LAO Report: Arnold, Time To Fix The VLF

As the special session gets underway, the new "Budget Nun" Mac Taylor, and since it's a he this time I think we'll go with "Budget Priest", has released an overview of the Governor's proposals. The first thing that pops out is we now have a new shortfall number: $28 billion for the next 20 months, and an unsustainable long-term deficit thereafter.

State Faces $27.8 Billion Shortfall. We concur with the administration’s assessment that the state’s struggling economy signals a major reduction in expected revenues. Combined with rising state expenses, we project that the state will need $27.8 billion in budget solutions over the next 20 months.

Long-Term Outlook Similarly Bleak. The state’s revenue collapse is so dramatic and the underlying economic factors are so weak that we forecast huge budget shortfalls through 2013‐14 absent corrective action. From 2010‐11 through 2013‐14, we project annual shortfalls that are consistently in the range of $22 billion, as shown below.

Overall, Taylor is generally supportive of the Administration's proposals for closing the gap, but I think that has a lot to do with the fact that the Governor is finally using realistic numbers and not employing any borrowing gimmicks. Compared to the 2008-09 budget, this is extremely welcome. However, Taylor makes the point that a short-term increase in the sales tax cannot possibly be the backbone of a long-term solution, and three years out we'd still see deficits in the range of $9-11 billion. Instead, he offers a couple points. First is one that I've been making a lot, that California needs to lobby hard for state and local government relief in the second stimulus package:

In the coming months, there is a good chance that Congress will pass economic stimulus measures in an effort to boost the national economy. In the past, some components of such measures have directly provided state fiscal relief. To date, the administration has not built any estimates of such relief into its budget numbers. For the time being, this is appropriately cautious to avoid counting on relief that may never come. The state, however, should continue to press the federal government for economic stimulus measures that will provide California with flexible fiscal relief. While such relief would not solve the state’s budget problem, it could provide several billions of dollars in budgetary solutions.

(While we're at it, we could also recoup the $2 billion giveaway to Wells Fargo precipitated by the Treasury Department illegally changing the tax code to allow banks to avoid corporate taxes. Any California Congresscritters want to hop right on that?)

He also rightly notes that the Governor's tax proposals are regressive in nature, and offers one final solution - fix the VLF that you broke as your first act in Sacramento.

Alternative Program Realignment. As noted above, raising the VLF tax rate to 1 percent has merit from a tax policy perspective. If the Legislature made it the foundation of a program realignment with local governments, programmatic outcomes could be improved as well. Under this approach, $1.6 billion of state criminal justice and mental health programs could be realigned to counties and supported by (1) the revenues raised by the increase in the VLF rate and (2) most of the VLF fee revenues currently retained for administrative purposes by the DMV. By consolidating these program responsibilities at the county level, and giving counties significant program control and an ongoing revenue stream, we think California could achieve greater program outcomes and significant budgetary savings.

You can see the total savings chart at the end of this PDF, but clearly the VLF raise is the big story here. The LA Times picked it up as a news story and also on their op-ed page today. For those who counter that the VLF is just as regressive as the sales tax, it doesn't have to be.

Right now the VLF is a flat rate on the assessed value of a vehicle, which is based on its purchase price and a fixed schedule of depreciation (basically 10% per year). It's true that if all you did was raise the VLF to its old rate of 2% it would remain about as regressive as a sales tax (see Table 5 here), but that's not the only way you can do it. Unlike a sales tax, which needs to be a flat rate for administrative reasons, the VLF could easily vary by assessed value. It could stay at its current rate of 0.65% up to, say, $10,000 in assessed value, increase to 2% for more expensive cars, and increase still further to 4% for top end cars. The average rate would still be about 2%, but the incidence of the tax would be more progressive.

You can also build progressivity into the VLF by having it function as a carbon tax, essentially. You could set the VLF at a higher rate for cars that produce greater emissions, and at a lower rate for cars that are cleaner. As California is about to get a waiver to regulate tailpipe emissions under the Clean Air Act in a new Obama Administration, they would certainly be empowered to do so.

This is a repudiation of the very issue Schwarzenegger ran on in 2003. We'll see if he's inclined to own up to his mistake.

...Here's Karen Bass speaking out about getting some bailout money.

Bass said that if the federal government is giving $700 billion to banks and financial institutions, then "can we have $5 or $6 (billion?)"

"We desperately need new revenues at the state level, as the governor has finally acknowledged," Bass said. "But we also need an infusion, or more accurately a transfusion of funds from the federal government.

"Any federal economic stimulus has to rank the needs of states and our cities as as deserving of help as banks and automakers and everyone else in line for funds."

Honestly, given the gridlock in Sacramento, I'd say that getting this cash is probably our best bet at this point.

Yes, California, There's Still A Budget Mess To Fix

I STILL haven't had a moment to process the still-brewing outcome of Election 2008 here in California, but there's not much time to savor or despair about the results. A new session of the Legislature has been called, and Arnold is starting off by calling for a tax increase:

Gov. Arnold Schwarzenegger called today for a temporary 1.5-cent increase in the state sales tax to help close an $11.2 billion deficit in the state budget, as well as new taxes on liquor and oil production.

Schwarzenegger also proposed one-day-a-month unpaid furloughs for state workers for the next 17 months, as well as rescinding two of the workers' 13 paid holidays.

There are also massive spending cuts planned, $4.5 billion in all, including $2.5 billion on primary school education. This is all happening because we have a short-term deficit of maybe $10 billion dollars, with an additional $13 billion dollar shortfall estimated for next year. In all, by the middle of 2010, the projections are that we will be $24 billion in the hole.

This proposal is completely and utterly insufficient to deal with that. A sales tax increase is regressive and there's no way around that. Part of the proposal to extend the sales tax to services like "appliance and furniture repair, vehicle repair, golf fees, veterinarian services, amusement parks and sporting events," according to the LA Times, and this is part of Karen Bass' restructuring of the revenue side. And an oil extraction fee is deeply needed. We're the only oil-producing state in the country that does not charge oil companies to take our natural resources.

But the cuts are pretty cruel. And education isn't the only thing on the chopping block. The Governor wants to eliminate dental insurance through MediCal for poor Californians, cut welfare subsidies, and reduce services for the elderly, blind and disabled. Hey, they don't have lobbyists, right? And this proposal somehow snuck into the package:

• Relaxing some state labor regulations dealing with meal and rest periods, overtime exemptions and work schedules.

Hey, it wouldn't be a Republican plan if there wasn't some giveaway for business.

There is no question that the state's finances are in the worst shape since the Great Depression. But those Californians doing well have shown, as Robert notes today, a desire to pay for those services that can make this a great state. It's aberrant for people who are wealthy to pull up the drawbridge and have no concern for the least of society. Their continued economic good fortune depends on the stability and security of all citizens, as a rising tide lifts all boats. We have been in a constant state of economic crisis for going on eight years because nobody will admit what needs to be done - to have a revenue structure that doesn't reflect the boom-and-bust cycles of the greater economy.

A couple of the things that Schwarzenegger is doing make sense. He is calling for a 90-day moratorium on foreclosures so lenders can work out loan modifications with borrowers, something President-Elect Obama has already proposed and which will improve our economy (a foreclosure costs something like $250,000 a piece to the economy). And his proposal would speed public works programs as a kind of statewide stimulus package. But the very first thing that can be done is to reinstute the automatic VLF increase that Arnold cut and is now scrambling to cover, which would cost the equivalent of $12 a month for most Californians. But Robert Lehman at SEIU has outlined a new progressive version of the VLF that I think would increase revenue and help protect the climate.

Dedicated Revenues. VLF revenues, based on up to 0.65% of vehicle market value, are dedicated (CA Constitution Article 11, Sec. 15, implemented by Proposition 47 in 1986) to cities and counties; some additional VLF revenues above 0.65% may also be partly dedicated to cities and counties, depending on current statutes. It is unclear whether additional revenues from a vehicle GHG-emission-based component of the fee, rather than the vehicle market value, might be obligated to cities and counties. GHG component revenues should be made available for other dedicated purposes, such as improving State transportation GHG emissions through R&D, energy infrastructure improvements, transportation equipment subsidies or incentives, etc.

Progressivity. The VLF is currently based on a flat 0.65% rate applied to the current estimated market value of the registered vehicle. Owners of newer and more expensive vehicles with higher current market values pay higher level fees, while owners of older and less expensive vehicles pay less. People without vehicles who use mass transit, bicycles, or other forms of transportation do not pay the fee. The 2003 reduction of the VLF heavily benefited Gov. Schwarzenegger for example, with his ostentatious fleet of Hummers, while mass transit riders did not benefit at all.

With this flat fee structure, the VLF still absorbs a larger share of low-income vehicle owners’ household income than it does for upper income Californians; the VLF’s moderate regressivity is similar to that of the sales tax in terms of its relative burden on the lowest income quintile compared to the upper quintile (see UCB Incidence paper below, and CBP, “Options for Balancing the Budget: Reinstating the Vehicle License Fee,” 5/8/02, p.2). A more progressive alternative exists. Rather than assessing the fee on the full value of the vehicle as California has done, Virginia exempts the first $5,000 of vehicle value, making the fee more progressive. With a $5,000 exemption, for example, an estimated one third of California vehicles would be exempt from the VLF and owners of slightly higher value vehicles would pay significantly less. The exempt value could be adjusted over time. A restored VLF should initially be based on vehicle value, with a significant deductible amount from this value, and a rate probably set above 2% to compensate for lost revenue.

This is a smart idea and should be the first counterpoint that the state Democrats propose. At some point we must start raising revenue sensibly. Furthermore, doing anything before December 1, when a net of 2 new Democrats in the Assembly and possibly 1 new Democrat in the Senate join the team in Sacramento, would be ridiculous.

Special Session To Fire Teachers

So with state revenues falling off the cliff, the Governor is calling a special session the day after the election to add new changes to the budget that can be implemented immediately to cover the shortfall. Let's set the scene: The day after the election is November 5. New legislators are sworn in December 1. The Democrats are going to take a minimum of 2 and as many as 7-plus Assembly seats, and could get a 2/3 majority, meaning they wouldn't have to deal with the Yacht Party on budget or tax matters.

And Arnold thinks he can push this through NOW? The entire political dynamic will change in 6 days. I know he's trying to strongarm the legislature by saying "things will get much worse if we don't act," but a lame duck session three weeks before swearing-in makes no sense whatsoever.

As for his proposals, the Governor is looking to increase the state sales tax, which is totally regressive. I can live with it, we need the revenue. But he also wants to slash public education, which is completely unacceptable.

Reporting from Sacramento -- Gov. Arnold Schwarzenegger told education leaders Tuesday that he would push for a tax hike and deep cuts to schools to help close the state's yawning budget gap, according to several participants in a meeting with him.

The news, delivered in a conference room outside the governor's office, came as a shock to the educators, who were told to prepare for immediate cuts in the range of $2 billion to $4 billion.

"There is just no way we would be able to cut that much," said Scott Plotkin, executive director of the California School Boards Assn., who was at the meeting. "For virtually every district I know of, this would be catastrophic."

Like Kevin Drum, I have a better idea - restore the Vehicle License Fee as a first step to responsible budgeting.

Golly, governor, California already has the highest state sales tax in the country, but I can think of at least one other broad-based revenue source that could be brought on line fairly quickly: an increase in the vehicle license fee that returns it to the same rate California had for virtually its entire history — had, that is, until you demagogued your way into office on a platform of slashing it by two-thirds and stopping all that "crazy deficit spending," a promise that you broke almost instantly when you asked the voters to replace the lost revenue with heavy borrowing in the middle of our last budget crisis. Increasing the VLF back to its historical 2% rate would bring in about $5 billion or so and could be enacted right away. How about it?

This would be something of a band-aid without bringing revenues fully in line with 21st-century reality, and also reforming the horrible budget structure that has become so constrained by the ballot box. But it's a hell of a lot better than firing a bunch of teachers, is mildly more progressive than a sales tax, and would cost an average of about $12 a month.

Deal Time

Deadlines involving getting measures on the state ballot (which may be necessary for finishing the budget) are leading to speculation about a budget deal in Sacramento. Of course, I'll believe it when I see it. But here's the latest:

Expectations are that there will be a temporary sales tax, some kind of spending cap perhaps like the one recommended by the Legislative Analyst’s Office, and that local governments will take a hit, possibly those permitted under Proposition 1A that allows local property taxes to be borrowed and requires repayment within two years.

Since at least some of these actions require a ballot item on the November ballot, the calendar requires action this week. This Saturday, August 16, is the drop dead date that Secretary of State Debra Bowen has written the legislature that ballot measures need to passed, even with a legislative passed exemption from deadlines that are in current law. The time is needed in order to print ballots and a supplemental pamphlet in time to get these to the voters.

Indeed, time is also running out on Prop 1, the high speed rail bond, and efforts to amend and strengthen it. There may be a deal which would place a separate measure, Prop 1A on the ballot that has these changes.

Dan Walters is hearing the same thing. Sounds like a Sacramento compromise where the conservatives that dug in feel no pain for their intransigence, all the solutions are temporary, nothing structural is addressed, the GOP extracts a MAJOR concession in a spending cap, and local governments get robbed. Considering that Schwarzenegger can blue-pencil out anything he wants after the fact, and the final deal may give him MORE authority to cut spending, giving up the Orwellian-titled "budget reform" without structural and not temporary revenue reform would be a mistake. But we don't have all the details yet.

I'm not seeing much of a strategy here to campaign on the budget, aside from a few outside groups. The 2/3 requirement is the only way out of this vicious cycle. We can talk about "more leadership" but really the answer is to make Republicans pay.

Same Old Parochial Politics Destroying Progress on LA Transit

Jenny Oropeza is a by all accounts a fairly good progressive Senator, but she's dead wrong on her threat to shut down the proposed ballot measure raising the LA city sales tax by a 1/2 cent to pay for transit projects, because her pet project won't get funded.

State Sen. Jenny Oropeza put it in no uncertain terms when I spoke to her late this Friday afternoon: she is prepared to kill the bill that would allow a half-cent sales tax increase to go on the November ballot in Los Angeles County to pay for road and transit projects.

“I said in order for the bill to pass the Senate, it is going to have to contain the Green Line extension,” Oropeza, (D-Long Beach), told me. “They” — Los Angeles County transportation officials — “understood that. They are playing a game of chicken and blaming the Legislature. I am praying to God they do the right thing. I don’t want to see this thing go down either.”

I asked her if she was prepared to try to kill the bill — and any chance of a vote in November. Oropeza firmly answered: “Yes I am.”

The most bizarre thing about this is that the Green Line extension is in the proposed ballot language. But she wants more of a guarantee. So she's prepared to undermine the entire set of transit projects - which would improve air quality, lower demand for gas, expand transit, enhance the reputation of transit as successful so that future projects can be built, reduce greenhouse gas emisssions, improve quality of life, etc. - because of silly parochialism.

I don't want to make it look like this is limited to Oropeza. Some of our favorite lawmakers - State Sen. Gil Cedillo, Rep. Hilda Solis - have expressed opposition to the project, for largely the same reasons - that not enough of the transit projects in the proposal go specifically to their districts. But on this one, I have to agree with Mayor Villaraigosa.

"The problem in Sacramento is that there are some who want to engage in the pork barrel politics of asking for even more money than has been distributed for their pet projects," Villaraigosa added later [...] using several maps and visuals, the mayor also said the sales tax revenues would be spent on an equitable basis when factors such as employment density and need are taken into consideration. "On the Westside, there are four times as many jobs than there are homes and people."

The traffic crisis in Southern California is not going to be solved overnight. There are specific need areas which are literally impossible to manage by car right now and are completely underserved by transit. A successful show of support for transit now will only improve prospects for better transit possibilities in the future. Which projects ought to be included or delayed is an important decision, but I frankly don't trust legislators with their own agendas to make it. And almost every one of them is playing this backwards-thinking, anti-progressive, reductionist parochial game where they judge the dollars their district will get against what another district will get and scream bloody murder if they come up a dollar short. That's maddening, especially considering that if the sales tax is dropped from the ballot, nobody gets any funding.

Oropeza responded to the Mayor dismissively, taking objection to the characterization of "porkbarrel politics" and leaving the outcome unclear on AB2321, the vote in the legislature that would allow the sales tax hike to go to the November ballot. The Senate Appropriations Committee vote is scheduled for today, and nobody really knows what the outcome will be. Labor, which appears to be on board with the increase (at least the building and construction portions of the coalition), will be watching Oropeza and Cedillo's votes very closely today.

Lots In The Air On CA Health Care

Seems like a great deal of things are happening on the health care front, but I don't think any of them point to significant reform in this legislative session. In fact, people are trying to scramble for alternatives.

Dan Weintraub has a feature on Fabian Nuñez' attempts to get through to the Governor that the other side of the aisle is simply not interested in compromise. As Julia noted the other day, Nuñez will put the Governor's plan up for a vote tomorrow, and nobody will vote for it.

The speaker says he intends to package the governor's plan as legislation and present it to the Assembly, where it will surely die. In fact, Núñez said, his own vote for the bill, which he will cast as a "courtesy," will likely be the only support the governor's plan receives.

"I'm going to take him from the stratosphere, and I am going to ground him," Núñez told me in an interview in his Capitol office. "He needs a little grounding. Nobody likes his plan."

I don't know how the Governor is going to respond to this, but clearly observers aren't thinking it will end in sweetness and light. They're making other plans.

State Sen. Darrell Steinberg is floating a plan to cover all children as a fallback reform should nothing else materialize.

"We ought to achieve comprehensive health care reform, but our first priority must be children," Sen. Darrell Steinberg, D-Sacramento, said Wednesday at a Capitol news conference to tout children's health care.

Steinberg's Senate Bill 32 and a companion bill, Assembly Bill 1 by Assemblyman John Laird, D-Santa Cruz, would expand the children's Healthy Families Program by increasing the household income limit from $51,625 for a family of four, or 250 percent of the federal poverty level, to $61,950, or 300 percent.

But there's currently no funding in the legislation, which would require the state to spend $225 million more annually to cover the estimated 800,000 children without insurance in California.

Any legislation would have to be approved before the Legislature adjourns Sept. 14, unless Gov. Arnold Schwarzenegger calls a special session.

"If our bills become the vehicle (for health care changes), they will be amended to include a funding source to either fund the full amount or at least a significant start for year one," Steinberg said.

Obviously, there's no chance of this happening without S-CHIP expansion, which the Governor is trying to get the President to authorize. Children's healthcare is cheap and saves the state money in the long run, along with being simply the right thing to do. But it's a small step, not the big change that Californians want. The Governor is opposed to a piecemeal approach, for the record, but could he really veto children's health care?

To that end, a couple unlikely partners are looking to the ballot box for an eventual answer.

In 2004, the California Restaurant Association led the successful effort to repeal SB 2, which would have required employers to provide health insurance to their employees. On the other side of that multimillion-dollar battle was the California Medical Association and organized labor.

Labor and the CMA are both heavily engaged in the ongoing Capitol negotiations, while business groups have rejected both the Democrats' and the governor's proposal as untenable. But the restaurants' proposal may serve as a starting point for negotiations for a possible November 2008 ballot initiative, just in case a deal cannot be hammered out this year.

"We are not ready to give up on current legislative proposals, but are interested in hearing what CRA has to say," said CMA's top lobbyist, Dustin Corcoran. "As a longtime proponent of universal health care, CMA welcomes any serious effort to reform health care and looks forward to further discussions."

But Jot Condie, president of the California Restaurant Association, said his members are "moving forward as if the Legislature has already concluded its business." Condie said, "It appears the Legislature is incapable of producing needed reform, so we decided to look to the initiative process."

I don't know whether this is serious or just an attempt to put pressure on the Legislature to get something done. The CRA is floating an 1% increase in the sales tax to cover the cost of health care, that's really all the details that have come out.

This might be just chaos before everything actually fits into place and a deal is brokered. I'm not seeing that, however.