Who could have ever predicted that California’s rosy assumptions of increased revenue would be cruelly smashed on the rocky reefs of reality? Certainly not California state leaders, that’s for sure. In what has become a depressingly routine ritual, California makes hugely optimistic estimates of future revenue in desperate attempts to get the budget to balance, only to discover a few months later that revenue is lowered than expected.
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.
Pardon my cynicism, but California has been here before. Balancing the budget seems insoluble. Then, seemingly out of nowhere, money drops from the heavens. Entire new sources of revenue are discovered! Sacramento rejoices. The budget will be balanced after all and there is much festivity. But then the Grinch sneaks in. The expected revenue vanishes or is way under expectations. Lamentations are heard among the land. The budget crisis yet again seems insoluble.
The coming $1 billion in mandated budgets cuts are due to precisely this phenomenon. Earlier this year, Sacramento predicted that $4 billion in new revenue would be arriving. It didn’t. This means deeply unpleasant mandated cuts will occur. Last month, the Legislative Analyst’s Office (LAO) said most of the $4 billion looks to be a phantom that never existed. But even in such dark times, Sacramento had an ace in the hole. Under the terms of the mandated cuts, California could take the cheeriest and most optimistic revenue estimate from either the LAO or the Department of Finance.
Hold on for this stunner. The Department of Finance released a much rosier estimate than the LAO. Apparently, unexpected new sources of revenue have been found and thus things are better than predicted. Who could have predicted such a miracle? Well, maybe it’s not so much a miracle as it is staving off a truly calamitous crisis. After all, the state is still $2.2 billion short. The governor says maybe $6 billion in further cuts are coming on top on the mandated cuts. He also wants voters to approve $7 billion in tax increases in November 2012. This will be tricky if he keeps insisting that the California economy is recovering. I’m guessing voters will be in such a foul mood they will vote down most everything, which will certainly complicate budget matters.
The $1 billion in cuts start Jan. 1 and will impact higher education, social services, home care for the infirm and elder care, local libraries, and even prisons. Rather astonishingly, $248 million of the $980 million in cuts are for K-12 bus service. That’s over 25% of the total. Worse, the bus service is federally mandated. School districts will have to find the money elsewhere rather than telling the kids to hitchhike or asking Mom to drive them. Their budgets are already beyond lean. John Deasy, Superintendent of Los Angeles Unified School District, says they have no money for transportation and will sue to block the cuts.
Home care for the sick and elderly will take a $100 million hit. A federal judge has already filed a temporary order blocking this. Doubtless many other lawsuits will be filed too.
This bipolar lurching from giddy expectations of higher revenue to depression when the revenue doesn’t appear is no way to run the financial affairs of the most populous state. The budget needs to be done based on solid and sane estimates of revenue. I propose that each year a team of outside, independent auditors, economists, and other such experts make the estimates. Further, they should be paid by an outside entity and not work for the State of California in any capacity. Businesses routinely have outside audits. California needs the same. It has shown it cannot come up with credible numbers on its own.
Who could have ever predicted that the projected California budget deficit for 2012-2013 would be much higher than previously assumed? Sadly, this is just the same old tired scenario.
In a desperate attempt to balance the budget, Sacramento makes hugely optimistic revenue predictions, only to have the ice water of reality thrown on it a few months later. Lawmakers then become gobsmacked when they realize they yet again need to pull more money out of the ether to make up for a gaping shortfall that no one in their right minds could have ever possibly predicted. Â Then, the whole tedious process starts over again. I call it the Pixie Dust Revenue Fairy Method of balancing the budget, which returns every year on schedule without fail. If you just close your eyes and wish hard enough, then the budget will be transported to Never Never Land whereupon the revenue fairy will sprinkle it with pixie dust making it all better again.
Tragically though, the revenue fairy has joined Occupy Wall Street, leaving the California budget in its usual dismal, reality-denying situation. Governor Brown had projected a $3.1 billion deficit. A legislative memo leaked to the Sacramento Bee now has it at $5-8 billion. I feel comfortable in assuming, based on past legislative estimates, that the final deficit will be much higher – because it always is. Â Based on a minor upturn in revenue several months back (which was not sustained), the governor then extrapolated that this would carry through, thus creating $4 billion more in pixie dust revenue.
But the revenue (surprise!) didn’t materialize, leaving the state open for serious and mandated budget cuts next month. These would be triggered by a $1 billion shortfall in revenue, and would be deep and painful. Some of the eternal optimists in Sacramento sunnily expect the revenue will come galloping in the door real soon now, and maybe it will. But past years have shown that the opposite usually happens. I am not reassured when their cheeriness includes the following, “Assembly aides believe that the economy has stabilized since late summer, pointing to an exceptionally strong stock market in October and an improvement in gross domestic product estimates.” I’m sorry, but on what Planet California are they residing? Â Except for Silicon Valley, the California economy has not appreciably improved or stabilized. Further, while a rising stock market may benefit Wall Street and the 1%, it does little to help Main Street and the economy at large. Stock offerings and IPOs only enrich a tiny few.
What California needs is solid, realistic assessments of the budget and most of all, jobs. The months-long ritual of the budget train wreck takes valuable time away from the legislature working on lowering unemployment and spurring the economy.
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.