Bloomberg News

Brown Turns to One-Time Fixes to Help Close Budget Gap

May 15, 2012

California Governor Jerry Brown’s plan to erase the largest state deficit in the U.S. may not be what he had in mind when he returned to office 16 months ago.

Brown, a Democrat who served two terms as governor from 1975 to 1983, pledged an austerity budget free from gimmicks. In June, he vetoed a spending plan in part because it used one-time accounting maneuvers.

Now confronting a $15.7 billion deficit, Brown said an interim fix such as a 5 percent cut in state worker pay is a legitimate way to avoid slicing deeper into social safety nets. The governor also wants voters to temporarily approve higher income taxes on top earners, to the highest in the U.S., and raising the biggest state sales levy.

“California has been living beyond its means,” Brown told reporters in Sacramento yesterday. “The United States of America and its federal government is living beyond its means. A lot of corporations have. A lot of people spend more money than they take in. Well, there has to be a balance and a day of reckoning.”

Brown set out a revised spending plan yesterday for the fiscal year that begins July 1, calling for more than $3 billion in reductions to medical care for the poor, welfare, in-home services for the disabled and childcare subsidies.

He warned that another $6 billion in cuts, mostly to schools, would be imposed midway through the year if voters refuse to increase income and sales taxes.

Spending Grows

Even with those reductions, the governor’s budget would increase state spending by 5.6 percent to $91.4 billion next year from $86.5 billion this year.

Brown said the deficit swelled from $9.2 billion in January because he overestimated tax collections, while spending rose above projections. At the same time, the federal government and courts blocked him from implementing some cost-saving measures to health and welfare programs, he said.

To reduce the deficit without cutting spending further, his budget includes accounting moves such as taking $292 million from California’s share of a $25 billion national mortgage- relief settlement over abusive foreclosure practices stemming from the housing collapse.

He would use about $200 million of that money to make debt- service payments on housing bonds, currently financed through the general fund. He also wants to siphon $300 million from local court reserve funds and $240 million from court construction funds to pay the state’s subsidy for trial courts.

“It’s perfectly legitimate to solve a one-time deficit with one-time revenues,” Brown said in a briefing for reporters in Los Angeles. “The real issue to watch here is ongoing cuts. We’re going to get those.”

38-Hour Week

Brown wants most of the state’s 214,000 public employees to switch to a four day, 38-hour work week next year, to save about $400 million. The reduction from a 40-hour week would require approval by labor unions. It wouldn’t affect employee pensions, which are tied to base wages rather than take-home pay. Brown said his own salary would be reduced 5 percent.

“The thing everyone gets in exchange is that the state stays afloat and they get to continue working,” said Marty Morgenstern, Brown’s secretary of the California Labor & Workforce Development Agency. “It’s a crisis situation.”

School spending would increase as required by law, though by $1.5 billion less than previously planned. Brown also plans to take $1.4 billion of the cash assets from the state’s now- defunct redevelopment agencies and give it to schools to reduce the state’s obligation to fund education by that amount.

Income, Sales Taxes

California, with the world’s ninth-biggest economy, lost more than 1 million jobs in the recession that started in 2007, reducing the most populous U.S. state’s revenue by 24 percent. For the past four years, California lawmakers have trimmed spending and temporarily raised taxes to combat deficits of more than $100 billion combined.

Even before yesterday’s budget revision, California’s 2013 deficit was the largest in the U.S., according to a March 21 report by the Washington-based Center on Budget and Policy Priorities.

Brown is asking voters in November to temporarily raise the statewide sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent. It would also boost rates on income starting at $250,000. Those making $1 million or more, now taxed at 10.3 percent, would pay 13.3 percent, the most of any state.

“I don’t like to tax anybody, but you’ve got to go where the money is,” Brown said.

Poll Support

In the latest independent poll of Brown’s tax plan, the Public Policy Institute of California (85265MF:US) showed in April that 54 percent of likely voters expressed support when read the ballot title and a brief summary. Thirty-nine percent said they would vote against Brown’s plan.

Brown’s bid to raise income taxes on the wealthiest Californians drew support from 65 percent of likely voters, whereas his proposal to raise sales taxes was opposed by 52 percent, the poll found.

Brown acknowledged that more than 65 percent of the growth in the deficit was caused by his overly optimistic projection of how much the state would collect in taxes.

He told reporters yesterday in Sacramento when asked about that miscalculation that even JPMorgan Chase & Co. (JPM:US)’s chief executive officer, Jamie Dimon, can fall victim to the whim of the capital markets.

‘Stuff Moves’

“You never can quite get it right because in our particular free-enterprise system -- a free flow of capital -- stuff moves and it goes up and down,” the governor said. “Even Jamie Dimon just blew $2 billion. That’s a big risk. We all have to live with the uncertainties of the business cycle, but we do our best.”

Brown was asked if the miscalculation should cost him his job, as some advocate for Dimon.

“Totally different,” he said. “One is a loss of actual money. The other is coming out inaccurate on the prediction you made.”

Brown’s critics who oppose his tax-increase initiative seized on the fact that Brown was off by more than $6 billion from his January estimate.

“There’s a fine line between being a ‘buoyant optimist’ and just plain delusional,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which in 1978 sponsored Proposition 13, California’s property-tax limit.

The state’s sinking finances may threaten its chances for a higher credit grade. California is Standard & Poor’s lowest- rated state, at A-, six levels below AAA. While the company raised its outlook to positive in February, a larger deficit will “test the Legislature’s commitment to a stronger fiscal position as a public-policy priority,” Gabriel Petek, an S&P analyst in San Francisco, said May 1 in a report.

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net; James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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