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California's revenue surge might stymie efforts to stabilize finances

The $6.6-billion of unanticipated revenue may relieve some of the pressure caused by California's huge deficit, perhaps weakening Gov. Jerry Brown's argument for tax extensions.

May 18, 2011|By Evan Halper and Anthony York, Los Angeles Times
  • Gov. Jerry Brown points to a chart as he introduces his revised budget proposal at the Capitol in Sacramento on Monday. State revenue has increased to a projected $6.6 billion beyond expectations.
Gov. Jerry Brown points to a chart as he introduces his revised budget proposal… (Ken James / Bloomberg )

Reporting from Sacramento — The cash pouring into state coffers may seem like good news for Gov. Jerry Brown, who this week announced a surprise $6.6-billion surge. But the joke in the Capitol is that he might have served the public better by burying the windfall in the backyard.

Propelled by the higher wages and investment incomes of the rich, the new money could actually stymie meaningful change in California's broken budget system, experts say, leaving state books unbalanced indefinitely.

"It's going to relieve some of the pressure, which is exactly what Jerry Brown did not want," said Christopher Thornberg, a principal at Beacon Economics in Los Angeles. "If he could've taken that money and stuck it under a pillow, where nobody can see it, I'm sure he would have liked to."

The dilemma is part of a familiar pattern in California, where state funds are at the mercy of taxes paid by top earners whose bank accounts are subject to unpredictable swings. One bad year for them can, and does, throw state finances into turmoil. Alternately, the accounting misery is quickly forgotten when the economy starts to rebound and tax receipts mushroom.

The boom-bust cycle creates instability that makes employers anxious, cripples the ability of public schools and universities to plan, throws into disarray efforts to overhaul California's deteriorating infrastructure and causes other problems. The potential cures are not complicated, but they are politically painful.

Placing strict limits on spending — especially during good times — and bolstering the state's rainy-day fund would require lawmakers not to use revenue spikes to reinvest in programs that for years have been pummeled with cuts.

Restructuring the tax code is an unpopular idea among those who don't want to see the rich pay less. Leaving it in place but maintaining higher sales, car and income levies, as Brown is proposing, may be difficult to sell to voters who believe the government poorly manages the money they already provide.

It takes an emergency to move such policy changes forward, experts say, and a simple blip in revenue can cause momentum to die.

Steve Levy, director of the Center for Continuing Study of the California Economy in Palo Alto, said voters accustomed to a steady drumbeat of budget gloom may mistakenly believe that a little more money means that the hard times are over, or at least coming to a close.

"It's ironic," he said. "It is good news that can become bad news for solving the problem."

Even the star power and public relations juggernaut of then-Gov. Arnold Schwarzenegger, who ejected a sitting governor in a historic recall by promising to impose fiscal discipline, didn't help. He couldn't keep lawmakers and the public focused on the task once revenue began seeping back, in the middle of his tenure.

"You have to have some discipline, and it's hard to exert when everyone thinks things are looking better," said Mike Genest, who was Schwarzenegger's budget director. "The political analysis seemed to be that when you have this much money, it is pretty hard to tell people you need to cut the budget or raise taxes. So we stopped trying for two years," putting the administration's energies elsewhere.

Meanwhile, the deficit lingered in the background. As soon as the state dipped into recession again, the state's fiscal crisis was worse than the one Schwarzenegger had inherited.

Like governors before him, Schwarzenegger nagged lawmakers repeatedly to confront California's underlying fiscal problems when money was in hand. But they had long since abandoned the cause.

"Individual legislators all understand what it means to be responsible," Genest said. "But the Legislature as a body is inclined to act incredibly irresponsibly, especially at times like this."

Then-Gov. Pete Wilson, after addressing a historic state budget crisis with painful tax hikes and program cuts in the early 1990s, emerged determined to fix the underlying problems. After years of stagnant revenue, he gathered a group of lawmakers, seasoned bureaucrats and academics to search for ways to change the budget process through a constitutional revision.

But when the economy began to rebound toward the end of Wilson's second term, "all the reforms we'd been talking about just evaporated," said Jim Mayer, a former member of the Little Hoover Commission, a government oversight panel that worked with the group.

Mayer is now executive director of the think tank California Forward, which is seeking solutions to the state's financial problems. He said Brown, who has vowed to stabilize the budget for the long term, now faces the same challenge.

"When the revenue starts rebounding, the first thing people forget is how bad the crisis was," Mayer said.

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