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Budget Disaster Pressures California to Roll Back Services

Crisis echoed in many states, particularly Nevada, Arizona, Florida

Hey, wanna buy 432 acres of prime San Francisco Bay-front property—free gas chamber included? How about staging your next wedding reception or corporate meeting in your own 18,000-seat outdoor amphitheater carved into the picturesque Hollywood Hills?

Selling off state properties like San Quentin Prison and the Hollywood Bowl may sound far-fetched in the middle of a massive real estate meltdown. But those are just some of the ideas being batted about to close California’s staggering $24 billion deficit, now that the state’s irate voters have resoundingly defeated a series of ballot measures designed to plug the gaps with increased state borrowing and higher taxes.

Even before this defeat at the polls last Tuesday, Gov. Arnold Schwarzenegger, R, and the legislature had taken drastic measures to plug their gaping budget hole. They chopped more than $50 billion from primary education, refused to pass on cost-of-living increases for beneficiaries of SSI and cut their individual payments $20 per month.

They also suspended the July 2009 cost-of-living adjustments for county operators of Medi-Cal (the state Medicaid program), reduced dental benefits for the indigent elderly and cut nearly $40 million in property tax assistance for seniors and blind or disabled Californians available through the Senior Citizens’ Property Tax Deferral Program.

And since last Tuesday’s ballot defeat, Schwarzenegger has backed away from an initial suggestion that he might ask for a federal loan guarantee to back new bonds; instead he has promised additional cuts to health services, education and the criminal justice system to get through the crisis.

Cuts on Top of Cuts

“We heard the voice of the voters loud and clear, and they want us to go all out and make those cuts,” the governor said. “You try not to make cuts that you feel would be devastating to some people, but now we have to do that,” he added.

Noting that California’s revenues are now at 1999 levels, the governor promised to roll back services. “It’ll mean cuts, cuts and cuts, and living within our means.”

On Tuesday, his budget team proposed dismantling the state’s Welfare to Work program, eliminating grants to lower-income college students, cutting state park funding and eliminating a program that provides medical coverage to 928,000 children and teens. The state’s universities also took an additional $750 million hit.

The current budget crisis in California—long seen as a kind of hothouse for new trends that end up defining America’s economic and political future—clearly outstrips those being experienced in other states. But as revenue collections collapse in the midst of the economic recession, and the demand for services grows from an increasing pool of the newly impoverished or unemployed, California’s current fiscal crisis mirrors the state of fiscal turmoil now being experienced in legislatures across the country.

“It’s a deteriorating situation for states. It’s bad and getting worse,” said Arturo Pérez, a fiscal analyst for the National Conference of State Legislatures, based in Denver. In a recent report, the NCSL estimated that states would have to close what it described as a “jaw-dropping gap” of at least $121.2 billion for fiscal year 2010, which for most states begins on July 1.

Only officials in North Dakota, he pointed out, are projecting that their revenue forecasts are accurate. “Everyone else is concerned, or pessimistic.”

Other States Also Hit Hard

Since California is the nation’s most populous state, it’s not surprising that its budget gap is larger than anyplace else. However, on a percentage basis, the state budget deficits in Nevada, Arizona and Florida—three states where the collapse of the real estate bubble hit especially hard—actually outstrip California’s current crisis. In most states, like California, the largest streams of revenue come from property taxes and real estate transaction taxes, as well as sales taxes.

And the news is getting worse as April state income tax collections roll in and budget officials across the country are discovering that expected amounts have fallen off the table because of the recession.

In New York state, for instance, Comptroller Thomas DiNapoli, D, reported that the government had collected nearly a quarter of a billion dollars less in April, when personal income taxes are due, than predicted. In Illinois, Gov. Patrick Quinn, D, wants to impose a 50 percent hike on personal and property taxes to fill a record budget hole of $12 billion. And according to Darryl Steinberg, president pro tem of California’s Democrat-controlled Senate, tax receipts in the state “have fallen faster than at any time since the Great Depression.”

‘Very Much a Revenue-Based Problem’

Across the country, “personal income tax collections are coming in significantly below forecast,” Pérez of the NCSL noted, meaning that budget crises could continue into 2010. “This is very much a revenue-based problem for states. Until revenues turn around and meet forecast or start growing, this will continue to be a problem for states.”

According to the Washington-based Center on Budget Policy and Priorities, 16 states this year have already enacted tax increases, while at least 34 have cut services to families and individuals, including services that benefit vulnerable families.

That includes California, where voters decisively knocked down proposals for short-term tax increases and borrowing measures (and where far more votes were cast to determine the winner ofAmerican Idol.) While preaching “bipartisan compromise,” Schwarzenegger, who won his office after his predecessor was recalled during an earlier budget imbroglio, has found himself unable to win support from his own party for most of his budget plans. One of the biggest difficulties Schwarzenegger faces in cobbling together a budget is that any final plan requires a two-thirds vote in the legislature.

“The voters were angry that the legislators couldn’t come up with a budget on their own, and instead dumped it back into the voters’ lap,” said analyst Mark DiCamillo, who runs the statewide Field Poll. A survey conducted by the Field Poll had accurately reflected the clear-cut defeat of the budget proposals. California voters consistently say they want increased state services, he said, but only want to impose higher taxes that “they think other people—but not themselves—will have to pay.”

Michael Zielenziger writes about the economy for AARP Bulletin Today.

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