Budgeting, or California Dreaming?

Monday, June 25, 2012

In the fabled Golden State, there are certain rites of summer. Along those lines: family vacations, top-down convertibles, the bow-wave of students coming and going at California’s nearly 400 colleges and universities.

Not to mention the odd wildfire when the mercury rises and the winds gust.

But there’s another Golden State summertime rite de passage – one that we’ve chosen to discuss in this, Eureka’s maiden voyage. And that’s the annual passage of California’s state budget.

Over the course of this week, we’ll examine various facets of the Golden State’s budgetary reality – the strained safety net, educational system and infrastructure grid, plus what if any budget reform is feasible.

And, in the columns immediately below and authored by a former state Department of Finance director, we’ll explore why the Golden State oft-times makes ill-advised choices.

But first, some background information:

A California governor unveils a budget proposal in early January, on the heels of his State of the State address (the governor spending his December imbibing at pre-holiday parties and agonizing over bad financial numbers – the two schedule demands not mutually exclusive).

The State Legislature, for the most part, drags its heels until the so-called“May Revise” of the budget, when the spending plan is readjusted for April’s tax revenue (this year, the “Revise” became a “Surprise” when it was revealed the state’s deficit had ballooned to $16 billion, or double the governor’s projection in January).

Then the real fun begins . . .

Fast-forward from mid-May and mid-June and the constitutional deadline for the budget’s passage. Lawmakers would ignore this speed bump were it not for 2010’s Proposition 25, which requires a spending plan by this date. Otherwise, legislators forfeit their salaries.

The result? California no longer has the prolonged budget impasses that occurred during the previous gubernatorial reigns of Arnold Schwarzenegger, Gray Davis and Pete Wilson.

But, in their rush to safeguard their paychecks by passing a budget deal “done” by June 15, lawmakers have sacrificed accuracy (some would say, honesty) for speed’s sake.

The budget sent to Gov. Jerry Brown earlier this month was, in fact, a very incomplete document – so much so that the blanks are still being filled in(translation: still trying to put a dollar sign on welfare cuts and reductions in health care-services for lower-income children) before a series of floor voters later this week will send a revamped plan back to the Governor’s Office.

The final act in the annual budget ballet: whether the state has a spending plan in place by the July 1 fiscal deadline. And, despite the differences between Brown and his fellow Democrats on those aforementioned cuts, getting the governor’s signature by this time next week seems likely (in part, because Brown knows that the image of a state government running on time makes his tax initiative an easier sell).

A few thoughts:

1)  Spending Spree. I came to California and Sacramento in early 1994, the final year of Pete Wilson’s first gubernatorial term. The budget he signed that July included $40.9 billion in General Fund spending. The last budget that Gray Davis signed into law, in 2003 and shortly before his recall defeat, included $70.8 billion in General Fund spending. The last budget that Arnold Schwarzenegger agreed to, in 2010 and after a 100-day standoff with legislators, included $86.5 billion in General Fund spending. That’s a 111% increase. It’s also a growth rate in spending six times greater than California’s gain in population (32 million in 1994; 37 million in 2010). Simply put, California’s been spending at a rate it can’t support – especially with a revenue stream (an over-reliance on fluctuating income, sales and capital-gains tax receipts, as evidenced in this year’s Facebook IPO) with more ups-and-downs than Oprah Winfrey’s caloric intake.

2)  The Golden State Difference. California’s not the only state struggling in these slow economic times. According to the D.C.-based Center on Budget and Policy Priorities, 30 states are heading into July and their new fiscal year in the red. What distinguishes the Golden State from its 49 junior partners: the size and depth of the nation-stare’s misery. The combined deficit of those 30 states is $54 billion, or an average of less than $2 billion per state. Jerry Brown stepped into a $28 billion deficit in January 2011. Arnold Schwarzenegger was swept into office thanks, in part, to the $38 billion deficit that arose on Gray Davis’ watch. Pete Wilson was confronted with a $14 billion shortfall, which many sound like small potatoes except for the fact that the state budget was only $43 billion back in 1991. It’s easy to forget that California and its world-class economy makes for apples-to-oranges comparisons with other states. But the size of the Golden State’s is a reminder that we’re a big state . . . swimming in a very big sea of red ink.

3)  Same Old Story. Pete Wilson inherited a budget meltdown in 1991. By 1999, when he left office, California had gone from 50th to 1st in job-creation. Wilson’s successor, Gray Davis, inherited a red-hot economy riding the bubble. When that bubble burst, so did Davis’ political fortunes. Enter Arnold Schwarzenegger who, like Wilson, walked into a fiscal train wreck. The Governator didn’t lack for creative approaches – spending cuts, tax increases and borrowing in the guise of a voter-approved “recovery bond”.  Still, the film star who battled all sorts of cinematic bad guys and aliens was no match for the Sacramento budget monster. And so California’s now turned to Jerry Brown, who campaigned in 2010 on austere rhetoric and a promise of budget austerity. That’s four governors and 20 years of a budget merry-go-round. The cast changes; the budget plot doesn’t. George Jetson said it best when he got trapped under the treadmill: “Jane, stop this crazy thing.”

4)  Is There A Way Out? Late last year, New York Gov. Andrew Cuomo reached a deficit-cutting tax deal with Empire State legislators. In New Jersey, Republican Gov. Chris Christie seems on the verge of crafting a budget with a Democratic-led Legislature. And California? In fairness, other states have advantages the Golden State doesn’t (Christie, for example, is forecasting a nation’s-best 7.4% revenue growth for New Jersey). That said, California’s political leadership is prone to . . . well, California dreaming when it comes to long-term budget planning. How to remedy this? That’s another topic for another Eureka forum.

And with that, I hand over the reins to Michael Genest, who served as director of California’s Department of Finance during the Schwarzenegger Administration, for his take on California budgeting . . .

Bill Whalen is a research fellow at the Hoover Institution and formerly served as chief speechwriter for California governor Pete Wilson from 1994 to 1999.

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