California Budget Shortfall May Hit 28 Billion; Expect More Gridlock and IOUs

Bloomberg writes California Deficit May Reach $28 Billion as IOUs Loom:

California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

“I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said.

Every year it’s the same spiel in California. Political gridlock, delayed budgets, IOUs, and deferred tax refunds. It’s the political class trying to figure out how to screw the taxpayer in the most propitious and palatable manner.

When a system lacks logic and reasoning from first principle in its conceptualization, then chaos will always arise in the long run.

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California Refuses its Own IOUs

I expected this to happen, California Won’t Accept Its Own IOUs:

Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California “paid” her with an IOU that two banks refused to accept – yet she had to pay California sales tax on the so-called “sale” of the uniforms.

The class consists mostly of small business owners, many of whom rely on income from government contracts to keep afloat. They say California has used them as “suckers” as it looks for a way to bankroll its operations while avoiding its own financial obligations.

“Instead of seeking funds through proper channels, the State has created a nightmare,” the class says. “Many of these businesses will not survive if they are required to wait until October 2009 to have these forced IOUs redeemed by the State.”

The class claims the state is violating the Fifth and Fourteenth Amendments. It demands that California be ordered to honor its own IOUs, plus interest. They are represented by William Audet.

…time to flood the FTB with IOUs. Let them issue a public explanation as to why they do not want to accept the state’s own IOUs.

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California Budget – Schwarzenegger Cuts Another $500 Million

Governor Schwarzenegger used the line item veto to slash the bloated California budget by another $500 million:

Gov. Arnold Schwarzenegger on Tuesday signed a budget plan sent to him by lawmakers to close the state’s monumental deficit, using his veto pen to impose nearly $500 million in additional cuts.

The new reductions will affect child welfare and children’s healthcare, the elderly, state parks and AIDS treatment and prevention, going beyond the dramatic cuts that were part of the deal Schwarzenegger negotiated with legislative leaders.

Democratic leaders in the Assembly and Senate reacted angrily to his use of the line-item veto, disputing the Republican governor’s authority to wield that power in this situation and portraying him as callous.

Schwarzenegger’s aides said the cuts were proper, and the governor said they were necessary.

“This has been a very tough budget, probably the toughest since I have been in office here in Sacramento,” Schwarzenegger said. “This budget is kind of like the good, the bad and the ugly.”

The good, the governor said, is that the plan does not raise taxes and includes changes he says will make government more efficient, such as reorganizing and abolishing some boards and commissions.

The bad are the deep cuts to state programs that will touch millions of Californians, particularly its most vulnerable citizens, he said.

The ugly, Schwarzenegger added, are the new reductions he made because lawmakers left town after failing to fully close the state’s deficit.

The Assembly on Friday capped a 20-hour session by rejecting provisions worth $1.1 billion that had been agreed to by the governor and legislative leaders.

The extra cuts the governor made Tuesday — $489 million — took nearly $80 million that pays for workers who help abused and neglected children; $50 million from Healthy Families, which provides healthcare to children in low-income families; $50 million from services for developmentally delayed children under age 3; $16 million from domestic-violence programs; and $6.3 million from services for the elderly. Among other reductions was $6.2 million more from parks, which could result in the closure of 100, rather than 50, of California’s 279 state parks.

In addition, Schwarzenegger effectively gutted a program that provides local governments with funding to encourage property owners to preserve open space and to use land for agriculture.

Ted Lempert, president of Children Now, an advocacy group, called the cut to Healthy Families “particularly galling.” He said a coalition, including his group, is spearheading a campaign to put a universal children’s healthcare measure on the fall 2010 ballot.

“A struggling family puts their kids first,” Lempert said. “What the governor and what the state has done is the opposite.”

Assembly Speaker Karen Bass (D-Los Angeles) and Senate leader Darrell Steinberg (D-Sacramento), in questioning the legality of Schwarzenegger’s moves, suggested that the governor’s veto power can be used only on original appropriations. The new spending plan is a revision of a budget Schwarzenegger and lawmakers ratified in February.

Both leaders said they would attempt to restore the cuts when they return from recess, in mid-August, and Bass said she would seek an opinion from the Legislature’s legal office.

In a long and harsh statement to the media, Bass called the governor “so eager to tear down the safety net that he appears willing to break the law to do it.” She faulted Schwarzenegger for rejecting taxes that Democrats proposed on “big oil and big tobacco” and instead attacking “the sick, the young, the elderly and battered women.”

In response, Schwarzenegger’s aides said Bass and the Assembly had forced his hand.

“The governor understands how difficult these cuts are,” said his spokesman, Aaron McLear. “But because the speaker sent him an unbalanced budget, he had no choice but to make these cuts.”

Assembly lawmakers turned down a plan to seize $1 billion in gas tax money that belongs to local governments and rejected a new offshore oil drilling project that could have produced $100 million in royalties.

The Senate approved the entire budget deal, including those measures, early Friday morning.

By killing the two proposals, lawmakers wiped out a reserve fund the governor has insisted upon to cushion future shortfalls. His aides said the cuts announced Tuesday would allow the state to put aside $500 million.

Even as he signed the plan, Schwarzenegger warned that the state’s troubles were not over. Finance officials are already predicting future deficits, and the governor said he was ready, “if our revenues drop further, to make the necessary cuts and live within our means.”

Overall, the new budget is expected to fundamentally alter life for many Californians, with reductions to K-12 education, state colleges and universities, healthcare and public assistance for the elderly and the poor.

It appropriates billions of dollars from local governments, which could force cities and counties to further reduce their own spending on roads, law enforcement and other services.

The package was approved to address a deficit that administration officials previously projected at $26.3 billion. Schwarzenegger’s aides now say that, although the budget plan contains $24 billion in solutions, it will close the entire shortfall because of changing revenue forecasts, a recalibration of education funding formulas and a decision to reduce the reserve fund.

The plan’s cuts, accounting maneuvers and other measures should soon enable California to resume paying all of its bills again. From July 2 until the end of the day Monday, the state had issued 209,219 IOUs worth $1.09 billion, according to Garin Casaleggio of the state controller’s office.

The state’s credit rating has declined to nearly junk status after two months during which elected officials could not agree on how to resolve the crisis.

I agree that the budget is a lot like the good, the bad, and the ugly. But in a different way:

The good: No more taxes for now.
The bad: No tax cuts.
The ugly: The tax hikes that will follow sooner or later if the budget is not slashed further.

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California Budget – Expect Another Shortfall

I agree with the Wall Street Journal’s assessment of the current California budget solution, California Budget Woes to Persist:

State lawmakers on Thursday evening were preparing to vote on a proposal to close a $26 billion budget deficit, but the plan likely will be a stopgap that passes the state’s financial woes on to the next year and the next governor.

The state will probably amass an additional shortfall of as much as $10 billion during this fiscal year, economists say, calling revenue projections for the proposed budget too optimistic. And the financial woes will likely persist for at least the next several years. Though lawmakers are cutting $16 billion in spending, they are closing the remaining $10 billion gap with borrowing, accounting gimmicks and asset sales that will be impossible or difficult to replicate in the future.

“The state has just once again failed to address its underlying problem,” said Bill Watkins, executive director of the California Lutheran University’s Center for Economic Research and Forecasting. “They do some of the hard choices they have to, and they essentially have to pass on part of the problem for later.”

The budget mess is already taking center stage in the race to succeed Gov. Arnold Schwarzenegger, who must leave office after the November 2010 election because of term limits. “It’s the issue that transcends all other issues,” San Francisco Mayor Gavin Newsom, a Democratic candidate, said in an interview Thursday. “You can’t talk about issues in health care, education and infrastructure improvement until you focus on the issue of these structural imbalances in the budget.” Mr. Newsom blasted the spending plan for taking $4.7 billion from local governments, saying the governor should have been open to new taxes on tobacco and oil extraction instead.

My comment: If you are thinking about voting for Gavin Newsom for next governor, think again. Keep this statement of his in mind. He may be personable and nice, I know that … he’s my mayor. But he has it exactly backwards. He is seriously considering to continue raising taxes on Californians.

Republican contenders such as Meg Whitman, the former eBay Inc. chief executive, condemned the budget as well. “As painful flaws begin to appear in this agreement, Californians should demand strong leadership focused on job growth, fiscal restraint and the effective management of our state,” she said in a statement earlier this week. Through a representative, Ms. Whitman declined to be interviewed.

Steve Poizner, a Republican gubernatorial candidate and the state’s elected insurance commissioner, said he gives the budget compromise a C-minus because it contains too few overhauls and pushes the fiscal problems to future years. “We’re going to go from one budget issue to another until we get a couple of basic reforms that are going to turn the state around,” he said. “I’m advocating modernization and overhaul.”

Former U.S. Rep. Tom Campbell, a Republican candidate who has served as the state’s finance director, didn’t return calls for comment.

Even California legislative leaders who negotiated the budget pact acknowledge they will probably have to revisit the spending plan by January to close a new shortfall.

They already are spoiling for another fight along party lines over taxes and spending cuts. “My clear message after tonight is that we have cut enough,” said Senate President Darrell Steinberg, a Democrat. “When you see people writing about the California dream and is it still real, I think that is a reflection of very common feelings that public services, education, transportation, public safety matter to the quality of life in California.”

My comment: Ah yes, those good old values that made California the great state it once was. The values that made innovative entrepreneurs and pilgrims come here to start a new life, dreaming of government service, paying taxes, teaching, train dispatchers, and policework. – The extent to which these state legislators are out of touch is truly staggering.

Republicans, meanwhile, vow to fight new taxes. Almost every GOP state legislator has signed an antitax pledge, though six of them in February broke party lines to approve a plan to close a then-$42 billion shortfall through tax increases and deep cuts. Minority Republicans can hold up budget deals because California requires a two-thirds vote to pass spending plans.

Legislative leaders, who negotiated the budget deal with the governor, have defended the use of one-time fixes in the current budget. Mr. Steinberg said the temporary solutions come in lieu of more spending cuts that would have hurt the poorest Californians. Assembly Minority Leader Sam Blakeslee said the state’s revenue drop amid the recession is historically large, and the fixes are meant to keep California afloat until better times.

Economic forecasters still aren’t sure when that will be. Mr.Watkins said his forecast shows the state won’t show signs of economic growth until early 2011. That’s much more pessimistic than the projection used for the current budget pact. “They’re using old data,” Mr. Watkins said of state finance officials, “and so the revenues will disappoint.”

… which will ensure that the California budget saga is bound to continue.

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California Budget Deal Reached

At long last, California reaches budget deal:

California Governor Arnold Schwarzenegger and top lawmakers agreed Monday to close a $26.3 billion deficit in the state’s budget in a deal that includes $15.5 billion in spending cuts, they said.

The government of the most populous U.S. state, also the world’s eighth-largest economy, began its fiscal year on July 1 facing the massive shortfall due to a plunge in revenues caused by the recession and rising unemployment.

Schwarzenegger, a Republican, said during a news conference the budget would be balanced through deep spending cuts and borrowing and shifting of state funds but without raising taxes.

“All around I think it is a really great, great accomplishment,” said the former Hollywood action star, noting the closing rounds of budget talks, which dragged on for weeks, had been like a suspense movie.

The Legislature’s top Democrats and Republicans said they would brief rank-and-file lawmakers on the agreement in the hope of holding votes in the Democratic-controlled state Assembly and Senate Thursday.

Democratic leaders acknowledged the agreement contained painful spending cuts in popular programs, the result of mounting financial woes for the state’s government since 2007.

Public schools, colleges and universities would lose $9 billion in funding, prisons more than $1 billion and cities and counties roughly $4 billion. Many state employees would have to take three furlough days each month through June 2010, which amounts to a roughly 14 percent pay cut.

“There isn’t a whole lot of good news in this budget,” said Senate President Darrell Steinberg.

Well, the good news is the $15.5 billion in spending cuts. The bad news is that taxpayers will be on the hook for yet another $10.8 billion. Those should also have been financed by cutting spending. And in fact, California needs to cut a whole lot more spending beyond that, remove bureaucracies, cut the crushing tax burden, phase out unsustainable pension plans, etc…

This will be a temporary fix for now, California will be running out of cash again sooner or later, and once that becomes evident, the bureaucrats will be back at the table to discuss how to cover the next shortfall.

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