It's no easy thing for Californians to figure out exactly what the six measures on the May 19 special election ballot do. For one thing, the Legislature and Governor did their best to hide the real impact of the measures by ordering up some glossy campaign-speak to decorate the titles and summaries on the ballot. It's easier to sell "budget reform" and "lottery modernization" than a tax increase (Proposition 1A) and more borrowing (Proposition 1C).
But even without the deceit, these measures do not yield to a quick study. For the first time in the nation's history voters are being asked to amend a state constitution to require the use of linear regression in determining how much the state will invest in higher education, health, and environmental protection. If it were necessary for a voter to actually explain how Proposition 1A works before being allowed to vote for it, I suspect it would get less than 1 percent of the vote.
As hard are the measures to understand, it may be harder still for them to answer the critical question: What do they mean for California? What signal will voters be sending by passing them?
California is among the states currently experiencing mind-bending budgetary shortfalls. Eventually returning to a period of wealth wisely will depend on fixing health care systems that were strained to a breaking point even before the crisis began. Here are some highlights from an event on Monday that The New America Foundation's Next Social Contract Program and its California Program co-hosted at the Commonwealth Club in San Francisco: "California, the Crisis, and the Next Social Contract: Staying Healthy, Wealthy, and Wise in Challenging Times." (We'll link to the webcast when it's available in a few days.)
Reinventing Government guru David Osborne kicked off the event with a presentation that laid out starkly how, unless brought under control, spiraling health spending will keep the states in permanent fiscal crises. Throughout the rest of the morning, the issue of health care costs kept rearing its head in panels on topics from economic development to education. As it turns out, making progress on any policy issue of importance to state governments will first require getting these costs under control.
President-elect Obama's call for enormous new investment in national instructure has the potential, as Steve Coll recently noted, to both stimulate the economy in the short run and strengthen it for the long haul. But as the situation in California illustrates, the economy cannot get the full benefit of that infrastructure package unless the stimulus package also includes a large dose of direct aid to state budgets.
In every respect but one, California is ideally positioned to take advantage of Obama's infrastructure plans. With its congested freeways, crumbling levees, and burgeoning population, it has boundless infrastructure needs. It has existing voter authorization to issue tens of billions worth of state bonds to cover the state's share of cost for projects. It has a bountiful supply of workers, now idled by the collapse of housing construction, to retrofit buildings for energy efficiency or to repair schools and public buildings. It has a vigorous corps of entrepreneurs and venture capitalists to spur a wave of green infrastructure investments, contributing new ideas and technologies to the effort.
It has everything to carry out an infrastructure stimulus program except cash.
With state revenues in free fall, governors are banging on the door of Congress, calling on lawmakers to put assistance to the states at the top of the list in the next economic stimulus package. In the ubiquitous media shorthand, the states want a “bailout.”
This shorthand, however, muddies the issue and the stakes here.
There are a lot of adjectives being used to describe the long-delayed California state budget passed in the wee hours of the morning on Sept. 16, few of them printable and none complimentary: “disgraceful,” “stop-gap,” “sham,” to cite just a few. But the most pertinent adjective now is “illegal."
A little history: In 2004, near the beginning of California’s long budget nightmare, newly elected Gov. Arnold Schwarzenegger, and most of California’s leaders, offered voters a two-part deal. Approve $15 billion in deficit borrowing to get the state through the budget crisis, the state’s grandees told voters, and then we “tear up the credit card.” Voters took them at their word. They approved both Proposition 57, authorizing the unprecedented borrowing, and Proposition 58, called “The California Balanced Budget Act,” forbidding the state from further deficit borrowing and making it illegal for the Legislature to pass, or the governor to sign, a budget in which spending exceeds revenue.
One of the prime uses of the California initiative process is budget theft: a special interest, unhappy with its cut of state spending, passes a ballot measure to increase or fence off its budget. But sometimes the loot doesn’t stay stolen.
Just ask the road lobby. Alarmed by reports that Republican legislators want to grab dollars from transportation accounts to paper over the state’s budget deficit, it has launched a radio ad campaign to defend its booty.
The loot at issue is the portion of the state’s sales tax revenue derived from the sale of gasoline.
Until this decade, the state, for tax purposes, treated gasoline like any other purchased good. California levied the normal state sales tax on sales at the gas pump and put the money into the general fund, along with the revenue from sales of surfboards, Steely Dan records, and other goods. This money helped pay for schools, health care, and prisons. (The sales tax should not be confused with the separate 18-cents-a-gallon state excise tax on motor fuels, a levy on road users exclusively dedicated to fund road maintenance and improvement.)
Like generals who are always fighting the last war, California's pundits are still fighting their way out of the last budget crisis. Latest case in point: George Skelton of the Los Angeles Times, who recently complained again that California's income tax "depends too heavily on the wealthy." In Skelton's world, the wealthy are just like those men mothers always warn their daughters about: they'll show you a good time, and then disappear, leaving you heartbroken. "Their incomes rise and fall steeply with the economy," he writes, "and therefore so do state budget deficits."
Except that's not why California has a budget crisis. As the state controller reported on May 9, personal income tax collections for the first nine months of the current budget year are $1.4 billion over the estimate in Gov. Schwarzenegger's January budget and within a whisker of the amount budgeted last summer. Through the first nine months California revenues are up 1.2 percent over a year ago, thanks entirely to the income tax, which has more than made up for the decline in sales tax revenues caused by the housing crash.
As usual, California faces a budget crisis. And just as predictably, Californians are mired in budget confusion.
How big is the crisis? a conscientious citizen might ask. The answer is: As big as you want it to be. Just take your pick. An "$8 billion budget shortfall," reports the San Jose Mercury News. "A $10 billion gap," says the Sacramento Bee. Gov. Arnold Schwarzenegger uses a more technical description: "$20 billion out of whack," he recently said.
This cacophony of numbers and nouns is a big piece of California's budget problem. Not only does California routinely fail to balance its budget, it can't even talk straight about its finances.
In normal accounting and common understanding, a budget is balanced when spending doesn't exceed revenues in a budget year. If revenues are greater than spending, the difference is a surplus; if spending exceeds revenues, the difference is a deficit. Revenues are the proceeds of taxes, fees, and interest on investments.
It is unclear what response, if any, will right the U.S. economy. Chairman of the Federal Reserve, Ben Bernanke, gave a speech today calling for "a vigorous response" to the mortgage crisis and suggested reinvigorating government-sponsored enterprises, like Fannie Mae and Freddie Mac, with increased regulation and possibly writing down the principal on home mortgages. Treasury Secretary Henry Paulson said in a speech yesterday, "Let me be clear: I oppose any bailout." It appears policy makers, officials, and economists still cannot agree on appropriate solutions to the mortgage crisis.
Snapshot asks, what policy will get the U.S. economy out of its current slump and not threaten long run growth?