Budget gone bad: hope Prop 11 is a done deal!

It was inevitable. As suspected, the state budget that was finally passed just a month or so ago has fallen far short of solving California’s money woes. While it enabled most incumbents to get through an election, it now turns out that we have a shortfall of $11.2 billion, may be facing imminent cash flow problems, and the Governor has called the legislature back into emergency session.

I’ll save most of my comments for now, but I can’t help but wonder if the majority leaders in the Assembly and Senate capitulated and “cooperated” with the minority on the certainty that the budget would come back very soon with proposed tax increases.

Nah…. they wouldn’t do that. Would they? Oh how I hope Prop 11 did indeed pass!

Everything is still in flux as the legislature considers what to cut. In the meantime, the special interests will be lobbying, legislators will be posturing, and frankly, this county and every other one in the state will be scrambling to maximize the amount of money that is allowed to dribble back home so we can continue providing the services you need and expect.

This afternoon I’m meeting with a homeowners group to answer to: “What do we get from the county for the taxes we pay?” If they aren’t happy now, just wait until I share the latest. Oh joy! Suffice to say, this is very bad news. Good thing we held off on approving our final budget until Nov. 18th – it’s going to have to change.

If you are concerned about a specific state budget issue, please contact Senator Dave Cogdill and Assemblyman Tom Berryhill. I plan to do the same. And if you’re a praying person, that might not be a bad idea too.

The Executive Director of the California State Association of Counties (CSAC) put out the following this morning.

November 6, 2008

Governor Schwarzenegger Calls Special Session to Address State’s “Revenue
Problem”, Proposes Significant Program Reductions, New Revenues

That dark cloud you felt pass over the state this morning was the announcement
by Governor Arnold Schwarzenegger that the state’s 2008-09 budget was
$11.2 billion in the red. The Governor announced a special session of the Legislature
to address the budget crisis, as well as an economic stimulus plan, the near-insolvent
unemployment insurance fund, and the foreclosure crisis. The Legislature has
until November 30 to act on the Governor’s proposal.

Department of Finance Director Mike Genest noted today that the state’s
cash flow situation is dire, with barely enough cash to make it through December
and no available cash in January and February. Today’s proposals must
be enacted quickly to ensure that the state can continue to pay its bills.

It was interesting to note the Governor’s perspective on the state’s
current fiscal crisis. He was careful to explain to reporters that he
believed that, due to the upheaval of the financial markets, the state was
experiencing a revenue problem, and that, while he generally did not support
tax increases, he recognized that the current situation required extraordinary

To quickly summarize the components of the Governor’s proposal:

  • $4.5 billion in program reductions, including reductions to K-12
    and higher education, modifications to CalWORKs, elimination of SSI/SSP
    grants, implementing a one day per month furlough plan for state
    employees, parole reforms for low-risk non-serious offenders, realignment
    of funding for local public safety programs, elimination of Medi-Cal optional
    benefits, and reduction of Medi-Cal benefits to minimum levels.
  • $4.7 billion in
    new revenues, including a temporary sales tax increase of 1.5 percent,
    broadening the sales tax base to include appliance and furniture
    repair, vehicle repair, golf, and veterinarian services, a new oil severance
    tax, and an increase in the alcohol tax of five cents per drink.
  • An economic
    stimulus plan to include: acceleration of hospital construction by
    streamlining the permitting and review process, acceleration of Proposition
    1B bond spending, provide overtime exemptions to certain professional jobs,
    allow flexible work schedules, clarify meal and rest period laws, and provide
    a targeted tax credit to the film and television industry.
  • A plan to
    shore up the Unemployment Insurance Fund by increase employer contributions,
    reducing benefit levels, and taking out a federal loan to ensure
    funding in the interim.
  • A foreclosure relief plan that includes a 90-day stay
    of the foreclosure process, a “safe harbor” if lenders can prove
    that they have an aggressive loan modification program in place,
    as well as reforms to prevent a future mortgage crisis.

The Governor and legislative leaders have previously announced the formation
of the Commission on the 21st Century Economy to provide options for
modernizing the state’s tax system.

6 thoughts on “Budget gone bad: hope Prop 11 is a done deal!

  1. Wow Teri,
    This is bad!!! I wonder how this would have effected the election had this news been presented before it took place. It’s a good thing prop. 11 passed, even if it was with only .6% (100,000 votes) of the vote. However, how much revenue are we driving away from the state by passing prop. 2 (standards for confining farm animals). We won’t fund our Law Enforcement, but we’ll make sure the animals have a room at the Hilton (eyes rolling). Lol, amazing!


  2. Increasing taxes during a recession is disasterous public economic policy. Taxes create excess burden, worsen the welfare trap, and decrease demand. Deficit spending, according to Keynes, is a soluble method for government to improve economic performance [move towards full employment; too high of savings.] Deficit spending can be extremely inflationary if the economy is at full employment. Keynes perceived economic recessions as being a problem with demand. Taxes decreaes demand for consumers in that they (1) make products more expensive; when private sector firms pass taxes on to consumer as cost of production (2) create an income effect whereby consumers demand less goods and services as they are faced with a tighter budget constraint. Gov’t can increase demand via spending [gov’t as consumer] and tax breaks [giving consumers/citizens more resources to spend.]

    The problem with deficit spending , in our current economic crisis ,is a tight money supply. Government borrowing will cause a crowding out effect; increase in interest rates as government increases demand for loanable funds. Gov’t can make credit markets worse than they already are.

    The most prudent solution [considering the credit market] , by the state, is to reduce spending. Although Keynes would defend spending [to maximize gov’t impact in increasing demand]… some spending can be wasteful leading to an inefficient distribution of resources. [Ideally gov’t should cut waste] If the credit market was not as tight [with government facing higher than normal bond rates] spending should be maintained [or increased] and taxes should be maintained [or reduced.] Again… the credit market complicates the matter. Increasing taxes while reducing spending is good for credit markets but lousy for promoting economic growth. While decreasing taxes and increasing spending is [assuming there is no waste by gov’t] is good for economic growth it is absolutely lousy for bond/credit markets and will crowd out private investment. A compromise is needed. Increasing taxes is more costly [in terms of burden on taxpayers] then it is to decrease wasteful spending [which does not promote economic growth.] The problem is whether there is enough waste in the budget to cut 11 billion. The government must decide whether deficit spending is a prudent method of improving economic performance or improving the bond markets. The latter is more reasonable due to a cash flow problem [where gov’t will have to borrow short term.] This process necessitates reducing debt or at least a balanced budget. However… a balance budget requires increasing taxes and/or decreasing spending. Again… the problem is that doing BOTH will or can worsen the current recession. Do one or another. My OPINION, is that decreasing spending is more [financially] prudent than increasing taxes. Politically.. cutting spending can be a nightmare versus progressively taxing the wealthy. I haved talked enough. Hopefully I was helpful.


  3. “Again… the credit market complicates the matter. Increasing taxes while reducing spending is good for credit markets but lousy for promoting economic growth. While decreasing taxes and increasing spending is [assuming there is no waste by gov’t] is good for economic growth it is absolutely lousy for bond/credit markets and will crowd out private investment.”

    I mean increasing taxes is good for credit markets in so far as gov’t does not crowd out private investment by increasing interest rates. Capital gains taxes [at least on the federal level] can be a disincentive to invest and lend.


  4. The main thrust of my argument is that “wasteful” spending “worsens” the prevalent problems in the credit market, as the wasteful spending is, at least indirectly, funded via borrowing. Gov’t can prevent further damaging credit markets by cutting spending. Gov’t should not increase taxes as it will decrease aggregate demand. Increasing taxes to maintain wasteful spending is doubly costly [the cost of waste and excess burden to fund said waste.] Again, a combination of the two is ill advised in recessionary times [decreases aggregate demand; recession is thought of as a problem with demand.] Deficit spending to maintain wasteful spending is, obviously, wasteful via the cost of waste, excess burden to fund interest payments on public debt [or loss of govt services to pay down debt], and crowding out private investment [citizens unable or unwilling to attain loans; the loss of benefit from purchase with loan money; not getting that new car, house, or creation of capital for business venture.]

    If interest rates are high, the dollar increases in value, and [therefore] deflation occurs. The cost of taxation actually increases [as each dollar spent in taxes can buy more for the consumer/citizen.] Conversely, the government can purchase more for citizens [assuming revenues do not drastically change] and also can waste more [the dollar wasted has a higher opportunity cost; you could have gotten more with that wasted dollar.] Spending can be decreased if prices decline [while still maintaining the same service level.] If tax rates and income levels are maintained, despite taxes actually costing citizens/consumers/businesses/etc more [during a period of deflation] they can still buy more with their remaining resources [facing a particular budget constraint.] Remaining resources after taxes can buy more than when prices are higher. Crudely stated and to summarize… wasteful spending is more costly in times of higher interest rates and lower prices [specially if deficit spending is used to finance wasteful spending] then in times of lower interest rates and higher prices. Gov’t should cut wasteful spending to lower deficit spending and crowding out currently. Increasing taxes is wasteful while cutting “wasteful spending” is, tautlogically, not wasteful. We can minimize waste by focusing on the spending side. Ideally, to reduce waste [to a maximum level] requires decreasing taxes and decreasing spending. Gov’t ought only to spend when it is necessary and said spending provides a greater benefit, to the public, then the costs of funding it. Does state spending satisfy that criteria? In other words, do “we” need the services the state [and counties] provide? Are programs based on market failure [hence the necessity of spending?] The answer? HELL NO!
    What should the state do to maximize financial prudence? CUT! CUT! CUT! CUT! Cutting spending is the least wasteful option [compared to the waste of increasing taxes to maintain wasteful spending.]


  5. Brandon,

    Thanks so much for the depth and detail in your comments. I am very concerned that the Legislature can’t (or won’t) reduce spending AND that further taxes are being suggested when so many people are already reeling from the bad economy…



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