California’s budget is described as being on a rollercoaster the last decade-plus streaming to great heights when the economy is good and bottoming out with a rush when the economy dips. There was no better expression of the California budget rollercoaster ride than this week when we went from the low of the state controller telling us Tuesday that the state would run out of cash by March to the giddy response from state officials yesterday that the Facebook Initial Public Offering could flood the treasury with as much as a billion dollars.
Let’s not get ahead of ourselves.
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.
Depending on the date the newly minted millionaires from the IPO decide to sell stock will determine when the state gets its share. Factors such as whether federal income tax rates expire or if the voters increase state income tax rates could well influence the actions of the Facebook beneficiaries.
For example, if the governor’s temporary tax increase passes, some of the young new millionaires who work for Facebook might decide to wait out the five years and avoid the higher tax rate. Facebook founder Mark Zuckerberg is only 27 years old and many of the young people who work for him might decide they can afford to wait for the higher tax rate to expire and reap a larger benefit.
The real debate within the state is what to do with the new money once it arrives.
Republican legislative leaders say spend it on education to avoid potential cuts the governor is threatening if his tax proposal fails at the polls. Democratic politicians want to stall cuts to social welfare or use revenue to reduce debt.
What the state should not do is follow the example of legislative actions during the dot com boom a decade ago. No massive spending on on-going programs or creating new programs. Gushing revenues were used to build up state spending that could not be sustained.
The so-called “Facebook Effect” on the state budget is a good thing if managed well. It speaks to allowing a growing economy to fill in state budget needs and argues for encouraging a business environment for entrepreneurs to thrive, benefiting the state treasury in the long run.
Given the history of legislative actions when money unexpectedly flows into the treasury, this episode reminds us it would be wise to have a strong law in place that directs unexpected revenue to debt reduction and a rainy day fund to take the state’s budget off the rollercoaster.