The budget showed a $2 billion deficit — modest by historical standards, but worthy of the lawmakers’ attention — caused by an increase in government programs over the last few years and lagging revenues.

Brown said he didn’t want to “repeat mistakes of the past,” recalling the days of the state’s budget crisis. The proposed budget showed approximately $8 billion in the Rainy Day Fund by the end of 2017-18, which is 63 percent of the constitutional target, which Brown said was bigger than it seemed as he called for greater savings now. 

Independent analysts, as well as Brown’s budget experts, have cautioned against the state’s over-dependence on the wealthiest residents to fund the government. Brown lauded the state’s “progressive” tax system, where people with the most pay the most. But he said it also requires prudence.

“It doesn’t make sense to pretend we have money when we really don’t,” Brown said. 

Trump 

Recently, many prominent Democrats staked out positions as Trump antagonists, in interviews and even with the Legislature’s hiring of former U.S. Attorney General Eric Holder. Brown took a more measured approach by saying money wasn’t moved around to certain areas in anticipation of Trump, but left the door open for the May budget revision.

Brown seemed confident that the Affordable Care Act, which has expanded coverage to millions of Californians, wouldn’t go anywhere, noting that any repeal-and-replace proposal would have to get Democratic support in the Senate and that cutting health care for millions of people would be political suicide for Trump. 

Transportation and housing 

In response to the ongoing infrastructure funding woes, Brown proposed a “road improvement charge” of $65 per vehicle. In other car-related news, the gas tax will increase 2.1 cents per gallon automatically. 

As for housing, one of the other major unresolved issues facing the state, Brown proposed to re-appropriate an unused $400 million in funding for housing that was set aside in the last budget.

The budget does send $3.2 billion to local municipalities for affordable housing projects, but Brown said more needed to be done to spur housing development by cutting red tape, cutting delays and cutting “whatever expenses we can do without.”

“We have to bring down the cost structure of housing, not just subsidize,” Brown said.  

Good morning! 

If there was ever an opportunity for a third-party run, now would be it.

Unfavorable opinions among voters of both Donald Trump and Hillary Clinton — the presumptive presidential candidates of the Republican and Democratic parties, respectively — create a do-or-die moment for Libertarians and the Green Party.

But the question is how high can they climb?

CalWatchdog has more. 

In other news:

• Since 2010, almost 1,000 police-issued firearms have been stolen, lost or who knows, according to The San Jose Mercury News. 
• “Democratic legislative leaders are suggesting the ‘Rainy Day Fund’ could help alleviate what Gov. Jerry Brown’s administration projects will be a $4 billion budget deficit in 2019 – even if there is no recession,” writes Capital Public Radio.
• Will Tom Steyer’s mega spending on behalf of Democratic priorities help him in a gubernatorial
  

  Tom Steyer

  run? The Los Angeles Times has more. (One of Steyer’s big issues is getting money out of politics — he spent $74 million in the 2014 cycle to spread his message.)
• And speaking of gubernatorial runs: Gavin Newsom, the lieutenant governor and candidate for governor in 2016, is fighting with Senate President Pro Tem Kevin de León over who will get credit for stricter gun control laws as both have introduced competing plans. The Sacramento Bee has more.     

Assembly: 

• In at 1 p.m. Several hearings. 

Senate:

• In at noon. Full slate of hearings.

Gov. Brown:

• No public events announced.

Tips: matt@calwatchdog.com

Follow us: @calwatchdog @mflemingterp

New followers: @LarrySabato @HannahNurrieum

Now the fourth-term governor has new evidence for his case. A comprehensive new report by the Mercatus Center at George Mason University that looked at every state’s audited financial documents from 2014 ranks California 44th in its ability to meet short-term bills and longer term obligations. The report makes the case both for caution on expanding new state spending and for putting as much as possible in the rainy-day fund that voters approved in 2014.

In two categories, the Golden State is in the middle of the back.

On budget solvency — which Mercatus defines as “can a state cover its fiscal year spending with current revenues, or does it have a budget shortfall?” — California ranked 23rd.

On service-level solvency — “how much ‘fiscal slack’ does a state have to increase spending if citizens demand more services?” — California ranked 28th.

Long-term picture for California is grim

But in three categories, the Golden State was far worse than the national average, buttressing Brown’s call to beef up the state’s rainy-day fund.

On long-run solvency — “can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks?” — California ranked 46th.

On cash solvency — “does a state have enough cash on hand to cover its short-term bills?” — California ranked 47th.

On trust fund solvency — “how much debt does a state have? How large are its unfunded pension and healthcare liabilities?” — California ranked 42nd.

A recent New York Times story about Gov. Brown depicted him as having put California on solid fiscal ground and guided the state’s economy into a “period of prosperity.” The Times account suggested Brown and the Golden State could be a model for national Democrats.

The Mercatus study indicates that this narrative is based on perception more than hard data. Recent U.S. “U-6” unemployment data, which covers not just people without a job but people who work fewer hours than they want, backs up Mercatus. As of August, only six states had more residents unable to find jobs or full-time employment than California.

But the governor’s proposed $170.7 billion budget ($122.6 billion general fund) for the 2016-17 fiscal year would lead to repeating that mistake when the next recession hits.

Revenues will plunge $55 billion over three years if an average recession hits next year according to the budget summary. That would result in a $29 billion budget deficit in 2020 based on Brown’s current spending proposal, which includes $4 billion in one-time expenditures. If the Legislature instead spends that $4 billion on new or ongoing programs, the deficit would balloon to $43 billion – larger than occurred during the Great Recession.

Recession Expected

California is in the seventh year of economic expansion. That makes it two years overdue for a recession, which has occurred every five years on average, according to Keely Bosler, chief deputy director of the California Department of Finance.

“While there is significant uncertainty in forecasts, there is one thing that is quite certain: and that is history,” Bosler told the Senate Budget and Fiscal Review Committee Jan. 19. “It’s this boom-and-bust cycle that this budget really aims to avoid going forward.” But she acknowledged that “the budget in the state of California does remain precariously balanced over the long term.”

Her cautionary words were echoed by committee Vice Chairman Sen. Jim Nielsen, R-Tehama.

“We must keep in mind that though times are a little bit better, some parts of our economy have not improved,” he said. “And therefore we must exercise constraint and not get overly ambitious. And that will be what governs our progress in the budget. Let’s not get overly ambitious, and let’s not let government get out of control.”

Examine the Department of Finance 2016 Budget Slides here

But Democratic legislators are eager to spend some of the budget surplus on ongoing social programs, particularly for the developmentally disabled, instead of socking it away in the state’s rainy day fund – despite the likelihood that doing so could once again bust the budget.

“It shouldn’t surprise any of us that a recession is at hand. The question is when, not if,” said committee Chairman Sen. Mark Leno, D-San Francisco. “At the same time, an additional $2 billion set aside in the rainy day fund above and beyond what voters told us they’d like to see in it – that I think will be at least part of the playing field of our debate.

“What is appropriate for continuing payment of debt and for reserves, at the same time recognizing that so many Californians who have been hurt at the time of the recession have not seen much recovery or reinvestment in the programs for which they rely for their quality of life?” Sen. Leno asked.

Rainy Day Fund

Proposition 2, passed in 2014, requires that $2.6 billion in this year’s budget be placed in the rainy day fund. Brown has proposed adding an extra $2 billion to the fund. That would bring the total to $8 billion (with previous funding), equating to two-thirds of the constitutional target of 10 percent of general fund revenues, according to Bosler.

But legislative analyst Mac Taylor warned the committee that, while it’s good to beef up state reserves, the Legislature would be unnecessarily tying its hands by going along with Brown’s extra $2 billion in the rainy day fund, which is known formally as the Budget Stabilization Account.

“We would caution you not to put extra money into the BSA,” Taylor said. “Once you put it in the BSA, it’s governed by the rules in the BSA. You can only take out half the monies, if you have a downturn, in the BSA. You might imagine a situation when you might want to take out more in the first year.”

Also up for grabs by the Legislature for whatever purpose it chooses is $1.1 billion from a tax on managed care organizations, an expenditure that Brown left unspecified, according to Taylor. In addition, he told the lawmakers that they could decide to siphon off some or all of the $2.5 billion Brown has proposed to spend on infrastructure, including $1.5 billion for state facilities.

Infrastructure Spending

“When it comes to one-time spending, the governor has focused on infrastructure,” said Taylor. “We think that’s a very positive thing. But keep in mind you have other one-time things that you can spend on. We have very high-cost pension and health retiree liabilities that are accruing costs at 7½ percent a year. So you may want to make additional payments to help fund those and pay those liabilities off. There’s no right choice.”

If the lawmakers do decide to spend the money on infrastructure, they should exercise more control on how it’s spent, instead of leaving it to the administration, Taylor said.

“You don’t want to lose control,” he said. “I think you’ve already lost way too much authority for capital outlay projects. You have given it to both university systems and the administration. Stop doing that. I think you should be exerting a lot more control over capital outlay projects.”

But Leno was more concerned about providing enough “human infrastructure” to help the state’s neediest residents.

Social Services Budgeting

“What I’m hearing is regarding developmentally disabled services that housing units are being lost, facilities are being closed,” Leno said. “Employees at the community-based organizations that supply services are leaving because the employees can find much better jobs than the $13-$14 per hour that some are being paid after 20, 25 years of service. What happens to that infrastructure?”

Taylor responded that there’s been a large growth in spending on the developmentally disabled due to the large increases in caseload. “But you can have just about every program and area of the budget come and tell you that they need a lot more,” he said.

Spending on regional centers for the developmentally disabled has grown by 24 percent in recent years, according to Bosler. “This is well beyond caseload and inflation,” she said. Contributing to the higher costs is California’s aging population, which requires more services and support, along with the rise in autism.

But Leno wasn’t satisfied, saying that the cuts made to social services during the Great Recession have yet to be fully restored.

“Do we want to suggest that even in these boom times that this is our new normal?” he asked. “Or do we have a goal of getting back to where we were at least in adjusted dollars to the 2008 level at some point? If not now, then the question is when. It certainly won’t happen during the next downturn, and quite likely we will have to make additional cuts. We continue to create a new normal level funding which is ever, ever lower.”

Power Over the Budget

Nielsen called the budgeting process itself into question, asserting that it gives too much power over spending to the governor.

“We’ve abdicated our authority over the budget,” he said. “I believe that we are almost making the Legislature irrelevant. Maybe we go through the exercise and pound our chest and try to think we’re important. And this has been a steady erosion over a long period of time.”

Taylor responded that budgetary authority is hard to get back after being given away. He cited the state’s ballot measures as contributing to the problem.

“Almost every initiative that has increased a tax in the last 20 years has dedicated the funds for particular purposes,” he said. “From a budgeting perspective, that’s just a terrible development. No matter how well meaning or how well purposed they may have been in the first year that that measure was passed, that’s not what budgeting is about. It’s about changing priorities, as you know, and being able to make decisions.”

Legislative budget committees plan to hold numerous hearings in the coming months to gain more insight into and provide input on the budget before the governor’s planned budget revision with updated revenue and expenditure figures in May.

The gov knows the bullet train doesn’t make sense, but he can’t bail on it without infuriating key constituencies. So maybe just maybe he tells this to AG Kamala Harris, who wants to be his successor, and then what happens? The state appears to try to lose in the court fight over the project’s legality.

That’s pretty cool if true. Good for Jer. But sometimes his 3D chess is solely about making him look good, not serving the public interest. Here’s part of my U-T San Diego editorial:

“… Brown is right: The state needs a ballot initiative that would create a ‘rainy day’ fund to limit the damage from boom-and-bust budget cycles caused by oscillating revenue. …

“But Brown’s proposal has a huge fundamental flaw. If it becomes law, money in the fund could be tapped at any time after a majority vote of the Legislature and an ’emergency’ declaration by the governor.

“Such loopholes have long doomed similar fiscal protections in California and other states. Many lawmakers don’t want to make tough decisions on budget matters and operate from a self-serving, short-term perspective: What will get me re-elected? …

“The governor knows this. He’s been watching Sacramento in action for more than a half-century. He realizes that courage is not a defining characteristic of Assembly and Senate members.

“So what is Brown up to? From his short-term perspective, touting this proposal gives him one more chance to burnish his media image as a tightwad in a capital full of spenders — and when he’s seeking re-election, too.

“Proposing such an easily gamed reform to such a big ongoing problem suggests members of the Legislature aren’t the only ones with a courage deficit.”

After his 99.4% likely re-election, Brown in theory could be crazy-ambitious with what he tries to accomplish in his last term. I wonder if he’ll shoot for the moon or settle for just being scary shrewd.