California’s Search For The Missing Moolah

Optimism has always been the hallmark of California—especially when it comes to tax-revenue projections. Now a new report from the independent Legislative Analyst’s Office (LAO) laments that Governor Jerry Brown’s budget is another extravaganza of that very California optimism, particularly its projections of how much moolah can be extracted from wealthy residents—an ever more recalcitrant bunch—via the personal income tax, and in particular, via the capital gains tax. Which the Governor expects to skyrocket, magically.

It seems the Governor and legislators would have learned something, after passing budget after budget with over-optimistic revenue projections. Even the current budget for fiscal 2012, which ends in June, relied on trumped-up hopes for an “unallocated revenue increase”—which means that no one had a clue where it was supposed to come from—of $4 billion. Even back then, it was seen as a sham. But that’s what it took to “balance” the budget. So now the state is $3.3 billion in the hole. Out-of-money-date is March 8. Solutions: shuffle money between different accounts, make a few cosmetic spending cuts, and Wall Street lenders will take care of the rest, as they have almost always done. Almost always, because twice in California’s illustrious financial history they didn’t, including in 2008, when California escaped default only by issuing IOUs.

This time, the LAO reported that the budget conveniently overestimated tax revenues by $6.5 billion for fiscal 2012 and 2013. But even the LAO has been infected with optimism. It expects personal income-tax receipts for 2012 to come in at $51.4 billion, and grow to $55.7 billion in 2013. A growth of 8.4%!

Do they expect California’s economy to suddenly reach bubble levels? OK, income and sales-tax increases may show up on the ballot this year. And then there is the Facebook IPO, the most prayed-for event in recent times. It will solve all budget problems for years to come, like the Google IPO—which transpired three years before the IOUs were issued.

But these projections were nevertheless more restrained than the Governor’s, which assumed the now pooh-poohed $54.2 billion in tax revenues for 2012, and a whopping $59.5 billion in 2013—a one-year growth rate of 9.8%. The weed in Mendocino County is supposedly the best in world, but by golly, did they smoke all of it at once?

So the Governor’s office pleaded for more time. Tax receipts in April would shed more light on reality, it said. In the background: Stockton, a city of 290,000 people in the Central Valley. A bedroom community of San Francisco during the housing bubble, it has since been named by Forbes America’s “Most Miserable City,” twice. And today, it defaulted on its bonds and took the first steps to declaring bankruptcy.

And yet, all of this pales compared to what’s upstream: $62.1 billion in accrued liabilities for healthcare and dental benefits for public retirees (audit report). These benefits have been promised to them, but they’re entirely unfunded—unlike the retirement system, which is at least partially funded, though it’s hounded by shortfalls. And obligations grew by $2.2 billion last year, with no end in sight—a billowing mushroom cloud.

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