The Budget on Little Cat Feet

The governor's latest plan, like its predecessor, faces little chance of passage since GOP lawmakers have held firm against tax increases.
- Los Angeles Times 01/01/2009

On New Year’s eve, the proposed California state budget arrived on little cat feet, quietly creeping into Sacramento so as to not be noticed. California’s third budget confrontation in less than a year, between the Governor, the Democrats and the Republicans is underway. At the present rate of spending, California will be out of cash in February. Lenders have already stopped making loans to the state, so projects across the state are now on hold. Things are so bad that the state Comptroller went to the hospital with chest pains. Believe me, when it comes to the budget he is not alone.

The source of California’s budget issues are complex. In a recent New York Time column comparing all state Governors to Herbert Hoover, Economist Paul Krugman held Scwarzenegger up for particular scorn. To listen to Krugman, one would think the Governor was on a blind ideological journey to balance the budget, no matter what. But in fact this is not the case. California, like the each of the other States, has unique political constraints that determine their budget processes and ties their Governors’ hands.

One constraint is the California constitution requires a balanced budget. The budget must balance when it is proposed, in theory we work on a “pay as you go” state. How do you pay when you have to go? To balance any budget you have only two options – cut spending or raise taxes. The Democrats in the legislature are willing to cut some spending. But despite what the hard core right will tell you, one can only cut spending so far. Yes, there is some wasteful spending in California as there is in any government. But to say you can balance the budget and end our chronic economic crisis purely by cutting “wasteful spending” is as realistic as McCain’s response to the economic crisis by proposing to cut ear mark spending.

This of course brings you to the next option on the table and that is raise taxes – or as we like to say “enhance revenue.” The only way the legislature can raise taxes (oops-enhance revenue) is by a 2/3 majority. Thus the minority holds the cards. The Republicans in the Legislature are die-hard, pure, Howard Jarvis anti-tax believers. They have consistently stood in the way of every compromise budget proposed over the past several years. They refuse to vote for one single tax. They believe that any tax on the economy is too great a burden for the state to bear.

They turn a blind eye to the even heavier burden the state will bear if it runs out of money in February with no relief in sight. They are blind the fact the extra borrowing costs of lower bond rating far outweigh the cost of any tax hike. Still they stand in the door blocking the entrance of any budget with a tax hike. Like the Captain of the Titanic they speed blindly ahead in the dark and ice asking “what icebergs?”

In a recent budget negotiation meeting with the Governor, Swartzenegger asked the Republican leader present what it would take for the Republicans to vote for a budget. The Republican responded “I don’t know.” The Governor followed up “When will you know.” The Republican leader responded “I don’t know.”
The another reason our budget problems are so severe is the initiative process. In California, with the right amount of signatures you can get anything on the ballot. Whether you are a hard right evangelical who wants to ban gay marriage or if you are left winger who wants to lock in spending for mental health, the ballot initiative is for you.

California voters have responded to the legislature’s inaction by passing a number of ballot initiatives that lock spending levels for various items. So for example California is mandated to commit a specific percentage of its budget to education. Another legal commitment is that gas taxes pay for roads and nothing else. The money can’t be moved around. That leaves no flexibility to move funds from one account that is running over to another account running short. Thus the Governor and Legislature are both hamstrung by these budget initiatives. The budget is pre built and there is no changing it.

These items are some of the main reasons California have trouble with its budget. As long as this structure is in place, regardless of whether the Democrats or the Republicans control the Governor’s office, it will be next to impossible to avoid our annual game of chicken with the budget.

California is typical in that budget woes are structural and are out of control of the people who profess to lead us. There is a unique dynamic to each state. It is over simplistic to write off all 50 Governors as mini Herbert Hoovers. They are each constrained by the unique physics of their state budget process and political dynamic. No matter how hard they try they are simply not strong enough to turn an economic tide that is worldwide.

To assume otherwise is wrong.