California - Fiscal Oblivion?

[Americano]

"Voters will soon decide what Gov. Arnold Schwarzenegger described as two dire scenarios for California: One comes if they approve five budget-related measures on the ballot next week. The other is even worse if they reject them."

http://www.google.com/hostednews/ap/article/ALeqM5jJ7uUDlO1sEo7K7bEfHpj4G7wuLQD986K0GG0

From the article:

"The senior advocacy group opposes Proposition 1A, which has been the most contentious. It would create a spending cap, which most state employee unions oppose, and extend increases in the sales, personal income and vehicle license taxes that lawmakers enacted in February. The extension of those tax increases would generate an additional $16 billion between 2011 and 2013.
Three other measures have an immediate effect on next year's budget: Proposition 1C, which is intended to raise $5 billion by borrowing against future lottery revenue, and propositions 1D and 1E. The last two transfer money from mental health and child development programs previously approved by voters.
If voters reject those three measures, the state deficit will grow to $21.3 billion from $15.4 billion in the fiscal year that starts July 1.


All five budget-related measures were trailing in the polls. Only the sixth, which would cap elected officials' pay during deficit years, was winning majority support."

While California is in the news, many US states are facing the same dilemma, no bond market to float deficit spending and sharply declining tax revenue. My state is facing a minimum 30% reduction in spending for the next fiscal year.

Does anyone see a happy ending for these circumstances or are critical government services going to be sharply curtailed with no end in sight?

[Michael]

While California is in the news, many US states are facing the same dilemma, no bond market to float deficit spending and sharply declining tax revenue. My state is facing a minimum 30% reduction in spending for the next fiscal year.

Does anyone see a happy ending for these circumstances or are critical government services going to be sharply curtailed with no end in sight?

You'll have to excuse the non-American half of the board for collectively scratching their heads over this one. The American rule that recessions automatically cause massive cutbacks and layoffs in State governments, education, welfare, unemployment and community/social services is just bizarre and I believe unique to the USA due to the way most governments are structured.

Heck, the horrific damage recessions do to the American economy and American people is probably one of the reasons the Federal Reserve and the US government go so far overboard to try to prevent them (thus tending to cause worse ones later on). Now of course being the perfect example of a 'worse one later on' type recession arriving that has been overdue for a couple of decades.

All that being said, I have no clue how things are going to turn out in the medium term. Tax revenues always lag the economy, meaning next year's budgets are being set based on this year's income (which is way down), so the cutbacks are only just beginning.

If you recall, the ONLY aspect of Obama's stimulus package that I supported was the lump-sum payments to the state governments in order to prevent this sharp program-cutting in education and social services (and to boost the Food Stamps program, and to support unemployment funding).

It would appear to me that the USA has a similar political-structural-fiscal problem as Canada does - though obviously, the US problem is far more serious. I've often ranted that the federal government is the collector of the vast majority of taxes but it is my local municipal government or provincial government that supplys 90% of the government services that actually matter most (police, fire, schools, social services, healthcare, etc). This seems weird and inefficient. The states/provinces are the ones with all the heavy expenses but it is the feds who have all the money (especially during recessions due to the nature of sales taxes vs income taxes).

[Greendruid]

Is there a problem specific to California that makes its budget shortfalls so much worse? Why is it in the news more often than, say, Louisiana? It would seem to me that in a place that is as large as California and as productive in food and natural resources, and has probably got more billionaires than all of Canada put together living in it that it should have a better grasp on its budget than other states. I would think a place like Idaho is having much tougher times ahead. Can someone please explain this to me?

[Michael]

Is there a problem specific to California that makes its budget shortfalls so much worse? Why is it in the news more often than, say, Louisiana? It would seem to me that in a place that is as large as California and as productive in food and natural resources, and has probably got more billionaires than all of Canada put together living in it that it should have a better grasp on its budget than other states. I would think a place like Idaho is having much tougher times ahead. Can someone please explain this to me?
Legislative government in California is non-functional. That's the short answer. It apparently has some unique problems.

1. It is partisan polarized. One needs a two-thirds majority in the legislature to pass a tax increase. Unfortunately, due to gerrymandering, California has about 60% of the seats are 'safe' Democrat seats and 40% are 'safe' Republican seats (and these never change hands). And the Republicans will vote as a block to prevent ALL tax increases no matter what (they've been doing it for decades).

2. Ballot initiatives. Several previous ballot initiatives have limited the ability of the California legislature to deal with some issues. Many ballot initiatives that have passed mandate some specified level of spending. Several other ballot initiatives mandate limits on taxes. When you freeze taxes but continuously add new spending programs...

3. Because of previous ballot initiatives, California's tax revenue sources are more dependent upon the 'recession-affected' income streams than other states are. That is to say, property taxes and income taxes tend to be fairly stable sources of income - sales taxes and development taxes tend to be highly cyclical. California's spending is heavily financed by the latter (due to ballot initiatives preventing the former).

4. Because people in California consider the state to be 'rich', California has the highest level of government services in the country. Thus, when a cyclical recession hits, they have MORE programs that hit the choping block than other states like Idaho (which have far less program spending to begin with).

And that is why California has a budget crisis EVERY YEAR even in good years. When a recession hits, the California legislature is essentially deadlocked and can't do anything to deal with the problem except slash the program spending down to the tax-income level. The Republican party in California apparently supports this policy goal.

It is to be noted that the State Republican party of California is apparently one of the most fanatically hard-core rightwing in all of the USA. This is the home of the John Birch society types.

[Americano]

Legislative government in California is non-functional. That's the short answer. It apparently has some unique problems.

1. It is partisan polarized. One needs a two-thirds majority in the legislature to pass a tax increase. Unfortunately, due to gerrymandering, California has about 60% of the seats are 'safe' Democrat seats and 40% are 'safe' Republican seats (and these never change hands). And the Republicans will vote as a block to prevent ALL tax increases no matter what (they've been doing it for decades).

2. Ballot initiatives. Several previous ballot initiatives have limited the ability of the California legislature to deal with some issues. Many ballot initiatives that have passed mandate some specified level of spending. Several other ballot initiatives mandate limits on taxes. When you freeze taxes but continuously add new spending programs...

3. Because of previous ballot initiatives, California's tax revenue sources are more dependent upon the 'recession-affected' income streams than other states are. That is to say, property taxes and income taxes tend to be fairly stable sources of income - sales taxes and development taxes tend to be highly cyclical. California's spending is heavily financed by the latter (due to ballot initiatives preventing the former).

4. Because people in California consider the state to be 'rich', California has the highest level of government services in the country. Thus, when a cyclical recession hits, they have MORE programs that hit the choping block than other states like Idaho (which have far less program spending to begin with).

And that is why California has a budget crisis EVERY YEAR even in good years. When a recession hits, the California legislature is essentially deadlocked and can't do anything to deal with the problem except slash the program spending down to the tax-income level. The Republican party in California apparently supports this policy goal.

It is to be noted that the State Republican party of California is apparently one of the most fanatically hard-core rightwing in all of the USA. This is the home of the John Birch society types.

Excellent description of California's problems.

I'd like to add that in the past California (and many other US states) have always resolved their annual budget crisis by simply offering and selling general obligation bonds to cover the spending deficits. With current national and international economic problems the muni bond market has faded into obscurity as investors remain liquid, closing that door. Spending must equal rapidly declining tax revenue with no bond cushion.

[Michael]

I guess one of the key lessons here is that 'direct democracy' and 'representative democracy' are incompatible as dual sources of government.

One can have or the other, not both.