Due to the way the State’s cash flow works, e.g. the lion’s share of budget expenditures occur in the first half of the fiscal year and the lion’s share of revenues come into the state treasury in the second half of the fiscal year, the state’s need for a cash cushion is essential to help smooth this cash flow discrepancy.
However, as the LAO chart below illustrates, the state’s cash cushion going into the first half of the next fiscal year is a third of what it was just two years ago. Also significant is the fact that the only reason the state is ending this fiscal year with a “cash cushion” at all is because of budget gimmicks and short term loans and transfers engineered by the Legislature in September, 2008 and February, 2009.
Here is what the Legislature did to help the state’s cash flow through the end of this fiscal year:
· Added funds with over $6 billion of balances to the list of state accounts able to be borrowed by the General Fund
· Deferred several billion dollars of payments to the 2009–10 fiscal year
· Allowed immediate receipt of $1.5 billion of federal stimulus funds to be used for Medi–Cal
· Secured a $500 million loan from The Golden 1 Credit Union
As a result of these cash management practices, this month the state will also draw down nearly $800 million of federal stimulus funds to cover the costs in the state’s prison system, thereby reducing expenditures from the General Fund.
It is important to recognize that these so-called cash management practices are not the structural reforms needed to address the state’s long term budget crisis. They represent incessant budget gimmickry and legislative sleight of hand, designed to buy the Legislature time in order to defer the inevitable day of reckoning. Unfortunately, time is running out and soon, a few months from now, the day of reckoning will come and the Legislature will find itself in an even leakier boat than the one they were in at the beginning of January.
No amount of tax increases, budget transfers and short term borrowing will solve the state’s fiscal crisis. And we certainly can’t expect state taxpayers to bail out the politicians for the foolishness perpetrated on them by an unaccountable political class and their fair weathered friends in the tax and spend lobby.
California needs real budget solutions starting with a real spending limit. And NOT a spending limit that ties spending to increases in population and inflation. This creates perverse incentives to add new social programs to the budget in order to attract more people to California thereby allowing the politicians to grow state government while consolidating more power in Sacramento.
What California needs is a real spending limit that limits state spending to the state’s rate of economic output. In other words, as the size of the California economy grows, which is only possible by lowering taxes and removing regulatory barriers to job creation, state spending, on an annual basis, and as a fixed percentage of the state gross domestic product, would increase as well, albeit proportionate to the growth in state economic output.
The most important immediate result of this spending reform would be the incentive it would provide to the big spenders. Indeed, every Legislator in Sacramento would suddenly have an incentive to grow the state economy and stop punishing the entrepreneurs who wake up each day, work hard, take risks and invest in California’s future.
Our Republican Governor, the Democrats in the Legislature and a handful of wobbly Republicans, are demanding voters approve more taxes, more borrowing and more spending via Proposition 1A. The budget outlook as presented above should provide ample evidence as to why this would be a mistake.
The problem in California isn’t that we are undertaxed…as the tax and spend lobby would have us believe. The problem is that our state government taxes us way too much, spends way too much of our money and overregulates our businesses and our individual lives. The polls show California voters understand this to be true even if the politicians don’t.