Taxable Talk

Governor Schwarzenegger announced yesterday that he has reimposed mandatory furloughs on state workers. Beginning in August there will be three furlough days a month for most state employees. These days are without pay and are a means of helping to close the budget gap.

Of course, the problem is that there is no budget. The reason is simple: Democrats in Sacramento don’t want to cut programs and/or employees of their major constituencies. Regardless of Democratic politicians’ desires, those cuts are coming; the easy “low-hanging fruit” is all gone.

Meanwhile, State Controller John Chiang is warning that unless there’s a budget by September he may be forced to issue Registered Warrants (aka IOUs). There are no budget talks currently scheduled.

California’s constitution required a budget be enacted by June 30th. Californians ought to ask June 30th of what year as there are no negotiations in Sacramento right now. Meanwhile, there was some news from Governor Schwarzenegger. He told reporters today, “If I do not get all of the things that we need … I will not sign a budget, and it could actually drag out until the next governor gets into office.” Democrats’ response is that the Governor threatens children and public education.

What does Governor Schwarzenegger want? He is demanding changes to public pensions, and to California’s budgeting and taxation systems. He opposes Proposition 25 (on the November ballot); that ballot measure would eliminate the two-thirds voting requirement in the legislature for passing a budget and replace it with a simple majority. To no one’s surprise, labor unions and Democrats are in favor of Proposition 25 and the California Chamber of Commerce opposes it.

Meanwhile, Californians are caught in the middle. There is a cost for not having a budget. Instead of making the budget cuts today that are going to happen, those cuts will be made sometime in the future…and those cuts will have to be larger in order to have a balanced budget. It appears that Democrats in Sacramento are more than willing to wait it out.

Usually, the Democrats and the Republicans in the California legislature at least realize the problems that exist with the budget. In past years, the Democrats will propose raising all sorts of taxes knowing they’ll only get a little of what they want (with a Republican governor); the Republicans will say there won’t be any new taxes but will know they’ll give a little.

This year is going to be different. The Democrats are anything but united according to this report from Dan Walters of the Sacramento Bee. Senate Democrats want to raise taxes. Assembly Democrats want to borrow their way out of the $19 billion deficit. The Senate and Assembly Democrats are not in agreement at this point.

There are major problems with both Democratic proposals. Attorney General and Democratic candidate for governor Jerry Brown has said the borrowing proposal probably violates a balanced budget measure passed in 2004. Additionally, the Assembly plan contains an oil severance tax that supposedly could pass by a simple majority vote (tax increases require a 2/3 vote under the California constitution). That would almost certainly be challenged in the California courts.

Meanwhile, the Senate proposal has lots of new taxes, and shifts major programs to local government…without funding the programs. This proposal has no chance of winning Republican votes (a budget requires a 2/3 vote, necessitating some Republican support) and no chance of being signed by Governor Schwarzenegger.

It’s just another episode of the unstoppable force meeting the immovable object.

The immovable object and the unstoppable force need to get ready: California’s annual budget woes are heating up. The Bronze Golden State is facing a $19 billion deficit, and Governor Schwarzenegger has proposed a new budget that has no chance to pass the legislature.

The Governator’s budget includes $12.4 billion in spending cuts, including the ending of California’s primary welfare program (CalWorks). There is also $3.3 billion in borrowing from other programs, and a hoped for $3.2 billion in federal aid. Democrats have already criticized the budget. Senate President Darrell Steinberg stated, “We will not pass a budget that eliminates CalWorks. We will not be party to devastating families. That’s not what any of us came to Sacramento to do.”

The problem is that the Democrats’ solution is to raise taxes, a complete non-starter for Republicans. California already has the 48th worst business climate; Democrats are trying for number one.

What California should do is cut taxes and regulations (which would encourage businesses to be in the Golden State and would lead to increased tax revenues). Salaries and benefits to government workers (especially pensions) need to be realigned towards reality. That’s going to happen, sooner or later, as California cannot afford the current costs of labor.

What’s likely to happen is nothing. There’s almost no chance of a good budget passing anytime soon. This is very likely to be a long, long summer (and fall) in the budget battles in Sacramento.

The Los Angeles Times story starts,

State tax collections plummeted unexpectedly in April, wiping out months of steady gains that legislators hoped would ease their budget troubles and restore California’s economy faster than experts predicted.

Perhaps the Legislature or newspaper writers should ask California tax professionals what would likely happen to tax collections. The only thing that was unexpected about the drop off was that it’s a surprise to some. California’s unemployment rate has risen to 12.6%. The Legislature increased income and sales tax rates in 2009. Many more people are out of work now than a year ago. How in the world were tax revenues going to increase when the average Californian is saving money rather than spending money?

California faces an $18.6 billion to $22 billion deficit. The state’s regulations make it clear that expanding businesses should look elsewhere. What California needs to do is drastically cut wage packages to unionized state employees. When I was growing up, civil servants received relatively low salaries but had good retirement packages. Today, they have great retirement packages and make more money that comparable individuals in private industry. This needs to change, just for state employees but all levels of government.

I’m not holding my breath for this to happen in Sacramento this year.

Notwithstanding sections 109 (d) and 301 of this title, a case under this chapter concerning an unincorporated tax or special assessment district that does not have such district’s own officials is commenced by the filing under section 301 of this title of a petition under this chapter by such district’s governing authority or the board or body having authority to levy taxes or assessments to meet the obligations of such district.

Thus begins Section 921 of Title 11, Chapter 9, Subchapter II of the US Bankruptcy Code. I bring this up because I read over the weekend that the Bronze Golden State is in “de facto bankruptcy.”

Such is the title of Steven Greenhut’s OpEd. Unfortunately, it appears dead-on accurate. You can’t spend more than you take in yet the “solution” to those in Sacramento (especially Democrats) and Washington is to spend more. It’s sort of like what I learned in business school: If you’re losing money on a per-item basis, just increase your sales!

Oh, yes: If you lose money on a per-item basis, selling more will just make your problem worse.

The solution has been obvious from day one, but it’s anathema to public employees, public employee unions, and the people they contribute to (Democrats, generally): there needs to be fewer of them making a lot less per person. California has the 48th worst business climate in the country, yet Service Employees International Union California President Bill Lloyd said, “The only way to do that is to make sure that everyone in the state pays their share, including the corporations who keep getting a free pass from the governor and the Legislature.” I guess Mr. Lloyd would like us to be at number 50.

Unfortunately, Democrats in the Legislature continue to hope that tomorrow will bring good news. With a structural deficit, it won’t until the underlying problems are addressed. There really is no choice.

California’s tax revenues were $1.2 billion higher than expected in January according to the Department of Finance. Democrats in the Legislature are unfortunately delusional about what $1.2 billion does to a $19.9 billion deficit. From the Mercury-News:

“There is a reasonable scenario by which we can get through this budget with minimal pain,” said Senate President Pro Tem Darrell Steinberg, D-Sacramento, noting “hopeful signs” in the state’s economy after four years of multibillion-dollar deficits.

“As difficult as this budget is,” Steinberg said “we’ve been through the worst of the worst.”

Meanwhile, the Department of Finance and the Legislative Analyst’s Office both note that things aren’t rosy. The Department of Finance has warned that something must be done before April or California will run out cash. The latest news hasn’t changed this. “It doesn’t lessen the urgency of taking action,” said H.D. Palmer, spokesman for the governor’s Finance Department.

I’m hopeful that Governor Schwarzenegger will follow the lead of New Jersey Governor Christie and cut, cut, cut. The problem isn’t revenues, it’s spending. But it appears that the Democrats who control the state legislature haven’t figured out that there really isn’t that much difference between a $19.9 billion deficit and an $18.7 billion deficit.

The answer is very, very stupid.

On a party line vote, the California State Senate passed a health care bill that would cost $200 billion. The legislation will undoubtedly be vetoed by Governor Schwarzenegger. Meanwhile, as I reported earlier California is lurching towards running out of money by April 1st…again.

But don’t worry, Democrats in Sacramento have a new idea for raising revenue: banning free parking. If California weren’t in such sad shape (and I wasn’t a Californian) this would be hilarious.

Governor Schwarzenegger is taking on unions with his final budget. Steve Maviglio, a Democratic strategist, told the Los Angeles Times, “It’s a continuing jihad against organized labor. The governor thinks public employee unions are Enemy No. 1.” So what does the Governator want to do? He wants to cut the number of government employees, shrink pay, and cut future pension costs.

Let’s look at what happens if you or I have a business, and revenues decline. Let’s assume that we can’t increase prices (while an individual sale would be for a larger amount, we would overall lose business due to a declining number of sales). We’d be forced to cut expenses. Except in the short-term, we can’t afford a deficit.

What Governor Schwarzenegger wants to do is what’s needed: cutting expenses. Attempting to raise taxes (a solution that is available for the government) is not a good option in California. Taxpayers in the Bronze Golden State already pay among the highest taxes in the country. Increasing business taxes will just drive more businesses out of state. The last several years have seen budgeting by gimmicks. I am thrilled that Governor Schwarzenegger is looking at actually cutting expenses.

Added to this is the news that while revenues have grown by 24% in the last decade, state pension costs have grown by 2000%. It doesn’t take a rocket scientist or a tax accountant to know that this is not sustainable. Unfortunately, it’s likely that Democrats in Sacramento won’t be able to figure this out.

Of course, Democrats in Sacramento are almost certain to reject Schwarzenegger’s measures. If they can propose other methods of cutting costs that equal what Governor Schwarzenegger has proposed—and when I say cutting costs, I mean without accounting and budgeting gimmicks—fine. I just don’t see that happening. I also see the almost certain likelihood of budgetary gridlock in Sacramento.