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Round One

As Brown Signs Democrats-Only Budget, Fight over California’s Finances Is Just Getting Started


Thursday, July 7, 2011

When Governor Jerry Brown took office in January, he vowed to craft a deal for a state budget that passed on time and was balanced without fiscal gimmicks.

Well, one out of two ain’t bad.

As Brown signed an $86-billion spending plan just hours before the new fiscal year began last week — $2,308 for each man, woman, and child in California — he ended a decade of prolonged and tiresome budget struggles that annually dragged on for months, forcing the state several times to issue IOUs and leaving schools and local governments uncertain about their own finances.

Capitol Letters

Actually meeting the budget deadline was an accomplishment in itself, made possible by last year’s voter approval of Proposition 25, which repealed a longtime requirement for a two-thirds budget-vote margin, empowering majority Democrats in the Legislature to do the job themselves.

As a political matter, however, the new budget came only after months of both partisan and internecine warfare and did not cure many complex and intractable problems still underpinning California’s troubled finances. These problems have given the state the nation’s lowest bond rating — and the corresponding highest interest rates for tens of billions of dollars of long-term debt.

Here is a look at some key elements of the new budget, and what they mean for the future.

Policy: The new budget represents about the same dollar amount the state spent a decade ago, when there were 3.5 million fewer people living in California. Starting last January with a $25-billion projected one-year deficit, Brown and legislative Democrats cut nearly $12 billion in spending; big losers included the poor, sick, elderly, and mentally ill, along with those who use state parks and students at UC and CSU campuses, who can expect yet another round of tuition increases.

Brown wanted to match big cuts with about $12 billion in taxes, to be collected by extending temporary higher rates on personal income, sales, and vehicles that were imposed in 2009 to balance the budget and due to expire this July 1. But Republican lawmakers refused to go along with the Democratic governor’s plan to let voters decide the issue, one of his key campaign promises, forcing him and his allies to find a no-tax solution.

The Democrats were helped considerably by California’s nascent economic recovery, which generated nearly $7 billion in unanticipated revenue during the first months of the year, reducing the estimated deficit considerably. To fix the rest of the shortfall, Democrats then “balanced” the budget by projecting another extra $4 billion in tax collections between now and January 1.

Republicans and other critics howled, with justification, that this was little more than fiscal sleight of hand of the type Brown had claimed he would avoid. To support their position, however, he and the Democrats specified $4 billion in extra cuts to be made in January, if tax collection estimates fall short.

While Republicans did a touchdown dance to celebrate their rejection of Brown’s bid for an election on higher taxes, it was largely a Pyrrhic victory because they failed in their effort to put before voters a set of proposed reforms — for pensions, regulations, and a spending cap — as part of a deal with the governor.

Process: The final budget deal came only after a brief but angry, Democrat-versus-Democrat clash between Brown and legislative leaders. While Prop. 25 gave Democrats the power to pass a budget with a simple majority vote, it also required that legislative paychecks be cut off unless a balanced budget was sent to the governor by June 15.

They did, in fact, pass a budget, but Brown promptly vetoed it, saying it was not balanced because it was filled with accounting gimmicks — like scoring more than $1 billion from hypothetical state property sales as income and raiding $1 billion from special funds earmarked by voters for other purposes. At that point, Controller John Chiang stopped paying lawmakers, enraging the Legislature and requiring Brown to quell a brewing revolt.

Politics: Although Brown insists his one-year budget is balanced — despite the phantom $4 billion — he also emphasizes the state still has a long-term “structural deficit” between its financial commitments and its tax base. For that reason, he still intends to put a tax-hike measure before voters next year, when it is expected to be just one front in a 2012 ballot-initiative war over competing partisan and special-interest measures on state finances.

“It really does put our fiscal house in much better shape,” Brown said, in signing the budget, “but we’re not finished.”

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