Beloved Banana Republic of California

The horse-trading sessions in Greece brokered by President Karolos Papoulias will most likely lead to new elections, and the inevitable: Greece’s exit from the Eurozone. The uncertain consequences for Greece and the rest of Europe will confound jittery financial markets. And while all eyes are fixed on Greece, a tiny economy on the worldwide scale, a much larger economy is heading deeper into fiscal disaster: California.

California has everything: stunning mountains and deserts, a breath-taking coast, delicious seasonal fruit and veggies, gourmet cheeses, a large variety of seafood, and grass-fed beef—well, and a mad cow, too. It’s the place where Facebook found the fertile soil to thrive, where Google and Apple and thousands of other companies made investors rich or went bust and took investors down with them. In other words, California is a great place to be. Or rather, it would be if it weren’t governed like a banana republic: Governor Jerry Brown, who is trying to do the right thing, just released his May revisions for the 2012-13 budget, the by now customary shocker that doesn’t shock anymore. In January, he’d estimated the shortfall to be $9.2 billion. Today, the hole has widened to $15.7 billion.

It kicks off the annual farce that elected officials perform for us to get around California’s balanced-budget requirement: “tough” negotiations interspersed with public posturing and non-public lobbying that end in a “balanced” budget—though revenue estimates are blue-sky numbers, and many of the cuts are either smoke and mirrors, or if they’re real, they’ll be stopped through court proceedings or derailed in other ways.

Nevertheless, expenditures are down for the first ten months of fiscal 2012 through April, just not as much as hoped for: State Operations outlays dropped by 8% to $20.8 billion and Local Assistance outlays inched down by a fraction to $59.5 billion. Combined, expenditures so far this fiscal year dropped 6.5% to $80.2 billion. Under Governor Brown, the state workforce has shrunk by 30,000 positions, though pay raises saw to it that salary expenditures rose. But that’s about to change—because the Democratic Governor, best buddy to the unions, has suddenly embarked on a stunning strategy.

Disappointing as the less than hoped-for expense reductions are, they’re the good news. The bad news is the steep drop-off in revenues, a sign of the shaky California economy, despite all the rhetoric to the contrary: For the first ten months of the current fiscal year, General Fund revenues dropped a chilling 10.7% to $65.6 billion, while Special Funds revenue was up 5.3%, for a combined decline of 6.5%—a deficit that was filled with $10.9 billion in “Temporary Loans.” To heck with the balanced-budget requirement.

Based on these numbers, Governor Brown today issued his revised budget for the fiscal years starting July 1. And it’s breath-taking in its exuberant assumptions:

  • The US economy will grow between 3% and 4% by late 2013.
  • By 2015, all of the US jobs lost during the Great Recession will have been recreated.
  • The California economy will create nearly half a million jobs by 2013. Construction, to decline in 2012, will suddenly jump by 6% in 2013.

As a result of these and other miracles, the Long-Term Revenue Forecast of the three largest sources—personal income tax, sales and use tax, and corporation tax—which together make up about 93% of all revenues of the General Fund, according to the May Revisions, will summersault through the economic hoops facing California, and in doing so, they will leap from $80.1 billion to $107.7 billion by June 2016. In four short years, a jump of 34.5%! An annual rate of 7.7%. But, but….

There are reasons, namely the unassailable logic that “The total revenue generated by these three sources has grown at an average annual rate of 5% since 1987.”

And more reasons: tax increases and the “potential behavioral impact of federal tax law changes.” The budget assumes that the Bush tax cuts, extended through 2012, will actually be allowed to expire. Projections also include a surtax of 3.8% on specified unearned income that will go into effect on January 1, 2013. And with this taxpayer nightmare blowing across the land like a thunderstorm in Texas, the budget assumes that people will seek shelter by accelerating their 2013 capital gains, dividends, and some wages to 2012, causing an astonishing deus-ex-machina revenue spike of 11.6% in 2012-13. Yet, the May Revisions forecast a $15.7 billion deficit! Oh my. In 2013-14, revenues are expected to increase “only” by 3.1%, followed by another 10.4% spike….

And all this, while revenues in the current fiscal year, ending June 30, are forecast to actually decline by 6.9%!

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