to 10 per year, reducing funding for hearing aids and other medical equipment, and increasing copays.
  • $811 million reduction in prison health care expenses by making the system more efficient and reducing funding.
  • About $360 million in savings by shifting nonviolent offenders out of state prisons and into county jails and by reducing the juvenile prison population and closing the facilities that house them.

State Employees

  • Payroll reductions of 5 percent across all state departments, except for constitutional offices, which already achieved 5 percent reductions. The administration says much of the payroll reduction can be achieved by departments not filling current vacancies.
  • A 5 percent pay cut for all state workers and a 5 percent increase in their pension contributions. The administration says this will save $1.6 billion.

Media Reporting

As soon as Schwarzenegger released the budget, the media was all over it. The LA Times headline says it all: Schwarzenegger’s budget deals blows to the poor.

Proposing a budget that would eliminate the state’s welfare-to-work program and most child care for the poor, Gov. Arnold Schwarzenegger on Friday outlined a stark vision of a California that would sharply limit aid to some of its poorest and neediest citizens.

His $83.4-billion plan would also freeze funding for local schools, further cut state workers’ pay and take away 60% of state money for local mental health programs. State parks and higher education are among the few areas the governor’s proposal would spare.

Elimination of CalWorks, the state’s main welfare program, would affect 1.3 million people, including about 1 million children. The program, which requires recipients to eventually have jobs, gives families an average $500 a month. Ending those payments would save the state $1.6 billion, the administration said. It would also make California the only state not to offer a welfare-to-work program for low-income families with children.

Democratic leaders immediately vowed to reject the governor’s plans and craft alternatives, which they said could include new taxes on oil companies as well as the abolition of some corporate tax breaks.

Meanwhile, Republican lawmakers, who hold enough votes to block tax increases and budgets, embraced the governor’s approach.

Another issue the governor’s plan addresses is prison costs. He would reduce them by shifting the responsibility for some state inmates to local governments, as he has proposed before. According to his estimate, the state would save $248 million by sending new low-level felons to local jails instead of to state prisons and by shifting supervision of state juvenile parolees to counties.

Narcotic treatment programs for roughly 160,000 Medi-Cal patients would be eliminated to save the state $53.4 million. And state money for county mental health programs would drop 60%.

“You can’t make these numbers work,” said Rusty Selix, executive director of the California Council of Community Mental Health Agencies. “You’re basically destroying the system.”

On Friday, the governor said he would use his negotiating leverage to continue to push for changes in state government that the Legislature has blocked year after year.

Among them are installing a less generous pension system for newly hired state workers and significant changes to the state budget process — a requirement that California build a larger rainy-day fund, for example — that Schwarzenegger argues would stop the budget “roller-coaster ride.”

“I will not sign a budget if we don’t have pension reform and budget reform,” he said.

Budget Proposal Not Really Balanced

For starters, Schwarzenegger’s proposal would not balance the budget. He fell $3+ billion short by borrowing money from the future while calling the result “balanced”. He arguably fell another $3 billion short, by counting on handouts from Obama.

Unfortunately, I see no specific pension reform mandates (Schwarzenegger is leaving that up to the legislature). The proposed payroll reductions of 5% primarily comes from not filling vacancies. Ho-hum where is the pain there?

Democrats are upset Schwarzenegger will not raise taxes, and sensible Republicans are unhappy Schwarzenegger did not stick it to the unions as did Governor Chris Christie of New Jersey.

In regards to the prison system, I see no radical changes, only wimpy proposals to move inmates from one jail to another.

Democrats Riled Up

Collectively, these wimpy moves have the Democrats all riled up as noted by Bloomberg in Schwarzenegger Seeks New Cuts to Close Budget Deficit

“We will not pass a budget that eliminates CalWorks,” state Senate President Darrell Steinberg told reporters after the governor’s speech. “We will not be party to devastating families. That’s not what any of us came to Sacramento to do.”

So much more, needs to be done, but one thing that does not need to be done is raise taxes. Yet the one thing Democrats want to do is raise taxes.

Pissing and Moaning Starts Already

The pissing, moaning, and finger pointing has already begun.

If Republicans remain steadfast on taxes, and Democrats on CalWorks, this is going to be one long, messy battle. Worse yet, given that Schwarzenegger made few specific proposals to permanently address structural defects regarding union salaries and wages, pension benefits, privatizing services, and school system reform, the odds are the legislature will not address those issues.

What a disappointment and what a mess.

–Mike “Mish” Shedlock

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