Jerry Brown faces daunting budget deficits in the years ahead

Voters November 2 didn’t do much to make the job easier for Jerry Brown, California’s former governor and current governor-elect.  In fact, from a fiscal perspective, voters made the already daunting task of being governor of a recession-wracked state even harder for the 72-year-old attorney general. 

They did, however, allow a budget to be approved by majority vote, which means Democrats can pass a spending plan without compromising to win enough Republican votes to reach two-thirds.  Brown, who bested GOP rival Meg Whitman by a 53.6 percent to 41.3 percent margin, already faces an estimated budget shortfall of $21.3 billion for the fiscal year that begins July 1, 2011 — a hole that will likely deepen because of the record 100-day lateness of the current year’s budget.  “The taxpayers gave and they also took away,” Brown told reporters on Election Night at his campaign headquarters.  “On one hand, the people said by a majority give us a budget. On the other hand, they said don’t pick my pocket.”  As Brown noted, he hasn’t been in Sacramento for 28 years.  A lot has changed. 

Far more spending decisions are now dictated by ballot measures approved since Brown left the governor’s office in 1982.  For example, Proposition 98, approved by voters in 1988, requires that public schools receive a minimum of 40 percent of state revenues and calls or the state to make schools whole in years when they are shorted.  Various other ballot measures further curtail the flexibility of lawmakers and the governor to respond to fiscal crises. 

Voters added to the list November 2 by approving Proposition 22, restricting the state’s ability to borrow local transportation and redevelopment dollars.  Opponents, which included the California Teachers Association, said that locking in various spending formulas and further restricting the tools available to the state to balance its budget will lead to deeper cuts for schools, public safety and health care which don’t enjoy the same protections, knocking a $2 billion hole in the state budget.  

     “While we strenuously disagree with this measure that will take $2 billion out of public safety, education, healthcare and other important public services and give it to redevelopment agencies, we will continue to advocate for shared responsibility among all levels of government for the major issues that confront us,” said Lou Paulson, president of the California Professional Firefighters, in a post-election statement. 

Besides closing a predicted $21.3 billion gap in the budget he presents in January, due partly to the expiration of a temporary 1 percent sales tax increase and .25 percent income tax surcharge passed to close previous shortfalls, the Democratic governor faces an even bigger hole the following year.  In its November 2009 Fiscal Outlook, the state’s Legislative Analyst estimates a $23 billion hole for the fiscal year beginning July 1, 2012. The 2010 Fiscal Outlook will be issued within several weeks. There won’t be much good news in it for Brown. 

The reason the budget gap widens is that the state must pay back nearly $2 billion in money it took from local governments in 2009 to help balance the state budget.  Under the terms of 2004’s Proposition 1A, a previous ballot measure restricting state borrowing from cities and counties, the state is required to pay back any money it takes from local governments within three years. The 2012 fiscal year is the third year.  Proposition 1A was approved by an even more lop-sided margin — 84 percent to 16 percent — than Tuesday’s Proposition 22 which passed 61 percent to 39 percent. 

Voters also rejected Proposition 21 by a comparable spread – 58 percent to 42 percent.  It would have saved $130 million in general fund money now being spent on California’s deteriorating state park system by paying for park expenses through an $18 annual surcharge on cars, motorcycles and recreational vehicles.  The fund would have raised $500 million annually. 

If approved by voters, which it wasn’t, Proposition 24 would have saved the state money by repealing several tax breaks enacted as part of the 2008 and 2009 budget compromises.  Corporations, particularly ones doing business in multiple states, donated generously to the “no” campaign because they are the beneficiaries of more than half of the $1.3 billion the state will lose annually by reducing their California tax burden.  Qualcom, like Disney and Time Warner, amng other large corporations, contributed $900,000 to the “no”. Genentech, more than $1 million. 

Proposition 26, approved by voters 53 percent to 47 percent, may have the most profound fiscal impact.  Under the proposition, some fees will now require the same two-thirds vote for passage that taxes do.  Fees imposed on industry pay for much of the state’s environmental efforts, including implementation of AB 32, the state’s landmark greenhouse gas reduction measure.  Taxes – income, sales, bank and corporation, for example – pay for general public services like schools and prisons. Fees, generally, cover the cost of specific services.  Now, those fees “that government imposes to address health, environmental or other societal or economic concerns,” will be treated as taxes, according to the Legislative Analyst.  So, for example, a fee for a cosmetology license could still be approved on a majority vote, but a fee imposed on oil companies to pay for oil recycling programs would now be a tax because it has a broader impact than covering the costs of a service being provided to fee payer.

The proposition also makes it more difficult to pass what is known as “revenue neutral” legislation such as federal tax conformity. “Revenue neutral” bills increase taxes for some and lower them for others, but the net effect is no increase. That allows for a majority vote bill. But one of the changes Proposion 26 makes says that a two-thrids vote is required if taxes for one individual are increased. 

The new governor can also expect billions in federal economic stimulus money to evaporate in the new fiscal year. And if he solves the first two shortfalls during his first two years in office, Brown can look forward to a $20 billion deficit in the 2013-2014 fiscal year and an  $18.4 billion budget gap in fourth year in office – assuming voters don’t make his job even more difficult in the 2012 elections.