California Revenues Already Well Behind Projections, Signals Possible Automatic Budget Cuts

To the surprise of no one, California’s current budget is proving to have been built on bogus numbers, particularly its overoptimistic revenue projections. The State Controller’s Office reports that revenues for the month of September came in over $300 million below projections, for a cumulative shortfall of $705.5 million for just the first three months of the fiscal year.

According to the Controller’s statement, “The State ended last fiscal year with a cash deficit of $8.2 billion. The combined current year cash deficit stands at $17.6 billion. Those deficits are being covered with $12.2 billion of internal borrowing (temporary loans from special funds) and $5.4 billion of external borrowing.”

Gov. Jerry Brown’s office seemed remarkably unconcerned about the disparity. “You can’t build a trend off of one month of cash reporting,” offered Brown’s budget spokesman H.D. Palmer. But what about three months? How deep into the fiscal year and deep into debt must we get before someone at the administration raises a red flag? Moreover, as State Controller John Chiang noted in his statement, “September’s revenues alone do not guarantee that triggers will be pulled. But as the largest revenue month before December, these numbers do not paint a hopeful picture.” The state’s 12.1% unemployment rate—3% higher than the national average—does not bode well for additional tax revenues, either.

The triggers that Chiang refers to relate to a “Plan B” mechanism put into place in the current year’s budget. Since Republicans in the legislature held firm on pledges to block further tax increases (and since legislators probably knew that the state was going to have a rough time hitting its revenue numbers), automatic budget cuts were set to take place if certain fiscal benchmarks were not met and the administration determined that revenues would not be enough to support current spending levels. This is similar to the automatic cuts that will be imposed on the federal budget if the congressional “supercommittee” cannot come up with its own set of cuts and get Congress to sign off on them.

A recent Bloomberg article describes the automatic cuts that could take place:

The first tier, if the shortfall is $1 billion, would trim University of California and California State University budgets by $100 million each, increase community-college fees by $10 per unit and cut in-home services for the elderly and disabled who need help.

[. . .]

If the gap widens to $2 billion, it would mean a seven-day reduction in the school year to save $1.54 billion and an end to $248 million in home-to-school busing subsidies.

The trigger determinations will be made in December by the Department of Finance based on economic forecasts for the entire fiscal year (not solely on the revenues received to that point). If necessary, the first-tier cuts would go into effect as of January 1, 2012, and the second-tier cuts would start February 1.

While this is actually an improvement over previous years’ budgets, under which California would accumulate debts all year long and seldom make any substantive cuts until a massive crisis and deficits of tens of billions of dollars had to be addressed at the next round of budget negotiations, it would be nice, for once, to simply have an honest budget with realistic numbers.