Adventures in Budgetland

Yevgeny Shrago

The world’s eighth-largest economy passed its budget on Wednesday. A year after setting the record for budget tardiness, California’s lawmakers took advantage of a voter initiative allowing budgets to pass with a simple majority and sent the budget to Governor Jerry Brown on time for the first time since 1986. A cynic might suggest that the threat of docked wages for legislators — which passed in the same voter initiative — was the real impetus for this minor miracle. But a real cynic would realize that unlike the many state employees whose livelihoods would be threatened by a late budget, California legislators don’t live paycheck to paycheck and wouldn’t feel the pinch of their tardiness for weeks.

The good news: With a budget passed on-time and the gaping budget gap closed, thousands of state employees, like teachers and firefighters, don’t have to worry about going on furlough or being paid with IOU’s. People doing business with the state don’t have to wonder whether they would have been better off putting their money in subprime mortgages. The creaky gears of democracy worked in a state whose political dysfunction is legendary. In a way, just knowing that it can pass a budget on time (without the Governor threatening to invoke emergency powers in a dictatorial coup, a la New York) may help the California legislature keep its momentum and pass some bigger reforms.

On to the bad news: Many of those state employees won’t be worrying about their present jobs anymore — because they won’t have them. This budget defers billions in payments to local school districts, forcing them to either borrow money or make cuts (probably both, given the costs of debt service). The budget also cuts funding for the UC system and the already-strained state courts. Less immediately painfully (except perhaps for the Assemblymen for whom the debate was a bit physical), but more disturbingly for the future, the budget continues California’s trend of borrowing against future sources of revenue. Billions of dollars were found by spending down the state’s general fund, taking money out of public authorities, and selling state property. These are one-off’s that won’t improve next year’s budgetary picture and may worsen it. The newly added sources of revenue, a sales tax and car registration fees, are regressive, piling onto the people who can least afford to pay. Californians might still go to the polls to vote on a package of other tax increases, but California voters have never let good sense get in the way of their low taxes.

The problem for California is that it has no good options. Raising taxes in the middle of a recession isn’t a great way to stimulate a recovery. But cutting spending costs state and local government jobs; these losses have also been a drag on the economy. Deficit spending isn’t the solution either: Greece shows what happens when fiscally irresponsible political actors get to run their own finances without controlling their own currency. A federal bailout of California remains a possibility (parts of this budget may be unconstitutional) and Cali still has to respect the bond raters.

Bailout or not, the answer has to come from the federal government. As economic indicators point toward extended stagnation, it’s time for the feds to realize that they will need to take responsibility for burgeoning state debts or risk cutting the legs out of what meager recovery we can get. In exchange, fiscal responsibility types should require states to buy into a sort of insurance program: during good times, states pay a percentage of their budget into a federally administered fund, which can then be used during recessions to smooth spending without pushing the deficit. Although it would be better for the federal budget to pass this legislation when things are good, this is the political moment to do it.

Old Paper by