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I was going to make a (fiscal) new year's resolution to stop picking on California. There are, after all, 49 other states doing things that don’t necessarily pass the good governance test, but the latest Golden State deal warrants comment. It would close the reputed $26 billion deficit by cutting spending by $15.5 billion, selling off assets, and deferring payments. Despite histrionics, the agreement comes less than a month into the budget year, much sooner than in past years.
Of course, the state had to act after it began paying its bills with IOUs—something not seen since the '90s—and its bond ratings plummeted.
We don’t yet have official numbers, but the L.A. Times reports $4.3 billion taken from K-12 schools and community colleges, $3 billion cut from higher education (the Cal State and University of California systems), over a billion each slashed from corrections and state workers' pay (three furlough days a month), a half a billion pulled from the state's welfare program, and other cuts in home health care and children's health insurance. Education and paycheck deferrals will "save" money this fiscal year by paying June 2010 obligations in July, but that only punts the problem downfield to next year’s budget clash.
Cutting education—especially higher education—after increasing fees will inevitably mean that fewer students attend classes. So much for building the future workforce California needs. Cuts in welfare and health programs will almost surely come from limiting access and possibly limiting benefits—a terrible idea when unemployment has hit 11.6 percent and continues to rise.
But California's cities and counties are probably the biggest losers with $1 billion cut from transportation funds, $1.7 billion pulled from redevelopment agencies, and $2 billion borrowed from local governments. That sounds a lot like what happened in prior recessions—like the "triple flip" at the beginning of the century, when the state balanced its budget by "borrowing" ear-marked local sales taxes to pay off deficit bonds. The governor promised he would never again take funds away from local governments. Whoops.
There is, of course, another important difference. Last time around, the housing boom increased property taxes, leaving local governments generally in much better shape than the state. But things are different this time around. L.A. County supervisors and other local officials are already talking about suing the state. And Wall Street needs to buy into the budget agreement, given the state's need for short-term borrowing.
It all comes down again to those prior ballot measures that have made it hard to raise needed revenue. The state needs a less volatile revenue system and an easier path to solving short-term fiscal problems. This budget does none of that.
Of course, those of us who think only a crisis will force needed reform can take solace in this untenable situation. The problems will almost surely be even greater next year and the year after that—once federal stimulus is gone.
So congratulations, California, for passing a budget. If it is painful enough, maybe the next one will include reform.
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