Exploring the painful options for resolving California’s massive budget deficit

With the unveiling of Gov. Arnold Schwarzenegger’s revised budget May 14 and its more than $12 billion in spending cuts, the stage is now set for the GOP governor and Democratic majority legislature to begin the tussle, posturing and compromise that will eventually lead to a final spending pan for the fiscal year that beings July 1.

A $17.9 billion gap between revenues and spending commitments to which Schwarzenegger wants to add a $1.2 billion reserve, coming on the heels of filling a record-setting $60 billion budget gap, means easy solutions are not an option.
“California no longer has low-hanging fruits. We don’t have any medium-hanging fruits. We also don’t have any high-hanging fruits. We literally have to take the ladder away from the tree and shake the whole tree,” the GOP governor said in presenting his revised spending plan.  “We are left with nothing but tough choices.”

In principle, balancing any budget is simple: Reduce money going out. Increase money coming in. Or a combination of both.
In Sacramento, as in Washington D.C. and other statehouses, the partisan dynamic is, stated broadly, Democrats seek maintaining or increasing levels of government spending paid for with increased revenue, while Republicans seek lower government spending and no tax increases.

“The best social program you can provide is a job with good benefits,” said Sen. Bob Dutton, a Rancho Cucamonga republican and vice-chair of the upper house’s budget committee. “A robust economy isn’t created through more government spending.”

While that’s the simple equation, politics complicates the budget process significantly.

Tough decisions – such as reducing prison and public school spending, curtailing services delivered to the state’s elderly and poor, and raising taxes all carry potential political downsides particularly in an election year at a time when, as the recent Kentucky election illustrates, the public’s favorable rating of incumbent lawmakers is drifting down toward single digits.

In California, budget balancing is further complicated by its almost unique status among states in requiring a two-thirds vote to approve both a budget and any tax increase.  Although Democrats hold comfortable majorities in both the Senate and the Assembly, they cannot reach two-thirds without votes from a handful of Republicans.

Nor can Democrats “close a tax loophole,” as they call it or reduce the generosity of a tax credit on a majority vote.  Senate President Pro Tempore Darrell Steinberg, a Sacramento Democrat, has all but said obtaining a new general tax increase is impossible and that Democrats won’t pursue the idea. Republican lawmakers and Schwarzenegger have said no tax increase of any kind is acceptable.

Even the Legislative Analyst, which filters the budget through more of a policy rather than political prism, agrees.  “We discourage increasing the state’s broad-based big three taxes – personal income, sales and corporation taxes – above their current levels, the analyst wrote in its assessment of Schwarzenegger’s revised budget.

Further adding to the difficulty of closing the gap between revenues and spending commitments is the GOP governor’s insistence that the budget be accompanied by both pension and fiscal “reform”.  Generally, Schwarzenegger defines budget reform as creation of a large “rainy day fund” the state can use to smooth out the sharp upward and downward spikes in annual revenue collections.

The governor’s idea of pension reform, which generates no immediate budget savings, attempts to reduce long-term unfunded liabilities through a combination of increased employee contributions and reduced benefits, and to smooth the peaks and valleys in investment returns that spike the state’s contribution to the system.

In previous budget battles, Democrats have been reluctant to link changes in the public retirement system to the budget, arguing the two are unrelated and pension changes don’t save the state any immediate money.  This go-round is no different.

“We will have and we will approve a budget and only a budget,” said Assembly Speaker John Perez, a Los Angeles Democrat.  “The Assembly will not engage in policy discussions that are not directly related to solving the budget process. Too often our budget is delayed because our governor tries to leverage it for policy changes he could never have gotten approved otherwise.”

While no obvious path to a compromise is readily visible, some of the components of a final budget solution can be predicted.

Roughly two-thirds of Schwarzenegger’s proposed spending plan — $12.4 billion – are reductions in state spending, $1.1 billion or eliminating the state’s welfare program – a move Democrats have already announced they reject.  Privately, budget negotiators both in the Schwarzenegger administration and the Legislature acknowledging scrapping the program won’t happen.

“I find it hare to imagine we really are going to eliminate CalWorks,” said Assemblyman Roger Niello, a Sacramento Republican and former vice-chair of the lower house’s budget committee.  Nor is it likely Democrats will back the 50 percent spending reduction — $750 million – proposed by Schwarzenegger for the In-Home Supportive Services program which provides care to the state’s low-income elderly.  Or back elimination of state-paid childcare to save $1.4 billion.

On the other side, Republicans will be reluctant to back $890 million of proposed savings in the state prison system, supported by Democrats.  “There are things in the governor’s package that are a hard sell for both parties,” said Jean Ross, executive director of the California Budget Project.

However, judging from the budget actions of the last two years, state spending for public schools will be further reduced. By how much is the question.

The state has already committed as part of last year’s budget deal to repay $11.2 billion schools have been shorted over the past two years.  Schwarzenegger proposes giving schools $4.1 billion less the minimum amount they are guaranteed under current law — $53 billion. The Legislative Analyst in its assessment of the governor’s budget says the state cannot afford to meet the $53 billion requirement but that the GOP governor’s approach is legally tenuous.

The Analyst recommends lawmakers suspend Proposition 98, the ballot measure whose formulas dictate state spending on schools. Suspension allows the Legislature to set any spending level it wishes. The analyst recommends $50.8 billion, which would not reduce school spending in the current fiscal year, other than the cuts imposed by the earlier enacted budget.

Suspension has political consequences. As Niello says, there’s a “sensitivity” about suspending Proposition 98 by both parties.  “There are political consequences when you vote to suspend,” said Dutton. “But they don’t outweigh the reality of the budget.”

Steinberg is an advocate of what he calls “realignment” – taking state responsibilities and transferring them to cities and counties and providing revenue to pay for those responsibilities.  “We must take many of these state programs that otherwise may be decimated, and give them to the locals and the school districts.  Give them restored revenue and the ability to raise revenue themselves,” Steinberg said in response to Schwarzenegger’s budget plan.

“Those who say – ‘too difficult, too complicated’, I challenge you to do this:   Bring forward an alternative that balances the budget, preserves essential public investments, and does not rely on gimmicks.”

The state’s last experiment with realignment was in the earlier 1990s in which it shifted responsibility from the state to counties for several mental health, public health, and indigent health care programs.  It’s unclear what programs Steinberg or other Democrats would shift. Under the terms of a 1979 ballot measure, Proposition 4, when the state imposes a new mandate on cities and counties, it must send money to pay for it. The one exception is public safety.

Although Republicans and some Democrats would likely oppose such a proposal because it provided no money, the state could shift various public safety programs like parole and court costs, to counties and cities.

Democrats will continue to seek new revenue potentially through fees, which require a majority vote. One example is leveling a fee on homeowners who live in parts of the state in which their fire protection is provided by the state Department of Forestry. The idea has been floated previously and defeated in the Legislature.

Politically, should sufficient GOP votes be secured, the easiest way to increase revenue would be to continue the temporary tax increases – a 1 percent boost in the sales tax and a surcharge on income taxes – put in place in the February 2009 budget.  “Voters see it as a continuation of an existing tax rather than a new tax. That’s always an easier nut to crack,” said Ross.

Republicans – at least publicly – show no sign of relaxing their no tax stance.  “There’s so much to deal with. All of us have to make priorities. There are programs we have to cut and some we may need to defund totally until we get this economy up and running again,” said Dutton. “There’s no more money to borrow. The day of reckoning is here.”