Monday, June 27, 2011

The morons in the Magic Kingdom

The Republicans in Sacramento are basically moronic. But we’re hopeful that they can realize we’re on an unsustainable trajectory here, one that is not fiscally responsible and one for which they are at least partially responsible. - Gil Duran, Brown's press secretary, in a interview with KPCC
California Government reflects the fact that the State is the Magic Kingdom as noted in a previous post. In keeping with that view, a key member of the Brown Administration declared the Republicans are the "morons" in our State Government? Really?

Here's what I wrote on January 11, 2010, the day after Governor Jerry "Moonbeam" Brown presented his budget proposal (emphasis added):
Foolishly I thought Brown was going to offer a severely reduced balanced budget to the Legislature with a possible solution such as proposing to increase the Proposition 13 tax rate of 1% of assessed value to 1½% of assessed value to avoid completely devastating our systems to educate and care for children. I thought he was going to create a serious discussion about the future of California government rather than attempt to put it off for five years.

In five years, the opportunities to keep California "golden" will be even more severely constrained. This is some legacy the son of Pat Brown is going to leave us.

Of course, with these proposals he simply just restarted the same old political arguments....
On January 30, I noted:
"When we unwind what has been done (in the past)," Brown said, "it's very difficult," noting the outpouring of opposition. But if it's not done and the tax extensions aren't approved, he adds, the alternative is "so horrible that we don't want to release it."
On the following day, Brown compared the Republicans in the Legislature to those in Egypt not wanting to fair and open elections despite the fact the Legislators and Brown were just elected in a free, fair, and open election just 90 days before.

Guess what! This year the Democratic majority in the Legislature adopted a budget on June 15 without a voter-approved tax increase. We had a budget! It did seem to have many cuts, but was it really "so horrible that we don't want to release it?" Yes, it was filled with gimmicks, many of which would likely be determined to be illegal. The "gimmicks" violated one of Democratic Governor Moonbeam's promises to the electorate. So he vetoed the budget bill.

During his campaign last year, Governor Moonbeam promised that he wouldn't accept:
  1. an unbalanced budget,
  2. a gimmick-filled budget,
  3. a budget that gutted education, medical care, and social services,
  4. a budget that included new taxes not approved by the voters.
To balance the budget, Moonbeam was advocating what now would be a voter-approved tax increase. To get that on the ballot, he needs the votes of all the Democrats in the Assembly plus the votes of two Assembly Republicans and the votes of all the Democrats in the State Senate plus the votes of two Senate Republicans.

He has tried since January to get the Republican votes, but he couldn't get them. Despite the fact that he'd been California Attorney General the four years immediately prior to 2011, he didn't know he likely wouldn't be able to get the Republican votes. In my opinion if there is a "moron" here it is Moonbeam who didn't understand the situation.

As usual in politics, to get the four votes Moonbeam and Legislative Democrats would have to compromise. The negotiations were messy and a compromise would clearly alienate some of the Democratic constituency. On June 14, for the record the Republicans provided an outline of what they wanted which you can view here. Though there is some important ideas in the proposals, the Democrats were never going to accept the key elements.

And everyone but Moonbeam is "reluctant" to adopt a budget bill based on a tax increase approved by the voters because the voters are unlikely to approve a tax increase.

Moonbeam lost his public employee and teachers union support for an initiative effort because the polls make it clear that getting a majority of voters to approve a tax increase is unlikely. It is unlikely he will get the Republican votes he needs to put a tax increase on the ballot and even if he does, at the risk of repeating myself, getting a majority of voters to approve a tax increase is unlikely.

Assuming income and sales tax revenue projections in the vetoed budget bill were accurate (which is a questionable assumption), to avoid gimmicks and legally questionable proposals and to begin to repay money borrowed from schools and local government and to prudently provide for a 1-2% General Fund reserve, the Legislature would have to cut another $11± billion from the adopted budget which included $11 billion in cuts the Assembly Democratic majority really didn't want to make.

In a recent Sacramento Bee article, absent a tax increase the dilemma is described as follows:
"I don't think there's a responsible way to cut your way to a solution," said Jean Ross of the California Budget Project, which advocates for low- and middle-income residents. "There's not a way to still have viable programs that meet federal standards, court standards, constitutional standards and the standards of the voters of California."
That pretty much describes it all.

To make any significant cuts, the Legislature would have to cut spending for  K-12 schools and community colleges. The voters established Proposition 98 which prohibits that without a two-thirds vote to suspend its provisions for another year. The Republicans have rejected that and it is clear that the voters are looking at that with a great deal of skepticism.

To make any significant cuts, the Legislature would have to cut spending on Medi-Cal and various programs for the poor elderly and children all of which would face legal problems in court or with the federal government, the latter probably resulting in loss of federal funds which would result in even higher unemployment in California. As the Gubernator proposed, the state's welfare-to-work program could be eliminated, but it's unlikely there would be enough votes in either house of the Legislature to do that.

Today we have this news:
Gov. Jerry Brown and Democratic legislative leaders announced today that they have reached an agreement on a new majority-vote budget plan.
A story earlier today explained:
Gov. Jerry Brown and legislative Democrats are hashing out a new majority-vote budget that relies on $4 billion more flowing into state coffers but "triggers" mid-year cuts to education and other programs if that money never materializes.

The trigger cuts would replace some of the most dubious solutions in the previous Democratic budget, such as selling state buildings and imposing a quarter-cent local sales tax on a majority vote, according to sources unwilling to be named. If revenues fall short, cuts would hit K-12 schools and higher education, public safety programs and In-Home Supportive Services.

...The new budget includes a tax swap that redirects 1 percentage point of the statewide sales tax to counties for Brown's public safety "realignment," sources said. Under that plan, the state would redirect lower-level inmates to county jails and shift parole responsibilities. The tax swap has the added effect of reducing the state's Proposition 98 requirement for schools.

This raises the question of what's a "gimmick" when we talk about the budget.  I've prattled on in previous posts about what gimmicks have been included in the various budget proposals - including Moonbeam's - and in prior year adopted budgets. Fortunately, others have begun to catch on. The venerable Pew Center on the States Stateline web site explained what budget gimmicks are. The writer also noted that "editorial boards have praised Brown for exercising responsible fiscal judgement" then wryly noting that "Brian Joseph of the Orange County Register has written that Brown's own budget plan uses gimmicks too."

That Register article explains:
For example, the Democrats’ budget was blasted [by Brown] for deferring payments to education. Well, in January, Brown proposed deferring $2.1 billion in payments to education, although his May revision scrapped the idea because the governor planned to have extra money, either because of an uptick in the economy or because he assumed his plan for a tax extension would pass.

Or take the issue of borrowing. In his veto message, Brown complained that the Democrats’ plan included “costly borrowing.” That’s a fair complaint. But in January, the governor’s budget plan called for $1.8 billion in borrowing from special funds, which was later reduced by $744 million in his May revision.

Then there’s the matter of one-time fund shifts. These are particularly galling to budget purists, because fund shifts entail robbing Peter to pay Paul. They solve nothing long term and create a hole elsewhere. Brown’s May revise relies on at least two major fund shifts, diverting $98.6 million in Proposition 63 funds to county health services and moving about $1 billion in Proposition 10 (First 5 Commission) dollars to Medi-Cal.
The Pew Center article lists "five ways states hide deficits." For example, Gimmick #1: Putting off payments. California has a handle on this one - we use it extensively. The easiest one was a simple bookkeeping entry. We dated State employee payroll checks for June 2009 payroll July 1 instead of June 30. This was the least problematic of our State Government "putting off payments."

Gimmick #2: Accelerating revenue was used when we increased our income tax withholding tables and accelerated Corporate Tax estimate payments.

We've basically used up all possible versions of Gimmick #3: Using temporary money for recurring expenses.

The Legislature this year used Gimmick #4: Counting on savings that aren’t likely to materialize.

And Gimmick #5: Counting on revenue that isn’t likely to materialize is the key element in what appears to be a final budget agreement.

So the Legislature and Moonbeam cobbled together some budget just as happened in previous years. But it won't solve any real problems other than getting the Legislators and state vendors paid.

As I've noted before, the one major "structural" problem in California's government is Proposition 13. We rely too heavily on volatile tax sources like income, corporate, and sales taxes. A greater share of government funding needs to come from property taxes. I've outlined previously how the Proposition 13 system should be revised,  as follows:
  • Proceed to use the Brown Corporation Tax proposal;
  • Cut the current Personal Income Tax to generate a third less revenue;
  • Reduce the state sales tax back to 5% (from 6%); and
  • Increase the Proposition 13 property tax rate from 1% of assessed value to 1½% of assessed value and put two-thirds of the revenue derived from the 1½% in a state special fund to fund education, from pre-school to graduate school, and to assure health care and day care for infants, toddlers, and all students.
  • Remove property other than owner-occupied residential property from the assessed value near-freeze of Proposition 13.
  • In the case of rental residential property, the assessed value should be tied to changes in tenants and rents paid by new tenants combined with appropriate renters tax credits.
  • In the case of all non-residential property, the assessed value should be increased 10% a year until it is equal to market value.
  • Restore and fund from property tax revenue the Williamson Act to conserve agricultural properties.
  • Establish a spending cap (general fund and special funds, exclusive of federal funds and enterprise funds) that is equal to a 1990-91 as base spending year:
    • for spending other than spending for K-12 schools and prisons the base year adjusted by the cumulative change in the CPI and the cumulative change in population,
    • for K-12 school spending the base year adjusted by the cumulative change in the CPI and the change in the number of students attending all K-12 schools, and
    • for prison spending the base year adjusted by the cumulative change in the CPI and the change in the offender population, all more or less as described in the Republican proposal.
A spending cap would be critical. Californians, as historically reflected by state spending, lack the discipline to not squander monies in good revenue years. But there's virtually no chance the voters would overhaul Proposition 13.

The Brown Administration had its one chance to make history by presenting a balanced budget for California on January 10, a budget balanced on cuts. It would have been unacceptable to everyone. But no one would have been able to find a legitimate way around it. And he could have called for the voters to solve the revenue problem.

But he didn't do that. So the Republicans are the morons and we have another gimmick-filled problem budget from the Democratic majority. And we're all here in the Magic Kingdom....

Addendum: Confirming my view that our State has become the Magic Kingdom, we have this in the LA Times:
"That's nearly $11 billion in new revenue that the Democrats assume will magically appear," said Senate Budget Committee Vice-Chairman Bob Huff (R-Diamond Bar). "That's a wand that Harry Potter would be proud to wield."

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