Fundmastery Blog

Kurt Brouwer May 22nd, 2009

With this post [Part I of a series on California], I’m providing a roundup of thought across the spectrum on California’s $21 billion budget deficit and the growing taxpayer revolt.

California Tax Revolt, Past and Present

It appears that many Californians have reached — or come close to reaching — the breaking point. This happened once before with the advent of Proposition 13, which back in 1978 capped the rate of property tax increases (for more on the history of Proposition 13, see Prop. 13).

Many advocates of bigger government complain about Prop. 13, but it is a bit misplaced. After all, how many Californians still live in the same home they lived in back in 1978? In my opinion, as the numbers below indicate, we do not have a revenue problem, but rather we have a spending problem. That is, California is addicted to living beyond its means.

This chart shows how strong tax revenue growth has been in California for most of this decade. Yet, despite strong revenue growth, spending always exceeded revenues. So, now we’re in trouble. Had our legislators kept spending in line with revenues, we would not be in this mess.

Source: California Republican Party

As you can see from this chart, spending was about 9% over revenues at the beginning of the decade and it still exceeds revenues by that much, despite strong tax revenue growth. In fact, tax revenues have grown consistently for this decade at a substantial annual rate of 4.35%. If state spending had grown at 3% per year, which is roughly the rate of inflation, then the budget would be balanced this year.

Therefore, I believe California has a spending problem, not a revenue problem. Make no mistake though, none of us — voters, legislature, governor, media, unions — looks good on this one.

• As voters, we have often voted for expensive, ‘feel good’ bond issues and propositions without taking into account the cost. Also, we have elected very few leaders who have any fiscal sense at all. To paraphrase H.L. Mencken, we deserve what we are getting, good and hard.
• The legislature and the governor have resorted to budgetary borrowings, sleight-of-hand and other gimmicks for years. As you can see from the table below, a huge deficit is nothing new even though it gets papered over briefly at the end of each fiscal year.
• Our media has generally been on the side of higher spending and it has often enabled our political leaders efforts to hide their addiction to spending.
• Finally, the unions have pushed for higher salaries, higher pensions and more stringent work rules. I come from a union family and am generally sympathetic, but as we saw in the bankruptcy filing of the city of Vallejo, all good things come to an end (see California City On Verge Of Bankruptcy).

From the Los Angeles Times comes this commentary that the message to take from the special election was — make sure you are sitting down — that voters don’t trust politicians and that this is the fault of politicians [emphasis added below on all excerpts]:

Distrust of lawmakers came through loud and clear (Los Angeles Times, May 21, 2009, George Skelton)

…All those steamy summers of squabbling over unconstitutionally late spending plans without honestly making ends meet finally caught up with the policymakers when the electorate emphatically trashed their convoluted offering.

The one common message from diverse voter groups was that they don’t respect or trust their elected state representatives. The public isn’t buying what the politicians are selling.

Restoring public confidence so they can start to lead California in a new direction should be their first order of business.

Gov. Arnold Schwarzenegger must follow through on his pre-election doomsday threat to slash and burn if voters wound up rejecting the budget fixes, or they’ll never believe another word he says. They hardly do now, based on the election results and previous polling.

…And what’s to argue about? After Tuesday, it’s fantasy to think there could be enough support in the Capitol for another tax increase.

Liberal groups Wednesday were dreaming again of eliminating the two-thirds vote requirement for passage of a budget and tax hike. Good luck, but that and other needed reforms are years off if ever.

…In staunching the bleeding, Democrats shouldn’t fret about some of their political patrons — the public employee unions — that opposed the ballot props and now have no right to whine when thousands more teachers and government workers are laid off. Ditto other liberal groups that will moan about Sacramento cutting an even bigger hole in the safety net for the poor, including children and the disabled.

…”Stop taxing us” was the dominant public policy message from the special election…

From the Wall Street Journal, we have this editorial:

Golden (State) Opportunity (Wall Street Journal, May 22, 2009)

California voters sent a blunt but welcome message Tuesday about runaway government. By rejecting by nearly two-to-one the political establishment’s $16 billion in higher taxes, spending gimmickry and more borrowing, the voters said it’s time government faced the same spending limits that the recession is imposing on everyone else.

Teachers unions, business leaders and the politicians outspent initiative opponents by six-to-one, and they still lost. Governor Arnold Schwarzenegger had warned that if these initiatives were voted down, government services would have to be slashed, criminals released early and public employees furloughed. But voters decided that as painful as these cuts may be, the alternative of letting the state’s tax-and-spend machine continue was worse. How right they are.

The response so far from Sacramento is typically short-sighted. Mr. Schwarzenegger, legislators and public-worker unions are now conspiring to roll out plan B: a federal bailout. The Governor was in Washington on Tuesday and, sounding like a Detroit auto executive, declared: “We need assistance.” As a starter he wants a federal guarantee on California’s next $6 billion bond offering.

…Tuesday’s vote was a voter cry that the state needs more such restraints, and now is the time to push them. First, California needs a sturdy cap on the rate of spending growth. Thirty years ago this November, when California’s economy was in a similar rut, three-quarters of the voters approved the famous Gann Amendment. That limited the annual growth rate of spending to population growth and inflation.

The result was that California’s annual average rate of spending growth after inflation fell to 2% through the 1980s from 9% in the 1970s. California’s state per-capita expenditures fell to 16th in the nation in 1990 from 7th in 1979. The economy soared, growing by 121% — 14% faster than the U.S. average. The Gann limits were effectively neutered in 1988 and 1990 by initiatives that exempted education and transportation from the cap.

…Despite the panic from Sacramento, Tuesday’s vote was the best fiscal news out of California in 30 years. It showed that the voters are paying attention to the games their elected leaders have been playing, and they have finally blown the whistle. We hope the sound was heard as far away as another out-of-control government, the one in Washington, D.C.

In this piece, the Sacramento Bee gives an example of how our media enable the deceit of many politicians who use scary words about ‘deep’ cuts and slashed spending even though the cuts envisioned are anything but deep.

Deep cuts in California services inevitable, state leaders say (Sacramento Bee, May 21, 2009, Jim Sanders)

Gov. Arnold Schwarzenegger and legislative leaders vowed deep cuts to public services Wednesday in response to voters’ rejection of ballot measures to ease the state’s gaping budget hole.

The Republican governor vowed to “go all out” in slashing government spending after voters killed a slate of proposals that would have lessened, but not ended, the fiscal hemorrhaging.

“We tried not to make those kind of cuts, but now we have to,” the Republican governor told reporters in Washington.

“There’s no other choice,” he said. “I think the message was clear from the people: Go all out and make those cuts and live within your means.”

…Steinberg said the state’s work force is likely to be affected.

“We’re not shying away from (cuts),” he said. “But we also say that we’re going to do everything we can to be responsible, to be creative and to protect people who need it most.”

Schwarzenegger released a revised budget last week that called for up to $9 billion in cuts, layoffs of 5,000 state workers and $7.5 billion in borrowing from local governments and the investment market…

Just to put things in perspective, the current budget deficit is $21 billion, give or take a few millions. The current full-time state workforce is over 213,000 so this huge-sounding layoff number — 5,000 — is a little over 2% of the workforce. Not exactly a deep cut by private sector standards. And, of course, it has not actually been done yet so it remains to be seen if it really happens.

There is a rather magical quality to announcements from Sacramento. For example, consider the Governor’s ‘hiring’ freeze. Though hiring was ‘frozen’ the state work force gained of thousands of state workers as this Sacramento Bee report showed:

…Last July, California Governor Arnold Schwarzenegger (R) signed an executive order to cut state worker pay during the budget crisis.

“I’m also ordering a hiring freeze,” said Governor Schwarzenegger last year.

But a Sacramento Bee analysis of the last nine months shows the state hired roughly an additional 2,000 people outside public safety, even as the budget deficit ballooned and the California faced a huge cash crunch…

From the Sacramento Bee’s State Worker blog, we get this follow-up information. Full-time state workers have grown by over 6,000 in the past year. The total number of state employees, has actually fallen slightly even though the number of full-time workers have increased:

Full-time employees accounted for most of the growth, their numbers going from 211,639 in January of this year to 212,616 the following month. There were 206,865 full-timers in February 2008.

March 2009 payroll grew to $1.48 billion, and the total number of employees grew to 213,001.

You can see more of the data by clicking here to view the Excel spreadsheets…

So, when you read about deep cuts and slashed budgets or hiring freezes, do so with a bit of skepticism. The upward trend in state spending is baked in to the process and it will be very hard to reverse. Our political leaders have generally tried to hide that fact from us. That’s one reason why taxpayers distrust politicians.

California already has among the highest income tax and sales tax in the nation. Any opportunity to garner more revenue will just make the state legislature and our Governor that much less likely to do the hard work of getting the state to become leaner and more productive.

As a side note, I recently had the occasion to drive from San Francisco to Santa Barbara and back. My general impression was that the highways had deteriorated over the past few years since my last trip of that length. Some might argue that we need more taxes to fund highway maintenance and improvements. Others, like me, would argue that the highways should be in awesome shape after all the state spending we have done over the past 10 years. I think state spending and procurement is broken. We are simply not getting value for our money and we need to change that.

California once led the nation in a positive sense. Now, that has changed and California is the poster child for how to turn gold into dross. Once, we had arguable the finest public school system in the country. We had good infrastructure and strong credit ratings.

No more. Some believe that we just need to spend more in order to fix these problems, but we have been doing just that for years and the problems were not fixed. Raising taxes on top of the already-high tax rates just makes the state less attractive as a place to do business.

Will our leaders actually respond to the concerns of voters? Unfortunately, I am not confident that they will. Instead, I fear that we’ll see another bipartisan effort to paper over the budget crisis? If that happens, we may see tax revolt 2.0. Stay tuned.

Update:

From the Associated Press (via Breitbart.com), here is a rather bland piece on private sector layoffs in California. California is the largest state, so it is no wonder that we lead in layoffs, but it is a reminder of what those of us in the private sector have to deal with — it’s called reality.

When revenues fall, companies cuts costs. In most cases, eliminating jobs is the last a business wants to do, but it is sometimes necessary. D’uh:

Forty-four states lost jobs in April, led by California where employers slashed 63,700 positions, as the recession took a further toll on U.S. workers.

…California’s unemployment rate dipped to 11 percent last month, fifth-highest in the country. Michigan’s jobless rate was the highest at 12.9 percent, followed by Oregon at 12 percent, South Carolina at 11.5 percent and Rhode Island at 11.1 percent.

As the recession eats into sales and profits, companies have laid off workers and turned to other cost-cutting measures, such as holding down hours and freezing or trimming pay.

Let’s see, cutting costs, holding down hours, freezing or trimming pay. All of these seem like things the state should consider.

I had forgotten about this final point and it’s a pertinent though depressing point on which to end. The AP piece continues:

…If California tries to borrow more to help pay its bills, it will be costly. The state has the worst credit rating in the nation. The state treasurer’s office estimates that California would pay an extra $500 million to $1 billion in lender fees on a $15 billion short-term loan.

The worst credit rating in the nation. That’s how far we have fallen.

See also:

Is California Broke?

New Jersey Can’t Afford Its Government

• Business , Economy , Geopolitics , Money , debt , income taxes
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