Riding the Budget Tiger

Joel Fox
Editor of Fox & Hounds and President of the Small Business Action Committee

Forget about the budget proposal introduced by Gov. Jerry Brown yesterday. The budget plan that will matter is the revised version issued in May–even more than usual–after we learn more about the economy and plans from the new Trump Administration, both of which could have major impacts on the budget.

The economy, which has shown some signs of weakening, is one factor that will become clearer in five months. And, major jolts to the budget could come depending on steps the new administration in Washington takes regarding health care and immigration issues.

The number of times the governor and reporters used a variation of the word “uncertain” in referring to the budget piled up during Brown’s press conference to introduce the budget.

With California’s predilection to rely heavily on high-income taxpayers, the budget could easily fall into jeopardy during an economic downturn. In five of the seven months since the current budget was put in place, revenue has been below expectations.

Declaring California’s tax system the most progressive and the most unreliable in the country, Brown warned the legislature to be prudent in budget deliberations. He said he didn’t want to face similar budget crises that bedeviled his two predecessors, Gray Davis and Arnold Schwarzenegger.

The governor described dealing with this new budget like riding a tiger.

The possibility of the Trump Administration turning off the Washington money spigot especially for health care would be extremely painful for California, Brown asserted.

Yesterday’s proposal indicated California is depending on $105 billion from Washington—a dollar amount that is equivalent to 85% of the state’s General Fund of $122.5 billion.

If the federal government cuts or eliminates the Affordable Care Act, how will the legislature respond? Will there be money to cover those Californians who have signed up for the state’s version of the act, currently mostly funded by Washington? What if the Trump Administration cracks down on sanctuary cities and denies funds to cities that ignore federal immigration laws?

Gov. Brown admitted the budget would have to be revisited if the feds hold back large chunks of cash. But he said he would not anticipate that happening; that much could change when the campaign rhetoric is translated into governing. He noted that all ready there have been cracks in the Republican congress on certain issues. But he said, just in case, the legislature must be wise in shaping a budget and not spend wildly. He emphasized the importance of the rainy day fund, now about $9 billion, but he added in an economic downturn, his Office of Finance projected state revenue could fall $18 billion a year for three years.

Brown’s Finance Director, Michael Cohen, said the budget presented yesterday was based on current law. The budget proposal contained no provisions to make up for reduced funds for sanctuary cities, for example. However, Cohen said in reference to possible changes coming from Washington, his office is considering things that it wasn’t considering in October.

Taxpayers must also wonder what changes might come if federal money is cut off. Despite a number of tax increases passed by voters in November, will lawmakers turn back to the taxpayers to make up for lost revenues? Will businesses find more costs or mandates on them? Or will the legislature look for other solutions like that advocated by state Senator Jim Nielsen in reflecting on the governor’s budget: “We’ve got to examine the regulatory and the economic deterrents for businesses in California. And much of what has happened here has discouraged our business growth.”

We’ll know much more in May.

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