Déjà vu all over again as California budget hit by July shortfall

The California legislature has done it yet again. It passed a budget based on hugely optimistic estimates of revenue only to have the reality pie of revenue shortfall hit it in the face a few months later. Of course, legislators are just gobsmacked by this unexpected turn of events. I mean, who could have known in a shaky economy that making overly-perky estimates of revenue could prove problematic? Not the governor and the legislature, that’s for sure. And this is hardly the first time a California budget has fallen apart due to projected revenue that never materialized.

To settle the remaining $4 billion shortfall in the budget this year, our lawmakers apparently decided that unicorns and magic rainbows would be coming to California along with a surprise burst in revenue. They never actually explained where these magic billions would be coming from, only that surely they would be appearing because the economy was improving and tax revenue was up in May and June. They assumed, without doing economic analysis, that this increase would continue. But they forgot to call in Tinkerbell to sprinkle her pixie dust.

Tax collections in July were off by 10%, a shortfall of $538.8 million, over half a billion. Ouch. The recent stock market plunge as well as the S&P downgrade of the US will have further deleterious impacts on California. The state relies heavily on capital gains taxes. The downgrade will almost surely raise the cost of borrowing money for Sacramento (as it will for most municipal bonds).

Only $120 million of the shortfall is from personal, corporate, and sales taxes. The remaining $419 million is from the monthly allotment of the magic $4 billion that never was. That’s right, they put $4 billion in assumed revenue into the budget without having the slightest clue where it would come from. But tragically, the revenue did not beam down from Arcturus on schedule. Hence the budget has been thrown into a bit of a tizzy.

Should the budget be determined in December to be wanting, then bludgeon-like cuts will hit education and social services. They are mandated by triggers in the budget and could amount to as much as $2.5 billion. The first trigger, which happens in January, occurs when there is a $1 billion shortfall, with $601 million in cuts. The state is already halfway there and we are only one month into the new fiscal year.

But wait, even though the previous estimate for the magic $4 billion has proven to be wrong, the governor’s budget spokesperson says that maybe all the money that should have been reported in July hasn’t been yet, that surely new revenue will be zipping into California next year, and that if finance officials think more money might appear in 2012 then they won’t have to pull the triggers in January. Tinkerbell, please report to Sacramento by December. You will be needed.

The tedious game of pretend and extend continues, but this is no way to run a government. Sacramento needs to make realistic, verifiable, auditable estimates of revenue, and then live by them. Spending money now based on future estimates of revenue that never come is just not fiscally responsible.

(crossposted from CAIVN)

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