California's Budget Blues Get Deeper


In a little more than month, the state of California lost over $6 billion in ground on its latest budget. With the deficit now thought to be $25.4 billion, Gov. Schwarzenegger calls a special session of the legislature to start on December 6.

Some Assembly Democrats think this is a political gimmick--what's changed in the 5 weeks since they last approved a budget that could make things better?--and their biggest priority is something that would make the deficit bigger, not smaller--reversing a Schwarzenegger line item veto of $256 million worth of day care.

Some of the details of the bad budget news, from the L.A. Times:

California faces a $25.4-billion deficit -- far larger than state officials were projecting only days ago -- the state's chief budget analyst said...[because of] billions of dollars in phantom savings approved by Gov. Arnold Schwarzenegger and legislators last month, more budget restrictions passed by voters last week and predictions of a "painfully slow economic recovery," ...

In addition, more than $8 billion in temporary sales, car and income taxes are set to expire in the coming year, and the federal stimulus program that has helped prop up schools, healthcare for the poor and other state programs also will soon disappear.....

The predicted $25.4-billion deficit is the equivalent of about 29% of this year's general fund budget....

And guess what? Republicans respond by promising no taxes, and Dems ferociously defend spending. The state won't see 2007-08 level tax revenues until 2015-16 based on current economic projections. And even this scary new deficit projection has some rosy thinking built in: "They assume no cost-of-living adjustments and that California will win all pending lawsuits against the state."

Results of some of this year's initiative votes complicated the state's budget situation as well:

Voters widened the deficits last week by approving two measures that constrain legislators' ability to assess fees on businesses and to take funds from local governments. Combined, the measures unravel $800 million in savings this year and up to $1 billion annually in the future...

For just one example of how and why California's government's money situation is so bleak down the line, see this report from the American Spectator on teachers pensions here.

The California State Teachers Retirement System (CalSTRS) assumes that its portfolio will increase in value by eight percent a year, three points higher than the 20-year compound annual growth rate for the S&P 500 stock index. To meet those return rates, CalSTRS has spent the past three decades pouring money into an array of hedge fund and other risky investments, including purchasing minority stakes in private-equity firms and real estate deals that haven't exactly panned out.

But these days, CalSTRS can no longer keep up the ruse. Thanks to an (official) $23 billion pension deficit, billions more in investment losses (including $43 billion in the 2008-2009 year alone), and embarrassing reports about its unrealistic investment expectations, it is preparing to reduce its expected annual rate of return to a barely less-inflated 7.5 percent. The state government and districts will have pony up $5 billion more a year just to meet the growing payouts to the pension's dependents. By the way, CalSTRS' request comes just as news came out that it paid $1 million in bonuses to its top officials -- including $116,604 to its chief investment officer.

Past City of Angles blogging on our state's budget mess.

Image taken by Flickr user Steve Rhodes. Used under user Creative Commons license.