California Budget Impasse Examined
California has until July 1 to come up with solutions to fix its $24 billion budget deficit. Joe Mathews, a former reporter for the Los Angeles Times and now a senior fellow with the New America Foundation, offers his insight. Joe Mathews, senior fellow with the New America Foundation, offers his insight.
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MICHELE NORRIS, host:
And for more now on the budget problems in California, we turn to Joe Matthews. He's a former reporter for the Los Angeles Times. He's now a senior fellow with the New America Foundation. That's a nonpartisan public policy institute. Mr. Matthews, welcome to the program.
Mr. JOE MATTHEWS (Senior Fellow, New America Foundation): Great to be with you.
NORRIS: Now, it's hard to find a state right now that's not swimming in red ink, yet why is California in particularly bad shape?
Mr. MATTHEWS: In a nutshell, California has institutionalized in its constitution the worst and most irresponsible impulses of both liberal and conservative governance - low taxes and sort of autopilot spending. And we have a very inflexible initiative process of a constitution that it's easy to add things to, but hard to take things away from.
And the result is we've sort of institutionalized a structural budget deficit that existed before the economic collapse. The economic collapse has just made it much worse.
NORRIS: And the initiative that limits property taxes probably compounds this problem.
Mr. MATTHEWS: It's a part of the problem, but while it's often described as, you know, a huge part of the problem, it's not - it's just one of many similar measures that have helped create this larger problem.
NORRIS: Now, California is one of several states that are trying to make the case for a federal bailout right now. Top officials in Sacramento and some of the mayors have been pressing the White House to save the state, saying California is too big to fail. Now, that's an argument that had mixed results for the auto industry - what about the Golden State?
Mr. MATTHEWS: I think it's an argument that inevitably is going to win. You know, when the White House says, well, we're not going to do this now, I think there's wiggle room in that - we have no plans to do this. Eventually, when the state starts to run out of cash in late July, we may be able to forestall that for some period of time, but eventually we're going to need help.
I don't think it's actually quite right to call that a bailout. Essentially all we need is essentially a letter of credit from the federal government guaranteeing our loans.
But I think there's an opportunity in federal intervention and federal assistance for the state. We are incapable, I think as a state, of getting the two-thirds in our legislature that's required for changes in the budget or for tax increases. So, ultimately, we won't be able to solve this problem.
The advantage of federal assistance is that there would strings attached. And I think those strings would involve some sort of budget plan for California -forcing us to adopt one - to have the cash to - using the leverage of this cash shortage to force us to adopt a real budget plan that we stick to with penalties. And I think it's actually an opportunity, and given our inability to govern ourselves, I think it's sort of inevitable that the Feds will have to step in.
NORRIS: After that point, though, this notion that California might be too big to fail, the people making that argument, do they have a point? Are the budget problems in California so large? Is the economy so large there that it could tank the entire national economy?
Mr. MATHEWS: I mean, the state government, all the budget is only about $130 billion annually. We have a GDP of three trillion. I don't think it's the economy that's a threat. The threat that California poses and the state government poses is to other governments in the country. Other states and I think, particularly, other local governments, cities and counties that are in a bit of trouble because of the economic climate.
If we were to - if there were to be some sort of meltdown or, you know, goodness knows, default, which I think is almost impossible, but if things get very bad, we could make it harder for other cities and counties to borrow all over the country and thus make, you know, things very bad all across the country. It could be kind of a financial contagion in the bond markets.
NORRIS: Almost out of time, but just a multiple-choice question. We heard about the possibility of a financial meltdown - a real meltdown - is that hyperbole or real possibility - which one?
Mr. MATHEWS: It's hyperbole with an audience of both trained to create interest in tax increases and is a message to the Feds that we need some help.
NORRIS: Thank you. Thank you so much. That's Joe Mathews. He's with the New America Foundation.
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Schwarzenegger Sticks To 'No New Tax' Promise
Gov. Arnold Schwarzenegger speaks on the status of California's budget earlier this month.
Gov. Arnold Schwarzenegger speaks on the status of California's budget earlier this month.
Where The Ax May Fall
California faces a $24.3 billion budget shortfall for the fiscal year beginning July 1. To address the deficits, Gov. Arnold Schwarzenegger has proposed deep cuts to many areas of the budget for the coming year.
Some of the most controversial proposals include:
- Eliminate CalWORKs, California's welfare-to-work program, affecting a caseload of 1.4 million individuals. Estimated savings: $1.4 billion
- Eliminate the Healthy Families program, which provides health care to nearly 1 million low-income children. Estimated savings: $305 million
- Eliminate general fund support for state parks, potentially closing more than 200. Estimated savings: $70 million
- Commute the sentences of nonviolent offenders who were not convicted of sex crimes to release them one year early. Estimated savings: $121 million. Slash funding for rehabilitation and education programs for inmates. Estimated savings: $789 million
- Cut $750 million from the budgets of the University of California and California State University systems.
(Sources: H.D. Palmer, Deputy Director for External Affairs, California Department of Finance, San Francisco Chronicle, AP)
Falling Revenues
The faltering economy has wreaked havoc on California's delicate budget balancing act. The latest figures from the California State Controller's office show a decline in all three of the state's largest revenue streams:
- Personal income taxes were down $10.2 billion, or 20 percent.
- Retail sales taxes were down $2.8 billion, or almost 12 percent.
- Corporate taxes were down $531 million, or 6.4 percent.
In California, there's still no political deal in sight in the struggle to close the state's massive budget deficit.
The clock is ticking. The state's controller said last week that California is less than 50 days away from, in his words, a government "meltdown."
Even so, Gov. Arnold Schwarzenegger remains adamant that his approach — major spending cuts and no new taxes — is the only way to go.
'The Will' To Cut The Fat
Four weeks ago, California voters rejected a package of ballot measures that might have minimized the state's budget problems. But in an interview Monday at the state Capitol in Sacramento, Schwarzenegger made it clear that he thinks the Legislature is dragging its feet on his $24 billion proposal to erase the deficit.
"They know what needs to be done. Those are all very smart people," says Schwarzenegger. "And that's why I said in my speech — my joint address to them — that it has to do with the will. Do they have the will? They know exactly where the problem is; they know where the fat is in government; they know what is bloated; they know where the fraud is; they know where the abuse is. They know all those things."
But few believe there's enough waste to solve California's massive problem. Even the governor's own budget director said recently that Schwarzenegger's plan to cut some $19 billion in spending is scraping the bottom of the barrel.
Democrats in the California Legislature want only about $13 billion in cuts and have rejected some of Schwarzenegger's most drastic measures. That includes his plan to abolish both welfare assistance and health care for children from poor families.
Still, Schwarzenegger says if Democrats would only re-examine some of the spending demanded by labor unions and others, they could save programs like welfare (known as CalWORKs), state parks or financial aid for college students.
'No More Taxes'
What Schwarzenegger says he will not do to solve California's financial meltdown is raise taxes. Democrats have now proposed a tax on oil drilled in California and a $15 annual tax on vehicles, earmarked to fund state parks.
Last year, both a handful of legislative Republicans and the Republican governor agreed to about $12 billion in new taxes. But Schwarzenegger says that was a one-time deal.
"No more taxes, because I said to them, 'Look, I go there this time. But everyone has to understand: We'll never go back again,' " Schwarzenegger says.
And time for debate is running out. California is on the verge of being $1 billion short of cash next month and billions more by the fall. Issuing IOUs is a very real possibility.
The plan is a short-term loan from Wall Street, with the debt backed by the federal government. But Tuesday morning, White House press secretary Robert Gibbs said the Obama administration has no plans to step in. That means Schwarzenegger — who has staked his reputation on fiscal common sense — will apparently have to do the heavy lifting himself.
John Myers reports for member station KQED.
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