Sunday, January 09, 2011

Jerry Brown's budget (that officially arrives on Monday)

Jack Chang of the Sacramento Bee continues his dubious coverage of the California budget in Legislators, left and right, dislike Brown budget 01/09/2011. No, the budget hasn't been officially released yet. It's due tomorrow as required by the state constitution. The article itself is scarcely more than conventional political truisms used as filler: Republicans don't won't to raise taxes, Democrats don't want to cut spending, blah, blah.

But this unsigned story seems to be a bunch of bullet points provided by the Governor's office of what the budget will contain: Anatomy of Brown's budget plan 01/09/2011. There aren't a lot of detail, and it takes time for the implications to filter through the affected agencies. And, of course, the legislature has to act on it.

But the cuts sound pretty specific, such as Parks: "Shut state parks with lowest attendance" and "Cut state funding for local libraries". As expected, many of the state cuts hit social services hard. Some are more vague, like "Consolidate some state departments and agencies."

On the revenue side, the plan as reported here includes requests for tax increases, most of which appear to be in the form of this item:

Ask voters in June to extend 2009 increases to sales, vehicle and income taxes, raising $8 billion to $10 billion over 18 months. If approved by voters, the revenue from extensions of the vehicle and sales taxes would flow to local governments to help finance government realignment.
It also includes a two-stage proposal on K-12 education financing, with a second tier of cuts coming if the public declines the proposed revenue increases on the June ballot.

There is some revenue substitution proposed, such as "Use voter-approved Proposition 63 money to replace general fund money now spent on mental health." There is some borrowing from special funds included. Borrowing for operating costs is a short-term solution. It doesn't eliminate the "structural" deficit, i.e., ongoing base costs in excess of available revenue. And it increases the state government's debt ratio which is already harming California's credit rating, thus increasing borrowing costs. (Borrowing for capital projects is another matter. Having a highway, for example, paid for in debt payments over 20 years spreads the costs to those who use it over years of the project's useful life and thus does not create an ongoing structural imbalance in operating costs.)

And there is some creative thinking on revenue options, including "Require all multistate businesses to calculate their tax liability solely on their sales in California. Businesses could no longer use an old formula that accounted for property and payroll size."

The Bee's summary article omits any estimate amounts on all the cuts and revenue items it cites.

No direct cuts are targeted to California's massive prison complex. But the prison overcrowding does affect the governmental "realignment" portions of the proposal as cited by the Bee:

  • Juveniles: Eliminate the state Division of Juvenile Justice, instead sending money to local governments to house juvenile offenders.
  • Adult prisoners: Low-level, nonviolent, non-sex offenders without serious prior convictions would be housed in county jails. Money would be sent to local governments to increase jail capacity and bolster rehabilitation programs.
  • Mandates: Reduce the number of services local governments are required to provide and perhaps give them greater latitude to raise revenue to pay for them.
Without numbers, it's hard to guess how far-reaching the implications might be of these measures. But recognition that the current level of incarceration expenses are not reasonably sustainable is long overdue.

Both those stories are the first two installments in what the Bee is billing as a "Countdown" series on Brown's budget.

Wyatt Buchanan's report Gov. Jerry Brown to unveil 'painful' budget 01/09/2011 in the San Francisco Chronicle is more helpful on understanding the key political backdrop of California's current budget process:

"We've hit the wall, and I as a Democrat and chair of the budget committee recognize what the governor is going to propose on Monday is going to be very distasteful, very painful, opposed to everything we've fought for all of these years, but this is where we are," said Sen. Mark Leno, D-San Francisco.

Leno and other Democrats argue, however, that while proposals for cutting the budget may be similar, the difference is the person proposing the cuts.

"The difference is we now have leadership at the top where we didn't the last seven years. Arnold Schwarzenegger never had a clue, and I mean this seriously, as to what he was doing relative to the severity of our budget crisis," Leno said.

And perhaps most important is that Democrats are anticipating that Brown will propose a special election for this year with ballot measures that would raise taxes to stave off even deeper cuts. That's something Schwarzenegger refused to consider after voters rejected an extension of temporary tax increases in a May 2009 special election and that Assembly Speaker John Pérez, D-Los Angeles, called "a significant distinction." [my emphasis]
While there are undoubtedly some Democratic legislators who will vote with some reasoning such as, I don't care about voting these cuts if I've got a Democratic Governor covering for me, it would be highly misleading to take that as the basic dynamic going on here.

The basic fiscal story of California 1978-1980 is that the Republicans have successfully promoted campaigns to limit tax and fee revenue to the state government with the scam expectation sold to the voters that I can vote to cut revenues over and over without harming any services that affect me. It was unrealistic, in the sense that the Republicans drove for short-term gain in election after election based on a dogmatic position that for ideologues like Grover Norquist was a long-term plan to cripple the functioning of democratic government. The latter is often referred to as the starve-the-beast strategy and less often as the drown-the-baby-in-the-bathtub strategy, from one of Norquist's more colorful metaphors.

The state was actually here about 20 years ago. But two factors have postponed this moment of reckoning. One was that except for five years of Gray Davis, we have had Republican Governors since Jerry left the Governorship in January 1983. They were all more interested in promoting the anti-tax, anti-government image of their Party than in taking responsibility for putting the state budget on a structurally sound basis. In that regard, Gov. Schwarzenegger probably had more responsible intentions that either George Dukmejian or Latino-basher Pete Willson. But Schwarzenegger was, as State Sen. Leno says above, clueless about what he was doing. The result of all this was the state government has run chronically close to bankruptcy for years now without the fundamental scam at the heart of the Republican pitch - cut taxes and have no negative consequences! - being prominently challenged.

The second factor that worked in California's favor was generally shared by the states: the increased revenues from the tech bubble of the 1990s and the housing bubble of the 2000s. Joseph Stiglitz describes the general problem in his 2010 Afterword to his book Freefall: America, Free Markets and the Sinking of the World Economy (the property tax issue presumably doesn't hit California quite so hard as many states because of the restrictions of property valuation increases here):

By the beginning of 2010, eighty-eight percent of communities reported that their problems in 2009 were worse than they were in the previous year, and for an obvious reason: many depend on property taxes; property values are reassessed gradually, meaning that an increasing number of communities face a reduced tax base. Tax revenues have continued to decline as a percentage of GDP. The stimulus provided some help in filling the gap, but that assistance is coming to an end. States and localities will figure out how to make ends meet, either by cutting back expenditures or by raising taxes. But either option will lead to a reduction in aggregate demand - a negative stimulus.
What Jerry Brown has to do as Governor, and what he is clearly trying to do, is to re-establish a clear connection in the political system between taxes and government service.

Put in a marginally more wonky way, Jerry has to re-establish a clear connection in the political system - including by the voters who make some major decisions directly in California via statewide referenda and initiatives (and in 2003 by recall election!) - between revenue (mostly taxes and fees) and the actual services people demand and receive from government.

That is hard to quantify. But achieving it would be a major progressive achievement. If progressive, or left, or liberal (in the American sense) has any distinctive meaning in the US today, it includes at its core the ability of affirmative democratic government to play an important and constructive role in the community generally. That includes providing services like education and roads that the private sector cannot deliver adequately. It includes acting as a good-faith regulator and enforcer on behalf of the public against corporate abuses. It includes using taxes to offset grotesque maldistributions of wealth and income.

Assuming as I do that major cuts are inevitable in the state budget in the short run, not just in California but in Texas, Mississippi and numerous other states, the relevant judgment about Brown's proposed budget is not whether the cuts are desirable in themselves. Most of them plainly are not. The question is whether the proposal can be considered optimal in an ugly situation. And, in the long term more importantly, whether California can be put on a sound financial basis by eliminating long-term structural deficits and whether the political system as a whole can re-learn the real connection between revenue and income.

Politics is politics. But money also has laws, even though deficits are very different matters at state and local levels than at the federal level. Revenue has to match or exceed income over the long run. And while you can get away for a while with ignoring the (practical) laws of accounting, that approach doesn't abolish those laws in the real world. Eventually they come back to bite.

Paul Krugman recently reminded us of how that can happen with a dramatic case he cites in The New Voodoo New York Times 12/30/2010:

I have seen the future, and it's on Long Island, where I grew up.

Nassau County — the part of Long Island that directly abuts New York City — is one of the wealthiest counties in America and has an unemployment rate well below the national average. So it should be weathering the economic storm better than most places.

But a year ago, in one of the first major Tea Party victories, the county elected a new executive who railed against budget deficits and promised both to cut taxes and to balance the budget. The tax cuts happened; the promised spending cuts didn'’t. And now the county is in fiscal crisis.

Now the federal government has a lot more flexibility than a county government: it needn't, and shouldn't, balance its budget each year. The deficits of the past two years have actually been a good thing, helping to support the economy in the aftermath of the 2008 financial crisis.

But Nassau County shows how easily responsible government can collapse in this country, now that one of our major parties believes in budget magic. All it takes is disgruntled voters who don't know what’s at stake — and we have plenty of those. Banana republic, here we come. [my emphasis]
The Republicans of Nassau County certainly have an impressive achievement there: in just one year, they put there county into the kind of hole it took California a good 20 or 30 years to achieve!

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