Facebook IPO won’t help California budget problems

It’s happening again. Hugely optimistic expectations of revenue for California didn’t materialize so Sacramento is scrambling to find some way, any possible way, to balance the budget. The state needs to find $3.3 billion by March to meet obligations. Lawmakers and the governor, as always, over-estimated revenue and under-estimated expenses. But now the bills must be paid. California doesn’t have the money so instead it will delay making payments to state and municipal entities and also borrow nearly a billion.

This of course means California will fall even further behind in its attempts to balance the budget. The deferred payments will have to be made eventually and interest on the borrowing adds more to the state’s debt load. And no one as yet knows how the budget will be balanced this year.

Ah but wait, on the horizon, could it be? Why yes, it’s a hitherto unexpected source of revenue. Facebook is going public and will IPO soon. Surely this must mean billions will be flooding into California coffers when all those dot com zillionaires cash out, right?

Pardon my skepticism, but I agree with Joel Fox of Fox and Hounds.

There is no certainty when or how much the IPO will bring in. Building budgets around an anticipated flood of revenue could put the state in the same fix as the current budget that was balanced on a supposedly miraculous new $4 billion in revenue that did not appear.

Those who work at Facebook and live in California may decide to hold onto their stock considering Gov. Brown wants to pass a temporary tax increase. Also, those privileged folks who receive shares at the IPO are often prohibited from selling them for several months. Many of the current owners of Facebook stock are hedge funds and the like, as well as the band U2 through their private equity firm. While I’m not a tax attorney, it seems doubtful that financial entities in other states or countries would have to pay California income tax on Facebook stock sales.

But that doesn’t stop state officials from cheerily saying the Facebook IPO could bring in a billion dollars. Maybe over a period of years it could. But even that is questionable. It’s also irrelevant because California needs the money now, not later, and is so underwater financially that even a billion dollars won’t help much.

That probably won’t stop perky estimates of this additional revenue being used to lower the budget deficit during the coming negotiations in Sacramento. The problem is, just like last year, the numbers are illusions. The money doesn’t actually exist and pretending it does just makes things worse. This refusal to accept reality is what is most troubling about California’s budget crisis.

I used to call this the Magic Revenue Fairy approach to solving the budget dilemma. When all seems lost, the fairy suddenly zooms in and sprinkles billions upon the state. All is well until next year’s budget crisis when it is discovered she was actually a cruel trickster who was sprinkling debt not money. But maybe a better name would be the Three Stooges Method of Governance. Desperate and clueless attempts to solve problems lead to even more unmanageable problems later on.

The Facebook IPO will not help balance the California in any meaningful way or even soon. That’s the reality.