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California Budget Deal: Cuts, Gimmicks and Can-Kicking

Leonard Gilroy
July 21, 2009, 1:35pm

California Governor Arnold Schwarzenegger and legislative leaders reportedly hammered out a deal to close the state's $26 billion budget deficit, and though details remain somewhat murky at this point, the early indications are that it will be a mix of real budget cuts, fiscal slight-of-hand and a borrowing scheme sure to infuriate local governments. The New York Times reports:

California lawmakers, their state broke and its credit rating shot, finally sealed the deal with the governor Monday night on a plan to close a $26 billion budget gap.

The plan, which is certain to be viewed with trepidation among legislatures across the country also facing huge budget gaps, distributes pain through nearly every aspect of government services. While the Legislature pushed back on Gov. Arnold Schwarzenegger’s proposal to eliminate health care programs for children and the state’s generous welfare program, both took large cuts. So did public education, universities and local governments.

I should interject here that as silly as it sounds, I would suspect that there are indeed state legislators and governors now biting their nails in anticipation of the budget cut battles they'll face because California—still in many ways a state policy bellwether, despite its epic political dysfunction and appalling fiscal management—says it's OK to cut spending for policitally-favored social services. Taxpayer advocates nationwide now have a handy rhetorical tool that's hard to argue—"...if even California can cut spending, then [State X] certainly should be able to..." Continuing on:

All told, the deal contains $15.6 billion in cuts, about $2.1 billion in borrowing, $3.9 billion in new revenues and about $2.7 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Mr. Schwarzenegger had claimed he would not brook.

Under the new budget, which runs through the 2010 fiscal year, localities will basically serve as unwilling lending agents to the state. It will raid their coffers and repay them over time as the state’s fiscal situation improves.

The Los Angeles Times adds:

Their agreement, which could go before the full Legislature within days, does not include any broad-based tax increases, relying instead on deep cuts in government services, borrowing and accounting maneuvers to wipe out the deficit.

The plan has not been formally released. But as outlined by lawmakers and their staffs, the proposal would reshape some aspects of government in California, significantly scaling back many services that have been offered to residents -- particularly the elderly and the poor -- for years.

Tens of thousands of seniors and children would lose access to healthcare, local governments would sacrifice several billion dollars in state assistance this year and thousands of convicted criminals could serve less time in state prison. Welfare checks would go to fewer residents, state workers would be forced to continue to take unpaid days off and new drilling for oil would be permitted off the Santa Barbara coast. [...]

The governor and lawmakers assumed the privatization of the State Compensation Insurance Fund would generate $1 billion, for example, but few, if any, experts believe such a sale is possible this year. And the plan would save $1.2 billion by waiting until a new fiscal year begins before sending out one scheduled batch of paychecks to state workers, a clear accounting scheme.

Based on these reports, I'd like to offer a few early thoughts on developments thus far:

More to come as this develops...

» Reason's California-Related Research and Commentary
» Reason's Privatization Research and Commentary


Leonard Gilroy is Director of Government Reform


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