Budgeting for Failure: CA’s Economic Woes

Illustration by Erin Johnson

Illustration by Erin Johnson
A Faulty Machine

It would not be unwarranted for Californians to conclude that their state is currently like a sinking ship that is mired by a dysfunctional budget process that is likely to sink California deeper as a result of the state’s deteriorating revenue and economic outlook. A high unemployment rate, home foreclosures and a huge deficit, among other negative occurrences related to the state’s economy, have made California’s fiscal crisis an inescapable reality, despite the budget package that was painstakingly passed in February. The question is how much further will California sink before reformation of the state’s budgetary model is seriously considered?

Relief was short-lived once the state legislature and Gov. Arnold Schwarzenegger passed a budget that looked to eliminate the state’s $40 billion deficit, as the Legislative Analyst’s Office (LAO) recently reported that the faltering economy will cause the budget to still fall short by about $8 billion. Such a shortfall is indicative of a flawed budget system that will continue to produce stalemates and larger shortfalls in the future if California fails to produce a dramatic overhaul in the way budgets are passed, namely the counterproductive two-thirds majority that is required by the state’s Constitution.

Supermajority requirements are not in place in 47 other states’ budgetary processes, so it’s time for California to join those ranks by adjusting the state Constitution. Also, the veto power that the minority party holds over the budget weakens the majority party’s power – based upon election results – to rightfully enact legislation that would dictate how the state is run. Reform is needed and it is possible through a ballot initiative in June 2010 or through a repeal of the two-thirds rule in the legislature (which would also require a two-thirds vote). While checks and balances and protection of the minority are important to any governing process, the veto power of the minority party is artificial and voters will inevitably lose faith in the system if they cannot pinpoint who they should hold accountable due to the lack of power the majority party ultimately has when it comes to such financial matters.

Due to this year’s struggle to approve a budget – particularly new taxes and spending cuts – with a two-thirds vote, public support will likely only increase for reducing the voting requirement. If California’s budgeting process remains the same, its flaws will continue to be a detriment to the state. California will no longer be a destination for businesses, and by extension growth, if there is a lack of focus on long-term fixes and development as opposed to short-term solutions that are bound to perpetuate the state’s fiscal problems.

For instance, California has resorted to selling billions in state bonds, which is not a long-term solution and will ultimately burden future taxpayers. The California Budget Project, a nonpartisan organization that provides fiscal analysis, points out that “the budget got so bad due to an ongoing imbalance between revenues and expenditures that is exacerbated by the state’s past reliance on one-time ‘solutions’ to balance the budget and debt service costs attributable to deficit-related borrowing.”

One such temporary fix is Proposition 1A, which voters will get to rule on in the special election to be held on May 19, as stipulated by February’s budget package. Gov. Schwarzenegger has been strongly pushing for this proposition because it will involve a series of temporary tax increases and limit spending in strong years.

However, according to LAO, this proposition is not guaranteed to produce results and could arguably make things worse. David Dayen, a writer for Calitics, argues, “The so-called ‘reform’ of Proposition 1A to hoard revenue in positive economic years to use in down years, will be inoperative for the foreseeable future, and even when the economy retains balance, the revenue forecasts for any spending cap will be increasingly based on these horrible years, leading to a disaster without end.”

The state’s perpetual revenue shortfalls are indeed problematic and while negative economic conditions have contributed to lower revenue intake, it is worth noting that at the local and state level there are no incentives to adhere to a fiscally responsible budget by spending less than what budgets stipulate at the beginning of the fiscal year. Furthermore, those who point to massive government spending as the sole source of blame ignore the fact that government inherently seeks to spend more than it has, and a combination of tax cuts during more prosperous times as well as large government spending has contributed to the dire fiscal situation the state currently finds itself in.

If solutions are to be found, long-term focuses such as solving the perpetual structural revenue shortfall problems, prison reform (marijuana laws included) and energy independence are conceivable directions. The state should also look to use federal stimulus funds as a way to patch things up while developing bigger, longer-term solutions. Unfortunately, due to the narrow interpretation of State Treasurer Bill Lockyer and Department of Finance Director Mike Genest, it was decided that California did not meet a self-imposed threshold to receive $10 billion in federal funds that would prevent a $1.8 billion personal income tax increase and $948 million in cuts. Consequently, on a local level, the University of California will receive a cut of $50 million in state general funds.

Perhaps it will have to get worse before it gets better, but if that’s the case, then Californians may have to prepare to live in a state that perpetually faces fiscal crises. That is if the state government can first keep the ship from completely sinking.

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