California's unstable tax base, debt and falling revenue are among the threats that could upend the budget despite the infusion from the passage of Proposition 30.
By Chris Megerian, Los Angeles Times | http://lat.ms/WVQ0sQ
California Gov. Jerry Brown's revenue-raising Proposition 30 was passed by voters, but the funds it's expected to raise had already been factored into the state's budget. (Wally Skalij, Los Angeles Times / November 7, 2012)
November 11, 2012, 4:51 p.m. :: SACRAMENTO — The election wasn't even over Tuesday when state Treasurer Bill Lockyer's phone started ringing. Activists of all stripes had the same message for him: With voters apparently poised to approve billions of dollars in tax hikes, it was time to spend more money.
"They had to be reminded the money has already been spent," Lockyer said.
As California tries to shake its national reputation as a financial bungler, policymakers in Sacramento will be managing an estimated $6 billion in annual revenue from Gov. Jerry Brown's newly approved tax plan, Proposition 30. The money is already included in the budget the governor signed last summer.
The bloodletting that has become a ritual part of assembling the state budget is expected to fade. But some of the issues that have made California's financial problems so persistent remain and could still create a budget gap if things don't go as planned.
In essence, analysts say, voters have stabilized the patient, but surgery may still be required.
Brown has long acknowledged that fixing the state's fiscal problems will require more work. He told reporters last week that "there are no cure-alls" and pledged to hold the line against new spending. As the former seminary student often does, he used a biblical allusion to make his point.
"We need the prudence of Joseph," he said.
The governor's plan will increase the state sales tax by a quarter-cent for four years and raise levies on high earners by one to three percentage points for seven years. Passage of Proposition 30 prevents billions of dollars in education cuts and gives the state an opportunity to end the fiscal year without a deficit for the first time in five years.
But California still has the lowest credit rating of any state. Its tax system is unstable. Borrowing costs remain high, and there are signs that the Brown administration's current $91.3-billion budget may be fraying at the seams as savings fail to meet expectations.
"By no means is California out of the woods yet," said Kil Huh, a director at the Pew Center on the States in Washington. "They've built up a set of challenges that are daunting for any state."
For starters, swings in the stock market can have an outsize effect on California's budget because the state relies so heavily on income taxes paid by the wealthy. In 2010, the richest 1% of Californians earned 21.3% of the income in the state and paid 40.9% of the state income taxes, according to the most recent government data available.
Gabriel Petek, an analyst at Standard & Poor's, noted that California has, over time, decreased more reliable sources of revenue, such as fees on motor vehicle registrations, while increasing less dependable ones, such as income taxes.
Revamping the tax base is politically treacherous. Voters approved strict limits on property taxes in 1978 with Proposition 13, which has since been considered the third rail in California politics.
"If I was dictator of the state, I would look at it," said Kim Rueben at the nonpartisan Tax Policy Center in Washington. "I'm not sure it will ever be looked at."
The responsibility for handling state finances now is expected to fall completely to Democrats, who are poised to gain a supermajority in each house of the Legislature. Republicans would no longer be able to block tax increases, which require a two-thirds vote.
Senate President Pro Tem Darrell Steinberg (D-Sacramento) said in an interview Friday that changes in the tax system can bring "political peril" and are not high on his agenda.
California could also face budget gaps when Proposition 30's tax hikes expire. Administration officials are banking on improvements in the economy to make up for the loss of extra tax revenue then.
Some Republicans fear Democrats will increase spending so much that they'll try to make the tax hikes permanent.
"They won't be able to help themselves from continuing to expand the growth of government," said Sen. Ted Gaines (R-Roseville).
And $34.1 billion in debt has accumulated over the last decade as the state has deferred payments to schools, local governments, pension plans and other areas. Ana Matosantos, the governor's finance director, said the administration has a plan in place to pay down most of that "wall of debt" by 2016.
California also has $80 billion in general obligation bonds outstanding, requiring the state to spend nearly 9% of its general fund annually to cover the cost of that borrowing.
"It means you're spending several billion dollars for debt service that isn't available for schools or healthcare," Lockyer said.
Administration officials counted on saving $3.1 billion in the current fiscal year with the dissolution of redevelopment agencies, but so far those savings have fallen far behind expectations. The nonpartisan Legislative Analyst's Office said the state could end up almost $1 billion short.
Finally, tax revenue has failed to match projections. The administration's most recent report showed it falling 2.1% below expectations in the current fiscal year, a $379-million drop.
Marilyn Cohen, founder of Envision Capital Management in Beverly Hills, worries that Sacramento will face the same problems year after year.
"I have no confidence," she said, "that this state knows how to create a budget and hit their budgetary goals."