Friday, June 11, 2010

The Evil Reality in the Magic Kingdom

As a government with serious responsibilities related to the well-being of its residents and visitors, the State of California has a twofold problem.

The first difficulty is that based on all available information the state's economy is essentially producing somewhere between 15% to 20% less wealth then it did in the period between July 2006 - June 2007. That was what I described as The Great California Slump last July and we know that a "recovery" will take a very long time. In the meantime, we read about the effects on our workers and families in stories like Jobless without a net , stories subtly warning us that the federal government will not be able to carry Californians through the slump.

The second difficulty is the resulting effect of The Great California Slump on state government revenues.
  • In fact, taxable sales are 16%+ lower than in 2006-07. Fortunately for governmental operations, in 2009 the legislature increased the sales tax rate from 5% to 6% - a 20% increase - so sales tax revenues are slightly higher than in 2006-07.
  • Though the numbers are harder to calculate, it appears taxable personal income is 20%± lower than it was in 2006-07 which is masked by a 2009 0.25% rate increase and a temporary 10% increase in withholding which makes it seem like income tax revenues have only dropped 7%.
  • The Corporation Tax income has dropped 17%±.
The Governor and the candidates for Governor, as explained in the last post, all operate in some Fantasyland where it is believed that the Governor has some powers - sort of magical pills - to reduce spending and make it all better. But, in fact, the pills have side effects that reduce revenue further, cause injuries to residents and visitors, and are simply illegal in some cases, as the Gubernator found out.

The Legislature operates in Tomorrowland - never do today what can be put off until tomorrow. In their case, for 2009-10 they "borrowed" money to avoid cutting expenditures, made one time accounting "adjustments" like moving the June 30, 2010 payroll to July 1, 2010 and what that didn't cover, they chose to budget revenues too high. So after waiting, we will learn in July that the 2009-10 Income, Sales, and Corporation taxes budget line items were in total 7% too high which amounts to about $6 billion.

What we know today about the fiscal year beginning July 1, 2010, is that nothing has changed for the better since the State's CFO, State Treasurer John Chiang, told a reporter that the State General Fund deficit could likely reach $35 billion. Since the total budgeted General Fund revenue last year was $89.5 billion, we're really discussing a potential 40% deficit. The Gubernator in January proposed a budget which was dead-on-arrival in the Legislature because of policy issues and is now dead because the numbers were from Fantasyland.

So far, as the 2010-11 fiscal year beginning approaches, Legislative leaders have proposed to borrow $9± billion to be repaid from beverage recycling fee revenue and to repay the recycling fund from a new tax on oil production, the latter being accomplished without a two-thirds vote by making various sales tax shifts! This was in response to the Gubernator proposing in the middle of The Great California Slump to eliminate medical care for the kids of the underemployed and unemployed whose jobs have disappeared in the past three years and for old people whose retirement nest egg went the way of the State's employees retirement funds.

And in the midst of most of the 58 Counties having to make unprecedented budget cuts for 2010-11 which will involve significant layoffs creating more unemployment, Legislative leaders and the Governor are discussing shifting welfare and prison costs to the counties offering meaningless promises to cover the costs which, of course, would be cheaper.

Let's take a look at the situation at the county level by sampling recent headlines:

Deep Cuts for Alameda County
31 Fresno County deputies let go in cuts
[Contra Costa] County budget proposal would slice $34.4 million
[Sonoma County] Social services brace for cuts
[Santa Clara County] Budget-related transit cutbacks take effect today
State cuts Humboldt County's victim witness support funds
S.F. home value drop, jobless drain city budget
L.A. County sheriff considers major budget cuts
LA County budget cuts to deprive seniors, disabled of homecare service

And to sample an article Yolo County budget includes less spending, more job cuts:

Yolo County has proposed a $271.5 million budget for fiscal year 2010-11, the third-consecutive budget with a dramatic decline in spending....

...Since the county’s largest-ever budget in fiscal year 2007-08, revenues and expenditures have dropped $38.3 million — or 9 percent — and 408 positions (24 percent) have been eliminated. The county’s ratio of employees per 1,000 residents is at the lowest level in more than 20 years.

Sure, why not pass down a few more responsibilities to the counties. Things are bound to improve.

After all, Treasurer Chiang issued a report for May this week indicating May revenues were looking better than estimated by the Gubernator in January just as we are told:

Retail sales in May took their biggest dive in eight months, raising fresh doubts about the state of the nation's recovery and the pace of long-term economic growth...

"Retailers have long recognized that it may be a long uphill climb to full recovery, but [Friday's] report suggests the climb may be steeper than we thought," said Sandy Kennedy, president of the Retail Industry Leaders Assn. "Until the overall economic news improves and those Americans out of work find employment, meaningful retail sales growth will be difficult to achieve."

So it is likely that June revenues, which include sales taxes paid to retailers in May, might not be so good.

Interestingly, to stimulate discussion Chiang included with his report a report on tax policy prepared by economists at the Milken Institute offering a recommendation to cut corporate taxes in the U.S. which could by 2019 "increase total employment by 2.13 million." Do these guys live in Fantasyland with the Gubernator? The U.S. economy lost 7.8 million jobs between November 2007 and April 2010 and we have a huge federal budget deficit, now, not in 2019.

If economists, the Legislature, and the Governor are lost is some fantasy of their own, it's no wonder that those involved in giving care to the poor and elderly, those teaching our children, those who offer "seed grant money" for new businesses under a state program, those who guard our prisoners, those who run our local governments, etc., all behave as if the problem isn't the economic collapse of the state but rather just unaware political leaders in Sacramento who control more than enough money to take care of everything.

Residing in the Magic Kingdom, the Governor and the Legislature both fantasized that the federal government would help. What we saw in the LA Times last week was this headline Congress pulls back state aid package, leaving a $2-billion hole in California budget. Oh well, a billion here, a billion there....

Within our Magic Kingdom an evil reality exists. The evil reality is the basic structure of our government which prevents any effective action that would begin to address the problems. Electing the folks now running for statewide or legislative office this November will not result in improving California government.

We need to replace the State Constitution. And maybe the only real solution, given the political divisions in the electorate, is to replace it with three state constitutions, one for each state created from the existing State of California as suggested here.

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