“Though the final spending plan is not pretty – few products of true compromise are – it is about as good a deal for California as possible in the current environment.”
This quote from now former Senate Republican Leader Dennis Hollingsworth in his column last weekend about the just-passed state budget really does sum up the reality of the 100-days late 2010-2011 fiscal blueprint for California.
There are a number of things about this spending plan that are positive, the major points of which I will summarize below. But it is important to note that this budget is not a good one for our state – not by a long shot. It does, however, as Hollingsworth points out, likely represent the best possible budget given that compromise was necessary with the Democrats who hold a majority of each legislative chamber in order to get a budget document to the Governor.
What’s good about this plan? Well the best feature of the budget isn’t what is in it, but rather what is not in it. All year long, there has been a rhetorical battle taking place between Republicans and Democrats concerning tax increases, with Republicans (this year to include Governor Schwarzenegger) drawing a line in the sand against any new taxes, while the Democrats, seemingly on a weekly basis, would throw more and more taxes on the table (many, many billions of dollars worth). The budget that was adopted does not include any general increases (don’t miss my critique below about “fee increases”).
It is also significant to note that this budget includes over $7 billion dollars in spending cuts. Fortunately the State of California, unlike the Federal government, cannot print money. If they could, we’d all be in very big trouble. But since they can’t, once again the recession-smacked government has to make do with less. Perhaps the Democrats who have been running the legislature, by and large, for over four decades will be reminded that the money that state government has to spend is actually tied to the health of the economy, which they seem to consistently forget).
Also included is some incremental but significant reform of the state’s public employee pension system. State workers will have to work five years longer (at least new ones), and pension “spiking” is mitigated by now calculating pensions based on an employees last three years of service, not just the final year.
Finally, on the positive side of the budget ledger is a modest ballot measure that will not significant overhaul state spending if passed by voters, but will impose a "rainy day fund" which is better that what we currently have – nothing (but this ballot measure has a downside, see below).
Let’s talk about the not-so-good news, though. And I should add that, by and large, these are all issues because of the left wingers in the legislature, who work hard to make sure that the state cannot produce a truly responsible spending plan.
First and foremost – a good chunk of the projected revenues in this budget are unrealistic. This budget projects billions of dollars more in anticipated funds from the federal government than are currently allocated, or are expected to be sent here. Also the projected revenues from state income taxes are, I believe, higher than they should be. One very capable California budget expert told me that they think that this budget will carry us through to perhaps March before the legislature will have to take mid-fiscal year action.
What is the difference between a tax hike and a fee? That line sometimes get blurred. But it is significant to note that while this is a “no new tax” budget, it is certainly not a “no fee hike” budget – with a significant number of higher fees (including a particularly onerous one on nursing homes that are predominately serving non-government supported, self-sufficient retirees).
This budget also has a number of programs in it to raise funds that are – well, somewhere between imprudent and dumb. As an anecdotal example, this budget calls for a massive sale of state-owned buildings, with the idea that the state will then lease back the space from its new owners. Governor Schwarzenegger himself pointed out that this was not ideal at the press conference after the budget had passed the legislature.
It is also important to note that the budget includes special "deals" for some local projects. These include special rules to help in a local taxpayer support of a sports stadium, and for an ethanol company.
But wait, there’s more. With regards to pension reform, it is important to note that while the provisions that were passed were positive, and that they were used to leverage the state’s largest public employee union, SEIU 1000, into a more favorable contract (for taxpayers) than they would have preferred, if you step back and look at the big pension tsunami preparing to strike California, we have a terribly long way to go. The public would be ill-advised to think that this budget has averted a major disaster in the making. Ultimately, the two things that need to happen for the long-term financial well-being of the state is to leverage layoffs in order to get significant concessions from the unions to lesson taxpayer liability for current employees, and we need to (at least with new employees) end the out-dated practice of defined benefit retirement plans. New employees should be responsible for taking a portion of their salaries and putting it away to plan for their own retirements.
Finally, this budget has given birth to a ballot measure for some future election that purports to contain real reforms for the state budget process, with some real spending controls and the establishment of a “rainy day fund” using a portion of the state’s income. The problem is that, as I understand it, this ballot measure’s language, with a few modifications, is the language that was used in last year’s Proposition 1A (though happily a massive tax increase is no longer tied to it). Don’t get me wrong, the modest provisions of this ballot measure are certainly better than the status quo. The reason why I am down on this proposal is two-fold. The first is for the missed opportunity. This measure should have had a real spending cap in it, that was solid and could not be gotten-around by a determined Governor and legislature. It does not. More importantly, this measure will undoubtedly be sold to the public as the “cat’s meow” and assuming the voters pass it, they will be duped into thinking they passed a much more impactful measure than they will have actually done, with voters assuming they have put in a useful "check" against big government, and the measure is far to modest to actually achieve this laudable goal.
It is worthy of note that this budget also delays implementation of some of the incentives for business that were struck in the horrific 2009 budget deal. While their delay is not helpful for the economy, it is hard to get animated in defense of this tax-breaks given that the big business community that advocated them did so while support over $16 billion in higher income, sales and car taxes on we, the little people. I am not alone in my thoughts here — the Howard Jarvis Taxpayers Association is officially neutral on Proposition 24, a measure financed by the California Teachers Association to permanently undo these business tax breaks.
Let me close on two points…
The first is to commend Governor Schwarzenegger and Republican Leaders Hollingsworth and Garrick for doing the best that they could under the circumstances. The appetite of Capitol Democrats to redistribute wealth is seemingly insatiable and very notorious – only the actual scarcity of funds and a determination of Republicans kept this budget going in the right direction – shrinking. The handful of legislative Republicans who voted for this budget can feel justified in that it probably was the “best possible” budget. The lion’s share of Republicans who did not vote for it are certainly on solid ground – it is a far cry from the budget that Californian’s truly deserve.
The second is to say that the passage of this particular budget really underscored the high stakes poker that is the race to succeed Governor Schwarzenegger. Come early January, either Jerry Brown or Meg Whitman is going to be sworn in as Governor. No matter which one it is, the red ink will be coming at them with all of the fury of a river overflows and breaks the dam holding it back. Not only is the current fiscal years spending plan out of whack (as I mentioned above) – causing this new Governor to deal with an immediate and large budget shortfall. But add to it that the 2011-2012 budget will have to deal with billions in anticipated shortfall – and that doesn’t even include that the massive, temporary tax increases that were passed in 2009 are set to expire in 2011 as well. If Jerry Brown is elected, taxpayers can invariably look forward the voracious appetite of the Capitol Democrats to meet a very sympathetic Governor (despite his campaign rhetoric). If Whitman is our next Governor, look for a battle like you’ve never seen before, as she has not only signed a no tax pledge, but opposition to new taxes has been a cornerstone of her candidacy.