Sunday, March 08, 2009

California: The Fools-Gold State.

California's government irresponsibly spent too much money during the housing and stock market bubbles. This year, when the economy tanked, California's tax revenues fell but government spending didn't. Instead of passing pro-growth measures to revive the economy and making adjustments to this year's spending in order to close the relatively small deficit this year, government officials ginned up a crisis. They inflated the size of the deficit by combining the real deficit from this year with the projected deficit for next year.

The state controller stopped paying California's bills, the governor declared an emergency, and legislators were locked in the capitol building until they passed a budget. The governor conspired with the Democratic majorities in the legislature to push a budget loaded with tax increases, a few token spending cuts, and not much else. Three Republican legislators in each chamber gave the votes necessary to secure passage. Declaring victory, the governor and legislative leaders claimed this budget would solve California's fiscal crisis through the 2010 fiscal year. The new budget would spare Californians from the legislature's annual budget fiasco this summer.

Not so fast. It doesn't take a genius to realize that increasing taxes in a recession will not increase revenues much and will slow the economy's recovery. The solution to California's budget crisis will involve real and significant cuts in state spending. California's politicians won't do that because real spending cuts will mean laying off state workers and taking on the most powerful political force in this state: the government employees unions.

Nice try, Sacramento, but no cigar. The day of reckoning has been delayed not avoided.

The state controller just issued a press release announcing that California will begin paying its bills again and refunding income tax payments. Buried at the end of the press release is this ominous warning.
"'While progress was made, this recent budget deal does not put California’s fiscal house in order. Revenue erosion of nearly $900 million in the month of February alone, coupled with numerous indicators that California’s economy has not yet turned the corner, demands vigilance over the State finances during the months ahead,' [Controller John] Chiang said. 'While current-year cash flow problems appear to be manageable, early projections indicate the recently-enacted budget did little to guarantee there would be sufficient cash solutions to meet the State’s payment obligations for the coming fiscal year. If the Governor and lawmakers do not take action before July, we could be accelerating towards the very cliff that we just stopped short of falling over.'" (PDF here.)
What kind of action do you think he has in mind? California's taxpayers had better hold on to their wallets.


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