California Budget Deal Doesn’t Fix Much

My new column looks at the California budget agreement:

The budget plan claims to rely upon a reported $15.5 billion in cuts to plug the $26.3 billion deficit. Regrettably, the rest is made up through accounting gimmicks, borrowing schemes, and raids of local government funds. One of the gimmicks: Delaying a payday for state workers by one day, from the last day of the current fiscal year to the first day of the next fiscal year. That may put off the bill, but it does nothing to reduce costs. What happens next year when the economy is still struggling and the state now has to account for that extra $1.2 billion payment?

It seems that legislators and the governor are hoping that the economy will suddenly snap back and that economic growth will bring in enough revenues to bail them out of the current budget crisis. But that hope is just that: wishful thinking, especially given California’s burdensome tax and regulatory climate. Experts, including those in the state government, expect the recession to drag on for some time. The state’s unemployment rate remained at 11.6 percent in June, which is even higher than the 11.0 percent rate achieved during the peak of the 1982-83 recession. According to the Department of Finance (DOF), things are not expected to get much better real soon. DOF forecasts call for double-digit unemployment through at least 2011. So assuming the state’s economy does not rebound quickly, and corporate, income, and sales tax revenues remain depressed, the state will continue to operate in budget crisis mode until it recognizes that stop-gap measures alone cannot fix its fiscal problems and embarks on some true structural reforms.

Over the past 11 years (FY 1997-98 to FY 2008-09), General Fund spending increased nearly 80 percent. If the state had just held spending increases during that period to the average annual growth rate of inflation plus population, it would not have any budget deficit at all. In fact, there would be a small surplus of a couple of billion dollars. Moreover, there would have been no need for the $12 billion in tax increases imposed by the February budget deal.

Full Column Here

California Research and Commentary