Governor Brown commences painful budget cuts

During Governor Brown’s press conference Monday, he was asked what would happen if voters reject the continuation of taxes set to expire this year.  He replied, take all the budget cuts we’re making now and multiply by 2. Ouch.

The cuts he announced are already severe and draconian. They are across the board, and not on ideological grounds. Among them are plans to:  eliminate redevelopment agencies, cut UC and CSU funding by 25%, axe $3.2 billion from Medi-Cal and welfare-to-work, reduce K-12 funding to minimum levels, lower state employees pay by 10% for those who have not already had cuts, eliminate funding for local libraries, hire less staff for wildfires, eliminate First Lady staff and Sec. of Education, and cut prison spending by shifting it to local governments.

Remember, this is just the first round of cuts. His plan – which is sly, devious and also completely transparent – is to let the impact of these cuts sink in, no doubt accompanied by a great gnashing of teeth and the sounds of lamentations being heard throughout the land, then propose a ballot measure that would extend current taxes by 18 months. It would send much of the money to municipalities in preparation for the state offloading many programs onto them. His pointblank message is, either vote to keep the taxes or accept further painful budget cuts. He’s quite transparent about this. In a welcome change, he clearly wants to treat voters like adults, present all the facts openly, and not demonize the other side.

Will it work? Does California have any other choices?

An in-depth Reuters article on California’s dismal financial situation says “The Golden State doesn’t just need to go on a diet – it needs emergency bariatric surgery” and it also needs to be friendlier to business and to the less socially progressive.

Bizarrely, and this demonstrates the cluelessness of many voters, a Nov. USC/LA Times poll showed only 24% thought major services like education and health care would have to be cut.  The rest got their wake-up call from Governor Brown on Monday.

California has major structural problems that have contributed to the fiscal emergency. Prop 13 capped property taxes at 1% based on when the property was bought. This dried up income and made the state more dependent on tax revenue. But as California painfully learned during the dot com collapse and the current real estate-induced recession, revenue can drop sharply and unexpectedly. Another problem is unfunded mandates, often implemented by California’s utterly broken and worse than useless proposition system, whereby huge spending can be mandated without explaining where the money to pay for it will come from. If you or I ran our personal finances that way, constantly making overly-optimistic estimates of income while saving nothing and going deeply into debt, well, we’d be bankrupt soon, wouldn’t we?

State Assembly member Charles Calderon says some on Wall Street think California should just man up, take the hits, and let the chips fall where they may, That may be exactly what happens, and could include California defaulting on bond payments with the bondholders getting pennies on the dollar. Be careful what you ask for, Wall Street, you may just get it.

When Iceland financially imploded, they let their banks fail and made it clear to bondholders and financiers that taxpayers would not be picking up the tab. Iceland currently owes $85 billion in debt and so far, has repaid none of it nor shows the slightest inclination to do so. Instead, they are focusing on rebuilding their economy, and while problems certainly exist, Iceland is recovering much faster than anyone expected.  Contrast that to Ireland, who has chosen to pay bondholders in full, and thus impoverished themselves for years to come.

Gov. Brown’s plan is bold and realistic, and a welcome change from the gridlock. But it doesn’t address bond debt, unfunded public pensions, or the small but growing trend of businesses leaving California because of what they see as high taxes and overly burdensome regulations. My view is that his plan is a good one but won’t stave off the inevitable. 

Soon enough, California will probably face a decision like Iceland did, that is, to save the state or save the bondholders. You can’t have it both ways.