California Budget Deal: Cuts, Gimmicks and Can-Kicking

California Governor Arnold Schwarzenegger and legislative leaders reportedly hammered out a deal to close the state’s $26 billion budget deficit, and though details remain somewhat murky at this point, the early indications are that it will be a mix of real budget cuts, fiscal slight-of-hand and a borrowing scheme sure to infuriate local governments. The New York Times reports:

California lawmakers, their state broke and its credit rating shot, finally sealed the deal with the governor Monday night on a plan to close a $26 billion budget gap.

The plan, which is certain to be viewed with trepidation among legislatures across the country also facing huge budget gaps, distributes pain through nearly every aspect of government services. While the Legislature pushed back on Gov. Arnold Schwarzenegger�s proposal to eliminate health care programs for children and the state�s generous welfare program, both took large cuts. So did public education, universities and local governments.

I should interject here that as silly as it sounds, I would suspect that there are indeed state legislators and governors now biting their nails in anticipation of the budget cut battles they’ll face because Californiaââ?¬â?still in many ways a state policy bellwether, despite its epic political dysfunction and appalling fiscal managementââ?¬â?says it’s OK to cut spending for policitally-favored social services. Taxpayer advocates nationwide now have a handy rhetorical tool that’s hard to argueââ?¬â?”…if even California can cut spending, then [State X] certainly should be able to…” Continuing on:

All told, the deal contains $15.6 billion in cuts, about $2.1 billion in borrowing, $3.9 billion in new revenues and about $2.7 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Mr. Schwarzenegger had claimed he would not brook.

Under the new budget, which runs through the 2010 fiscal year, localities will basically serve as unwilling lending agents to the state. It will raid their coffers and repay them over time as the state�s fiscal situation improves.

The Los Angeles Times adds:

Their agreement, which could go before the full Legislature within days, does not include any broad-based tax increases, relying instead on deep cuts in government services, borrowing and accounting maneuvers to wipe out the deficit.

The plan has not been formally released. But as outlined by lawmakers and their staffs, the proposal would reshape some aspects of government in California, significantly scaling back many services that have been offered to residents — particularly the elderly and the poor — for years.

Tens of thousands of seniors and children would lose access to healthcare, local governments would sacrifice several billion dollars in state assistance this year and thousands of convicted criminals could serve less time in state prison. Welfare checks would go to fewer residents, state workers would be forced to continue to take unpaid days off and new drilling for oil would be permitted off the Santa Barbara coast. […]

The governor and lawmakers assumed the privatization of the State Compensation Insurance Fund would generate $1 billion, for example, but few, if any, experts believe such a sale is possible this year. And the plan would save $1.2 billion by waiting until a new fiscal year begins before sending out one scheduled batch of paychecks to state workers, a clear accounting scheme.

Based on these reports, I’d like to offer a few early thoughts on developments thus far:

  • The good news is that the budget deal involved no new taxes. The bad news is that they already hiked taxes back in February, so the best you can say is that it could have been worse.
  • No one thinks that this will solve the problem. This is just another round in a series of ongoing, periodic budget fixes that we’ll continue to see for some time in California, as evidenced by the accounting gimmickry. This is the second $25+ billion fix thus far this year in Californiaââ?¬â?we’ll see several more through at least 2011, I predict. It’s fiscal whack-a-mole, and to be fair, many states are experiencing it.
  • I suspect that everyone’s going to complain about the spending cuts. Some, like me, will say that it’s not enough and there’s plenty of fat remaining to trim. Others will say that the cuts are drastic/dramatic/painful/catastrophic/death-inducing. But to even mention the words “$15.6 billion” and “spending cuts” together in California is noteworthy and represents a political feat. And I guarantee that other governors and legislative leaders across the nation will be mentioning Cali’s cuts in defense of their own proposals. In California, the cuts themselves are likely a mixed bag of smart cuts, bad cuts and innumerable missed opportunities. For other states’ policymakers, the California cuts are political cover.
  • The proposed $1 billion privatization of the State Compensation Insurance Fund may be a good startââ?¬â?if bidders show up. But I certainly hope there’s more privatization in the state budget than this. The Governator has announced that the state is going to start selling some low-tier assets (vehicles and the like), but those are small potatoes compared to San Quentin and the other big-ticket real estate assets the state owns. Where are those in this budget, and where’s the serious thinking on the plethora of other privatization opportunities in state services, activities and backend functions? Maybe they’ll be in the next round of budget fixes to come.
  • The borrowing scheme will put pressure on the cities to generate increased revenue, whether that’s through higher taxes and fees or through blatant property rights heists along the lines of Kelo. The L.A. Times article linked above includes this disturbing news (emphasis mine): “Cities and counties would lose another $1 billion in transportation money under the proposal, and the state is also seeking at least $1.7 billion — and possibly billions more — from local redevelopment agencies. Lawmakers will also be given the option to greenlight a controversial plan that would give some local redevelopment agencies broad new discretion to tear down and rebuild neighborhoods under their jurisdiction for decades to come, regardless of whether those areas are blighted.” California policymakers need to be taking steps to protect private property rights in the state regarded as the worst offender of eminent domain abuseââ?¬â?not undermine them furtherââ?¬â?if the goal is to restore California to prosperity and encourage economic development.
  • I’d be remiss if I didn’t state the obvious. Local governments will repaid by the state “when the economy improves”?? According to the new NCSL state budget outlook, that’s not going to happen for some time, so munis shouldn’t hold their breath waiting for those checks to roll in (more IOUs?).
  • Policymakers could only agree to cut one board stacked with high-paid political appointees? Seriously? Louisiana Gov. Bobby Jindal cut 68 similar boards in that state last year, and another batch this year. Come on guys…

More to come as this develops…

Ã?” Reason’s California-Related Research and Commentary
Ã?” Reason’s Privatization Research and Commentary