Sad times in California
The news in the Sunday LA Times was ominous. The state deficit, which was expected to be about $9.2 billion, had ballooned up to $16 billion. It was an increase of $6.8 billion, and, as the Governor made very clear, big cuts are coming.
The increased deficit came about from several things, but probably most important, the state’s economy was not doing as well as we thought or hoped it would be doing when the budget was made up last November and December. At the end of each year the Governor’s Department of Finance makes up a budget and tries to guesstimate what the income will be for the next 12-18 months. Understand that the California gross domestic product (GDP) is about $2 trillion dollars a year, or, to put it another way, about 2,000 billion dollars. To give it some perspective, Bill Gates is worth $61-plus billion and he is one of the richest men in the world. If the GDP estimate is off by one percent then it’s off by $20 billion, so you can readily see that relatively small mistakes in estimating can have very large consequences. It’s really not fair to call it a mistake, because there are no crystal balls and last year the California economy was picking up momentum. That momentum has apparently lagged somewhat this year.
Every May the Department of Finance does the May revise, which means they check the estimates made six or so months earlier against the actual receipts coming in since April 15th, and then revise the budget accordingly. In a normal year the state’s income is reasonably stable and predictable. In this economy little is stabile. How we’re doing not only depends on our own economy but also on our exports to Canada ($14 billion), Mexico ($26 billion), China ($14 billion), Japan ($13 billion) and Europe ($25 billion) because we export to all those countries. In a globalized world, when they sneeze in China we say “bless you” in the United States.
The Governor just announced today, Tuesday, in another front page story, what would have to be done and it wasn’t pretty. The cuts are going to be major. We’re going to have to slash healthcare costs—meaning hospitals, nursing homes, the disabled and also put the state workers on a four-day week. The courts are going to be cut; in fact, just about every piece of the economy is going to take a hit.
As you would expect, everyone is already screaming and either blaming or explaining why they should be exempt from all the cuts. This time the moaning you hear is going to be reasonably bipartisan. The Republicans will whine about expenses and the costs of government, which has actually been cut since the recession began. The Democrats will talk about the Governor as if he had $16 billion stashed in a Suisse bank account, which he’s just too selfish to share with the rest of us. The bottom line is that the income isn’t there and may not be there for another couple of years. There actually is some improvement. Last year we were in the hole by $26 billion and this year by $16 billion, which I guess is an improvement. Next year I’m guessing it could be a $6 billion deficit and then thereafter into the black.
The California economy is not some small state like Rhode Island or Oklahoma. If we were a country we’d be the ninth largest economy in the world. Our economy (38 million people) is just barely smaller than Italy (59 million people) and slightly larger then Canada (35 million people). These days, in the aftermath of a deep recession, most countries are running at a deficit, primarily because their economies are down. But we are legally bound to have a balanced budget, even if it’s near impossible to do in a recession, so it has to be done with cuts, some new revenue sources and probably some smoke and mirrors.
Our budget is very complicated so I called my son Anthony in Sacramento to get his take on what happened and what happens next. He covers the Governor for the LA Times and is in and out of the Governor’s office most everyday and co-wrote both of the LA Times stories. His take on the budget deficit is that it was a combination of things. Probably some of the income projections were overheated, the economy was slower growing than had been anticipated based on the last few quarters of 2011, the courts and the Feds blocked about $1.5 to $2 billion in cuts that they planned on, there were some changes in the corporate tax formulas, which ended up with 2 billion less in corporate taxes, the share of property taxes went down because real estate has dropped in value, etc. etc. In other words, our budget is so complicated that the reasons for the deficit can be spun in a dozen different ways and they’ll all be a little bit correct.
Bottom line is we have to cut back on expenses and increase revenue, which means more taxes. We’re going to have an opportunity in November to vote some new revenue, taxes, if you please. If we don’t there is another big cut coming after the election, and this one is going to be the schools, which so far have managed to escape major cuts. But that will change if the ballot propositions fail.