Chiang’s legislative pay freeze is a sideshow
As the most outspoken, if not prettiest, opponent of Proposition 25 on these pages, I take smug
satisfaction in how the measure has exploded in its champions’ faces.
Last November, Senate Leader Darryl Steinberg said, "(T)here is no reason
for a late budget again with the passage of Prop. 25… (it’s) a real game changer."
Yes, the Democrats on a virtually party line, simple majority vote passed and
sent to the Governor a budget, which he promptly vetoed. Boom!
Well, at least (they thought) by passing a budget on
June 15 they avoided the pay penalty included in the measure. Boom! Controller
John Chiang has stopped their salary and expenses because the on-time budget
wasn’t balanced budget.
Brown’s “Who’s the Boss?” Moment
In vetoing the budget bill, Governor Brown criticized Republicans for stymieing his proposed election to extend temporary taxes. But the real message was delivered to Democratic leadership in the Legislature: "I’m in charge here."
Pressured by a deadline to play-or-not-get-paid, Democratic majorities passed a gimmicky budget, described by the Governor
Regulatory Reform is Budget Reform
The Legislature debates the state budget today, appropriate since today is the budget deadline. A handful of determined Senate Republicans have offered a path to an election on tax extensions, contingent on Democrats agreeing to changes in laws that cramp business investment and hinder fiscal solvency.
Some may question the relevance of the business climate changes to the state’s fiscal health. I offer this: while Californian workers and even government employees have suffered under the chill of the recession, state regulatory agencies have been on a hiring binge.
California’s Economy Began its Rebound in 2010, but only Grudgingly.
Figures released by the national Bureau of Economic Analysis showed the state’s gross domestic product recovering by 1.8 percent, after adjusting for inflation. This compares to national real economic growth in 2010 of 2.6 percent.
California’s GDP, at just over $1.9 trillion, is still below its 2008 peak. And our anemic recovery shows: 33 states are growing more robustly than California, including most of our key competitors. Construction, finance and nondurable manufacturing continue to be the major private sector economic laggards.
Power grabs
Two budget-related developments yesterday bring a
small amount of clarity to the political positioning on achieving a deal. But
their long-term effect is to re-allocate political power.
Controller John Chiang released
a legal opinion interpreting the section of Proposition 25 that would halt salary and expense
payments to the Legislature if it fails to transmit a budget to the Governor by
June 15. His lawyers concluded that even if the budget is timely passed and
sent to the Governor, if it is not a balanced budget, then legislators
would forfeit their pay until they pass one that is balanced. This twist arises
from an earlier measure, Proposition 58 in 2004, which requires that the
Legislature may not send to the Governor, nor may the Governor sign, a budget
that would spend more than the revenues estimated for the year. Until the
Controller’s memo, this constitutional provision had no teeth. Now that
provision has been given real force, and the arbiter of whether a budget is
balanced – and therefore whether the Legislature will be paid – will be
Controller John Chiang.
Deficit primer
California has a budget deficit.
The deficit was caused by (1) the Legislature
spending one time revenues on ongoing programs, and (2) most recently, the
recession.
The deficit has persisted because the Legislature
relied on gimmicks and one-time solutions instead of dialing back spending.
At the urging of Governor Brown, the Legislature
adopted $13 billion in solutions, including billions in permanent spending
cuts.
Wall of Debt
Governor Brown unveiled a new theme on Monday to sell his budget solution: the Wall of Debt.
This approach targets Republicans and other voters skeptical of the need for tax extensions.
- The Governor specifically calls out the nearly $35 billion in borrowing and gimmicks devised by previous Administrations and Legislatures to paper over earlier deficits. The subliminal message: “Never again.”
- The debt retirement theme provides a landing zone for Republican legislators who might agree to tax extensions in return for a spending cap, where any revenues above the cap could be used to retire budgetary borrowing. The Governor expressed his support yesterday for an undefined spending cap.
- Raising the debt issue also provides a platform from which the Governor could insist on aggressive reforms in state and local pension obligations. Actuaries peg the unfunded liabilities of the two big state pension systems north of $150 billion. This off-budget debt was recently noted by Standard and Poor’s as a further threat to California’s anemic credit rating.
- Finally, the overall capacity of the government to take on debt will be front and center as the Congress debates whether and how to raise the federal government’s debt ceiling.
Can we make growth a priority?
California’s budget, like the economy as a whole, may
be slowly slogging out of the Great Recession. Tax collectors have logged
better than anticipated receipts. The Legislative Analyst reports revenues for the
current fiscal year to be about $2.5 billion better than expected.
Of course, only in Sacramento would more revenues
(without tax increases) be a mixed blessing. The Brown Administration is downplaying the revenue
bump, placing it in the context of overall pressures on the budget, while
Republicans are barely restraining themselves from singing "Happy
Days are Here Again." These reactions are proxies for the parties’ positioning
on the Governor’s proposal to temporarily extend the 2009 tax increases.
A $2.5 billion, or even a $5 billion improvement in
tax revenues is still a long way from closing the remaining $15 billion
deficit. Yet the least painful approach and most enduring solutions are still
conspicuously absent from the public policy agenda – improving the state’s
economic performance. After all, the $2.5 billion in higher revenues came about
because of economic growth. Imagine what would happen if growth could be
improved and quickened.
Did housing have a false recovery?
After several months of encouraging news on the
housing front, California housing prices are in the midst of another downturn,
if not yet a fall.
Housing prices have been steadily dropping since last
spring, after a year of recovery, according to a California composite of the
S&P Case-Shiller U.S. National Home Price Index. More ominous,
year-over-year home prices have been dropping since the beginning of the year,
signaling a return to the persistent price stickiness California has
experienced since the bursting of the mid-decade housing bubble.
Does California’s ranking on national business climate surveys matter?
If you’re like me, your instinctive reaction to a
business climate (or quality of life or innovation) state-by-state ranking will
be to laud the ones with which you agree, and find fault with the ones that
don’t match your preconceptions. Sort of like your first-blush response to the
latest survey research.
But just like solid methodology can overcome your
skepticism about a poll, a better understanding of state-by-state business
climate rankings can shed light on what is useful for public policy and what is
merely entertaining. The Public Policy Institute of California (PPIC) has
recently released a study that provides a useful template
for applying state rankings to policy problems.
The PPIC authors, Jed Kolko, David Neumark and
Marisol Cuellar Mejia, posed a puzzle: why does California rank so poorly on
many business climate indexes even though our economy over time tends to equal
or occasionally outperform the national economy?