California lawmakers have passed and Gov. Arnold Schwarzenegger (R) has signed a budget deal eliminating a $26 billion budget deficit.
But the deal, signed by the governor on July 24, is being derided as bizarre and full of gimmicks and is bringing warnings that the state’s budget problems will be even worse next year.
Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Association, a California taxpayer advocacy group, thinks the budget deal “could have been worse” but, “It is still pretty bad because although there are no blatant or upfront tax increases, there are actually ‘revenue accelerators,'” Vosburgh said. “They are going to start taking more withholding out of people’s paychecks. So really this deal is the state borrowing from the taxpayers.”
Vosburgh characterized these budget moves as “pranks” and “gimmicks,” citing, for example, “moving the payday of state personnel ahead by one day in order to appear to be saving one billion dollars by accounting.
“A lot of this is just plain nonsense, and the kind of thing that would probably get private-sector managers before a grand jury,” Vosburgh added. “I guess if you had to give this budget deal a grade, I would give it a mediocre minus, bordering on bad.”
Prof. Roger Noll, a Stanford University economist, believes the budget deal is bizarre and dangerous.
“California’s budget process is so constrained by existing constitutional amendments and statutes, it is not possible to balance the budget,” Noll said. “The system is impossible, and one could not possibly have made a decent budget within those constraints. The crisis will return next year, and the problem they face next year is roughly of the same magnitude they faced this year, about a $20 billion deficit.”
Noll added, “What’s more, they will not have any more remaining accounting gimmicks to play. Next year, something terrible will happen. They are in an extremely difficult situation that they cannot solve through expenditure cuts alone. Even if they cut everything they could, statutory requirements make them still short by about $10 billion.
“They are in a terrible bind, and as long as there is a two-thirds voting requirement there is no way a tax increase will occur in the state legislature. It is interesting, though, that they chose to kick this problem into an election year, next year. That is bizarre,” Noll concluded.
Steve Levy, director of the Center for Continuing Study of the California Economy, thinks the current deal should be called “a temporary budget.”
“When the governor puts out a preliminary budget in January 2010, I would guess there will be a $20 billion shortfall, of which part is a $10 billion structural gap that this budget does not address,” Levy said. “Also, some of the tax increases implemented this year expire, some of the borrowing can’t be repeated, and they will have a little less stimulus money to use. There will be severe repercussions on California’s financial reputation. This is a ‘temporary budget’.”
Melanie Reagan, chief press secretary to California’s state Senate Republican Leader, Dennis Hollingsworth (R-Murrieta), says Hollingsworth does not consider the budget deal a success.
“Clearly this budget is no victory because of the rampant spending of these automatic spending formulas that are built into the state’s budget and are statutory. There are no cost controls in this budget,” Reagan said.
Adam Summers, a researcher on California’s economy at the Reason Foundation, a Los Angeles-based think thank, believes the one good thing about this budget deal is that it did not include any fee or tax increases.
“I think the state legislature understands that more taxes will drive more businesses out of the state,” Summers said. “However, this budget deal is filled with short-term, temporary solutions, and it is kicking the can down the road. It does not address the long-term structural budget deficit.”
In particular, Summers believes there is a need for serious and comprehensive reform of how California pays for state employees’ pensions.
“Public employees in California get significantly better pensions than their private-sector counterparts, and they get good health benefits. When they retire, the state pays 100 percent of their health care benefits,” Summers said, which is extremely rare in the private sector.
Summers said the lack of reform has probably pushed California to the brink of bankruptcy.
“We probably are getting close to a bankruptcy tipping point,” Summers said. “There will probably be reform in California when there is enough voter anger over California’s state employees getting richer and richer while they—the citizens of the state—are getting poorer and poorer. That is when it is going to come to a head, and there will be serious reform.”
Noll said he believes the budget deal is almost tragic.
“Undoubtedly, one of the outcomes next year would be a sort of redux of the federal government closing down,” Noll said. “The state legislature missed their opportunity this year to try and do something that would get them through 2009 and 2010.”
([email protected]) writes from Cambridge, Massachusetts.
Pensions Threaten Bankruptcy
No Cost Controls
‘Really a Temporary Budget’
‘Pranks, Gimmicks, Nonsense’