If you believe the 2003-04 state budge process was ugly this
year, you
’ll be depressed to hear it’s likely to get worse next year.
If you believe the 2003-04 state budge process was ugly this year, you’ll be depressed to hear it’s likely to get worse next year. How can it get worse? Let me point out some of the ways, after legislators scrambled to make a dent in a $38 billion deficit.
First, as we begin to consider what’s in store for 2004-05, the most favorable forecasts project a deficit of about $8 billion.
Second, an estimated $11 billion of the $38 billion “bailout” just approved is to cover a “deficit bond” that will be backed by taking a half-cent sales tax from local governments and committing it to pay off that bond. Sort of like taking out of loan to pay off your credit card debt.
Third, the pension obligations for the state are growing geometrically, by hundreds of millions of dollars per year. Local governments are in the same bind.
Fourth, through a combination of one-time revenue infusions to the state’s general fund, California this fiscal year will recognize more than a $5 billion bonanza that won’t be available in 2004-05. Such as: a $2.4 billion federal grant for homeland security and Medicaid; transferring about $1 billion from the state transportation funds to the general fund – which has a payback obligation in it; and legal Proposition 98 (education) and Medi-Cal fiscal year bookkeeping gimmicks worth about $2 billion.
And so, you might ask, “How in the world could anyone vote for such a budget? Well, with a $38 billion deficit hanging over our heads, we were still able to protect our most important state programs without doing it on the backs of California taxpayers.
While both parties agree that there is much not to like in this budget, we were still able to:
Maintain the state’s commitment to protect K-12 education by meeting the Proposition 98 guarantee, and minimizing cuts to local Basic Aid districts.
Make real spending reductions of nearly $700 million in the current year, and $3.4 billion in the budget year. The $70.8 billion in general fund spending for the current fiscal year is 9.4 percent less than last year.
Reduce the deficit from $38 billion to $7.9 billion, without any new general tax increases.
Protect the elderly, blind and disabled by providing a cost of living increase for SSI and SSP recipients.
Protect environmental programs like the California Coastal Commission.
Economists say that every day without a budget was costing California about $20 million, and our bond rating had fallen in the tank. Without a budget, and some sign of fiscal stability, bond fund managers said they weren’t ready to play with this state’s financial debacle. The time to approve a budget had come, and waiting any longer would have only deepened the hole we are trying to dig out of.
While the governor (without a vote of the Legislature) did increase the VLF to the tune of $4 billion, there were several other suggestions for general tax increases like those in the early 1990s, but thankfully reasonable budget decisions were made.
One suggestion was to impose an additional half-cent state sales tax. The Board of Equalization predicted that approval in such a tax would result in the loss of 25,000 jobs in the state, which may not seem like many unless one of those jobs is yours.
Another proposal was to increase the income tax rate from 9.5 to 11.3 percent for high-income earners. Sounds interesting, but when that was done 12 years ago, state income tax revenue declined by $1 billion for two years in a row.
And then there was the cigarette tax. Frankly, I don’t care if another Californian smokes another cigarette. But, when New York jacked up its cigarette tax recently, it didn’t receive anything near its anticipated additional revenue. People either quit (a positive), decided to buy on the black market or out of state (negative – negative).
So what to do next year?
First, don’t go on a spending binge for ongoing programs like governor and legislative majorities did in their early years. They approved a 36 percent increase in the general fund as the state population was growing by 5 percent. When you’re in a hole, stop digging. The handwriting was on the wall two years ago, but they didn’t want to read (or believe) it.
Unfortunately, unlike the mid-1990s, there is no high-tech-like revenue bonanza on the horizon that will allow California to recover soon.
If we’re looking for new revenues, review the tax breaks which was granted during the good times of the mid-1990s, but don’t pile on with a new tax.
We need to fix our horrendous workers’ compensation system so that businesses – mostly small and medium-sized – don’t close their doors and/or leave the state. The private sector, its employees and employers, will get us out of this financial disaster, not government.
Also we need structural reform in our budget process. Hopefully, some suggestions coming out of a bipartisan Senate Select Committee on Fiscal Restructuring, of which I am co-chair, will receive serious attention this fall.
Every legislator, Republican and Democrat, will tell you he/she didn’t like this budget for 2003-04, and with good reason. If we’ve learned anything during this laborious budget process this year it’s that we have to stop digging into this financial abyss and begin dealing with fiscal reality.
Bruce McPherson represents the 15th District in the state Senate. The district includes a small portion of Santa Clara County, including the cities of Morgan Hill, Gilroy and a portion of the City of San Jose. It also includes all of San Benito and Monterey counties and most of Santa Cruz County. The boundaries of the 15th District will change in December 2004. He was the Republican nominee for lieutenant governor in 2002.
