Looking Back At Absurd State Budget

This article was first published in City Journal.

OCT. 28, 2010


Smoke and Mirrors in Sacramento: California’s latest state budget is a fraud.

Even before Governor Arnold Schwarzenegger signed California’s state budget on October 8—100 days late—it was clear that the deal that made it possible was a kick-the-can-down-the-road deception. As the Los Angeles Times reported before the budget’s legislative passage: “If approved, [the budget] would fall out of balance almost the moment the ink dried.” The paper concluded that legislators had, for the most part, “settled on accounting sleight-of-hand: deferred payments, borrowed money and optimistic revenue assumptions.”

Both Republicans and Democrats seemed happy enough with the agreement, relieved that the long ordeal was finally over until a new governor and legislature take office in January. Some Republican officials even insisted that the deal wasn’t so bad, and that, at $87.5 billion, the budget was as lean as it could be, given today’s political realities. “I am disappointed that it took us a full 100 days into the new fiscal year to pass a state budget, but I do believe this plan will help move our state forward,” said Republican Martin Garrick, the state assembly’s minority leader, in a prepared statement. “This budget doesn’t raise taxes, brings our state closer to living within its means, and includes budget and pension reforms.” Echoing the positive spin from another perspective, the Senate’s president pro tempore, Democrat Darrell Steinberg, declared: “While this year’s budget agreement includes billions in painful and difficult cuts, it also recognizes that our future economic success depends upon maintaining key investments in our people and our state.” Steinberg was pleased that the budget didn’t impose deeper cuts and included some “key reforms.”

Yet just about everyone else on the right and left has ridiculed what Tom Brokaw, moderating the October 12 gubernatorial debate between Democrat Jerry Brown and Republican Meg Whitman, called budgetary “smoke and mirrors.” As Loyola Law School professor Jessica Levinson explained in a Huffington Post column: “California has balanced its budget in part based on the assumption that the state will get $5.4 billion in federal funds. The problem is that the federal government has indicated that it will give something closer to $1.3 billion.” She notes, moreover, that $3 billion of the spending cuts come out of the education budget. Because the size of that budget is constitutionally mandated under the terms of a voter initiative (Proposition 98), those dollars must ultimately be repaid from the state budget—in other words, they’re not really cuts. Delayed tax credits will also have to be paid. And as antitax activist Jon Coupal of the Howard Jarvis Taxpayers Association points out, the budget’s “estimates of future revenue . . . would only be believed by someone who had just put their life savings into Florida swampland.”

Current estimates place California’s unfunded pension debt at somewhere between $300 billion and $500 billion, depending on the predictions one uses of future stock market and investment performance. The good news is that Schwarzenegger did insist that some modest pension reforms be part of the budget deal. But at best, these reforms—requiring increased contributions from many existing public employees and slightly reduced benefits in the defined-benefit pension plans of new state workers, depending on final union negotiations—would shave off $100 billion over the next 30 years. Something more has to be done about pension promises to current workers. But despite Republican legislative pressure for a tougher deal, the budget includes only Schwarzenegger’s limited measures. And state contributions to the pension fund will be rising steeply in coming years, which will put further strain on an already precarious budget.

Will the next governor be able to turn things around? During the most recent Brown-Whitman debate, both candidates dealt with budget issues only in vague generalities. Brown, who as governor in the late 1970s helped create the state’s current mess when he approved collective bargaining for state employees, said he would lead by example—that is, he would cut the budget for the governor’s office by 15 percent. Touting her “30 years of experience balancing budgets and using technology,” Whitman championed pension reform, but only for rank-and-file state employees; she would exempt public-safety officials from her plan to switch to 401(k)-style, defined-contribution plans.

Meanwhile, the state’s gerrymandered legislative districts and budget-passage rules create an impasse. Democrats are opposed to cutting government services and seem committed mainly to raising taxes, while minority Republicans are committed to a no-new-taxes pledge. The state budget requires a two-thirds vote for passage of tax hikes, and Democrats don’t quite have that supermajority—and because of legislative gerrymandering, few seats are competitive in any election cycle. Thus neither party is likely to affect the balance of seats or break the stalemate one way or the other.

So California muddles along, hoping that eventually the economy will grow again, which will boost the capital-gains-dependent budget and solve the political establishment’s quandary. Yet the economy shows little sign of recovery. And the state’s fundamental problems—one of the worst business climates in the country, the third-highest income-tax rate in the nation, the seventh-latest Tax Freedom Day, a punitive regulatory climate, and well-funded but ill-performing public schools—make business and economic development an uphill struggle, especially as more business-friendly neighboring states actively recruit California firms.

Democrats are pinning their hopes on Proposition 25 on the November ballot, which would eliminate the two-thirds legislative requirement for passing budgets and give the legislature more leverage in pushing for its instinctive first answer to everything: tax hikes. Even some Republicans favor a majority-vote budget, figuring that the Democrats will get one massive tax hike through the legislature before the public reacts angrily against Democratic leadership.

No one knows what’s next in California. Everyone, however, agrees that the political process is broken and that the state budget is a fraud. And many are wondering why Brown or Whitman would want the governor’s job.

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