California Reaches Short-Term Budget Fix

On July 23, after a 30-hour marathon session, the California legislature passed its third budget blueprint in nine months.  It is likely already out of balance.  

Problems Were Obvious

In spite of large numbers of millionaires, entrepreneurs, farmers, inventors, and just plain hard-working Californians, living in a state with a wealth of natural resources and wonderful weather, California can’t seem to balance its state checkbook.  

California’s present budget problems were easy enough to see coming. With the fourth latest tax -freedom day in America and a business tax climate that ranks so low that only New York and New Jersey are worse (according to the Tax Foundation), California has been exporting jobs to its neighbors for years. Further, with generous welfare benefits and little fraud enforcement, California, with 12% of the nation’s population, now has 32% of the nation’s welfare recipients.  

In September 2008, California’s budget was passed 80 days late.  The $15 billion deficit was closed without new taxes, but most of the $10 billion in spending cuts were one-time shifts and gimmicks.  

Higher Taxes Lost in May Vote

As the budget situation deteriorated, Gov. Schwarzenegger and lawmakers labored to put a new budget in place ahead of deadline for the fiscal year starting July 1, 2009.  The result was an unprecedentedly early budget, passed in February of this year. But the early budget contained the largest state tax increase in U.S. history while making insufficient spending reductions to bring the budget into balance. Within weeks it became apparent that this budget was also out of balance.  

As part of the February budget deal, six measures were put on the ballot in a May 19 special election.  Proposition 1A, a measure that would have extended the big state tax hike for two years, failed by an almost two-to-one margin, while all four of the other fiscal measures failed as well.  Only Prop. 1F, a ballot initiative prohibiting pay raises for state elected officials in deficit years, passed.  

More Taxes Vs. Spending Cuts

After the voters’ overwhelming rejection of higher taxes as a solution to fix the budget, Gov. Schwarzenegger reverted to his 2003-to-2005 era advocacy of no new taxes and government reform. With Schwarzenegger again anti-tax and two new Republican leaders in the State Senate and the assembly, budget negotiations restarted. In the meantime, California’s deficit grew to over $26 billion while revenues declined. The state controller started issuing IOUs (registered warrants) on July 2 for only the second time in 75 years as the state was going into debt by $25 million a day.  

Short-Term Solution

With California teetering on insolvency, Democrats were holding out for billions in additional taxes, while Republicans were advocating spending reductions and health and welfare reforms along with the elimination of excess state bureaucracy. The compromise reached on July 23 reduces spending, enacts healthcare delivery (Medi-Cal) reforms, puts in place modest welfare reforms (CalWORKS), including fraud-reduction efforts, and doesn’t raise taxes.  But, about half of the $15 billion in cuts were one-time accounting maneuvers while all of the $9 billion in revenue was also one-time. As such, the new budget doesn’t reform enough or reduce spending enough while borrowing too much, meaning that California’s lawmakers are guaranteed to be forced to revisit the budget again in a few months.  

Off-Shore Oil Leasing Rejected

The sole proposal to generate ongoing revenues — California’s first new offshore oil lease in 40 years — passed the senate but was rejected in the assembly with all but three Democrats opposing the bill and all but three Republicans supporting it. ABX4 23 (X4 for “Fourth Extraordinary Session”), which I authored, would have immediately put $100 million into the state budget with a minimum of $1.8 billion and as much as $4 billion more in oil royalties through 2024.  At the end of the lease, ABX4 23 would have seen the dismantling of four offshore rigs as well as onshore infrastructure in addition to almost 4,000 acres being donated as a nature preserve.  Even that wasn’t enough to overcome opposition from environmentalists who would rather see the offshore oil gradually seep into the ocean rather than be extracted in an environmentally sound manner with the royalties going to help an overtaxed state.