California Deficit Soars, Calls for Spending Reforms Grow

Published June 12, 2012

California is facing a worse budget predicament than previously thought, and while the governor touts additional short-term fixes of tax hikes and spending cuts, opponents are calling for systemic reform.

In January, the state was staring down a $9.2 billion deficit. By mid-May, the projection had ballooned to $15.7 billion. Gov. Jerry Brown (D) told reporters the soaring deficit has been caused by lower tax receipts in the aftermath of the “worst recession since the 1930s.” A few days later, the state’s nonpartisan Legislative Analyst’s Office said the budget hole might bottom out at $17 billion.

This November, Californians will vote on a measure that would increase the personal income tax rate on the state’s wealthiest taxpayers for seven years, to 13.3 percent (the highest state income tax rate in the nation) and raise the sales tax one-quarter percent for four years. The initiative is estimated to generate $8.5 billion annually. If rejected by voters, $6.1 billion in automatic cuts to school and public safety funding would automatically commence January 2013.

The voter referendum allows Brown and the legislature to dodge responsibility for making lasting change, said Brian Calle, a senior research fellow at the San Francisco-based Pacific Research Institute.

“The average person isn’t meant to dissect a complicated tax code,” Calle said. “Our ballot box legislating in California has really, really hurt the state.”

‘Scotch Tape and Gimmicks’

Amid the intense debate, Democrats and Republicans blame each other for “phony” or “gimmicky” measures they say led to the red ink in this and previous years.

“Budget after budget was patched together with Scotch tape and gimmicks,” Brown said of the budgets before he took office last year. “I worked with the legislature to enact billions in painful spending cuts from welfare and Medi-Cal to prisons. When the legislature passed another gimmicky budget . . . I vetoed it.”

California’s problems run deeper than the annual budgeting nightmare, however. The state was struggling with its budget long before the recession hit, Calle notes.

“It’s budgeting 101,” Calle said, “but the state budget office estimated expenses low and revenue high. You’re always going to end up in the red when you do that.”

The state’s budget plans have long relied on trimming spending around the edges but mostly reallocating money from one pot to another. This year’s projected revenues include $1 billion from cap-and-trade regulations as AB 32, California’s Global Warming Solutions Act of 2006, goes into effect. The state’s Legislative Analyst’s Office warns it is an unstable calculation.

Huge Unfunded Liabilities

That’s compounded by the state’s collapsed economy and large number of unfunded projects and programs. These include unfunded obligations of more than $100 billion for government pensions and $62.1 billion for health insurance for retired government employees. There’s also a $69 billion high-speed rail line (though transportation analysts say the largest public works project in state history could end up costing more than $100 billion)—mostly unfunded. The state also must spend money on real property, including an inventory of 2,339 state-leased and 2,942 state-owned properties.

Brown’s revised budget outlines an approximate 50-50 split between state spending reductions and tax increases. His proposal includes reductions to public assistance, hospitals, and the state’s Medi-Cal program. He is also negotiating with Service Employees International Union Local 1000, which represents the largest number of state employees, on a 5 percent pay cut.

In spite of the cuts, the budget includes $4.9 billion in additional spending, and general fund spending is expected to grow 29 percent above 2011-12 levels by 2015-16, according to California Fact Check, a website run by the California Assembly Republican Caucus.

De Facto Default’

“We are in a state of de facto default because Wall Street is about to cut off our credit,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, based in Los Angeles. “When you can’t even get money at a Tony Soprano interest rate, you’ve got a problem.”

With the nation’s CEOs recently voting California as the worst state in which to do business for the eighth year in a row in CEO Magazine’s annual business climate survey, and Silicon Valley industries migrating to more business-friendly states, Republican lawmakers say the way for California to climb out of the budget hole starts with becoming business-friendly again.

“Californians can’t afford another budget based on phony revenue projections and spending reductions that never materialize,” said Senator Bill Emmerson (R-Hemet), vice-chairman of the Standing Committee on Budget and Fiscal Review. “State spending has increased by $20 billion since the recession began. Despite this fact, the majority party continues to ask Californians to raise their taxes even though they are unwilling to enact crucial government reforms and improve our state’s tough business climate.”

‘Time to Clean House’

Emmerson and others say the legislature needs to take systemic steps toward paying down the debt and creating jobs.

Coupal said the legislature is paralyzed by an institutional resistance to needed reforms.

“In California, if this budget were in Barnes & Noble, it would be in the fiction section—everything about it is fake,” he said. “Brown says we’ve stopped the gimmicks. Nobody in this town believes that. Californians are not anti-government, but they’re paying a lot of money and getting really lousy services. At this point they’re saying, we give you this money, it’s time to clean house.”