Cuts to education and health and human services, and borrowing funds sent to local government are budget provisions likely to spark debate as the new agreement is taken up by the Legislature, reports the Los Angeles Times.
A chart that accompanies the Los Angeles Times article gives some of the provisions proposed to close California’s $26.3 billion budget gap. The aspects listed account for about 86 percent of the total budget gap. The bulk of the effort is through spending cuts, but also through accounting procedures to defer costs, plus borrowing $2 billion from local government.
Special interest groups for education, safety-net programs and labor all criticize aspects of the budget agreement. No new taxes are included, although some revenue collections are accelerated.
Opposition to education, health care, and welfare programs is expected to be vocal, but given the size of the state’s budget deficit (nearly 30 percent of the state’s general fund, which pays for day-to-day operations, says the Associated Press), significant cuts were seen as inevitable. And these programs represent a vast proportion of general fund spending.
A chart provided by the Public Policy Institute of California shows that education spending (K-12 and higher education) totaled about 40 percent of spending in both FY 1978 and FY 2008 (although funding shifted more in favor of K-12 by 2008). Education and health and social services together represent about 70 percent of spending, based on the chart.
Although media attention may focus significantly on the special interest wrangling likely to take place this week as the full Legislature prepares to vote on the agreement (possibly Thursday), the Public Policy Institute of California finds that many larger problems loom.
California’s cyclical budget turmoil, failure to engage is longer range planning, volatile revenue sources and mammoth future costs for pensions, healthcare and more make any budget celebration short-sighted and ill-informed, according to this group’s analysis.
In addition, the National Conference of State Legislatures has released a new report warning that states’ fiscal outlook for 2010 and beyond is far worse than in Fiscal year 2009.
Public Policy Institute of California Analysis
In the fiscal year that ended June 30, 2008, California spent $194 billion:
Total spending: $194 billion
- $103 billion in General Fund Spending
- $56 billion in federal funds
- $27 billion from special funds
- $8 billion from bond funds
“About three-quarters of state spending goes to local governments for K-12 education, health and social services, public safety and other programs. The remaining 25 percent finances state operations, including the University of California and California State University systems, correctional facilities, and administration,” the PPIC notes.
Given the reality of these allocations, it is not surprising that any effort to close a budget gap that is about one-third of the General Fund would necessarily involve cuts to education, health and welfare, and borrowing back funds sent to local governments.
The other side of the equation, of course, is revenue. Governor Arnold Schwarzenegger, who has frequently asserted his opposition to another tax increase because of the potential impact on economic recovery and jobs, spoke with pride that the agreement included no tax increases. However, he has spoken of the need for “radical” tax reform in California which relies heavily on volatile income taxes that contributed to the state’s undoing this time.
The Public Policy Institute of California agrees.
Compared to taxpayers in other states, Californians’ per-capita tax burden drops sharply when the state’s large tax base and large influx of high wage earners is considered, says PPIC.
But making state revenues highly dependent on income taxation of the highest earners (a policy suggested on the national level to pay for healthcare and other policy initiatives) has its downside. The income of high wage earners tends to fluctuate with the economy in a more volatile fashion.
In California, the top 1 percent of wage earners pays almost 50 percent of the state’s income tax, notes the Public Policy Institute of California.
The volatility of this revenue stream during an economic downturn, coupled with the volatility of sales and user taxes, which California also relies on, makes revenue shortfalls inevitable in hard times.
California needs to re-design its tax system to achieve greater long-term stability of revenue, not just for year-to-year budget processes, but to address looming longer term needs, according to the PPIC.
Pension funding is one, with shortfalls threatening as the state’s population ages and pension funds were battered by stock market losses.
Another is the looming inability of the state to pay its debt service costs. The state treasurer has projected that the state will fall $14.6 billion short of the amount it needs to pay down general obligation bonds and cover operating expenses in 2027-2028.
The inherent structure of California’s budgeting processes creates a year-to-year melee, and the Public Policy Institute of California recommends the state move to a longer-term planning process to help streamline operations.
Nationally, States Still in Trouble
Road construction and other works projects funded by federal stimulus dollars may be putting more people to work in the short term, but they put the nation in a precarious fiscal situation in that these short-term projects are being funded by long-term debt.
One of a panel of experts speaking last Sunday at the National Conference of State Legislatures’ Summit 2009: States of the Economy meeting put it this way:
“The money we’re putting out there is 30-year bonds and we’re paving roads that last for seven years. You wouldn’t buy a car with a 30-year note when the car is only going to last seven years. If you do that you’re going to start looking like California and you’re going to be in trouble.”
For FY 2009, reports initially said states faced cumulative budget gaps of $113.2 billion, but now the NCSL has updated that figure to $142.6 billion. In its new July 2009 State Budget Update report, the NCSL estimates the total cumulative budget totals for FY 2008, FY 2009 and FY 2010, and projected numbers for FY 2011 and FY 2012, already indicate the gap will reach at least $348.2 billion.
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