California Budget Crisis

Every day I find myself captivated over the California Budget Crisis. It is an incredible showdown. 3 parties going at each other - the governor, the Democrats and the Republicans. They are tied in a knot over this with no compromise or reform in sight. $26 billion and growing caused by a $20 bil+ drop in income and sales tax revenues. When you rely on stock wealth to drive a majority of finances, there's a price to pay. When the rich lose money on the stock market and have their salaries cut, the state suffers. It is supposed to be about progressivity, but instead it creates boom and bust cycles. People say Proposition 13 is the culprit with the essential freeze on property taxes: the need for a 2/3rds vote in 2 house for a budget to make it's way to a government, and the same 2/3rd vote required for tax increase. The idea was to limit fast growing government. Instead it has caused paralysis. Critical reforms never get made. Proposition 13 had great wisdom at the time. It needs to be changed, but it's not the only reason the California budget is a mess.

There are gerrymandered districts that ensure the most liberal Democrats and most conservative Republicans get elected. There are term limits that essentially prevent legislators from getting experience in government. Special interests get stronger.

Voters then throw in propositions to carve out more and more of the budget. They throw in one to force the state to carve out a % for education. Of course, we love that cause. Then there's one for after school programs to get underprivileged kids off the street. We love that, too. Well then there's tougher sentencing. We got to be safe, so let's build more prisons. Then transportation related fees can only go for transportation projects. That makes sense, doesn't it? Then there's bonds for affordable housing, water projects, hospitals, roads, community colleges, universities and more. All of them are advertised as not requiring more taxes.

At some point, we need to make choices. When the rich aren't making as much. When people are losing their jobs and not spending as much, it affects people. Schwarzenegger has made choices - education, cut welfare, child healthcare, elderly homecare and, of course, our parks. He and the legislature did throw those propositions out there to pay for the budget deal - the one with the $15 bil deficit - but no one could understand them, so we voted no.

Democrats have tried to put a budget together which cuts $11 billion, raises some taxes, and uses some accounting gimmicks to balance the budget.

Republicans refuse to raise taxes saying, well, get $26 billion from the budget. That's a 25% decrease over last year's budget. There may be waste, but is there that much? It's hardly responsible.

Now California is issuing IOU's so it doesn't run out of money. In a recession, this is going to hurt more and result in higher interest on future bonds. We end up paying for 0 benefit.

The Federal government, acting all cocky and responsible, says it will not help. "Get your act together," they say as they create a $1.7 trillion deficit. So much for the stimulus. What the Feds giveth, the state taketh away.

This sounds like a mess with everyone playing a high stakes game of chicken. Someone's going to blink, just not me. They discuss having a Constitutional Convention, but what will they decide on then. Where will the courage come? If it's not here, then where will it come.

Well, in my own budget game on the LA Times site, I got to balance with $14 bil in cuts and $12 bil in tax increases. I spared much of the poor for more than sympathy - a desperate person can cause harm to himself and others. But there are real cuts across the board. They will hurt. I'm against taxes solely on the wealthy. If people think something is worth paying for, everyone should pay even if the wealthiest ones pay more. With climate change and the need for more efficient cars, we should be taxing gas a lot more. If people want better education, they should let property taxes rise to pay for it. If we want to get out of the constant LA gridlock, we should pay for usage and build mass transit. However, most people run away when they learn there's a cost for what they want.

In tough times, governments are supposed to live off their reserve budgets. Operating deficits enable those who are having tough times from going desperate. They keep schools operating and highways humming. However, that's not reality. In flush times, people spend more or offer tax cuts. They don't use the extra revenue to pay down debt or build a savings.

The state is ungovernable with all the issues described. It is too diverse. Northern California is far more liberal than the rest of the state. Inland Empire is very conservative. The LA and Orange county area is a mix. Central Valley is a different region altogether. The reason for all these crazy paralyzing rules is because no one trusts each other. In Palo Alto, we can get parcel money for schools and a bond passed for the library. It's because we see the impact. County-wide transportation taxes have passed, because we drive these roads. However, people don't see the personal and collective impact of a lifting of Prop 13, something that would bring greater financial stability.

So the showdown continues. Schwarzenneger has until 2010. While there probably are more skillful legislative executive, we chose him. He's decided to push for reform with this crisis. Here are some of my thoughts:

This Year's Budget
- Go for balancing the budget with no gimmicks or clever accounting tricks
- Cut half of the $13 billion across programs, sparing the poor and elderly
- Increase taxes to make up the difference: especially gas taxes and auto fees, whatever taxes are raised should be across the Board with progressivity towards the wealthy

Future Reforms
- Benchmark against other states: California should have economies of scale that others do not have. We should not have the 6th larget tax burden in the country.
- End Prop 13, let money raised go directly to school districts. Let locals their own show. Drop the crazy 2/3rds vote. There are 2 houses and an executive veto for a reason.
- Every proposition must be paid for through taxes or cutting something. Even better would be to eliminate mandated carve outs for programs regardless of how much we love them
- Enact tolls throughout the highway system to pay for mass transit infrastructure. I love my car but I'd love to get around with better transit.
- Create a $1 gas tax with 25 cents phased in every year over a 4 year period. Have it improve infrastructure. Long term this drives new business to the state
- Push for a better balance of Fed money vs. today's outflow. There's always the threat to break the state into pieces to get more Senate pull. A break up would enable more responsive government.

It's unlikely that compromise will be reached. More likely are IOU's, potential bond default, and a Constitutional Convention. It would not be beyond the pale for California to break into multiple states to enable more responsive government. This may be the best solution of all...