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California to run out of money by March without further action

by Wes Messamore, published

According to a letter from state Controller John Chiang, if California can’t scrape together $3.3 billion through borrowing and delayed payments by March, the state will run out of cash even though lawmakers thought the state had enough money to last through June.

The problem, Chiang notes, is overly-optimistic budget projections by the governor and lawmakers last year, which over-estimated revenues by over two-and-a-half billion and under-estimated state spending by the same amount. State officials are taking steps to avert fiscal disaster by borrowing nearly a billion and delaying payments to universities, counties, and Medi-Cal.

While some lawmakers and commentators are dismissing the shortfall as a minor logistical hiccup, to others it’s just one more example of the Golden State’s perennial fiscal dysfunction. Even if the multi-billion dollar shortfall in revenue can be chalked up to a poor economy instead of bad financial planning, any candid observer has to wonder why the state spent $2.6 billion more than it budgeted. Where did that money go? Why were those expenses higher than projected? What can be done to plug leaks in the budget that amount to billions of dollars?

And with the letter from the state Controller's office showing lawmakers just how delicate California's budget situation is, Governor Jerry Brown's recent claim in his State of the State address that California is "on the mend" doesn't seem very credible. Meanwhile, the string of ambitious public projects-- including high speed rail-- which Brown devoted much of his twenty minute speech to propose, doesn't seem very affordable. How can any rhetoric about fiscal responsibility and austerity be anything but lip service when paired with proposals for multiple, ambitious public spending projects? Where's the money going to come from to pay for them?

Some lawmakers and policy analysts say that California's economy can outgrow its debts. Some are predicting a surge in revenue from the much-anticipated Facebook IPO for example. But even tax receipts on capital gains from something as massive and record-setting as the Facebook IPO will not save California's budget, nor correct its systemic and unsustainable flaws. These growth optimists point to the example of Google. After its IPO, the state collected nearly $15 billion more in tax receipts on stock sales than it did the year before. But note that the Google IPO filing came much sooner after a major trading low for the NASDAQ than we would be seeing with Facebook today. Part of that increase in revenues was just the market on its way back up. It can't all be pinned on Google. Correlation does not prove causation.

Perhaps more importantly, despite the big boost in revenues for 2005, did the state's finances eventually clear up and substantially improve for the long term, or were Independent Voter Network columnists writing all about California's budget crisis five years later? The answer is: the state didn't use the boon to dig its way out of the hole. It just kept digging the hole deeper. Another boon, driven by Facebook, will not save California's finances if the extra earnings are used to continue spending more and more on government projects instead of being seen as a lifeline, a gulp of fresh air for a drowning budget, a chance to carefully and consciously rein in spending and new obligations while making sure the state meets its old obligations. But in the end, Facebook, like Google, cannot fix California's budget problems, and history has shown it. There's just not enough money there to cover the current cost of government.

In my view, the solution is going to require drastic cuts to public spending. Instead of hoping its fiscal inefficiencies will be covered by Silicon Valley giants, Sacramento should take a closer look at these companies and act more like them. The private sector's success is simply, mathematically not going to be enough to make up for the public sector's inefficiencies. The public sector just needs to become more efficient (and yes, that's a euphemism for "spend less").

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