California State Legislature to Vote on Budget

Will lawmakers implement real austerity measures?

It is once again that time of year when the California State Legislature and the governor fluff up their feathers and do a mating dance to agree to the details of the state budget and try to convince each other-and the taxpayers-that this year the budget is sound and realistic. As with every other budget for at least the last decade or so, however, the new budget is held together with accounting gimmicks, questionable or unlikely assumptions about tax increases and revenues, duct tape, and sealing wax. But as my fellow long-suffering Chicago Cubs baseball fans say, maybe this year will be the year (which is always quickly followed by “There’s always next year”).

The main budget bill for the fiscal year starting July 1, which needed to address a $15.7 billion estimated deficit, was hastily passed on the June 15 deadline, after which legislators would have had their pay withheld until a resolution was reached. A number of accompanying bills that spell out details such as how to implement spending cuts and revenue increases have been the subject of additional debate since then, however. One of the main remaining points of contention between Gov. Jerry Brown and Democrats in the legislature concerned reforms to the state’s welfare system, although that has reportedly been worked out and a final vote on the remaining budget bills is expected on Tuesday.

While the usual special interests will bemoan supposedly severe budget cuts, as with the struggling European governments, claims of austerity are illusory. The budget passed on June 15 calls for $92.1 billion in (General Fund) spending, an increase of more than 6 percent over the current budget. This would be the biggest budget since the recession, eclipsed only by the 2006-07 and 2007-08 fiscal years at the height of the financial and housing bubbles.

The budget also estimates that General Fund revenues next year will total $94.4 billion, more than 10 percent higher than the $86.8 billion received this year. Keep in mind that the new budget bill assumes passage of Gov. Brown’s tax increase proposal in the November election, and the resulting $8.5 billion in additional tax revenue. In other words, without the tax increase, revenues would be about $87 billion, basically the same as this past year. This is hardly a crisis-unless you continually spend more money than you have.

To this point, Standard and Poor’s (S&P) recently issued a report warning the state that further spending cuts are needed: “The reality of California’s budgetary framework and revenue outlook suggests to us that significant additional-and, in our view, achievable-spending cuts will be necessary for budgetary balance to occur in fiscal year 2013.” The report also cautioned that, in the longer term, the state’s continued failure to address its unfunded pension and retiree health care liabilities will put even more pressure on its finances and credit rating, which S&P already ranks as worst among all the states.

Yet, what has been the reaction of the legislature and the governor? They are planning to waste more money by spending over $2.8 billion this year (and untold tens of billions in future years) on a high-speed rail boondoggle that everyone and their mothers, from both sides of the political aisle, have criticized for its lack of feasibility, ridiculously optimistic assumptions, and poor management. In addition, the legislature has opted to punt on even the modest public pension reforms offered by Gov. Brown when the Senate refused to approve putting Brown’s 12-point pension plan before voters on the November 2012 ballot. According to the Stanford Institute for Economic Policy Research, CalPERS faces an unfunded liability of $170 billion, while CalSTRS has a $104 billion deficit. Local governments are looking at an additional $136 billion in unfunded liabilities. Moreover, according to the State Controller’s Office, unfunded health-care benefits for retired state employees are an additional $62 billion.

Yet the legislature continues to put its head in the sand and hope the problem will go away. Perhaps it is expecting to tax the state to prosperity, despite the fact that this never has worked in the past and never will work. Even Democratic State Treasurer Bill Lockyer, who has indicated his support for Brown’s tax increase, is growing wary of the increasing tax burden being placed on the state’s richest and most productive residents. Addressing the effects of additional tax increases, particularly on the wealthy, Lockyer noted: “The potential for out-of-state migration is substantial enough that we have to be very sensitive about those rates.”

California has earned a bad reputation for its long history of dysfunctional and unwise budget making. As the S&P report observed, “Whether the state has had a genuinely balanced budget at any point in the past decade or more is debatable.” Like the optimistic Cubs fans, the state’s political leaders seem to think there’s always next year to get it right. But if it continues wasteful spending such as the high-speed rail project, eschews common-sense solutions such as allowing the private sector to compete to provide services for cheaper than state agencies, and ignores crushing debt burdens such as pensions and retiree health care that are approaching rapidly with each year of inaction, it will find in the not-too-distant future that the only thing to look forward to the next year will be insolvency.

Adam Summers is a senior policy analyst at Reason Foundation.