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8Aug/090

California’s 2009-2010 Budget

As of July 1, 2009, the California state legislature was late in passing a 2009-2010 fiscal year budget.  This is not the first time the legislature has been late in passing a budget.  As a result of their inability to get a budget passed by June 30, the state’s budget deficit rose from $24 billion to $26.3 billion.  The problem had gotten so bad that the state had to resort to issuing billions of dollars in IOU’s to many state contractors in order to stave off a cash crisis.  Finally, on July 25, almost a month late, the state legislature managed to pass a new budget.  Unfortunately, the budget they passed still fell $1.1 short of being balanced.

A little over a week ago, Governor Arnold Schwarzenegger signed the 27-bill budget-balancing package into law.  Before doing so, Schwarzenegger used the line-item veto to make an additional $489 million in spending cuts.  The Governor had to do so because the budget that the legislature gave to him left the state with a depleted rainy day fund.  Schwarzenegger rightfully felt the need to replenish that fund to ensure the state’s ability to respond to emergencies.  At the end of the day, California has an $85 billion budget for 2009-2010.

In order to balance the budget, about $15.5 billion came by way of cuts.  Education took the biggest hit, with $6 billion cut from K-12 education and $2.8 billion taken from higher education.  MediCal services were cut by $1.3 billion, the corrections department faces an “unallocated” $1.2 billion in cuts, and three major welfare programs (CalWORKs’ Welfare-to-Work program, In-Home Supportive Services, and the Children's Health Insurance Program) face $878 million in cuts.

A total of $3.4 billion dollars was created through one-time raids on local government funding.  A proposal to allow additional oil drilling off the Santa Barbara coast in exchange for $100 million this year (and $1.8 billion in the next decade or so) was defeated in the Assembly.

This is where things start getting tricky with the budget.  Another $1.7 billion was saved by speeding up tax withholdings on individuals and businesses.  And by deferring state employee paychecks by one day (from June 30 to July 1, 2010), the state saved $1.2 billion in the 2009-2010 budget.

There is a problem here.  Significant amounts of money have been created through accounting gimmicks.  The process of smoke and mirrors used by the California state legislature is not sustainable.  Speeding up tax withholdings and deferring paychecks only pushed the problem off into the next fiscal year.  Money taken from local governments will have to be repaid.  Eventually, reality will catch up to us, and we will be facing a problem that will be even more difficult to deal with.

Of course, this is already assuming that the tax revenue projections used in the budget are even remotely close to being accurate.  There is a very real possibility that the rosy estimates used in the budget could overestimate true revenues by $10 billion or more.  This is going to leave us with an almost impossible situation to deal with both next year and in upcoming years.

Realistically, the woeful inadequacy of the budget recently signed into law will become glaringly obvious far sooner than next summer.  I predict that by late fall or early winter, legislators will once again realize how inept they have been at their jobs and will begin taking measures to attempt to stop the bleeding.  For everyone’s sake, let’s hope they are finally able to take real actions that can lead to a stable California going forward.

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