California Chaos – Phase 2 – Another Day Older and Deeper in Debt

Diane Harkey Board of Equalization Member Diane Harkey Leave a Comment


This op-ed originally appeared in the Dana Point Times


The world did not end on June 30! We celebrated the 4th of July, summer is in full-swing and not much has changed with our state’s finances. Or has it? As of midnight, June 30, the end of the state’s fiscal year, we had failed to balance our “unbalanced budget” and reduce our “expenses” to meet the declining revenues. Recall the country western tune as we enter Phase 2.


Still “talking” the Governor and Legislature are grappling with a $24 billion+ and growing potential budget deficit. One could say things are status quo, we are still broke, and “revenues” continue their downward trend. When people are unemployed and/or have taken reductions in their salaries and bonuses, it is logical that Personal Income Taxes (PIT), our primary source of tax revenue, is down. So the reality is that however we manage to fill the cash shortfall now, we will need to reassess our situation in a few months again, and debt is accumulating. We must take action.


We in the State Assembly (R & D members almost unanimously) did agree to pass a few measures, one that would have saved us $3 billion immediately, and potential savings in future years. When facing a huge deficit and a decrease in revenues (taxes) we thought it was wise to vote “yes” to realigning our education funding, as we may legally do. No one wants to reduce education funding, but education received over $6 billion in federal stimulus dollars for the year ended June 30, 2009, so backfill to replace most of the reduction was available.


However, “all or nothing” won the day as the Governor and Senate held firm on resolving the entire budget issue. Their position is understandable, as we must agree to reduce in other areas and try to implement some reforms to soften the blow and encourage job creation. Unfortunately, now we may be asked to “suspend” the Proposition 98 guarantee, which is a tad more difficult politically and could be more expensive.


What is Prop 98? Proposition 98, the complex education initiative voters passed to protect education, is key in all budget decisions. First, it mandates that 40 percent of all General Fund revenues must be directed to education. There are three tests that apply to the funding, but simply stated the “guarantee” is set with the budget each year based on “projected revenues.” (The Legislature usually allocates more that the guarantee each year.) The guarantee may be adjusted at certain intervals when and if “actual revenues” fall below projections, such as what happened this year. We had until June 30 to realign the projected level to the actual revenue level.


Here’s the catch – Because we did not reduce the base in 2008-09, this year’s (2009-10) funding level begins at a higher base. Additionally, if we “suspend” the Proposition 98 guarantee, we will need to pay it back in future years. The extra funding also means that we may need to reduce spending in other categories such as public safety, health and human services, and college education by a larger amount, and/or borrow more just to balance the “unbalanced budget” we put in place for 18 months in February 2009.


Will there be a “push” to raise taxes? Fortunately, the Governor and finally “both sides of the aisle” seem to be unwilling to raise taxes, but fees may be another matter. Recall, two-thirds majority of the legislature raised taxes in February, and we are still taking in less dollars. That’s no way to balance a budget!


So, expect to be hearing and seeing protests, as well-funded special interest groups lament about budget cuts and the pain they will cause. There are no easy choices and revenue is down. We must reduce spending, just as you have had to do personally and in your cities and counties. The reduction number hovers around 15 percent+ of what we projected for 2008-09 and will grow the longer we delay making the necessary expense reductions. As long as we keep spending at previously projected levels, we will dig deeper and deeper into debt. And with IOUs being issued, that will ultimately need to be paid back with interest, the longer we delay the more it will cost you, the taxpayer.


The good news – things are looking up, even if the climb will be slow. The turn-around for California is beginning from what I am seeing reflected in housing and other markets. Gas prices may even remain level or decline this summer, and there is so much to do in sunny California. Beachside resorts, hotels and rentals offering great bargains, restaurants are discounting and picnics are on the rise. With so much to explore – enjoy your summer and stay tuned!



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