Saturday, May 12, 2012

The Bare Bones Era - 2012: Brown admits a deficit of $16 billion

A little before noon today these headlines appeared California deficit has soared to $16 billion, Gov. Jerry Brown says and Brown: California facing $16 billion shortfall. A little after noon, The Sacramento Bee offered this headline Gov. Jerry Brown: State budget deficit now $16 billion - double January estimate.

Apparently this week Governor Jerry "Moonbeam" Brown "discovered" some "unanticipated" problems with the 2011-12 adopted General Fund Budget and his January proposed General Fund Budget for 2012-13. Thus the press dutifully reports:
California's budget deficit has grown to a projected $16 billion and the state will have to make severe cuts to schools and public safety if voters reject tax hikes in November, Gov. Jerry Brown announced Saturday.

The Democratic governor said the state's shortfall grew from $9.2 billion in January because tax collections have not come in as high and the economy isn't ramping up as fast as the administration had hoped. The deficit has also gone up because billions of dollars in state cuts have been blocked by lawsuits and federal requirements.

"This means we will have to go much farther and make cuts far greater than I asked for at the beginning of the year," Brown said. "But we can't fill this hole with cuts alone without doing severe damage to our schools. That's why I'm bypassing the gridlock and asking you, the people of California, to approve a plan that avoids cuts to schools and public safety."
For his constituency which has a short attention span, Brown spins this in a less-than-3-minute   YouTube video late in a Saturday morning and the press dutifully reports it without comment. You have to admire how he controls the news cycle. No details, just a "golly folks, it seems a problem has mysteriously developed."

In fact, it was a problem built into the 2011-12 adopted budget. As noted here on June 29, 2011:
...It's a budget predicated on significant revenue growth. In the first seven months of the current fiscal year, 2010-11, the total of Corporate, Personal Income, and Sales Taxes exceeded 2009-10 by 12.16%. Based on that surprising news, every budget proposal discussion since February has assumed continuation of the growth.

The problem is February through May the 2010-11 total was the same as 2009-10. If February - May is indicative of a trend, the adopted budget will be $10-$12 billion short on revenue without even considering the gimmicks that may not work because they are illegal.
And as pointed out here February 11 "what is clear is that Moonbeam's Administration has no idea what's going on."

Finally, as noted here Tuesday "the actual revenue shortage two months from now can be estimated to a range that is, itself, nearly 5% to 10% of the annual budget." We can't offer a better estimate because of how poorly California's uninformed, incompetent voters have structured the State's tax revenue.

Whatever Moonbeam proposes for 2012-13 in the next week will be based on guesses about revenues and expenditures, that together predict an ending balance that easily could be off by 15% or more.

In May 2009 I noted here:
In Grapes of Wrath, John Steinbeck told a story about how folks migrated to California to find hope within The Great Depression. We are now in what Time Magazine calls "The Great Recession" but California is not going to be a place to find economic hope.

The "other shoe" is about to drop in our Great Recession. California is hosting a "belated" economic collapse. Of course, no one publicly calls it that because no one wants to see it. But the boring statistics are available.
In January 2011, Moonbeam said the description of State's financial situation was "so horrible that we don't want to release it." And so he didn't, instead proposing a foolish budget to a foolish Legislature for a foolish population. At that time I said:
Is it horrible? Depends on our perspective, I guess. If one increases the amount disbursed from the General Fund in 1990-91 by the increase in population and cost-of-living since then, we should be disbursing $80± billion from the General Fund 2011-12. Brown's budget, which uses all kinds of gimmicks, is $7 billion higher than that.

An honest budget from Brown would have told Californian's the truth - we need to cut education and safety net General Fund support by 50% from 2007-08 levels. The immediate cause is that our economy crashed. We are in The Great California Slump.

But the underlying reason our government is in that position is that since 1978 we've relied on taxes that are too sensitive to the economy - sales, income, and corporate taxes.

When we gave up a huge chunk of our property tax revenue, we made our schools and government too dependent on economic cycles. In a recession we may buy less at Wal Mart because our income dropped 25%, but we don't pull one of our four kids out of school because the school's income dropped 25%.
In 2007-08 the State disbursed from the General fund $107.3 billion with only $103.4 billion in receipts coming in. In January, Moonbeam submitted a General Fund Budget proposing to disburse $92.947 billion. But these aren't "apples-to-apples" comparisons as $6 to $8 billion has been "realigned" meaning costs and some revenues have been shifted to counties, the most infamous of which has been to move prisoners from prisons to county jails.

An honest statement is that in January Brown proposed for 2012-13 to disburse $92.947 billion, or 93% of 2007-08 disbursements after factoring in the realignment. He should have proposed for 2012-13 to disburse no more than $83.7 billion or 86% of 2007-08 disbursements after factoring in the realignment. He proposed to disburse $9.2 billion too much.

Compounding his problem is the fact that at the end of the 2011-12 Fiscal Year, it appears that there will be some deficit carry-over from 2011-12 plus the General Fund owes schools and local governments monies that were "borrowed" in the past three years to be repaid in the future.

Moonbeam says this all combines to $16 billion due in 2012-13 that we don't have. Apparently the the description of the State's financial situation that in January 2011 was "so horrible that we don't want to release it" is still as horrible, but rather than honestly confront it 18 months ago, he now intends to confront it when it will cause more real damage in the long term.

Oh, and by the way, in his YouTube announcement today he reminds you to support his tax increase ballot measure which will soften this $16 billion problem by between $4.8 billion to $6.9 billion by taxing the working poor and the well-off-to-very-wealthy.

The only problem facing Moonbeam's Finance Department in attempting to predict tax revenues in the next two years is just how to predict how much income tax from capital gains will result from the Facebook IPO. It may not be quite as much tax revenue as one would expect. We recently learned:
Eduardo Saverin, the billionaire co-founder of Facebook, renounced his U.S. citizenship before an initial public offering that values the social network in upward of $90 billion, a move that may reduce his tax bill.

...Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in this country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world's largest social network holds its IPO.
Of course, California needs to quit taxing these folks so high if we want California's economy to recover. As I noted in March when pointing out that Moonbeam's popular tax-the-rich-and-poor tax measure is bad policy compared to Molly Munger's measure:
The difference between the measures is one appeals to the idea that we can simply tax the rich to solve our problems, an idea that has a strong emotional appeal right now. Many want to ignore the idea that there is a limit on how much California can attempt to tax the so-called wealthy "1%". The simple fact is that companies can move their "headquarters" out of California. And if their executives and major investors move their "primary" residences out of California (keeping both the Carmel "beach bungalow" and the Tahoe "cabin", of course), those taxable profits from future high tech IPO's would leave California also.

It is dangerous when a politician like Brown chooses to compromise with those selling the emotions of class warfare. He could have backed Munger's measure as does the California PTA.
It will be interesting and likely disturbing to see how much damage to California Moonbeam 2.0 and his allies can do to further the damage Moonbeam 1.0 did in his first two terms.

Californian's could, of course, vote to approve Munger's measure backed by the California PTA.

It would generate $10 billion to $11 billion per fiscal year beginning in 2013-14, monies that would go to local school boards instead of the Legislature. It is the one tax increase measure now circulating specifically aimed at improving California's economic future by educating California's children for a 21st Century economy.

Californian's could vote to approve it instead of Moonbeam's measure. But they probably won't because they seem to like Moonbeam even though he regularly lies to them.

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