The key to Gov. Schwarzenegger’s new budget plan might be
called the Deukmejian Gambit. And throw in some Jerry Brown, too.

A short history….In 1983, Governor George Deukmejian faced a
large deficit, although smaller in proportional terms than the one faced today
by Gov. Schwarzenegger. Deukmejian put forward a plan that included no tax
increases. There were the usual howls and protests. Other ideas were floated,
including—get this one—creating a state lottery to generate funds. A few
years later a state lottery was created and now this governor wants to borrow
against it to raise immediate cash.

Finally, a deal was struck between Deukmejian and the
legislature. A 1-cent sales tax increase would trigger if there was a shortfall
of tax receipts at a certain time.

The gamble was that the economy would improve. Gov.
Schwarzenegger is using the 1-cent sales tax trigger in a slightly different
way. It is a back-up plan to insure revenue will be there if voters reject the
idea of borrowing against the lottery. The sales tax would be in place for up
to three years unless the deficit is erased in shorter time. This governor is
also hoping for a swelling economy to bail out the deficit.

Let’s state clearly that tax increases during economic
downturns will dig us deeper into the hole. Let’s also state that mandates and
automatic spending formulas should be trashed.

Looking at the political realities of what might happen in
this year’s budget debate after all the yelling and saber-rattling, the refusal
to make cuts or to support anything that looks like a tax increase,
Schwarzenegger may have found some ground for compromise.

Why do I think so? He
is proposing no general tax increase in an election year, something even
Democrats will come to appreciate…..however, a promise of a tax increase to
come if things don’t improve….and, the hope that things will improve.

Could the
revenue situation improve in a few months? Maybe. Tax revenue is a bit higher
this April and prognosticators are predicting an upturn in early 2009. Perhaps
it will come earlier. Historically, the sales tax trigger back-up plan worked
for Deukmejian when tax receipts improved as he waited out the crisis and the
trigger was never pulled. Then there is the same human nature that is at work
in the legislature all the time….passing the problem on to the next generation
of lawmakers.

One last thought. How does Jerry Brown figure into this?
Remember, Deukmejian took over from Brown and a budget deficit was left on the
new governor’s doorstep as a sort-of welcoming gift. Deukmejian had to face the
deficit his first few months in office. If the Deukmejian Gambit doesn’t work
for Schwarzenegger as well as it did for Deukmejian himself, and other fixes
are not put in place, the next governor could inherit a real deficit mess —
and that next governor may well be Jerry Brown.

Day after day, we see the spending-induced budget deficit grow in California. As the year began, it quickly rose from $14 billion in January to an estimated $17.2 billion today, and who knows where it will be by the time the budget is due (though rarely delivered on-time) in June. The need to fix the budget is urgent, and our state legislators need to work with the Governor to address the problem before it is too late. But it needs to be a thoughtful discussion, and one that does not place the burden of additional taxes on hardworking small business owners and families.

There are some in the legislature that are chomping at the bit to raise taxes to cover this massive budget gap. But how would you go about generating $20 billion into the state coffers? It would look something like this: each family would have to pay $1,100 in additional taxes, the state sales tax would have to increase by two to five cents, and property taxes would also go up.

So far, the vast majority of the legislative budget-balancing schemes involve tax increases on California businesses, including:

• A Proposition 13-eviscerating split-roll property tax that will raise taxes on California businesses and push more out-of-state or out-of-business.
• An increase in the Personal Income Tax rate that will hit the more than 80 percent of businesses that file personal returns for their business.
• Elimination of business tax credits for purchasing new equipment and investment in research and development of new technologies.

However, increasing revenues is not the answer that will solve this problem. Our state leaders who spent our state into this problem now have a responsibility to reduce expenses, like any small business or family would be forced to do. We need to continue to have budget hearings and take action on the additional budget reductions proposed by the Governor, since that is the minimum needed to achieve a balanced budget.

Now is the time to make our government leaders accountable for how they spend our money. The budget in California has increased by $25 billion over the past five years, but what has resulted from those increases? Is the education system in California better? Has the health care system improved? Are our roads better maintained? Is there a "rainy day" fund that we can tap into during trying economic times? With a 32% increase, we should have something tangible to show for it.

If spending had been limited to population growth and inflation, the state would not be facing a budget deficit at all. In fact, we would be facing a multi-billion dollar surplus.

This budget crisis was entirely foreseeable and preventable. Hardworking families and small business owners should not be punished for the legislature’s failure to maintain responsible spending habits.

Yesterday, the UC regents reluctantly voted to increase tuition by 7%, the 8th increase over the past 10 years. Greatful that the Governor supported education and included $98.5 million to restore most of the UC budget cuts from January, the regents and students were passionate about the need for the legislature to support this.

So on Wednesday at UCLA, the regents and students had an emotional and spirited debate about Jefferson, democracy, an educated citizenry, economic reality and the responsibility of the State to support public universities, and the future of UC.

CalGrants and other aid are helpful to students in families earning below $60,000, but middle class families are left to fend for themselves. And while these grants offset tuition, California’s high cost of living is making it more and more difficult for both low and middle-income families to send their kids to a UC school.
Leaders talk a lot about affordability and accessibility, and CEO’s across our state talk about the importance of supporting a great public education system, and investing in "human capital". Well, it is time for the legislature to take a hard look at their responsibility over the long term to our state colleges! It’s time for business leaders to step up and "put their money where their mouth is," and contribute more to the college aid and scholarship funds available to support our great young college students.

The legislature has some difficult choices to make as they debate the budget, and the future of our state colleges is as critical as any!

There is no longer any doubt about one thing in California politics: Gov. Schwarzenegger is willing to die on the cross of budget reform.

My conversations with people inside and outside the administration, and a review of news leaks in advance of his revised budget proposal this afternoon, make it clear that he is doubling down on budget reform. For a man with a reputation for twisting with political winds, he is doing the opposite here. He is so determined to pursue his budget reform (a spending-side proposal based on a rainy day fund and more power for governors to make mid-year cuts) that he is risking what’s left of his governorship.

One piece of the approach is undeniably smart. As the Sacramento Bee reports, he’s pulled back from his proposal for including education in his cuts and is proposing to meet the Prop 98 minimum on education. Schwarzenegger’s cuts might have been more fiscally responsible–but they were politically poisonous to his project of budget reform. By dropping the unpopular education cuts, he is making a strategic move that shows the depth of his commitment to budget reform — or bust.

To paraphrase Yogi Berra, "It’s déjà vu all over again". It was just a little over four years ago, in March 2004, that the legislature placed on the ballot and the voters approved Propositions 57 and 58. Proposition 57 authorized $15 billion in bond financing for the deficit at that time and Proposition 58 was supposed to end deficit spending "forever".

But here we are today, again faced with a budget deficit of at least $15 billion. Many in the legislature during the budget debate two years ago warned that the housing market was going to bust, the economy was going to slow, and that state revenues were going to drop. In fact, clearly prescient predictions of $15-20 billion deficits were made, but little attention was paid to the warnings. This year’s budget deficit should not have been a surprise to anyone.

In a bit of irony, the Governor is once again proposing $15 billion in borrowing by securitizing future income from the State Lottery and other one time fixes. These one time fixes are just a continuation of business as usual for Sacramento and are certainly not the needed fundamental fixes to the budget’s structural gap between revenues and spending.

It is time for the Governor and the Legislature to get our State’s fiscal house in order. One time fixes and accounting "gimmicks" are no longer going to suffice for our State’s future, and it is time for our leaders in Sacramento to face the fiscal reckoning and tackle the difficult issues.

Long term budget reform, reform of our State’s tax system, public employee pension reform, business reforms, and infrastructure investment should all be on the agenda for the upcoming budget debate.

"We don’t have a tax problem , we have a spending problem!" We in California have heard this sold brilliantly from our Governor and economic and business leaders for 4 years. It makes a great "sound byte", but hoping those visiting Fox & Hounds have slightly more depth than viewers of Fox or CNN,

I would like to say that this is both wrong and wildly simplistic.

We have BOTH a tax and a spending problem. We rely on tax revenues that fluctuate and are unfair to the middle class. Yeah, remember the middle class, the largest group of working Americans neither dems or repubs seem to champion?

We offer some truly unfair tax breaks, like the yacht tax credit — other than Senator Dick Ackerman and a few hundred yacht owners, who cares! We don’t put enough revenue aside each year in our "rainy day fund", so on a big declining revenue year like now, we are royally screwed.

And our spending formulas and spend happy legislators insure ever increasing budgets with little oversight that any of these billions are going to be used effectively.

Since its budget time in Sacramento now, its hard to resist this topic. I have little hope the political system will allow true and fair reform, but maybe crisis will create opportunity for modest reform.

Nothing gives the state legislature’s Democratic leadership — and the Republican governor — more headaches than the constitutional requirement for a two-thirds vote to pass a state budget or any tax increases.

To achieve a two-thirds vote requires the unanimous support of the Democratic members of both houses plus two additional Republican votes on the senate side and six additional Republican votes on the assembly side.

The budget battle in the state Senate last year so infuriated Senate Pro Tem Don Perata that he spent over $1 million to qualify and fund a June 3rd recall campaign against Republican Senator Jeff Denham.

But, for whatever reason, Perata abruptly announced last week that he is abandoning any further funding of that effort, making it highly unlikely that the Denham recall will be successful.

The California Target Book, which I publish, is a publication that tracks and handicaps congressional and state legislative races in California. Looking at the 20 odd-numbered senate districts up for election in 2008, we initially labeled only two as being competitive: the 15th Senate District represented by Republican Abel Maldonado, and the 19th Senate District, an open seat due to Republican Senator Tom McClintock being termed out.

There is little doubt that the race between former Democratic Assemblywoman Hannah-Beth Jackson and former Republican Assemblyman Tony Strickland in SD19 – both unopposed in the June Primary – will be a top November target.

But to the surprise of many – particularly among many Democratic Party activists – no Democrat or third party candidates filed to run against Maldonado, allowing him to run unopposed in both the June Primary and November General Election.

Therefore, with Perata throwing in the towel in the Denham recall election, he all but threw in the towel for Democrats being able to pick up the two seats needed to reach a two-thirds level.

Can Assembly Democrats pick up the six addition seats needed to reach a two-thirds level?

There are three Republican-held seats that are at the top of our Democrat target list, and all are open seats due to the GOP incumbents being termed out this year.

The top two of the three are AD 78 (Shirley Horton) and AD80 (Bonnie Garcia). These are two districts that the 2001 redistricting mapmakers purposely drew to favor a Democrat — Democrats have a significant registration advantage in both — but the Republicans won in 2002 due to fielding a superior candidate in both races and, with the power of incumbency, held them in 2004 and 2006. Now open seats, the Democratic leadership will spend big bucks to get them into the Democratic column.

The third is AD15 (Guy Houston), the last remaining Republican-held district in the San Francisco Bay Area. The Republicans are currently in a four-candidate June Primary battle, with no clear favorite. On the Democratic side, San Ramon Valley school board member Joan Buchanan is facing no more than a token Primary opponent and is expected to handily win the Democratic nomination, and she is perceived as a strong candidate. Party registration is 39 percent Republican, 39 percent Democratic, 19 percent independent.

Number four on our Democratic target list is AD26, currently represented by Republican Greg Aghazarian, who is termed out this year and is running for the state senate. On the Democratic side this year is John Eisenhut, a Merced County farmer, former school board member and self-described "Valleycrat," meaning political conservative. Unopposed in the June Primary, he has an impressive resume and it is highly unlikely he would have entered the race without strong encouragement from the Democratic leadership. On the GOP side is Bill Berryhill, also unopposed in the June Primary. He is the brother of GOP Assemblyman Tom Berryhill, who represents an adjourning assembly district. The registration in this district is 41 percent Republican, 41 percent Democratic, 14 percent independent.

Democratic wins in the above four districts would make it a very good year for them, but can they get to plus six?

This would require two major upset wins, and the Target Book is looking at two seats: AD10, represented by Republican Alan Nakanishi who is termed out, and AD37, represented by Republican Assemblywoman Audra Strickland, who is seeking re-election.

The powerful public employees unions have always had their eye on AD10, a suburban Sacramento area assembly district with a large number of public employees residents. Senator Dianne Feinstein carried the district over Dick Mountjoy 51%-41%. But this would be a major upset and the Republicans have strong candidates currently running in the June Primary. Party registration is 41 percent Republican, 38 percent Democratic, 17 percent independent.

As mentioned at the top of this article, a multi-million dollar campaign will be raged in SD19 this fall between Democrat Hannah-Beth Jackson and Republican Tony Strickland. Democrats may look at Audra Strickland’s assembly district and see the opportunity of a "two-fer."

Can the Democrats do it?

First, it truly would have to be a Democratic landslide year. But equally important, they will need to hold on to the sole Democratic-held seat that is competitive this year: AD30, the conservative Central Valley seat held by Assemblywoman Nicole Parra, who is termed out this year.

With the preliminaries now over, the annual California Budget Goat Rodeo will kick-off this week with the unveiling of the fabled and eagerly awaited Governor’s May Revise. I don’t know about you but I’m as nervous as a long-tailed cat in a room full of rocking chairs in anticipation of what the new deficit number will be. $10 billion? $15 billion? $20 billion?

We will soon hear the cries against cuts to programs grow louder from one side of the Building and the line in the sand statements of "no new taxes" from the other side.

But the one thing you probably won’t hear is "how about eliminating some programs?" That is a concept that seems to be foreign to the Legislature.

I don’t mean indiscriminately taking the budget ax to a particular program or agency, but review the program to see if it is still effective and necessary. You can’t tell me there are not things we are currently funding that don’t need close scrutiny and could be eliminated.
Enter the Sunset Commission.

California will suffer a more severe recession than the rest of the U.S. economy according to a report issued by the Milken Institute. The report, The Economic Outlook for the United States and California, Slow Growth or Recession?, by Ross DeVol, director of regional economics at the Milken Institute with assistance from Armen Bedroussian, summed up its analysis this way: "If the U.S economy has the sniffles, California’s economy has a full-blown cold-with all the associated aches and pains."

However, DeVol points out the recession will be mild by historical standards.

The report says California’s economy will be hit harder by the housing market correction, depressed consumer spending, and slowing imports. Also, California’s economy, especially in the L.A. area still feels the effects of the Hollywood writers’ strike. The report claims that California will face a net job loss in 2008 with the unemployment rating hitting 6.6 percent in the fourth quarter.

Los Angeles
Mayor Antonio Villaraigosa spoke at a meeting of the Valley Vote organization last
night in the San Fernando Valley. He’s not the
governor and I didn’t ask him if he was running for the job, but as we walked
out of the meeting I did ask him how he would handle the current state budget mess.

Villaraigosa responded: "I’ve said
for some time the state budget deficit is a spending problem but it’s also a
revenue problem. There are very real structural elements to it. The only way to
resolve this budget deficit is to cut some spending and also to raise revenues
and that’s what we’re doing here with the city budget. We’re saying for every $1.50
in cuts we are going to raise a dollar in revenue."

My thoughts: Using that formula on a
$20 billion state budget deficit problem would mean a combination of $12
billion in cuts and $8 billion in tax increases. Scary numbers. Yes, I know
that is a static calculation and that’s not what the final numbers would be, but
a one-and-a-half to one ratio still means a large tax increase in a tough
economy. I don’t think the voters buy it and we know the Republicans in the
legislature won’t. The economic ripples from a large tax increase would not be
good for the state economy.

I also asked the mayor about Los Angeles’ reputation
for being bad for business.