California Budget Resolution puts Band-Aid on Failing Dike

After months of political wrangling between Democrats, Republicans, and the governor, California Approves Budget, Sends Bills to Governor.

California Governor Arnold Schwarzenegger said he supports the plan the Legislature approved today to erase a $26 billion deficit that pushed the most-populous U.S. state to the brink of insolvency.

The Senate and Assembly passed the package of more than two-dozen bills though a marathon 18-hour session. Schwarzenegger told reporters afterwards that he will sign the budget reduction plan within days after using his line-item veto authority to trim spending and bolster state reserves.

The package cuts spending by $15 billion, including $6 billion from schools and community colleges, $3 billion from universities and $1.2 billion from prisons. It also raises $4 billion, in part by accelerating personal and corporate income- tax withholding and increasing the amount withheld by 10 percent.

The passage will allow the state to use $2 billion of local property taxes meant for cities and other local jurisdictions and some $1.7 billion earmarked for redevelopment agencies.

The deficit plan also shifts $1.5 billion between accounts and moves the last payday for workers this fiscal year to the next 12-month period.

Hollingsworth, the Republican leader, said he hopes that lawmakers don’t have to redraw the budget yet again should the state’s revenue keep falling.

Budget Incorporates Fiscally Unsound, Possibly Illegal Budget Gimmicks

For starters, the much ballyhooed budged is not even balanced. Borrowing money from local governments is fiscally unsound and possibly illegal.

Please consider California Cities Knock State Budget, Wary of Bonds.

California local governments criticized the budget deal struck last night and expressed doubts about plans to tap $2 billion of their property taxes to close the $26 billion state deficit.

McKenzie and Paul McIntosh, the executive director of the California State Association of Counties, said localities may file a lawsuit challenging the use of their gasoline tax and redevelopment funds, which they said violates the state constitution.

“They don’t want to cut spending and they don’t want to raise taxes,” said McKenzie. “They find it’s easier to steal the money.”

The Los Angeles County supervisors voted unanimously today to sue the state if $400 million of funds it expected are withheld, the Associated Press reported.

Numerous Unsolved Structural Defects

California has numerous unsolved structural defects that are going to come back time and time again to haunt its citizens.

“We had a deficit,” said Assembly speaker Karen Bass, a Los Angeles Democrat. “We fixed the problem. The IOUs should stop soon.” California Treasurer Bill Lockyer said the new budget plan addresses the state’s structural deficit.

Speaker Karen Bass and Treasurer Bill Lockyer are sadly mistaken, assuming they even believe the nonsense they are spouting. This bill solves nothing. Not a single structural problem was addressed.

Ongoing Structural Defects

• An ever increasing demand for free services by an influx of illegal aliens
• Too many free social programs in general
  
• Massive underfunding of pension plans especially CALPers
• An untenable pension system in general based on defined benefits on too few years of service
• Structurally unfair property tax system
• Union contracts the state cannot afford
• A bloated prison system

Schwarzenegger Proposes Two Tier Pension System

On June 30, Schwarzenegger calls for two-tier state pension system.

California public employee unions already reeling from pay cuts have been dealt a new blow by Gov. Arnold Schwarzenegger – a push to lower pension and retiree health care benefits for state workers hired after today.

Schwarzenegger's call for creation of a two-tier system of retiree benefits was part of a package of proposals submitted to Democratic leaders Saturday in tense negotiations over the state's $24.3 billion shortfall.

The plan would not affect existing state employees.

Specifically, Schwarzenegger's retiree proposals for future state workers would:

• Alter the pension formula to ensure lower benefits or longer public service. For example, most state workers who are not public safety employees now may retire at age 55 with a pension totaling 2 percent of their salary multiplied by number of years worked. The new formula would pay that benefit at age 60.
• Compute pensions for peace officers, firefighters and highway patrol officers based on the highest three years of compensation earned, rather than the highest single year.
• Provide lifetime health care benefits only for retirees who have worked 25 years. Currently, the state pays 50 percent of retiree health insurance costs for employees with 10 years of service. The percentage rises 5 percent annually, to 100 percent for 20-year employees.
• Lower the state's contribution for retiree health care benefits from 100 percent of the average HMO premium to an amount that matches the contribution for active state employees – generally 85 percent of the insurance premium.

Those are modest proposals that do not come close to solving the structural problems I mentioned above. However, they would be a step in the right direction. Unfortunately, the California legislature failed to address, or even discuss Schwarzenegger's proposals. It is equally unfortunate that Schwarzenegger would not stick to his guns and force such a discussion.

Sadly, but not unexpectedly, the end result of months of political wrangling is a California budget bill that fails to address or even consider numerous structural defects. This is akin to putting a Band-Aid on a failing dike, hoping the problems go away on their own accord, something that will never happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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