Happy Days Return to California Budget

by John M. Curtis
(310) 204-8700

Copyright Jan. 12, 2012
All Rights Reserved.                                         

           After years of deficits, 74-year-old California Gov. Jerry Brown announced today that the state budget now has $851 million surplus, thanks in part to Prop. 30 raising tax revenue on the wealthy to help fund public schools.  Only a few short years ago the state ran a $26 billion budget deficit with the future looking bleak.  Known as state heavily dependent of income taxes, the 2007-08 recession drove California’s unemployment rate up to 12.4%, emptying state tax coffers creating whopping budget deficits.  While $851 million is a small fraction of the state’s $97.7 billion spending plan, it still reflects good news for public education, including the U.C. campuses and Cal States.   As the unemployment rate dropped to 10.2%, income tax revenues filled the State Treasury, leaving welcomed budget surplus now restoring vital funding the state’s beleaguered education and health care programs.

             Brown, a former two-term governor [1975-1983] ran for office in 2010 against former Ebay CEO Meg Whitman, promising to turn things around.  Now that the state’s economy has improved, Brown warned lawmakers against a spending binge.  “I am determined to avoid a fiscal mess that the last few governors had to deal with,” said Brown, promising to be extra thrifty with the new tax revenues.  Brown plans to let spending rise 5% or $4.7 billion from the current 2013-14 budget, handing public schools and state universities $4 billion, health care $1.2 billion, while dropping payments to local governments by $2.1 billion.  Local governments, some facing insolvency, have had cup-in-hand, begging the state for more money.  With the nation’s unemployment rate at 7.8%, California still remains 2.4% above the national average.  Any further drop in unemployment would add millions more to the surplus.

             Since the White House and Congress settled the “fiscal cliff” Jan.1, Wall Street has been on a positive upward trajectory.  More good times on Wall Street gives publicly traded companies the capital needed to keep hiring new employees.  With all the talk on Capitol Hill about federal budget deficits, another one percent drop in the unemployment rate could also eliminate the lion’s share of the red ink.  California’s heavy dependence on the state income tax causes the state’s deficits to evaporate quickly.  It won’t take long for S&P, Moody’s or Fitch to upgrade California’s current A-minus credit rating.  Like an individual’s FICO score, when the state’s credit rating improves, borrowing costs go down, further adding to the state’s surpluses.  Having a surplus allows the state to fund education, health care and public works projects, making the state more attractive to out-of-state companies.

             Since Brown took office Jan. 2, 2011, the unemployment picture has steadily improved, eliminating the $9 billion deficit the day he took office.  Three years ago S&P downgraded the state’s credit rating when the budget deficit climbed to $25 billion.  California’s State Department of Finance expects the current 10.2% unemployment rate to drop to 9.6% in 2012 and to 8.7% in 2014, generating even bigger surpluses.  At some point, Brown and the Democratic legislature will need to consider rolling back tax hikes that stymie business and make the state one of the costliest in the nation.  “It’s very hard to say no.  That’s going to be my job,” said Brown, resisting the legislature’s attempts to increase spending.  If the Dept. of Finance’s projections are true, the state treasury will have plenty of cash to restore public school funding that’s seem mass teacher layoffs over the last three years.

             Now that the state’s back in the black, it’s time for the governor and legislature to look at how to make the state more business-friendly.  Raising taxes helps pay for essential government programs but it shouldn’t push in-state businesses out of state companies seeking to relocate.  With California’s Democratic legislature holding a  supermajority, Republicans now have difficulty opposing well-intentioned but budget-busting tax hikes.  Brown has the right instincts of placing tax surpluses into a rainy day fund before the legislature finds more ways of spending taxpayers’ money.  If the legislature helps fuel more job creation, tax revenues will continue to pour into the State Treasury.  It’s up to the White House and its new Treasury Secretary-nominee Jack Lew to figure out more ways to keep Wall Street rolling, generate more jobs and add to tax dollars to the U.S. Treasury.

             Brown’s good news about rising budget surpluses throws doomsayers for a loop.  With everyone expect more deficits, the California budget has turned around with improvements in the State’s unemployment rate.  As the State continues to add jobs, surpluses should grow to the point that Brown and the Democratic legislature should consider cutting taxes.   Brown has no problem lecturing on frugality, expecting the Democratic legislature to go hog wild with higher than expected tax revenues.  Like former President Bill Clinton back in the late ‘90s, Brown now enjoys the good fortune of rising stock markets, improved employment and more tax revenue.  While there’s nothing that detracts from his good stewardship, it’s sometimes better to be lucky than good.  If present economic trends continue, the State should be well positioned to lead the nation to lasting economic recovery.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.