UPDATED: Another California Fiscal Year Begins With No Budget

Another July 1 has come and California does not have a budget.  That’s been the case since I moved here in the mid 1990s; in fact that has been the norm for longer than that. 

This time, though, the impasse is particularly bad. 

California’s historic fiscal crisis became even more difficult to resolve today, after the state Senate failed to pass three bills that would have averted an immediate cash crunch.

The bills – which would have made immediate cuts in schools, saved the state additional cash by deferring certain payments to schools and made technical changes in how the state shifts funds from redevelopment agencies to schools – were unable to gain the required two-thirds majority support in the Senate by the midnight deadline. The failure of the bills could push the deficit to more than $27 billion.

Legislators are trying to solve a $24.3 billion deficit, which just got worse by another $3 billion because they missed the deadline.  Now the state will begin to issue IOUs to pay its bills probably as early as tomorrow.

Democratic legislators are trying to deal with that piecemeal, but Governor Schwarzenegger insists that the legislature deal with the entire deficit at once, something that seems to be an impossible task.  Schwarzenegger is also insisting that there be no new taxes on anything and promises to veto anything that passes that contains new taxes.  He is insisting that the legislature not kick the can down the road.  Personally, I think Schwarzenegger is being needlessly hardheaded on this.  There is no pragmatism in California at the moment, just people in entrenched positions, launching occasional forays against the other side’s emplaced machine gun nests.

The legislature is hindered by a requirement that budgets pass with a two-thirds majority, a provision that was enshrined in the state constitution when Proposition 13 passed in 1978.  That measure is still popular in California, largely because people vote (understandably) with their own pocketbooks in mind.  That, and all the mandated spending passed by California’s overly robust referendum system, has hog-tied the legislature.  It is a genuine struggle each year to get the required majority and to keep the budget within constitutional limits.  Because you know that if they don’t, someone will sue.

There is no help from anywhere.  The federal government doesn’t really want to help, although if California makes all the budget cuts it needs to make, it will deepen an already bad recession in California and in the rest of the country.

States across the nation are suffering the effects of lost tax revenue in the worst economic downturn since the Great Depression. California’s woes are similar and different in kind, played out on a grand scale in a state that boasts the world’s eighth largest economy and a Hollywood star in the lead role. After voters rejected a slew of convoluted budget-balancing measures, the governor has proposed cuts to programs that would make California more like a struggling Third World state than 21st century America: welfare subsistence benefits would end, 1 million poor children would lose health care, college aid for the state’s best and brightest would be phased out, nonviolent prisoners would be released, hundreds of state parks would be shuttered, and thousands of teachers would lose their jobs.

[snip]

This week, however, the Obama Administration said it was not going to do anything to help California right now, believing that the state should try to get its budget mess in order first. There are good reasons for the Treasury not to rush to California’s aid. If it backstops Sacramento, rewarding the state’s bad behavior, it would set an example for other states to follow. A nightmare scenario: the Federal Government backs California’s loans, which leads to a downgrading of the Treasury’s credit rating and the unnerving of the global credit markets. Spooked, the Chinese government, which currently bankrolls a large portion of the U.S. deficit, decides to take its money elsewhere.

Stark news indeed.  California is in shambles, a far cry from Pat Brown era, when the state spent loads of money on freeways, aqueducts, schools, universities that were the best in the world.

So, how did the state get here?  I’ve alluded to that a little above.  Proposition 13 bears much of the blame.  It requires a two-thirds majority in the legislature to pass a budget or to raise taxes.  Then we have other propositions — like Proposition 98 that sets education spending levels — that mandate state spending but doesn’t say how the legislature has to pay for that mandated spending.  It’s a real mess (and I know I’ve over-simplified it).  California’s dream, as Harold Meyerson writes today, is decimated.

In Sacramento, they can hear the chimes at midnight. State legislators and Gov. Arnold Schwarzenegger have been told by State Controller John Chiang that he will be compelled to pay the state’s bills with IOUs starting tomorrow unless they come up with a way to close California’s mammoth $24 billion deficit.

[snip]

But California is a special case simply because it’s so big. Closing California’s budget gap entirely through cutbacks in programs, as Schwarzenegger and the Republicans in the legislature propose, will deepen not only the state’s recession but also the nation’s. Fully 1 in 4 of the nation’s underwater mortgages, for instance, are on California homes, and the effects of the governor’s proposed cuts — which UCLA’s Anderson School of Business estimates will cause 60,000 state employees to lose their jobs — will be to create a new wave of foreclosures and toxic assets on the banks’ books. California accounts for 12 percent of the nation’s gross domestic product and a disproportionate share of the federal government’s revenues (and for every dollar that Californians pay to the feds, they get just 80 cents back in services).

Right-wing ideologues see the crisis as an opportunity to shrink government regardless of the consequences. Schwarzenegger is proposing to end welfare, not just as we know it but altogether, and to throw 1 million children off the rolls of the state’s healthy families program. But the consequences of closing the deficit simply through cutbacks will be felt by more than the poor. Already reeling from $15 billion in cutbacks that the state put through in February, many school districts, including that of Los Angeles, have canceled summer school this year. Scholarships that enable students of modest means to attend California’s fabled university system have been slashed. Most of the state’s parks may have to be closed as well.

The terrible irony in decimating the public sector to save the state is that the California that was the epicenter of the postwar American dream was fundamentally a creation of government. Fighting a Pacific war during World War II compelled the federal government to spend billions on California industry and infrastructure, and the state was the leading beneficiary of Pentagon dollars during the Cold War. As Kevin Starr, California’s leading historian, points out in “Golden Dreams,” his brilliant new history of the state in the 1950s and early ’60s, fully 40 percent of all defense dollars for manufacturing and research in 1959 went to California, anchoring the state’s booming economy in a well-paid workforce that was either unionized or professionalized, and seeding an electronics and high-tech sector that was to blossom in the following decades. Building on that prosperity to create more prosperity, Earl Warren, Goodwin Knight and Pat Brown — two Republicans, one Democrat — invested state dollars in schools, universities, freeways and aqueducts that were the best in the world. The Golden State was never more golden.

Today, its governor seems determined to turn that gold to dross. On Monday, the Democrats in the legislature passed a budget that included cuts of $11 billion, levied a tax on oil companies and tobacco, and raised auto registration fees by $15 per car to keep the state parks from closing. Schwarzenegger reiterated his refusal to raise any taxes or fees and said he would veto the budget.

From a model for far-sighted investments in the future, California has become a state that uninvests in the present and has no vision at all for the future. Proposition 13, enacted by state voters in 1978, effectively blocked its cities and counties from funding their own endeavors, and the Republican minority in the legislature, abetted by Schwarzenegger, has made it all but impossible to invest in the kind of projects that Warren, Knight and Brown undertook. Today’s California visionaries are calling for a constitutional convention to rewrite the plainly dysfunctional rules by which the state governs itself. It is not only Californians but also America that has a stake in their success. A California that decimates itself during recessions drags the rest of the nation down with it.

I agree with the suggestion in the last paragraph of Meyerson’s piece.  It’s time for a constitutional convention in California.  The system of government we have now is not working.  When something doesn’t work for as long as California’s constitution hasn’t worked, it’s time to try something else.  Prop 13 needs to be repealed (as does Prop 8, for that matter).  The people need to stop mandating spending that sounds good but isn’t actually provided for, putting the legislature behind the 8-ball.  The referendum system needs to be completely overhauled.

California needs to dig out of this mess, and will probably require federal help to do it.  But it has to help itself in the long run and enact some sensible political system reforms so that this doesn’t happen again.

UPDATE: Governor Declares State of Emergency

Gov. Arnold Schwarzenegger declared a fiscal emergency today citing the Legislature’s inability to pass a comprehensive solution to solve the state’s $24.3 billion deficit.

The Republican governor called a legislative special session under Proposition 58, which requires lawmakers to adopt a plan to close the deficit within 45 days.

In addition, the governor signed an executive order forcing 220,000 state workers to take a third furlough day without pay beginning this month.

What good will that do?  The legislature can’t fulfill its constitutional requirements to pass a budget already.