Author: Loren Kaye

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.

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.

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.

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?

Governor Brown and Speaker Perez are floating the notion of legislative
approval of tax extensions, to be "ratified" by the people at a later election.
This raises an interesting question – how would you present the question?

Remember, this is not a plebiscite, it’s a proposed
constitutional amendment.

The most straightforward approach would be to propose
to continue the extension of the taxes for however many years is agreed upon.
In that case, a "yes" vote continues the taxes while a "no" vote brings them to
an end. As a bonus, any related constitutional changes, such as a spending cap,
could be included in the measure. The disadvantage, as any political consultant
would attest, is that it is more difficult to obtain a "yes" vote from voters
than a "no" vote.

Last week I recounted how legislators could still get paid
even if there is no budget in place by the beginning of the fiscal year in
July, in apparent contravention of the spirit of Proposition 25.

Today comes the story of how the Legislature has
passed with a majority vote and the Governor has signed substantive laws that
take effect immediately to implement the budget – but without a budget having
been presented to the Governor for his signature. This is probably legal, but
in this case again violates the spirit of Proposition 25.

All of this is permitted by a loophole in the "On-Time
Budget Act." The measure lowered the legislative vote requirement to pass a
budget from a two-thirds to simple majority. It also reduced the vote threshold
for "other bills providing for appropriations related to the budget bill."
These are commonly understood to mean substantive changes in the law necessary
to implement the state budget, but are not by its terms legally limited to
that. The only limitation in Prop 25 is that these bills must be "identified as
related to the budget in the budget bill passed by the Legislature."

That didn’t take long. The bayonet in last November’s
Proposition 25 to cut Legislators’ pay in the
event of a late budget has been quietly re-sheathed. While proponents had insisted the measure "holds legislators
accountable for late budgets (and) ends budget gridlock," it is conceivable
that the budget standoff could continue well into the summer without any
consequence to lawmakers.

How could this be? Well, as proponents said at the
time, just read the initiative.

"…in
any year in which the budget bill is not passed by the Legislature by midnight
on June 15, there shall be no appropriation from the current budget or future
budget to pay any salary or reimbursement for travel or living expenses for
Members of the Legislature…"

The key phrase is, "not passed by the Legislature."
Note that the Constitution does not require that the bill be enacted, or be
signed by the Governor, or even presented to the Governor for his
consideration.

Recession? Check. Record state budget deficit? Check. More spending on favored special interests? Unchecked!

Like water rising to its own level, legislative Democrats find a way to spend money on new programs. Even as the budget deficit tops $15 billion, the Legislature passed SB 1 in the first special session, which appropriates $8 million a year in utility ratepayer charges to provide career education subsidies for “clean technology and renewable energy job training” programs. The money would be used by schools to set up Partnership Academies to train prospective workers in, among other occupations, energy audits, retrofitting and weatherization activities, and installing energy-efficient household appliances, windows, doors, insulation, lighting and water and energy conservation technologies.

With a June election to extend the 2009 tax increases
now officially kaput, and legislative leaders and the Governor
committing to not place the measure on a June ballot by a majority vote, state leaders are entering
uncharted territory in their quest to resolve California’s fiscal crisis.

What are the fallback options to address another $15
billion or more in budget solutions by the new Prop 25 deadline, which is June
15 or legislative pay is cut off?

Here are my thoughts on a Plan B, and for good
measure Plans C and D:

Plan B: A gimmicky or worse budget approved by the
Legislature by June 15. Legislative Democrats have created the specter of an "all cuts"
budget, even prevailing on the Legislative Analyst to prepare a list of cuts to illustrate the shape
and extent of another $13.5 billion in spending cuts. But an all-cuts budget is
either a myth or a euphemism. More likely will be a revised plan that avoids
most of the worst cuts, whacks some earlier untouched areas, like K-14
education and corrections, but that papers over the gap using tried and true
methods of the past decade.