Tuesday, June 28, 2011

Budgepocalypse 2011: What Have We Learned?

The smoke is starting to clear in Sacramento with yesterday's news that Jerry Brown and the majority Democrats in the Legislature have reached agreement on a plan to close California's remaining budget deficit for the coming fiscal year. With Brown expected to quickly sign it and Controller John Chiang not expected to object to its, ahem, assumptions, what's next for California and its government, and what have we learned?

We're this close to a balanced budget!
1. That even in California, good things still happen sometimes. The upside to the Democrats' budget is that Brown's plan to extend income, sales, and use taxes for another five years is well and truly dead. That's right: just in time for the weekend, Californians will see their sales tax drop by 1%! Moreover, it finally means that we can stop writing about this awful idea, which never stood a chance with the voters and is precisely the wrong direction for the state's economy. Also looking very dead this morning are the state's 425 redevelopment agencies, which are slated to get the axe in this plan. We will not shed a tear for the corrupt local governments and crony businessmen who will have to find other ways of wasting taxpayer money after October 1.

2. That we're all going to have to pretend that the emperor has clothes. Lost in the litany of news reports breaking down the deal's particulars or discussing the marginalization of the GOP is a very uncomfortable truth: in many ways, this budget is just as problematic and certainly just as unbalanced as the budget Brown vetoed eleven days ago. The item getting the most attention is the new budget's assumption that $4 billion in extra tax revenues is going to magically appear this year. This might or might not happen, of course: the drop in tax rates will likely have some stimulative effect on the state's economy, but all of the near-term economic forecasts point to stagnation. To get around this laughably irresponsible method of fixing the budget, the new plan contains "triggers" that would cut spending on schools and welfare services in the middle of the year. But, the triggers would only cut $2.5 billion from these programs; so, by our count, the budget still relies on $1.5 billion in imaginary money. Moreover, if you're a school or a social service agency receiving these funds, how on earth do you plan your budgets knowing that a chunk of your funding could get clawed back mid-year? Moreover, the new budget still relies on $200 million being collected via the Amazon tax; a more likely scenario involves the state losing hundreds of millions in tax dollars as the company ends business within its 20,000 California affiliates. But the biggest elephant in the room is that $2.15 billion of the current budget's revenues might not stand up to legal challenges. The backfill of $1.7 billion from the RDAs is almost certainly illegal under Prop 22, and neither the $12 vehicle license fee hike nor the CALFire surcharge on homeowners' policies will be legal if the budget passes on a simple (i.e., not two-thirds) majority. But to judge by the morning news, we're all going to just pretend these things aren't problems.

3. That the big winner is still the status quo. Despite all of Brown's rhetoric about reform and responsibility this year, it's hard to look at this budget and not see "business as usual" written all over it. Did we pass a budget that used one-time gimmicks to put off tough choices? Yep: almost $3 billion of the money used to fix this budget comes from a one-year deferral of payments to schools and community colleges. Was organized labor quietly able to kill urgently needed reforms? Yep: by cutting Republicans out of the negotiations, Brown dropped all discussion of pension reforms, a spending cap, and an easing of business regulations. Are we still moving in the direction of bigger government and higher taxes? You bet: with Brown planning soaring increases in state spending, including a $12 billion increase next year, he and the Democrats are already talking about a tax initiative for next year's ballot. So what did we learn this year? Absolutely nothing.

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