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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  1. stevefromsacto
    stevefromsacto 29 October, 2010, 11:51

    Local tax votes do well nationwide

    By ROBIN HINDERY – Associated Press

    SACRAMENTO, Calif. — Forget all the talk about voters being fed up with high taxes: In hundreds of cities and counties across the country, they are raising them.

    An Associated Press review of local election results found they boosted taxes to help pay for schools, public safety and other services they believe are essential to their communities.

    In an election year dominated by angry anti-government and anti-tax rhetoric, the results may seem counterintuitive. Throughout the country, raucous tea party rallies have been blanketed with signs reading “Taxed Enough Already,” “Cut Taxes, Cut Government” and “We Make, They Take-No Socialism.”

    But with states facing huge budget deficits, reduced aid to communities is leaving them with a difficult choice: Dig deeper into their own pockets or cut the services that most impact their lives.

    “We’re talking about funding services that are more tangible to voters, and what happens in the elections has a lot more to do with local realities than it does with anything happening on the national level,” said Michael Coleman, fiscal policy adviser to the League of California Cities.

    No single entity tracks local revenue measures at a national level, and the vast majority of states do not have a centralized public database of city and county election results.

    In addition, some states allow bonds and tax increases only on the general election ballot, meaning voters must wait until this Tuesday to decide many additional measures.

    The AP was able to provide a snapshot of how voters in several states have been embracing tax increases at the local level. The analysis looked at 39 states, representing a cross-section of the country.

    The review found 2,387 revenue measures in 22 states where they appeared on local primary and special-election ballots this year. Voters in 19 states – or 86 percent of those holding such elections – passed 50 percent or more of the local tax initiatives that came before them.

    The types of taxes run the gamut. School district budgets in New York. Utility rate hikes in California. Sales tax increases in North Carolina. School construction bonds in Nebraska.

    In many states, the pro-tax vote was overwhelming. Ohio voters approved 72 percent of 448 local tax measures. In Louisiana, voters passed 83 percent of 77 local tax questions. Voters in recession-ravaged and fiscally conservative Arizona approved 66 percent of the 30 local tax measures.

    Kansas, Nebraska and Washington were among other states with high percentages of local tax measures passing.

    Not every state has been so accommodating.In New Jersey, where a cost-cutting governor campaigned against local tax measures, voters in April rejected 59 percent of 537 revenue-generating school budget proposals. It was the first time in 34 years that a majority of the state’s school budget proposals were defeated. In Illinois and Massachusetts, roughly 60 percent of local measures failed.

    Still, those states appear to be in the minority.

    In many communities, the reality is that state budget deficits have forced county and city governments to shoulder the burden of maintaining critical services, said Jackie Byers, director of research and outreach for the National Association of Counties in Washington, D.C.

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