Yeah, California Is Still Well And Truly Screwed
There's a very pernicious habit in California of turning away from budget issues once a crisis is averted, in a show of relief that we will at least get a small reprieve from having to deal with the contentious battles for a period of time. This false sense of security is bad enough in regular years, when the budget is cobbled together through borrowing against the future and no long-term solutions are implemented. In this dynamic economic crisis, when rosy outlooks can darken in a matter of days, it's downright foolhardy.
Greg Lucas at California's Capitol has been one of the louder voices in insisting that the budget crisis is not at all over. According to Controller John Chiang, revenue in February was $900 million dollars below estimates. Now, if you extrapolate that out, we'll be in a $10-$12 billion dollar budget hole by the end of the year just if things remain at the same level. This is of course unlikely, as the February national job numbers showed. So much of the tax increases passed in the February 19 budget solution are tied to employment - an increase in the income tax, and sales tax increases that of course rely on residents having purchasing power. In addition, these lean economic times will push more people into needing state services, like unemployment and Medi-Cal. Then there are the counter-cyclical increases and cuts that are working against what the economic recovery is attempting at the federal level.
In addition, many of the spending and taxation decisions made in the recent budget cancel out some of the benefits to California of the American Recovery and Reinvestment Act.
The federal package provides an estimated $13.1 billion in refundable income tax credits for middle to low-income Californians at the same time the state budget includes $12.2 billion in tax increases, only some of which are deductible. And only half of taxpayers deduct.
The federal bill includes a one-time $250 payment to the state’s aged, blind and disabled poor at the same time the state is reducing the maximum grant for an individual by $37 a month, $444 annually.
“California is roughly an eighth of the nation. The impact of this is sufficiently large that it could affect the prospects of recovery for the nation as a whole,” said Jean Ross, director of the California Budget Project, who has been examining how the state’s budget interacts with the federal stimulus package.
The biggest short-term issue is cash. Lucas did an interview with John Chiang where he admitted that we will still need to borrow against the anticipation of future revenue as early as April, to the probable tune of $1.5 billion. Because the budget deal was completed too late to include changes to the income tax code, those revenues will not come in until the following tax year. The sales tax will go up April 1, but that will not be enough to cover expenses.
CC: Is February a big month for obligations?
JC: No. April is the real difficult month. If we don’t get that RAN, we’re $636 million in the red. But then the bigger issue is July. When we walk into the next fiscal year we will need a massive cash infusion.
CC: How come?
JC: We always borrow at the beginning of the year, 25 out of the last 26 anyway and then in April we make up the difference. But this year we walk in with weakness into the next fiscal year. There are less tools in the tool kit. We’ll need a massive RAN or RAW (Revenue Anticipation Warrant).
Remember these last budgets borrow $16.5 billion from (state) special funds to backfill the general fund. So if we have any emergency in the state requiring aid from one of those special fund departments, the state is in trouble. Over 1,100 special funds in the state and we borrowed from over 650 of them. Part of this last budget solution gives us the ability to borrow another $2 billion more. The governor’s budget has us borrowing $11 billion from special funds over the next 18 months.
So we’re going to have to do some outside borrowing for the next fiscal year. Period.
And of course, there's very little anticipation of the worsening economic picture in the budget, meaning that we'll be in unquestionably worse shape by summer. And the cash crisis, forcing short-term borrowing, really impacts selected projects that go out into the bond market, for example infrastructure like the high speed rail project, which will basically have to shut down if there isn't a quick infusion of cash. Keep in mind that California has the worst bond rating in the country and the credit markets are still not that friendly to the state.
Another pressing matter is the determination of how much money from the federal stimulus will be available to the state to fill budget holes. There is a "trigger" in the state budget that would actually reduce some cuts - most of them the worst of the worst, particularly in health care for the needy - as well as reverse increases to the income tax, if at least $10 billion dollars in federal money hits the state budget. It's not just that money comes in, it's that it has to go toward general fund relief in order to contribute to the trigger. And Mike Genest, the Governor's finance director, has a preliminary estimate up showing that the state will come up short. This is insanity. As the California Budget Project noted on a conference call today, there will be many billions above the trigger number available to the state, the legislature need only craft the receipt of that money in such a way to hit the trigger. Otherwise, they are raising taxes and cutting services, and needlessly so. One such bill would change Medi-Cal eligibility requirements to free up as much as $11.23 billion over 27 months. That should happen ASAP. Democrats are trying to write this as a special session bill and ensure that it requires only a majority vote.
The main point here is that we remain in crisis mode with the state budget, and will continue for years upon years until we stop putting off the fundamental, structural solutions the way we constantly do. For example, the prison system remained virtually untouched during the budget crisis, despite being both crippling to the bottom line and unconstitutional in its overcrowding and inability to provide health care. We desperately need structural changes with how the state budgets, and those will only be accomplished by demolishing the conservative veto over the process and repealing the 2/3 rule.