Thursday, November 4, 2010

The Magic Kingdom 2011: Governor Moonbeam and the Deliberators

The 2010 General Election is over and "The 2010 Meg Whitman Local TV Station Recovery Program" has ceased.

California generally bucked the trend of a Republican tide. Jerry Brown, hereinafter referred to as Governor Moonbeam, will become Governor on January 3, 2011.

At the same time, the new Legislature, hereinafter referred to as the Deliberators, will begin a two-year session. The makeup of the Deliberators changed slightly in that the Democrats actually gained two seats in the Assembly giving them 65% of the membership. In the Senate, they will continue to have 63% of the membership.

The voters in the State of California, hereinafter known as the Magic Kingdom, voted to allow a simple majority of the Deliberators in each house to adopt a State Budget. They also voted to:
  1. Add to the requirement for a 66.7% vote in each house to raise taxes by including more "fees" in the definition of "taxes" and reversing prior increases in conflict;
  2. Prevent the Legislature from borrowing or shifting certain gas taxes and redevelopment tax revenues to balance the State General Fund; and
  3. Not roll-back an existing provision that allows corporations
    • to income average future profits with the past few years losses,
    • to share tax credits among affiliated corporations, and
    • in the case of corporations doing business outside California to determine the portion of its taxable profits on in-California sales as opposed to a formula taking into account in-California payroll, California property ownership, and in-California sales.
Item 1 will increase State General Fund costs by at least $1 billion annually.

Item 2 will reduce funds allocated to the State General Fund by about $2 billion annually.

Item 3 will reduce State General Fund tax revenue by $2.3 billion annually over at least the next three fiscal years.

So, the voters of the Magic Kingdom with their left hands gave Governor Moonbeam and the Deliberators the ability to approve a State Budget with a majority vote. With their right hands, the voters of the Magic Kingdom reduced by $3 billion funds used needed to "balance" the General Fund and confirmed the elimination of $2.3 billion in corporation taxes collected in previous fiscal years.

Oh, and by the way, about $8 billion in revenue will disappear when temporary increases in the vehicle license fee and sales and income taxes expire July 1. And even the most optimistic analysts admit that the "balanced" General Fund Budget for the current year is at least $5 billion short. And, the bill comes due to repay at least $2 billion that the Gubernator and Deliberators siphoned from local governments in 2008. Oh, then there is that other 2010 General Election fact at the federal level, the Republicans took control of the House of Representatives assuring the end of federal stimulus money which provided $6 billion to local schools in 2009.

In a related subject, while the federal government may or may not extend the unemployment benefit period for millions of unemployed Californians next year, the odds that California will not have to start repaying the huge unemployment insurance fund loan beginning in 2012 have all but disappeared. That will result in an increase in direct payments by California employers to the federal government as explained in my last post.

Governor Moonbeam has indicated he will roll up his sleeves and start working. He's been thinking out loud that he doesn't need a Chief of Staff while he personally organizes his administration and prepares a revised General Fund Budget for the current year 2010-11 and a Budget for next year 2011-12.

We know that most of the easy one-time "gaming of the system" budget balancing techniques have been used up, such as shifting the last payroll of the year from June 30 to July 1. And we know, as discussed above, that:
  • The current budget as adopted is at least $5 billion short;
  • The election eliminated $5.3 billion of borrowing from local government and corporation taxes;
  • We are losing $8 billion in temporary revenue increases;
  • We likely won't be seeing about $6 billion in federal stimulus money in the future; and
  • We need to repay a minimum of $2 billion borrowed.
Depending upon revenue, it appears that $20-$30 billion (23%-35%) needs to be cut from 2009-10 spending levels by 2011-12. As a basis for budget preparation, here's the financial picture resulting from The Great California Slump comparing 2007-08 spending to 2009-2010 spending (click on the image below to see the table full size):
As Governor Moonbeam knows and you will note, by 2009-10 the State of California had already cut its spending from 2007-08 levels by $20.7 billion or 19.2%. Here's what Governor Moonbeam and the Deliberators are facing:
  • 47% of 2009-10 spending was for education (preschool - university), which many of the voters seem to have said they don't want cut, partly because cutting education is cutting California's chances for future economic growth;
  • 27% of 2009-10 spending was for the State's share of  Health and Human Services, an area which is problematic because for every $1 cut, anywhere from $1 to $3 of federal funds will not be spent in California during the budget year, reducing the State's economy accordingly; most cutting here impacts on children, the disabled, and the elderly and their caregivers, which seems like a good place to cut to avoid raising taxes on multistate/multinational corporations;
  • 9.6% of 2009-10 spending was for prisons and jails; most of this spending is controlled by a federal judge, so one can make more "pretend cuts" like the Legislature did in the adopted current year budget or put in an honest estimate of spending or release a bunch of prisoners;
  • 1.4% of 2009-10 spending was for Resources Protection including State Parks, CalFire, Fish & Game, and EPA enforcement of such things as the new environmental law the voters just confirmed; apparently closing the State Parks to fund enforcing the new law would be OK with the voters based on the election, but really you could eliminate the entire Resources Protection budget and not make a dent in the total needed cuts;
  • 5.7% of 2009-10 spending was for debt payments which will go up in future budgets and you can't do anything about it;
  • 2.1% of 2009-10 spending was for capital outlay - buying or building stuff that has a usuable life of several to many years; that would include things like replacing the 1970 payroll system and other squandering of tax money; and
  • 7.1% is everything else which includes the court system, the various elected official's offices, property tax relief, and a myriad of other things state and local government have to do and which was cut 42.5% already.
The Republicans Deliberators could join with Democrats to approve a $20-$30 billion tax increase. But that won't have to happen because Governor Moonbeam and the Deliberators have a voter mandate to balance the Magic Kingdom's budget with fairy dust, and they can do it on time since it only needs a majority vote now. Yeah, sure, good luck with that.

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