California Nearly Broke, $40 Billion 18-Month Deficit Projected

Published March 1, 2009

California entered 2009 with a state budget deficit estimated by the governor’s office to exceed $40 billion in the next 18 months. The office warned the state could run out of money by February and would be $5 billion in deficit by March.

Gov. Arnold Schwarzenegger (R) blames the problem on the state’s weakening economy and the legislature’s failure to stem the crisis.

“By the end of February we’re going to run out of cash, which means that we have to make our payments, paying our bills with IOUs,” the governor said in a press conference. “And by the next fiscal year the problem could be even much worse; it could go up to $30 billion. What is amazing about all of this is the legislators act as if we have $30 billion in surplus.”

Special Session Called

Last November Schwarzenegger called a special session to address the budget and called for “real revenues balanced with real long-term cuts, aggressive economic stimulus to put Californians to work, and mortgage relief to keep Californians in their homes.”

In early January he vetoed an $18 billion package of spending cuts and revenue hikes put forth by Democrats, who control the legislature.

Schwarzenegger said he prefers more spending cuts, and on January 8 he proposed shortening the state’s K-12 school year by five days to save money.

Two-Thirds Majority Needed

Tax hikes in California need a two-thirds majority for approval, and Democrats currently don’t have enough votes to hit that target. Thus Schwarzenegger and Democrat lawmakers ushered in the New Year with a plan to get around the supermajority requirement by raising various “fees.”

Recently proposed tax hikes have included a 2.5 percent surcharge on anyone paying personal income tax, a 0.75 percentage point hike in the sales tax, an oil severance tax, and replacement of current taxes on gasoline with even higher “fees.”

Any attempt to push through tax increases without the two-thirds majority likely would face lawsuits from the Howard Jarvis Taxpayers Association, said Jon Coupal, president of the organization.

Lawsuit Threatened

“We have no idea who is providing legal advice to the Democrats, but they should have been informed before launching this silly proposal that not only would a lawsuit be inevitable, the challenge would also succeed in preventing the taxes from ever being imposed,” Coupal said.

In a commentary on the organization’s Web site, Coupal wrote, “The two-thirds vote requirement, one of the most important provisions of Prop. 13, clearly provides that ‘any changes in state taxes enacted for the purpose of increasing revenues collected pursuant thereto whether by increased rates or changes in methods of computation must be imposed by an Act passed by not less than two-thirds of all members elected to each of the two houses of the legislature.'”

Coupal said the governor’s attempt to circumvent the law by using “fees” and other terminology instead of “taxes” won’t work.

“On its face, any attempt to circumvent this requirement is going to look suspicious at best,” Coupal said. “Nor is this language narrowly crafted. It applies whenever a statute is enacted for the purpose of raising revenue.”

Spending Uncontrolled

Coupal also questions the claims of California being out of money.

“They need to reduce the expenditures to match the level of revenues,” Coupal said. “It’s not like a Circuit City or Mervyns that has run out of money. Even with reduced revenues, California is still a huge tax-producing machine. People are continuing to shop [producing sales tax revenue]. Even though [shopping] is at reduced levels, it’s still producing tens of billions of dollars of revenues.”

There’s plenty of fat in the state budget, Coupal says.

“Local and state governments can still lay people off,” Coupal noted. “I’m surprised that state workers are complaining about being furloughed for a couple of days a month. It’s not like they are losing their jobs entirely like so many people in the private sector are.”

Coupal said the state must reduce future benefits for government workers, to reflect reduced incoming revenues.

“They can’t spend money they haven’t got,” Coupal said. “They’ve failed to reign in spending for 40 years.”

Phil Britt ([email protected]) writes from South Holland, Illinois.