California Finally has a Budget: A Deal Only Pols Could Love!

It’s not pretty, but it works.  That was the general consensus about the deal struck by the Big 5 (Governor Swarzenegger plus Assembly and Senate Leadership from both parties) to close the State’s $26 billion budget gap. Details are still leaking out while legislative leaders scramble to brief their members on what they have signed up for and plead for enough votes to get 2/3 approval on a package of about a dozen bills now scheduled for Thursday July 23rd to bring this latest budget saga to an end.

The compromise is reported to have about $15 billion in spending cuts which means there is another $11 billion in smoke, mirrors, stealing from others or borrowing to “close the gap”.  So did they close the gap or just kick the ball down field for another first down?

Here is a quick list of the major spending cuts as we know them today:

Spending Cuts

Source

Impact

$6.0 billion

K-12 Education To get deal to take $6.0 billion in dedicated K-12 funds this year; the Big 5 agreed to repay $11b to schools from past takes when economy improves.

$3.0 billion

Universities UC & Cal State to furlough staff and hike student fees—this is token

$1.3 billion

MediCal Health care costs are out of control. These cuts mostly stick it to hospitals and doctors with lower reimbursements.

$1.2 billion

Corrections Given the power of the prison workers union this is a big deal; but the pols better hope none of them ever gets sent to San Quentin.

$1.3 billion

State Employees 3 unpaid furlough days per month

$800 million

State Parks Parks must have friends since Governor proposed closing all state parks.  Cuts hurt but could have been worse—much worse.

$875 million

Social Services Ditto here—social services spending cuts hurt poor and elderly with few other options but the politics on this revolves around inclusion of illegals in safety net.

And don’t forget the smoke, mirrors and gimmicks to avoid deeper cuts:

Gimmicks

Source

Impact

$1.5 billion

General Fund Delays final paycheck of fiscal year one day pushing expense into next budget year.

$4.7 billion

Local Government Takes money from cities and counties to fill state general fund gap. Technically a “loan” to be repaid with interest but locals must make real cuts or go to voters to raise property or sales taxes—yea right!

$2.1 billion

Economic Development State takes dedicated revenue for redevelopment projects often used as match for other sources.

$1.0 billion

Gas Tax Can you say Holy Pothole?

$4.0 billion

State withholding Accelerates state withholding from wages and increases amount of withholding 10%–but “technically” this is not a tax—HA! HA! HA!

$2.0 billion

Borrowing And we still will borrow $2 B’s unless the economy gets worse or not better—see you again in 6 months!

We have yet to learn about all the back room deals that were cut to get the two-thirds vote the Big 5 promise to deliver to pass this budget.  No doubt there will be surprises there for both good and ill—laws, sausage, budgets and politics being what they are. So stay tuned for the rest of the story.

Let the Screaming Begin!

It must be a reasonably good “political” deal since the special interest constituencies and state employee unions are screaming about it this morning as I write this.  Here’s what the state employees union Local 1000 President Yvonne Walker said:

“Legislators’ and the governor’s refusal to close tax loopholes, eliminate waste in private state contracts, and make big tobacco and big oil pay their fair share, is another series of bad decisions,” Walker said in a statement. “We cannot accept three furlough days … we’ll fight it in the courts, in the Legislature and in the workplace to have it cut back.”  “Step up and show your anger through unity in our worksites and our strike authorization ballots.”

The Sacramento Bee also ran nonstop public reaction on its website side-by-side with the reporting of the facts as the reports gathered them for their stories.  Here is a sample:

“The legislators passing this phony budget have insulted the intelligence of the people of California.”

“Here’s the score for state workers – 13.85% pay reduction, increased State withholding taxes, same work load. Gov Adolph and his pinhead Mini-me spokesidiot won the media blitz by successfully vilifying the lowly drone. Now every brain-dead, right-wing goose-stepping elitist parrots the “blame the state worker” mantra. Never forget that it was this joke of a governor and these corrupt, self-serving legislators who wrought this fiscal meltdown, not state workers. These political hypocrites are forcing everyone to pay for their mistake. They should be imprisoned. But no one is holding them accountable. They got away with it. At ours and others’ expense.”

‘Until the outrageous public safety employee pensions are axed and reformulated to reflect the real world, there is simply NO state or county fiscal crisis as politicians and bureaucrats want you to believe. This new budget appears again to be mostly smoke, mirrors, and accounting tricks. These legislators simply don’t get it.”

“”shifting costs into the future” – wow, that’s smart. How quickly can I get out of CA?”

“Why do we, year after year, applaud these morons for consistently passing a bad budget, always weeks late, and full of crappy proposals? Why do we honor poor performance and clowns?”

“Expect more deficits. The $1.3 Billion in savings for furloughs is not happening. As a state manager, I have been getting paid overtime on Saturdays and Sundays. Rank and file have been upgraded and are earning more overtime pay now. There are 3 Tiers in state: Tier 1 are employees in departments exempt from furloughs (Education, BOE, SCO, SCIF,etc or about 40,000 employees. Tier II are employees in Federal funded and special funded departments (about 100,000 who are being upgraded in place and making mega-overtime pay (both non-supervisors and supervisors). Tier III are employees in General Fund departments Making some overtime but really not being upgraded in place (New to state service, looking to get out soon, loyal for some reason.) Based on this agreement, abandon General Fund departments NOW !! SCIF won their lawsuit and will not have to participate in furloughs (expect other departments to win their court cases soon, EDD? Caltrans? Calpers? DMV?”

For more of this reaction see: http://www.sacbee.com/

So What?

In the Spring primary election, California voters rejected every ballot proposition the politicians had proposed to raise taxes and shift money to close the gap, except the one to freeze politicians pay in any year in which there is a budget deficit.  Since then, Governor Swarzenegger and Republicans have refused to support any plan that raised taxes and this latest budget stalemate ensued.

Since the California Constitution requires a two-thirds vote to pass the state budget, the Democrats were stymied and ultimately the Big 5 reached a compromise that makes cuts in many state programs, “borrows” money from dedicated school funding, counties and cities, gas tax revenue for roads, redevelopment and other places we have yet to learn about on the promise to pay back most of the money when the economy turns around.

This is not the end of the story by any means.  California will not balance its budget in truth until the economy turns around.  This budget will not stay balanced until there are genuine reforms in the tax structure that currently relies on big tax payments from high income tax brackets and volatile stock market capital gains—and genuine limits on spending.

This compromise did create a $875 million “rainy day fund” but that is rounding error in a $100 billion annual budget—and it will likely be used up in the next 3 to 6 months since not all these cuts will stick nor will all the gimmicks work—nor will the economy get that much better that fast.

Three signs of encouragement:

  1. Lower Base Budget Next Year. The budget deal resets the General Fund base budget for next fiscal year from $100 billion to $78 billion—great news if they can live with that base or cruel gimmick if it just makes next year’s structural deficit that much bigger.
  2. CALPERS Raises Retirement Contributions. Calpers raised its mandatory employee contribution into the state retirement plan from 2% of salary to 4% of salary to make up for stock market performance losses.  This is a great humbling for this giant and mischievous pension fund that has spent the last decade in the boom times sticking its nose into other companies business with its social agenda.
  3. Election Season is Starting Early. Why is this encouraging?  Because the convergence of worry over unemployment and the recession, this budget mess, and voter disgust with politicians is concentrating the mind in the electoral search for “fresh ideas”, “new faces”, and adult supervision for Sacramento.  Most of the Big 5 are termed out include Arnold.  California could even lose one seat in Congress is people keep moving out at these rates.  Every candidate will face a skeptical mob of voters with short memories that should be fun to watch. Imagine the California version of “cage fighting” with Barbara Boxer vs for HP CEO Carly Fiorina for Senator and former eBay CEO Meg Whitman vs either Attorney General/former Governor Jerry Brown or San Francisco Mayor Gavin Newsom—talk about blood sport!!!!

Don’t cry for California!

This is a state of great promise and enormous creative potential but it is wandering in the wilderness.  It is one of the world’s great laboratories for both innovation and new ideas.  It has the potential to grow itself out of this current recession stronger, wiser, and more economically vibrant.

California is also a microcosm of the potential train wreck that lays ahead for President Obama if he lets the Democrats in Congress do to him what they have done to California.  It is also a lesson for Republicans who once dominated this state’s political leadership and squandered it by out of control spending on their watch and politics as usual to get by instead of keeping faith with the voters aspirations for a state government that enables their full potential.

Both major political parties are controlled by their fringe groups.  The largest single party registration in California today is “decline to state” leaving little doubt the state’s voters are tired of the game.  We expect a ballot proposition to approve an open primary—the state courts rejected the last one, but voters will do it by Constitutional Amendment this time telling the Supreme Court to stay out of politics.  An open primary neuters both Democrats and Republicans and allows voters to choose the top two candidates from any party to run for state offices.  True competition—and a pox on both your houses!

Some argue for a Constitutional Convention mostly in search of an end to the two-thirds vote rule.  Voters are wary of such grand overhauls fearing they might end up with something worse than we have at present.  But a grass roots voter revolt is entirely possible here in the Golden State.  We’re ready for a good hanging!