Wednesday, November 10, 2010

The California $46 billion dilemma

Today the State Legislative Analyst issued an outlook for the State General Fund Budget:
Our forecast of California’s General Fund revenues and expenditures shows that the state must address a budget problem of $25.4 billion between now and the time the Legislature enacts a 2011–12 state budget plan.
It is surprising how close that is to what I wrote last Thursday:
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12
And that is on top of the $20.6 billion we reduced cash expenditures from the 2007-08 level. It's our $46 billion dilemma.

It has been puzzling since the election to watch all the players in California State Government already maneuvering for some big positive change that will come about because the Governor is going to be a Democrat and the Democratic majority in the Legislature can adopt a budget by a majority vote in each house.

Doesn't anyone get it? In the San Francisco Chronicle after the election San Francisco School Board Member Rachel Norton blogged:
California faces a projected $21 billion budget shortfall for 2011-12...
As I started reading her post, I thought here's someone who gets it. But it soon became apparent that her education issues discussion was oriented to improvements in the schools, all still on the front burner. This seems to be a general approach to whatever ox or oxen is owned by the writer or speaker.

Hey folks! Your oxen are going to be gored to the point of severe crippling in the fiscal year 2011-12 budget. Look at the numbers. The actual cash spent in 2009-10 was already $20.6 billion below 2007-08. Assuming a need to cut $25 billion from 2009-10 cash outgo, here's what reality looks like (click on the chart to see a larger version):

What don't people understand? Even if by some miracle Governor Moonbeam and the Deliberators discover an extra $10 billion available for the year, the situation in the Magic Kingdom will be stark.

The State of California cannot print money. Nor can we borrow it. Even if we legally could, no one would loan it to us.

And so will Governor Moonbeam and the Deliberators go to the voters for a tax increase? Well for starters, there's that pesky problem of the 20% temporary sales tax increase that went into effect in April 2009 which will expire the end of June 2011. They increased the State's share of  the tax from 5% to 6% which produced $4,443,169,000 in cash in the fiscal year 2009-2010. That's $4.4 billion that will be going away.

So what are we to do? Ask the voters to approve that 20% sales tax increase on a permanent basis? That, along with a 10% surcharge on personal income tax which would generate about the same amount of money, would take care of the $8 billion in revenue losses. Sure, the voters will approve that. Now where will the remaining $17± billion come from? Here's how we will have to cut to balance the budget if the voters approve to continue the 20% sales tax increase and to put a 10% surcharge on the personal income tax:

Then there's the State's economy. The Legislative Analyst forecast is less pessimistic than mine. What supports that less pessimism view I'm not certain.

Nothing is worse for a State's economic future than a collapsing government. That is particularly true when you've cut education expenditures by 40%-50% over four years. What will a prospective employer contemplating a startup in or moving to California think about the situation with the State's previously highly regarded university system?

With regard to the Cal State University system, we learned today:
The California State University Board of Trustees has approved a 15% hike in undergraduate tuition, arguing that the action was an essential step to provide access to the Cal State system by more students.

The two-step increase will raise undergraduate fees 5%: $105 for the rest of the school year, and an additional 10% -- or about $440 -- for next year.
The fees (tuition) will become $4,884 for an academic year. The CSU system receives the same amount of money from the state as it did five years ago even though it has 25,000 more students.

The situation with the University of California is similar:
If approved by the UC regents in San Francisco next week, annual tuition for undergraduates would jump from $10,302 to $11,124 - about double what it was six years ago. Add in the mandatory fees, and the cost would rise to $12,150. Graduate level fees would also rise by 8 percent.

"We're down a billion dollars" from what the state gave to UC in the 2007-08 budget year, [U.C. President Mark Yudof] said Monday, explaining why he is asking for yet another increase. Last year, the regents hiked tuition by 32 percent, an increase that took effect this fall after a year of sometimes violent protests by students.
Already the egalitarian left wing is attacking the folks struggling to keep the Cal State University and University of California systems at somewhere near a respectable level.

And there's a certain irony that the conservative financial folks a Bloomberg news actually act as if this is news. Anyone who doesn't need to take off their shoes to count to 20 should have seen it coming, except perhaps the voters of California who live in the Magic Kingdom.

So what about Wall Street? From Bloomberg News in an article that says we may (?) face this deficit:
The new deficit figure comes as the state is preparing to sell about $14 billion of long- and short-term debt during the next two weeks. Standard & Poor’s rates California general- obligation debt A-, its fourth-lowest investment grade and the worst rating among states.
In other words, our State finances are in such disarray that it is comparable to the family member whose credit rating is so bad he borrows from loan sharks just to live. Now Governor Moonbeam and the Deliberators merely have to keep the State's legs from being broken by creating a solution to a 42.5% reduction in available funds since 2007-08, a problem that looks something:

Oh, and they need to do this by achieving a consensus among all interested parties

One other thing worth noting. California Controller John Chiang, who was just reelected to another four year term garnering 55% of the vote, on January 7 told KPIX veteran newsman Hank Plante that the State General Fund deficit could likely reach $35 billion. Given the problem with the Unemployment Insurance Fund, he was probably correct.

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