California began its new fiscal year at midnight, and celebrated by taking billions in budget solutions off the table.
So how exactly did California get into this mess, and what are state lawmakers and Gov. Arnold Schwarzenegger doing to try to get out of it? The Associated Press gets most of the questions and answers right:
Q: How big is the state's budgetary mess?
A: California's $24.3 billion deficit is roughly a quarter of the general fund, which is the state's main bank account for paying its daily expenses. For perspective, lawmakers could eliminate all funding for state prisons and the higher education system and still not save nearly enough money to address the shortfall.
The budget gap is the biggest of any state.
Q: How did the state get into this mess?
A: California's problem is partly of its own making. (pay close attention to the first part of the answer)
Lawmakers and voters have agreed to higher levels of spending over the years without identifying a dedicated funding source. Over time, that means the state's general fund has had more obligations than it can afford to pay.
Because of caps on local property taxes adopted three decades ago, the state budget has come to rely heavily on revenue from capital gains and personal income taxes. Both have plunged over the past two years.
The state has its highest jobless rate (11.5 percent) in modern times, and personal income has declined statewide for the first time since the Great Depression. As a result, personal income tax revenue coming to the state plunged 34 percent for the first five months of the year.
During an unusual February session, Schwarzenegger and lawmakers thought they had solved the budget deficit through the middle of 2010. Since then, rapidly declining tax revenue put that budget package out of balance shortly after Schwarzenegger signed it, leading to the current deficit.
Q: When the federal government can't balance its budget, it just operates with a deficit. Can't California do the same thing?
A: No. Under its constitution, California must balance its budget every year. The federal government also can print money, something states cannot do. The main options available to states in lean economic times are spending cuts, tax hikes and borrowing money.
Q: What happens if California can't balance its budget?
A: The state controller will begin issuing IOUs to college students who are expecting grants, welfare recipients, and private companies that contract with the state to provide a wide array of services. Counties that administer social services also would not get paid, nor would taxpayers who are still expecting refunds.
The IOUs are intended as a cash-saving move until lawmakers pass a balanced budget.
In normal years, California can take out short-term loans so it has enough cash to pay its bills until spring, when the bulk of its tax revenue starts flowing. This year, it expects to need $7 billion to $9 billion in such loans, but the state treasurer's office says it will not even try to sell those bonds unless lawmakers balance the budget.
Lenders are unlikely to go along with such loans if California has a $24 billion deficit and no credible plan to close the shortfall, because they will be worried that the state will not be able to meet its financial obligations. That has led to the immediate cash crisis.
Q: Are there any other ways Californians will be affected?
A: Lack of a balanced budget is likely to mean higher lending costs to pay back all sorts of bonds that already have been approved, which lead to difficult budget decisions in the future about more spending cuts or tax increases. For example, a credit rating downgrade on $53.3 billion of unsold infrastructure bonds would increase long-term borrowing costs by $7.5 billion.
Schwarzenegger also has ordered 235,000 state workers to take three days off a month without pay if there is no balanced budget by Wednesday, a move that would reduce available staff at state offices. The three furlough days will reduce the workers' pay by 14 percent.
As of Tuesday afternoon, Democrats and Republicans remained at an impasse. Democrats want to moderate Schwarzenegger's cuts to welfare and health care programs for the poor, but Republicans refuse to go along with tax increases to make up the difference.
Q: Is there anything California can do to avoid this problem in the future?
The AP's answer is that California has had problems with balancing its budget for many years, in part because of its dependence on personal income tax and capital gains taxes, which rely on a rising stock market.
As we have pointed out time and time and time again, California does not have a revenue problem it has a spending problem.
Remember: If, since 1990, state spending increases had been held to the inflation rate plus population growth, the state would have a $15 billion surplus instead of a $42 billion budget deficit.
Because of caps on local property taxes adopted three decades ago, the state budget has come to rely heavily on revenue from capital gains and personal income taxes. Both have plunged over the past two years.
The state has its highest jobless rate (11.5 percent) in modern times, and personal income has declined statewide for the first time since the Great Depression. As a result, personal income tax revenue coming to the state plunged 34 percent for the first five months of the year.
During an unusual February session, Schwarzenegger and lawmakers thought they had solved the budget deficit through the middle of 2010. Since then, rapidly declining tax revenue put that budget package out of balance shortly after Schwarzenegger signed it, leading to the current deficit.
Q: When the federal government can't balance its budget, it just operates with a deficit. Can't California do the same thing?
A: No. Under its constitution, California must balance its budget every year. The federal government also can print money, something states cannot do. The main options available to states in lean economic times are spending cuts, tax hikes and borrowing money.
Q: What happens if California can't balance its budget?
A: The state controller will begin issuing IOUs to college students who are expecting grants, welfare recipients, and private companies that contract with the state to provide a wide array of services. Counties that administer social services also would not get paid, nor would taxpayers who are still expecting refunds.
The IOUs are intended as a cash-saving move until lawmakers pass a balanced budget.
In normal years, California can take out short-term loans so it has enough cash to pay its bills until spring, when the bulk of its tax revenue starts flowing. This year, it expects to need $7 billion to $9 billion in such loans, but the state treasurer's office says it will not even try to sell those bonds unless lawmakers balance the budget.
Lenders are unlikely to go along with such loans if California has a $24 billion deficit and no credible plan to close the shortfall, because they will be worried that the state will not be able to meet its financial obligations. That has led to the immediate cash crisis.
Q: Are there any other ways Californians will be affected?
A: Lack of a balanced budget is likely to mean higher lending costs to pay back all sorts of bonds that already have been approved, which lead to difficult budget decisions in the future about more spending cuts or tax increases. For example, a credit rating downgrade on $53.3 billion of unsold infrastructure bonds would increase long-term borrowing costs by $7.5 billion.
Schwarzenegger also has ordered 235,000 state workers to take three days off a month without pay if there is no balanced budget by Wednesday, a move that would reduce available staff at state offices. The three furlough days will reduce the workers' pay by 14 percent.
As of Tuesday afternoon, Democrats and Republicans remained at an impasse. Democrats want to moderate Schwarzenegger's cuts to welfare and health care programs for the poor, but Republicans refuse to go along with tax increases to make up the difference.
Q: Is there anything California can do to avoid this problem in the future?
The AP's answer is that California has had problems with balancing its budget for many years, in part because of its dependence on personal income tax and capital gains taxes, which rely on a rising stock market.
As we have pointed out time and time and time again, California does not have a revenue problem it has a spending problem.
Remember: If, since 1990, state spending increases had been held to the inflation rate plus population growth, the state would have a $15 billion surplus instead of a $42 billion budget deficit.
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7 comments:
CL- Great indepth analysis of the current situation we are in. Great work. I have a question for you and would like your response. The fall back response for many blaming the repulicans is "if we didn't have the 2/3's majority to pass legislation we wouldn't be in this mess." Knowing that isn't the cause of the budget situation.
What is your defense of the 2/3's majority besides giving the minority a voice?
To address one point, your "remember point":
Remember: If, since 1990, state spending increases had been held to the inflation rate plus population growth, the state would have a $15 billion surplus instead of a $42 billion budget deficit.
I don't have data since 1990, but for the last ten years, expenditures have risen by $46 Billion. Accounting for population growth and inflation, you are down to $15 Billion.
The biggest chunk of that is a result of the cut to the vehicle license fee aka "the car tax". The state pays over $6 billion every year to backfill that to local governments, so it counts as state spending under the budgeting procedures. Had we not written cut the VLF, we would have had over $30 Billion more over that period
Prisons grew by 3.4 Billion over and above pop. growth and inflation.
The other expenditure increases were almost all due to either bond interest or ballot box budgeting.
Soooo...next?
http://www.youtube.com/watch?v=ogfNEw2XSbY
Oh come on now with those general arguments. Spending has grown on many fronts and to place the blame on not having the "car tax" is simplistic. We spend 11 billion a year a lone on illegal's that is half the deficit right there. The unions have also contributed to supporting those in office who continue to inflate their policies to make sure the fat cats of the SEIU are taken care of. Why for example do most gov't contracts go only to union work? Dosn't that go against the free market? When gov't work is contracted out there should be an open market competition for those jobs (suck as roads etc) not just given to the unions which pay 4 guys to hold a shovel.
To the prisons...what are the statistics of illegals in the prison system that are on the tax payer dime? Send them back and save us money. Also if we want to save money on prisons be like other states and have the private industry run them. The private run prisons are saving millions of dollars (see http://www.mackinac.org/article.aspx?ID=5022) for more information.
Now I am not a budget expert by any means but my recollection is the VLF was only a device to be used in fiscal crisis. What it was becoming as one of your commenter seems to assume is a permanent source of revenue for the state. It is real simple; California needs to learn to live within its means.
People always comment on this issue or that issue as being the big problem. NO, over spending is something systemic throughout our entire state government. Why, you might ask. Well the tail is wagging the dog here. We have a government building a regulatory machine which very existence size and appetite for more regulations, more employees is crushing our state.
We need to cut, we need to cut hard, and people are going to feel the pain. Those that feel the pain the most are those that have contributed the least but use the most. It hurts, it is sad and it is tough. We are in a deepening economic crisis around the world, and success is not found in the charity of government but ingenuity of the people and the best way to allow recovery is for government to step aside and be a companion assisting recovery rather than oppressing progress through more spending and taxes.
As far as the 2/3's majority vote, I must point to the old saying, "beware of the tyranny of the majority." I believe the 2/3 majority vote is something that was put into place to ensure that what ever budget or tax is passed is more than just a desire but a genuine need for the entire state.
I think the question should not be to defend the 2/3's majority but really why should we have a budget for the state that 2/3's can't agree on. So I guess the question has been returned, why should California only have a budget which only a simple majority can agree on?
Nope, actually, the State of California had a vehicle license fee of about 2% for a generation. I believe it was initially passed when cars became ubiquitous in the 1950s.
Under Gov. Davis, the state passed a "good times" reduction of the VLF because we were raking in so much money from the income tax. (Literally, that was the phrase used in legislative debate.) Unfortunately, the only reason that was true was the unsustainable bubble.
When the bubble burst, Gov. Davis reversed the "good times" reduction. But, Schwarzenegger thought that the good times should keep on rolling, and cut the VLF back to the "good times" rate. The state has to backfill that reduction to the local governments, resulting in what is itemized as a line item of spending of about $6.5 billion for the 08-09 fiscal year.
As to the immigration question, it must be very nice to only see one part of the equation. For a rough cost of how much undocumented immigrants cost the state, let's go with the State of Iowa's figure of 2.7% of the budget. This is California, so maybe we should double that to 5.4%. That's real money in California, but nowhere near the numbers we're talking about with the deficit.
Furthermore, without these immigrants, our economy would be a very different beast altogether. Agriculture would be much more expensive, resulting in far higher prices at the grocery store. Ultimately we all must eat, so we all end up benefiting from this immigration.
Pointing the figure at immigration is easy, it just doesn't really address the question though.
I guess I stand corrected, a fee in leu of a property tax that California changes to match its revenue loss. So, I stand corrected the fee is not for a financial fix but the increase is. So, we are losing revenue in the state, because people and business does not have as much revenue of their own to pay taxes on, so we increase fees is that how the VLF savior works?
I understand what you are arguing but I would have to still disagree that you can see the VLF as the silver bullet to the majority of the deficit problem. As the article said the flexibility in the state budget is minimal and the benefit from VLF would be in that minimal angle. But like I prefaced I am not a budget person but I can see part of the bigger debate here.
In a state with an electorate that wants all the services but does not want the taxes or the fees. So the debate we are facing right now could be termed the ultimate showdown, the royal rumble if you will. Who will win reduced services or increased taxes and fees.
I believe and continue to believe we are looking at more than just a revenue problem, we have more government than we can afford a diminishing ability to control our checkbook.
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